Eguana Technologies Inc.

Good afternoon. Thank you for joining us for iguana's third quarter 2022 earnings call. My name is Brent Harris, Chief Operating Officer of iguana. On the call today, we also have Justin Holland, iguana's Chief Executive Officer. 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. Before we begin, please note that certain remarks made on this conference call 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 other factors that may cause our actual results to differ from projections made in any 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 disclosed is represented in Canadian dollars unless otherwise noted. I will now turn the call over to Justice.

Thanks, Brent. Thanks to everyone for joining us today to discuss the Q3 results and the future outlook for iguana. Just quickly, due to a scheduling change, CFO Sonia Kuhnler will not be with us On the call today, however, has provided all the details for the financial discussion, which we will get into shortly. As we previously noted, at Iguana, our mission is to be a global leader in grid-tied energy storage, which we see as a critical component of the power grid transformation. Through the third quarter, we've broadened this mission with the addition of the infused microinverter product lines. Combined, the energy storage solutions and microinverters provide greater access to two key pieces in the transformation of the power grid to a distributed model and give iguana the largest product portfolio in the sector. After transitioning manufacturing and supply chain to San Jose, California through the second quarter, our focus was squarely placed on plant commissioning and scale-up. Step one was the introduction and installation of a new state-of-the-art inverter functional test station, or IFT. This station is critical for the company as it defines iguana's manufacturing capacity. Each IFT station can test up to 400 energy storage systems per month across each two-shift operation. It was key for the development team to update not only our testing equipment, but our testing processes as well. Job well done to Daljeet and the team as we are seeing consistent improvement in first pass yield numbers since the first full turnkey production began this past June. Additionally, we have a second fully commissioned IFT in transit to San Jose for installation in September. Combined, this will provide up to 800 units of production capacity monthly. A third station is in the procurement process with a target installation date of March 2023, which will bring annualized production capacity across two shift operations to 14,400 systems. Alongside the operational focus was, of course, supply chain management. Although global supply chains remain challenging, we have been able to mitigate any immediate supply chain availability concerns through combined efforts with the Omega team. The alternate parts program and strategic inventory investments have also aided in mitigating further risks. Having the right materials in the right place at the right time will allow a steady state manufacturing environment where first pass yield improvements will continue until we reach our target metric of greater than 95%. We are also happy to report two recently announced financings totaling approximately 40 million Canadian. of long-standing partners, the Atochu Corporation and Western Technology Investments. The transactions are broken down into a $33 million convertible to venture note with Atochu and the second $5 million USD draw from our previously announced loan agreement with lending partner WCI. These funds will be immediately put to use with respect to battery module and microinverter inventory positioning. Projected growth rates look very good, and we will start eliminating risk factors now for future orders and rapid growth. Supply side optimization was clearly the focus. To summarize, we have now completed phase one plant commissioning and IFT installation for full turnkey production, built and commissioned second IFT stations, which is to be installed in September, and continued improvements in first pass yield, a metric that ultimately drives manufacturers product availability. It is worth noting that recent supply optimization objectives were driven by expected order increases for the US market under both premium and iguana branded products. The expectations of rolling out an additional white label partnership later this calendar year and increased volume expectation coming in from the Australian market. We'll touch on the demand outlook and developments after a quick financial review for the third quarter of 2022. On an overall revenue basis, Q3 product sales increased 73.5% or 2.3 million versus prior year product sales 1.3 for the same quarter and 0.3 million in the previous quarter. These numbers came within a few thousand dollars of our second highest revenue quarter over the history of the company, which was set in fiscal Q1 of 2021. The achievement we were looking for given full-term key production did not start until the last month of the quarter. The increase is directly related to relocating operations to San Jose and beginning to scale the facility, as well as the expansion of our power controls platform to include the microinverter solutions, which also saw their first sales during the third quarter. As expected, demand continues to steadily grow for the microinverters, which can be attributed to a couple of factors we will discuss later on the call. Gross margins for the quarter decreased from 3.6% in Q3 of last year to 0.04% for Q3 this year. The decrease is due primarily to the inventory rationalization associated with winding down Canadian supply chain activity and the full transition to omega. When removing the inventory adjustments, margins would have seen an improvement when compared to prior year at an estimated 7.8%. We are still experiencing the impact of significant increases in global freight, particularly with expedited shipments, as well as large duty fees on products and materials coming in from Asia, which both impact margins. Our expectation is global freight lane costs will begin easing in the next few quarters. However, we did expedite the microinverter shipments in the June quarter to look after immediate customer needs. Operating expense increased by 0.3 million in comparison to the same period last year. Increases from fiscal 2021 are due to continued team expansion, particularly for sales, after sales service, and research and development, which are all in line with iguana's market growth objectives and expectations. With respect to the balance sheet, We have continued to build inventory positions as well as having secured future raw material inventory for growth by way of deposit. We will continue to hedge these risks associated with global product availability, particularly for battery modules and microinverters. Alongside the growth in assets, we saw an increase in our debt structures as we received additional financing with WTI in April, drawing on 5 million USD, which was used as part of the inventory positioning strategy. As with previous WTI financing, warrants granted in consideration for the loan hold and exchange option, which is recorded as a warrant derivative liability. Fluctuations in fair value of the derivative liability are seen through a profit and loss statement. Post quarter end, WTI approved the second tranche of the loan, providing an additional 5 million USD waiving all previous financial milestones required under the original loan agreement from this past April. Lastly, our positive working capital trend continued, closing out Q3 2022 at a positive 7.4 million, an increase from the previous quarter, which sat at 4.4 million. Last quarter, we covered in detail changes to the virtual power plant program in Hawaii. Essentially, the program was established to address gaps in peaking capacity on the island of Oahu, which were driven by a scheduled retirement of the island's only coal facility. Phase one of the program targeted retrofits to existing rooftop solar systems that were installed under the original net metering tariff system. This was somewhat limiting in scope and energy storage adoption. Battery bonus program rules have since been modified to encourage system owners under CGF and CGS Plus tariff programs to take part in the island's battery bonus program. The recent changes have brought additional momentum to this program, which has resulted in new orders coming in from our partner, Pineapple Energy, formerly known as Hawaii Energy Connection, totaling 2.4 million. Happy to add the first 100 units of that order have shipped since the changes with planned shipments, building an additional 200 systems before the end of the calendar year. We will continue to work closely with Pineapple Management to address U.S. mainland opportunities as they achieve their growth objectives and our two companies remain aligned. Staying with the U.S. market for a moment, the sales team executed the PowerCenter Plus distribution expansion through the second and third quarters to include national distributors across the nation in all key regions. Demand will continue increasing as additional branch doors are opened up. We will maintain a systematic approach to distribution tied tightly to product availability and internal branch product and installation training programs. In addition to this focus, we have recently augmented our sales leadership functions to have specific support for distributors and branches and installers and consumers. We expect this will result in better branch management, increased branch opening and drive installer consumer pull-through. Border uptake looks strong for the 5-kilowatt LFP, the microinverter lineup, particularly in the dual configuration, and the 10K match product, full home product. As expected, near-term demand for the micros is beginning 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 growth forecast of 17% compounding annual growth rate. As a result, the company has invested approximately $10 million to support the launch and growth opportunity relative to the microinverters. The product line is inclusive of the single, the dual, and the quad configuration, which provides ultimate flexibility to the installer and enhance reliability to the consumer. Energy storage system growth is expected to be pulled through distribution from the microinverter positioning in the short term. It is also expected that demand will come in the form of 5 kilowatt and 10 kilowatt product orders. The 10K max full home product recently completed all certification and will be formally launched in conjunction with an additional white label partner later this year. It is currently available under the iguana and the premium brands through distribution. Certification of the 10K Max was a crucial milestone for iguana, providing the market with its first true full-home backup capable product solution. The product was tested to UL9540 second edition standards, and as a result of our advanced power electronics platform flexibility, the 10K Max was also successful in reaching UL9540A fire test standards. This is a critical piece to understand as it allows us to put more than 20 kilowatt hours of storage together in one installation. Typically, in California, energy storage systems require a minimum three-foot spacing for every 20 kilowatt hours of storage. Due to the 10K max certification achievement, iguana can avoid this, simplifying installations by allowing larger systems to be installed in smaller spaces, providing the company with a significant market advantage for full home backup solutions. The MAX product is also a better fit for grid infrastructure improvements with higher power and higher capacity. Its management's belief that grid infrastructure advancement will be put into overdrive to support the electric vehicle growth coming from the auto sector. Keeping with this theme, We've also begun development of our next product cycle to further enhance our power electronics platform. The product, which will be in a tower format for wall or floor mount installations, can be used single or in series to create ultimate flexibility in residential and commercial energy storage applications. The product will also have higher power than the max and easily accommodate three-phase applications. Additionally, The product will have an outer skin that can be easily modified to support white label opportunities and allow product differentiation. The development team has the new product on schedule to enter certification on or before the end of this calendar year. Following previously noted complications to the 10K max certification process, the company took steps to simplify certifications on a go-forward basis. Following our recent investment in lab expansion at the head office in Calgary, we set out to be qualified under CSA's Supervised Manufacturers Testing for Certification program for the SMTP. Program, which was completed and qualified, allows the company to conduct internal certification testing and submit results for approval to CSA. This provides significantly more control over testing timeline and removes major uncertainty with respect to the certifier scheduling process. The program has already had immediate effect in rapid certification of alternative component requirements driven through the Alternative Parts Program. Under CSA's timeline, qualification process would have taken much more time than what was achieved with SMTP. The SMTP, along with the Alternative Parts Program, allows us to stay on top of supply chain risk and continue to mitigate future issues as we continue scaling. Maintaining product certifications is a critical aspect of our business across all markets and all products. The SMTP will also simplify and mitigate risk on product portfolio management as a result. Moving on to Australia, we have revised our business model to include full system sales, inclusive of all parts of a residential renewable home energy system. Our home builder and VPP program partners express strong interest in iguana providing installation and support services alongside our industry-leading product offering. Having the ability to control the sales start to finish, as well as providing the hardware and software solutions, provides a one-stop shop for our key partners. We are happy to confirm initial full bundle sales in Australia have commenced and are now being installed. Additionally, the Frequency Controlled Ancillary Services Market Regulations, or FCAS for short, have recently been published. The company is in the process of demonstrating our product compliance through self-reported verification. This will be a challenging process with respect to energy storage system functionality and as such should open up opportunities within the Australian VPP market. Guana's expected timeline to complete is within the next two to four months, at which point we expect to hit the VPP market running with a leading position alongside our Australian utility partner, Simply Energy. In Europe, we're continuing discussions with the French utility for white label solar plus storage solution. Our expectation is we will see microinverters move first, followed by the energy storage solution. The utility has been clear they will have multiple supplying partners to meet their demand, and we expect to see first micropilots go out later this year. At this point, I will turn the mic back over to Brent for an update on battery module and iguana cloud advancements. Afterwards, we're having to answer some questions from the group on what is presented here today. Right? Over to you.

Thanks, Justin. The team continues to add new battery options to our ESS platform through integration and verification efforts. Given the current supply chain uncertainty and the demand coming out of the electric vehicle segment, keeping multiple battery options available across the product line is critical to our ability to provide consistent supply to our customers. Our partner, Itochu, assists us with qualification of additional suppliers, and as mentioned previously, to line the company up with promising new battery technologies, using our BMS to integrate these next generation cells into our product without requiring a certified module. This is starting with the 24M technology. We've had questions also about the use of our BMS to extend the life of automotive batteries in second life applications. This is very feasible technically, but through our experience with major automotive manufacturers, we've determined there's a limited market opportunity for second-rate batteries. We prefer to focus our efforts on commercializing new battery technology for stationary markets. At the other end of the technology stack is the Iguana Cloud, which has now been launched and is operational, supporting our premium brand partners. The Iguana Cloud provides us with direct control over our customer experience, and better visibility for our service teams. We've also begun defining the process of API integration for fleet management with several fleet aggregation and white label partners, and our first in-field demonstration is in progress. Back to you, Justin. Thanks, Brett.