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.

Before taking some questions, just a quick summary of where we are positioned. It's obviously a very difficult market situation out there, and we're recently successful in negotiating new capital to not only accelerate our growth objectives, but also to continue investing in the future of iguana. We have the widest product suite in residential solar plus storage markets across energy storage and microinverter solutions. We have iguana and premium branded products with additional white label partners on the horizon and in multiple geographies. The objectives are all advancing in all areas, and we're really looking forward to consistent quarter-over-quarter growth. With that, we'll open up for a few questions. First question ties directly in line with that, which is on revenue stability. We can talk a little bit about revenue stability here today as we do have now microinverters and energy storage systems. And if you recall from prior calls, the microinverter supply chain is significantly less complex than the energy storage supply chain. Both products are driven through advanced power electronics. However, the advanced power electronics in a microinverter has 50 to 60 components, and the advanced power electronics on the energy storage system has closer to 900. So to manage the supply chain of 50 to 60 components, you can mitigate supply chain risk quite easily and start to bring predictability to the revenue. That will help stabilize iguana's revenue growth in the coming quarters. It also ties in nicely with the fact that we are seeing the early demand increases on the microinverter at a growth rate faster than the energy storage system. This was the plan. This is what we're seeing in the market with the expectation that as more microinverters go through distribution, it will pull the energy storage system sales up. We are also seeing that trend. With that, it does drive the critical nature of supply side optimization, which we started the call with today and continuing to make sure we focus on first pass yields through the IFT. so that we maximize throughput relative to the production capacity. We've got several questions coming in on production capacity, so just a few minutes on that. Production capacity is how many units we can process through the IFT on a monthly basis. It does not suggest that production capacity equals production throughput. From an operational perspective, You want to maximize your planned capacity, which is the number of IFTs. After the second IFT goes in, that nameplate capacity will be 800 units per month across a two-shift operation. The actual throughput, which drives product availability, is driven by a number of factors, primarily first-pass yield. How many times did the unit go through IFT on the first time? was there an issue that had to be resolved? Did a system have to get processed more than one time? These are the types of things that limit production capacity and frame the difference between throughput and capacity. But right now, we're focused on increasing the capacity in general. We do want to get to three IFTs by March. We do want to be in that 14,000 to 15,000 units annualized capacity. And as we continue to focus on first-pass yield, throughput will increase. That's the primary metric we'll utilize through contract manufacturing is first-pass yield, because that will determine how many IFPs we need relative to future demands. Question on the 10K certification and why it took longer than predicted. Again, we have discussed this previously. It took significantly longer than predicted. However, it has left the company in a much better position with the SMTP with CSA. We will be able to keep certified and certify new products much faster as well as component certifications much faster than we have in the past. With respect to the 10K unit itself, there were a host of factors, which I'll just rhyme off a couple. One, due to the COVID restrictions, no iguana techs were allowed inside the certification facility, which you were then bound by the technical capability of the certifier on test setup and performance. Once we were able to send one of our techs in, we ran through all testing processes in just under one week. The second part of the process was a regulatory change midway through the certification, which forced the company to pull the product back, improve to the new standards, and resubmit to certification, which we have detailed in the past. But again, the product is now certified. There will be a formal launch in the coming months. And we have now set the company up to self-certify most of the requirements for full product certification. Question on the assembly facility in Calgary. Great question. We have already transitioned the assembly area in Calgary to what we call the prototype for the model shop. This is how we're working through the new product development. It is significantly shrinking time to market for the company, and we will continue to push additional products through that prototype shop. The other side of the facility here in Calgary, we did another further expansion of lab stations, which I believe we now have eight. Is that correct? Yeah, correct. Eight stations. Keeping in mind that our previous location, we had two stations, so a significant improvement in development capability, a significant improvement in the ability to certify products, and a significant advancement in time-to-market working with internal prototype remodeling shops. Question on insight, question from the MD&A actually. Insight into whether the next white label partner is largely finalized. Is the partner known and what industry are they in? Unfortunately, I can't go into that level of detail. Yes, it's largely finalized. But due to respect for our partner, we will have to leave that there. Another question on capacity. Are we operating at 400? The number of units hooked up to the IFT and being tested at last check was around 87% of the capacity. We are running a one-shift operation currently, which means the throughput would be 200 systems per month. But we are running at about in the high 80% for capacity, which given we just started to ramp up full turnkey production in June, we are quite happy with. A question on the split between storage and microinverters. It's a great question. Currently, the split was roughly 50-50. This was what we were hoping to see as we do see A near-term larger opportunity on the micro, again, due to reasons that were pointed out. Supply chain is simpler, market is more mature, less competitors. So we do expect to see that. We did expedite the inventory for those shipments, which did impact the gross margins, as we noted in the financial session. But right now, we're seeing a 50-50 split. I do expect to see micros take a higher percentage of the revenue going into the next fiscal quarter. Target gross margins. Again, we look for a target gross margin in the mid-20s. blended across all products. Obviously, that's also factored against standardized across all of the products in the offering. So we do want to have a blended gross margin of around in the mid-20s. Update on the Tochu investment for BMS. Obviously, with the recent financing news, we do have a longstanding partnership with the Tochu. We do have a number of objectives with them. BMS is certainly one. We are looking at new battery technology in the semi-solid state with the Tochu. We have objectives ongoing with home builders in Australia. being asked specifically about Frayer. Frayer is one of the companies that are taking the 24M cells. Our initial discussions with Frayer was focused on residential applications. Frayer is going to do utility applications first and then transition into residential. At that time, the engagement with Frayer will start moving forward. The breakdown of funds on the two financing transactions, again, one was in the form of a 33 million Canadian debenture note, and the second was the second half of the 10 million loan we completed with Western Technology Investments last April, so 5 million USD. The funds that we're bringing in, obviously, will go to mitigating supply chain risks against future orders. Current order book, which currently stands around 27 million. We do feel very good about the supply chain pipeline on the component side, as well as the battery module and microsite. Again, tremendous work between the Iguana and Omega teams going through and identifying risk items spinning boards in a matter of days, not weeks, and working with the certifier through the self-certification process to make sure we have all the components we need, particularly in a difficult supply chain situation. Chris Alessio and his team at Omega, you know, as we said, top-notch operationally. The design teams are very well integrated. And we continue to solve challenges. The difference is we're solving challenges that are now out months instead of imminent and damaging to the revenue opportunity. So we do expect to see a quarter-over-quarter growth now that we've mitigated all near-term supply chain issues. Question on milestones and what should we look forward to? The milestones that we were looking forward to, the internal milestones, obviously, were getting full turnkey manufacturing in San Jose. And, you know, we did the transition in the second quarter. We went full turnkey kind of midway through. The third quarter, albeit with some bumps and bruises, and then into June, we were able to go full turnkey, steady state production, which is where you will start seeing energy storage revenues flying quarter over quarter. So what to look forward to is that growth rate. The second piece to look forward to is an investment in the battery module and the microinverter inventories. We want product availability on the North American side. It's a tricky supply chain and logistics world out there. We invest in inventory strategically. We can then backfill inventory investment rather than have gaps in revenue opportunity. This is something that the distributors and large installers are keying in on. They want to make sure that product availability, particularly under the premium brand, is available and accessible when they start rolling out. We now have four national and leading distributors in the stable, so we need to get this right. The new capital provides us that opportunity to make much larger investments, to make sure future orders are met on time and with expectation of the distributors. I think with that, we'll wrap up for the day. I'd like to thank everyone for taking the time. Great questions today. Thanks for sending those in. We look forward to additional growth in the next quarter, and we feel very confident with the position of the company, the new capital, the channels, and the partners to start to scale this business at a much more significant rate. Thanks, everybody.