Eguana Technologies Inc.

Thank you for standing by. This is the conference operator. Welcome to the Iguana Technologies, Inc. Second Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode. The conference is being recorded. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. If you are participating by webcast, you can submit a question using the form in the lower section of the webcast frame. I would now like to turn the conference over to Justin Holland, CEO of Iguana Technologies. Please go ahead.

Thank you. Good afternoon and thank you for joining us for our quarter results and update call. On the call with me today, we also have Brent Harris, COO, Hansine Olberg, CFO, and Madison Duncan, our corporate controller. 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 Plus for a more inclusive discussion of risk and more details relating to the uncertainty of forward-looking statements. Please also note that 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. We will talk about general market conditions and provide additional details on the strategic direction and positioning of the business. The company continued to see negative impact of elevated inventories within distribution channels in the quarter. Revenue of $2.1 million comes almost exclusively from energy storage sales in the United States and full system sales in Australia. Distribution inventory levels continue to remain high as installer sell-through continues to be impacted by the pace of change in consumer interest rates. The result has been a market slowdown nationally in the U.S. and we are seeing similar impacts with residential consumer sales for energy storage products in the Australian markets. Residential markets are now showing signs of growth, however, after the first half slowdown, which has resulted in increased sell-through and steadily increasing partner shipments for microinverters in both July and August. Aligned with increasing product shipments has been an increase in customer receivables in both frequency and amount, both trending in a positive direction. We do remain cautious on near-term growth, however, as our partners work through their own inventory positions. We do expect as well to see growth in the California market's balance of year as prior NEM 2.0 backlogs are addressed and NEM 3.0 installations become dominant in the state. NEM 3.0 includes a 75% reduction in export rates, which will incentivize consumers to purchase energy storage systems along with rooftop solar. It is anticipated under NEM 3.0 that adding a battery will also reduce consumer return on investment. Under prior programs, the addition of energy storage devices increased the consumer ROI times. So this is a significant change. What is also key for Iguana is our proprietary technology is in the software and hardware of the energy storage platform. We saw similar impacts in the German market 2016 to 2018, with dropping tariff rates, which drove the adoption of energy storage solutions. Gross margins remained impacted with low volumes, product mix, and pandemic cost-related materials. 2024 outlook on gross margin, however, is much better, with an estimated increase of 12% to 14%, coming from new key component price points, normalization of freight rates, and supply chain redistribution out of China. which reduces or removes a 25% import tariff on materials moving into the U.S. Blended product margins as a result are expected to climb to approximately 17% to 19% over the next 12 months. This, however, will be dependent on achieving sales volumes as planned. In Australia, we continue to see an increase in revenue with full turnkey system sales growth of 400%. We anticipate launching the infused microinverters into the Australian market in Q1 2024 as we continue building out the Australian product ecosystem. All FCAS services, including accuracy and reporting, have now been completed in Australia, and we anticipate near-term residential growth through virtual power plant incentives, which include a healthy consumer rebate program. and lowering hardware costs, the initial hardware costs for the consumers. Additionally, homeowners will see up to 80% reduction in energy bills, which is particularly important, as many parts of Australia have just gone through a significant jump in energy costs, with certain markets seeing increases of up to 60% in a one-time increase. Additionally, new home builder objectives are advancing, and we anticipate revenue from the channel later this year. Enduro sales in Europe, were previously halted as a result of manufacturing delays through battery module availability issues with one of our battery partners. Their capacity continues to be impacted from a prior multi-year module recall, which has impacted Iguana. As a result, the development team has integrated and certified additional battery supply options for the European products. Shipments of the new product commence in August, and we anticipate near-term growth in Europe balance of year as a result. Aligning with our objectives are increased utility engagements, the number of virtual power plant pilots being rolled out in our markets, and the number of DERMS providers the company is now working with. This is a significant change to the marketplace as utilities are now rebating direct to consumers to bring initial hardware investments down. Consumers, in turn, allow utilities to access their system from time to time. Software providers like Iguana Cloud aggregate these systems into fleets, which are integrated with DERMS partners for control alongside other devices. Our view has been that utilities struggle with the intermittency of renewables generation coming onto the power grid. Energy storage devices operating as fleets resolve this for the utilities and allow them to have control over renewable generation by utilizing the energy from the fleet on an as-needed basis. In essence, utilities can time shift consumption through DERMS management and generation with energy storage fleets. Iguana has a key advantage with respect to utility signal response, accuracy, and measurement, as our advanced electronics platform was designed for energy storage. These keys, control response, measurement, and accuracy, were the development foundation of our platform, which is an industrial control system with a cascading control architecture that provide very rapid, accurate, and stable responses to changes in a range of remotely controlled set points. This is well beyond the capability as many of the simple switch mode controlled solar inverters that have been adapted for early energy storage solutions. Many of our peer companies have migrated solar technology in this format, where accuracy and measurement are far less critical. This creates a disadvantage in virtual power plant applications, as utilities need that accuracy and control to operate effectively, efficiently, and for billing and reporting purposes. Utilities will utilize energy storage fleets as grid assets, providing the ability to flex the grid for enhanced efficiency, reliability, and control. Utilities, much like the consumer side, will then pay for access to the energy storage fleet, which is delivered in the form of recurring monthly revenue for the system or fleet manager, in this case, the Iguana Cloud. This is good news for Iguana as we now control the hardware and software in a fully integrated ecosystem that delivers a three-pillar revenue stack, including both hardware and software revenue streams, or as we call it, the roof, the wall, and the cloud. Iguana's mission is to become a global leader in the deployment and adoption of distributed energy storage. Energy storage will be a critical component of the power grid transformation to a distributed architecture, which is necessary to support the broad electrification of the economy, which is also necessary to meet the demand of doubling electricity consumption over the next 20 to 30 years. Our combined product line approach with energy storage solutions and microinverters, along with the Iguana Cloud, provide a complete solution linking utilities and consumers and bringing renewable, responsive, additive energy to the power grid. At this point, I will turn the discussion over to Brent to talk a little bit about product development and operations.

Thanks, Justin, and thanks to everybody for joining us today. We remain focused on strategic initiatives in these three areas. First of all, product development. With the slower market activity, we focused on a number of development activities, including the following. Simplified energy storage installation processes with the completion of two new iguana hubs, 100 and 200 amp, which removed the need to install backup load panels during product installation. We modernized and expanded the iguana cloud platform by developing fleet control APIs and added features to the onsite energy management system used in the evolved energy storage product to enhance BPP capabilities. We completed UL 1741 SB certification of the redesigned 5 kilowatt PCS that integrates with these hubs to provide simplified whole home installations for installation partners. We completed our frequency control auxiliary services virtual power plant demonstration, including accuracy and reporting to utility partners Simply Energy to support the virtual power plant rollout there. and recertified our European Enduro with an additional battery module option and started shipments of that new product. For manufacturing efficiency and scale, our test capacity includes our state-of-the-art inverter functional test station, or IFT. Our current annual capacity of over 24,000 systems allows us to meet market demand forecasts for 12 months without any additional capital investment. We made positive progress this quarter on production test processes allowing for faster and more efficient testing of units before delivery. On business development and strategic sales, we added to our business development team members in the USA and Australia, and we've engaged with more DERMS providers, such as our recently announced partner, Virtual Peeker. These DERMS providers typically manage utility virtual power plant programs and are the conduit to recurring revenue streams for iguana. We began software integration with additional germs partners in several markets to pursue VPP opportunities spanning the U.S., Canadian, and Australian markets. The company continues to grow its trained installer network through Iguana University, Iguana's comprehensive partner training platform, which includes system design, sales, installation, and commissioning. The more boots on the ground, the deeper and broader our sales channels will be. It's the installer base that sells at the kitchen table. We pride ourselves on being a standard install unit that allows consistent ease of installation in a short time window, allowing installers to do more installs and earn more revenue per day. The installers influence not only buying decisions, but feature selection and consumer choice. We surpassed our 500-plus enrollment target at Iguana University and are driving toward $1,000 by the end of the calendar year. Unfortunately, the quarter did see a downward trend in financial results tied to the overall industry slowdown. We previously commented that we expect to see margin improvement from some supply chain optimization decisions, such as moving certain materials out of tariff countries. But at the lower revenue volumes, it will take longer to pull these savings through our financial results. The positive impact will likely not be seen until we get a further sell-through of higher average cost products, over the next four to six months. The overall negative macroeconomic factors that Justin outlined have also impacted our Q2 financial results, which Hansine will lead us through now.