SUNation Energy - Q4 2023

Transcript

Operator (participant)

Good afternoon and welcome to Pineapple Energy's fourth quarter and full year 2023 conference call. As a reminder, today's call is being recorded. All participants are in a listen-only mode. For opening remarks and introductions, I would like to turn the call over to Eric Ingvaldson, CFO Pineapple Energy. Mr. Ingvaldson, please go ahead.

Eric Ingvaldson (CFO)

Thank you. Good afternoon and welcome to Pineapple Energy's conference call to discuss results for the fourth quarter of 2023. With me today is Kyle Udseth, our Chief Executive Officer. Our call this afternoon will include statements that speak to the company's expectations, outlook, and predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may cause our actual results to differ materially from those expressed in or implied by these statements. We are not obliged to revise or update any forward-looking statements except as may be required by law. Please refer to our disclosures regarding risk factors and forward-looking statements in today's earnings release and other SEC filings. A copy of our press release has been posted to the Investor Relations page of our website for reference.

The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued earlier today. With that, I will turn the call over to our CEO, Kyle Udseth. Kyle, go ahead.

Kyle Udseth (CEO)

Thanks, Eric, and thank you to everyone for joining us on the call this afternoon. Today I'm once again happy to share another quarter of solid operational and financial results from Pineapple Energy, which capped off an excellent full year 2023. But once again, I will also say it didn't come easy. In writing this script, I was reviewing our call from Q3, and in that call I said that in my nine years in rooftop solar, I couldn't recall a more trying quarter. Well, we just went through an even more challenging one. Numerous longstanding operators in the space have gone bankrupt, the rate cut signal by the Fed has not yet materialized due to stubborn inflation, and public equity valuations in our sector are near all-time lows. However, if you dig a bit below the surface, there are signs of green shoots starting to emerge.

Demand is starting to rebound, although the real acceleration should pick up in the second half of the year as rate cuts begin. But even if you parse that statement for a second, demand is like a technical economics term. I think of it more like the desire for homeowners to go solar and ideally add a battery is, in my opinion, as high as it's ever been. People want control and predictability over their electric bills. They want a way out of crushing annual bill inflation. They want to produce their own clean power, and they want backup and resilience in the face of increasingly severe weather and an increasingly fragile grid. That desire has not yet fully translated into econ textbook demand, as people have stayed on the sidelines, some due to interest rates, regulatory uncertainty, and some general economic malaise.

I think it's really important to parse out that first point: the desire is as strong as ever. This is the winning technology. It's the technology of the future. It's also the technology of the present. Consumers very much want solar, battery storage, and to further electrify their homes. Then additional green shoots. Unfortunately, for everyone who pays an electric bill, but helpful for our industry, utilities keep raising electric rates double-digit percentages each year. This trend shows no sign of abating, and they don't seem to see a problem with it. See Pacific Gas and Electric announcing a 25% annual profit increase to $2.2 billion - that's billion with a B on the heels of, I believe, 17% rate increases and then claiming the two weren't related. This monopoly behavior is why our industry will keep winning over the long run. We offer consumers choice and control.

Then green shoots on the equity markets and valuation front. Zeo appears to have had a successful de-SPAC recently, and we welcome them to the public markets as another resi solar company. Valuations are coming back for Sunrun and Sunnova after their strong fundamental performance in Q4 was far overshadowed by some unforced errors on their last earnings calls regarding capital raising. I think investors are starting to move past that, although the hedge fund shorts are still out there, but that just sets up for a bigger short squeeze as value and long-term investors focus on the fundamentals that have been strong and keep improving. Let's now zoom in from these broader industry discussions and focus on Pineapple, where, in spite of these macro challenges and headwinds, our teams were able to rally and deliver another quarter of positive Adjusted EBITDA.

That's four for four, with every quarter in 2023 coming in with positive Adjusted EBITDA. That is no easy feat for a company like us with sub-$100 million of revenue while bearing all of the public company costs. I'm incredibly proud of the whole team and grateful to all of our employees for their hard work and sacrifices throughout the year in making this EBITDA result happen. We've talked a lot so far about demand, and of course, revenue generation is critical for any company and critical for growth and continuing to realize our long-term vision. But one thing I believe really sets us apart at Pineapple from many of the companies who didn't make it in our industry is a relentless focus on cost containment and margins.

Cash is the lifeblood of any company, and our focus on profitability as well as disciplined forecasting and cash management has really shown out in our results. Delivering on our performance metrics and hitting our goals will continue to be the focus into 2024. On this, as well as prior calls, you've heard a lot of discussion of organic growth and bottom-line focus from our existing businesses. They are our foundation, and they support the strategic platform for Pineapple. But the broader vision is absolutely still intact as well to drive the roll-up of leading local and regional residential solar and storage companies across the country, and we've made steady progress on that front as well. The current environment presents a tremendous buying opportunity for experienced and savvy consolidators who can find and integrate the right companies.

With that, I'll now turn the call back over to our CFO, Eric Ingvaldson, to walk through our financial results. Eric, please go ahead.

Eric Ingvaldson (CFO)

Thank you, Kyle. I will review the GAAP financials as required by the SEC and then review certain pro forma numbers that will give you a better sense of the year-over-year performance of our business. The GAAP numbers are less insightful because Q4 results last year included a full quarter of our Hawaii operation and a partial quarter of the results of SUNation, which was acquired in November of 2022. Let's start with the fourth quarter 2023 U.S. GAAP results. Total revenue was $19.4 million, up $2.3 million or 13% from the fourth quarter of 2022. The increase in revenue was primarily a result of the SUNation acquisition in Q4 of 2022. Total gross profit was $5.5 million, an increase of $515,000 or 10% year-over-year. Gross profit also increased primarily due to the SUNation acquisition and an increase in revenue. Total operating expenses were $7.9 million for the quarter.

That's a decrease of $692,000 or 8% year-over-year. The decrease in operating expenses was primarily a result of transaction-related expenses due to the closing of the SUNation acquisition in the fourth quarter of 2022, offset by only a partial quarter of SUNation operating expenses represented. Operating expenses in the fourth quarter of 2023 included $1.1 million of amortization and depreciation expense, $246,000 of stock-based compensation expense, and $190,000 unfavorable fair value remeasurement of earnout consideration. Operating loss in the fourth quarter was $2.3 million, a decrease of $1.2 million, and a 34% improvement from the prior year. Other income was $781,000, a decrease of $2.2 million from the prior year. Other income decreased primarily due to a $1.8 million decrease in the favorable fair value remeasurement of Contingent Value Rights over the prior year and an increase in interest expense.

Net loss from continuing operations was $1.7 million or a loss of $0.16 per diluted share in the fourth quarter of 2023. This was an improvement from the net loss from continuing operations after taking into effect $16.9 million in deemed dividends in the fourth quarter of 2022 of $17.4 million or $2.58 of loss per diluted share in the fourth quarter of 2022. Please refer to the press release filed earlier today for full-year U.S. GAAP comparisons for the 12 months ended December 31st. Please note that 2022 results only include the post-merger operations from the CSI merger and HEC acquisition beginning on March 22nd of 2022 and the SUNation operations beginning on November 9th of 2022. Now let's summarize the pro forma results, which assumes we owned SUNation and HEC for the full year in 2022.

The pro forma year-over-year comparisons better represent the operational performance of the business versus growth because of the timing of acquisitions. Q4 pro forma revenue declined 17% compared to the prior year. This was due to a 20% decline in residential revenue, a 6% decrease in commercial revenue offset by a 6% increase in service and other revenue. The decrease in residential revenue of 20% is the result of a decrease in residential kW installed of 17%. The average price per residential kW installed declined 6% due to the impact of lower equipment costs and financing fees on customer pricing. However, this decline was offset by additional revenue resulting from an improved battery attachment rate.

Q4 pro forma gross profit decreased 28% compared to the prior year as a reduction in equipment costs and financing fees was outpaced by an increase in indirect costs that are included in gross profit and the increase in the battery attachments, which are at a slightly lower margin. Q4 pro forma net loss increased by $2.7 million compared to the prior year primarily due to a $1.8 million decline in favorable fair value remeasurement of the contingent value right liability and increase in interest expense. Pro forma Adjusted EBITDA of positive $208,000 improved 222% from negative $171,000 in the prior year. This improvement was achieved primarily through operating leverage gained by actively managing the operating costs of the business. Year-to-date, pro forma revenue was up 8% from $74 million last year to $79.6 million for the 12 months ended December 31st, 2023.

Full-year pro forma revenue increased due to an 8% increase in residential revenue, a 4% increase in commercial revenue, and a 15% increase in service and other revenue. Year-to-date, pro forma gross profit increased 16% due to an increase in revenue and margin improvement because of reduced equipment costs and financing fees. Year-to-date, pro forma Adjusted EBITDA of $1.2 million improved by $4.5 million or 137% from negative $3.3 million in the prior year. Pro forma Adjusted EBITDA includes adjustments for fair value remeasurement of earnout consideration and Contingent Value Rights obligations, stock compensation, gain on the sale of assets, impairment losses, and the Employee Retention Credit. We ended the quarter with cash available for Pineapple operations of $3.6 million compared to $3.4 million available at the end of the third quarter. We had another $1.8 million of restricted cash in liquid investments, which is reserved for the CVR holders.

Net cash generated from operating activities during the fourth quarter of $160,000 was the result of changes in net working capital. Notable changes in net working capital were due to a decrease in inventory and other assets and increase in accrued compensation and benefits in the quarter offset by a decrease in customer deposits and other accrued liabilities. We are actively engaged in fundraising efforts to ensure we have adequate capital to fund all the company's obligations in 2024. Now we would like to open the call for any questions. Operator, go ahead.

Operator (participant)

Thank you. The floor is now open for your questions. To ask a question at this time, please press star the number one on your telephone keypad. For the meantime, we'll just pause for a few moments to compile a Q&A roster. Our first question comes from the line of Donovan Schafer with Northland Capital Markets. Your line is now open.

Donovan Schafer (Managing Director and Senior Analyst)

Hey, guys. Thanks for taking the questions. I want to start off talking about gross margins. So it looks like sequentially, quarter-over-quarter, they were down about 10 percentage points, 38.5% last quarter and 28.4% this quarter. And so I'm just curious if you can talk about what drove that difference on a quarter-over-quarter basis.

Eric Ingvaldson (CFO)

Yeah. This is Eric. How are you doing, Donovan? The increase quarter over quarter sequentially is really related to not necessarily direct costs, but indirect costs that are allocated into gross margin. So these are things like rent, indirect labor, insurance, and other costs that are attributable to jobs. We've put into place a more consistent methodology to make sure that we're allocating those indirect costs the same way throughout the company. And we've also seen increases in those costs as we've gone throughout the year. So it's not necessarily a result from increase in equipment costs or direct labor. It's more related to the indirect allocations that are given to gross margin due to U.S. GAAP and accounting requirements.

Donovan Schafer (Managing Director and Senior Analyst)

Okay. And you're saying that's mostly some of that customer acquisition costs? Or is it mostly insurance? I mean, just the change on a quarter-over-quarter basis is kind of more abrupt, so. The specific items you said, insurance, and what were the other ones?

Eric Ingvaldson (CFO)

So I mean, indirect allocations to gross margin are anything that's kind of indirectly attributable to the job. So it would be overhead costs of any type.

Donovan Schafer (Managing Director and Senior Analyst)

You're just saying those just did increase sequentially?

Eric Ingvaldson (CFO)

Correct.

From last quarter.

Donovan Schafer (Managing Director and Senior Analyst)

Okay. Okay. And then talking about just in terms of what we've talked about for Sunnova and Sunrun and other companies, we have some sense of how the market is doing across the United States. But could we go a little bit more in-depth and get sort of updates on Hawaii and New York or Long Island specifically in terms of what trends you're seeing? And is there anything? Are you getting any tailwinds from the fires in Hawaii? HECO may have to raise rates if they get hit with a big lawsuit liability. Just any updates that are specific to those regions.

Eric Ingvaldson (CFO)

I mean, we can talk about trends through 12/31, right? We're almost on April 1st. So I don't think we want to talk too much about market-by-market breakouts of anything that's happened since 12/31 because we haven't filed that yet. I would say, in general, the Hawaiian market, and this is no different than what you'll hear from anybody else who's active in the market. I think the Hawaiian market had a strong fourth quarter to finish out the year. I think there was this Battery Bonus program that was in place through the end of last year to help kind of emergency backfill the missed capacity that Hawaiian Electric wasn't able to bring online, from their own utility-scale projects to backfill the coal plant that shut down. And so consumers stepped in and provided a lot of generation and storage and resilience to the grid like they always do.

And that was a good program. It should have continued. I think it cut off sooner than people were expecting because of some miscommunication and queuing with the utility. But I think that was a big demand support last year. I think the successor tariff this year around bring your own device is not as lucrative. And I think customers are kind of on the sidelines waiting to see exactly how that gets implemented. And then you always see in Hawaii kind of a lull in demand after the end of the year until tax day and people get their refunds back from last year's. So I think Hawaii is holding up fine, but you don't have quite the support that you had from the battery bonus program last year. I think Long Island continues to be a healthy market.

I think that there should be a shift to increased battery storage as people shift on more time of use rates. I think that was supposed to come for some customers on January 1st. I think it's been delayed because of IT issues at the utility. I think both of those markets are holding up pretty well. I think it's hard to disentangle the trends state by state sometimes in the narratives you read more broadly from the NEM 3.0 wipeout in California. Yeah, I think both of those markets are holding up well.

Donovan Schafer (Managing Director and Senior Analyst)

Okay. And then in the past, you've given annual guidance. I'm just curious, do you have plans? Do you anticipate giving, and apologies if I missed it, but do you anticipate giving revenue guidance for 2025 or something, maybe you wait a while to do? Or I'm just curious what your current state of thought is on that.

Eric Ingvaldson (CFO)

Yeah. We're not doing it this quarter. I think we'll revisit that decision next quarter.

Donovan Schafer (Managing Director and Senior Analyst)

Okay. Okay. So potentially next quarter, but just depends on what kind of visibility you get.

Eric Ingvaldson (CFO)

Yeah. I think that's well, I mean, sure. I think we did guidance this year, and we hit it almost right on the nose. And the stock seemed to respond, and investors didn't really seem to care one way or the other any given quarter when we did it. So I think we have our own budgets. We have our own forecasting. We track towards those. On the question of public guidance and giving it for full year or giving it quarterly, I think we have a bit more discussion to do internally here and potentially talk about with our board before we make a decision for what to share on the next call.

Donovan Schafer (Managing Director and Senior Analyst)

Okay. Okay. Then I have a question for Eric. So in the adjusted EBITDA or pro forma EBITDA reconciliation, I saw that in the fourth quarter of 2023, there was this about a $1 million write-off for legacy CSI receivables. And of course, that has to do that's with the legacy company. There's the reverse merger into that. And so operationally, it has absolutely no tie to what you guys do. But I guess I'm curious, is there any way of recovering that at all? Is it for you is it a receivable? There would be a claim for Pineapple versus CSI's former owners and shareholders? Or is it a claim of CSI from its legacy business to a customer? And just kind of what happened there if it can still be recovered in any way.

Eric Ingvaldson (CFO)

Yeah. The receivable was write-off. It's a longstanding receivable due from a government entity that we received news in the fourth quarter that the likelihood of collection was drastically reduced. It is related to the subsidiaries of which we sold the assets already. But it is an asset of the CVR holders. So if we are to collect that money, that money would be distributed to the CVR holders. We wanted to include it in discontinued operations, but accounting guidance had it in our continued operations since those legacy assets had already been sold. But unlikely, it will be collected. And if it is, it would be distributed to the CVR holders.

Operator (participant)

Seeing no more questions in the queue, I'd be turning the call back over to Mr. Udseth to conclude the call.

Kyle Udseth (CEO)

Thank you, operator. To conclude, speaking on behalf of the entire Pineapple leadership team, we're pleased with the strong results we were able to deliver in 2023 on the revenue front and especially with four quarters of positive Adjusted EBITDA. So I'd say pleased, but never satisfied. We need to continue pushing forward to help more homeowners go solar. We're holding the line on costs and pursuing growth by acquisition as well. Thanks to everyone listening to or reading this for your ongoing engagement. These past two quarters have presented a challenging operating environment and have been a really tough time for pretty much everyone I know in the industry. But for better or worse, we are on the Solar Coaster, and I think the ride will become fun again in the second half of the year for the companies that can make it through.

Utility rates keep going up, solar costs keep coming down, and interest rate cuts are on the horizon. That's a winning setup for consumers and a winning setup for rooftop solar and battery storage. Pineapple will be there to keep helping homeowners and leading the industry forward. Thank you again for joining us this afternoon and for your continued support. If you have any questions, please contact Eric or me. This concludes our call today. You may all disconnect. Thank you.