PowerBank - Earnings Call - Q3 2025

Transcript

Megan Haley (Marketing Analyst and Head of Investor Relations)

All right, hello everyone. Thank you for standing by. Good afternoon and welcome to the SolarBank Fiscal Third Quarter 2025 Financial Results and Corporate Update Conference Call. My name is Megan Haley. At this time, all participants are in a listen-only mode, and after today's presentation, there will be a question-and-answer session which will feature previously received questions. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call and accessible on the Investor Relations portion of our website for access for 30 days. Today, the company issued a press release for its financial results for the fiscal third quarter ended March 2025.

A copy of that press release can be found on the company's website at solarbankcorp.com under the Investor tab. Joining me on today's earnings call from SolarBank's management team are Dr. Richard Lu, Chief Executive Officer, and Sam Sun, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address SolarBank's expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in SolarBank's annual information form, most recently filed annual report on Form 40-F, and subsequent periodic reports filed with the SEC, SEDAR, and SolarBank's press release that accompanies this call, particularly the cautionary statements in it. The content of this call contains time-sensitive information that is accurate only as of today, May 15th, 2025.

Except as required by law, SolarBank disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to CEO Dr. Richard Lu.

Richard Lu (CEO)

Thank you, Megan. Good afternoon to everyone on the call. Prior to turning this call over to our CFO, Sam Sun, I'd like to highlight some of our existing progress to accompany our filing and the financial report for the year to date and the fiscal third quarter 2025. We're going to focus our presentation today on our nine-month year-to-date results. As of today, we are sitting with projects representing approximately 146 MW that are expected to reach notice to proceed within the next 12 months, which we believe has the potential to grow by an order of magnitude in the coming years. Solar power is undeniably a source of energy that has unique, significant cost and environmental benefits to power producers and consumers alike as technology continues to propel solar's proliferation across the globe.

For the first nine months of fiscal 2025, we reported CAD 29 million in revenue, down CAD 21 million compared to last year's same period. Our largest category last year, EPC, Engineering Procurement Construction Services, was down approximately CAD 27 million to CAD 20 million. As discussed last quarter, SolarBank went public for the purpose of being able to own more assets and grow its independent power producer business. This strategy is going to provide a high margin recurring long-term revenue to the company. The historical develop-to-sell model, which will produce higher revenue, has been successful, but the revenues can be lumpy. By keeping more of the assets that we are developing as an owner is necessarily going to mean a reduction in the EPC revenue. The revenue reduction is not because of projects' development or execution, but rather the changing policy from build-to-sell to build-to-own.

We raised the funding from Highbridge, which is owned by JPMorgan, who invested in 140+ energy companies and is a very high-quality institutional investor that is closed during the quarter with almost all of those funds allocated to grow our IPP portfolio. The IPP production generated the CAD 6.5 million in high-margin revenue. This is a significant increase compared to CAD 215,000 in the prior fiscal nine-month period. This revenue represents recurring asset-based revenue for zero-emitting electricity supplied to our customers, such as electrical system operators and municipal governments. To underscore, we believe IPP revenues will grow over time in lockstep with the solar power plants we built that we choose to own upon completion. I'd like to also highlight some of the announcement events and milestones in the quarter that support the conviction that we are well-positioned for growth.

We announced among many projects that our 3 MW Camillus Solar Project has been sold to and will now enter construction for Solar Advocate, a wholly-owned subsidiary of [Charleys], for valued at $7.3 million. That's a revenue addition. We commenced the construction of our first large-scale battery storage project with an IESO EL1 contract for 21 years. That's a capacity contract. That project is located in Ontario, Canada, known as the SFF-06 Project. That project is financed with long-term debt from Royal Bank of Canada and equity from ourselves, and that will be our first large-scale battery storage project that added to our IPP fleet. We also have a significant portfolio of community solar projects in New York and Nova Scotia that are advancing, supporting our total development pipeline of more than 1 GW.

Worth to mention is that the announcement in Canada, giving the overall background that geopolitics, that the Canadian government is heavily investing in Canada, and our team working with AI Renewable, which is a Flow-Through Fund, have obtained the first batch of community solar projects in Nova Scotia. We will continue to explore any opportunities in the renewable energy in Canada. We complete a registered direct offering with a single institutional investor, which is Highbridge, owned by JPMorgan, for aggregate gross proceeds of approximately $88.5 million. Up to an additional $10.7 million may be funded upon full cash exercise of the warrant at a 20% premium. That warrant has been issued to Highbridge at the closing of this financing.

We also have entered into a mandate letter, as you see from our announcement, with the CIM Group, which is a $60 billion company in the West Coast, that they have heavily invested in real estate, in renewable energy, in battery storage, and other long-term assets. That commitment letter gave us up to $100 million preferred equity to own project that is going to be used to finance a portfolio of 97 MW solar power projects located in the United States. Those are the significant milestones and events. You can see the company, even though our revenue is being reduced because we purposely decided to keep the project while establishing ourselves as a stronger IPP player owning and operating assets going forward. I also want to comment on the recent announcement of the increased tariff on those Southeast Asian countries and our plan to manage its supply chain.

SolarBank has not been importing solar panels from any of the four countries that are subject to the tariffs announced by the U.S. Department of Commerce on April 21, 2025. As a result, our present operations are not affected by this announcement. In addition, SolarBank has been exploring sourcing solar panels from other international markets and also from North America. Our relationship with Qcells, not only selling projects to Qcells for them to deploy their made-in-the-U.S. panels, but there's also a relationship we start to establish going forward, move our supply chain to the U.S., where domestic assembled solar panels are becoming more cost competitive with the panels imported from the international market.

SolarBank also has significant development opportunities in Canada, as I mentioned, specifically in Nova Scotia, in Ontario, in BC, and other provinces, including Alberta, which we are building for Fiera on the commercial and industrial buildings, where solar panels are not subject to the same tariffs. Finally, I am expecting that electricity costs will increase in response to those tariffs, which will further mitigate the financial impact on our projects. Overall, SolarBank is well-positioned to manage this risk. Now, I'd like to turn the call over to Sam Sun, who is our CFO, who will review our financial results in more detail. Sam, please.

Sam Sun (CFO)

Thank you, Richard. First, please note that all figures are in CAD. Again, we are going to cover the nine-month numbers with the quarter numbers available in the filings as was submitted today. Our total revenue for the nine months was CAD 29 million versus approximately CAD 50 million in the prior year-peer time, a decrease of approximately 42%. As Richard just mentioned, the decline in revenue was primarily due to a CAD 27 million decline in EPC services revenue, partially offset by over CAD 6.5 million in IPP revenue, which compared with CAD 260,000 in the prior year. Revenue from different fees and other sources were relatively unchanged. The gross margin for the nine months lowered to approximately 19.9% compared to 20.4% in last year's same period.

There was a CAD 1.5 million depreciation in the fixed asset included in the gross margin, which is a non-cash item and for about 5% of the margin. Additionally, due to seasonal factors, the margin contribution from IPP revenue tends to be lower during the winter and the spring months. We anticipate a significant improvement in both revenue and gross margin in the fourth quarter. Excuse me. Our operating expenses were approximately CAD 12.6 million for nine months compared to CAD 8.1 million in the prior year period. Lower sales in the first three quarters have increased our operating expenses as a percentage of sales, but we are targeting a continued decrease in operating expenses as a percentage of sales as we scale and continue to maintain a careful eye over our operating costs.

As noted in the press release we were issued today, there are just the EBITDA of -CAD 23,000 as compared to the positive CAD 2.2 million in the prior year's period. Net loss for the nine months was approximately CAD 9 million or CAD 0.29 per share basic share compared to the net income of CAD 5.5 million or CAD 0.20 per basic share in the prior year period. For the period ending March 31st 2025, SolarBank reported CAD 45 million in current assets, an increase of CAD 28 million compared to the end of fiscal 2024. The increase is mainly due to an increase in cash receivables and inventory. Current liabilities increased CAD 27 million to CAD 40 million as of March 31st 2025, mainly due to an increase in payables and the current portion of long-term debt, which is almost entirely non-recourse project level debt assumed as part of the Solar Flow-Through Fund acquisition.

Long-term debt as of March 31st 2025, was CAD 59 million, an increase of approximately CAD 54 million from year-end. Our debt consists primarily of project debt, which is non-recourse, and our projections out in 2025 indicate that the current level of debt is certainly manageable relative to the projected adjusted EBITDA and the other key balance sheet metrics that we monitor very closely. We would like to point out that our largest lenders are top North American financial institutions, such as RBC, which we announced back in last November, provided a loan for CAD 25 million for two 4.7 MW by four-hour battery system projects to be located in Ontario. We continue to be able to achieve very favorable financing terms, particularly considering our firm's size, which you can find detailed in our filings.

Our cash and short-term investment was approximately CAD 25 million as at March 31st 2025, compared to CAD 6 million at the end of last fiscal year. A portion of the cash position is required to be maintained pursuant to the term of the credit agreement assumed as part of the Solar Flow-Through Funds acquisition. We continue to believe we can execute on our strategic growth for the remainder of 2025 and beyond, which includes continued growth of IPP portfolio and execution on the development pipelines. That concludes my remarks, and I would like to turn back to Richard for remaining comments. Thank you.

Richard Lu (CEO)

Thank you, Sam. That's great. Before we open up for questions and answers, I'd like to make some remarks on the market and SolarBank's current conditions. To start with, listeners here are probably thinking, "Wow, the company actually had a huge revenue reduction. What's going on? Is the company in difficulties?" It is not. It is not. The first remark I'd like to make is about what is SolarBank's strategy going forward to grow as a North American renewable energy player. Okay? In our corporate deck and in the discussions or roadshows that I have been performing, we always shared from day one that this company's growth strategy is twofold. Number one is the traditional model, as we started back to 2013, is develop, build, operate, and sell. In other words, we don't take ownership.

Because of the nature that the revenue is very high, as you can see, last year we were CAD 60 million, now we are CAD 40 million, right? That function is truly designed to meet corporate Americans' needs. As you know, our customers are Checkers, and they are a premium fast food chain, and the owner has a great desire to do something for the environment while very philanthropic in the renewable energy area. Our customers have been Honeywell, as you know. In addition to their investment and the tax management needs, they do care about the environment. That was for their superfund site and also helped them to achieve their ESG goals.

We have Qcells as our customer, and not only are they a U.S. manufacturer in the solar equipment, but also they want to contribute to the owning and the assets to develop renewable energy, right? When you look at those ones, that the corporate requirement of our project will always be there. We will always have a component to service our existing and future customers, like the names I mentioned. On the other hand, when we went to public through the travels, we hear clearly and loudly from the investment community that this company needs to have recurring revenue, which we need to shift our model from develop, build, operate, and sell to develop, build, operate, and own. We have very methodically looking at those strategy shifts, as you can see that our revenue from a couple of hundred thousand now is in the millions.

You will see going forward that that part of business will grow significantly in parallel matching our revenue side of things. The revenue deduction is by design through the technical shift from build to sell to build to own. That is the first comment on our strategy. The second comment was really about risk mitigation through vertical integration. As everyone on this call realized, North America is going through a huge fundamental change because of the geopolitics, because of the new administration. I think overall that we are very comfortable with the initiative to make America great again, especially when we talk about making the U.S. as an energy-dominant country and recall all the manufacturing facilities. That in the long run will have a benefit. However, what about the short term? The first concern is tariff.

As I mentioned before, the tariff announcement did not impact us because we have never taken any delivery from mainland China. We have been taking delivery from Southeast Asia for some time. Now we have moved to other international markets and also moved to the States. Given the increased cost matched with the increased incentive and also given the increase of electricity price because utilities cannot absorb the tariff, your electricity price will increase, which means our revenue increase. From that perspective, the tariff to our impact is neutral, minimum, or to positive. We also achieved negotiations with our long-term suppliers. Any tariff will be shared 50% going forward. That is on the tariff side. The second one on the political risk is the investment tax credit. As you can see, yesterday or two days ago, the Means and Ways Committee published their ITC reduction schedule.

For residential, it's very detrimental. Could be end of this year, 2025. However, for commercial, industrial, and other community, even large scale, the schedule will not start until 2028 or 2029. I think we fully baked those scheduling into our operation, and we will continue to deliver the strategies that we have been discussing. That is on the ITC. The third one under this risk mitigation is really the energy market. As I always shared with you, the energy market participants are operating in a price-taking environment, which requires the operators, such as SolarBank, to manage their cost and to increase their production. We have a vertically integrated system. We call it production line from development to construction to operation, maintenance, and all the way to asset management.

Because we have the capability from A to Z that all those in-house activities will allow us to manage our cost, to simplify our process, and focus on our cost reduction, especially at this moment, cost on productivity and increase of the volume. Now, if you look at the energy market, the demand is increasing more than ever because of the digital economy. The supply is really slow coming online. As you can see, the old thermal plants are at the end of the service life. The new gas plants take about five years to build. SMRs are in the 10-year horizon. What really can deliver now is really in the next three to five years is really solar, wind, natural gas, and other, in a smaller degree, thermal plants.

The approach about all above approach in energy truly plays to our favor because we, with 1.2 GW of pipeline continued in the area of mergers and acquisitions, will be able to deliver energy at a cost that is competitive with the market in the short term, hence producing further investor returns to our investors. That is the second comment in terms of risk mitigation and our defensive mechanism as the vertically integrated company. The third comment is really about the company's strong cash position and financial sustainability. Compared to the same year last year, we have about CAD 6 million cash, and today we're sitting on CAD 25 million cash. That is how careful or how skillful that we found this company in a very, very defendable position. If you look at a broader case, our relationship with financial institutions is very strong and growing.

Traditionally, we took long-term debt from PNC, continue to be a good partner. We are working closely with Royal Bank of Canada in Canada, and M&T Bank in the States has been great in terms of helping us in terms of operating needs. Seminole Financials being a good partner with us on the ITC, on the project financing. Now with Highbridge, a JPMorgan fund, be a major institutional investor and continue to invest in us further strengthens our connection with the institutional investors and the financial world. Of course, CIM, a $60 billion company, offered us $100 million of preferred equity will certainly top it up in securing our strong financial environment. On the other hand, we operating in the renewable energy business, as you know, we do not do residential business.

On the large scale, we only do projects when it's paired with strong demand of customers such as data centers. Our core business in this area is really about commercial industrial. We're working with Pure Industries, which is a BlackRock-owned company. We're working with Fiera, which is a $7 million or $8 billion real estate company. Of course, the community solar is our bread and butter. All of those things, if you look at the quality of customers, not to mention the name that I mentioned, the Fiera or Pure Industries and so on, Honeywell, for example, Charleys, for example, the IESO, for example, Qcells, for example. When you look at our strong cash position, we're sitting on CAD 24 million of cash that will give us 15 months of runway matched with strong financial connections and customers.

This company is well positioned to weather any of the foreseeable financial or market volatilities. I'm really excited, and I will say time will tell. Certainly, this company slowly but surely will achieve our technical shift from build to sell to build, own, and balance the needs of corporate America and also the needs of our investors. I'd like to turn over to the operator, Megan, so that we can begin some of the questions and answers. Okay, great.

Megan Haley (Marketing Analyst and Head of Investor Relations)

Thank you, Richard. We're now going to conduct a Q&A session. I did notice a hand up currently, and as everyone on the call will need to remain on mute, please do submit the question through the Q&A function on the call. Now to get started with the first question, this is for Richard.

Could you please elaborate more about the Trump government's impact on the business?

Richard Lu (CEO)

I touched upon tariff on ITC, but I will say if you look at Trump's government, what they want, they want to make America great again. They want to make America an energy-dominant country. They want to bring manufacturing to reestablish manufacturing mighty of the United States. From us, if you look at our business, we have been purposely focusing on the Canada and the U.S. market. We did not go global as most of our competitors went. That is the purpose that we'll say as the countries, both U.S. and Canada, become stronger and stronger, so will be our business. That is the first one, make America great again, benefit our business. Secondly, he talked about the domesticate of the manufacturing.

We understand today China probably is a dominant party in renewable energy and other areas of social force. They supply the majority of the materials in solar, in wind, and so on and so forth. Those technologies are easily transferable, the same as more than 20-30 years ago when we transferred technologies to the Far East. We have been in touch with at least a dozen manufacturers, whether they are from China or from other countries that are in sales, in modules, in inverters, and so on and so forth. Because of the CIM connection, we actually are in term sheet discussions with U.S. companies where solar cells are made, where modules are made. From that perspective, as you bring the manufacturing back to the U.S., that will give us a stronger connection, at least at this moment, taking advantage of the ITC and the PTC.

That is the second implication of this recall, all the manufacturing back to the U.S.. Of course, the last one he talked about is that makes U.S. an energy-dominant country. Not only he likes the drill, baby drill. As you know, in North America, the production probably is less profitable if the oil price is less than $70 a barrel. Currently, I believe it is around $56. There is no drill. There is no drill. Where is the power coming from? Obviously, we can do natural gas. Obviously, we can extend the life of the thermal plants. Obviously, we can refurbish the existing nuclear reactors. Obviously, we can continue our pursuit for fusion in the near term, SMRs. What is in hand is the momentum of renewables, whether it is solar and wind, and to deliver in the next three to five years. This is all above approach.

In the background of making U.S. an energy-dominant country, help us give us a reminder that we are in a business that keeps the lights on. We are in a business that keeps people connected. As the data center business going forward, and we are part of as their power partner, that will further strengthen the need for the product produced by our IPP fleet and also indirectly through our customers such as Honeywell, such as Qcells, such as Charleys, that will make the all the above energy approach more profitable and prevalent in the States. I know it's a long answer, but I will say the policy benefits companies like us in the long run.

Megan Haley (Marketing Analyst and Head of Investor Relations)

Okay, fantastic. Thank you so much. Just a couple more questions have come in here for you, Richard.

The first is, are you able to provide any color on the critical path forward to definitive documentation under the CIM funding agreement?

Richard Lu (CEO)

As a public company, obviously, we will comply with the disclosure requirement of the CIM documentation. As you can see, I can give you a high level, but I think on further details, I will certainly be working with our corporate counsel to make it available as allowed. Effectively speaking, the CIM is a takeout financing that enables us to engage bridge loans or other means to fund the construction of 97 MW of community solar project in Upstate New York. As the project achieves mechanical completion, 20% of the revolvers or the bridge loan will be paid out. Shortly after mechanical completion, as the project is closed, connected into commercial operation, the remaining 80% will be paid out.

From there, the project will be owned by CIM for a period of, let's say, five years. Eventually, SolarBank will be the long-term owner post. It's almost the same as a part and flip model that happened very often in the United States.

Megan Haley (Marketing Analyst and Head of Investor Relations)

Okay, thanks very much. The last question for you here is, looking at the revenue mix, should we expect the IPP segment to continue to take a larger share of the mix in the coming quarters, or is this more of a calendar 2026 type development?

Richard Lu (CEO)

Historically, if you look back to 2013 all the way, I will say till 2020, our revenue are purely by building to sell. That's the increasing the year we went public, it went to CAD 60 million.

That is where, based on the input from our investors, we decided to do a technical shift from build to sell to build to own. You will see that on the revenue side we will continue to service corporate America's needs. Now the recurring revenue becomes a more and more significant component of the total revenue. In the last year, it was a couple of hundred thousand dollars. This year it is already in the millions. Next year will be in the tens of millions and so on and so forth. Our goal is to have a balanced approach in the next two to three years and to balance our income so that we can both service corporate America and also service our shareholders.

Megan Haley (Marketing Analyst and Head of Investor Relations)

Okay, great. Thank you so much. Our next question here is for Sam.

Sam, could you tell us why is the three-month IPP revenue only CAD 1.1 million, which is only one-sixth of our nine-month IPP revenue?

Sam Sun (CFO)

Sure. This is very typical in the solar industry. It is called peak sun hours. That is the crucial factor impacting our IPP revenue. Early in wintertime and the springtime, the peak sun hours are much lower than in summertime. If we are looking at the CAD 10 million annual revenue in the IPP portfolio, typically we look at probably CAD 1-CAD 1.5 million in revenue per quarter in winter or springtime versus the CAD 3-CAD 4 million revenue in summertime. That is the major reason. Thank you.

Megan Haley (Marketing Analyst and Head of Investor Relations)

Okay, thank you. Our next question here, why has the percentage of operating expenses to the total revenue increased compared to the last fiscal year?

Sam Sun (CFO)

That is a very good question.

If we look at the bigger picture, the major reasons are twofold. The first is the revenue decreased by CAD 20 million. As Richard mentioned, we do have a seasonality. Also, one thing I would like to mention here, before we can recognize the revenue based on the accounting IFRS policy, the team needs to do a ton of work, non-financial work to bring the project to start the construction, the engineering, and procurement. For the past few months, the team has done a ton of work to prepare the four projects we sold to Qcells to ready to build. The team is ready and a lot of equipment has been procured. We anticipated there will be a huge catch-up of the revenue in Q4. The second factor here is depreciation. Compared to the last fiscal year, there were only CAD 300,000 depreciation.

We incurred almost CAD 4 million depreciation in the first nine months this year, which decreased the percentage of or increased the percentage of the operating expenses compared to the total revenue. In summary, we anticipate the company will improve those financial metrics in Q4 and the next fiscal year. Thank you.

Megan Haley (Marketing Analyst and Head of Investor Relations)

Great. Thank you so much, Sam. Our last question just coming in from the chat here is to either Sam or Richard, how might state-level policies, community initiatives, and corporate buyers counterbalance any federal-level uncertainty around sustainable energy goals?

Richard Lu (CEO)

As the audience know, energy is a state or provincial jurisdiction. At the federal level or at the top level, they are really about the policies such as the taxation policies and overall inflation reduction policies, so on and so forth. That is a broad application of it.

At the end of the day, each of the states decide how to proceed with the energy needs. In Canada, for example, we are in Ontario. We used to own half of the market of the small FIT tariff program. We play in the ELT1 program, so on and so forth. Those are all provincial programs enable us to participate to grow. Our team went to Nova Scotia because realizing Nova Scotia, New Brunswick, and Alberta are higher carbon content energy provinces, and they have better needs. Their provincial policy encourages the development of lower or zero carbon electricity development. That is how much that state-level or provincial-level policy driven this. In the U.S., as you know, we are only focused on the 22 states where community solar policy is there. We are not into the remaining states because there is no such a policy.

Not to say the other states do not have renewable energy initiatives. Just from a policy perspective, we feel more comfortable if the states that stated as law clearly and loudly that they support such an initiative, and we will move our resources, people, money, and time into those states. State policy is where we are taking more action in the backdrop of the federal-level policies. Wonderful. Thank you. For that, Megan, I think you said that is the last question. I am sure there are more questions, dear audience. Let us know. Email us. We will certainly want to continue to engage with our dear investment bankers, analysts, and our broader shareholders. At this moment, I want to thank all of you for participating in today's call and for your interest in SolarBank. Thank you so much. You all have a wonderful evening.