Eguana Technologies Inc

XTSX:EGT

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Eguana Technologies, Inc. Fourth Quarter 2023 and First Quarter 2024 Results and Shareholders Conference Call and Webcast. [Operator Instructions]

The conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Justin Holland, CEO of Eguana Technologies. Please go ahead.

[Justin Holland, executive]

Thank you, and good morning. Thanks for joining us on the update call today. With me, we have Eguana team members, Brent Harris, Chief Operating Officer; Hansine Ullberg, Chief Financial Officer; and we're happy to introduce [ Dave Hanlon ], our Corporate Controller.

Before we begin, please note that certain remarks may constitute forward-looking statements, and although management believes these statements reflect our best judgment based on factors currently known, actual results may differ materially and adversely. Please refer to the company's filings on SEDAR for a more inclusive discussion of risks and additional details relating to the uncertainty of forward-looking statements. We also note these statements are being made as of today. And we disclaim any obligation to update or revise.

All financial data represented in Canadian dollars and although the year numbers were audited for reference on this call, we will disclaim that the numbers are as per our financial statement filings, however, will be considered unaudited unless otherwise noted. We will also talk today about general market conditions and provide some additional details on the strategic direction and positioning of the business.

In opening, I want to address the combined nature of this call as the company filed its audited financial statements for the year ended December 31, 2023, a month late. Although not ideal, it was necessary as our finance team worked through staffing turnover and reductions along with delays in the audit itself. In addition to integrating new team members and completing the annual audit, the team work diligently on the first quarter filing, which has put the company back in line with all required filings.

As the standard with delays in audit filings, the ASC, or the Alberta Securities Commission, implemented a management seize trade order on myself and Hansine as the CEO and CFO of the company. The trade order has since been removed and no further actions taken.

As reported in prior quarters and recent market releases with various business and financial updates, the company continues to operate in a very constrained low demand environment as the solar industry has not rebounded from significant decline that started at the end of the first quarter of 2023. As most of you know, increasing and remaining the high interest rates along with escalating inflation and difficult consumer credit markets has diminished consumer demand for residential rooftop solar applications, which has also severely impacted consumer-driven energy storage solutions, including Eguana and Eguana white label products.

Distribution channels in the U.S.A., including channels managed by our partner, Duracell Power Center, continue to have high inventories as a result of slow sell-through into the consumer-driven markets. Initially, industry analysts predicted a short low demand period that would truck and rebound during the second half of 2023.

From a seasonality perspective, it's generally the highest demand time of the year for residential renewables. This rebound has not happened yet and the company expects this load to continue for another 2 to 3 quarters. Although there are no predictors for the future, the company has adapted the strategy and operating model in several ways.

First, near the end of 2023, we reduced staff and furloughed employees. Furloughed employees have been since recalled minus minor natural attrition, and we've stabilized the headcount for approximately 50% of where we were prior to the industry contraction. The company continuously work with senior lenders to adjust and defer payments, and we'll continue to operate in this fashion in the near term, and our partners have been and continue to be very accommodating to us.

We've just recently made the difficult decision to reduce the scope of our activities in Australia. The deployment of energy storage systems has been slower than anticipated with our Australian utility partner, Simply Energy, and the adoption of their bring-your-own device virtual power plant rollout, which is also in line with slower overall industry metrics.

We adjusted our approach to our U.S. partner, Duracell Power Center, realizing that they have also been negatively impacted by lower demand and are managing their financial strategy. We have negotiated returns of various inventory components along with finished goods as an offset to existing accounts receivable.

The outcome of these negotiations have provided immediate product availability and flexibility to deliver units into our utility accelerator program, which Brent will walk you through shortly. Mentions of utility and VPP accelerated programs have been in our recent news releases as well as our MD&A at a high level, strategically, what we have done is to transition from a B2C business to a B2B business focus, where credit markets and economic uncertainty have much less impact.

The value proposition of our ESS technology is now a fully integrated hardware and software platform, delivering grid services to utilities and grid operators. The recent developments, particularly on the software platform, Eguana Cloud, has opened recurring revenue streams and includes key features in managing at the edge of the grid, real-time theater line balancing, demand response and voltage control to accompany other VPP features.

Utility partnerships are increasing rapidly as there is limited competition for utility-grade ESS solutions that provide both fully integrated hardware and software solutions, delivering utility grade features for efficiency and resiliency. Having the technology fully developed within North America is also proving as a key differentiator for the company and resonates very well with North American utilities, where security and importantly, cybersecurity is critical.

Initially, the projected consumer solar demand growth, the path to rapid sales team quicker in the B2C space. However, the market became very unpredictable, as you know, and as macroeconomic factors began to overshadow the overall solar industry, we adjusted. And we believe the larger value creation is in working with several mostly North American-based utility companies to deploy grid-connected ESS solutions.

Utilities gained massive benefit from residential storage assets through efficiency, rapid response controls and infrastructure capital deferrals. Brent will review some of the specific features and key differentiators of Eguana and what we've built into the platform, including recently released Eguana Edge as well as why utilities are moving from bring your own device, or BYOD, programs to different asset ownership models to speed up grid adoption of utility-grade solutions.

Before that, however, I'll turn it over to Hansine to give a quick overview of the past year-end and Q1 financial results. Hansine, over to you.

[Hansine Ullberg, executive]

Good morning, everyone. I'm going to cover off the year-end audit piece on a calendar basis and then some points on the first quarter. As a reminder, in the year-end, we did a change in year-end a while back now. So the comparative year-end reflects 12 months ended December 31, 2023, compared to 15 months ended December 31, 2022.

When I get into the quarter, we're just comparing 3 months over 3 months ended March. So year-end December 31, 2023, sales decreased 32.1% to $11.5 million in fiscal 2023 in comparison to $16.8 million in fiscal 2022. On a simple 12-month average proration, fiscal 2022 would have worked out to 13.4. So this reflects a 15% decrease on a normalized basis.

In early 2023, the industry was strong, but at the end of that first quarter 2023, we saw the negative impacts of the macro factors, including high interest rates, consumer credit degrading and inflation. This caused elevated inventories throughout all the major distribution channels and overall the market contracted.

After the first quarter, fiscal 2023 sales declined due to this demand shift and low-demand consumer markets remain unfortunately. Overall gross margin for fiscal 2023 also remained low because of this low demand environment. Gross margin for the year ended was negative due to inventory impairment charges recorded by the company of about $2.1 million.

With year-end audit work and internal review, the net realizable value assessments and some slower markets in the U.S. resulted in impairments or write-offs to align to the current market conditions. Operating costs, which I'd like to refer as excluding amortization and share-based compensation expense, which are generally noncash.

But in fiscal 2023, these remained high, largely due to the first half of the year where the company was in growth mode and all categories of those operating expenses increased for headcount and product and business development. Remembering that the start of 2023 was on the heels of the 2 strongest revenue quarters in the company's history.

And after we started to see those declines, we adjusted. Also in 2023, the latter part saw increases in operating expenses from the Australian branch, which added all operational costs and additional headcount. Additional provisions were recorded in fiscal 2023 with respect to our large slow paying customer.

Total expected credit loss for the year, again, IFRS construct under the audit requires a lot of assumptions and valuations, resulted in a charge of $9.9 million. This essentially decreased the receivable to a net value of future expected consideration. This is in line with the collaboration agreement that we signed with this partner that was previously outlined in our news releases, where Eguana felt that value in kind consideration like inventory, where we could deploy it in the VPP space had current value.

And so we worked on that collaboration agreement. With continual contact with our customers, they are making efforts to improve their business and their financial position, and they do remain committed to paying these amounts. But there is an uncertainty in the amount and the timing that they will eventually deliver to Eguana.

The net loss for fiscal 2023 before tax was $35.5 million, which included this large $9.9 million expected credit loss and can also be attributed to lower margins, higher expenses, increase in financing costs, accretion from prior year's debt financings.

Moving on to quarter end, March 31, 2024, Q1 revenue for 2024 was $1 million and this was a significant decrease from the strong comparative quarter at March 2023. Q1 2023 was the last strong industry quarter. And that has -- we've since seen significant market contraction overall in global solar markets.

Q1 2024 revenues are indicative of the slow market recovery in North America, particularly with micro inverter sales, which has previously been a market driver for all residential solar-based products. Q1 2024 gross margin was approximately 7.4%, an improvement from the comparative quarter.

Inventory impairment and warranty charges in the first quarter of 2024 were nil and small. Q1 2024 operating loss was $2.0 million, a decrease from 3.2 in the comparative March 2023 quarter. This improvement is largely due to lower expenses in all categories in the first quarter as the company made efforts to reduce headcount, reduce development spending and overall spending to align to market conditions.

Working capital and cash remain constrained in this market, as Justin outlined at the start both our year-end and our quarter end financial statements do contain going concern disclosures, and management has been navigating this and working very closely with our senior lenders.

Our secured lender has deferred various amounts of monthly payments starting in December 2023 up to an inclusive of June 1, 2024, and our debenture holder has deferred their interest payment or cash shares in lieu originally March 1, 2024, out to August 31, 2024.

The constrained liquidity position has made it imperative that the company focus on near-term strategic opportunities, like the utility accelerator and continued cost reductions throughout the company.

Thank you, and I'll turn it over to Brent to talk about that accelerated program and some updates on business development.

[Brent Harris, executive]

Thanks, Hansine, and welcome to everyone joining us today. As Justin explained, in 2024, we're seeing much greater interest from utilities in our VPP solutions. The launch of the Eguana Cloud last year has enabled us to engage directly with utilities to offer solutions to their feeder level and system-wide peak power concerns.

Utilities across North America and elsewhere have been using demand response programs to reduce peak load for decades, starting with voluntary programs for industrial loads in the 1980s. With the advent of the Internet of Things, utilities were able to bring increased sophistication to these programs and then extend them to residential applications, starting with thermostats about 10 years ago.

Deferred charging programs for electric vehicles then followed with the growing adoption of EVs. The ultimate goal through these stepping stones has always been to be able to dispatch residential energy storage systems, which can deliver a far broader range of services than just deferring energy consumption.

Utilities have expanded their bring-your-own device demand response programs to include customer-owned backup power systems, but the results have been underwhelming. There's a number of reasons for this. First, as Justin mentioned, adoption of energy storage has been limited due to depressed consumer markets.

Second, contrary to how they are promoted, most backup power systems are just that. They cannot deliver the range of high-value services utilities are seeking. And finally, when a consumer is driven to purchase a backup power system and finally makes that big purchase due to frustration with the reliability of their utility service, they are not very receptive to the request from that utility coming a couple of months later to say, hey, can you share that backup power system with us at times of peak demand.

They're not willing to give up access to their backup power once they've made that decision. So we have a two-pronged approach to resolving this gap for utilities. The first and preferred long-term approach is for utility direct procurement. When the utility purchases the system, they're in full control of what they purchase and how they dispatch it.

They earn the right to install the system and the customer home by offering backup power as a service to that customer. So it kind of -- it flips the bring your own device program on its head. It works better for everybody we're rolling out programs with several utilities on this model right now.

The second approach is for utilities that need to see success in their BYOD programs before taking the next step to direct procurement. So we're making this happen for these utilities through our VPP accelerator program. And the accelerator addresses the 3 barriers I mentioned about by: one, providing a very advanced ESS that delivers the services utilities actually want hand need; secondly, direct marketing of the combined hardware and VPP program solution to consumers so they know what they're getting. They're getting an attractive price on an energy storage system, but they know right from the beginning that some partnership with the utility.

And thirdly, reducing the sticker price to the consumer by working directly through regional electrical contractors rather than through the standard solar distribution channels with multistage markups and high rooftop solar customer acquisition costs. Many -- or most of these systems are going to be installed without solar and the homeowner will have the opportunity to add solar themselves at a later time if they'd like.

So we publicly launched 2 of these programs in addition to direct [ cursors ] partners in Oregon and Nova Scotia. You can see these on our website and there will be more program rollouts to come in the coming weeks and months. Beyond the objective of getting these demand response programs moving, utilities have been excited to learn about Eguana Edge, a key staple in our total cloud solution.

The Eguana Edge goes beyond peak -- sorry, beyond basic demand response that reduces the system-wide peak and provides utilities with visibility into issues on constrained theaters and tools to manage those constraints. This is the killer solution for Eguana that is driving utility direct procurement. The VPP accelerator programs are also being planned so that we can demonstrate these capabilities under the BYOD programs, and we retain the right to do so under our customer agreements for these programs.

We're seeing a real change in utility interest in residential distributed grid assets and in our solutions, in particular, driven by the combination of shifting industry dynamics and the launch of the Eguana Cloud. We look forward to sharing the results in the upcoming quarters.

I'll hand it back to Justin for closing remarks here.

[Justin Holland, executive]

Thanks to both. Just to wrap up, we believe our approach to strategic integration and integrated software and hardware solutions will help to accelerate the adoption of residential grid assets and market penetration in the VPP and utility space.

I commented in the last shareholder call that, quote "VPPs will drive energy storage momentum". We still believe this is the case. However, now surmise that the driver will be the utility itself and not the end consumer, which was geared through the BYOD programs. The programs with bring your own device, where utilities gave upfront incentives and/or bill credits have been largely unsuccessful globally for the utility and mass adoption of energy storage solutions capable of these functions.

Consumers were deterred by the high interest rates and inflation, which we've mentioned. And we learned in many cases, consumers simply don't want to be tied to the utility for multiple in many years. The updated expectation is that utilities will target through virtual power plant and energy storage fleet access, energy storage systems that have a full suite of VPP capability.

We see this as the early tipping point specific to energy storage in the renewables marketplace. Up to this point, the primary focus within our industry has been with residential and commercial solar. We believe the utility shift is happening given it provides utilities far greater control over renewable generation, increased grid efficiency and capacity while proving a pathway for utilities to defer large capital expense to achieve the exact same result.

These are the drivers shifting focus to a B2B model and building the Eguana brand through utility and our terms partnerships. Residential energy storage in and of itself delivers key advantages as power grid assets and delivers results to multiple stakeholders at the same time.

Eguana has been working with utilities for more than 10 years. Our energy storage solutions have been proven globally with development and enhancements to the Eguana Cloud. And additional product positioning, we feel the utility VPP accelerator program will be the start of defining a true value proposition of Eguana and the Eguana brand and based wholly on our developed technology, its differentiators and competitive advantages.

Although we are already engaged with a couple of dozen utilities, these programs will still take time, liquidity and focus, and we are driving every day to manage these variables and expectations. We appreciate the value of the shareholders, lenders and employee support and dedication through what has been a difficult time for all renewable energy-driven companies.

We will continue to update the market frequently with news releases and social media posts as additional utility and VPP programs roll out and new partnerships are formed.

With that, we'll open up to some questions. We're just going to read them of the board here

With that, we'll open up to some questions. We'll just kind of read them off the board here.

[Justin Holland, executive]

The first one, which is likely key in everyone's mind is why won't their sell pay their builds? Great question.

First, I'd comment that it's Duracell Power Center. So there is a differentiator between Duracell and our partner, Duracell Power Center. So please note that. They've been impacted severely by the contracting market. And part of our strategy and just to do a question that's a little bit further down. Part of our strategy last year was to build out distribution channels, and we put a lot of focus on Eguana University and training installers and we were successful.

We trained over 1,300 installers. We did see significant growth in revenues coming out of Q4 2022 and Q1 2023. However, it coincided with the collapse of the market. The overall strategy was to build out the retail consumer demand channels through distribution with trained installers under a brand name, which obviously with Duracell Power Center and then focus on building out utility VPP partnerships with Eguana direct.

So we've done the work, executed the training and set up the distribution channels for our partner and started to move towards the utilities, however, that retail space collapsed. And that's really what has driven the pressure on Duracell Power Center. They are working diligently to solve their issues. We still are in constant contact with them, but it's a difficult market out there for all renewable companies, and particularly the ones that are focused on residential rooftop solar.

Can you explain what a collaboration agreement is? Absolutely, we can. So as we looked at the AR, and we internally reviewed the technology in the market channels where we wanted to go and what could we do with our partnership, and we were able to negotiate certain inventories, including finished goods to be returned to reduce the value of the receivable.

That put us into a position to immediately have flexibility for the VPP programs and offer to utilities better pricing which is what we felt was holding up the adoption of energy storage technologies through the BYOD program. So we kind of took what was a difficult situation from a receivable, spun that into raw material, finished goods and manufacturing credits so that we could execute the utility partnership program without the requirement of significant additional capital to do that.

So the collaboration agreement is the guiding agreement that details the returns of the inventories and the offsets to the VARs. It's the agreement that has put us in position to launch the various virtual power plants and utility partnerships that we put together over the last 2 to 3 quarters.

Which utilities are we working with? We can't, obviously, go into direct naming of these utilities. We can say they are right now a couple of dozen. One of the things that we like and particularly from a Canadian technology viewpoint is we're now working with a number of Canadian utilities. And we have said in the past that we didn't see a real market for the technology in Canada, and we do now.

And we are shipping products to both the West Coast and the East Coast of Canada with additional and partnerships developing with utilities across the countries. And then there's also utilities in the U.S., some we published like PGE, Green Mountain Power, utilities across Massachusetts. But the total number right now sits, I believe, at 23 specific utilities that we're at the table with.

Germany has not been mentioned. Can you update on that? Yes, absolutely. So in Germany, the team at GMBH, put together a partnership with a bank called FinanzDesk. FinanzDesk has a number of current customers with solar leases. They are targeting those customers to add energy storage, which is exclusive to Eguana alongside their rooftop solar. It has been slower than expected from our perspective, certainly, but also from FinanzDesk perspective. They are now in direct marketing phase, and we do expect to see growth from that direct marketing campaign within the next couple of quarters. So a fantastic partnership, partner with a bank, lowers the upfront price and cost of the unit. Puts it on a lease immediately, which is a gentle sales process or we do expect to see some volume coming out of that.

I'll just go on to one of the next questions on Simply Energy. What happened there? Why didn't it work? Simply Energy, we did get that partnership done. They also had a BYOD program with upfront rebates. And as we said, I think one of the things the industry missed was the fact that consumers simply are not working directly with the utilities. And as Brent walked you through, that's being turned around now where the utility is now going into direct procurement modes and offering backup as a service for the homeowner rather than the homeowner procuring the hardware and software themselves and allowing the utility to use it from time to time.

So we're seeing a fairly dynamic shift in the utility channel, which we believe will drive mass adoption. So we still work with Simply Energy. They're still moving forward in the program. However, they're not getting the uptake in adoption that they had planned because it is a BYOD program and it has been executed much in the same way as what we've seen in the North American utilities.

Will the company raise capital? We're looking at all forms of liquidity right now. We have press released this multiple times. We'll continue to update the market on that. So the answer is we will look at all forms of capital and liquidity as we continue to execute our utility and VPP strategy.

What really happened with the annual audits? Great question. Tricky question to answer, but we'll give it a shot. It's a challenging audit this year given the market contraction, what's been happening with renewable companies, the auditor dug deep at a time when we were going through some changes within our finance team. Obviously, the company has been under tremendous pressure, which adds further complications to the analysis of the auditor.

Hansine and the team pushed this over the goal line. It took a little longer than we had anticipated. However, bear in mind, it was double duty as they were also finalizing the Q1 results as well, which were filed yesterday on time. So just a complicated situation, new agreements to review from the auditor, deferrals on payments, working with amendments with our senior lenders and the auditors making sure they turned over every stone to make sure everything was under proper process control. Hansine and the team worked constantly with the auditor and we're able to get the sign up and get that filing done.

Here's a great question. Is Eguana Edge going to make a difference? We believe it is. But just a little bit of backup on Eguana Edge. It's one portion of Eguana Cloud. So Eguana Cloud actually consists of 4 key components. Eguana Engage, which is a consumer-facing app solution that gives the homeowner visibility into the operating status and history of the system, along with additional features like reserve management and time of use optimization.

So we've developed the software site specific to the homeowner. Eguana Insight, and I realize some of these names will be new. Eguana Insight, we develop specific for our service and installation partners opening access to individual system and fleet data along with remote diagnostic and repair functionality.

So we have a specific solution for the homeowner. We have a specific solution for the installer partners. And Eguana Exchange develop geared for the utility and partners to deliver demand and frequency response functions along the spinning reserves. So another software within Eguana Cloud, that's going to be developed specifically for the utilities and DERMS partners.

However, we believe, as Brent mentioned, Eguana Edge will be the game changer as it allows for real-time feeder load balancing for distribution system operators or DSOs to stabilize and control voltages. To give you an example of how the program works, we've done one in Western Canada, where you have a rural feeder, which has underlined voltage issues and the utility needs to open up capacity in a growing tourist town.

The options for the utility are replaced the feeder line, which obviously takes many years and tens of millions of dollars, or start installing Eguana products to manage the line after the substation. Think about it in terms of a funnel. You can push so much power through the constraint at any one given time. But if you can open up the time, you have more power available along the feeder line, and you can control those voltages.

That's what Eguana Edge allows. It allows for additional energy to push through the feeder line and be able to be used at the peak demand points. We believe it's the only product in the world that can do real-time theater balancing, and we are getting tremendous response from our utility partners as it is a fully integrated software and hardware platform, North American developed and again, as I mentioned, critical to security or utilities.

If there's anything else we need to hit? I think that covers most of what we've seen. So at that, I will turn it back to the operator, and thanks, everybody, for joining today.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.