Pineapple Energy Inc. (NASDAQ:PEGY) Q4 2022 Earnings Call Transcript

Pineapple Energy Inc. (NASDAQ:PEGY) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Good morning, and welcome to the Pineapple Energy Fourth Quarter 2022 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 now like to turn the call over to Jennifer Lee of The Blueshirt Group. Ms. Lee, please go ahead.

Jennifer Lee: Thank you, operator. Good morning, and welcome to Pineapple Energy’s conference call to discuss results for the fourth quarter and full-year 2022. With me this morning are Kyle Udseth, our Chief Executive Officer; and Eric Ingvaldson, our Chief Financial Officer. Our call this morning will include statements that speak to the Company’s expectations, outlook or 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, our Annual Report on Form 10-K and our 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 disclosed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued yesterday. With that, I’ll turn the call over to our CEO, Kyle Udseth. Kyle, go ahead.

Kyle Udseth: Thanks, Jenny, and thanks to everyone for joining us on the call today. Although we went public last spring and have reported three quarters, this is our first conference call in conjunction with earnings. We are excited to report great news to you and to take your questions. We intend to maintain this practice conducting a conference call with each quarterly report. So what a difference a year makes, huh? As I look back on 2022, I’m proud of all that we’ve accomplished together. We started the year as a small private company with big ambitions. In March, we completed our merger with Communications Systems, Inc. launching Pineapple as a publicly traded company. Simultaneously, we completed our first acquisitions, bringing Hawaii Energy Connection and their technology company E-Gear, under the Pineapple umbrella.

We started public life with modest, but real assets and operating business, revenue and capital. Some investors and analysts were skeptical of our strategy and ability to execute, but we proved them wrong last autumn when we completed our second acquisition Long Island-based SUNation. With that deal, we showed that we could continue to source deals, come to terms with owners, and assemble the financial resources to close in a repeatable manner. We exit 2022 with operations on both sides of the country, a revenue run rate of over $80 million annually, and line of sight to positive cash flow from operations later in 2023. Celebrating this amazing year, we rang the NASDAQ closing bell in late February, giving us welcome and deserved recognition for our employees and their accomplishments.

I have never been more excited about the prospects for our company. Now let’s zoom in on SUNation, which was a transformational acquisition for the company. In addition to tripling our sales, it expanded our footprint to the East Coast, added approximately 160 talented and dedicated employees and meaningfully bolstered our management team. SUNation Founder and President, Scott Maskin is a key leader within our company now and one of our largest shareholders. His vision and strategy in building SUNation are proving their value as he continues to drive its growth, and we are utilizing these experiences and lessons learned as we pursue in diligence future acquisitions. SUNation Executive, Jim Brennan moved over to Pineapple Corporate taking on the role of SVP of Corporate Development.

And in his new role, Jim is applying his experience and expertise in sourcing, negotiating, and ultimately closing new acquisitions. SUNation is on a roll. Their residential kilowatts sold surged 63% last year with installations up 25%. And this kick starts 2023 for us with a meaningful backlog of $30 million of pending installs. Revenue grew 32% and gross margin expanded. This resulted in adjusted EBITDA of 172% year-over-year for SUNation. As strong as they are, there is plenty of room for further growth. For example, battery attach rate was only 7% last year, giving us a huge revenue and margin opportunity going forward. In contrast, HEC’s battery attach rate approaches 90%. While there are certainly structural differences in those two markets, there are also many similarities in customer needs and desires, and so we are actively working to cross-pollinate our battery approach from Hawaii to accelerate battery sales in New York.

Furthermore, we are seeing initial success in our new home build strategy. In February, we had a significant win with homebuilder Baiting Hollow Development Group, where we will outfit 29 of the homes in an upcoming development on Long Island’s North Shore. This strategy has the potential to substantially increase our volume at an efficient customer acquisition cost. Finally, in March, we opened an office in Florida, establishing a foothold in one of the country’s biggest residential solar growth markets. All-in-all, it’s been an exceptional performance from the team at SUNation. Turning now to Hawaii. HEC performance was also solid, although that market faced some headwinds in the second half of the year, which have now been resolved. Revenue was up 21% for the year, but increased service expenses and permitting delays led to an adjusted EBITDA decline year-over-year.

Kilowatts sold were up 30% and installations up 15%, which is a very strong result in the context of those obstacles. Battery performance continued to be outstanding with the attach rate for the year reaching 88%, and we are sustaining this momentum through innovation. For example, we are ahead of competitors in installing the Franklin whole home battery and advanced next generation storage system. Even with that solid full-year performance in Hawaii, revenue growth slowed there in Q4 as kilowatts installed were down. We grappled with a variety of issues, the most impactful of which was the freezing in December of a significant portion of installation permits on Oahu due to a federal investigation, which was completely unrelated to Pineapple at the Honolulu Department of Planning and Permitting.

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As if that wasn’t enough, we and many other solar installers experienced significant hardware failures with certain vendor equipment during the quarter. This presented a sizable challenge, setting back revenue while also elevating COGS and OpEx, but I am proud of how the HEC team pivoted quickly to focus on fixing these issues for our customers. I’m happy to report that these issues are now largely resolved and growth has resumed in 2023. HEC had $17 million of pending installs at year-end and partway through Q1 of this year, kilowatts sold are triple the level of a year earlier. We are confident that Hawaii will be a strong market for us for years to come. And complimenting our installation business in Hawaii is E-Gear, our grid services technology company.

E-Gear has historically been a small and steady business, but in 2023, under the leadership of our Head of Product, Chris DeBone, we will push to productize and monetize this leading-edge technology and IP. The most tangible example to date is the licensing agreement with Eguana that we announced last week. Eguana’s residential batteries will pair with the E-Gear Energy Management Controller to create an advanced energy storage system that can balance between electricity consumption in the home, storing up backup power and maximizing savings via time of use rates. Perhaps most exciting are the grid services capabilities that this hardware and software union can enable. It can create opportunities for recurring revenue streams as individual homeowners help stabilize the grid and power their neighborhoods in the face of extreme weather events and grid outages.

We are also partnering with a leading supplier of utility side distributed energy resource management systems. Together, we are pursuing the opportunity for E-Gear technology to serve as a dispatch agent under Hawaiian Electric’s upcoming, Bring Your Own Device program. This is an important step to offering virtual power plants based on our customer’s solar systems. Overall, we entered 2023 with optimism and we are now exiting Q1 with great momentum. In spite of no shortage of challenges, they don’t call it the solar coaster for nothing. We’ve managed to build a sustainable business and an exciting platform for profitable growth. We have a high quality pipeline of acquisition candidates across a wide variety of strong residential solar markets, each of which meets our financial parameters.

But more importantly, these founder-led companies are solid cultural fits and they share our passionate focus on delivering a great customer experience. We expect to accelerate our growth through complimentary new acquisitions in the months and quarters ahead. With that, I’ll now turn the call over to our CFO, Eric Ingvaldson, to walk through our financials. Eric, please go ahead.

Eric Ingvaldson: Thank you, Kyle. I will very quickly review the GAAP financials as required by the SEC and then review some pro forma numbers that will give you a better sense of the performance of our businesses. The GAAP numbers are not very insightful because we had no operations a year-ago and because we had only partial period contributions due to the timing of the HEC and SUNation acquisitions. Let’s start with the fourth quarter GAAP results, which includes 52 days of contribution from SUNation. Legacy CSI businesses, JDL and Ecessa are reported as discontinued operations in the fourth quarter. Revenue in the fourth quarter was $17.2 million. Gross profit $5 million and net loss from continuing operations was a bit over $500,000.

Net loss from continuing operations includes a $3.3 million favorable fair value remeasurement of the contingent value right liability. Fourth quarter revenue nearly tripled sequentially and gross profit more than tripled due to the contribution of SUNation. Revenue in the fourth quarter of 2021 was de minimis at $13,000. Now let’s summarize our fourth quarter pro forma results. Assuming we had SUNation for the full quarter in 2022 and had HEC, E-Gear and SUNation for the full quarter in 2021, the comparisons are year-over-year. Company revenue would have grown 13% to $23.5 million with HEC up 11% and SUNation up 32%. Company adjusted EBITDA would have declined slightly to a loss of $170,000 due to the decline at HEC that Kyle mentioned earlier.

Although adjusted EBITDA shows a loss without permitting delays in Hawaii, this number would be positive, which gives us confidence going into 2023. Let’s switch to full-year GAAP results, which includes 52 days of contribution from SUNation and contributions from HEC and E-Gear, since the merger on March 28, 2022. Revenue was $27.5 million, gross profit was $7.4 million, and net loss from continuing operations was $3.3 million. Total net loss of $10.5 million includes a $7.1 million loss from discontinued operations. Revenue for all of 2021 was de minimis at $38,000. Now let’s summarize full-year pro forma results. Assuming we had SUNation, HEC and E-Gear for the full years of both 2022 and 2021, company revenue would have grown 18% to $73.9 million with HEC up 21% and SUNation up 39%.

Adjusted EBITDA would have shown an improvement of 14%. Turning to the balance sheet. We ended the year in good shape. Cash and investments, which are available for use in our business, the solar business were $3.5 million. We had another $4.5 million of restricted cash and liquid investments, which is reserved for the CVR holders. Debt is approximately $13 million with the majority due to Pineapple Board Member and Executive, Scott Maskin in connection with the SUNation acquisition. We plan to raise capital in 2023 to refinance debt and fund our acquisition strategy. Looking ahead, we are confident and optimistic. In 2023, we expect to generate revenue of $80 million to $85 million before acquisitions. We anticipate attractive organic growth at both SUNation and HEC and stability at E-Gear.

Importantly, we expect cash flow from operations to flip positive in the second half of the year and to be positive for the full-year. As you know, acquisitions are core to our strategy. We can’t predict when, who, or what size of companies we will buy, but you can expect to see attractive growth as we complete deals in the quarters ahead. Let me mention one other detail before we go to Q&A. You will see today that we are filing a Form €“ SEC Form 12b-25 election, meaning we are asking for a 15-day extension to file our 10-K. As you can see today, our books are closed and our number is basically set. Our situation was complex this year with a public listing and multiple acquisitions, one being in the fourth quarter. We are also presenting discontinued operations in the fourth quarter due to the pending sale of JDL and Ecessa.

There are no material issues outstanding and we anticipate filing within the 15-day extension period. Now, we would like to open the call for any questions. Operator, please go ahead.

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Q&A Session

Operator: Our first question comes from the line of Donovan Schafer from Northland Capital Markets. Please proceed.

Donovan Schafer: Hey guys. Thanks for taking the questions. So I want to start asking about the permitting delays in Hawaii. You gave some details. There was a federal investigation, thankfully unrelated to you guys specifically. But from a timing standpoint, is that something that really just hit in the fourth quarter and closed out? Is that €“ you could see there was no impact in the third quarter and then fourth quarter comes around and there’s this sort of an event or something or an announcement and that bogs things up and then it clears before the start of the first quarter. And then just sort of any other kind of qualitative details around what was going on there that’d be just helpful to know about?

Kyle Udseth: Yes. Absolutely. And thanks for being on Donovan. I know it’s early for you, so appreciate it. Yes, it was a unfortunate situation. Certainly, I think we were in line for a really tremendous year, and it’s a testament to the leadership of Chris DeBone and the whole team out there. They worked incredibly hard throughout the year taking care of customers. We’re harvesting unprecedented top of funnel demand, had a really healthy backlog, install crews, firing on all cylinders. It was I think late mid to late November that Chris first talked to me about this. I don’t know all the details, but you can find them online. I think there was a FBI ongoing investigation, including a sting and something out of a movie like multiple people taking kickbacks and bribes in like in federal prison now from this.

And it was not just solar, it affected all types of permitting island wide or at least countywide in Honolulu County. The ramification for us was that something like 70% or 80% of the permits are pretty standard and go through just the normal process. There’s not much to have to look into, but something like 20% maybe a bit more are more complex. There’s something going on that’s just non-standard. Older home, older wiring requires a second layer, a third layer of diligencing on it, and those ones were no longer able to be expedited. My understanding is that the scandal overall was projects like that were allowed to be kind of bumped up to the top of the queue by people paying kickbacks or something like that. And so €“ rightfully so I think when this happened, they came and said, okay, like, let’s lock things down, let’s make sure everything is dotted i’s, cross t’s fully gone out.

At the same time, literally bodies were going to jail and people were doing early retirements, and so they were just short-staffed. It certainly hit over the following five €“ four or five weeks and really bit the most in December. I think at first it was 40 or 42 projects, that we thought we were going to have permits on. That got gummed up. Ultimately, we were able to pull forward something like 10 or 12 from our January install calendar and get those done before the end of the year. But the net effect was something like 30 installations that were fully ready to go, like funded, permitted, interconnection, like cruise on the schedule, ready to install, that got pushed out of Q4, and so that was over a $1 million of revenue. And because you’ve already eaten all the overhead there, it’s €“ EBITDA to the bottom line is a lot more than just your typical gross margin.