Good morning, and welcome to the Pineapple Energy's Second Quarter 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'd like to turn the call over to Eric Ingvaldson, CFO of Pineapple Energy. Mr. Ingvaldson, please go ahead.

Thank you. Good morning and welcome to Pineapple Energy's conference call to discuss results for the second quarter of 2023. With me today is Kyle Udseth, our Chief Executive Officer. Our call this morning 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 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 discussed 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 will turn the call over to our CEO, Kyle Udseth. Kyle, please go ahead.

Thanks, Eric, and thanks to everyone for joining us on the call this morning. I know this is early especially for U.S. Coast folks. Today, I'm happy to be able to share another strong quarter of operational and financial results at Pineapple Energy. In the second quarter, the Hawaii business continued its great sales and installation momentum and exceeded both prior year and our internal plan. The New York business showed strong year-over-year growth and we continued deepening their integration into Pineapple. And in the corporate office, we effectively contained overhead costs while continuing to build out our shared services Center of Excellence model. The U.S. residential solar industry has not been without its challenges this year, as evidenced by weak Q2 earnings results from many of our public peers. But at Pineapple, we were able to buck that trend and deliver both strong top line growth and another quarter of positive adjusted EBITDA. We are continuously improving and by no means finished, but we've made great progress in cultivating a lean and hungry mentality with a focus on execution and delivering on goals. I think everybody at the company now understands what's expected of them and the cultural improvements we've made in holding each other accountable give me confidence that we will continue to perform and thrive over the rest of this year and into 2024.

Battery attached rate in Hawaii remained outstanding at 89%, which is so important as we continued building out the foundation for the grid of the future where people can produce, store and consume their own electricity. And in Q2 in Hawaii, 75% of our systems sold came via customer referrals, which is just a phenomenal number and a testament to the great customer experience that Chris and all of our HEC team deliver every day. Turning now to our New York business, Scott Maskin and his team also delivered a really strong second quarter. Kilowatts installed were up 26% year-over-year and I want to give a shout out as well to our New York installers for working hard to help the company hit our goals and to help the people and their communities go solar. Battery attached rates in New York were only 5% in the quarter, although that's not unexpected and is consistent with historical levels in that market. We do expect batteries paired with solar to really take off starting in January of 2024 when time of day rates are implemented in our Long Island market. When this happens, we'll be poised to capitalize by leveraging our years of experience and knowhow from the team in Hawaii. And 35% of all New York sales in the quarter came from customer referrals. Now this may appear small just relative to the Hawaii number, but it's truly a great result as well. And just think about that for a minute, over a third of our new business comes from existing satisfied customers. That's a great number. I used to run the referral programs at both Sunrun and Sunnova, and I don't think we ever had a month where we topped 30% at either company. So this number shows how great…

Thank you, Kyle. It certainly has been a busy quarter. On June 1st, we closed the debt financing round with Decathlon Capital Partners. This financing was important for Pineapple as it retired the SUNation short-term sellers note with no equity dilution, allowed us to fully move forward with the integration of SUNation and begin to fully realize both the cost and revenue synergies of the deal. Then on June 30th, we completed the sale of substantially all of the assets of the legacy subsidiaries JDL Technologies, Incorporated and Ecessa Corporation. This sale substantially completes the monetization of all the legacy assets remaining from the CSI merger and allows Pineapple to proceed forward as solely a solar company. Prospectively, the results of JDL and Ecessa will not be included in Pineapple results and our historical results from JDL and Ecessa will be presented as discontinued operations in prior period comparisons. Now 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 Q2 results last year included only the results of our Hawaii operations and not the results of SUNation which was acquired in the fourth quarter of 2022. Let's start with the second quarter 2023 GAAP results. Total revenue was $19.8 million, up $15.6 million or 370% from the second quarter of 2022. The increase in revenue was a result of the SUNation acquisition in Q4 of 2022 and strong organic growth in Hawaii. Our total gross profit was $7.1 million, an increase of $6.2 million or 691% year-over-year. Gross profit increased due to increased revenue and an improved gross profit margin. Gross profit margin improvements were a result of the SUNation…

Hi guys. Thanks for taking the questions and congratulations on the quarter. It's nice to see the gross margins be good. I want to first ask about the headlines right now, these wildfires in Hawaii. I think they made the front page of the Wall Street Journal yesterday. And I think it's somewhat isolated and I don't really actually know Hawaii particularly well. But within that market, I'm curious if I think as I understand the fires themselves are caused by some weather events, storms, it looks like it has caused like an elevated level of power outages in parts of Hawaii. And so I'm just kind of curious if in general when you get an event like this in Hawaii where it increases headline exposure and outages, even if that's -- I think it was like, oh, I don't know, something on the order of 5% or something of customers without power. But getting that plastered all over the Daily News and everything from drive, interest and part of what you do provide is backup power. So I'm just kind of curious with how that -- if you have any experience with that in Hawaii if headline events like this can help drive significant uptakes and demand, if this event in particular would just be too small to matter, even if it does get headline exposure, just kind of any clarity, details or help me understand things that would be great.

Yes, sure and thanks Donovan for being on so early although with the new baby, maybe this is just your normal pattern every day, so I appreciate you making time for us and congrats on the start to the new family. I appreciate you asking about the fires and, I probably should have mentioned this just in the release, but we've certainly been paying a lot of attention to what's going on there and have talked to Chris and the team in Hawaii and we're not on Maui with operations, we're on Oahu, but some of our folks have family members and certainly friends on Maui and for us, fortunately nobody has been directly impacted by it. Everybody is safe and that's great to hear and a big relief, but it's obviously tragic and so our hearts go out to those folks. I think that it does. It does just under score in general the importance of what we're doing right? I don't -- it's hard to tie the specifics of any one event to any one thing, but severe weather events are getting more extreme. We're seeing more of this, not less, and it's going to continue. And it really is a big motivation for why I wanted to get into this space, why we wanted to found this company. It's not just to help individual homeowners go solar to save money, right? It's this is where the grid needs to get to. This is what decarbonization looks like and you can't just rely on regulated monopoly utilities to move in this direction. This has to be distributed generation. This is the grid of the future, and it's what spurs the broader industry to decarbonize and get to where we need to get for the planet and for the…

Okay, that's helpful. And then I want to ask about you mentioned peers seeing weakness in kind of the U.S. market and a lot of, I know a lot of that's tied to like NEM 3.0 in California where you guys don't really have any of that exposure and some others talked about weakness and like the Southeast and Texas where you also don't really have much exposure. I think you did say SUNation at least kind of had the very beginnings of doing some expansion in Florida, but I imagine that's pretty small at this point. But I'm curious it looks like revenue did decline at least sequentially. So it was lower this quarter than last quarter and I don't think that's a seasonal thing, but I, but I feel like it's, try as hard as I try to remember. I somehow seem to keep getting seasonality patterns wrong. So are you totally kind of immune from some of that weakness or is the sequential decline reflecting some of it maybe more broadly kind of macro economically or just consumer behavior? Yes, that's just kind of the question there. Sequential decline and if you've really totally been immune so far are you seeing anything there?

Yes, I think it wasn't unexpected for us. I think we had talked about on the last call how we had some, I don’t know what's the right term, pullback some residential projects in New York and Hawaii as well, that we had been expecting to install in December of 2022. And for different reasons in each market, those got delayed and we were able to recognize them because they got completed in Q1 of this year, so we had a stronger Q1 than we otherwise would have and we've baked that into the revenue range. So no, it is not evidence of weakness in the market demand. I think everybody in this space is impacted to a bit by rising interest rates. I think that in Hawaii the demand is just so strong given the fundamentals and the value prop there that we've continued to power through and take share there. And the team there is doing a great job of capitalizing on that. I think, you mentioned markets like Texas and Florida. Yes, I think that those, I've been in this space for nine years and we always talked about those as the sleeping giants in the states with huge populations and sunny and hot, a lot of electricity use. And eventually they'd wake up and you'd start to see that penetration take off. And it seemed like we finally got there at the end of last year and the start of this year, but the economics were always close to get to positive savings. And then with rates going up in those states it's kind of pushed back down below it. So we're not directly impacted by it, although we're ambitious and aspire to grow into each of these markets. And so we've kept an eye on…

Yes, and I would just add that the reason we do the pro forma numbers is to better compare the actual operating performance of the businesses that we've acquired. And if you look at our first quarter results, yes, we did -- our revenue number was higher, but the pro forma results of the underlying operating businesses had a 60% increase Q1 of 2023 over Q1 of 2022, which was quite substantial. And in the second quarter here we're -- we did it, we're up 23% Q2 of 2023 or Q2 of 2022. So part of it, part of the sequential decline is just a result of that massive growth number that we had in the first quarter; it normalized to 23% in the second quarter.

Okay. Yes, I did forget about the kind of exceptional circumstances for the first quarter. So that's very helpful. Thank you. And then on the same kind of theme of the weakness and other parts of the U.S. is, can you comment on if that has had an impact on kind of either the deal flow or opportunities that come across your desk from an M&A standpoint or maybe the pricing that potential targets are looking for? I think you said, you're able, you've been able to get some insight into those markets because you have been actively reviewing opportunities, but just kind of incrementally versus where we were, a quarter ago. Are you getting more proposals or maybe more people answering your calls or more interest where you can kind of, zig when everyone else is zagging? So when there's a weakness here, it kind of opens up those opportunities. Just any kind of con -- any details around that would be helpful?

Yes, I think it's a great question and I think it’s certainly has made this space dynamic and interesting over the last three months. I think for us, the key thing more than anything else is it's, it's, we've got to find fit. We got to find the, the right companies. And I think there are a bunch of components to that. We, in no particular order, the company has to be healthy and growing financially and profitable. I think there's a revenue sweet spot we look at, but we're not, totally dogmatic and tied down to that. But we want to make sure that we can integrate well and the new company doesn't swamp the existing company and buy something that's, 5x the size although, we look at all the opportunities, but I think there's a sizing piece. There's kind of a financial top line growth and an EBITDA piece. But I think that the cultural fit is really, really important. And I think it's because of, it's one of the reasons why right up there with the revenue growth, we talk about referral rates and we talk about battery attach rates, like that is the thesis that that's how we grow. We don't just buy first company, we find that has top line growing or that's profitable. We look for companies that are committed in the same way that we are to delivering a great customer experience because we think that that customer experience begets referrals. And that's the virtuous cycle where you're able to continue to grow efficiently at a low customer acquisition cost. And it opens up even more opportunities down the line for upsell and cross-sell and distributed energy resources turning into grid services and virtual power plants and recurring revenue streams. And then you…

Sure. Right, okay. And then just my last question is around storage. The high attachment rates in Hawaii and the growth you're certainly, deploying a lot of actual batteries. And I remember, if I recall correctly, you really liked the franklin whole home product and have been kind of deploying that, and I believe you, you either, I can't recall it. There's either an exclusive relationship with you guys in like Hawaii market or if it's more just that, you're one of the limited number of folks that are kind of certified with that. Just curious if we can get an update on, how you're liking that product? If that really is dominantly what is getting deployed, what you guys are deploying right now? And kind of how that relationship is going and what benefits or competitive advantages or not you get through offering that product versus some of the more mainstream, perhaps better known products?

Yes, I'd say the Franklin Whole Home battery system is a fantastic product, and I think they entered the U.S. market with a mission to produce, in their words, the Tesla Powerwall killer. And I don't know that it's done that quite yet, but it's a impressive piece of hardware. And it looks cool too. Not one of ours, but just on LinkedIn yesterday I saw a picture of somebody who had four of them installed in their garage and it just looks cool. And it's a great product. And Franklin's been a, an excellent partner. Customers have been incredibly happy with them. The product availability and the supply chain is great. The pricing is great. The commissioning time is great. We are taking a look at these for the New York market as well. And so it's been a great pivot that, and hats off to Chris and the team for finding this early and being one of the first scale installers in the U.S. I think that we always want to be a little bit cautious and prudent to make sure we're not single-threaded, just from a redundancy and a risk management standpoint. We always want to have multiple partners. And I think that maybe not really my place to say, but some of, if you look at, you know, what happened with Enphase this quarter you can get complacent when you're in a duopoly for a long time and you're the only choice and you might think that you've got leverage. Well, the person on the other side of the table is just sitting there frustrated after every interaction because they don't have choice, right? And they just keep getting pricing stuck to them. So I think it's the beauty of the market system, right, is like,…

Okay. So more kind of like a reflection of being a knowledgeable, versatile kind of home integrator in that sense. So not sticking to one product, but [indiscernible] was, here we are showing we were able to get out ahead of an exciting product in a market where it's doing well and that demonstrates that we can kind of keep doing similar things in the future. Is that kind of more the appropriate way to look at it?

Yes, I think in a sense we're hardware agnostic on like what the brand is. We're not agnostic on, we need really good product that's going to be reliable and deliver the good experience to the customer. So we're always keeping the finger on the pulse of what's out there. We're always shopping, we're always trying to craft the right product and solution set for homeowners. And that can be different in AC coupled versus a, DC coupled application that can be different by markets depending on the tariffs and the use cases for the batteries, et cetera. We're starting to install span panels in New York. Those are really cool. I want one in my house in Minnesota. No one installs them here. The New York guys have offered to fly out here and do it for me. Integrating EV charging more certainly excited to go to RE+ and have a good, slate of meetings already and then just understanding, what's new and what's coming next. So yes, I think that we like to work with good partners who we've got a track record with who we think are reliable, but there's a lot of innovation happening in the space too, and it's only going to benefit homeowners from choice and quality of product and cost.

Okay. Well that's great. Thank you, guys. I'll take the rest of my questions offline and congratulations on the quarter.

Thanks a lot, Donovan. Congratulations on the new baby. That's awesome.

Thank you, Donovan.

Thank you. [Operator Instructions] The next question comes from the line of Jeff Grampp from Alliance Global Partners. Your line is open.

Good morning guys.

Good morning, Jeff.

Couple questions on the margin front for you. Again, really nice quarter on the gross margin front despite, a little bit lower revenue sequentially as you guys already talked about in the mid-30s, but how sustainable do you view that and what might be kind of the gives and takes to that changing, for the better or for the worse over the coming quarters? Thanks.

Just on the margin side specifically.

Yes, just your view of gross margins. I mean, I think it's a super competitive number, which obviously is a, testament to, how you guys run your business and the efficiencies, but just wondering that, the sustainability of that in the coming quarters.

Yes, I mean, I would say that, it is a sustainable margin number. We we're continuing to see better deals out there in the space on being able to buy panels and inverters at better prices. The supply chain has normalized, the distributors are willing to negotiate and as a larger organization with the relationships we have both in Hawaii and New York and the relationships that are future partners have, that we will, do acquisitions with, we just continue to gain leverage in buying power against our vendors. So, we definitely know there's a ton of manufacturing capacity coming online as a result of the Inflation Reduction Act in the United States. And, as Kyle mentioned, continued innovation and new entrance to the market such as Franklin Whole home, and so we see the pricing of the equipment that we're purchasing to continue to be very competitive.

Okay, great. Thanks for that. And I'm curious, with the changes coming in 2024 in the New York market for you guys, is there kind of a ballpark number in terms of the delta and contribution margin from an install with and without a battery? So the way I'm kind of thinking, I assume it's going to be a nice tailwind on revenue but just thinking about the margin impact, if any to the extent battery attachment rates in New York have kind of a step change here.

Yep. We certainly expect the battery attach rate to go up in New York. As we mentioned in some of the comments, they're converting to time of use rates, I believe in the first part of 2024. We have not yet kind of forecasted out the margin impact and the pricing of that yet. So I can't really comment on that intelligently, but we certainly do anticipate battery tax rates to go up in New York with the time of use rates being deployed.

Okay. I guess I was more thinking Eric, just kind of on an install today, is the, how does the contribution margin profile look like if a customer has a battery or does not, is it a material, I assume obviously the revenue's higher, but is the contribution margin materially different if at all with or without a battery for you guys?

I think that I'm I don't have the number in front of me and I think we can follow up with you as we pull a little bit more. I'd say it's, it's been a, and especially in a new battery market, I think you have a question about how you want to price. And in a lot of markets, apart from Hawaii historically where just because of the non-export tariffs, you kind of have to have it, so you just bake it into the overall margin of the project. You've had a decision about, do you, they're not, in markets like Long Island, traditionally, it's the reason why it's been low single digit attach rates. It's not really a “savings product”, right? There's not really an ROI on adding the battery historically to the PV. It's like the solar has savings, the solar has a ROI or an NPV, but then if you're going to add the battery onto it, it's more for resilience, backup, peace of mind. And so people almost think of it in the whole like, well, okay, I'm going to add the battery and I'm going to use some of the savings from the solar to pay for the battery end markets like that. I think as things flip to time of day, more and more people are going to want batteries, but especially at the start it's not going to be just like a screaming glaring, I don't think huge ROI financially just to add the battery. So we'll try to be thoughtful about how we price it. You're not necessarily looking for this to be an add-on right away where there's this huge extra margin. I think it's more trying to design systems for people that meet their use cases and just holistically with the PV, it's still a product where they save some money and where you make a good margin. So understand that's not specific, but I wouldn't expect it to be a significantly higher, like, gross margin product than just the PV itself, but we're also not going to just sell them and install them at cost on top of the solar.

Understood. Okay, I appreciate the commentary. If I can just sneak one more in any material update on the Florida expansion opportunity that you guys were kind of organically pursuing?

Yes, it's early still. I think that we'll start to see some of those results filter through in three months when we report on Q3. We got a lease signed down there, we're starting our lead-gen efforts, we're starting our sales efforts. So we're building up. I think that rightfully so, I think we viewed it as a test the entire time, right? And I think it is part of, we mentioned being data-driven and metrics-based. We talked about accountability. I think another part of, the culture and just the mindset we're trying to bring to this company is a test and learn approach to it. It's not just do things. It's not just do what we think is best and if it doesn't work, you get in trouble for it. It's being thoughtful about laying out an experimental plan and, that can showcase in a lot of areas. Marketing is my background and something I'm passionate about. And it's like the whole premise of marketing nowadays is you have to be analytical and you have to have a test an experiment plan, testing, control, plan, test and learn. I think in Florida it's the same, right? We viewed it as a kind of low investment test to see if we could build outside of our core market in a non-adjacent geography. And I think the verdict's still out on it, but whether it takes off like a rocket ship or whether it doesn't I think it's that mentality about kind of testing and learning different things that's going to serve us well and we're going to keep trying that in other markets as well. But I think we've got, we're approaching it the right way where it's capital unintensive, but good personnel who have the tieback to SUNation. And I'm confident that Scott and John [indiscernible] and the team in New York are going to be able to make it successful.

Okay, great. Sounds good. Thanks for the time, guys.

Yes. Thanks for joining.

Thanks, Jeff.

Thank you. Seeing no more questions in the queue, let me turn the call back over to Mr. Udseth to conclude the call.

Thank you, operator. But before we conclude, just a quick mention I'd said this before but with the detail, Eric and I, as I'd assume most of you as well will be in Las Vegas for the RE+ convention September 11th through the 14th. We welcome the chance to connect with all of you in person there. With the time change, I'm sure I'll be up early and I will say that it's a surreal but cool experience to run a few miles on the strip in the morning as the sun is coming up. So if anybody wants to join me for one of those, I'm bringing my running shoes. All right, back to business speaking on behalf of the entire Pineapple leadership team, we're excited by the strong first half. The company's been able to deliver in 2023, and while at this point three months ago, I told you I had confidence we'd be able to sustain our strong performance after the hard work we put in this past quarter to build out better, more connected, and more real time reporting analytics and scorecards across the entire business. Now I can say that we have that same confidence, but with even more robust data to back it up, we're building a data-driven metrics-based company where accountability is key for each and every employee. That is what will enable Pineapple to continue growing and growing profitably. We're on track to deliver our 2023 guidance while continuing to pursue transformative acquisitions. We look forward to reporting our progress at our next earnings call in November. Thank you again for joining us this morning and for your continued support. If you have any further questions, please contact Eric or me. This concludes our call today. You may all disconnect. Thank you.