Earnings Transcript for UGEIF - Q2 Fiscal Year 2021

Unidentified Company Representative: Thank you for joining us to discuss UGE International’s Second Quarter Fiscal 2021 Financial Results. On the call today we have UGE's CEO, Nick Blitterswyk; and UGE's CFO, Marissa Lauder. During the call, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. We’ve collected investor questions via email but you can also submit the questions through the web portal at any time. And management will answer them following their prepared remarks. Before management discusses the results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For caveats about forward-looking statements and risk factors, please see our MD&A for the year-ended December 31, 2020, which can be found on our company’s profile at sedar.com and the company's website. I will now pass the call over to UGE's CEO, Nick Blitterswyk. Nick?

Nick Blitterswyk: Thanks, [Marcel]. Good morning and welcome to everyone on the call. We want to thank you for joining us today. My name is Nick Blitterswyk, CEO of UGE and today I'm joined by our CFO, Marissa Lauder. For today's Q2 webinar, first, I'm going to run through the agenda and let you know where you can find additional information. Pertaining agenda, I am going to begin by summarizing our key business highlights for the quarter. Next, Marissa will run through our Q2 financial results. And from there, I'll provide some concluding remarks with a look towards the future. We'll then take questions to wrap up the webinar. As a reminder, you can submit a question through the portal on the left hand side of your screen. As always, our goal is to be mindful of your time and keep this webinar concise and to the point. We will be speaking relatively high levels and focusing on the areas that we feel are most important to understanding our business and financial results. Our website address is listed here as well, where you can download our full financials. We also want to remind our listeners that we report in U.S. dollars. So the results in this webinar are represented in U.S. dollars as well, unless addressed otherwise. So with that, let's start by talking about our key business results in the quarter. I'll start off by talking about our project development pipeline, which saw substantial activity in the quarter. here we see our pipeline table is taken from our MD&A. When we zoom in on the earlier stages of this pipeline, you see that the top of our funnel has grown dramatically so far this year. To break it down, we had 112 megawatts in these pipeline stages at the beginning of the year. It has since went and tripled to 358 megawatts with most of that growth being experienced in Q2. In terms of what’s driving this growth, first and foremost, I want to call attention to the work we have been doing to grow origination and development efforts. Starting in March, we recruited several additional members of our origination team, which has given us really good start to our markets and these new team members have hit the ground running, which will translate to project backlog in coming quarters and operational projects thereafter. Of course, I'd be remiss not to reference longer serving members of the team as well, who’ve also been having a great year. The pipeline growth also speaks to the opportunities available in our market right now, and the work we've done to be a leader in the space. On the next slide, we see most of our project backlog with the exception being operational projects, which I'll cover on the next slide. For stages 3.1 to 5, we’ve seen strong growth throughout the year as well, totaling 60 megawatts at the beginning of the year to over 82 megawatts at the end of Q2. Getting a little bit ahead of myself, the total backlog including operational projects was 84 megawatts on June 30th. We've also seen steady progression of projects through the stages. It might be a little hard to track here, but we have positive progressions through each of the stages in Q2, including 823 kilowatts of projects reaching the deployment phase, with the expectation that they all reach commercial operation by the end of the year. The effective plan is to ramp up toward the end of the year, with current expectation of 7 to 10 megawatts reaching construction by December 31st, which is up from our forecast of 5 megawatts at the end of Q1. On next slide here we see the operating portfolio. In the big picture, these numbers are still low compared with our medium term goal of 100 megawatts. But we are excited to see two additional projects reach commercial operation within Q2. One note is that smaller projects tend to be quicker to deploy, and so our current operating portfolio has a smaller average project size within our overall backlog by a significant factor. Here our operating portfolio average is about 200 kilowatts per project, which compares to a little over 2 megawatts for the entire backlog. Turning now to pipeline Maine, we see the total pipeline as of June 30th of 441 megawatts, which was up 76% in just one quarter. That includes 84 megawatts of what we refer to as backlog. On the last slide before turning things over to Marissa, I wanted to highlight a few other important updates. First is, our replacement activity has continued to be impressive so far in Q3 with several leases and LOIs signed thus far. Notably, as announced in today's release, we have just signed an LOI to exclusively develop projects add up to 81 rooftops in the U.S. for a global real estate firm, with development work already starting in earnest. As our sector across has it into the mainstream, we reported building portfolio wide relationships with other large real estate owners as well. In a similar vein, we'd also announced the partnership with Bloomberg in July, where they will be off takers for the energy produced by our community solar facilities. We also see this as an area for opportunity to expand both for Bloomberg and other corporate entities as well. Second, we touched on it earlier, but we've been really pleased with the additions we’ve made to the team this year. I touched on origination developments already, several of which came to UGE from competitors in the industry as they saw UGE as an attractive place to work for their competitive advantage. In other areas of the business we are pleased to be joined by Edgar Lim, our Managing Director of Engineering who has also been helping take that new business unit to new heights. In the market itself, there continues to be a significant movement. So first, in Maine, where we're redeveloping several community solar projects. Legislation passed has temporarily decreased the maximum allowable project from 5 megawatts to 2 megawatts which causes to revise the size of several projects downward which decreased the backlog by just over 5 megawatts from what it otherwise would have been. The Maine market is still evolving, but we believe that long-term these changes should lead to a more sustainable market in the state, even if there were negative impacts in the shorter term. Also in the country, community solar continues to grow, however good progress being made in several states including Pennsylvania, a state we entered in Q2; as well as states like New Mexico, Wisconsin, Oregon, Michigan and others. Just this week a federal bill was introduced to promote community solar across the country. So we’re feeling on the front of the wave on this one. Of course, we're also watching the infrastructure bill pass and expect news on the long-term extension of the investment tax credit by the end of the year. My last comment, in Q2 we did announce the closing a project funding for two New York projects, and we're in discussions for upcoming project requirements as well. Generally the funding environment is very strong and high demand for funding other privates in our sector. We have seen debt markets more turning steady rate wise but we're looking to compress rates as volumes have defended growth later this year. Our tax equity in New York City is with its terms and availability this year, and signed the term sheets from institutional provider in Q2. That transaction is expected to fully close in the coming weeks and grow as additional projects reach stage 5. I'll now turn it over to Marissa to summarize our Q2 financial results, and then I'll return for some concluding remarks before taking your questions.

Marissa Lauder : Thank you. Nick. And thank you for joining us today. I'm going to review a few items from our Q2 financial results. And so looking at Slide 9 here, we more than doubled our energy production to 234,000 kilowatt hours, compared to 103,000 kilowatt hours last quarter. This almost doubled revenue to $47,000 from $26,000 last quarter. So these are relatively small dollars, it does demonstrate the rate of growth as projects come online. Our fourth U.S. facility was completed at the end of the quarter, and it is expected to contribute to revenue in Q3 and our operating solar facilities are producing within our expectations. Moving down, we earned $528,000 in EPC and consulting revenue in the quarter. And this is up from $399,000 last quarter, and $253,000 the same quarter last year. The U.S. team made good progress on a larger project in New York City and the Philippines team also increased their activity. Assuming projects continue the current level of momentum, we would expect to round this level of activity into Q3 and Q4. As we've mentioned previously, until we reach scale in operating solar facilities, we will continue to see variability in our top-line revenue. This is why we're super-focused on growing our backlog and moving projects efficiently through to operating status, so that we can reach scale and get to a solid base of recurring revenue from energy generation. This transition will lead to a certain period of accounting net losses. But even so it's important to note that developing and building projects can create positive cash flows through the development cycle, through the retention of the developer fee. And this is despite accounting revenue not being recognized until the project is operational. Now looking at expenses, our operating costs increased $50,000 quarter-over-quarter, as an increase in staff costs was mostly offset by a decline in corporate costs, including professional fees. Costs are increasing in line with the addition of origination and development staff to support growth as Nick has already mentioned, along with the professional services that go along with the business activity. We ended the quarter with 50 staff, up from 36 at the end of the year. We expect measured growth in costs over the next few quarters as full effect of the additional staff are absorbed. We still have a few key roles to fill in the year, but the rate of staff growth should slow somewhat for the remainder of 2021. Overall, the net loss for the quarter was $0.8 million or $0.03 a share, improved from a net loss of $1.07 million or $0.04 a share last quarter. This quarter did include approximately $234,000 in income from COVID relief programs, compared to $85,000 last quarter. So, on an adjusted basis, net loss was $0.5 million this quarter compared to an adjusted net loss of $1.14 million last quarter. Moving to the next slide, let's look at our financial position. We ended the quarter with $2.25 million in cash, down from just over $3 million at the end of Q1. While we earn cash from the EPC business, operating facilities and developer fees, we have not yet reached scale to generate positive cash flows internally. We continue to thoughtfully manage the business and our cash flows. As we build value through the development and deployment cycle of our solar facilities, this will begin to reduce our cash burn, as well as provide us additional opportunities to improve our cash flows as the larger volume or projects reach the deployment phase. Moving down, construction and progress declined as a 263 kilowatt project was completed and moved to solar facilities in use at the end of quarter. And also at the end of the quarter, the construction of a new project has just begun. Finally, on the asset side, project development costs and right-of-use assets have increased as we continue to grow our backlog of projects. As a reminder and as required by accounting standards, right-of-use assets represent our rights in our lease arrangement over the life of the lease, and is not a current cash outlay. The right-of-use asset is offset by a similar lease liability for obligations to pay the lease over the lease period. On the liability side, our project debt and tax equity balances are increasing in line with operating facilities and construction activities. And as Nick mentioned, we're tracking well on our project finance activities and we are confident we can continue to secure both debt and tax equity at improving costs to fund our backlog. That concludes my prepared remarks. And I will turn it back to Nick.

Nick Blitterswyk: Thanks, Marissa. As you can see, we are making solid progress towards our goals. In 2021, we set out to grow our origination and development efforts to capture a greater share of this fast growing market, as we see greater scale as an organization. With the growth of our pipeline and backlog, we are well towards to our short-term target of exiting 2021 with 120 megawatts of backlog, which will also put us in a great position to meet or exceed our 2024 goal of having 100 megawatts of operating assets, which we really see as just the tip of the iceberg with this business. As you can see here, with our goal of adding 100 megawatts to backlog per year by 2024, we expect to grow at much greater heights from there. With that, we'll wrap up the prepared remarks by pointing you to where you can find more information. As mentioned earlier, our website is regularly updated. It contains all of our financial filings and other updates. You can also follow us on Twitter to get links to announcements and other media, and visit Sophic Capital's website for additional information. Thanks again for tuning in today, [Marcel], back to you for the Q&A.

A - Unidentified Company Representative: Thank you, Nick. We’ve collected the questions investors have submitted since issuing the financial results and the questions submitted through the call web portal. We'd like to thank you for your questions. Our first question is from Nicholas Boychuk from Cormark Securities. Nick, can you please provide some additional color on the LOI time for the New York rooftop sites? How did this opportunity come about? What is the potential amount of new capacity? And is this a sign of things to come, could we have some more announcements?

Nick Blitterswyk: Thanks, Nick. So, in terms of how it came about, I think it's, our industry is maturing and there's a lot more interest from larger and larger real estate clients, and so this is -- this -- though -- currently recently, it's a very recent signing for us, of this LOI, by building a relationship with this real estate company and showing them the value that we can provide to them by developing these projects and building the growth financing and [then noting] them. So it's a very reasonable ally, 81 sites. So none of this was in our pipeline or our backlog as of Q2, this is all recent progress. I think it is fair to say, we believe it's a sign of things to come in terms of the ability for us to build other large relationships with other real estate owners in the months and quarters and years to come as well. And in terms of timing and where we go from here? Our development team is now working across this portfolio to analyze those sites in terms of the projects. Given that it's into later August now, we expect that, that will converting into backlog most likely in Q4. And then given that the timeline to build out projects and so on, we'd expect the first projects in this portfolio to be operational at some point in the latter half of 2022.

Unidentified Company Representative: And a follow-up question for Nick. Can you please comment on the updated regulations in Maine? Any color on why they reduced the max size 2 megawatts, will this have an impact on the interconnection approval timelines and processes?

Nick Blitterswyk : Yes, so with states introduce community solar over regulations, different states move in different ways. Kind of the opposite in the spectrum is a state like New Jersey, which has a pilot program, which is much more narrow-deep to get through. Maine was very open right away. And so we were one of the companies that got in there very soon after to develop a number of projects. So what it led to is a real rushing at the gates, if you will. And so Maine has been looking for ways to help, as I mentioned in remark, make it a more sustainable market, as opposed to a gold rush market. So based on the change in those regulations, two of our Maine projects, we decreased the size of those projects by a combined a little over 5 megawatts. So if we hadn’t made that change, our backlog would have been a little bit over 89 megawatts at the end of Q2. But big picture we see as a positive for the market in terms of putting a better process together, in terms of getting projects through interconnection and approved in that state. So to the question in thereabout, do we see it impacting interconnection? You should see it as a positive interconnection, right, because it's lessening the total megawatts of projects that are going through interconnection in the State of Maine. So we mentioned in the last two calls, I think that we had experienced delays in getting interconnection approval in Maine based on the number of projects that utilities were analyzing for interconnection. We see this as one step in helping get that organized and on the right track.

Unidentified Company Representative: Moving on, we have two questions from [Jeff Cowell], a Private Investor. Nick, since you’ve pivoted to an ownership model, what has been your win rate in converting pipeline into backlog?

Nick Blitterswyk : Our estimate on converting pipeline into backlog based on historical results is 1/3.

Unidentified Company Representative: And the second question for Marissa. Given your current burn rate, what coming developer fees plus cash on hand enable you to hold the equity raise and for how long?

Marissa Lauder: Yes. I mean, you can see from our financial statements, we're not quite cash flow positive. Having said that, as we move through our development of our backlog, and particularly the 7 to 10 megawatts expected to move to deployment by the end of the year, we do expect to see a reduction in the cash burn before we generate free cash flows. And along with the value we're building in the business, if we did wish to build our cash position. We do have meaningful other options like unlocking some value in our development pipeline by perhaps only 1 or 2 of our 45 projects. And since we have almost no operating leverage in the business right now, that also is an option. So we'll say we have no plans to raise equity at this time. Nick, would you like to add to that?

Nick Blitterswyk: Yes, no, I think you summarized it well. Certainly no plans and on the flip side, like Marissa said, yes, we have 45 projects in our backlog as of June 30th. We test the market from time to time to see what some funded buyers of projects are willing to pay for them. We routinely do that to test the market. And just a few weeks ago, we’ve been approached for the Maine projects and had captured bids on those projects that were 2-brackets combined in the $7 million to $8 million USD range without us -- pre-constructed. So there's meaningful options, like Marissa said, and has meaningful value that we're building in the business as we move forward here.

Unidentified Company Representative : Our next questions come from [Dan Corn]. The first one for Nick is, do you expect to hit the 120 megawatt backlog guidance by the end of this year?

Nick Blitterswyk: Yes, we think we are tracking well towards that, the growth in the pipeline and also our ability -- in our MD&A, we’ve referenced additional leases that we've signed since June 30th as well, leases being one of the earlier steps for us to lock in additional sites. So, we feel we have all the activity needed to get to that goal.

Unidentified Company Representative : Dan's next question is, are you having any difficulties finding tax equity partners? And do you expect this to be a [perm] in the future? Marissa, would you like to take this one?

Marissa Lauder: No, I think, Nick covered this in his comments, is that we're working very well on our project debt finance activities right now. We're just in the process of closing an institutional tax equity agreement for a current project that's under construction. And there's lots of appetite in the market, particularly lead for the size and scale that we're looking at. And so we're not seeing any issues in that market. I mean, Nick can talk a little bit more about the rumors in the market with a direct pay option for the IPC, which would certainly alleviate any pressures that we would otherwise -- that we're not seeing, but that would certainly improve our economics in these projects if that came to fruition.

Nick Blitterswyk: Just pressing on that one itself. What Marissa is referring to there is the infrastructure bills and the expectation at this point in time. This has remained the case through 2021 so far, is that when the infrastructure bill -- and then referring to the reconciliation bill, which is one of the two infrastructure bills expected, that it will have reforms for investment tax credit included right now and proposed to include a direct pay option. And all that means is that -- into -- in asset, sell our tax credits that we derive from developing and building these projects, we would be able to get paid as a cash [stream] instead, and that would very much streamline things and boost the economics for our projects.

Unidentified Company Representative : And Marissa, what is the source of the developer fees that you will look? Is it the tax equity or from construction loans?

Marissa Lauder: Yes, good question. It's a combination of both. It's really the capital stack at the project, exceeding the capital cost of the project. And so, the remainder being the developer fee that we can retain as a positive cash flow.

Unidentified Company Representative: By quick growth in the pipeline, what percentage of the pipeline you expect to hit backlog?

Nick Blitterswyk : I think Marcel, I want to say that -- I earlier questioner asked that as well. But our historical average or estimate is 1/3 of the pipeline convert into backlog.

Unidentified Company Representative: Moving onto our next question from [Allister]. When you look at getting bids on pre-construction projects, what sort of dollars per megawatt are you seeing on the $7 million you quoted earlier in the call?

Nick Blitterswyk : In terms of the construction costs that we're seeing, specifically, sub-contracting out the build on the solar projects, it -- a rule of thumb would be in the $1.20 to $1.45 range per watt. So if 7 to 10 megawatts of projects, it’s a good momentum to operate, you're looking at a total of let's say, USD10 million to USD15 million of cost to build that out. So that would be the full CapEx for building these projects, so the subcontractors, the equipment, and so on. I should mention that, that is the solar project aspect of things. In our CapEx, in our assumptions, in the backlog table, for projects sometimes -- we’ve noticed in some of our New York rooftop projects, for example, that as part of the economics of the project in lieu of lease payments or by lowering the lease payments, we might have an upfront cost to reboot the building. So there is sometimes in our CapEx assumptions, costs above the solar project. And I just put it out there because you can’t see the numbers a little bit. And I think we ran into a question on that on Q1 webinar. But, yes, right now, I would say in that $1.20, $1.45 range, depending on size of the project in ground mount versus rooftop.

Unidentified Company Representative: Our next question comes from [Warren Alonzo]. Nick revenue per kilowatt hour in Q2 dropped to about $0.20 from the Q1 value of $0.25. Could you provide some color on that?

Nick Blitterswyk : Yes. As the portfolio matures and grows, you're going to see that number evolve and become probably less a variable as the size of the operator portfolio grows. Based on different markets, there is different averages for what we get for the value per kilowatt hour. The first two sites we had operating in the U.S. were in New Jersey, and that -- those projects had energy credit aspect to them, which provided an extra boost in revenue area. Also, Metro New York projects tend to be quite high in terms of the revenue per kilowatt hour that we’ve tracked. Whereas we can move out to larger ground mount projects, you see those drop a little bit. So longer term $0.20 per kilowatt hour, still a bit on the higher side for what a long-term average will be. And that's the reason behind that compression there.

Unidentified Company Representative: We have a question from [Jeff Cowell], Private Investor. Nick, you mentioned that you're expected to ramp 7 to 10 megawatts this year to construction-ready. Have you booked any cash on the balance sheet for that?

Nick Blitterswyk : Yes. So as -- so 7 to 10 megawatts on -- we did mention it, also it was separately press-released, there was 723 kilowatts of projects in the U.S. that had moved to the deployment phase. And by the end of the year that additional 7 to 10 megawatts will be rolled in through as well. So, as projects reach that stage, we typically start putting our developer fee to positive cash flow contribution through that timeframe. And so there’s a timing aspect of things for when those projects reach what stages. But as Marissa mentioned in the response to an earlier question, as the volume of deployments grow we're going to see that cash from here, all things considered equal obviously. And so we're looking forward to getting those deployments up. If you just think 7 to 10 megawatts by the end of the year, the number through the first half of the year if I am not mistaken was a little less than 1 megawatt. So we're expecting those deployments to increase quite rapidly by the end of the year but especially through 2022 as well.

Unidentified Company Representative : Two questions for Marissa that came through email. Marissa, what percentage of ground -- what's your percentage of ground projects versus rooftop projects?

Marissa Lauder: Yes, good question. So in our backlog today, 6.4 megawatts is rooftop in the U.S. All of the backlogs in Philippines would be rooftop. And that 6.4 would include the 0.9 megawatts that are operating.

Unidentified Company Representative : And a second question. With corporate relationships like Bloomberg, what type of ROI increase can you capture that been using third parties to find multiple off-takers?

Marissa Lauder: Yes, that’s a question. I'm actually going to send that to Nick, because he has a little more detail on the Bloomberg deal at this point.

Nick Blitterswyk: Yes, for sure. That's a good question. In rough terms, earlier actually there was a good question about the CapEx per project and also in our table we talked about the fair market value of our projects. And so CapEx is upward of $1.25, $1.45 and the overall backlog value tends to be close to $2 per watt. I give that as context because in that estimate for how much it's going to cost to put a project together, if we're purely relying on a third-party subscription management company, these are third parties that line up that energy off take, which we have traditionally done, those rates are typically up to $0.10 per watt. So $0.10 per watt versus $1.25, $1.45, it is material. And so in this case, when working directly with corporate off takers, that provides a meaningful boost in terms of the value that we get out of the projects. And I did mention it earlier in the prepared remarks, but we’re not only working with Bloomberg, but we also see that as an avenue that will expand over time. We're seeing really good interest in corporate off take for potential projects that we're doing. And so look forward to building relationships on that side of the house as well.

Unidentified Company Representative : We have a follow-up question from [Dan Corn] for Nick. Is there a way to predict what a developer fee will be per megawatt?

Nick Blitterswyk: Let me pass this on to -- call back to Marissa on this point. Listen, do you have an estimate for that?

Marissa Lauder: Well, I mean, it's going to be highly dependent upon the project, it's also going to be dependent upon our own wish to take cash out of a project earlier versus leaving it in for long-term value. So there's not an easy way to estimate what the developer fee would be, I mean on a rule of thumb and in the background we try to make sure that we're earning a margin of at least 20% but we may not take that much cash out of the project.

Unidentified Company Representative: Just a reminder, if you want to submit a question in the Q&A, we have some time left over. Okay, Nick and Marissa, it looks like we have no more questions. So this concludes today's question-and-answer session. I will now turn the call over to Nick and Marissa for their closing comments.

Nick Blitterswyk : Thanks, Marcel, and thanks, everyone for joining today. Really appreciate the questions. And as you can see, we're really pleased with how the business is tracking throughout the year. At beginning of the year, we set out first and foremost to reach a certain scale in the organization as we move these projects through the various stages and into building our operating portfolio. And we feel we're very much on track for that. And in fact, the pipeline growth that we're experiencing is a fair ways ahead of what we would have otherwise expected. So appreciate everyone's interest in the company. And look forward to keeping everyone updated in the months and quarters to come here.

Unidentified Company Representative: This concludes UGE International Second Quarter of Fiscal 2021 Conference Call. Thank you.