An 'Electrical Storm' of Catalysts Converge to Jump Start Sales of Eguana's Solar-Power Storage Solutions

The Punch:

Eguana Technologies Inc. (EGT:TSX.V; EGTYF:OTCQB), which provides solutions for residential and commercial energy storage is about to supremely capitalize on a wave of industry catalysts and government-led solar powered storage initiatives. These advancements affecting demand, distribution and production culminate into a "perfect electrical storm," which should boost revenues from about $1 million per quarter to six times that amount and beyond in the next 12 months. The product is there, the installs are waiting, the last piece of the puzzle, which was to exponentially ramp up production, was ushered in through a recently announced big-fish partnership backed with the essential, scalable financing. Since that announcement we see a clear buying signal as the stock has a solid base at $0.10. EGT.V appears to now have the momentum to climb back to a previous plateau of $0.17, then beyond as this translates into real sales.

That big fish is a global production agreement, announced September 3, with industrial giant Jabil Inc. (JBL:NYSE), a $4.5 billion market-cap company with more than $22 billion in global revenue. The sweetener on the entire arrangement is that Eguana is now backstopped, with working capital support by Export Development Canada (EDC) to guarantee its loans and lines of credit with Eguana's banking partners, so production and financing is instant and scalable from one to 100,000 units.

"Given the success the company has had building out our distribution and dealer network, we needed a manufacturing partner with the ability to produce around the world, with an engineering and design core competency, and a global supply chain and logistics network," said Justin Holland, Eguana's CEO. "Jabil has over 100 manufacturing sites and more than 200,000 employees, providing Eguana the scalability and reliability required to service our customer base and growing demand.

"Having EDC's support for working capital is a significant step forward for Eguana," said Holland. "As orders continue to scale, working capital becomes critical to recognizing revenue, and this agreement immediately lowers our cost of capital and allows us to get Jabil started immediately."

After developing the brains behind the batteries in an ever-changing market, it looks like the market is about to clash head-on into Eguana's photovoltaic (PV)—that's "solar power" to you and me—two-way energy storage system. The "two-way" is important as it relates to the grid, but more on that later.

The Purpose:

Eguana's vision is "to become a global leader in residential and small commercial grid tied energy storage systems." Strategically, the company remains focused on product standardization, with pre-integrated, factory assembled, software driven energy storage systems with flexible capacity to the market. Put simply, all of this had led to Eguana developing smart battery storage systems that enable households or small commercial businesses with legacy or newly installed solar panel electrical units to store excess power in lithium batteries. This enables the owner to store power off the grid and—even better—to sell excess power back to the grid, through what is known as "feed-in tariffs." Over the past few decades, in the push toward clean renewable energy, utility providers and governments would offer installation incentives and feed-in tariffs, an incentive for residential or small commercial solar power, to be sold back to the grid. It created an arbitrage system that rewarded solar-power customers, a motivation beyond the environmentally friendly aspect of renewable energy. However, over the recent years those incentives have decreased and now the game is to provide incentives for power storage rather than the power itself.

Two key global markets leading the PV storage trend and adapting Eguana power control solutions are Germany and Australia. "You skip forward to what's happened in the last four years in South Australia, for example; well, those feed-in tariffs, those subsidies, continue to reduce," said Holland. "And that was by design, because everyone's now using this stuff. Before, residents in Australia were getting 65 cents per kilowatt to deliver power onto the grid. Then in 2017 the utilities and government recognized they don't need to do this anymore, so they dropped the feed-in tariffs down to 10 cents. And now there's a new arbitrage opportunity for the homeowner who's thinking, 'Why would sell my solar power for 10 cents, come home, and buy off the grid at 40 cents? I'm going to stick a battery in the middle of this whole thing and save money, be less reliant on the grid, and reduce my carbon footprint with renewable energy.' When it comes down to it, the real incentive starts with 'I'm going to save money. I'm going to have a more reliable energy source.'"

To maintain flexibility, Eguana has focused on the software layer of the entire energy storage architecture. Ownership of the power control systems (PCS) provides control over the energy storage design, reliability and key performance characteristics of the system. The company has a development partnership and is fully integrated with LG Chem, a global-leading battery supplier and is fully tested and endorsed by Mercedes Benz Energy. Eguana, because of this focus on the software layer of the PCS, has the flexibility to be the "agnostic" player in the space with the flexibility to adapt new and legacy battery and PV systems. It's a significant competitive advantage for them to not be relying on specific providers to adapt to Eguana's battery controls.

"What Eguana focused on in the past and excels at today is power control," says CEO Justin Holland. "So that's the brains of the battery system, it determines how to move the energy in and out of it, and onto the grid, while providing protection for the battery modules. It's a testament to Eguana to have a partnership with a world leader like LG. It's this protective layer for the battery modules that has given Eguana a complete flow through to the LG battery warranty.'

According to industry researcher GTM Research, the annual residential energy storage market size is expected to grow at a CAGR of 44% to beyond $3 billion by 2023, so even a slice of that pie can be significant for a company such as Eguana that now has an opportunity to significantly ramp up sales in key markets such as Germany, Australia and beyond.

The Partnerships

In Europe, Eguana has partnered exclusively with Hanwha Q CELLS to deliver its residential Enduro product as part of Q CELLS industry leading Q.HOME+ package. Hanwha Q CELLS is one of the world's largest and most recognized photovoltaic manufacturers for its high-performance, high-quality solar cells and modules. It is also the current European market leader for residential rooftop PV installations, with more than 17,000 residential systems installed in 2018 alone.

The Q CELL network includes over 1,000 trained sales and installation partners throughout Europe. The Eguana Enduro will provide the Q.HOME+ package with residential energy storage capability, allowing homeowners to utilize their self-generated energy at night. Approximately one out of every two residential solar installations have an accompanying integrated battery.

According to Bloomberg, the German market remains the largest market and has topped €5 billion and continues to grow at a 10% rate per year. The agreement with Hanwha Q CELLS has the size and scale required to enter the largest and most competitive market for Eguana.

According to a Mackie Research report published back in March this year, "We believe the Q CELLS agreement could provide about $3 million in revenue in the first year alone. Cumulatively about 3,500 units over three years could provide $20 million potential."

In Australia, Eguana established its Adelaide sales, training and manufacturing facility, and increased its local staff to support dealer partners locally and across the country. The South Australian market is expected to be one of the fastest growing markets in the world for residential storage based on the government-run Home Battery Scheme, which provides grant and loan subsidies for energy storage. Installations have been steadily increasing since the first volume delivery was completed at the end of the quarter. Eguana has also qualified for the Simply Energy virtual power plant (VPP) program, Simply Extra. With 10 installation partners in South Australia and two national distribution partners through the onboarding process, the company expects to see further growth in orders and revenues from this key region

The Home Battery Scheme offers $100 million in state government subsidies for up to 40,000 households to install battery storage in their homes with individual grants of up to A$6,000 to help purchase batteries. In addition, the Clean Energy Finance Corporation will offer A$100 million in loans to help purchase rooftop solar. The 40,000 batteries will create a state-wide Virtual Power Plant, a new phenomenon that Eguana has addressed with battery-agnostic capabilities right out of the box.

South Australia has 230,000 rooftop solar deployments; over the next few years the state may be producing more rooftop solar supply than demand, which creates grid challenges.

In May this year Eguana introduced Sharpe Energy Rating Systems (ERS) as its newest partner delivering the Eguana Evolve energy storage system to support Simply Energy's Simply Extra Virtual Power Plant in South Australia. This is the first VPP to be launched in support of South Australia's Home Battery Scheme storage incentive program, which aims to install 40,000 systems over the next two years. As a result, Sharpe ERS has placed an opening order valued over $2.3 million and expects to see immediate order uptake in the region.

Speaking to the Home Battery Scheme effect, Mackie Research noted in late 2018, "We suspect this announcement could be very positive for EGT's F2019 order intake. Medium term, a 10% penetration in South Australia implies at roughly $12 million revenue opportunity for EGT versus 9-month (Sept) revenue of about $4 million.

Meanwhile, Eguana's other partnerships contributing to revenue include more than 20 solar dealer partnerships in the U.S. and Caribbean islands; a partnership with Puerto Rico's top two solar installers, Maximo Solar and New Energy Puerto Rico; and the leading Hawaiian solar installer, Hawaii Energy Connection, all supported with more than 300 trained and Eguana certified contractors.

The Production Ramp Up

The bottleneck to this point is not product or market demand, but production and the related financing. But that has now been blown wide open with a new agreement with Jabil Inc. (NYSE:JBL). Jabil is a worldwide manufacturing services company headquartered in St. Petersburg, Florida. With 100 plants in 28 countries, and 170,000 employees worldwide, Jabil is a massive manufacturing conglomerate, one of the biggest behind Flextronics. The company has a market capitalization of about $4.5 billion and more than $22 billion in trailing 12-month revenues.

"Jabil has the size and scale to get better pricing on everything," said Holland. "Battery modules, all the components, virtually the entire supply chain, and they're underway right now in engineering, building in cost savings, streamlining components. We also now have working capital support from EDC, another step forward for the company, that will be backstopping a letter of credit from Comerica." Export Development Canada (EDC) is Canada's export credit agency, offering trade financing, export credit insurance, bond services and foreign market expertise. "Normally to get a letter of credit you have to deposit cash. In this case, EDC is effectively collateralizing purchase orders. You got purchase orders for 2 million dollars? EDC guarantees the bank financing. 'Here's a load of credit,' Jabil gets going.

"So that is huge. That now allows you to scale because Jabil will buy from LG and all the other component suppliers, manufacture it, ship it, you collect the money from the customer, then you pay Jabil. Then you do it all over again."

The Proposition:

Consider how a top line revenue boost of X6 should affect a company with about 235 million shares out at current price of CA$0.115 for a market cap of ~CA$26 million. Eguana completed a CA$4 million preferred share financing and loan settlement with the company's largest shareholder, Doughty Hanson (26%), in January to help finance imminent working capital needs, as well as two convertible debenture tranches in June and August totaling $4.2 million, of which Doughty Hanson took an additional CA$1.2 million. The company has nominal warrant overhang of 21 million warrants, and insider ownership of about 30%.

Due to delays of Jabil/EDC agreements, Eguana's revenues for the period ending June 30, 2019, were low at CA$774,670 in fiscal Q3 and CA$2.6 million in the nine-month year-to-date period, compared to CA$3.8 million in the same period in 2018, for a current 12-month trailing revenues of around CA$4 million, so trading at a multiple of 5.5 times. With anticipated revenues to ramp up to CA$6 million per quarter based on the aforementioned agreements and a gross profit margin around 20%, it's not entirely unreasonable for investors to weather this storm well north of the current CA$0.115 support level.

Knox Henderson is a journalist and capital markets communications consultant. He has advised for a broad range of small cap companies in the resource, life sciences and technology sectors for more than 25 years.