3 Interesting Catalyst - Driven Plays (Part 2)

Good Morning Followers,

Last article I spoke about WELX.

To summarize, WELX is an interesting nano cap play on the Mt. Gox bankruptcy crypto claims, mining in general, and the overall bitcoin market.

So far, the market hasn't treated WELX too well.

I believe that is largely due to 1. the Mt. Gox crypto claim disbursements getting pushed off; 2. the market hitting a wall; and 3. Bitcoin falling faster than a prom dress on prom night (I heard that phrase one time at work and loved it. I've never even been to a prom so I can't really attest to its accuracy).

Anyway, it's time for the next big idea - Pineapple Energy (PEGY).

If you haven't done so already, I'd encourage you to first read my article on Seeking Alpha (shameless plug - I get 1 cent per view if you click on my article so even if you aren't interested, it would really mean a lot to me if you clicked on the link. Inflation sucks. I'll take any help I can get).

Although my article does a nice job with PEGY's background, I'll do my best to discuss the opportunity here. So, here goes...

PEGY is a solar residential company that was just founded. It is run by a guy named Kyle Udseth who has a large amount of solar experience. Kyle is sharp. Kyle is nice. Kyle is my friend. We chat every now and again and I'd love to grab a beer with him one of these days. Kyle, if you are reading this - hey!

Before PEGY existed, a company called JCS existed. JCS worked in the internet/communications infrastructure space and decided to make a pivot away from that business and change course. They decided to do a reverse merger with PEGY and sell all their legacy assets. Now, for all intents and purposes, JCS is no longer relevant and the company is solely focused on PEGY.

PEGY operates in two main markets - Hawaii and California. As part of the reverse merger they purchased a company called HEC and a company called E-Gear. HEC is a solar installer out in Hawaii and E-Gear is a provider of a lot of the infrastructure needed for solar installation, implementation, monitoring, and storage.

HEC: https://www.hawaiienergyconnection.com/

E-Gear: https://www.e-gear.us/

PEGY, in its own right, has no material business...yet. The PE firm that incubated PEGY had purchased the assets, referrals, and practices of Sungevity out of bankruptcy and turned the company into PEGY. Although PEGY proper doesn't really have much business outside of HEC and E-Gear, the company is hitting the ground running, plans on acquiring additional businesses, and is positioned well to grow into this next phase of the solar revolution.

Let's dig a little deeper.

As per recent filings, PEGY has a run-rate annual revenue of about $25MM - and that figure is growing very quickly. HEC and E-Gear alone anticipate they'll earn about $25MM in revenue in 2022. Now, throw PEGY in the mix and we could be looking at $40MM - $50MM by the end of 2023. I've spoken with members of the sales team at PEGY and they've shared that they have had a massive amount of customer interest and sales success - irrespective of HEC and E-Gear.

But, I believe my estimates are extremely conservative. Based on recent reports, it's quite possible PEGY will grow revenue even more than HEC and E-Gear's 20% estimate. Backlog was up 75% and battery attachment rate stood at nearly 80%. They are even beginning to work on the weekends to keep up with the solar and battery installation demand. And, that is where I believe the opportunity lies.

With massive grid outages and brown outs in California and oil and gas insecurity at the forefront of everyone's mind, the shift to solar install and storage will be robust. E-Gear is in a great position to cross sell its battery storage products to solar customers. And, with the Hawaii Battery Bonus Program underway, the attachment rate and growth will be even stronger.

Battery install growth was 137% year over year and Eguana Technologies (the manufacturer) announced a great order log from Pineapple ($2.4MM in orders!). They also announced on their earnings call that they are prepared to expand the relationship with Pineapple as they grow operations in the mainland U.S.

Eguana Earnings Call: "The recent changes have brought additional momentum to this program which has resulted in new orders coming in from our partner Pineapple Energy, formerly known as Hawaii Energy Connection, totaling 2.4 million. Happy to add the first 100 units of that order have shipped since the changes with plant shipments totaling an additional 200 systems for the end of the calendar year. We will continue to work closely with Pineapple management to address U.S. mainland opportunities, as they achieved their growth objectives and our two companies remain aligned."

The growth opportunities are quite remarkable. Solar is extremely underpenetrated and energy is all anyone ever talks about these days. Even the firm that helped assess PEGY's value believes PEGY will have over $100MM in revenue by the end of 2023. See below from the proxy filing:

So, how do you value a company that could have $50MM - $100MM in revenue within 2-3 years and has the opportunity to cross sell products like monitoring systems, batteries, and a whole lot more?

Let's start from the outside and work our way in.

Solar companies in general (see RUN, SPWR, FSLR, ENPH, SUNW, NOVA) trade at a multiple of sales.

RUN - 3.94x

SPWR - 3.26x

FSLR - 5.88x

ENPH - 24.81x

SUNW - 0.76x

NOVA - 7.78x

A bit of a wide range, but if PEGY is going to have $50MM in sales (or more), the equity should theoretically be valued somewhere in the $50MM range (1x sales?). That would imply about a 2-3x upside from today's $15MM market cap. However, initially they'll be burning through some cash to get those sales so it'll be challenging to determine how quickly they'll actually turn a profit.

To be honest, I generally shy away from these high flying growth stocks - especially ones that are super hard to value. But, there is something really intriguing about paying $15MM in equity for a company that could have $50MM - $100MM in sales in just a few short years.

But, the crux of the thesis lies primarily in analyzing what the "smart money" has done and what they will do. The PIPE investors invested $32MM to bring PEGY public and purchase HEC and E-Gear. In exchange for their capital, they received preferred shares and warrants that convert into 2.35MM common shares, respectively. Those shares convert at a price of $13.60. Each preferred share represents $1,000 in face value and, at today's price of $2, they are nearly 80% underwater on their investment.

Let's take Bigger Capital Fund LP as an example. They own 1,625 preferred shares that they paid $1.625MM for. Those shares convert into 119,485 shares ($1.625MM/$13.60). If they converted them and subsequently sold them at today's $2 market price, they'd only receive $238,970 in value. Yikes!

Here is a full list of the preferred shareholders and the amount of shares they'd have if they execute their preferred stock and warrants. I've already tried reaching out to some of these holders and for some odd reason no one has answered me. The nerve!

So, although there is certainly some dilution in the PEGY capital structure, these investors are so heavily underwater I can't imagine they'd add selling pressure to the stock.

The question becomes - is the market dumb for valuing the stock at $2/share or are these investors dumb for thinking it'll get remotely close to $13.60/share in the near future? And, to add to the argument, management and the PE fund that started PEGY and owns 35% of the company (Northern Pacific Group) have a large amount of shares they own in escrow only to be released if PEGY hits $8 by 2024. That would mean the stock has to go up 4x in 2 years just for them to get access to some of those shares.

So, what am I missing here? I think this opportunity exists for a few reason:

1. PEGY is an unproven business

2. PEGY is a really small business and no one is looking at a solar company based out in Minnesota with operations in Hawaii and Cali.

3. People think the shelf they filed two weeks ago to issue stock is going to dilute shareholders. This is only my speculation, but I really don't think the shelf will be used to dilute shareholders at $2/share. PEGY has enough cash to continue building out its business. They just raised equity with a $32MM PIPE and management needs the stock to hit $8 to get more of their shares. I think the shelf was issued strictly to register the common shares the pref holders will get when/if they convert their shares. On top of that, Kyle has been receptive to my request for him to purchase shares in the open market. I'm hoping he does that soon to show some confidence to minority holders.

I've made this one a large position. I really believe in 2-4 quarters from now the stock will be materially higher ($5 - $8). Valuing this company is hard. There is this dilution overhang and uncertainty about the business's viability. However, that being said, a company that shows continued revenue growth and a promising business model that generates $100MM in revenue in 2 - 3 years with incentivized management and a growing industry should not be valued at $15MM.

These are just my thoughts and not an exhaustive due diligence report. Always do your own due diligence.