2023 Annual Shareholder Letter

Start with the ‘Why’

2023 was the world’s hottest temperature on record, and anthropogenic greenhouse gas emissions were and still are the root cause; these concerning trends will compound at an accelerated rate. To reverse these trends, reducing emissions is more important than ever before.

Palmetto is directly involved in decarbonization efforts. To highlight our contribution, for every Palmetto customer that installed a rooftop solar system in 2023, Each consumer contributes to our broader clean energy community, which produced 161,122,668 kilowatt hours of clean electricity in 2023, alone; our community reduced carbon emissions by 251,204,800 pounds of carbon dioxide emissions, which equals the removal of 1,888,068 trees growing for ten years, which is equivalent to 10 days of a coal plant shutting down.

Climate change mitigation requires a wide range of decarbonization solutions; the fossil fuel-driven energy segment is at the epicenter of the problem, and clean technology is the clear planet-positive solution. For these reasons, Palmetto’s growth and long-term success directly correlate to climate change mitigation, and that’s the purpose of our existence.

Introduction

Clean technology is both a complex and an emerging market. Palmetto is at the forefront of innovation and leading the sector in many ways; we leverage an asset-light, technology-driven platform model to deploy user-friendly products and services that drive cleantech adoption; we have built the world’s first end-to-end platform that is the core foundation for future, scalable growth; starting with our deep tech, Energy Intelligence engine that powers our consumer platform and our partnership platforms (sales/marketing and distribution, capital, supply chain, construction, service, and others). Additionally, there are a multitude of additional applications that can unlock new users or enhance existing user personas and, in turn, drive future growth for our organization. It is important to reiterate that technology is the scale factor to harness the immense growth opportunity in our sector.

2023 Market and Navigation

A Year in Review

Over the past 18 months, primarily due to the interest rate environment, the residential solar market has experienced an unsettling 30% year-on-year nationwide market decline. The rising interest rate environment had a series of knock-on effects that impacted market participants adversely. In Q1 2023, we correctly predicted a couple of things: 1) the consumer market would shift to third-party ownership (“TPO”) and increasingly shift away from loan products, and 2) credit tightening would drive substantial risk to the installation (construction segment) and, in turn, harm the broader ecosystem (supply chain, distribution partners, solar platforms, etc). These market predictions, coupled with our Long Range Plan, led us to focus on three main objectives for FY2023: 1) launch a market-friendly TPO product, 2) increase cash on the balance sheet to manage short-term shocks to the Company and invest in our TPO product line, and 3) continue to drive the cost of customer acquisition down through digital channel strategies.

Within the first half of FY2023, it was clear that our Company, along with the broader industry, was underperforming our demand forecast due to the weaker-than-expected loan product adoption (due to higher costs, thus decreasing the consumer value proposition, and therefore, lowering demand); we needed to revise our FY2023 Plan. Our TPO financial product, LightReach¹, a significant growth lever, was scheduled to launch in early Q4 2023, and we needed a bridge solution to manage our fiscal objectives. As a result, we undertook cost management adjustments throughout the year.  Two initiatives were at the speartip of cost management adjustments to set up our Company for long-term success and near-term business result achievement:

1. Extended Range Plan and Objective-Key Result Cadence Implementation - Implemented a three-year rolling roadmap to ensure we invest in the most strategic, differentiated areas (per our Company Vision Statement on our website)  and preserve resources for agility and market-driven opportunities.  We then performed a complete teardown of our Company initiatives and stack ranked those under the Long Range Plan.  By emphasizing near-term Objective Key Results, we assessed areas that were over and under-invested based on more tangible, data-driven performance and
2. Business Segmentation - Established business segments to bring more clarity to the performance of our four areas of business: Software Products, Financial Products, Solar and Storage (logistical) Services, and Services.  In addition to this step, we also assigned Business Leaders responsible for their respective business results, such as driving profitable growth and day-to-day decision-making within the context of the Long Range Plan; as a consolidated model, we set the foundation for the ability to pull on levers to manage growth and profitability in the short- and long-term.

Consistent with our Long Range Plan, we executed the launch of Lightreach through our partnership program; this is highly reflective of our go-forward business model whereby we drive initiatives that have both short-term cash gain value and generate consistent long-term, predictable cash flow streams; this will continue to differentiate us as a best-in-class operator so long as we remain an asset-light and lean, efficient operator with a consistent focus on our Company’s number one value - Customer First.  We believe these traits are essential for the next generation of cleantech companies, which we call “CleanTech 2.0.”

Restructuring

From my point of view, 2023 was one of the most challenging years in our Company’s history, given the organizational restructuring and resulting layoffs. Alongside the rest of the market, we needed to conform to the new market environment and ensure we took the necessary steps to deliver on our Long Range Plan and preserve resources to ensure successful execution.  Longevity, a core value, means ensuring staying power and financial strength, which serve our mission, consumers, and partners.  I believe we were direct, thoughtful, and compassionate in delivering a reduction in force; nonetheless, the fact remains that teammates, many of whom became close friends, left the company. That is ultimately my responsibility, and I own that decision.

Highlights

During a challenging year, we executed many areas of our Long Range Plan to set up 2024 for success. We will distribute the year-end audited financial results to investors once completed; however, for a more public audience, I wanted to share a few business highlights from 2023 and the 2024 Plan:

• Grew market share in 2023 – amount to be determined based on the final audit
• Generated a backlog of ~$150M Orders in Q4 generating a strong H1 2024 revenue outlook;
• 76% growth rate in orders from digital channels exiting 2023 vs. exiting 2022;
• 160+% Increase in organic leads from Palmetto.com;
• Launched the LightReach platform and TPO product – booked nearly 5,000 TPO projects in 2023 for a value of ~$150M
• Completed a $150M equity raise in February 2023 with TPG Rise; we are considering a Series D capital raise during the second half of 2024;
• Closed non-recourse financing facility to fund LightReach program, including a $450M non-recourse debt aggregation facility and first-ever tax equity facility;
• Reduced fixed operating expenses and set the stage for significant acceleration in 2024. The Company financial plan includes:
  • 100%+ growth in 2024;
  • Fixed cash Opex-to-revenue of 7% for FYE2024 exit;
  • Achieve sustained profitability within FYE 2024;
• Received customer experience excellence awards from CNET and Inc. Magazine

FYE2024

Our year-ahead planning process considers several factors. Still, we ensure we execute the Long Range Plan and consider the broader macro environment.

Macro Environment Outlook & Predictions

From a macro perspective, there are a multitude of factors that we are anticipating and risk managing; in terms of the major market movements, below are the most influential factors in the market for the year ahead:

• Interest Rates: While the inflation may soften and the interest rate environment may improve, we don’t believe that it will return to anywhere near the ‘normalcy’ that the solar market expects; this is primarily because the solar market developed under the zero percent interest rate environment for an entire decade-plus and many companies still have more opex refactoring to undertake to compete in the current market conditions.  For these reasons, we see a healthy balance between ‘ownership’ and ‘third party ownership’ financing products and a continued market slowdown through late Q2 that could last as long as Q4 2024;
• Operator Insolvencies : The weakest balance sheets will trigger a wave of insolvencies.  Typically, in this sector, the most undercapitalized companies are installers, unfortunately. This subsegment of the industry is the lifeblood of delivering solar and other cleantech solutions to consumers, but it is where we see the most concern as these models struggle to pay bills, defer out payments to their vendors, borrow money from industry-linked partners (typically companies that are not familiar with underwriting, but need the ‘business’ from installers to perform against their forecasts); the installers are not alone, we also see this issue across the board with niche financiers in the space who fail to pay their partners or withhold payments and trigger bankruptcies for their working own capital purposes;
• ‘Bye Bye’ Cleantech 1.0 and ‘Hello’ Cleantech 2.0:  companies that have failed to focus on consumers and operated models that directly or indirectly enable companies to mis-sell to consumers; for those of us in the industry, there are known ‘bad actors’ that somehow can restart newly incorporated entities with new investors without settling debts of the past. Like a cat, these bad actors seem to have multiple lives.  This stops as the market consolidates and becomes more in tune with the associative costs. There are many, and they are big and small.  On a positive note, there is a whole new generation of entrepreneurs who are focused on best-in-class consumer experiences (pricing, service, etc) and are grounded in values and principles; I believe these cleantech 2.0 companies will emerge as the leaders in the long term and we will start to see the 1.0 vs 2.0 this year; 
• California’s Shockwaves: California sets the tone regarding environmental policy in the United States. The NEM 3.0 policy may have a knock-on effect on other policymakers that are policy-aligned with California. This was a devastating blow to many CA-based operators in 2023 and will continue to drive painful market contraction for many operators who are not adequately policy-diversified;
• Political Noise Outweighs Market Fundamentals: It is an election year in the United States, and the climate discussion, specifically the Inflation Reduction Act will be at the center of the discussion topic. As for 2024, nothing substantive will occur, but the political noise will be overwhelming. We are also keeping an eye on China importation tariffs; and
• Consumer Regulation, Please!:  It’s time to either level up our standards as an industry or face the consequences of regulation.  Like the Truth In Lending Act (TILA) for residential mortgages, the cleantech sector needs some level of compliance regarding selling, financing, and installing consumer products.  Insolvencies (see prediction point above) coupled with a substantial cohort of consumer (1st, 2nd, and 3rd) year installation anniversaries will create a large number of orphaned assets (projects built by defunct solar installers); state Attorney Generals are (rightfully so) cracking down and upending “sales companies” accountable for deceptive trade practices (or the certified solar operators that enabled their tactics). It is so bad that Attorney Generals are launching investigations into all solar operators in some markets because they cannot differentiate the good from the bad.  In my eyes, regulation is a welcomed option over the continued bad practices in the sector. It is better for the consumer and, thus, cleantech adoption to mitigate climate change.

Our Plan for 2024 - The “Breakout” Year

2024 is the “Breakout” year for three reasons. We will 1) deliver unparalleled, profitable growth for our industry (free operating cash flow), 2) differentiate ourselves with our technology-led and customer-first mindset, and 3) Grow our digital channel acquisitions to continue to reduce costs to consumers.

• Unparalleled, Profitable Growth:  Building long-term revenue streams and carefully managing operating costs will yield a robust OPEX-to-revenue metric as an indicator of cost efficiency; growing profitably through a downturn is a strategic decision to ensure that we are well poised for 2025 (when the market begins to ‘turn’); hence, it’ll be critical to balance growth and positive free cash flow operations;  
• Cleantech 2.0: Our brand will focus on the breakout from the Cleantech 1.0 competition.  By the end of 2024, we will have created several critical thresholds to become the leader in the next generation of cleantech Companies: continual reinvestment in innovation for compound growth purposes, excellent consumer and partner experience; on the latter, we will expand our new established Service business segment to service assets to peak performance. We also have plans to launch two new business lines that will drive growth in the coming years: 1) Palmetto Home, our consumer energy advisory platform, and 2) Palmetto-as-a-franchise to enable local entrepreneurs to establish their localized business footprint on our platform and the tools that are necessary to be successful (e.g., offering services such as platform process management tools, recruiting support, supply chain discounts, financial products, working capital facilities, brand, sales flow); and
• Digital+: This year, we will announce our Digital+ channel, which generates up to a 50% cheaper price than the competition; it also generates 1) a 50% reduction in consumer cancellations, 2) a 30% increase in Net Promoter Score, and 3) better unit economics. Affordability (and experience) are at the heart of the cleantech adoption solution. We continue to compound our investments into the Digital+ channel and better manage consumers' expectations with an increasing focus on compliance-based sales practices.

We see growth on the horizon and will continue to invest in the relationships with our consumers and partners.  Our team is committed to the Long Range Plan and will carefully manage our financial performance results against the backdrop of the evolving market. 

2023 Most Valuable Player Award

Each year, I recognize a member of the team who demonstrated the values and principles we live by.  This year, I’d like to acknowledge two individuals. Mari King, Onboarding & Compliance Lead (Palmetto Finance team), has worked both sides of the fence in Energy and Finance, supporting onboarding and compliance efforts in both organizations for several months with a positive attitude. She puts the Company and her teammates first.  Leonardo Rodriguez, Senior Pipeline Specialist (Palmetto Energy team), is a flexible resource with a wealth of solar and Palmetto knowledge. I have seen Leo manage complex challenges such as third-party pipeline management and navigate the Single Family Residential pipeline processes; he always delivers with a customer-first mindset. Mari and Leo, we recognize your hard work and thank you for leading the Company by demonstrating our values and principles. I look forward to toasting your MVP recognitions at our annual event.

In closing, I want to acknowledge the hard work and dedication of all our teams and their agility as we’ve managed to navigate a challenging year together.  I maintain that operations are the bedrock of any cleantech company because we are building real, physical projects. The net result of all our hard work is a happy customer and a quality-built asset.  Per our vision, the continual aggregation of assets will culminate in becoming the world's largest utility provider. It’s a big vision and an essential part of our ‘why.’ As for 2024, we will double the carbon emission reductions for the planet and continue to build towards our mission of leading the world towards a clean energy future.

Onwards and Upwards,

Chris Kemper

Founder, Chairman and Chief Executive Officer

January 25, 2024