Sunworks, Inc.
Q3 2021 Earnings Call Transcript

Published: 12 Nov 2021

[Operator:]

Good afternoon, and welcome to the Sunworks’ Third Quarter 2021 Earnings Call and Webcast. At this time all participants have been placed on a listen-only mode. It is now my pleasure to turn the floor for your host, Jeff Stanlis. Sir, the floor is yours.

[Jeff Stanlis:]

Thank you, Operator. Good afternoon everyone and thank you all for joining Sunworks’ third quarter 2021 earnings conference call. Participating on the call today are Gaylon Morris, Chief Executive Officer; Jason Bonfigt, Sunworks newly appointed Chief Financial Officer; and Paul McDonnel, who following Jason’s appointment transition from Interim CFO to Senior Vice President of Finance and Accounting. Before we start, I would like to remind everyone that during this call, management’s remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements during the question-and-answer session. Therefore the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by forward-looking statements because of certain factors, not limited to, general economic and business conditions, competitive factors, changes in business strategy, or development plans. The ability to attract and retain qualified personnel and changes in legal and regulatory requirements. In addition, any projections as to the company’s future performance represents management’s estimates as of today, November 11, 2021. Sunworks assumes no obligation to update these projections in the future as market and business conditions may change. I’d now like to turn the call over to Sunworks’ CEO, Gaylon Morris.

[Gaylon Morris:]

Thank you, Jeff. Good afternoon, everyone, and thank you for joining our call. This was a productive quarter for Sunworks. As we continue to build out our team and integrate our platforms to enable us to scale profitably. As I discussed in the last quarterly conference call, as we have grown and matured as an organization, we have endeavored to improve all facets of our business. Progress continued in the third quarter as evidenced by a stronger and more professional marketing organization, as well as continued margin expansion, reflecting more accurate estimating and improved execution. We are building an organization that can effectively scale taking advantage of industry and regulatory tailwinds. We are encouraged by the proposed legislation to extend solar incentives for a meaningful period of time. If passed this legislation would progress the ESG initiatives and associated mandates from C&I buyers to reduce reliance on fossil fuels as well as offer lower cost, renewable power to communities across the country. We are uniquely positioned to support both of these markets. First on the residential side of our business. All new work is now being sold and performed under Solcius using their proven business processes. The availability of batteries due to the supply chain challenges following the pandemic, continue to inhibit growth in our storage business though, our scale is enabling us to navigate this challenge better than many. Geographically, we are now offering residential solar storage solutions in 17 markets in 10 states. We have significantly expanded our presence in Texas, adding Laredo and Dallas during the third quarter. Additionally, we are assessing additional markets to enter into over the next several quarters. Geographic growth is a key initiative for Sunworks, especially in the residential market, because the Solcius to model enables us to quickly establish a presence in a new geography with limited initial costs. We continue to actively recruit for new sales channel partners throughout the United States to augment our other third-party sales partners. We believe our capabilities notably our technology platform and proven ability to scale into new markets will offer a compelling opportunity for sales channel partners seeking to expand their supply chain as well as support growth. Solcius recently launched a select program for new and existing sales channel partners, making us even more competitive on base install rates by streamlining what is included in the base rate to our most popular offerings and shifting more specialized selections to a list of ad-ons. This will help us to increase the number and locations of our sales channel partners rapidly expanding our channel revenue streams. To support our direct and indirect sales efforts, we continue to invest in comprehensive digital marketing activities and our increasing all of our marketing and branding efforts. These investments increased costs, but they are improving our lead generation capabilities, and expanding our brand equity. Turning to our commercial and public works businesses, margin improvement remains our key priority. As many of you know, lower margins were a significant challenge for Sunworks in the past. And we are focused on accuracy and estimating and quoting as well as enhancing our deployment execution to avoid cost new project overruns. Sunworks is now a margin focused organization with compensation and evaluations based on margin, not just revenue. As a result, our estimated gross margin for public works already won, and our backlog is over 15% and for commercial is now over 20%. Looking to the future margins on our quarter work now exceed 20%, but I caution that until these projects have won, convert to backlog and ultimately to revenue, this is speculative. It is however indicative of the progress we have made. In the near term, we continue to seek a national sales leader with the goal of injecting new energy in focus into our C&I sales efforts. We anticipate identifying that person by the end of the year. With that, I will ask Paul to provide more specifics related to our financial results in the quarter.

[Paul McDonnel:]

Thank you, Gaylon, and hello everyone. For the third quarter of 2021 installation revenue was $31.2 million. This is up significantly year-over-year, reflecting the $23.3 million revenue contribution of Solcius absent from the prior year. Sequentially consolidated revenue was down slightly compared to the second quarter, but Solcius revenue was modestly higher as this was the first full quarter for Solcius to be included in our consolidated numbers. Installation revenue was negatively impacted by labor constraints, permitting delays in certain markets, final inspection delays for residential projects, pushing residential revenue into the fourth quarter. In addition, lack of battery availability is negatively impacting commercial, industrial and residential project timelines. Residential installation revenue was $24.6 million or 79% of quarterly revenue, compared to $2 million or 21% of total revenue in the third quarter of last year. Commercial and public works installation revenue was $6.6 million or 21% of total third quarter revenue, compared to $5.3 million or 79% of total revenue in the same quarter in the prior year. Gross margin for the third quarter of 2021 was 46.2% compared to 22.4% for the third quarter of 2020. As Gaylon said, this gross margin improvement was due to operational enhancements in all areas of our business. With a particular focus on accuracy in our estimating process and on scheduled deployments. This also reflects the positive contribution of residential revenue margins from Solcius. Total operating expenses for the third quarter of 2021 were $20.9 million compared to $4.3 million for the third quarter of last year. The increase in operating expenses due primarily to the expenses related to Solcius. Breaking this down, our selling and marketing expense was $10.1 million compared to $1.1 million in the year ago quarter. This reflects the Solcius residential sales model, including commissions as well as increased marketing efforts. G&A expense was $7.7 million compared to $3.2 million primarily related to the expenses from Solcius, and the expansion of our senior leadership team, as we invest in marketing, information technology and finance functions to support scaling the platform. Stock-based compensation was $1.2 million compared to $16,000 in the prior year quarter, reflecting the grants to new employees that joined us from Solcius and other new hires. Depreciation and amortization was $1.9 million in the quarter compared to $82,000 in the prior year quarter, reflecting amortization of the $15.6 million of intangible assets identified as part of the Solcius acquisition. These intangible assets are being amortized over lives from nine months for the project backlog required up to 10 years for trademarks and trade names. Detail of the future amortization expense is included in the notes to the condensed consolidated financial statements included in the 10-Q to be filed tomorrow. Our net loss for the quarter was $6.5 million or $0.24 per share compared to a net loss of $2.9 million or $0.17 per share for the prior year quarter. Turning to our consolidated balance sheet. Our unrestricted cash and cash equivalents balance as of September 30, 2021 was $11.2 million, compared to $26.9 million as of June 30. As Gaylon mentioned earlier, we made strategic investments in our operating working capital during the quarter, notably securing inventory of critical components to reduce supply chain risk, and to ensure that we meet our customers’ timelines into 2022, approximately $11 million has been invested in various working capital initiatives during the quarter. With that, I’d like to turn the call back to Gaylon to introduce Jason Bonfigt our new CFO.

[Gaylon Morris:]

Thank you, Paul. I want to first thank Paul for facilitating such a smooth transition as we strengthen our finance team. After five years at Sunworks in various finance and accounting leadership roles most recently as Interim Chief Financial Officer, I am pleased to say that Paul will continue with Sunworks as our Senior Vice President of Finance and Accounting. Paul has played a key role in getting Jason up to speed. Jason Bonfigt joined Sunworks in October from Broadwind, a diversified precision manufacturer, primarily serving renewable energy markets where he spent 13 years in leadership roles most recently serving as Chief Financial Officer and Treasurer. Previously, Jason held the progression of finance positions at Schneider National, a Wisconsin based trucking and logistics company. Jason is a season and strategic financial executive who will undoubtedly play a key role as we scale. Though, Jason is new to Sunworks, I asked him to join us today to provide a strategic overview of his priorities going forward. Jason, welcome to the team.

[Jason Bonfigt:]

Thank you, Gaylon, and Paul, and thank you all for joining us today. I look forward to meeting many of you virtually or in person in the coming weeks. As Gaylon indicated at growing and scaling our company is a key area of focus. And my priority is to make sure that we have a stable and cost effective platform to support this. There’s significant leverage built into our model as we grow and like to speak to that today. First, we have significant organic growth opportunities. The most obvious of this is geographic expansion. As Gaylon indicated, we have expanded our presence in Texas and we have identified several additional markets for expansion, and our targeting, adding a significant amount of sales channel partners, both of which will enable growth in next year. The Solcius offering enables us to quickly and inexpensively ramp up a new market, so geographic expansion is key. Additionally, we’re assessing our quarterly in the residential business, which is reflected as the percent of time that we complete a job relative to the initial sale to the customer. Increasing the number of projects we both sell and install can meaningful increase revenues. And this represents a compelling opportunity for us. Finally, as we grow our presence and our brand awareness, we expect to expand our commercial, industrial opportunities. From expense standpoint, our sales and marketing costs are tied to our revenues for the most part, due to the commission structure on our residential sales. However, we have leverage opportunities related to G&A, and area focus for us, especially in Solcius business is G&A dollars per watt. We have built an organization that can support significantly higher revenues. And as we grow, we expect to see our G&A decrease as a percent of revenue. When combined with gross margin expansion, this should lead to improved operating margin and ultimately sustainable profitability. As Paul mentioned, we proactively secured critical components in Q3. Additionally, we are accessing our supply chains strategy, working to identify synergies across our commercial and residential businesses. We’re actively developing plans to support next year’s market growth and our internal growth aspirations. As we move forward, we’ll continue to assess marketing conditions, including supply chain lead times and believe our balance sheet is positioned well to take advantage of future opportunities. Let me now turn the call back to Gaylon for some closing comments. Gaylon?

[Gaylon Morris:]

Thank you, Jason. I want to conclude with a brief discussion of a new initiative at Sunworks. For many years, Sunworks and Solcius have helped address climate change by harnessing the power of the sun to create clean, renewable energy being good stewards of the planet is as core to us as being good stewards of shareholder capital. We believe the companies that incorporate environmental and social risks and rewards into their business models are more likely to produce better risk adjusted returns over time. As such, I am excited to announce that we are embarking on a journey to build a structured environmental, social, and corporate governance or ESG program. This program will be a natural complement to our company’s commitment to quality products, service and the highest business ethics. As the next step, Sunworks has established an ESG Advisory Committee to promote, monitor and measure the company’s commitment and compliance to sustainable business practices. Committee is composed the members of the executive leadership as well as a diverse group, representing all levels of Sunworks. We look forward to providing you with updates on the progress of this important initiative. With that, we are now happy to answer any questions.

[Operator:]

Your first question is coming from Philip Shen with Roth Capital. Your line is live.

[Justin Clare:]

Hi guys. This is actually Justin Clare on for Phil today.

[Gaylon Morris:]

Hi, Justin.

[Justin Clare:]

Hi. So, I guess first off on the backlog it looks like it moved a little bit lower here in Q3 and it sounds like it’s primarily due to project timing in the commercial and industrial markets here, but was wondering if you could expand a little bit more as to, why you’re seeing well, are you seeing delays in projects as a result of potentially higher costs here? Well, our economics being impacted because of higher costs? And I know generally there tends to be some lumpiness in the business, but is there anything unique right now as a result of the supply chain?

[Gaylon Morris:]

With regards to the supply chain, we were able to make quite a few investments over the second and third quarter and we aren’t yet seeing significant supply chain impacts with regards to modules and inverters and et cetera. I think everybody’s seeing some aluminum and steel impacts, but nothing that’s caused us to stop work or not start work on time. With regards to higher costs, the primary thing that we’ve seen moving really is labor. The tight labor markets driving up some costs. So, we are definitely evaluating for that. With regards to material price increases, even though we have boasted our supply, we are still seeing supply chain increases with regards to modules and inverters for the most part, we’ve been able to absorb or pass on those charges as appropriate. But we’re definitely keeping our eye on what’s happening in the market and I’m trying to stay in front of any changes that are being announced as they’re being announced.

[Justin Clare:]

Okay, great. That’s really helpful. And then maybe just on the residential segment, how are you seeing the backlog there evolve here? Are you seeing, meaningful increase here, and then how does that affect your view on the outlook for Q4 and into 2022 in terms of the growth that you could see in that residential segment?

[Gaylon Morris:]

Yes. So the residential backlog is definitely improving. The number of sales channel partners that we’ve added as well as implementation of a direct sales channel where we’re actually have associates Sunworks in place, selling directly to residential – residences has contributed to seeing a run rate going into 2022. That should be stronger than we’re leaving has had throughout the rest of 2021 with regards to residential. So, we are definitely looking at and anticipating and planning for growth for 2022 in residential.

[Justin Clare:]

Okay. That’s great. And then on battery storage, you’ve talked about tightness in the supply chain there, I was wondering if you could share what your attach rate for storage was in Q3 and potentially how much that supply chain tightness is inhibiting that attachment. Like what could it have been, if you had all the supply available that you needed?

[Gaylon Morris:]

So the attach rate is not anywhere near as high as we would like for it to be primarily because we sell through sales channel partners and those sales channel partners don’t want two part sales. They don’t want us to sell solar system and a battery system and then come back later and install the battery system. So the uncertainty in the supply chain by the way, neither do our finance partners want us to sell that because they want to close deals and pay us and move and start to collect payments as quickly as possible as much as anybody else does. So what we are experiencing is not so much a customer who’s not willing to, or doesn’t want batteries and certainly not associates somewhere who doesn’t want to sell batteries, but a sales channel partner and a finance partner, who’s concerned that if we sell a system with batteries, that the batteries are then not available, that the whole payment schedule and when the job can be “closed” is impacted. So, what we’re really seeing, the real challenge we’re having is the comfort level of the folks who are on the front lines to sell batteries, given the supply chain concerns. I think if we were, had an infinite supply of batteries, and we were able to demonstrate to our supply chain partners or – start our sales channel partners primarily that we could see attach rates between 10% and 15%, but we’re not seeing anywhere near that much at this point.

[Justin Clare:]

Okay. Got it. Are you seeing things ease up a little bit on the supply chain for storage and others? Some new entrance here, with storage that are expected to be ramping capacity either, this quarter, or maybe early into 2022, are you seeing any potential added storage supply here?

[Gaylon Morris:]

I can’t say that we’re starting to receive or have received more Tesla batteries in the last three months than we received in the first six. So that’s wonderful. With regards to other suppliers, we tend to sell systems that are optimized for our customers and to do that, we mix and match where necessary componentry. So when you have those customers, those are the vendors who are supplying an end-to-end solution for, panel optimizers all the way through the batteries. We typically aren’t moving those types of systems. It just doesn’t fit our model at this time. So, I say that to say some of those suppliers actually have had some better storage availability than some of the ones that we’ve been working with. And then there’s been issues with a few major suppliers having recalls that have also caused us some concern and challenges, because we were prepared to offer those sort of solutions right up until the point where they market availability and then decreased.

[Justin Clare:]

Okay, great. And then just wanted to understand the outlook for gross margins here. It sounds like in the backlog, you have projects for public works with margins over 15%, and then for commercial margins over 20% does that – will that enable you to increase your margin into Q4 and then potentially further into 2022? Is that the expectation?

[Gaylon Morris:]

We hope for sure is that we will see improved gross margin. The – all the indicators that we have projects that we’re quoting, work that we’ve been committed to, or has been committed to us, all of those things point towards increased gross margin, where I say hope instead of expect is we’re not always able to pass on to our customers, changes in supply chain cost. So there are places where we could actually see margin erosion, if we’re unable to pass the costs of those slight increases onto our customers. So, I would like to say, and I think I can say that we expect to see margin improvement, but with the caveat that we also aren’t certain exactly what the effects of the supply chain will be in 2022 on our margins.

[Justin Clare:]

Okay. Got it. All right. That does it for me. So, I will pass it on. Thank you.

[Operator:]

We have no questions from the phone lines at this time. I would now like to turn the floor back to Sunworks management for closing remarks.

[Gaylon Morris:]

Thank you all for joining our call and for your continued interest and support. Please don’t hesitate to reach out to Jason or myself or Rob Fink and the FNK IR team at any time, if you have further questions. Thank you.

[Operator:]

Thank you, ladies and gentlemen this does conclude today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.