Sunworks, Inc.
Q4 2021 Earnings Call Transcript

Published: 11 Mar 2022

[Operator:]

Good day, ladies and gentlemen and welcome to the Sunworks Fourth Quarter and Full Year 2021 Earnings Call and Webcast. At this time all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jeff Stanlis. Sir, the floor is yours.

[Jeff Stanlis:]

Thank you, operator. Good afternoon, everyone and thank you all for joining Sunworks fourth quarter and full year 2021 earnings conference call. Participating on the call today are Gaylon Morris, Chief Executive Officer; and Jason Bonfigt, Sunworks Chief Financial Officer. Before we start, I would like to remind everyone that during this call, management's remarks may 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 the 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 represent management's estimates as of today, March 11, 2022. Sunworks assumes no obligations to update these projections in the future as market and business conditions may change. I would now like to turn the call over to Sunworks CEO, Gaylon Morris.

[Gaylon Morris:]

Thank you. Good afternoon, everyone and thank you for joining our call. This was a very productive year for Sunworks, as we have successfully built a scalable platform for profitable growth in the rapidly growing solar industry. In April, we acquired Solcius, a residential EPC organization with significant market reach, excellent technology solutions and sales-oriented competencies. This acquisition transformed Sunworks from being a small player in both residential and C&I to a scalable platform in both end markets. This residential business continues to deliver excellent results and we are moving to continued expansion of our geographic presence which according to many industry forecasts should be a very strong market for the foreseeable future. We now have a robust organization of proven professionals with deep and relevant experience at larger companies. Over the past year, we have added key leadership to our commercial and industrial business and have established enhanced processes to ensure quality and timely installations, helping us expand our gross margins and to scale our business in the future. Our focus as we turn to 2022 is on growing this effective platform and we are pursuing both organic and inorganic growth opportunities. The successful Solcius acquisition gave us a platform for growth with differentiation and a track record of success. Scale matters in this industry, scale enables greater access to panels, batteries and other components and sometimes to more favorable pricing. Scale enables us to more effectively leverage marketing and advertising investments, both in our residential and commercial business units. We need to scale to better cover our public company costs. And as a public company, we have greater access to capital and more pathways to finance acquisitions. Finally, with more than $48 million in net operating loss carryforwards acquiring and integrating businesses represents a path to extracting greater value as we can utilize these NOLs to reduce future federal taxes. Over the past year, valuations for solar companies have declined and the supply chain issues have created a more biofriendly acquisition environment. We are evaluating potential acquisition targets, primarily small- to medium-sized companies, bolt-on acquisitions that will expand our scale and contribute to our growth. Geographically, we are now offering solar and storage solutions in 19 markets in 15 states. During the past year, we significantly expanded our residential presence in Texas. We continue to assess 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 model enables us to quickly establish a presence in a new geography with a limited initial cost. Staying with our residential business, our goal is to create a multichannel sales organization more effectively leveraging our capabilities, notably our fulfillment technology platform. We continue to actively recruit for new sales partners throughout the United States to augment our other third-party sales partners. As a part of this, Solcius recently launched a select program for new and existing sales channel partners, making us even more competitive on base install rates by streamlining was included in the base rate to our most popular offerings and shifting more specialized selections to a list of add-ons. This will help us increase the number and locations of our sales channel partners, rapidly expanding our channel revenue streams. Not only will we expand via sales channel partners, we also have rapidly grown and will continue to grow our direct sales channel. Post-acquisition, we have added 250 direct salespeople and in six months, our direct sales team is now our second largest source of deal origination. This team will further penetrate existing markets and allow us to grow in markets where we do not participate today. And while we are in the early innings of executing the strategy, I'm encouraged by the number of new originations being generated through this channel. Turning to our Commercial and Public Works businesses. Margin improvement and growth remains our key priorities. This business can be seasonal and winter weather in the fourth quarter can and did impact installation time frames impacting both revenue and margin. But overall, we have made significant progress in addressing lower project margins that presented a significant challenge for Sunworks in the past. Today, we are much better at accurately estimating and quoting and have improved our deployment execution to avoid costly project overruns. Sunworks is now a margin-focused organization with compensation and evaluations based on margin, not just revenue. Looking to the future, margins on our quoted work now often exceed 20% but I caution that until these projects are won, convert to backlog and ultimately to revenue, this is speculative. It is, however, indicative of the progress we have made. Over the past year, we have added industry veterans to this business in key operations positions and within sales. These individuals have significant experience and a track record for growing businesses in the C&I space. I am encouraged by the pipeline of opportunities that our organization is pursuing and look forward to providing backlog updates throughout the year. Overall, the market backdrop is a tailwind to the industry. The Russia-Ukraine conflict has driven up crude oil pricing and quickly made renewable forms of energy more important than ever. Motor sentiment regarding clean energy and energy independence is growing and we believe Congress will pass climate-related provisions to further incentivize renewable energy adoption and to reduce reliance on oil. Additionally, our customers see solar as a natural fit to offset inflationary pressures and a mechanism to reduce their reliance on carbon-based fuels and to ultimately lower their utility bills, while providing energy independence on an individual basis. With that, I will ask Jason to provide more specifics related to our financial results in the quarter.

[Jason Bonfigt:]

Thank you, Gaylon and good afternoon, everyone. For the fourth quarter of 2021 revenue was $31.7 million. This was up significantly year-over-year, reflecting the contribution of Solcius of $26.1 million. Sequentially, consolidated revenue increased modestly compared to the third quarter on higher Solcius revenue. Revenue was negatively impacted by weather issues, labor constraints, permitting delays in certain markets, delaying commercial and industrial project progress and the delayed revenue into 2022. Residential installation revenue was $26.1 million or 82% of quarterly revenue versus $2.1 million or 25% of total revenue in the prior year fourth quarter. Commercial and Public Works installation revenue was $5.6 million or 18% of total fourth quarter revenue versus $6.5 million or 75% of the total revenue in the prior year. Gross margin for the fourth quarter of 2021 was 47.4% compared to 25% for the fourth quarter of last year. Sequentially, we continue to see improved gross margins and as Gaylon said, this improvement was due to operational enhancements in our Commercial Industrial section of our business, with a particular focus on accuracy in our estimating process and on schedule deployments. This also reflects the positive contribution of residential revenue from Solcius. Total operating expenses for the fourth quarter of 2021 were $28.2 million compared to $6.9 million for the fourth quarter last year. The increase was due primarily to the expenses related to Solcius. Breaking this down further, our selling and marketing expense was $11.3 million compared to $1.8 million in the year ago quarter. This reflects the Solcius residential model which includes commissions and as well as increased marketing efforts. G&A expense was $8.2 million compared to $5 million, primarily related to the expenses from Solcius and the expansion of our senior leadership team and as we invest in our marketing, information technology, finance and legal functions as we look to scale the platform. Stock-based compensation was $1.3 million compared to $10,000 in the prior year quarter, reflecting grants to new employees that joined us from Solcius and other new hires. The Solcius retention program, RSU and option grants issued and vesting in April 2022 and are being expensed during the first year following the acquisition of Solcius. Depreciation and amortization was $2 million in the quarter compared to $90,000 in the prior year quarter, reflecting the amortization of $15.6 million of intangible assets identified as part of the Solcius acquisition that are being amortized over the lives ranging from 9 months for the project backlog acquired to 10 years for trademarks and trade names. Details of the future amortization expenses included in the notes to the consolidated financial statements in our 10-K. We also recorded a $5.5 million impairment charge related to goodwill from prior acquisitions in our commercial and industrial business. While we remain excited about the opportunities to grow the commercial business over the long term, the business has not historically generated free cash flow, so our fair value calculations fell below our book value requiring the impairment. Just to note and further put a point, this impairment is not related to the Solcius acquisition or the related goodwill of Solcius. Our net loss for the quarter was $13.5 million or $0.47 loss per share compared to a net loss of $4.9 million or a loss of $0.20 per share for the prior year quarter. For the year, revenue was $101.2 million compared to $37.9 million last year. The increase is primarily attributable to the acquisition of Solcius which added over $72 million of revenue in 2021. Gross margin for the year was 44.1% compared to 13.9% last year. Operating expenses for the year were $73.9 million compared to $20.5 million last year. $29.9 million of the year-over-year increase is attributable to selling, marketing and other operating costs associated with the Solcius acquisition. Additionally, we incurred noncash expenses of $15.1 million primarily related to stock compensation and amortization expense, as well as inclusion of the impairment. Net loss for the year ended December 31, 2021, was $26.6 million or $0.99 per basic and diluted share compared to net loss of $16 million or $1.03 per basic share in 2020. Turning to our balance sheet. Our restricted cash and cash equivalents balance as of December 31, 2021, was $19.7 million compared to $39 million as of December 31, 2020, reflecting the cash used to acquire Solcius. Our inventories at the end of the year were $10.7 million compared to $1.2 million in the year ago period. While there continues to be supply chain constraints and delays, we believe that recent investments in working capital have positioned us well to meet our customer commitments throughout the year. With that, I'd like to turn the call back over to Gaylon for closing comments.

[Gaylon Morris:]

Thank you, Jason. The solar industry continues to grow and as it grows, it is experiencing growing pains. The supply chain challenges have made it harder for the industry to access panels and batteries. The tight labor market is impacting the industry's ability to maintain installation schedules. Larger organizations are navigating these challenges better and smaller companies are struggling, creating distressed opportunities and incentives for combinations. As such, growing and scaling our company is a key area of focus. We have built significant leverage into our model as we scale. We have significant organic growth opportunities in both C&I and residential. The most obvious of this is geographic expansion. We have recently expanded our presence in Texas and there are additional markets we are adding to the new state. We have identified several additional markets for expansion and are targeting adding sales channel partners and increasing our direct sales channel, both of which will enable growth in 2022. As we grow our presence and improve brand awareness in a region, we expect to expand our commercial and industrial opportunities. From an expense standpoint, our sales and marketing costs are tied to our revenue for the most part due to commission structure on residential sales. However, we have leverage opportunities related to G&A. And you can see that in the relatively modest G&A increases over the fourth quarter. An area of focus for us, especially on 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 profit. Sunworks is committed to not only increasing sustainable shareholder value but also to making the best possible impact on the communities in which we operate. In 2021, Sunworks launched an environmental, social and governance, or ESG initiative with the creation of an ESG Advisory Committee that is comprised of employees from all levels of the organization and has championed by myself and Judith Hall, esteemed Chairperson of our Board of Directors. This committee has been reviewing our environmental policies and impact establishing social and sustainability goals and studying how our internal governance methods and indicators can be expanded beyond their own practices to our supply chain partners and other vendors. I'm excited by the progress being made and look forward to reporting specific accomplishments over the months to come. With that, we are now happy to answer any questions.

[Operator:]

Your first question is coming from Donovan Schafer from Collier Security. Your line is live.

[Donovan Schafer:]

Hey guys, congratulations on the full year results. I want to start off by asking about the revenues for the quarter. So I think when I look on a pro forma basis, if you add in Solcius for Q4 2020, revenue may have been down a little bit year-over-year but it looks like most of that was on the C&I side, while the Solcius Residential Business, I think, was either flat to up year-over-year. I'm guessing the C&I business was down just because of the -- kind of the redesign of the whole quoting and bidding process and letting some of the lower margin projects go. Just is that overall, that analysis sort of, correct? Just curious if you -- if I've got anything wrong there and if you can elaborate?

[Jason Bonfigt:]

I can start that off Gaylon. The C&I business last year had about $8.6 million of revenue in the quarter. We had -- this quarter was $5.6 million. Partially -- some of that is because we don't -- we've transitioned the residential business over to Solcius and that was about $1.9 million last year. The balance is project timing and the weather and permitting related delays that we talked about in the remarks.

[Donovan Schafer:]

Okay, great. And then actually, yes. So for the weather and the permitting delays you just -- you talked about it as kind of a seasonal challenge. And I just wanted to know was the -- was it unusually challenging weather or maybe you're in geographies where it's more of a challenge and if that's something what we should expect in Q1 as well, Shoals Technologies reported yesterday and they highlighted that weather challenges is something for Q1 for them. So just curious if you can elaborate there?

[Gaylon Morris:]

Yes Donovan, this is Gaylon. The weather issues in the fourth quarter were specific to Northern California, where we do a significant amount of agricultural and ground mount type work. We had multi-inch depending on where you are in California, a multi-inch rain day in early to mid-November that basically washed out intended most of the month of November for our ability to do ground network and agricultural works. So that was a significant impact to the middle month of that quarter. I've not -- I didn't catch Shoals presentation in Northern California where we operate primarily again the weather has been fairly dry in this first quarter. So I'm not anticipating the same weather delays that may be played us -- that did play us in the fourth quarter.

[Donovan Schafer:]

Okay, that's helpful. And then one more question. It looks like you guys raised just based on sort of the change in additional paid in capital, about $14 million during the quarter. And based on kind of your starting and ending share count, I get an average share price of about $6.50 for the raise with issued shares which looks great with your price now right around $3 a share. Is -- how do you -- first, I guess, is my kind of math there right or is anything I'm missing? And then second, I guess, just how do you look at this going forward in terms of -- where do you kind of feel like just talk is cheap for lack of a better word? And where do you feel like -- what level do you feel like it's not in the really interest of shareholders? Where do you feel like it makes sense what do you plan to kind of do with the proceeds? Just kind of at a high level on that.

[Jason Bonfigt:]

I'll start with the math part of the question. I think the average sale was about 60, so slightly lower than what you're describing and there was about $12.5 million of proceeds from that. I'm not going to get into sort of valuation on this call of what we would and would not do and how we value our company. But Gaylon talked about potential acquisitions. Certainly, we want to secure supply chain so that we can execute on the growth strategy; so those are sort of the main use of proceeds to date.

[Donovan Schafer:]

Okay, that’s helpful. And, yes -- I'll jump back in the queue I’ll get back in the queue from here.

[Operator:]

There are no other questions in the queue at this time. Donovan please proceed.

[Donovan Schafer:]

Yes, I'll keep going. So I like the additional color on the direct sales. I'm curious to know, are you -- does your -- your new hires, does that include -- is this a door knocking sort of telemarketing sales force? Or is this primarily a digital effort? It sounded like a decent head count additions. I'm guessing, there might be door knocking or telemarketing involved? Can you, yes.

[Gaylon Morris:]

Yes, absolutely. On the residential side, we launched the direct sales effort in the summer of last year. It was a post-acquisition initiative that was part of the acquisition thesis when we acquired Solcius. Brian Jackson, who was one of the founders of Solcius he was in charge of Solcius entire sales effort, transitioned into this new growth emerging market role or emerging role and has built an incredible organization over the last now eight months. At this time, they are budding up against being our second largest revenue contributor month-to-month at fares between them and one other sales channel and one of the channel partner. So they're doing really well. Are they door knocking? Absolutely. Is their tele-sales involved? There is. Are we at a digital presence yet? We are strongly closely evaluating adding a digital selling initiative to the way that we're currently selling products. But at the moment, our digital efforts are limited to traditional marketing and lead generation but not actually offering product through online offering at this time.

[Donovan Schafer:]

Okay, that's great. And then for sort of geographic expansion, there was, of course, the news, there's been a lot of headline grabbing news around covering NIM 3.0 and then now Florida recently passed something. I don't think the governor has not signed it into law, yet but -- and I know you're not in Florida but I think here and there, there are some states are going to the Carolina or there's something. I'm curious, as you look to geographic expansion, do these developments were you targeting Florida somewhere you'd go in the next year or two or was that sort of not an ideal geography for you for other reasons? And then are there some of these other geographies like, I forget which Carolina but or other states that are considering net metering revisions that sort of change where you want to go geographically?

[Gaylon Morris:]

First question, I think, was whether or not Florida was in our potential pipeline. Florida was not in our potential pipeline. We have a very close relationship with a sales channel partner who sells quite a bit for us in the West of the United States. But they do self-fulfill in Florida and they do an excellent job but we wouldn't want to encroach on that. So we've never really had looked at moving into Florida. I'm sad to see the NIM bill in Florida pass. It is definitely counter to the industry and it will be challenging for those folks that operate in Florida. But fortunately, that's not us. Other states that are looking at NIM rules, we track them as closely as we can. And whenever we go into or look at going into a new market, there's a dozen-plus criteria that we evaluate. And certainly, the legislative or regulatory outlook in that market is something that we consider. There's no question there. With regard to some of the markets that we are looking at, Texas continues to be a great state for us. We continue to move into new cities and areas within Texas and tend to continue to be successful there. So there's really no reason for us to, to not continue to expand into Texas. With regards to other states around that or in the South, we're carefully evaluating and we'll be announcing over the next six months, what we're going to be doing with regards to other states. For California's NIM 3.0, I'm optimistic when the PUC when the utility commission pulled the previous proposed decision that the new proposed decision will be considerably less onerous. But if it does, we're prepared for that. We have evaluated solutions that do not include export or off-taking and would make -- therefore, hopefully, depending on how it's actually written, not triggering that export fee of what was kilowatts per -- $8 per kilowatt in the previous decision. So we're prepared to offer solutions that will work under the new NIM 3.0 for whatever the new NIM 3.0 is in California. We're bullish on California. It's a market with tremendous growth opportunity and a constituency that wants solar. And then you really can't walk away from that. And if the government makes it more difficult for us, we'll figure out a way around it.

[Donovan Schafer:]

Okay, all right. That's interesting. I think I feel like -- yes, I think you've heard of some of the sort of idea of how you can avoid whatever statutory would trigger the idea of putting solar back into the grid, so you can avoid the fees and kind of net out positive; so that's great. On the C&I side of the business, you guys have brought in someone who has a pretty good track record from . They're private C&I-focused sort of installer or EPC. Is -- are there specific states SEIA and Wood Mac and I think it was a Q4 sort of update highlighted Illinois and New Jersey, states that had changed policies that would really drive C&I business. But I don't -- I think you're in New Jersey but I don't think you're in Illinois but just in general, you're looking to expand C&I and leverage the footprint with Solcius from a logistics standpoint. So there's certain -- out of the states that you're in or that you're looking at are certain ones that are particularly exciting to you? Is it sort of state is a policy-driven or just certain states maybe have great sort of demographics or businesses or solar resources or whatever it is. Just curious there, from a geographic standpoint, where you're sort of most excited or most interested on the C&I side?

[Gaylon Morris:]

I'm excited and interested in the Northeast for sure. We have a person there who is a project manager/developer. And we consider -- we constantly are considering expanding operations in Northeastern. For the most part, the only thing that's held us back from really pushing forward was we spent most of 2021 getting our house in order with regards to how we estimate, how we quote, how we execute, what's the right model, what's the right mix. We needed some time. I was new. We needed some time to really get to know what we were doing with regards to the market and how to approach it and now what we wanted to change and we did make those changes. So the Northeast is an area we're very interested in and looking at and now that we're ready to move and expand an area that we're considering very, very closely. I think the Mid-Atlantic has some interesting opportunities in it as well with regards to legislation or proposed regulation. And then obviously, with regards to -- obviously but with regards to the Solcius footprint of locations off there in 10 states, every one of those states has a physical presence that we could leverage to very quickly start offering services in those states. So there's a kind of a -- and then, of course, let me finish with there's always inorganic expansion as well. There's candidates all throughout the United States, our candidate companies all throughout the United States who are looking actively seeking the opportunity to combine with a merge with another organization.

[Donovan Schafer:]

Okay, that's great. And then just so coming back to the residential, you did mention there are sort of parameters you look at when you think about what residential markets, what states you're interested in for geographic expansion. And it stands out to me your sort of approach of the -- you're sort of below your typical installation with Solcius is smaller than the average, I think, sort of U.S. solar installation. And so maybe that goes after sort of demographics and where you can kind of have this attractive, reasonably priced it like your best-selling offering. Does that change -- like if you compare yourselves to your peers, the publicly traded peers. What attributes do you bring in when looking at what state to expand into? I mean some southern states are sort of -- historically sort of lower average per capita incomes and things like that. And so maybe that plays better to what you offer versus other companies. I'm just -- what are the attributes you look at? And are there certain specifics where it's different for you than what someone else would look at when they're expanding into another state or area?

[Gaylon Morris:]

So let's see. One of the things we obviously look at is the cost of energy. I mean, if you're in a state where energy is just very, very low cost, is that much more challenging. States that don't have any sort of export remuneration for the individual or at least credit against their electrical bill, it makes it harder for these things to pencil out. With regards to the customer income or the demographic, we believe in solar for everybody. So we're pushing solar solutions that can save a small house in Arizona, most of their electric bill or a large house and somewhere else, most of their electric bill, the solutions scale from 8 to 10 panels all the way up to 70 panels on some of these projects. But I would say that the vast majority of the customers that we sell to are primarily interested in saving money and they're primarily interested in increasing the value of their homes and so forth, not necessarily large off-grid solutions that maybe some other people are talking about when they're talking about the size of the systems they can sell.

[Donovan Schafer:]

Okay. And then I think my last question and then I'll sort of take the rest off-line is just for storage and the battery side of things, I know historically, it's been relatively low attachment rate for you guys and not. And kind of on purpose because you're trying to pump out these installations and volume and batteries have been one of the supply chain constraints. And so even as the sales force -- the sales force itself doesn't want the payout of their commissions to be delayed by waiting on a battery. But I'm just curious if you sort of have any updates there on the residential side of the business. if it is something you plan to bring into these kind of kits, the base kind of model you offer in a way that is available? I mean, I know, again, with supply chains right now that might be hard but maybe a year down the road. Like is that seen as a growth factor for you is something where you can drive growth with higher attachment rate? And then also, have you seen more interest for storage with C&I business and projects you're bidding on for the C&I stuff?

[Gaylon Morris:]

So on the residential side, we are starting to see increased interest in batteries. I think it's inevitable that systems will have more batteries as batteries become less expensive and more available. Electricity continues to increase and states and utilities look at time of use type of rate changes. And I think it's just inevitable. We are seeing more. But right now, the primary focus of the Solcius business is the ability to provide solar to many, many people in a very short period of time. We can -- our crews can do two, sometimes three house installations in a single day. So it's a very, very fast turn business. And as -- if we add batteries and we add supply chain constraints into that, we really need to look at a more elaborate solar and storage solutions for larger customers with the ability to either hold larger loans or put more money into the system -- into the project and it doesn't really meet the demographic that we're pushing at right now which we think is vast majority of homeowners in the territories that we operate in. Less than 4% of homes in the United States have any sort of solar on them at all. It's a wide-open market and the space we're playing in just solar is something people think about. They talk about it a little bit but when you pencil the numbers in right now, it often doesn't work. On the C&I side of -- but that said, we are actively looking at different solar battery manufacturers and battery technologies. I'm meeting with some next week at the ROTH Conference, met with some last two weeks ago out of Pennsylvania. There's all kinds of technology providers that are coming to us and asking us to consider their solutions and we're looking at them all the time. On the commercial side of the business, we're definitely seeing an uptick in battery storage but that's partially because we operate primarily in California and in California with the time of use and the idea of rate shaving, it's very, very simple to make batteries work and we've installed a number of different systems over the last year.

[Donovan Schafer:]

Okay right, great. Very helpful. Thank you, guys.

[Operator:]

Thank you. That concludes our Q&A session. I will now hand the conference back to our host for closing remarks. Please go ahead.

[Gaylon Morris:]

So thank you, everybody, for joining our call and for your continued interest and support in Sunworks. I'd like to let people know; I did mention we'll be at the ROTH Conference this coming week. We will be participating in that conference if anybody listening here is attending and would like to meet who has follow-on questions at the conference or in any other format, please reach out to Rob Fink and the FNK IR team to schedule some one-to-one time with Jason and or myself. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.