Sunworks, Inc.

Please stand by, we're about to begin. Good day, ladies and gentlemen, and welcome to the Sunworks second quarter 2021 earnings call. After the presentation, there'll be a question and answer session. If you should require assistance during the call, please press star zero and an operator will assist you. At this time, it's my pleasure to turn the floor over to Mr. Rob Fink of FNKIR. Sir, the floor is yours.

Thank you, operator. Good morning, everyone. Thank you all for joining the Sunworks Second Quarter 2021 Earnings Conference Call. Hosting the call today are Galen Morris, Chief Executive Officer, and Paul McDonald, 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 Q&A 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 statement because of certain factors including, but not limited to, general economic and business conditions, competitive factor, changes in business strategy or development plans, integration and operational risks associated with the acquisition of Solstice, the ability to track and retain qualified personnel, and changes in the legal and regulatory environment. In addition, any projections as to the company's future performance represent management's estimate as of today, August 13, 2021. Sunworks assumes no obligations to update these projections in the future as market and business conditions may change. With all that said, I'd like to turn the call over to Sunworks' CEO, Galen Morris. Galen, the call is yours.

Thank you, Rob. Good morning, everyone, and thank you for joining our call. I have been the CEO of Sunworks for approximately seven months. In that short period, we have changed the face, the trajectory, and the culture of the company. We are a larger, more mature, and more efficient company. We have endeavored to improve all facets of our business. The Solstice combination has brought energy, scale, and effectiveness to our residential projects. Increased rigor and accuracy have improved our margins in our commercial and industrial projects. Combined with regulatory and market tailwinds, we are positioned to progress towards profitability, and we have many opportunities to maintain and accelerate our growth. I'm excited to speak to our stockholders today to discuss the transformation of Sunworks and speak to our go-forward strategy. First, on the residential side of our business, all work is now being sold under the Solsius management team. For more than seven years, Solsius has been a recognized leader in residential solar solutions, and we are benefiting from their processes their expertise, and their energy. Partly due to increased availability and partly due to our greater scale and resulting purchasing power, we have seen an increase in our access to batteries. This has enabled us to advance more than 80 projects which have been stuck in backlog awaiting batteries. Additionally, Solstice is now offering energy storage solutions in each sale. From a geography standpoint, we are now offering solar and storage solutions in Laredo, Texas, expanding our residential operations to 19 markets in 10 states. We plan to expand into Dallas in September and Houston by the end of the year, significantly expanding our presence in Texas. From a sales channel partner standpoint, we just signed an exclusive two-year extension with our largest sales partner, which will continue to contribute a significant portion of our residential sales and revenues. Additionally, we have added 22 new sales channel partners since closing the acquisition on April 7th, bringing our total number of sales channel partners to 57. We are continuing to actively recruit for new sales channel partners throughout the United States. To that end, earlier this month, Solsius launched a new Select program for new and existing sales channel partners, which will allow us to be extremely competitive on base rate installs. by streamlining what is 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 to increase the number and locations of our sales channel partners, expanding our indirect revenue streams. We will continue to support and grow our sales channels in an effort to further improve our growth. While we continue to support and grow our sales channels in an effort to improve our growth outlook and be able to move more quickly and effectively into new geographies, Solcius kicked off a dedicated direct sales effort this summer, hiring sales leaders in multiple geographies who will build teams of local direct sales agents, allowing us to deploy increased sales coverage in local markets. Additionally, the SumWorks residential sales team has transitioned to become the Solcius telesales team, focused on selling to wide geographies via telephone and virtual sales efforts. To support this effort, we are now running television ads, radio ads, and are increasing our focus on all of our marketing and branding efforts. This is a large reason why our costs have increased as we are investing in marketing programs to drive brand awareness and revenues. In addition, we have hired a new senior vice president of marketing. Starting in September, she brings extensive experience not only in modern marketing methods, but also in brand management and acquisition integration. Turning now to our commercial and public works businesses, we have made significant progress in our efforts to improve margins. To achieve this, our highest priority has been increasing our focus on improving our estimating and quoting and enhancing our deployment execution to avoid costly project overruns. Simply put, SumWorks is now a margin-focused organization. Our team is measured on margin, not just run revenue. In addition, as our business matures, we are increasingly focused on process improvement throughout the business. We have put additional processes in the turnover between sales and operations to improve integration and avoid miscommunication, and we have started conducting post-project profitability reviews to identify and learn from our successes and our misses. In short, we believe we have finally succeeded in getting away from revenue for revenue's sake. As a result, our forecasted gross margin for public works projects is now over 15%, and for commercial projects it is over 20%. This is on projects that are in our backlog or already in construction, not on quoted work. We have a very clean backlog right now with almost all of our work scheduled for execution. In the past 18 months, partially as a result of COVID-19, we have experienced project delays that have made more difficult the timely completion of projects. Scheduling delays can also make quoting a challenge in an environment where material prices change frequently. Actively working to avoid delays has been an important initiative for Sunworks. In the near term, I have started a search for a national sales leader with a goal of injecting new energy and focus into our commercial and industrial sales efforts. On the operations and maintenance front, we have decided to put significant energy into turning our O&M group into a profit center servicing all users of solar and storage, including residential and utility customers, as well as the commercial and public works customers the group currently serves. I expect we will sign several new accounts in Q4 of 2021 and Q1 of 2022. With that, I will ask Paul to provide more specifics related to our financial results in the quarter.

Thank you, Galen. And hello, everyone. For the second quarter of 2021, installation revenue was $32.1 million, compared to $9.7 million in the year-ago quarter. Solstice operations accounted for $22.8 million of the revenue increase. Combined, Solstice and Sunworks residential revenue totaled $24.9 million for the quarter, or 78% of quarterly revenue. compared to 1.8 million or 19% of total revenue in the prior year. Prior year COVID impacted second quarter. Commercial and public works installation revenue was 7.2 million or 22% of total second quarter revenue versus 7.9 million or 81% of total revenue in the prior year quarter. Gross margin for the second quarter of 2021 was 47.2% compared to 24.9% for the second quarter of 2020. As Galen said, this gross margin improvement was due to operational enhancements in all areas of our business. We have had a particular focus on improving accuracy in our estimating processes and in meeting project schedules and deployments. This gross margin improvement also reflects the positive contribution of Solstice to the margin mix. Total operating expenses for the second quarter of 2021 were $19.9 million compared to $3.7 million for the second quarter of last year. The increase in operating expenses was primarily due to the addition of Solstice. Breaking down operating expenses, our selling and marketing expense was $10.2 million compared to $1.3 million in the year-ago quarter. This quarter includes the costs associated with maintaining the Solsius channel partner network for sourcing customers and also includes the increased marketing spend for radio and TV advertising related to growing our residential business. G&A expense was $6.7 million compared to $2.4 million primarily related to expenses from Solsius. Stock-based compensation was $1.1 million compared to $23,000 in the prior year, reflecting the stock option and restricted stock unit grants to key employees that joined us from Solstice. These retention program grants cliff-fest in April of 2022 and are being expensed during the first year following the acquisition of Solstice. Depreciation and amortization was $1.9 million in the quarter compared to $83,000 in the prior year quarter, reflecting the amortization of the $15.6 million of intangible assets identified as part of the Solstice acquisition. These intangible assets are being amortized over lives ranging from nine months for a project backlog required 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 later today. Other income was $2.9 million for the quarter. The bulk of this current quarter other income results from a gain on forgiveness of a $2.8 million paycheck protection program loan and accrued interest. Interest expense declined from $137,000 to $20,000. The decrease in interest expense is the result of having paid off the promissory note to crowd out capital in the fourth quarter of 2020. Finally, we recorded an undecorating gain on disposal property and equipment of $51,000, reflecting the increased market value for used vehicles disposed of during the quarter. Our net loss for the quarter was $1.9 million, or $0.7 million per share, compared to a net loss of $1.9 million, or $0.9 million per share per payment in the year 2020. Change of balance sheet. Our average cash and cash equivalents balance as of June 30, 2021, was $26.9 million, compared to $39 million as of the 31st of 2020. This reflects the money raised in late 2020 and in early 2021 through our at-the-market offerings. The cash raised was used to acquire Solfius and for operating and working capital needs during the first six months of 2021. With that, we're now happy to answer any questions.

Thank you, sir. And ladies and gentlemen, if you'd like to ask a question at this time, it is star 1 on your touchtone telephone. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one on your touchtone telephone at this time if you'd like to ask a question. We'll go first to Philip Shen with Roth Capital Partners.

Hey, good morning, guys. This is Justin Clare on for Phil today. Good morning, Justin. Morning. Good morning. So I guess first off, you indicated in the press release that you're expecting strong year-over-year growth in residential revenue in line with market trends. And I wanted to make sure we have the baseline correct. I believe Sunworks plus Solstice revenue for the resi segment was $103 million in 2020. So I just want to make sure that's right. And then also, you know, we're seeing market growth in a range of, let's say, 20% plus, you know, up to maybe even 30% is possible this year. So how are you thinking about your growth relative to kind of those numbers?

Paul, do you have the year-over-year pro forma from last year to answer the first part of that question?

But not immediately in front of me, Galen.

Okay. Justin, your number sounds accurate. I would want to go back and validate that, and I can send you and fill an update on exactly what the residential revenues were for 2020 when you combine the pre-acquisition Solstice numbers and the Sunworks numbers. With regards to market trends, I think we indicated in our last press release that we were looking at a 15% year-over-year growth. I understand a lot of people in the market are talking 20-plus percent, but I like to think that when they talk that number, they're talking pretty holistically about the entire market. When we measure it purely from a revenue standpoint, I'm a little more conservative than that.

Okay, that's helpful. So then just looking at the performance of the business for Q1 and Q2, the gross margin level here has been at this 47% for both quarters when looking at both the businesses combined, so Q1 pro forma. Is that a decent gross margin to kind of think about as we move forward here, or are there key factors that might move that either higher or lower here? you know, as we move into Q3 and Q4?

I'd like to see that. I'd like to be able to say that's going to increase. We certainly are making tremendous efforts to increase that. Q1 and Q2, that 47% gross margin still had baked into that projects that were won during the COVID period where we were being very aggressive on pricing. I think that we will see some improvement on the commercial side that will drive that a little bit higher. On the residential side, specifically, as we continue to increase our efforts in direct sales, that should contribute a little bit more margin to the bottom line as well, since you're not paying another company to provide you with those leads.

Okay, great. That's helpful. And then shifting to OpEx, You know, also looking at the last couple of quarters, it has been reasonably consistent, you know, a little bit of change, but, you know, selling and marketing at that maybe 10 million, G&A, you know, a little bit below 7 million. Are those decent numbers to think about going forward here or should we be anticipating any meaningful change?

Well, as I indicated in my comments, there's a new senior vice president of marketing starting. I'm looking for a sales leadership position. They'll be a little bit more on the selling end or G&A expense side, depending on where they fall in the structure. But we're not anticipating a large hiring trend or renting any new facilities or anything like that. So I think I would say it's going to be fairly consistent with the possibility of just a little bit more salary in there to support our growth.

Got it. Got it. Okay. And then just one more for me. We've seen cost inflation affecting the industry kind of broadly here, whether it's modules or steel or inverters. Can you talk about how you're managing the potential for costs to further increase and how you're you know, quoting CNI projects, you know, with that potential, you know, so that you don't get caught, you know, with a particular quote and then costs increase later down the road?

Sure, sure. So, first half of that question with regards to how we're managing our supply chain, I would say aggressively. We have, we're fortunate in that we're sitting on some cash reserves. We're able to make intelligent purchases and and able to buy inventory up in advance at current rates and well-negotiated current rates. So I would say at least through the end of this year, we're operating at a lower cost basis than maybe some other people are. With regards to how we're quoting projects, we have been building in some small material price increases, specifically on steel for carports, for instance, as our suppliers have pushed those projects those increases or potential increases to us. We've also made some revisions to our contracts to make it easier for us to talk with our customers about those price increases and to be able to push some of those price increases over.

Okay, great. That does it for me. I'll pass it along.

And that is the final question in our queue today. Mr. Morris, I'd like to turn the call back over to you for any closing remarks.

Thank you. And thank you all for joining our call and for your continued interest and support. I believe we have delivered significant progress in a short period of time, and I am increasingly optimistic about our prospects for the future. Please don't hesitate to reach out to Paul or myself or Rob Fink and the FMK IR team at any time if you have further questions. Thank you.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time. Have a great day.