Sunworks, Inc.

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 Standless. Sir, the floor is yours.

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 Galen Morris, Chief Executive Officer, and Jason Bonfit, 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 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, Galen 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 Solsius, a residential EPC organization with significant market reach, excellent technology solutions, and sales-oriented competencies. This acquisition transformed some works 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 continue 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 Solstice 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 carry-forwards, 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 buyer-friendly acquisition environment. We are evaluating potential acquisition targets, primarily small to medium-sized companies, both 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 Solstice 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 multi-channel 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, Solstice 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 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, but we also have rapidly grown and will continue to grow our direct sales channel. Post acquisition, we have added 250 direct sales people, 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 am 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 timeframes, impacting both revenue and margin. But overall, we have made significant progress in addressing lower project margins that presented a significant challenge for Someworks in the past. Today, we are much better at accurately estimating and quoting and have improved our deployment execution to avoid costly project overruns. Someworks 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've 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 CNI 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. Voter 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.

Thank you, Galen, 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 Solstice of $26.1 million. Sequentially, consolidated revenue increased modestly compared to the third quarter on higher Solstice revenue. Revenue was negatively impacted by weather issues, labor constraints, permitting delays in certain markets, delaying commercial industrial project progress, and related 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 Galen 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 Solsius 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 Solsius in 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 Solstice and other new hires. The Solstice Retention Program, RSU, and option grants took best in April 2022 and are being expensed during the first year following the acquisition of Solstice. 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 Sol C acquisition that are being amortized over the lives ranging from nine months for the project backlog acquired to 10 years for trademarks and trade names. Details of the future amortization expenses include 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 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 Solstice acquisition or the related goodwill of Solstice. Our net loss for the quarter was $13.5 million or 47 cents loss per share compared to a net loss of $4.9 million or a loss of 20 cents 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 Solstice, 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 Solstice acquisition. Additionally, we incurred non-cash 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 31st, 2021, was $26.6 million, or 99 cents 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 31st, 2021 was $19.7 million, compared to $39 million as of December 31st, 2020, reflecting the cash used to acquire Solstice. 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 Galen for closing comments.

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 CNI 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 in the 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 the Solstice 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 GNA decrease as a percent of revenue. When combined with gross margin expansion, this should lead to improved operating margin and ultimately sustainable profit. Someworks 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, Someworks 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 is 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 our own practices to our supply chain partners and other vendors. I am 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.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phones. Please hold while we poll for questions. Your first question is coming from Donovan Schaefer from Collier Security. Your line is live.

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

I can start that off, Galen. The C&I business last year had about $8.6 million of revenue in the quarter. This quarter was $5.6 million. Some of that is because we've transitioned the residential business over to Solstice. 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.

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

Yes, Donovan, hi. 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, no pun intended, most of the month of November for our ability to do ground mount work and agricultural work. So that was That was a significant impact to the middle month of that quarter. I didn't catch Shoal's 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 maybe did plague us in the fourth quarter.

Okay, that's helpful. And then... Um, one more question. Uh, it looks like you guys raised, um, just based on sort of the change in additional paid in capital, uh, 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 and 50 cents, um, for the raise with issued shares, which, you know, uh, looks great with your price now, right around $3 a share. Um, you know, 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, you know, where, you know, where do you kind of feel like your stock is, you know, cheap for lack of a better word or where do you feel like, you know, 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? You know, just kind of at a high level on that.

I'll start with the math part of the question. I think the average sale was about 610, so slightly lower than what you're describing. 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, you know, Galen talked about potential acquisitions. You know, 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 today.

Okay, that's helpful. So yeah, I'll jump back in the queue you know operator if you want to open it up to someone else but I do have more questions so you know I'll get back in the queue from here there are no other questions in the queue at this time Donovan please proceed yeah I'll keep going so I like the additional color on the direct sales I I'm curious to know, are you, does your, you know, your new hires, does that include, is this a door knocking sort of telemarketing sales? Or is this primarily a digital effort? It sounded like a decent headcount addition. So I'm guessing there might be door knocking or telemarketing involved. Can you, yeah.

Yeah, 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 Solstice. Brian Jackson, who was one of the founders of Solstice and was in charge of Solstice's 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 butting up against being our second largest revenue contributor month to month. It varies between them and one other channel partner. So they're doing really well. Are they door knocking? Absolutely. Is there telesales involved? There is. Are we at a digital presence yet? We are strongly and closely evaluating adding a digital selling initiative to the way that we're currently doing. 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.

Okay. That's great. And then for sort of geographic expansion, you know, there was, of course, the news, there's been a lot of headline-grabbing news around California NUM 3.0 and then now Florida recently passed something. I don't think the the governor has not signed it into law yet, but, um, and I know you're not in Florida, but I think, you know, here and there, there are some States, maybe one of the Carolinas or something. I'm curious, as you look to geographic expansion, do these developments, um, you know, 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, you know, if it's, I forget which Carolina, but, or other States that are considering net metering revisions that sort of change, uh, where you want to go geographically?

Uh, first question I think was whether or not Florida was in our potential pipeline. Florida was not in our potential pipeline. We have a, 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, and we wouldn't want to encroach on that. So we've never really had a look at moving into Florida. I'm sad to see the NEM bill in Florida pass. It is definitely counter to the industry, and it will be challenging for those folks that operate in Florida. But, you know, fortunately, that's not us. Other states that are looking at NEM 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 cities areas within Texas and continue to be successful there. So there's really no reason for us to not continue to expand into Texas. With regards to other states around that or in the south, we're carefully evaluating and will be announcing over the next six months what we're going to be doing with regards to other states. For California's NEM 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 $8 per kilowatt in the previous decision. So we're You know, we're prepared to offer solutions that will work under the new NEM 3.0, if or whatever the new NEM 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 we really can't walk away from that. And if government makes it more difficult for us, we'll figure out a way around it.

Okay. All right. That's interesting. I think I feel like, yeah, I think I've heard of some of this sort of idea of how you can avoid... whatever statutorily 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. Um, on the CNI side of the business, you know, you guys have brought in someone who, you know, it's a pretty good track record from Borrego solar. Um, you know, they are, they're private CNI focused, um, you know, sort of installer, um, or UPC is, are there specific States, you know, SIA, um, and Woodmack in, I think it was their, I think it was their Q4 sort of update highlighted Illinois and New Jersey as States that had changed policies that would really drive CNI business. But, um, you know, I don't, I think you're in New Jersey, but I don't think you're in Illinois, but just in general, you know, you're looking to expand CNI and, leverage the footprint with Solstice from a logistics standpoint. So there's certain out of the states that you're in or that you're looking at, there's certain ones that are particularly exciting to you. Is it sort of state, you know, is it policy driven or just certain states maybe have great, you know, sort of demographics or businesses or you know, 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 CNI side.

I'm excited and interested in the Northeast for sure. We have a person there who is a project manager slash developer. And, you know, we consider, we constantly are considering expanding operations in the Northeast. And for the most part, the only thing that's held us back from really pushing forward is 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 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 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 the, or I shouldn't say obviously, but with regards to the Solstice footprint of locations, they're 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 an organic expansion as well. There's candidates all throughout the United States or candidate companies all throughout the United States who are looking, actively seeking the opportunity to combine with or merge with another organization.

Okay. Okay, that's great. So coming back to the residential, you know, you did mention there are sort of parameters you look at when you think about what residential markets, you know, which states you're interested in for geographic expansion. And, you know, I, I, it stands out to me, your sort of approach of the, you know, you're sort of below your typical installation with Celsius is smaller than the average, I think, you know, sort of us solar installation. And so maybe that goes after sort of different demographics and where you can kind of have this, attractive, reasonably priced kit, like your best-selling offering. Does that change, like, if you compare yourself to your peers, you know, the publicly traded peers, what attributes do you bring in when looking at what state to expand into? You know, I mean, some, you know, southern states are sort of historically sort of lower average per capita incomes and things like that. And so, you know, 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?

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. We're pushing solar solutions that can save a small house in Arizona off Most of their electric bill are a large house and somewhere else most of their electric bill. The solutions scale from, you know, 8 to 10 panels all the way up to, you know, 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, you know, 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 install.

Okay. And then I think my last question, and then I'll sort of take the rest offline, 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 know, you're trying to, you know, pump out these installations and volume and, you know, batteries have been one of the supply chain constraints. And so, you know, even the Salesforce, you know, the Salesforce itself doesn't want the payout of their commissions, you know, 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, you know, kind of model you offer in a way that is, you know, 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, something where you can drive growth with higher attachment rate? And then also, have you seen more interest for storage with CNI business and projects you're bidding on for the CNI stuff?

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 Solsius business is the ability to provide solar to many, many people in a very short period of time. Our crews can do two, sometimes three house installations in a single day. So it's a very, very fast-term business. And if we add batteries and we add supply chain constraints into that, we really need to look at more elaborate solar and storage solutions for larger customers with the ability to 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 the 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 CNI side of the, but that said, we are, 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.

Okay, great. Very helpful. Well, congratulations. Thank you, guys. And I'll take the rest of the questions. I'll reserve the rest of my questions for offline. Thank you, Donovan. Thank you.

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

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 or 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.

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.