Sunworks, Inc.

The answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jason Bonfit, Chief Financial Officer of Sunworks. Thank you. You may begin.

Thank you, operator. I'm Jason Bonfit, Chief Financial Officer of Sunworks. On behalf of our entire team, I'd like to welcome you to our second quarter 2022 results conference call. Leading the call with me today is our president and CEO, Galen Morris. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. Following our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to Galen.

Thank you, Jason, and welcome to those joining us today for our second quarter results conference call. Before I cover our progress on our strategic objectives and provide a Q2 financial update, I wanted to highlight the importance of the likely passage of the Inflation Reduction Act. The provisions of the act support the Biden administration's domestic renewable resources and climate policy goals by promoting clean, reliable and low cost energy to businesses and homeowners. We view this as a significant win for the solar industry, specifically the 10 year extension of the investment tax credit at the 30% level. The ITC is a proven path to rapidly growing solar adoption. While costs in the solar industry have declined over the past decade, They have risen sharply in 2022, and this ITC extension is expected to have a meaningful impact on lowering the cost of solar and storage and additionally should promote U.S. manufacturing. Moving on to our business update. During the second quarter, we demonstrated measurable progress on our business transformation strategy while continuing to capitalize on increased demand for our integrated solar solutions. Net sales and gross profit each increased on a year-over-year basis in the second quarter, driven by strong residential demand, while both orders and backlog increased to multi-year highs. Since our last quarterly conference call in May, demand conditions have strengthened materially across both our residential and commercial markets. While supply chain disruptions, module availability, and wage inflation remain a headwind, We've enacted several consecutive price increases in 2022, the benefits of which will position us to achieve improved gross margin capture as we move into the latter months of the current calendar year, while moving us that much closer to free cash flow break even. In our residential solar segment, which represented nearly 90% of second quarter revenue, new installation activity continued to accelerate, while total lots installed increased by nearly 35% on a year-over-year basis, as concerns around rising energy costs and grid reliability have contributed to increased customer adoption of our rooftop solar solutions. Within our commercial solar energy segment, water activity accelerated meaningfully in the second quarter, positioning the segment for improved performance as we look to the second half of 2022. We secured a multi-year high of nearly $24 million in new orders in the second quarter, more than double our order intake in fiscal year 2021 due to strengthening demand for commercial and public works solar projects. As discussed last quarter, we've continued to execute on a well-defined slate of growth priorities designed to both capitalize on favorable demand conditions across our markets and maintain a level of margin discipline required to support sustained profitable growth. Over the last year, we've significantly restructured our residential go-to market strategy. In just 12 months, we have grown our originations from the direct channel to 25% of our total originations, a strategy that will allow us to profitably scale our business. During the second quarter of 2022, the direct sales team was responsible for nearly 15% of total installation revenue versus 5% in the prior year period. Operationally, we remain focused on reducing our velocity of installation or the time between when a contract is executed and when final installation is completed. We believe a reduction in installation times not only improves customer retention, it also encourages more channel partners to work with us, which provides us more leverage around how we price our projects. Following a recent pilot test during which we decentralized all design, permitting, and installation activities, we were able to significantly reduce our installation times. Given the success of this pilot, We are actively mapping company-wide workflow to marry the benefits of scale with this decentralized approach, the combination of which we believe will improve the overall customer and dealer experience while ensuring improved conversion on signed contracts. Further, as we've highlighted on recent calls, we continue to expand our sourcing and procurement relationships to ensure a cost-effective, high-quality supply of modules. While disruptions to the global supply chain and tariff-related policy concerns have both constrained module availability and contributed to higher material costs, we've taken action to expand our supplier relationships while opportunistically increasing prices to more than offset labor and materials inflation. Although we have sufficient module inventories to address current demand, inventory availability across the broader market remains tight. As disclosed last quarter, the Department of Commerce received a petition filed by California-based solar module manufacturer Oxen Solar in March of 2022. The petitioner requested that the DOC review solar panel imports from Chinese companies working in Cambodia, Malaysia, Thailand, and Vietnam related to anti-dumping. This action served to reduce imports of panels from affected regions, resulting in reduced domestic availability of modules and a corresponding increase in module costs. In response to the significant adverse impact this investigation could have on domestic solar industry, President Biden signed an executive order in June 2022 that suspended the collection of anti-dumping and countervailing duties of certain cells and modules exported from the main regions for 24 months. While this situation is far from resolved and a DOC investigation remains ongoing, We believe panel producers from the affected countries will increasingly resume shipments during the second half of 2022, helping to ease inventory availability issues. In combination, we believe our collective focus on reducing customer acquisition costs through a growing direct sales force, improving the velocity of installation, improving the accuracy of our project bidding and pricing, together with the continued expansion of our supplier and procurement network, will position us to drive improved performance. With that, I will hand the call over to Jason for a review of our second quarter financial results.

Thank you, Galen. During the second quarter, our team executed ahead of plan across several key operational metrics while driving significant growth in revenue, orders, and backlog. Although we are pleased with the share gains achieved across both our residential and commercial end markets, we remain focused on leveraging recent price actions and newly implemented operating efficiencies to improve margin realization. For the three months ended June 30, 2022, Sunworks reported total revenue of $36.4 million versus $32.1 million in the prior year period. The year-over-year growth in revenue was attributable mainly to increased contributions from the residential segment, which benefited from a growth in installation volumes and the benefit of a full quarter of Solstice revenue. During the second quarter, residential and commercial revenues represent 91% and 9% of total revenue, respectively. Total gross profit increased to $16.9 million in the second quarter of 2022 versus $15.1 million in the prior year period. The year-over-year variance was primarily attributable to revenue growth partially offset by inflationary pressures in the current year. We reported a net loss of $7.6 million in the second quarter, or 23 cents per basic share, versus a net loss of $1.9 million in the prior year period, or 7 cents per share. The year-over-year variance was primarily attributable to the forgiveness of the PPP loans in the prior year and investments to support anticipated growth in each of our company's segments. Adjusted EBITDA loss was $5.7 million in the second quarter, compared to $1.7 million loss in the second quarter of the prior year. Turning to a review of our residential solar segment, which is our Solstice business. Segment revenue increased 42.5% year over year to $32.5 million driven by growth within our direct sales platform. Total residential watts installed increased 34% year over year in the second quarter. Direct sales represented approximately 15% of total revenue installed in the second quarter versus less than 5% in the prior year period. The residential segment generated an EBITDA loss of $1.9 million driven by continued investments in our direct sales function, expanding our direct labor force to meet growing demand, as well as inflationary pressures, which we expect to offset throughout the year through price actions and improved operating leverage. Total residential backlog increased 26% sequentially to approximately $60 million in the second quarter, driven by growth in both direct and dealer originations. Within our commercial segment, revenue declined 19% sequentially to $3.9 million, driven by lower order intake in the preceding quarters. Our pipeline of opportunities has increased in recent months, resulting in approximately $24 million of orders in the second quarter. The commercial segment generated an EBITDA loss of $1.9 million in the second quarter, primarily due to volume. Turning to our balance sheet, our unrestricted cash and cash equivalents balance as of June 30, 2022, was $12.1 million, compared to $19.5 million at the end of the first quarter, 2022. Operating working capital increased by $2 million sequentially as a result of continued investments in inventory, partially offset by payables management and improvements in other working capital measures. Full inventory at the end of the second quarter was $18.8 million, compared to $10.2 million at the end of 2021. Given the AD-CVD issues Galen referenced earlier, we will continue to make investments in inventory from our expansive list of module suppliers and distributors. Operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Donovan Schaefer with Northland Capital Markets. Please proceed with your question.

Hi, guys. Congratulations on the revenue numbers. I know growth is a pretty important part of kind of the story and your strategy, so that's Nice and cool to see, and especially also, I guess, on the residential side, even kind of more concentrated there. So looking forward from this point, you had a nice bump in the backlog going from 60 million to 90 million. And you said, I think in the prepared remarks, there was a sales kind of originations or something were double on a year-over-year basis. So I'm curious if these are things that we can read into as leading indicators, looking at kind of Q3, Q4. I mean, I know you don't give guidance, but with the bump in the backlog and the origination numbers, would it be appropriate to extend that into some kind of improvement in revenue performance, meaningful improvement in Q3, Q4? Or would we be mistaken, misleading ourselves by reading into that?

Good morning, Donovan. It's Jason. If we pick apart the segments, I think it'll provide more context. So on the commercial side of the business, that was really an excellent quarter for us from an order standpoint. And we are continuing to have further discussions with customers to even expand this backlog further. Really, the question mark that we have and we're pushing for is for these to start to record revenue quickly. That may happen as early as Q4, but depending on project timing, that could delay out into Q1. But certainly, we're planning that we see some revenue growth in Q4 in that commercial business because it has been depressed for the last few quarters. Okay.

Oh, go ahead.

And on the residential side, the backlog is rising, you know, sequentially. We're bringing on new crews to support that growth. So we're expecting growth throughout the rest of the year based on that backlog improvement and the origination growth that we saw in really since we've seen since the beginning of the year.

Okay. So is it fair to say that Most of the increase in backlog was from commercial and industrial, but there was still, like you said, a sequential increase in the residential backlog.

Is that accurate?

That's accurate. Our backlog in our commercial business rose from about $16 million at the end of Q1 to $36 million at the end of Q2. Balance of that from the residential.

Got it. Super helpful. Okay. And then for sales and marketing, you know, I like the way that you guys, you know, kind of report and break things out so we can kind of look at your gross margins and isolate that as sort of, you know, how you operate as, you know, getting the product sourcing and installing. And whereas, you know, the customer acquisition costs is you keep it separate in selling and marketing. It's, super variable and tied tightly with revenue. But I think I might have been a bit premature in my own thinking in terms of how sales and marketing could come down as a percentage of revenue as you're shifting to more direct channel sales. So I'm wondering if we can kind of get an update there Obviously, you know, it was up in the quarter because of the good revenue numbers. So, of course, that's a good thing. But it's about the same as a percent of revenue from the first quarter. I'm wondering if we should expect that to start coming down with the direct sales effort or maybe even as I know you launched a new website, maybe those expenses will go away. So I'm just trying to think about the selling and marketing side of things and how I should expect that to trend.

We're expecting that sales and marketing as a percent of revenue to come down slightly throughout this year, and we'll look to further expand on that into 2023. There are a few levers there. Leverage will certainly help us. because we do have salaries and benefits in sales and marketing. And then what's really gonna impact the numbers in the second half of the year are the price increases that we've made in our residential business to offset the inflationary pressures in the first half of the year. So those two factors will compound on each other over time and we'd expect gross margin to expand and at the same time sales and marketing should come down slightly.

And with the sales and – Donovan, this is Galen. Go ahead. On the residential side of the business, the timing of our recognition of revenue is significantly later than the timing of the beginning of commission payments due to just the way the market – the way this market is run. So we are often – as you see backlog build, you will see sales and marketing costs increase in advance of revenue.

That makes sense. That makes sense. Okay. Yeah. and then just follow up on that. Um, so is it something in terms of making the improvement in transitioning to, you know, more direct sales? Um, one, if we can get an update on kind of what the Delta there is on customer acquisition costs, you know, how, how much money can you save or what fraction of a, of a external lead do you pay, uh, internally to generate the same lead? And then, um, And is there anything changing there? Because if it's going to be a gradual decline as a percentage of revenue, should we expect it to just kind of continue as a gradual decline also in 2023 or just in the future? Are there any kinds of sort of inflection points or something where a certain thing gets rolled out or something happens that makes a more abrupt reduction there?

Or should it really just be a pretty gradual thing? I think we can cover it more off.

This is a little bit competitive. We want to stay away from that. But I think your assessment that your direct sales channel should have a higher margin, we do believe that, and that's why we're focused on growing that channel. It does allow us to... select certain markets, be more selective of products as well. So it does help us operationally as well to move more to this direct channel. But I think I wouldn't be expecting any major inflection points in our margin profile over the next, you know, six months to a year.

Okay. Okay. And then I'll ask, I'm going to ask one more question. Then I'll jump back in the queue because I could always, you know, I could probably ask questions. uh, you know, the day is long, but, um, so with the inflation reduction act moving through Congress right now, it seems like it's got a pretty good chance of passing. Um, you know, you could probably talk about, I'm sure there are some commercial and maybe public works benefits and stuff in there, but the thing that immediately really jumps, uh, comes to mind for me is the, the, um, the sort of standalone or, you know, 30% ITC for adding a battery and storage. And I know historically that just kind of doesn't really fit as well with sort of like your, your demographic, what your, um, you know, the, the, where you're so many, a lot of your customers are in socioeconomic sense, you know, I mean, you guys are really kind of serving, I think of like the trader Joe's, um, you know, population, you know, sophisticated people, but kind of on a budget. And so you haven't really emphasized battery sales or battery attachment rates too much. Is that something that could change with the ITC, or do you think it doesn't kind of change that equation in terms of how often or how much you try to push to get more battery sales and battery attachments?

I think the ITC pushes batteries in a good way, and we're going to continue to emphasize selling those, probably emphasize them more. The ITC also pushes and makes more valuable PPAs, which will change our market space in some good ways, I believe, also. I would say that on the commercial side, the ITC definitely will have a significant opportunity to drive the business forward based on that.

Okay, great. Yeah, I'll go back into the queue.

Thank you, ladies and gentlemen. As a reminder, it is star one to ask a question. We'll pause a moment to allow for any other questions to come in.

Once again, if you have any additional questions, please press star one.

Our next questions come from the line of Donovan Schaffer with Northland Capital Markets. Please proceed with your questions.

Hi, okay. I thought, you know, I know, obviously, former colleague Phil Shen, I thought you may be on asking a question. I know that there's a lot of companies reporting today. There's a lot going on. So I'll just opportunistically monopolize your time. I think we should probably talk a bit about kind of the cash situation. It seems like you guys are in a good position. You know, you have... you know, healthy amounts on the balance sheet. And, you know, since last quarter, actually a decent amount of that has gone to, you know, accounts receivable, building the inventory, kind of contract assets. And I know some of that's, at least like on the inventory side, that's around supply chain concerns. So I'm curious, from an outlook standpoint, kind of looking forward from today, and where you're at with the supply chain and your backlog, are you going to need to continue building inventory or is this, are you actually in a fairly comfortable position to, uh, you know, to, and I think you have enough cash. You look like you have enough cash anyway to, um, be good for quite a while. Um, but if, if there's a, someone were to have doubts on the comfort level or something, Are you going to be in a position to not be building up as much inventory in this kind of proactive staying away from, I mean, staying ahead of, you know, demand? Or are you going to actually, do you think you might actually need to continue to accumulate more inventory with what's going on in the supply chain?

On balance, we believe that we have the working capital in place to support the growth. With that said, We have well-documented issues at the ports related to documentation of panels that are coming in from various countries. I believe that many of the module manufacturers are working through the documentation that's been requested so that they can clear customs. That's the environment that we're living in. We need to make sure we have adequate inventories to support any near-term disruptions. So we may, from time to time, procure materials on a spot basis if we feel it's the right timing and the right price and it mitigates risk. So I think that's really the one uncertainty that we have right now.

And I suppose the increased commercial backlog, I suppose, probably also adds a little bit there, where now you know you have sort of a time horizon with respect to, well, We know we're going to have to have certain modules ready, but the project won't be until the fourth quarter. Is that fair?

We're starting to plan for that, and we did receive some modules for Q4 and Q1 relations during the quarter, so that was a portion of that inventory increase.

Okay, great. And then, Galen, I think you said in the opening remarks that You said something about where you get to positive cash flow, positive operating cash flow, like moving in that direction towards the end of 2023. I missed it if you actually said you thought you would hit a positive operating cash flow by the close of 2023, or if that you'd be getting sort of close and then that's something you expect would happen in 2024. I'm just curious if you can kind of clarify that a bit more when you think or see that that is likely to happen and maybe any particularly big assumptions that are behind that or caveats that might be important to highlight.

We're making every effort to approach break-even cash flow. It's the number one priority for the company. with regards to shareholder value, and we recognize the importance of it. As we close out this year, we anticipate being significantly closer to that, and our intention, every effort is being made to reach break-even next year.

Okay, okay. And my last question is, may seem, to some may seem trivial, but I'm quite interested in it. I know you did launch the new website, and that's something you guys have been thinking about for a while. And in this line of work, I think it can be such an important thing, especially on the retail side. If you're getting sold on your roof, it's sort of who are these people I'm working with? Who is it? Someone knocked on my door or whatever it is. Okay, I'm going to go Google the name and pull it up. And so I'm curious, are there specific things in the website change or relaunch that you guys, you made certain changes that you think could help increase kind of either, you know, customer leads or close rates, something that kind of translates into the financials for the company. Of course, just at a high level, it's always good to have, you know, better website brand marketing, whatever. So I'm just wondering if there's anything kind of more concrete built in there. or you know and or um you know even if not if you're sort of tracking metrics to try and understand how often does someone come to your website and then are you able to link that to a phone call you know an inbound phone call things like that i'm just kind of curious uh what what's been built into the new website that can kind of help from getting to the bottom line in some way

Sure. Good question. Thank you. We did a number of outreaches to customers over the first half of this year, both on the residential and commercial side, to find out what they thought of the company, what were their driving motivators when they were making decisions, what resonated with them. And then we took that feedback and filtered that through a market lens where we looked at what others in the marketplace are doing and what makes sense from a growing and evolving marketplace standpoint, and built all of that into what we think is a much more modern and accessible website that takes into account the changes in search algorithms by the major search engine providers. Those were all critical inputs to that process. So what we have here in this commercial-focused website, the residential-focused website will be released later this year, refresh will be released later this year, is a website that we think speaks to the potential customer and gives them not only reasons for going solar, but reasons for going solar with Sunworks and on the residential side when we do that with Solsius. And we're excited about that being an increaser in our lead generation. lower cost lead generation, I think it's going to benefit the business greatly.

Okay. And then I know I said that was going to be my last question, but one just occurred to me. So I'm going to sneak another one in. You know, I noticed, so I think one of the things, you know, as an analyst, you know, I've been buy rated on your stock since I initiated, you know, I think There's a lot of interesting opportunity here with the Solstice acquisition and how a lot of that was driven in a lot of ways by kind of the crazy run-up in the stock price, part of the GameStop and the meme stocks and everything that gave you the opportunity to sell shares at the very, I think, $15 a share or something for pretty reasons we all recognize and understand as an anomaly, but you guys were able to in a savvy, intelligent way, take advantage of that at the time. But then from that same perspective, I think there, as an analyst, I also had the thought in the back of my mind of, well, gee whiz, I hope they don't try to sell a bunch of shares at a very, very low share price. And so I'm pleased to see that in the second quarter, The share price was fairly low. Obviously, there were a lot of political headwinds. There was a small amount of share issuance, I think, but it was really quite tiny. That's great and reassuring that you weren't selling shares down in this $2 share and that you really have that view and conviction that as a company, you're worth meaningfully more than that. I'm curious... If going forward, if you have maybe what you're, if you have an internal evaluation approach or something or how you kind of try to make those judgment calls and or if maybe you just feel very comfortable with where you are from a cash standpoint where that you have pretty much no intentions to really issue shares, you know, in the near term as is, you know, just any clarification or kind of color around there would be great.

From a high-level standpoint, we look at our value when we decide whether or not we're going to sell shares and raise capital. We look at our share value against the competitive marketplace and evaluate whether or not the value in our shares is above, at, or below where we think it should be with regards to the market. I will say that right now, if we were to execute on shares, the goal would be to grow the business. Our only mechanism or primary mechanism for raising capital is the ability to sell shares. And if we do that, we're doing that with the intention of increasing our ability to grow the business. Okay. Okay. And in a volatile marketplace where any number of different geopolitical and or supply chain type issues or a combination of the two could occur, there's always the outlook of de-risking the situation. And being able to have cash reserves or greater cash reserves always de-risks the situation.

Sure. Okay. Right. So there's still, even in there, there's kind of a conceptual... either arbitrage or sort of a treative aspect where you could kind of value what the associated risk is that you're trying to offset. And so, you know, maybe it makes sense in some ways to issue shares at a relatively lower share price, but it's because of what you're able to do with that somehow seems to have a better sort of economic trade-off. Okay. Okay. Well, that's great. Thank you guys. Very helpful. And, you know, congratulations on the quarter. Thank you. Thank you.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Morris for any final comments.

So once again, to everybody on the call, thank you for joining. Should you have any questions, please feel free to contact us at ir.someworksusa.com, and a member of our team will follow up with you. This concludes our call today. You are now free to disconnect.

Thank you, ladies and gentlemen. This concludes the conference call. You may now disconnect your line.