Sunworks, Inc.

Greetings. Welcome to the Sunworks Inc. Third Quarter 2022 Results Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Jason Bonsig, CFO. You may begin.

Thank you, Operator. I'm Jason Bonsig, Chief Financial Officer of Sunworks. On behalf of our entire team, I'd like to welcome you to our third 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 otherwise 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. During the third quarter, our business benefited from a combination of strong residential solar demand, strategic price actions, disciplined expense management, and market share gains. As household electricity bills continue to rise, order rates for new residential rooftop solar installations accelerated on a year-over-year basis, contributing to robust organic revenue growth in the third quarter. While customer financing costs have increased in tandem with higher interest rates, originations during the quarter were at record levels, as the economic case for residential solar remains highly compelling, particularly for customers who value independent, reliable access to renewable energy. To help illustrate this point, let's use a real-world example. Currently, the average residential electric bill in California, our largest market, is more than $1,550 annually, or nearly 50% higher than it was a decade ago. Even as electricity prices have risen meaningfully, grid reliability has declined, leaving many households and businesses to explore alternative options. Consumers want more control over how they source energy, They want choices. The average residential installation will typically cost between $25,000 to $30,000, including the benefit of tax credits financed over a 15- to 25-year period. By installing solar, a homeowner can, in most cases, use their system to offset their electricity usage 100% and have a system which will support future consumption growth. Over the past year, the cost of solar has increased for the first time in the industry's existence. Financing rates have increased by more than 5%, and low interest rate products are being limited by the loan providers. Inflationary pressures for labor and key componentry have pressured the economics of solar. Despite these headwinds, many homeowners continue to see an immediate reduction in their utility bills, but the economic benefits compound over time as the cost of solar remains fixed compared to the rising costs of retail rates from traditional utilities. Even after accounting for higher financing costs, the long-term economic case in favor of residential solar remains well intact. And with inflation at the highest level since 1982, we take the view that households will continue to look for ways to lock in sustainable energy cost savings. To that end, our total backlog increased 116% year over year to $110 million at the end of the third quarter, driven by broad based origination growth across both residential and commercial end markets. Importantly, in the face of rising demand, we have been able to pass along several strategic price increases this year. Given the anticipated impact of these recent price actions, our backlog margins are the highest we have seen in several quarters, which should support improved margin capture beginning in the fourth quarter and into 2023. Fortunately, Supply chain conditions improved during the third quarter versus what we experienced earlier in the year. Given expectations of continued demand growth, we invested heavily in panel and component inventory during the third quarter to support a growing backlog of project activity. Although easing in the supply chain conditions is encouraging, we recognize this situation can easily reverse, particularly given the current geopolitical climate. With this in mind, we will continue to prioritize working capital investments in critical componentry, positioning us to mitigate material sourcing risks. As we discussed on our prior calls, we intend to shift an increasing proportion of our current sourcing from foreign manufacturers or third-party distribution channels toward U.S.-based original equipment manufacturers, an approach that we expect to provide improved surety of supply over time. By the end of 2024, we intend to source a significant share of our panel and component inventory from U.S.-based producers. Turning now to a high-level overview of our third quarter results. Total revenue increased 30% year-over-year to $40.7 million, as robust residential demand more than offset near-term softness in commercial activity. Within our residential solar segment, total watch installed during the third quarter increased by nearly 50% on a year-over-year basis, driven by strong new contract origination sourced through our direct sales force. Our direct sales force, which now includes more than 600 agents in 14 metro markets, represented 23% of total residential solar segment revenue in the period versus less than 5% of segment revenue in the prior year period. More importantly, I'm pleased to report that we delivered positive residential segment EBITDA in the third quarter. At a strategic level, our business transformation continues to advance meaningfully. Customer retention is up, given a higher volume of installation. Order cancellations have declined. We're expanding in the direct sales channel, which reduces costs and puts us closer to the customer. We're using intelligent, data-centric pricing strategies to optimize margin capture. And we're refining our sourcing and procurement model to ensure uninterrupted access to high performance, quality, componentry across multiple markets. Looking ahead, I'm positive on the outlook for our business, even as concerns around an impending recession become the consensus view. Today, the domestic solar industry has the technology to provide affordable, reliable electricity to every home and business in America. Sunworks remains a pioneer in the renewable energy revolution, one well-positioned to capitalize on the underserved, fragmented residential and commercial solar markets where we built a leading position. It is an exciting time at Sunworks. Thank you for your continued interest in and support of our business. With that, I will hand the call over to Jason for a review of our third quarter results. Thank you, Gail. During the third quarter, our team executed ahead of plan across several key operational metrics while driving significant growth in revenue, orders, and backlogs. For the three months ended September 30th, 2022, we reported total revenue of $40.7 million versus $31.2 million in the prior year period. The year-over-year growth in revenue was attributable mainly to increased contributions from the residential solar segment, which went from a growth in installation volumes and improved pricing. Commercial solar energy revenue declined $3.8 million compared to the prior year period, primarily driven by lower order intake in the preceding periods. During the third quarter, residential revenue was 92% of our quarterly revenue, while commercial revenue represented the balance. Total gross profit increased to $19.5 million in the third quarter, 2022, versus $13.7 million in the prior year period. We'll note that the current quarter benefited by an accounting estimate change in our residential segment of $1.8 million related to the capitalization of costs incurred on projects that are in progress and expected to be completed in the coming months. The year-over-year variance was primarily attributable to growth in customer acquisition and operational improvements throughout the business, including increased focus on accuracy in estimating, quoting, and improved execution partially offset by inflationary pressures on materials and labor. We reported a third quarter net loss of $5.4 million, or a loss of 16 cents per basic share, versus a net loss of $6.5 million in the prior year period, or a loss of 24 cents per basic share. The year-over-year variance was primarily attributable to lower amortization expense associated with the Solstice acquisition and lower stock compensation expense, partially offset by inflationary pressures on materials and labor, as well as investments to support anticipated growth in each of the company segments. Adjusted EBITDA was a loss of $3.7 million in the third quarter, compared to a loss of $3.3 million in the prior year quarter. Turning to our view of our residential solar segment, which is our Celsius business. Segment revenue increased 57% year-over-year to $36.7 million, driven by growth across all sales channels. Total residential lots installed increased 50% year-over-year in the third quarter. Direct sales represented approximately 22% of total revenue installed during the third quarter versus less than 4% in the prior year period. The residential segment generated positive EBITDA of $1 million, driven by strong end market demand, recent price increases, and improved operating leverage. Total residential backlog increased 18% sequentially to approximately $70 million in the third quarter, driven by growth in both direct and dealer originations. Within our commercial segment, revenue declined 48% year-over-year to $4.1 million, primarily based on lower revenues low order activity in 2021 and earlier this year. The commercial segment generated an EBITDA loss of $2.6 million in the third quarter, primarily due to lower volume. Turning to our balance sheet, during the third quarter we raised $7.3 million under our at-the-market equity program to support strategic growth. At the end of the third quarter, we had no debt and $14.5 million in cash to support the ongoing growth of our business. Networking capital increased by $5 million sequentially as a result of investments in inventory. Total inventory at the end of the third quarter was $26.9 million compared to $12.4 million in the prior year period. As Galen mentioned earlier, we believe investments in componentries are prudent use of capital at this time given a combination of strong underlying customer demand and a global supply chain that, while improving, remains in flux. In summary, we remain well-capitalized to support growth. We've made the necessary inventory investments to support a growing pipeline of customer demand, and we have a strong backlog of higher-margin project work to support us in the fourth quarter and into 2023. Operator, that concludes our prepared remarks. Please open the line for questions as you begin our question and answer session.

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