The following discussion of our financial condition and results of operations
should be read together with our unaudited condensed consolidated financial
statements and related notes included in Part I, Item 1 of this Quarterly Report
on Form 10-Q (this "Quarterly Report") and the audited consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2021 (our "Annual Report"). This section contains forward-looking statements
that are based on our current expectations and reflect our plans, estimates, and
anticipated future financial performance. These statements involve numerous
risks and uncertainties. Our actual results may differ materially from those
expressed or implied by these forward-looking statements as a result of many
factors, including those set forth in the sections entitled "Risk Factors" in
Item 1A of our Annual Report and Part II, Item 1A of our Quarterly Report for
the quarter ended March 31, 2022, and "Cautionary Note Regarding Forward-Looking
Statements" included in this Quarterly Report.
Unless otherwise noted, (1) "Sunworks" refers to Sunworks, Inc., (2) "Company,"
"we," "us," and "our," refer to the ongoing business operations of Sunworks,
Inc., and its wholly owned operating subsidiaries, Sunworks United Inc.,
("Sunworks United"), Commercial Solar Energy, Inc. ("CSE"), and Solcius LLC
("Solcius"). All material intercompany transactions have been eliminated upon
consolidation of these entities.
All amounts presented in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, unless otherwise noted, are expressed in
thousands of U.S. dollars, except share and per share amounts and unless
otherwise noted.
The financial and operating results for the three and nine months ended
September 30, 2022, include the operating results of Solcius acquired on April
8, 2021, with only a partial contribution for the three and nine months ended
September 30, 2021.
Overview
On April 8, 2021, Sunworks, through its operating subsidiary Sunworks United,
acquired all of the issued and outstanding membership interests (the "Solcius
Acquisition") of Solcius, from Solcius Holdings, LLC ("Seller"). Located in
Provo, Utah, Solcius is a full-service, residential solar systems provider. The
transaction creates a national solar power provider with a presence now in 15
states, including California, Utah, Nevada, Arizona, New Mexico, Texas,
Colorado, Minnesota, Wisconsin, Massachusetts, Rhode Island, New York,
Pennsylvania, New Jersey and South Carolina. The Company believes the
transaction enhances economies of scale, leading to better access to suppliers,
vendors and financial partners, as well as marketing and customer acquisition
opportunities.
The Solcius Acquisition was consummated on April 8, 2021, pursuant to a
Membership Interest Purchase Agreement, dated as of April 8, 2021 (the "Purchase
Agreement"), by and between Sunworks United and Seller. The purchase price for
Solcius consisted of $51,750 in cash.
Residential Solar
Through our Residential Solar operating subsidiary, we design, arrange
financing, integrate, install, and manage systems, primarily for residential
homeowners. We sell residential solar systems through multiple channels,
including our network of sales channel partners, and our growing direct sales
channel strategy. We operate in several residential and commercial markets
including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado,
Minnesota, Wisconsin and South Carolina. We have direct sales or operations
personnel in California, Nevada, Utah, Arizona, New Mexico, Texas, Colorado,
South Carolina, Wisconsin and Minnesota.
Commercial Solar Energy
Through our CSE operating subsidiary, we design, arrange financing, integrate,
install, and manage systems ranging in size from 2kW (kilowatt) for residential
projects to multi-MW (megawatt) systems for larger commercial and public works
projects. Commercial installations have included installations at office
buildings, manufacturing plants, warehouses, service stations, churches, and
agricultural facilities such as farms, wineries, and dairies. Public works
installations have included school districts, local municipalities, federal
facilities and higher education institutions. Historically, our CSE subsidiary
participated in the California residential solar market. Following the Solcius
Acquisition, all new residential sales are managed under the Solcius brand. Due
to materiality, the Company will continue to report the remaining backlog of
residential projects in the Commercial Solar Energy segment, which is expected
to be fulfilled within the next year. CSE primarily operates in California.
For the third quarter of 2022, approximately 92% of our revenue was from
installations for the residential market and approximately 8% of our revenue was
from installations for the commercial and public works markets.
For the third quarter of 2021 approximately 79% of our revenue was from
installations for the residential market and approximately 21% of our revenue
was from installations for the commercial and public works markets. Solcius
revenue was only included since its acquisition date of April 8, 2021.
20
Strategic Update
Increase the velocity of installation. We believe a reduction in the time
required to install a residential solar installation improves both pricing power
with third-party channel relationships and customer retention. During the second
and third quarters of 2022, we decentralized all design, permitting and
scheduling activities to local and regional Company hubs, while continuing to
leverage the benefits of scale across shared services. We will continue to
utilize lean principles and practices to optimize workflow and improve
installation timelines.
Expand cost-efficient direct sales channel. We have embarked on a multi-year
initiative to develop a robust, direct sales team designed to complement our
third-party channel partners. This direct sales team is incentivized to develop
business across the residential markets where we operate, with an emphasis on
rooftop solar installations. During the third quarter of 2022, the direct sales
team was responsible 24% of total installation revenue, versus approximately 4%
in the prior-year period.
Drive efficient sourcing and procurement. We intend to shift an increased
proportion of our sourcing away from foreign, third-party distribution channels
toward U.S. based original equipment manufacturers, an approach that will allow
for improved surety of supply. By year-end 2024, we intend to source a
significant share of our panel and component inventory from U.S. based
producers, whereas no materials are currently sourced domestically. During the
third quarter of 2022, we grew total inventory by $8,100 on a sequential quarter
basis to $26,900, thereby ensuring product availability during a period of
elevated customer demand.
Drive sustained margin expansion. We believe key drivers of margin expansion
include programmatic price increases; market share gains in both our core
California commercial market and new geographic regions; reductions in lead
times; optimization of our sales channel partner network; an increased mix of
revenue derived from our direct sales force; increased productivity resulting
from recent headcount investments; and the adoption of lean principles to reduce
cost and drive continuous improvement. We expect to achieve improved margin
realization in the fourth quarter 2022, when compared to the first nine months
of 2022, as recent performance improvement initiatives are further implemented.
Orders and Backlog
For the quarter ended September 30, 2022, our combined backlog was $110,000,
representing an increase of 116% compared to the third quarter of 2021.
Residential Solar segment originations increased 48% in the three months ended
September 30, 2022, compared to the prior year period, driven by growth in both
dealer and direct channels. Within this segment, originations generated from the
direct sales channel were approximately 24%, in the three months ended September
30, 2022, compared to approximately 3% in the prior period, due to execution
against our stated goal to diversify our sources of originations. As a result of
these improvements, the Residential Solar backlog increased to $70,000, during
the third quarter of 2022 which is double the prior year quarter and up
approximately 18% on a sequential quarter basis. We expect to execute against
our Residential Solar segment backlog over the next 1-5 months, as project
complexity, jurisdictional requirements, materials and labor availability each
influence timelines for completion.
Commercial Solar segment orders were approximately $8,000 during the three
months ended September 30, 2022, compared to approximately $6,000 during the
comparable period in 2021. The Commercial Solar segment backlog increased to
approximately $40,000, during the third quarter of 2022, which represents an
increase of over double the prior year period. We expect to execute against this
backlog over the next 3-18 months, subject to receiving timely authorizations to
proceed with construction from the various stakeholders.
21
IMPACT OF COVID-19 ON OUR BUSINESS
The continued global novel coronavirus and its variants (COVID-19) pandemic, has
resulted in significant governmental measures being implemented to control the
spread of the virus, including quarantines, travel restrictions and business
shutdowns. The uncertain macroeconomic environment created by the COVID-19
pandemic has had and may continue to have a significant, adverse impact on our
business. To assist readers in reviewing management's discussion and analysis of
financial condition and results of operations, we provide the following
discussion regarding the effects COVID-19 has had on the Company, what
management expects the future impact to be, how we are responding to evolving
circumstances and how we are planning for further COVID-19 uncertainties.
State and local directives, guidelines, and other restrictions, as well as
consumer behavior, continue to impact our operations in the regions in which we
operate, particularly California. During 2022 and 2021 we continued to serve
customers. COVID-19 and the governmental directives materially disrupted the
operations of the local and state governments by closing or restricting
operations at city, county and state offices for design reviews, permitting
projects, and inspections of projects. Utility companies have been unable to
provide timely shutdowns, inspections and interconnection approvals. This
disruption negatively impacts our ability to complete projects, generate revenue
on projects in backlog and causes many customers to delay decisions on new
projects.
Our revenue and gross profit for the first nine months of 2022 were negatively
impacted by governmental responses to the COVID-19 pandemic, which delayed
pre-construction approvals and installation activity for our larger public
works, agriculture and commercial projects by delaying approvals. Earlier
governmental orders and social distancing guidelines slowed our sales process,
as our customers avoided interacting with our sales and installation personnel
and delayed buying decisions.
We received a loan under the Paycheck Protection Program of $2,847 which was
used to pay for payroll costs, interest on debt, rent, utilities, and group
health care benefits, allowing the Company to focus on revenue generating
activities in an effort to mitigate some of the impact COVID-19 has on our
business. The entire principal of the loan and all accrued interest was forgiven
in June of 2021.
Although there is uncertainty around the continued impact and severity the
COVID-19 pandemic has had, and will continue to have, on our operations, these
developments and measures have negatively affected our business, including a
negative impact on the supply chain upon which we rely on to operate. We will
continue to attempt to mitigate the impact through appropriate operational
measures.
As the COVID-19 pandemic and its effects evolve, we are monitoring our business
to ensure that our expenses are in line with expected cash generation. The
extent to which our results are affected by the COVID-19 pandemic will largely
depend on future developments which cannot be accurately predicted and are
uncertain, but the COVID-19 pandemic has had and will continue to have an
adverse effect on our business, operations, financial condition, results of
operations, and cash flows.
Critical Accounting Estimates
We prepare our unaudited condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP"), which requires management to make estimates and assumptions
that affect the amounts of assets, liabilities, revenues and expenses recorded
in our financial statements. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carry values of assets and liabilities that are not readily apparent from
other sources.
These estimates may change as new events occur and additional information is
obtained. Actual results may differ from these estimates under different
assumptions and conditions.
There were changes in our critical accounting estimates during the third
quarter. In July 2022, we completed an assessment of the contract fulfillment
costs that give rise to an asset for residential contracts. We determined that
additional specifically identifiable costs related directly to residential
contracts can be capitalized, in accordance with Accounting Standards
Codification ("ASC") Section 340-40. The additional capitalized costs of
approximately $2,794 as of September 30, 2022, include the allocation of costs
that relate directly to the residential contracts. This change in estimate is an
update of the estimates previously disclosed in "Critical Accounting Policies"
and "Use of Estimates" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in our Annual Report. For the
three and nine months ended September 30, 2021, these related amounts were
immaterial.
22
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2021
CONSOLIDATED RESULTS
Revenue and Cost of Goods Sold
For the three months ended September 30, 2022, revenue increased to $40,713
compared to $31,220 for the same quarter in the prior year. Approximately 92% of
revenue was from installations for the residential markets, or $37,253, compared
to 79% of revenue, or $24,854, for the same quarter in the prior year. The
increase in residential revenue is a result of organic growth and the inclusion
of the Residential Solar segment (Solcius) revenue. Within the Residential Solar
segment, revenue from the direct salesforce accounted for approximately 24% of
revenue for the three months ended September 30, 2022, compared to approximately
4% in the prior year. Commercial and public works revenue was approximately 8%
of total revenue or $3,460, for the three months ended September 30, 2022,
compared to 21%, or $6,636 of revenue in the same period in the prior year. The
reduction is primarily driven by lower new orders in the preceding quarters.
Cost of goods sold for the three months ended September 30, 2022, was $21,204,
compared to $18,150 reported for the three months ended September 30, 2021. The
increase in cost of goods sold is primarily the result of increase in revenue
compared to the prior year period and inflationary pressures on material and
labor costs.
Gross profit was $19,509 for the three months ended September 30, 2022, compared
to $13,070 for the prior year period. The gross margin increased to 47.9% in the
third quarter of 2022, compared to 41.9% in the third quarter of 2021. The
margin percentage increase is the result of a higher mix of Residential Solar
projects as well as inflationary pressures on materials and labor. The change in
estimate for the capitalization of additional specifically identifiable costs
related directly to in-process residential installation contracts increased
gross profit by approximately $2,794 during the third quarter of 2022.
Selling and Marketing Expenses
For the three months ended September 30, 2022, our selling and marketing
expenses were $14,773, compared to $10,072 for the same three months in 2021. As
a percentage of revenue, selling and marketing expenses were 36.3% of revenue in
the third quarter of 2022, compared to 32.3% of revenue in the same period in
2021. The increased expenses in the current year period were largely related to
additional marketing spend for dealer commissions and investment in the
residential direct salesforce.
General and Administration Expenses
Total G&A expenses of $8,718 for the three months ended September 30, 2022
increased compared to $7,185 for the same period in the prior year. The G&A
expenses increased in the current year period due to investments in salaries and
related benefits to support the revenue growth of the business.
Stock-Based Compensation Expense
During the three months ended September 30, 2022, we incurred $364 in total
non-cash stock-based compensation expense, compared to $1,206 for the prior year
period. The year over year decrease in stock-based compensation is the result of
the vesting of the Solcius Acquisition related RSUs and stock options in April
2022. Partially offsetting the reduction in stock-based compensation expense is
the non-cash expenses for expanding RSU grants as part of the compensation
structure to a broader population of employees.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended September 30,
2022 was $1,232, including $176 recorded within cost of goods sold, compared to
$1,930, including $868 recorded within cost of goods sold for the prior year
period. Depreciation and amortization expenses decreased as a result of the
identified intangible asset for the acquired order backlog related to the
Solcius Acquisition having been fully amortized within the first nine months of
the transaction. The intangible assets are being amortized over the estimated
useful lives of the specific assets, which have original useful lives ranging
from nine months to ten years.
Other Income (Expense)
Other income was $9 for the three months ended September 30, 2022, compared to
an expense of $(5) for the same three month period in 2021. A gain of $65 was
recognized on the sale of surplus equipment during 2022. Interest expense for
the third quarter of 2022 was $50 compared to $10 for the same quarter in 2021.
The 2022 interest expense is primarily related to the ROU finance leased assets.
23
Net Loss
The net loss for the three months ended September 30, 2022 was $5,393, compared
to a net loss of $6,460 for the three months ended September 30, 2021.
RESIDENTIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
Three Months Ended
September 30,
2022 2021
Net Total Originations (Watts in thousands) 15,249 11,101
Installation (Watts in thousands)
8,703 5,805
Average Project Size Installed (Watts) 6,689 6,072
Revenue $ 36,659 $ 23,379
Gross Margin 53.2 % 52.9 %
Operating (Loss) $ (328 ) $ (3,259 )
Operating (Loss) % (0.9 )% (13.9 )%
COMMERCIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
Three Months Ended
September 30,
2022 2021
Net Total Orders $ 8,193 $ 5,841
Revenue $ 4,054 $ 7,841
Gross Margin 0.0 % 16.1 %
Operating (Loss) $ (1,898 ) $ (1,037 )
Operating (Loss) % (46.8 )% (13.2 )%
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2021
CONSOLIDATED RESULTS
Revenue and Cost of Goods Sold
For the nine months ended September 30, 2022, revenue was $108,306 compared to
$69,480 for the nine months ended September 30, 2021. Approximately 90% of
revenue in the first nine months of 2022 was from installations for the
residential markets at $97,416, compared to 73% of revenue or $51,044 for the
same period in the prior year. Residential Solar segment revenue increased as a
result of the full period inclusion of the Solcius Acquisition, which was
completed in April 2021 and the expansion of our direct sales force and growth
across the traditional dealer channel. Commercial Solar Energy segment revenue
was 10% of total revenue, or $10,890, for the first nine months of 2022,
compared to 27%, or $18,436, of revenue in the same period of the prior year.
The reduction was primarily driven by lower new orders in the preceding
quarters.
Cost of goods sold for the nine months ended September 30, 2022 was $59,030, or
54.5% of revenue, compared to $42,348, or 60.9% of revenue, reported for the
nine months ended September 30, 2021.
Gross profit was $49,276 for the nine months ended September 30, 2022. This
compares to $27,132 of gross profit for the same period of the prior year. Gross
margin improved to 45.5% in the first nine months of 2022 compared to 39.1% in
the same nine-month period of 2021. The gross margin improvement in the current
year period is predominantly driven by a mix of higher margin residential
revenue, partially offset by inflationary pressures on materials and labor. The
change in estimate for the capitalization of an additional specifically
identifiable costs related directly to in-process residential installation
contracts increased gross profit by approximately $2,794 for the nine months
ended September 30, 2022.
24
Revenue and gross profit in the nine months ended September 30, 2022 were
positively impacted by the Solcius Acquisition. In contrast, the prior year
Solcius results were only included from the April 8, 2021 acquisition date
through the end of the third quarter of 2021.
Selling and Marketing Expenses
For the nine months ended September 30, 2022, our selling and marketing expenses
were $41,320, compared to $21,468 for the nine months ended September 30, 2021.
As a percentage of revenue, selling and marketing expenses were 38.2% of the
first nine months revenue in 2022, compared to 30.9% of revenue in the same
period of 2021. Selling and marketing expenses increased in the current year
period as a result of higher residential revenue, as the residential business
model focuses on lead generation and effective interaction with third-party
sales organizations.
General and Administrative Expenses
Total G&A expenses for the nine months ended September 30, 2022 was $24,025,
compared to $17,081 for the nine months ended September 30, 2021. The G&A
expenses increased from the prior year period as a result of the Solcius
Acquisition, which was completed in April 2021, and increases in salaries and
benefits in support of the revenue growth.
Stock-Based Compensation Expense
During the nine months ended September 30, 2022, we incurred $2,019 in total
non-cash stock-based compensation expense, compared to $2,470 for the same
period in the prior year. The year over year decrease in stock-based
compensation is the result of the vesting of the Solcius Acquisition related
RSUs and stock options granted in April 2022. Partially offsetting the reduction
in stock-based compensation expense is the non-cash expense for expanding RSU
grants as part of the compensation structure to a broader population of
employees.
Depreciation and Amortization Expenses
Depreciation and amortization expense for the nine months ended September 30,
2022 was $3,827, including $650 recorded in cost of goods sold compared to
$3,900, including $1,740 recorded in cost of goods sold for the same period in
the prior year. Depreciation and amortization expenses decreased in the current
year period as a result of a portion of the $15,600 of identified intangible
assets of Solcius being amortized within the first nine months since the closing
of the Solcius Acquisition in April 2021. The total $15,600 balance of
intangible assets is being amortized over the estimated useful lives of the
specific assets. The estimated useful lives range from nine months to ten years.
Other Income (Expense)
Other income was $174 for the nine months ended September 30, 2022, compared to
$2,907 for the same period in 2021. Other income in the 2022 period was the
result of equipment sales, most of which were fully depreciated. Other income in
the prior year period was primarily the result of the June 2021 forgiveness of
the PPP loan of $2,847 and $34 of accrued loan interest. Interest expense is
primarily for interest on finance leases. Interest expense for the nine months
ended September 30, 2022, was $115, compared to $40 during the nine months ended
September 30, 2021.
Income Tax Expense
Income tax expense was $94 for the nine months ended September 30, 2022,
compared to no income tax expense in the prior year period. The income tax
expense in the current period is attributable to the Texas margin tax related to
our Texas based operations, which we acquired as a result of the Solcius
Acquisition in April 2021.
Net Loss
The net loss for the nine months ended September 30, 2022 was $21,185. The net
loss for the nine months ended September 30, 2021 was $13,140.
RESIDENTIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
Nine Months Ended
September 30,
2022 2021
Net Total Originations (Watts in thousands) 43,927 29,702
Installation (Watts in thousands)
23,003 17,766
Average Project Size Installed (Watts) 6,552 6,051
Revenue $ 95,570 $ 46,191
Gross Margin 50.1 % 54.1 %
Operating (Loss) $ (7,868 ) $ (4,424 )
Operating (Loss) % (8.2 )% (9.6 )%
COMMERCIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
Nine Months Ended
September 30,
2022 2021
Net Total Orders $ 34,737 $ 3,720
Revenue $ 12,737 $ 23,289
Gross Margin 10.6 % 13.8 %
Operating (Loss) $ (5,462 ) $ (4,579 )
Operating (Loss) % (42.9 )% (19.7 )%
25
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
We had $14,273 in unrestricted cash at September 30, 2022, as compared to
$19,719 at December 31, 2021. We believe that our existing cash and cash
equivalents is sufficient to meet our operating cash requirements and strategic
objectives for growth for at least the next year. To satisfy our capital
requirements, including acquisitions and ongoing operations, 12 months and
longer into the future, we will likely seek to raise additional financing
through debt and equity financings.
On January 27, 2021, the Company filed a Registration Statement on Form S-3
(File No. 333-252475) (the "2021 Registration Statement"), with the SEC. The
2021 Registration Statement allows the Company to offer and sell, from time to
time in one or more offerings, any combination of common stock, preferred stock,
warrants, or units having an aggregate initial offering price not to exceed
$100,000. The 2021 Registration Statement was declared effective by the SEC on
February 3, 2021. From January 1, 2022 through the date of this filing we sold
5,754,161 shares with gross proceeds of approximately $17,500 under the 2021
Registration Statement. Approximately $19,400 of the $100,000 total is available
for future offerings pursuant to the 2021 Registration Statement.
On June 1, 2022, the Company filed a Registration Statement on Form S-3 (File
No. 333-265336) (the "2022 Registration Statement"), with the SEC. The 2022
Registration Statement allows the Company to offer and sell, from time to time
in one or more offerings, any combination of common stock, preferred stock,
warrants, or units having an aggregate initial offering price not to exceed
$75,000. The 2022 Registration Statement was declared effective by the SEC on
August 5, 2022. No shares have been sold under the 2022 Registration Statement.
As of September 30, 2022, our working capital surplus was $29,830, compared to a
working capital surplus of $28,736 at December 31, 2021.
During the nine months ended September 30, 2022, we used $22,102 of cash in
operating activities, compared to $25,331 used in operating activities for the
nine months ended September 30, 2021. The cash used in operating activities
during the current year period was primarily the result of the current year net
loss combined with investments in working capital to secure solar panel and
inverter inventory to support growth and minimize the impacts of supply chain
disruption.
Net cash used in investing activities totaled $121 for the nine months ended
September 30, 2022 and was primarily used for the acquisition of vehicles and
equipment. The cash used in investing activities for the same period in 2021
totaled $51,093 as a result of the purchase of Solcius, which required net cash
of $50,619, and the purchase of vehicles, property and equipment.
Net cash provided by financing activities during the nine months ended September
30, 2022, was $16,702 primarily due to net proceeds from sales of our common
stock during the first nine months of the current year.
Net cash provided by financing activities during the nine months ended September
30, 2021 was $48,652. Net cash was provided primarily by financing activities
includes the net proceeds of $48,858 from sales of our common stock.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, revenues, results of
operations, liquidity, or capital expenditures.
© Edgar Online, source Glimpses
SUNWORKS, INC. 
