Complete Solaria Q4 2023 & Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 5 speakers on the call.

Operator

Good afternoon. And welcome to the Complete Solaria's earnings call. My name is Brian Wibbles, and I am the Chief Operating Officer for Complete Solaria. Joining me here today is TJ Rogers, Chief Executive Officer of Complete Solaria. We will be presenting the company's recent financial and presentation will be followed by a question and answer session.

Operator

A few quick reminders before we start. First, today's call is being webcast. A link to the webcast can be found along with our press release on our Investors section of our company website at www. Completesolaria.com. 2nd, during this call, we will be making forward looking statements based on current expectations.

Operator

Actual results may differ due to factors noted in the press release and in our periodic SEC filings. We will reference some non GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today's release on our website. Last, questions can be submitted anytime during the call using the question submission box found on your screen. And with that, I will turn it over to TJ Rodgers.

Speaker 1

Thanks, Brian. First of all, let me introduce people going, starting with you. This is, as he said, Brian Wuebbles, who's our COO. He is actually our CFO as well. He is, will hire to replace him.

Speaker 1

And since Brian is moving up in the company, I'd like him to introduce himself to you.

Operator

Yeah. Thanks, TJ. And just a little bit about myself. I joined the company about a year ago as the CFO, as TJ mentioned. I started my life out as an engineer.

Operator

I have a mechanical engineering degree from the University of Illinois. I've also got my MBA. Before I joined Complete Solaria, I was with a multinational company and I was the president of the control and elevator division of that business and that company was called NEDEC. Before I joined Nidec, I'd actually spent some time in solar, quite a bit of time actually, at GCL running their US finance operations. And before that I was with almost 10 years with MEMC Electronic Materials and SunEdison where I last with various operating and finance roles.

Operator

And then prior to my experience in solar, which was about 10 plus years, I spent my career where I worked in operations and finance, with the general my career where I worked in operations and finance with the General Electric Company under Jack Welch's leadership, so I'm super excited to be here I'm, you know, like I said I've been on the long road in the last year getting the company public and I think what's really exciting about where we're at right now as the company is I can come in and provide some stability. I can also help the company move to the next level in quality delivery and cycle time which TJ is going to talk about today. So I'm super excited to be part of this transformation and work closely with TJ as our new CEO. So I'll turn it back to you, TJ.

Speaker 1

Next is Will Anderson. I've introduced him before. Will is the founder of Complete Solaria 12 years, 13. Will is still probably our best engineer. In the software side.

Speaker 1

Great. And he and he is the guy we go to to solve problems. I'll talk about stock grants today and how he helped us out. I'll wait till I get there. Last one is, Siddarth Madhav.

Speaker 1

Siddarth is from INA. INA is a company that spun out of McKinsey. McKinsey, the famous McKinsey that we all know. The most highly known McKinsey group was Palo Alto. That group came to my company and helped me.

Speaker 1

When I went to end phase for a turnaround effort, I hired rehired the same group because they did been very, did a lot for me at Cyprus. And Sid was the project leader for the Enphase turnaround. I think that one's pretty famous. That's the one that went from, I don't know, $115 a day. And when I came in, they were $0.92 And they were big enough that the turnaround isn't me coming on the table.

Speaker 1

The turnaround is 15 guys working for a year to get a lot of stuff fixed. And that's, that is the level of work we're doing right now at Complete Solaria. Sudarth, you got to?

Speaker 2

Thank you, T. J. As T. J. Said, my name is Sundar Ramatil.

Speaker 2

I help with the team that is supporting complete delay in its but we're already seeing early results. And it's a privilege for me and the team to work with T. J. And his team on this effort. Okay.

Speaker 1

So let's get on with the quarter report. First of all, we did our first 10 ks this year and that thing didn't get ready till almost the end of the Q1. So we decided to put the Q1 report in the 2023 Q4 report together. By the time, of course, you get to the Q1, that's all you care about and you want to know about the Q2. So that's really what we're going to talk about today.

Speaker 1

Okay. Press release. I wrote this myself, so I picked the title that I thought would tell you the most important thing that happened and that is we're to be self funded in the quarter we're in right now. TJ won't be any more checks. That's even more important for me.

Speaker 1

And that's a lot of work and I'll show you what that is. The bullets. First, talk about revenue. Our Q1 revenue was $10,000,000 half of the prior quarter. We got cut in half 1 quarter, even though our backlog was $17,800,000 The revenue drop is due to a shortage of working capital.

Speaker 1

We can't buy panels the revenue drop is due to a shortage of working capital. We can't buy panels to put on people's roofs, therefore we can't charge them and get our revenue. And that's where we are right now and that's we're running just super lean on capital. The working capital crunch is due to an unresolved loan situation with 1 of our private equity funding firms, Carlyle. And our revenue in the Q2, we already had a very lean April, will also be limited and depending upon whether or not I get a few $100,000 is all I need.

Speaker 1

Maybe I'll do crowdfunding. A few $100,000 we'll be we can be on the high end of that. Okay. Our gross margin was 24%. That is not our our target.

Speaker 1

Our target is over 40%. But with, dollars 10,000,000 in revenue, that was pretty good. And we've got a forecast to break the 30% mark in Q2, again with the low revenue hanging over it. Headcount and employees, we now are down to 109 employees. We started last June with 428.

Speaker 1

That's almost exactly 3 out of every 4. Pretty tough layoff. Tougher than I've ever been involved in before. And, the team handled it well. I'll show the way Silicon Valley works.

Speaker 1

This company did not work that way and we now have given out options. I'll talk about that. Our OpEx is now $5,500,000 That's down from $12,900,000 a year ago quarter. We're forecasting next quarter we've got some cuts we've already made to get to $3,600,000 So that's almost a factor 3 down in OpEx. And in terms of OpEx, we're about where we want to be.

Speaker 1

Sales commissions, the way our industry works, for those of you who don't know it, is that you typically buy your orders if you don't have a sales force and an order costs you 33, 34 percent of sales. And you pay for that, a lot of it upfront and the order fallout rate is something in the order of 30%. So a lot of times you pay and then the order doesn't happen. The guy that changes his mind, whatever. So this is, if you want to ask, the weakest part of our profit and loss statement right now.

Speaker 1

Is getting control of these orders. And by the way, last quarter, we dropped from 38%, which is higher than the industry, to 1%, which is better than the industry, specifically from having worked on this problem, but we've got farther to go. Accurate cash flow capability, this is going to last us up 2 through the second quarter. So I put 2 July 24 here. We'll need more money at that time, but we're not voracious for money.

Speaker 1

We're running close to cash flow breakeven. Here are the finances from the report. And by the way, that report, if you go there, is this where they go to get the report? Okay. You go to this and this report is available.

Speaker 1

This is a report for Q4 of 'twenty three and Q1 of 'twenty four. So you can see the Cash Crunch has taken our revenue down dramatically. We do have and I'll even show you our orders. Okay, story number 1 is normally if your revenue gets cut in half and the quarter is over. And the fact is our losses which were 12,000,000 last quarter went to 6, so we actually cut our losses in half, meaning our cost cutting effort offset a massive revenue decline and we actually cut our losses at the same time and of course that projects forward, I'll come to that later.

Speaker 1

There is the last, we hope, $5,000,000 and you can see our funding, what's required, you know, your cash balance is kind of an artificial thing with your operating income and what's got to fill in from funding. And as you can see, our funding has been dropping dramatically in this quarter, which I've have not forecast is 0. Second thing I want to talk about is gross margin. In the last quarter, even with $10,000,000 we had 24% gross margin. And we have a whole team working on gross margin.

Speaker 1

And we're very actually proud that we got hammered this badly. If you look in the year ago quarter, we had 2.5x more revenue and the same gross margin. So all that came out of cost. And we're proud of that. And that's been painful.

Speaker 1

It's just not been an easy road. Okay, we changed. I became A WEEK OR SO AGO THE CEO. We Our CEO, CHRIS LONDEL, IS FROM SALT LAKE. HE was our man in the corner.

Speaker 1

He was the steward of the place. Right now, we need so I was kind of like a driving force. Now, we need to raise some money and we need to do some M and A. And I've done a lot of those in my career. When I was CEO of Cyprus, I acquired 26 Companies in 34 years.

Speaker 1

So I even have a spec for it. What a surprise. Roger's objective as CEO and there's really 2 points. About a month ago, I said I am not willing to work for Carlyle for free anymore. In fact, I'm not willing to work for Carlyle at ALL.

Speaker 1

THAT'S STILL TRUE. THAT'S GOT TO GET RESOLVED IF WE'RE GOING TO GO FORWARD. AND THEN, WHEN BECOMING 76. All this stuff happened literally when I take one vacation a year and go sit on the beach in Mexico and read the book I didn't have time to read. And I got the call down in Mexico, more like 20 of them in one day.

Speaker 1

And, so I took over and therefore, I want a well defined endpoint. This is not this is not career 2 for me. And we're going to have 1 of 2 things happen. We're going to have success. And I'll define that and it's vague right now.

Speaker 1

I'll quantify it later. When we're on solid economic footing, that means we got a bank account and we're not rationing capital and telling stories like that. And growing rapidly, meaning we're taking off from that revenue trough and in a solar world, it's not that great right now. We're recovering back to old revenue. We've routinely had revenue in the low 20s to the low 30s of 1,000,000 of dollars per quarter in the past.

Speaker 1

The failure point is when I believe market. Being successful. I'm not willing to waste my time. I am willing to walk off of my own investment. We already introduced you to Brian, so I won't do that.

Speaker 1

He's our COO. During the quarter, we reorganized in the product lines. When I ran a chip company, in my industry, you ran it with product lines. And the Studs in the semiconductor company were the 7 product line managers who all made silicon things, but there were different shifts made differently for different customers and they really were different businesses. And we've divided into product lines, one for California, one for rest of U.

Speaker 1

S. And that means for us now, Texas and the East Coast, Connecticut, New York and one for Starbucks and other new homes we have. People don't know much about Starbucks, but it's a pretty interesting opportunity. We've already upgraded 33 of their outlets and we got another 42 contracts. So here's a Starbucks solar awning.

Speaker 1

A lot of panels up there, 50,000 way down, because it produces a lot of power. Okay. Headcount. So I shown this graph before, number of employees starting at 428 back in June of last year and then the ride and we got to the last riff took us down to 109. And like I said, I've never been through it before.

Speaker 1

The companies I've worked for or have run, typically if you do a 5% layoff, you get screaming and crying. If you do a 10% layoff, And our riff number 1. It it was, difficult. And then I'll I'll show you you notice this this climb here. I'll talk about that in a minute.

Speaker 1

When you get to 109 people, then the math, even for a 10,000,000 quarter. For 109 employees, the math works out to be $367,000 per employee per year. That's right even a little bit better than Sunrun, Sunnova and SunPower with only $10,000,000 a quarter per revenue. So the point is, there's a huge amount of leverage in our company for dropping through orders. We have a lean and efficient company.

Speaker 1

We've had just a quarter ago or 2 quarters ago, dollars 24,000,000 quarter. That number starts to approach $1,000,000 and any company that has $1,000,000 per employee per year is a viable company in any industry. Here, I told you we laid off and then we had the backsliding. It's classic. I have a system called the rec auction that is requisition as an employment requisition to hire somebody.

Speaker 1

All companies typically have 100 of these and they are the giant giant waste of time in a big game. And I managed to get rid of them at Cyprus and the way they work is simple. There are no now the stasis in headcount. You can go up and down by adding and subtracting Rex from the mix. But let's suppose you're trying to hold headcount.

Speaker 1

Then, you have you have you get a weekly report exactly who left. Of course, it's denominated in dollars, so you're dealing this this is done in dollars when I'm gonna, for sake of explanation, talk about heads. So you go to your staff meeting, the president runs it, and the VP of HR comes in and says, Mary Jane in marketing quit last week. Then you got one wreck. And then the question is, what do you do with it?

Speaker 1

It's a very valuable asset. This builds up the mentality. People are valuable asset, and you don't waste them, and you don't have extra ones. So you go the room and each VP argues why he or she wants such and such a person. What I loved about it was it used to be 9 VPs against TJ.

Speaker 1

And I would argue your efficiency isn't that good. You should get more per person per week out of that or you know, you should be able to sign a chip with so many people. I was always on the end of one argument on the wrong side of it. In the new method, the wreck gets thrown on a piece of the table, you know, meat flies onto the boardroom table, and then the VP's start talking about why the person they want is most important. And they also learned, don't try to get 18 racks, don't hire a recruiting firm, find the one turned I didn't have it, and I saw the classic backward drift.

Speaker 1

Here, I turned it on, and in this case, we had it turned on with less than one to one replacement and as you can see, even though we were really lean, we were drifting downward at a new record low level. That's the rec auction. So, I actually filmed a staff meeting and the VP of VP of HR came in and did say Mary Jane in marketing left. And then we decided who would get that. By the way, the way the system works, think about it, your attrition, the people that don't want to be there, maybe not that productive.

Speaker 1

You can rehire if that is an important position, but it's very unlikely that somebody who quits is gonna be more important than the most important person to hire in the corporation. And that's what you get. So you have this turnover and you you less important people go away and key people get hired. And after you do that for a year, it changes your company. And by the way, this is very scalable.

Speaker 1

Think about a 1,000 person company. They got a 5% turnover. That's 50 people a year. Okay? And 5% turnover is moderate or even a little bit low.

Speaker 1

Well, 50 people a year is 1 person a week. So the rec auction means every week VP walks in, HR and says, we can hire one person. Maybe 2, maybe 0. And then you have the argument, then you hire the person. And a year later, you have 50 people that the consensus of the executives are key people and you don't have 50 other people whose names you maybe even can't remember anymore.

Speaker 1

That's how it works. Now I wanna show it to you in action, and this was truly Mary Jane in marketing quitting, and then we're trying to decide who gets it. I didn't bring I was gonna bring in my hat today. I forgot it. So there's the REC auction in action.

Speaker 1

By the way, that system I just described comes out of a book I wrote in 1992. And that book was the story of building a semiconductor company from 1982 when I the business plan in my living room Cypress Semiconductor to getting it to $100,000,000 in revenue. It was all the things you had to do to build a company. And it's systems for hiring, systems for giving raises, giving out stock, measuring efficiency, specking and bringing to market on time, new products, etcetera. And each time back in those days, we had no tools, right?

Speaker 1

And we didn't have IT departments, which really isn't that bad. Okay? And and we ended up having to use the tools we had. Word, in that time was WordPerfect, Excel, and that time was Lotus 123 and and the other and PowerPoint. And that's what she had run a company with and he had to run a chip company, so it was not an easy company to run.

Speaker 1

So at age 10, I worked on writing all those systems down. And what's interesting, the book didn't sell very well. The reason I have a picture of one to show you here with a brand new clean cover on it is that, I have several cases of them in my study. But it turns out, this book is exactly right for where these guys are. They don't have a lot of money, they don't have an effective IT department, and they need to build a company and investors don't care about any of that.

Speaker 1

Okay. Fab. So we call the area where we make new systems, solar systems through people's houses, a fab because of my background. It is a virtual fab in that there are no physical objects working through it. But if you look at a fab in semiconductors, you got a box that's got wafers in it, bunny suits, and the boxes move through the fab from step to step.

Speaker 1

Typically, you have something like 35 or 40 masking steps and each masking step has 2 or 3 operations, so you have something like 100 operations. Our fab has 42 steps and we've documented it semiconductor style. So each step has got a spec and it's not perfect yet, but as every time we mess up something, we make that speck a little bit better. And we are getting better and the numbers will and I'll show you in a minute. Okay.

Speaker 1

So this is jobs jobs and so the our fab, we used to have things back in the non computer days called lot travelers. So they'd move the silicon and the operator come in, they'd mark the step they're at, they'd mark the machine number, they'd mark the lot number, they'd go and do the operation on the machine, pulling up the recipe that they were supposed to. There'd be an output measurement thickness of a layer and they'd mark that down. And then that lot traveler would move through along and at the end of the line you'd have a record and that also is computerized on a silicon lot so you can start doing yield analysis and cycle time measurement and stuff you got to do to make a fab run right. So we exactly have a fab, only we have the lot traveler and the things that move around in the world are out in Texas or Southern California.

Speaker 1

So we treat it like a fab and we think about it like a fab. Okay. I'm now looking at the number of jobs in the fab and that's 2000, 4000 and this is back in January 23 and everybody in the company tells me those are the good old days. So we started out saying 2,000 is what we can handle. 2,000 is what we can handle and not screw it up.

Speaker 1

And what screws you up, of course, is each job has its own special problems. Like the city won't give you a permit because the person has an unpermitted structure and they'll shut you down for that. That's illegal in California, but legal everywhere else. Or the financing got done and and then the the the dating on the financing expired and the financing expired. Now you got to go get refinanced, etcetera.

Speaker 1

I can name a 100 of them and these are the defects that pile up and when you have a lot of jobs in the fab, those defects end up being pretty important and they slow you down and that's what happened here. So here, you see this is when I came in. June 23 and their inventory was big. I did a for fab guys, it's called back envelope analysis on the inventory and I said you guys have bloated inventory. So then I said, you know, you got to cut down on the inventory.

Speaker 1

And then they said, no. We're not going to do that in the standard way. Ignore me and then go off and do what they want. So we went a little bit longer and when we got to that point, I send out the memo, no new jobs are to go in our fab. None.

Speaker 1

But that means we're going to turn orders. Yep. But, if we don't have orders, we might not have revenue. Yep. And if we don't have revenue, we might die.

Speaker 1

And I go, Bingo! So you better get the problem fixed, don't you think? And that kind of shutting on authority is often used in the real world in manufacturing, where when you screw something up, it's not a recoverable error getting another permit. It's an irrecoverable error, ruining a wafer that never will produce revenue. So there we shut her down.

Speaker 1

When did we turn it back on? I I should've put that in here.

Speaker 3

November.

Speaker 1

Okay, so I didn't really hang in there too long. I turned it back. We had this drop. I remember this drop here and I turned it back on. But that broke the problem and then the inventory came back and the news today is we now have 2,000 lots in the line.

Speaker 1

And so I have the shutdown. Now what's interesting is when we started, our cycle time was 112 days. We managed to hold that cycle time. That's way too slow, just FYI. And this is cycle time from order to install, complete.

Speaker 1

We managed to hold it, but it's not good enough and you can't react quickly enough to problems. You can't flush your line, you can't take advantages of new orders if you're that slow. So we started working on cycle time and cycle time primarily is getting rid of quality defects. And that that in the semiconductor is called 1st pass yield. You want something to go to a step, go through the step, get it done right the first time and move on and do all that in a fraction of a day.

Speaker 1

Today, and by the way, we have a couple of semiconductor experts that are helping us on this problem in the line. And their work, which is primarily quality, has brought our cycle time down to the 34 to 40 day. Meaning, when you're here, you can do 2a half cycles per year. So you can make 2,000 times 2a half lots per year. Here, let's say, let me use 34, it's a month, you can do 12 cycles a year.

Speaker 1

So you can do 24,000 a year. So you're getting more out of the same fab. It's a very powerful effect. And that's where we are today. And if I had to name one thing that changed the company, it's that.

Speaker 1

Now the other point is, this is our target and let's take that as a given. I'm gonna suggest it's not good fab like this, you're taking money and you think about roofing a guy's house with $100 bills and they stay there for months. And then you do another one and another one and another one and then you run out of money and you borrow some money and that was the problem. And of course, what we've done now is we've taken that money back out or the fraction of it that was still left, you lose some and we're down here. I did a calculation today and it's again back of the envelope, but it's not far from wrong.

Speaker 1

And within a week, it'll be a paper on exactly what we have to do by our consultants. I think we should have 1,000 jobs instead of 2,000. I think we could maintain our revenue of half the WIP, half the money in WIP. WIP work in process. So that is is what, we're that's the next step here now that we've had a nice move to where we are.

Speaker 1

And by the way, I think this, these number of days can drop some more as well. Okay. Well, given that tech talk, I know I'm for many of you, I'm speaking boring stuff. Let me talk about cash flow breakeven to our 25,000,000 quarterly revenue, that's a $100,000,000 run rate, and I'd be happy as heck right now to have a 100,000,000 dollars profitable solar company, and it's very doable. We're gonna need about 11.5 more $1,000,000 of working capital.

Speaker 1

Even with fast cycle time, you do have to have stuff you buy and put on their roof and you're holding, you're paying for it until you turn it on and then they get the money from the finance company and start paying and pay you back. Another thing being cash shy, we've piled up $13,000,000 of accounts payable. Some of it's not okay. Like the lawyer who checked this pitch today for accuracy, so I didn't mislead anybody. We owe him money, 1,000,000.

Speaker 1

And and, he did it because he likes us and he's trying to help us. But we've got there. So there between those two things, there's $25,000,000 In my career, I've raised 1,000,000,000 of dollars. I've had single offerings that were, in the old days, right? This is back, but even then, I would have $600,000,000 offering.

Speaker 1

So this offering is not a big deal. Problem is, if you have somebody who's saying you're in default of your covenants and we can call it and then you call her bluff and say great, come on in, run the company, here's the keys for the front door. Then of course they go, well, you know, we'll let you work on it for a while. Hence, my statement I made before. We've got to get past that because nobody's gonna let us bar nobody's gonna, give us money in an offering with the hammer hanging over our head and that's where we are right now.

Speaker 1

So, we need Carlyle and Clineal to agree to a debt to equity swap. And they made profit on us on the debt, significant because the debt's high coupon debt. They can roll the whole thing over into equity and I'll make money for the shareholders if I'm still around and this company is still alive. I am quite convinced we can make money for shareholders. Now, this this I wrote this data last night.

Speaker 1

I wrote this thing last night and 8 minutes after I got it done. The lawyers called me up and said Klein Hill. We got a deal with Klein Hill. That's one of the 2 equity firms. They invest in complete with a debt for equity swap.

Speaker 1

So the deal was 9,800,000 shares that's 19.9 percent. The largest amount the board can authorize without a shareholder vote, in return for all of their debt. And they also, got are gonna buy 3,700,000 shares of Complete Sol Area. So obviously, I was overjoyed on that. I have Mike Beagle here.

Speaker 1

This is going to be ugly. He's on a cell phone. He's the president of Klein Hill. He's in New York. And Mike, I apologize in advance for all the bad things I said and will say in this talk about New York.

Speaker 1

But why did you do it? And thank you very much.

Speaker 4

Hey, TJ, first of all, thank you so much for including me on this call. I'm very excited about everything that you're doing, everything going out of the company. For those who don't know Client Hope Partners, we are a 4,000,000,000 dollars diversified secondary fund. We typically provide liquidity to investors in private assets, and we only get directly involved in companies when we see there's a huge potential upside. And we're super excited about everything going on in Complete Solaria.

Speaker 4

And it's like three things. It's the Complete Solaria platform, the technology, everything going on at the company, the management team led by TJ, and we're excited about the unlocked cap table. I'll talk about it a little in a second. So with regards to the company, you know, that solar space is huge and expected to grow substantially over the years. And we see their technology and what they can offer to the residential market throughout the U.

Speaker 4

S. As being a very compelling offering with substantial upside. And it's a huge opportunity. And right now, complete Solaria is very small, so there's a huge amount of upside there. 2nd is the management team led by TJ.

Speaker 4

And the thing there is he's a guy and they're a team that can execute on a huge amount of growth. And obviously everybody knows TJ has been like very successful. He's been fantastic to work with. Same thing with like a very high level of quality across the whole management team. And then the last part where clientele is coming in a little bit right now, so what we're very excited about is unlocking the capital structure.

Speaker 4

And so that has been a little bit of a noose around the neck of the company, and that probably has been the number one thing holding the company back over the recent past. And we're very excited to convert our debt into equity because we see a lot more upside on the equity from an equity standpoint as we and Carlisle looking to do this jointly together. So we would be doing this as and when Carlisle is also agreeing to come alongside with us on this and they're reasonable, very smart investors. So we're really expecting that to be coming out shortly as well. And so it's a tremendous opportunity for investors.

Speaker 4

And so if you just like stand back again, it's like complete Solaria, industry leading company, amazing platform, tons of room to grow into the industry. I'm structure will wipe out this massive entire layer of debt, free the company up to be much more nimble. And in addition to converting to that, we're also excited to be putting capital

Speaker 1

night. Haven't gotten the news. I had to figure out what to say. That was true. About about Klein Hill.

Speaker 1

I I won't claim victory yet, but we have a different company than 9 months ago. Our fab is doing a lot better right now. We've had a vigorous but painful reorganization. We don't need any funding until July. And I had this in last night.

Speaker 1

We have come to terms with 2 private equity groups and I put this one in. We got one left and if we get that, then the we can go raise money based on merits. And my last point was last night, if we survive and my last point was last night, if we survive, our newly lean and fit company can become profitable and grow. So that oh, yep. That's for a question in case you ask it.

Speaker 1

That's it. We, like to take questions. They're electronic, texting kind of things.

Operator

Thank you, TJ. And thanks everyone for joining the call. We're going to now move into the Q and A section. So if you have any questions, you can go on the link that's on the webcast and you can type your question in directly what is the most logical way for the company to solve the working capital problem and return to the $100,000,000 annual run rate.

Speaker 1

I'd have to ask other questions. If that happens in a way that I let me tell you something. Our contracts with with one is 55 pages long. I can't go to the bathroom without calling New York. That ain't gonna happen.

Speaker 1

So answer number 1 is if that structure, and I used the word knee in my neck in a prior communication, stays in place, I'm gone and I don't think the company is going to make it. Maybe it will. You know, Carlyle is a big company. They've got a lot of solar companies. Maybe they a hot dog that wants to come in, get a lot of socket at less than a buck and that would be fine with me and I do everything in my power to help the guy out because after I got a bunch of money in the company.

Speaker 1

It's not in my interest to do anything negative. The best way is the debt for equity swap, assuming you can agree. That's a big assumption. But we'll talk. What I've got to be able to do is run the company.

Speaker 1

Right now, I can't raise money with equity. I can't raise money with debt. I can't sell an asset unless I get written permission and the written permission always has a now therefore clause and then a few more pages. And can't work that way. That's got to end.

Speaker 1

Other than that, And we've I'll leave it there. We'll talk.

Operator

Yeah. Thanks, TJ. We got another question here. It says, Dear Complete Solaria Management. Under the assumption that the debt to equity swap with Carlyle complete soon, what would be approximate breakeven revenue?

Operator

And there's a second question as well. We'll go with the first one.

Speaker 1

All right. So I read that question when I 5 minutes before showtime here. And turns out we obviously ask that question to ourselves all the time. That's the question. So I'll give you this is a this is a large document and I picked out one page.

Speaker 1

And what it is, is 3 parameters that matter: commission percent, gross margin percent, and this is gross margin on the commissions is treated separately and then OpEx. And our OpEx is headed to 3,000,000 dollars next quarter, 3.6% and more less than 3% after that. So that's kind of a given. Then this table defines for a matrix of percentages, what is our breakeven revenue. So this says at 30% commission, we're currently 31 and 47% gross margin, our breakeven revenue is 16,600,000 and that breakeven revenue could be a lower gross margin and lower commission, lower gross margin and lower commission yet.

Speaker 1

It's quite possible if we work on getting an indigenous order creation effort in the company and we're paying for cost orders as opposed to the higher profit that we can get down to these levels. Right now, I just showed you 24%, 25% that is based on 10,000,000 dollars of revenue. We can see how to get into the forties, pretty well. So the answer to your question is somewhere between $90,000,000 $9,000,000 a quarter, and and the real numbers are here and $16,000,000 is achievable number within a couple of quarters. I don't know how long it's going to take to grow back from $10,000,000 I don't know how much damage has been done, but right now I know there's a robust market for solar.

Speaker 1

Let me I forgot to show you. Let me show you this. Okay. Is this is the graph I showed you. This is inventory and jobs and then it divides it out by where it is.

Speaker 1

So this is pre construction, think of orders. This is post construction orange and then up here is pending PTO, that's power turn on. So this is the systems in and it's, we've already been paid for it and we're waiting to turn it on. And this is a place where when you get in trouble, this bulks up. So you see the good old days turned into the not so good old days when that one bulked up.

Speaker 1

Okay. So, here's our order backlog that peaked up when we were getting orders and we couldn't and they went into a fab and didn't move. Or we couldn't put them in the fab because the fab was jammed. Notice what's happening here, they're piling up again and it's because we can't service them. So, I infer that this means there's business out there.

Speaker 1

Utilities are charging more and more. They're extremely inefficient businesses. People don't them, and all you gotta do is go put solar on their house and they'll appreciate it. And the faster you put it on, we keep tracking that promoter score, the faster you put it on, the more they like you. So the recipe is pretty simple.

Speaker 1

This little fab right here is complex and and it's kinda obvious, you know, you say, well, it's silicon fab. It's got equipment. It's got science and all that. This one's got 5 1,000 different sets of rules in it with a lot of people who really don't like you or solar. And you've got to somehow make it happen.

Speaker 1

And you've got to get funding for it in the 7% world. So this particular problem, although there's no big technology in it, from a company point of view, is a significant problem. By the way, any companies you see having survived this little GOAT downturn, I think we're getting near the end. I think we'll have a better summer. Those are good companies.

Speaker 1

Those are good companies that are well

Operator

So the next question comes from Thomas Merrick at Janney. Using the fab chart on Page 13, will you discuss the gross margin you realized over the past 12 months?

Speaker 1

Okay. We got a do we have FIN Form 1 here? We'll have to bring this out of our head. We obviously track that. What is the record for gross margin?

Speaker 3

49%.

Speaker 1

So the company in one time its life made 49%. That's how we chose a 47% gross margin. Right now, we're looking at operational issues and financing issues that don't get us into the 40s. We can see easily how to get in the 40s. There's also a tail wind in gross margin.

Speaker 1

China Inc. Has got this little problem. They use lave labor to make silicon and the world doesn't it and they shut them down. Then they move plants to to to Malaysia and Vietnam to circumvent the the shutdown and now there's a circumvention. So their panels can go to Europe, can't come to the United States.

Speaker 1

And there's been a dump of panels and the business is going down. There's been a dump of panels on the market. So, our costs are going to go down, at least for equipment costs. We also one of the things we're learning from INA is how to buy stuff. We're not very good at that.

Speaker 1

We kind of pay retail and we kind of do ad hoc purchasing. Sometimes we do purchasing on the way to the job. And obviously that's bad. So now we have a in Indianapolis, we've got a Rent A Purchasing Group that's PROs and we're going to start driving our costs down. So we've got quite a bit of room there to do better.

Speaker 1

I believe gross margin will get into the 40% range in a couple of quarters. We will go into the if you notice I fudged, you can always tell, let me go back here. You can always okay see gross margin was 24 despite higher revenue. Q4 forecast is 30%. That's because I don't know what my revenue is going to be.

Speaker 1

So that's a guard band in number on what we think we can do. So we think we can get into the mid 30s, but we don't know. And then the next step after that is we got to you have to get back a little volume. You have amortization of overhead the way you amortize opex to make operating income. You amortize manufacturing overhead and you've got a VP of manufacturing, you've got a plant, you've got all that, you amortize manufacturing overhead with revenue that comes through it.

Speaker 1

So we'll have a natural improvement in in gross margin just from running more stuff with the same group of people.

Operator

Thank you, TJ. The next question comes from Derek Soderberg at Cantor Fitzgerald. You guys we made some final cuts in the workforce here down to 109. Can you talk about the cadence of OpEx from here? Should we continue to expect OpEx around $3,600,000 per quarter?

Speaker 1

You CFO.

Operator

So I think T. J. Actually answered this question a little bit earlier. Right now, we're projecting $3,600,000 for this coming quarter, Q2. I think you saw from the breakeven chart kind of where we're headed.

Operator

We believe we need to get this business under 3 $1,000,000 of OpEx in order to be breakeven and at a efficiency level that we think makes sense. So that's our focus. And I think, you know, to give away a little bit of how much we've been focused on this, if you did notice on that

Speaker 1

breakeven chart that TJ said, that's version 4.

Operator

And I believe the first version 4. And I believe the first version that TJ shared was during our October call where we talked about the North Star plan version 1. Will gave some updates on it in December, and we were still on version 1. So we have really started to hone in and I want to just thank Siddarth and the team at for their help because they are helping us think differently every day about what's possible. So that's where we're headed.

Operator

Thanks Derick. The next question is, we'll throw this one out there, do you see a reverse split coming up to stay in compliance?

Speaker 1

Well, I got a letter from NASDAQ the other day and they said your stock's under a buck, been under a buck for 30 days and if you don't, what do they call it, cure. If you don't cure the problem, then you'll get traded on the pink sheets. So the answer to that would have been yes. I think the company will be clearly worth well north of a dollar shortly. And then the question is, how do you want to play THE GAME TO ME?

Speaker 1

I GIVE SOMEBODY THE DOLLAR AND HE GIVES ME 2.50 CENT PIECES. IT DOESN'T MATTER. I dollars A lot of people care about that. A lot of people like stock where they can buy 100,000 shares. So the fact is, if we're safely on the right side of NASDAQ, and employees like options like that, where they can see upsides, we'll probably not do a reverse split.

Speaker 1

It's a it's easily doable if we want to do it. It's another paragraph in the in the annual report. Right now, there's not a plan. Right now, we're going to earn our way back above dollar.

Operator

Yeah. Thank you, TJ. Next question comes from expect the cash generating or the free cash flow to be at that point?

Speaker 1

Answering that question makes me feel like a dinosaur brontosaurus and he's in Southern California at the Tar Pits and somebody says, why don't you put your foot in the tar? And the dinosaur goes, that's kind of sticky. And then he uses other foot to try to pull it out and then 50,000 years later, you find its bones. I don't know. It's hard for me to answer that question.

Speaker 1

You look at look at the issues today. Look at the statement if we survive I I haven't done those calculations. That's step after next. And we will those calculations. We're capable of doing it.

Operator

Thank you, TJ. Can you discuss the current retail economics for solar

Speaker 1

homeowners. Will, you want to do that?

Speaker 3

Yes. So the current economics rates increase all over the country. In California, they have been going up very rapidly. That is our biggest market. Texas, where retail energy is non regulated, rates have stayed down lower, but even there, it's going up.

Speaker 3

The cost of burning things in order to generate power continues to increase. And so that's really the competition for the solar industry is to compete against the retail cost of power coming from traditional sources. And in all of our markets, we beat the utility. And that gap is growing. As we continue to work on our cost basis and improve our margins, that gives us even more opportunity to that gives us even more opportunity to hold our prices and allow consumers to increase the benefit to them.

Speaker 3

So, it is typical that we will see our customers saving on a financed project 40% to 20%. And then if they're buying it outright, then their return on investment happens within 5 to 7 years.

Speaker 1

Let me take a shot at that one as well. And it's about the structure of the industry, which isn't very good, frankly. When I was at Stanford, I TOOK TWO Courses FROM WILLIAM SHOCKLEY, THE Nobel PRIZE WINNER ON transistor electronics. And in 1962, he and one of his students, a guy named Quesser, a paper based on quantum mechanics, on the theoretical efficiency of a solar cell made from silicon. And it turns out it's still true today.

Speaker 1

And the answer is 29.3 percent. That's it. And if you want to do more than that, you've got to start using more exotic materials, using layers of material to trap different colors of light. And I actually work with a couple companies that work on that stuff. Okay.

Speaker 1

That's big time science. I've always loved that. Guess what? It doesn't make a damn bit of difference today. Because in China, you've got a government that's decided they're going to own that market and they will drop to whatever price is required to own it and they currently own a a lot of it.

Speaker 1

I'm a free market capitalist, but suppose they attack me and they really kill me and they drop the price of panels to 0 and then I get all I want. Then all I have to do is install them and make money. It's not bad. So then if you look at the value chain and ask is there a free market, a true free market with competition in the value chain, the answer is not really. And the hardest point is to sell the solar.

Speaker 1

The kitchen table sell. To sell solar is the hardest point. And therefore, there are sales companies that know this and that's what they do for a living. And some of the stuff they do to, their customers isn't good. As a matter of fact, we just signed a it's a credo for the corporation.

Speaker 1

It's called the Golden Rule, Customer Golden Rule, and Ten Commandments. And it talks about ethical treatment of customers. And there's a lot of it in the sales there's a lot of it in the sales the incredible things that have happened, the guy who knocks on your door and knows how to talk his way in even if everything he says is not true is the limiting point in the solar chain. Therefore, that guy is king. So the industry is organized around that.

Speaker 1

So solar companies, EPC, Engineering Procurement and Construction Companies, which is what we are. We have a price called a red line. That, in effect, is our price. And then and that price is is, let's say $2.2 something per watt. And then anything that's above that is profit for the sales guy.

Speaker 1

And they can charge $6 and that's fine. They pay us 2, they get 6. So that's how the industry is segregated. So in America, the solar prices aren't what they could be. For example, it's a totally opposite in the semiconductor industry.

Speaker 1

Totally opposite. You know, today, honest to God, today you can buy a 1,000,000,000 transistors for a dollar. Okay? So I'm not used to that. I'm used to I'm used to cost cutting and competing head on in order to serve customers.

Speaker 1

Of course, in our case, they're the electronics companies who are some of the toughest buyers in the entire world. So retail pricing in the United States is looking like $30,000 And the same system in Europe because of, frankly, our government and the way it runs, the same system in Europe you can buy for a dollar a watt. And and they they get much cheaper and better. They don't they actually, believe it or not, in France, we're on freer markets for solar than we run here. So we've got structural and government problems and asking what the price is if, you know, you try harder, you advertise, you get a better technology, get your efficiency up, all the things you would think about doing, doesn't matter.

Speaker 1

It's some politician wanting to get elected that sets price and the guys that are willing to go to the edge of ethics to sell. And that's how the industry runs. So we specialize in the things we can do. We get excellent at them, and where we can do it better than anybody else, that's value added and that's where we are. Point 2: Where's value added?

Speaker 1

It used to be the calculation you buy a solar system and you pay so many dollars a watt and then you get so many kilowatt hours from the solar system. And like 1500 hours, kilowatt hours per year, per kilowatt in in California, for example. And then you save, therefore, pick a number, 20¢ a kilowatt hour times the number of kilowatt hours your system produces. And that's your savings. That means your utility bill goes down by that much.

Speaker 1

Then you add up the savings over the years with the appropriate interest rate and you have a payback time. And that payback time used to be 4, 5 years. The rules are called NIM, Net Energy Metering. NIM. And it used to be the utility served as a storage element for your solar system.

Speaker 1

So your solar system would put electricity the meter would run backwards and the solar system, the utility would do it. Well, now they're not willing to buy your power anymore. And in the United States, the power they buy back as opposed to their price, let's say, dollars 20 a watt a watt hour, kilowatt hour, is now 5¢ a kilowatt hour. So you can't do that calculation anymore. Fortunately, the utilities are creating another opportunity and that opportunity is for time shifting.

Speaker 1

So they kind of charge you, pick a number, dollars 20 a kilowatt hour during the day and then at 4 o'clock at night, they really screw you. And we're talking 60¢ a kilowatt hour. So, the new pitch for systems is buy a battery, and this is a big lithium ion battery, buy a battery. During the day, let your solar system charge the battery. In and at night, let the battery run your house.

Speaker 1

And then you design that system to have the right size battery to move the right number of kilowatt hours back and forth every day from the sun in the day to your house at night and you wipe out those side charges, then that ROI works today. And it's actually pretty good for us because batteries are lucrative to install and I happen to be a board member of Enphase and I happen to be an expert on batteries. And and, so we we have a collaboration with them. We're actually having a meeting with them in Salt Lake later this week. And so that's the opportunity to make money right now.

Speaker 1

So the point is the value proposition, you have to be nimble. You you have to be able to figure out what customers need and about backup. In Germany, you can't sell a backup system. You go to a guy and say, How'd you like a battery and if the power goes off, you know, keep your house running? And the guy goes, the power hasn't gone off in Germany in, like, the last 2 years.

Speaker 1

Why would I buy that? In the United States, if you're around PG and E, if you can pick up your phone, meaning the power's on, you know, you do you do have a problem there. So we are looking at new products and new partners all the time to try to keep a real time value proposition in front of customers because they are homeowners, they don't have a lot of money, and you really do have to and they're not that dumb. They really want to see a return on investment and we provide them an honest one. That's one of our 10 commandments, a completely honest return on investment.

Speaker 1

And there are there are times when you do an ROI and the numbers are negative. That is, if you buy the system 8 years from now, you'll have less money than you have now. And and we tell them that straight up.

Operator

Alright. Well, thank you, everyone. We've come to the top of the hour. And I want to thank everyone for joining us today for the Q4 'twenty three and Q1 'twenty four earnings update

Powered by Quartr
Earnings Conference Call
Complete Solaria Q4 2023 & Q1 2024
00:00 / 00:00