Some exciting news, I’ve decided to take a stab at analyzing a pretty popular company on the OTC called Solar Integrated Roofing Corporation, or SIRC. I’ve been following them on and off for about six months. But given their relatively recent surge in performance (and popularity) over the last month or so I figured what better time than now!
I’ll note this below, but I don’t have any financial interests in SIRC. I have a self-imposed rule of investing very minimally in companies that aren’t full SEC reporting. So right now I cannot, but they’re going to be at least audited soon (is the plan).
This article will just be giving my initial thoughts based on what I’ve seen to date. I’ll likely release more articles in the coming weeks breaking down some aspects of the company that I get into below and giving you your DD fix.
Now, onto the article!
I won’t rehash this too much as I assume most of these readers know about SIRC already. But in case you don’t know…
SIRC is a solar power and roofing installation company at the core of their business. Their business has generally two major segments:
Solar Power Installation and Solutions
The first, and the largest, is designing and installing solar panel solutions for homes and businesses. They aren’t a manufacturer or developer of the actual solar technology; they are the ones who partner with the companies developing and selling solar panels and act sort of like the end distributor and face to the customer.
In other words, they purchase solar panels and associated equipment, develop the end solution for a customer (like how many solar panels, where do they go, how much wattage generation do you need, yada yada), and then sell them the equipment and labor, etc. and subcontract out portions of the work, all at a nice mark-up.
This segment also dabbles in installing solar panels to generate power for electronic vehicles and battery storage (as opposed to general use for a home, business, etc.) This appears to be a smaller part of the segment, but interesting nonetheless.
The second part of their business is just general roofing contracting, which they define as roofing repairs and replacements. It kind of makes sense that they do this given that they also install solar panels which generally go on, you guessed it, the roof.
This is the less interesting part of the business, but likely along for the ride as solar panel installations increase.
From a macro industry perspective, this company is right at the heart of a booming industry, especially in the southwest United States. I’ve seen sources estimating 20% growth annual for the entire industry, bringing the total revenue for the industry to over 200 billion in a few years. So this is clearly not a “fax machine” type industry.
The company itself has grown incredibly quickly in the last 12 months, more on that below. They have grown mostly through acquisitions of regional solar installation companies. We don’t get a ton of detail on these companies, but the general concept is that SIRC is acquiring similar companies which have an already established based of salespeople, installers, partner contractors, etc.
These companies fit pretty much seamlessly into the already established business model of SIRC, help them gain market share, and inject (theoretically) immediate profits and will hopefully provide immediate return on investment.
From an efficiency perspective, the general idea is that these individual companies operate much more efficiently as a group than as individuals. I’m not an expert in the industry (😊), but logically these companies will now have access to a larger network of potential clients, have more purchasing power from suppliers, and have more access to different solutions for customers from their affiliated companies.
Over the last few quarters, the company has grown significantly from a revenue perspective. For example, from the quarter ended 8/31/2021 to the quarter ended 11/30/2021, revenue grew from about 10m to about 48m. Operating profits also increased from -1.92m to 18m over the same period which is a staggering profit increase.
I will be the first one to point out that this has been due to acquisitions and not necessarily organic growth. Like I mentioned above, SIRC has purchased the entirety or majority ownerships in several companies performing the same functions as the legacy business, or very complimentary businesses.
That being said, given the drastic increase in financial performance and immediate profits, it appears on the face of it that the acquisitions were successful and the former business owners they bought out tended to have successful businesses. But more to come there.
They have a massive current receivable for all of that revenue, about 40m. But the CEO mentioned in a Q&A that their days of sales are about 70 days. So no issues yet. More on this later…
I think SIRC has about a B in terms of capital structure. Let’s quickly recap:
- Series A preferred – voting preference only, not an issue.
- Series B preferred exchange for 10 common shares. These are being re-purchased by the company which is cool news, but there’s still some outstanding. Not staggering though. There are only about 90m (as of Q3 end) potential new common shares from these out of 450m in common (roughly). Not bad.
- Warrants – there is a bit here to clean up, and the company is working to buy them out. Again, not drastic.
- Convertible notes – this is a non-issue. The conversion prices are way above the market price per share.
- Series C and Series D preferred – someone correct me if I’m wrong, but there is no info on these as a byproduct of them not being full SEC reporting. Slightly concerned because they were issued for acquisitions. Hopefully they’re not mega-dilutive 😊. My copium is telling me that these are just voting preference shares.
All in all, not too bad!
Next, they’ve taken out a loan of 42m at 4.75% interest which is an incredible deal. It is almost entirely related to that massive receivable they have above. So they can deploy this cash immediately and repay the debt with business cash flows.
Look for dilution to slow down for acquisitions, but I suspect there may be a bit more. In general though, it appears debt financing will be the primary method of raising capital if it all possible.
Why the Share Price May be Held Back
Couple quick hits here about why I think the share price may be held back near term. These are just some general things to keep in mind for investors as risk areas in my opinion:
They are not fully SEC reporting. So we don’t have the full picture on financials yet. Timeline is end of March to get an audited quarterly financial statement. Previously, they’ve only had year-end Feb 2021 and Feb 2020 audited financial statements. Things I’m looking out for in a fully audited financial statement:
- Terms of the C Series and D Series preferred
- I’m confused by their consolidation method of accounting for their <100% stakes in some LLC’s. For example, they say USA Solar Network LLC was only a 60% purchase. Yet later they say it is a “wholly-owned subsidiary”. If it’s not wholly owned, there should be a reduction to net income per the acquisition method of consolidation, which they would have to use under US GAAP.
- Large receivables like that always make me nervous, but the facts make sense.
Not necessarily a bad thing, but SIRC has quite a few legal battles going on. One of them is with SinglePoint (SING) which I am absolutely, 100%, not a fan of and I know them quite well. Avoid.
But there are five others listed in the 10Q which make me pump the brakes a little bit. But I’m more curious how these turn out. Long legal battles can be a distraction for a company, but they can serve a very important purpose if they are successful.
The one that sucks the most is the one not listed in the latest 10Q, which is a lawsuit against the guy who sold them Cornerstone Construction. It was an expensive acquisition, 3m cash and 45m shares, and it appears the company is a dud because the CEO said on the Jan. Q&A that the company is suing the former owner for misrepresentation of financials. Basically, saying he lied about how well the business did. And they’re trying to get the 45m shares back.
Not good, but if they win the legal battle that’s something.
From my experience, generally your end customer facing distributor in a supply chain commands a rather weak margin long-term unless the business is absolutely killing it. This is in the case of a company distributing and selling a product for which they don’t own the IP, tech, patents, whatever and are literally just selling and installing someone else’s products.
Don’t get me wrong, it’s a super viable business model and there are probably a million companies globally who do things like this across industries. But generally, profits get squeezed in these types of companies to where a 10-15% operating margin is very good, but something like 5-10% is more standard.
SIRC had a huge Q3 and earned an operating margin around 37% which is incredible. So they knocked it out of the park in this quarter. But if I had to look into my crystal ball, I’d tell you to expect those margins to shrink some as time goes on. They claim to earn somewhere around a 40-45% gross margin on most products, so a 37% margin is likely not sustainable.
I would be ecstatic if they hit a 10-15% operating margin longer-term, but I hope they prove me wrong 😊.
Wrap Up – My Take
All in all, a very intriguing company and I can’t wait to see their financial reporting get better so I can get a better sense of how the company’s doing. I really like what I’m seeing so far: solid acquisitions (mostly), strong growth, healthy margins, cleaning up their capital structure… all of the right steps a company should be making right now.
One last thing I didn’t mention above, but management seems fairly transparent. They do Q&A’s and seem pretty forthcoming with news. So that is always a good sign as the news doesn’t seem too “pumpy”.
Like I said, I can’t invest in it yet, but I’ll be watching very closely how this company progresses. It seems like there’s exciting stuff on the horizon!
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I DO NOT HAVE A POSITION IN $SIRC. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. AT THE TIME OF WRITING THIS ARTICLE, PERSONS AFFILIATED WITH THE COMPANY ANALYZED ABOVE MAY BE PROVIDING MONETARY COMPENSATION AS MONTHLY PATRONS THROUGH MY PATREON. THIS COMPENSATION IS NOT PROVIDED IN RETURN FOR ANY SERVICE, WRITING ABOUT A PARTICULAR TOPIC, AND/OR FAVORABLE OR UNFAVORABLE OPINIONS. MY PATREON SUPPORTERS HAVE NO INFLUENCE ON THE CONTENT OF MY ARTICLES.