Sunworks, Inc.
Q1 2020 Earnings Call Transcript

Published: 10 May 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sunworks' First Quarter 2020 Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation [Operator Instructions].At this time, it is my pleasure to turn the floor over to your host, Rob Fink of FNK IR. Sir, the floor is yours.

[Rob Fink:]

Thank you, operator. Good morning everyone, and thank you all for joining Sunworks' first quarter 2020 earnings conference call. Participating in the call today are Chuck Cargile, Chief Executive Officer, and Paul McDonald, Chief Financial Officer.Before we start, I would like to remind everyone that during this call, management's remarks will contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements during the question-and-answer session. Therefore the company plans the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.Actual results could differ materially from those contemplated by forward-looking statements because of certain factors, not limited to, general economic and business conditions, competitive factors, changes in business strategy, or development plans. The ability to attract and retain qualified personnel and changes in legal and regulatory requirements.In addition, any projections as to the company's future performance represents management's estimates as of today, May 7, 2020. Sunworks assumes no obligation to update these projections in the future as market and business conditions may change.Today the company issued a press release with financial information and commentary. They also filed their 10-K report this morning. We encourage you to review the press release and the 10-K to augment the information provided on this call.With all that said, I'd now like to turn the call over to Chuck Cargile, Sunworks' CEO. Chuck, the call is yours.

[Charles Cargile:]

Thank you, Rob. Good morning everyone and thank you for joining our call. We entered the first quarter of 2020 with optimism. Our backlog was flush coming out of Q4 2019 after experiencing our highest bookings in seven straight quarters. We had adjusted our cost structure by reducing overhead and organized operations and field teams for greater efficiency. And we’ve raised $7.7 million in cash through our at the market offering.Although the early start of the year was marked by normal seasonality, we were confident that by early spring we would have the wind in our sales. Then in mid-March, the Coronavirus or COVID-19 became the epicenter of our attention and we've also been focused on adjusting to the unpredictable challenges that have been presented.As all on this call are experiencing, we're not only faced with macroeconomic challenges impact in the organization but the personal impact this is having on employees and stakeholders alike. Before Paul discusses the specifics of our first-quarter financial results, I'll spend a moment discussing our current situation as it relates to COVID-19 and how it's expected to impact our actions and execution in the near to mid-term.As it relates to COVID-19, our primary goal is to ensure to the greatest extent we can, the health and safety of our employees, their families, our customers and others in our ecosystem. Fortunately, none of our employees have tested positive for the virus and we've taken and continue to take the necessary precautions. We're complying with all public health directives and are reminding our employees to follow the necessary steps to mitigate risks for themselves and those they encounter.We're following the Center for Disease Control and Prevention safety guidelines which include common social distancing protocols, personal protection by regularly washing hands and wearing face-covering, and keeping all vehicles and workspaces clean and sanitized.Although our operations have slowed, we're fortunate to continue serving customers as an essential business as defined by county agencies shelter-in-place directives. The energy industry is identified by the federal government as critical allowing us to continue operating. Some of our customers, subcontractors, and suppliers have not been deemed as essential, and some who are categorized as essential are taking this time away from work commitments. Therefore, they are not operating at a similar capacity as we are. In some cases, this has caused our business to be disrupted despite our essential designation.The key areas where we have identified operational bottlenecks are through the Authority Having Jurisdictions, known as AHJ, and utility companies. The AHJs are individual cities and counties of which many have experienced layoffs and furloughs themselves. These entities are responsible for permitting and final approval of all projects.The utilities grant permission to operate or PTO approval, and although they have been operating, it has not been at the same capacity as in the normal course of business.As soon as COVID-19 became a prevalent concern, we quickly reacted to mitigate our risk in this evolving and dynamic situation.At the onset of the first shelter-in-place orders, we immediately analyzed our headcount need as we were facing significant uncertainty in our volume and determined that we needed to adjust by approximately 40%. At the time, we had 179 employees, and then we put 42 on a temporary leave of absence, and 32 took a reduced salary or transition to working part-time.In our cost-reduction decisions, we've been very careful to maintain at full capacity for all functions that support customer needs and revenue generation. In other cost-reduction measures, we negotiated rent relief from our landlords, we cut non-essential travel and limited all other discretionary spending. These actions have resulted in almost $500,000 of savings per month.As operating conditions stabilize, we will return to a new normal whereby some of these cost reductions will be reversed. However, we are determined to carefully monitor our costs as we intend to operate a leaner, more agile business going forward.We announced on April 30th, that we have strengthened our cash position by securing a $2.8 million loan under the Paycheck Protection Program, a provision within the Corona virus Aid, Relief, and Economic Security, or CARES Act, and guaranteed by the Small Business Administration. And that means during May and June, the amounts that we spend on payroll, benefits, rent, utilities, and interest will be forgiven.The specific forgiveness criteria is still being determined although we are confident that a large portion will qualify providing us added relief. The principal amount that isn't forgiven will be deferred six months from the funding date, their interest at 1% fixed, and will be paid back starting in November 2020, and continuing for 18 months until May of 2022.In the near-term, we continue to execute on our backlog, which is approximately $42 million. Due to COVID-19, we've experienced some customer deferrals, although we are still confident that these jobs will be installed in 2020.What is the most impactful is customers' hesitancy to sign new contracts. Our pipeline remains flush with opportunities, particularly in the HTI business customers appear to be waiting for some greater degree of normalcy.We believe that the expectation of tougher economic conditions, including the risk of a recession, will be a driver for customers reconsidering their own operating costs. Therefore, the incentive to invest in solar becomes more attractive.Once there is more economic predictability, we anticipate customers will have a greater interest in signing new contracts. In the meantime, because of the low bookings this year, we will ensure that our cost structure remains very lean, allowing us to lower our break-even point and conserve and perhaps grow our cash balance.In summary, we are prepared to weather the current storm. We've reacted quickly to the evolving macroeconomic conditions, we had strong backlog for the near-term, and we had our largest cash balance in eight quarters. Once market conditions stabilize and we return to more normalized operations and revenue, we expect to return to profitability and generate positive cash flow from operations.With that, I'll ask Paul to provide more specifics related to our financial results in the quarter. Paul?

[Paul McDonnel:]

Thank you, Chuck, and hello everyone. For the first quarter of 2020, installation revenue was $12.4 million, a 33% increase from the $9.3 million reported for the first quarter of the prior year. Our agriculture, commercial, and industrial, or ACI, and public works installation revenue were $8.6 million or 69% of total first-quarter revenue, versus $5.3 million, or 57% of total revenue in the prior-year quarter.Residential installation revenues were $3.8 million, or 31% of quarterly revenue, versus $3.9 million, or 43% of total quarterly revenue in the prior year.Gross profit for the three months ended March 31, 2020, was $1 million or 7.7 % of revenue. Our gross margin was negatively impacted by several key drivers. First, agriculture projects were impacted by normal seasonality from rain falling in Northern and Central California, resulting in lower revenue in the first quarter of 2020.Second, as Chuck mentioned earlier, we were impacted by unprecedented challenges caused by COVID-19, primarily due to AHJ and utility holds. Within ACI projects, these AHJ and utility issues caused us to incur approximately $200,000 in costs and delayed revenue without respective profit. This delayed revenue and profit will be earned once the respective jobs receive final inspection from the respected AHJs and we receive permission to operate from the utility.In residential operations, we experienced a similar margin miss of approximately $300,000, also due to AHJ and utility delays. These delays, coupled with lower Q1 residential sales and installations, caused revenue earned to be lower than expected, resulting in residential revenue as a percentage of total revenue to be less than in prior quarters. The negative [Technical Difficulty] our residential business more than our ACI business.Traditionally, residential gross margins are higher than ACI gross margins. So this change in revenue mix also put downward pressure on the overall gross margin. The third driver of the lower gross profit for the first quarter was two non-recurring expenses, a $200,000 expense to federal and customer dispute for projects started in 2017, and $100,000 expense for significant projects overrun which was unrecoverable from the customer.Without the AHJ and utility holds and the non-recurring expenses, our estimated gross margin as a percentage of revenue would have been in the mid-teens, which would have been reasonable at this level of revenue. As we look forward into the second and third quarters of 2020, we anticipate that our gross margin could return to the 18% to 20% range as a result of higher earned revenue and enhanced operational efficiency, combined with our cost savings resulting from organizational changes.Total operating expenses for the first quarter of 2020, excluding the goodwill impairment of $4 million, were $3.4 million, compared to $3.7 million in the first quarter of 2019. This reflects deflux at 6.5% reduction in normal operating expenses from the same period of the prior year.Total operating expenses, including the goodwill impairment of $4 million, was $7.4 million. As of December 31, 2019, our external valuation expert and our independent auditors determined that our goodwill balance of $9.5 million was not impaired, especially at the momentum that we had heading into 2020.As described in our last quarterly conference call, based on the significant changes in macroeconomic conditions, we repeated the valuation process as of March 31, 2020.As instructed by the accounting guidance, the carrying value of the company's assets, including goodwill, must be evaluated comparing market capitalization to the expected future cash flows of the business as of the valuation date, in this case March 31.For the current valuation, we first adjusted our expected 2020 earnings to account for possible project delays caused by COVID-19, which reduced our near-term revenue, profit, and cash flow, pushing each into future periods.Secondly, in Q1, our share price declined significantly causing our market capitalization to drop approximately 30% below the value at December 31, 2019. Our market capitalization has rebounded since March 31, 2020. Despite the rebound in capitalization, accounting rules require the valuation of goodwill to be as of a specific point in time, and in this case March 31. The lower market capitalization, coupled with a reduced expectation of near-term profit and cash flow, caused us to determine that an impairment charge was reasonable.As a result of the aggressive measures taken to reduce costs in March and April of this year, we expect operating expenses, including stock-based compensation, to drop significantly compared to 2019. We are still uncertain which of these reductions will become permanent as our decisions will be fluid, determined by performance data and by our immediate and projected operating needs, reducing our overhead costs without compromising the ability to operate effectively, has and will continue to be our emphasis.During the three months ended March 31, 2020, we incurred $98,000 in total non-cash stock compensation expense, compared to $124,000 for the same period in the prior year. The expense reduction is primarily due to the discontinuance of stock-based compensation per former employees.Depreciation and amortization expense for the three months ended March 31, 2020, was $81,000, compared to $92,000 in the same period in the prior year. Interest and other expenses increased $50,000, to $269,000 for the first quarter of 2020, compared to $219,000 for the same three months in 2019.As mentioned in our last quarterly conference call on March 30th of this year, the $1.5 million pay-down of the CrowdOut debt in January of 2020 required us to recognize an additional non-cash expense of approximately $98,000 for accelerating the write-off of the capitalized issuance costs and extension fees associated with the portion of the early pay down. As a result, the future quarterly amortization expense will be lower over the remaining term of the load.To a small degree, we are also benefiting now from the lower 30-day LIBOR rate upon which the interest payments are calculated. The 30-day LIBOR rate has declined approximately 165 basis points in 2020 and is now approximately one quarter of 1%.The company incurred a net loss of $6.7 million, or $0.60 per share, for the three months ended March 31, 2020. Excluding the $4 million non-cash goodwill impairment, and the $98,000 of non-cash charge for the accelerated write-off of the CrowdOut capitalized fees, the loss would have been approximately $2.6 million, or $0.24 per share, compared to a net loss of $4.5 million, or $1.21 per share, for the three months ended March 31, 2019.Turning to our balance sheet, our cash and cash equivalents balance as of March 31 was $5.9 million, compared to $3.5 million as of December 31, 2019.Our recent cash and liquidity position have benefited from two key activities. After broker fees, we raised approximately $7.7 million of cash during the first quarter of 2020 through our at the market offering, which have since been fully utilized and canceled as of March 30, 2020. Additionally, in April we secured the $2.8 million PPP loan.At the end of the first quarter of 2020, our working capital surplus was $3.1 million, compared to a working capital surplus of $1.5 million at December 2019 year-end.During the three months ended March 31, 2020, we used $3.6 million of cash in operating activities, compared to using $1.19 million of cash in operating activities for the same period in 2019. The cash used in operating activities was the result of our operating loss and the pay-down of accounts payable and accrued liabilities during the quarter.The cash expense and the cash impact of the net loss was partially offset by cash received from the collection of accounts receivable, and from a reduction in inventories. Our total non-trade debt at March 31, 2020, was $2.2 million, compared to $3.8 million at December 2019 year-end. The $2.2 million consists primarily of the CrowdOut promissory notes together with a minor amount of equipment financing. All $2.1 million of the CrowdOut debt is due at the end of January 2021.With that, we are now happy to answer any questions you may have.

[Operator:]

[Operator Instructions] Our first question comes from Philip Shen, with ROTH Capital Partners. Please state your question.

[Philip Shen:]

Hey guys, Thanks for the questions. Wanted to see if we could explore the residential business first and then explore ACI next. But specifically for the Resi segment, I was wondering when do you think your sales either has troughed, or when do you think your sales troughed, or when do you expect it to trough? And when do you expect your sales for Resi solar to get back to the February volumes?

[Charles Cargile:]

Well, that's a million dollar question, Phil. I should probably be asking you that because you have had better visibility to all the companies than I do. First, I would say I was pleased with the start that we had in resi. January and February were actually pretty good. And I know when we talked, just six weeks ago, about our residential business, at that time I told you I didn't think we'd be able to get to revenue levels that matched last years.But we did, at the $3.8 million, and that was worth a very, very slow last two or three weeks of the quarter. So we are off to a bit of a good start and then now it hasn't been well. It's hard to extrapolate a trend on such small amounts of data, but we have troughed and seen a little bit of come back in the last week or two, but not nearly enough to, as they say, extrapolate a trend or predict it's going to get better. So I don't have a prediction, and we're not managing that business right now on the basis of prediction. We've streamed it down to the bare bones in terms of field crews. We have temporary furloughed our crews and less are working specifically on projects and that changes day to day. The office staff is either on part time or also furloughed.And again, day to day, we manage to see if we need to bring people back to support either customer relations, or new project entry, or assigning crews in the field. So if we start to see this move, I think we're prepared and positioned to move very nimbly than to react to it, but I wish I had an answer for you. I wish I had a better crystal ball, but I don't know how long it's going to be -- how long it's going to last.

[Philip Shen:]

Okay. Have you guys transitioned to virtual sales like ZOOM sales and things like that, or are you focused on just doing the in-person consultations still?

[Charles Cargile:]

Yes, good question. And first, by way of reminder, and I know you know this but some on the call won't, we are almost exclusively represented two-third-party sales. So we don't have a lot of inside sales. We do get some request to come through the web or over the phone and we're able to support those, but again it's two-third party, and our third parties we've worked with them, and they are absolutely doing more virtual sales.We've added new distributors or channel partners even in the last month and six weeks, ones that we selected specifically because that's what they focus on. So we, like everyone else, believe that one of the aftermath of this sea change in business will be much more virtual, not only on the sales side, also on the back-end for permitting, et cetera. So, yes, we're doing that and we'll see how long it takes for that to gain traction.

[Philip Shen:]

So the volume that you're seeing now -- what's the percentage of volume you're doing on a weekly basis now versus maybe the volume for the average week in February? Is it down 50%, down 80%?

[Paul McDonnel:]

Yes, I think compared to February, it's probably down 50%. And what will be interesting is, as we move forward now, because April, May, June is traditionally when we see acceleration, and so will we see acceleration, even in the new world, that is at the lower levels, or are we just bottoming out at this level? So that's what I'm keeping a close eye on, is this 50% going to stay at 50% of historical levels, or is it going to stay at 50% of February levels? And again, I wish I could predict better but I'm not capable of that.

[Philip Shen:]

And then shifting to the challenges with the AHJs and working with utilities, given the friction there, perhaps you could share with us, typically, what is the time between when you get an install, like whatever the starting clock is, versus when that installations PTO or complete? Is that time typically 45 days for example? And then how much worse have you gotten? So let's say historically, you were at 45, are you at 60 now? So if you can give us a couple of markers there, that would be great.

[Charles Cargile:]

Sure. Yes. Our historical number would be closer to 35 to 40 days, I'd say, and now it's, not doubled, but almost. So now we're looking at probably closer to two months. And I guess an easier way to think of it is, it used to be about a month and now it's about two months. And that's on average. With the number of installs that we have, it can vary quite a bit by the different AHJs.

[Philip Shen:]

And do you have a sense for when that might improve given the AHJs that you deal with? I mean, just saying it's maybe a modest handful or two handfuls. Are you getting a sense that things are improving there or not yet?

[Charles Cargile:]

It's very dependent upon the individual AHJs, and some, we see improvement. We have had a lot of presence and success in the Bay Area, particularly the San Jose area where we have an office, and we have seen improvement there and it's pretty much dictated by local shelter-in-place rules and so I'd say it's spotty. But on balance, I'd say, not a lot of improvement yet. The one thing that I've heard that does provide some glimmer of hope long term is that more of the AHJs and utilities are allowing remote or electronic processing and that's still relatively new, but being forced to do that now could accelerate processing in the future. That's something that we've seen and that we hope will be a benefit, but time will tell.

[Philip Shen:]

Okay. Let's shift to ACI. Almost the same series of questions and maybe we'll start with what kind of volumes -- I know the time frames are longer, so you can't compare this week for ACI versus an average week of February, but maybe you can look at it from a monthly time frame. So let's take the month of April versus the month of February, or what you would have expected for the month of April. How much slower is business for ACI? Has ACI been less impacted perhaps because the timeframes are a little bit longer or have you seen activity from farms and farmers and other owners just go away completely, and maybe it actually might even be worse than Resi. So just curious where your head is on ACI.

[Charles Cargile:]

Our non-residential business has been less impacted as you alluded to. We haven't seen anywhere near the 50% follow-up like we saw if you compare it back to February, but we've not been --there's only been one major project that we're working on that I can think about off the top of my head, that we've been stopped from working on.And it was a rather large one on the public works site around the state prisons that we are working on. They had asked us to pull out because they had someone in the prison actually due to be tested for the virus so they were concerned about it. So we had to pull off that one. We think or hope that we will get back in there in June. And be able to start generating or continue the project, but we've been put on hold there. But that's the only one.The other ones, we've been pretty consistent on. We're following the same strategy there where even though it's not as impacted as residential, we're not at the full capacity that we thought we would be two months ago and so we don't have as many field people on furlough there, but we still have some. And again we manage that, the field teams and our superintendents and project managers manage it day to day. We look at the leadership team once a week and know who else is going to be in the field. And fortunately, we still have a higher percentage of people in the field every day, certainly more than we had in residential.So I think that that will continue to click along pretty well. I do, however, have the same concerns on the front-end. The sales side in our non-residential business has been very slow. So there is a reluctance even by agriculture customers, our large industrial customers, our public work partners, there has been a delay now.We actually, this week and last week, have seen it break a little bit, not anywhere near the levels that we would expect in May, but certainly better than what we were seeing in March and April. So hopefully, that will start to thaw a little bit.And also more so on the non-residential side, when you are looking down the barrel of a recession or tough economic conditions, companies that have cash are great targets to talk about how they can lower their operating costs, how they can spend some money to lower operating costs, as opposed to having to terminate people or cut other discretionary spending.So we think once those non-residential customers feel like they're on firmer footing, that we'll have a good sales pitch and be able to start a new dialog about why they should want to buy solar in the second half of this year, because of the recession, save costs, get in before the next down step in the ITC, et cetera. But again, that's probably another month or so before we can see that start to maybe have a firmer footing or new normal to become something worthwhile for us.

[Philip Shen:]

Okay. Thanks, Chuck. Do you think from AHJ and interconnection standpoint with utilities, is there friction there as well for non-res in a way? Was your typical installation time may be extended by 20% or something as a result of that friction?

[Paul McDonnel:]

Yes, there is still friction. With a similar answer as the residential, it's case by case or different AHJs. Some of that on the commercial side and the ag side because they are larger projects and fewer projects, there is a little bit more relationship that can be built, and then you get better reaction, maybe you know someone at the AHJ and so they help expedite it for you. We have that benefit in some of them. But there is still friction and part of that is certainly not animosity or are people not doing a good job. It's just they have fewer people working and they're just impacted like everybody else's.In terms of the timing [Technical Difficulty] yes, so that is probably a little bit shorter than on the residential side, maybe 20 to 30 days on average.

[Philip Shen:]

Okay. Good. And then shifting over to some modeling questions, you had your lower margins this quarter and how do you expect margins to trend in Q2 and maybe Q3?

[Charles Cargile:]

The AHJ issues that we highlighted in the press release and in our prepared remarks, we referenced about $500,000 across the company, both residential and non-residential, for things where we had incurred costs and we can't count the revenue or the profit yet. If we can start to see that far and those projects that were delayed at the end of Q1, can get pity up in Q2, and we can have some kind of normalized environment for the next two months, that can bode well for the product because we're going to get that pure profit coming through in Q2 or perhaps Q3.So I think the pain that we took in Q1 from the AHJ perspective and the utility PTO perspective will benefit future quarters because that's just a timing that we missed in Q1 and now we get it back in Q2. So just that basis alone, it should be $500,000 or so of profit coming our way as soon as that clears. And then if we can get a quick return on the other ones, we can get somewhat of a doubling effect in the next couple of quarters.So I think that we'll see that benefit on the gross margin side. So in our own internal forecasting for Q2 and Q3 we're back to expecting mid-teens if we're going to be at revenue levels even like what we were for this quarter. So if we can be in the $12 to $15 million range in revenue, then we can be probably in the mid-teens in terms of margin.And it's interesting also to note on the revenue side, I said that we were off to an okay start. We normally had a slow Q1, as you know, but our first two months of Q1 were actually equal to or slightly higher than the first two months of Q4. And then in Q4, we had $2 million [Technical Difficulty] we had in either the first two months. So if we would have seen that kind of activity in this quarter, then we would have been close to $15 million, and for Q1, that would have been really strong for us. So if we can just get through this storm, there is still that backlog that can start to convert like it would have in Q1, I think if we didn't get the COVID-19 impact.

[Philip Shen:]

Okay. As for OpEx, do you expect -- typically you guys are at a $3 million to $4 million quarterly run rate. Do you think you could maintain that or do you think there could be some impairments or things that impact Q2 or Q3?

[Paul McDonnel:]

Yes, I don't see an impairment in Q2 to be completely transparent. We probably could have supported a lower impairment for Q1, but with the uncertainty in terms of how long this runway is going to be or the tail from this is going to be, in discussions with the Chairman of our Audit Committee and reviewing it with our auditors, we said let's go ahead and take the impairment that's at the high end of the range of what the valuation experts came back with.So that should give us some headroom even if things are protracted in Q2 and Q3. So I don't see a non-cash impairment in the next couple of quarters of 2020. I do see a reduction in the operating expenses for the reasons that we said. We have not brought back many of the people that we furloughed or went to part-time, so we already have a four-month of savings there and that will continue now in May.As I said in -- I can't remember if I said it or Paul said it, there will be some of those costs start to come back this quarter, but they really haven't started to come back yet. So I think that where you mentioned maybe $3.5 million to $4 million having been our recent run rate, that's going to be closer to $3 million. And so that will bring it down a little bit.And then if we continue to see slow revenue, we'll continue to monitor that as well because we are determined now that we do have a higher cash balance than we've had in seven quarters, we want to make sure that we're not going to use that cash in operations anymore. And as I said in the call, the intent now is to keep that balance even in this strained environment.

[Philip Shen:]

Okay. I appreciate all the questions and I will pass it on. Thanks.

[Operator:]

Our next question comes from Ken McGarry, with Bradley Wills. Please state your question.

[Ken McGarry:]

Yes, thanks, good morning. As far as the PPP loan goes, are there any restrictions on what you can do with the funds? I know that what you do with them has an impact on how much is forgiven, but is there any outright restrictions on what you can do with those funds?

[Paul McDonnel:]

The loan documents state specifically that the loan is to be used for salaries and benefits, utilities, rent, and interest on debt. There is not a lot of specifics, and you can imagine the term utilities, the term benefits, they can be pretty broadly interpreted and so I'd say -- and there has been mentioned that there will be an audit. So I think that what we have to finalize or formalize with our bank over the next seven weeks is what they believe is going on with the SBA as well as what they believe is going to be forgiven and we'll work through that.And then theoretically, two years after that, we'll have to use for those same items. But those are such -- I mean, especially a company like ours where about 75% of our operating expenses are salaries and benefits, that will be -- I mean, I'm not worried at all about justifying that the $2.8 million was spent on those items. The cash becomes fungible and so like I said, as long as we can prove that we've spent that much over two year period, then I think that we won't be inhibited by those rules at all. As you say, the main thing is how much of it is going to be forgiven.

[Ken McGarry:]

Okay. And after all of the expense reductions, what is the revenue level that you need? And I know you're going to have to assume mix and margins. But assuming, now let's call it current mix and targeted margins, what kind of revenue do you need in order to achieve cash flow breakeven on your current expense structure?

[Paul McDonnel:]

Yes. With the target of where we are now with what we've done not only as a result of COVID-19, but as you'll recall, we had done some cost reductions earlier than that as well. We think the skinny down version of Sunworks if we didn't bring any of the cost back and carried them forward, we'd probably could get to operating expenses and maybe the $2.7 million range. And so if we can then have revenue $15 million and have it back in the high teens in margin, then we would be able to break even there.At $14 million, 20% margin would be $2.8 million, and as I mentioned, we have $2.7 million of operating expenses. So that's kind of the high level of where we've identified the breakeven to be. And that's operating income breakeven, not EBITDA, because that would still include a couple of hundred thousand dollars of non-cash stock comp and depreciation. So a couple of hundred thousand different if you're looking at EBITDA as opposed to operating income.

[Ken McGarry:]

All right. [Indiscernible]. And are there any segments that it looks like there is pent-up demand that is waiting for at least a, not even a resumption of the economy opening up, but let's say a loosening a little bit, is there any -- what sector do you think is most likely to bounce back first?

[Charles Cargile:]

So two different answers for residential and non-residential. A little bit of glimmer of hope, if you will, on the residential side is that we currently have $6 million of backlog, which is a healthy backlog number for our residential business. I think I've said in the past that we generate the backlog business that covers you for about a quarter. So if we were in a normal situation, I would look at $6 million of backlog, and then annualizing that, and well, that's a $24 million year, that would be really good for our residential business. And it's the delays in the AHJ's that's keeping that $6 million from converting to revenue.So if there becomes a breakout, as you said, and that $6 million starts to convert more quickly, that could turn to revenue quickly and that would be real benefit for us. So that's something that we're keeping our eye on.And on the other side, on the ACI side, where I see the pent-up demand because, as I said, we're still working on most of those projects. So it's not the same as -- I mean it's just because of the long gestation and then that's quick turn. We're still working on those so I don't see as much of a revenue opportunity. But what I do see on the ACI side that gives us some hope in the midterm is, number one, the pipeline is still flush for commercial industrial and Ag projects.And so I really believe if some of those customers start to feel more comfortable, we could get some momentum on the sales side pretty quickly, which would then start to fill the coffers for the end of this year and rolling into 2021.And then the second area on the ACI side is we have a large amount of projects that we've already signed that have now been delayed in terms of scheduling, either for the customer, or for the financing delay, but we have more than $11 million of projects that are currently outside of our fourth quarter scheduled backlog. And so if we're working those aggressively also to try and get them pulled in, because we've seen this low now in terms of new sales of things that are going to convert to revenue on the non-residential side, three and four quarters out.We need to be more aggressive in pulling those things that are five quarters out, pulling them in to kind of fill that vacuum and then hope by the time after we've pulled those in and started working on them, then the normal sales will pick up and we'll be able to backfill that in 2021. Does that make sense Ken, or is that too convoluted?

[Ken McGarry:]

No, that's perfect. Thank you. I appreciate it.

[Charles Cargile:]

You're welcome.

[Ken McGarry:]

Okay. I think I'll stop there. Thanks a lot and good luck with everything.

[Charles Cargile:]

Thanks, Ken.

[Operator:]

Okay. I'd like to turn the call back over to Chuck.

[Charles Cargile:]

Thank you very much, Operator, and thank you all for joining our call today and for your continued interest and support of Sunworks. Please don't hesitate to reach out to Paul, or myself, or Rob Fink and the FNK IR team at any time if you have further questions, thank you.