Sunworks, Inc.
Q2 2019 Earnings Call Transcript

Published: 2 Aug 2019

[Operator:]

Good day, ladies and gentlemen. And welcome to the Sunworks Second Quarter 2019 Earnings Call. All lines have been placed in a listen-only mode, and there will be a question-and-answer session following the presentation. [Operator Instructions]At this time, it's my pleasure to turn the floor over to Mr. Rob Fink of FNK IR. Sir, the floor is yours.

[Rob Fink:]

Thank you, operator. Good afternoon, everyone. And thank you all for joining Sunworks' second quarter 2019 earnings conference call. Hosting the call today are Chuck Cargile, CEO; and Paul McDonnel, CFO.Before we start, I would like to remind everyone that management’s remarks 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 claims 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 the 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 the legal and regulatory requirements.In addition, any projections as to the Company's future performance represent management's estimates as of today, August 2, 2019. Sunworks assumes no obligation to update those projections in the future as market and business conditions may change. Today, the Company issued a press release with financial information and commentary and filed its second quarter SEC filing on Form 10-Q. We’d encourage you to review the press release to augment the information provided on this call.I would now like to turn the call over Sunworks' CEO, Chuck Cargile. Chuck, the call is yours.

[Chuck Cargile:]

Thank you, Rob. Good morning, everyone. And thank you for joining our call.Earlier today, we reported our financial results for the second quarter of 2019. I'm pleased to report that we delivered a strong rebound from the seasonally weak first quarter of the year. Our revenue of $18.7 million was in line with our guidance for the quarter. More importantly, we reported positive operating income and adjusted EBITDA.Our gross margin was at the highest level we’ve achieved in two years. And our operating expenses were at the lowest level in three years. Our cash balance exceeded $3.5 million and we have $47 million of awarded projects in backlog which are scheduled to be installed over the next four quarters. Paul will provide the details in a minute but suffice it to say, it was a good quarter across the board from a financial perspective.Our performance was strong across all our business lines, and I'm particularly pleased with the results within our residential business.As you may recall, we hired Valarie Serrato to run our residential business at the end of 2018. She’s done an excellent job of positioning us for growth in this segment and increased profitability. In the second quarter, we recorded $7.2 million of new residential sale. These new sales generally result in near-term revenue. So, this increasing run rate positions us well for significant growth over the 20 million of residential revenue we generated in 2018.Second quarter residential revenue of $5.5 million reflects a double-digit increase over the year ago second quarter. In the current quarter, revenues carried a gross margin above 20%. In addition to the positive contribution for the quarter, we experienced some exciting residential project wins, most notably, as we announced on July 11, we’ve partnered with Bright Power to install 576 (sic) [567] kilowatts of roof mounted photovoltaic systems for a Northern California residential complex.Bright Power specializes in multifamily apartment buildings and has worked with more than 1.4 million apartments, covering 1.2 billion square feet. They are a recurring customer for us. And we’re excited to partner with them on this project and are working together to evaluate additional projects for the future.Also, last quarter, we discussed our relationship with MAROMA Energy, a developer for low income residential projects. We are beginning installation for MAROMA projects in California in Q3 and expect to generate approximately $0.5 million of revenue this quarter from these projects. We continue to anticipate more than $3 million of residential revenue from MAROMA projects over the next 12 to 15 months.We are pleased that our residential businesses is performing well and appreciate the faster cash conversion cycle it brings to our business. In addition, we continue to benefit from the cross-selling opportunities that are shared between our commercial businesses and our residential business.We also had a good quarter in terms of adding some significant new projects and continue to build a robust pipeline for new projects in our commercial business. I'd like to elaborate on a few of the new projects.We were awarded a $1 million project with Foursquare Church. We've enjoyed a long and successful relationship with this church, and they are embracing renewable energy in a big way. In fact, they've installed nearly 9 megawatts of solar power across their portfolio of churches, and have many, many more in the pipeline for conversion, to convert to solar power. Most recently, we completed a project for one of their sites in Rocklin, California, and then immediately were hired to install solar on the local minister's home. This is just one example of the cross-sell opportunity that comes from coordinating between our commercial and residential teams. And if solar is good enough for the church and the minister, I have to believe that more of the congregation will be signing up with Sunworks as well.We also announced a $1 million follow-on project in New Jersey with Cibao Meat Products. This is just the latest in the line of new wins in the Northeast region. And we believe we have more to win in the second half of this year in Massachusetts, New York and New Jersey.Our focus continues to be on driving higher margin project wins and then executing on those projects with effectiveness and efficiency. By doing so, we will deliver more consistent profitability and cash flow.We're also considerate of our capital structure and the importance of having financial flexibility. In the second quarter, we established a shelf registration, which provides us the ability to access up to $15 million in cash through equity offerings. In connection with that, we’ve put in place and At-the-Market or ATM program, which allows us to sell equity shares of our common stock into the open market at our discretion. In essence, it provides us with an equity-based line of credit. Having access to this cash allows us a degree of flexibility that we've not recently had. It allows us to negotiate better payment terms, consider small strategic investments, and ensure that we pay our suppliers, partners, subcontractors on time, even with some of our long gestation projects.We acknowledge that the equity shares create some dilution to our shareholders but are confident that the advantages we accrue from the ATM outweigh the dilution. During the second quarter, we sold 1.2 million shares in total, which is less than 5% dilution. We will continue to utilize this vehicle prudently, keeping dilution very much in line going forward.On a macro level, we’re keeping our eye on House and Senate legislation calling for a five-year extension of the solar investment tax credit. Polling shows that Americans across the political spectrum are concerned about our changing climate and they strongly support solar. A bipartisan group of Senators and Congressmen sponsored the legislation and are working with their peers to try and push it over finish line over the next several quarters.In summary, we’re looking forward to a good second half of 2019. We believe there’s positive momentum in the solar industry in California and beyond. We believe that Sunworks is poised for continued profitability and further shareholder enhancement as we continue to grow our residential business, expand our relationships with strategic partners, diversify our business through geographical expansion and focus on driving higher margin project win and then executing on those projects with effectiveness and inefficiencies.With that, I’d like to hand it over to Paul to discuss our financial details. Paul?

[Paul McDonnel:]

Thank you, Chuck. And good morning, everyone.The second quarter of 2019 saw Sunworks again return to positive operating income, profitability on an adjusted EBITDA basis and demonstrated that the weak financial results of the first quarter were partially a function of the seasonably wet weather and not indicative of the operational enhancements we have made across the organization.Installation revenue for the second quarter of 2019 rebounded from the low of $9.3 million in the first quarter to $18.7 million in the second quarter. The $18.7 million of installation revenue is a 6.7% decrease from the $20 million of revenue for the same period in the prior year. Non-residential revenue which includes ACI and public works installation revenue was about 70% of the total second quarter revenue or $13.1 million. Residential installation revenue was 30% of quarterly revenue or about $5.5 million.Cost of goods sold for the three months ended June 30, 2019 was $15 million or a 12.1% decrease from the $17.1 million reported for the same three-month period of the prior year. Lower construction cost offset the lower revenue, resulting in a gross profit of $3.6 million for the quarter. This compares to $2.9 million of gross profit for the same quarter of the prior year or an improvement of $0.7 million. The gross margin was 19.5% in the second quarter of 2019, an increase from 14.5% in the same quarter in 2018.Turning our attention to operating expenses. Our total operating expenses excluding stock-based compensation for the second quarter of 2019 were $3.4 million. This reflects a 9.6% reduction from the same period of the prior year. Within our operating expenses, selling and marketing expenses for the first quarter were $0.6 million or 41.6% below the second quarter 2018 level. The reduction in selling and marketing expenses primarily resulted from a reorganization of the sales and the sales support functions, lower commission and promotional expenses, and lower advertising expenses.We continue to refine our marketing efforts to align with more third-party revenue generators, as we also continue to improve our sales tracking systems. Our goal is to minimize customer acquisition costs, while finding the optimal balance between third-party generated sales and in-house sales.Please keep in mind that costs associated with third-party generated sales are included in cost of sales, above the gross profit line, contributing to our ability to reduce the sales and marketing expenses, recognized as operating expenses, below the gross profit line.Our second quarter of 2019 general and administrative expenses remained essentially flat compared to the year-ago quarter. Although total dollars spent on general and administrative expenses is stable year-over-year, the competition has changed from the prior quarter -- or the prior year quarter as a result of an emphasis on improving talent and using technology to improve construction management systems and processes, while at the same time reducing discretionary general and administrative expenses.Operating expenses, including stock-based compensation for the remainder of 2019 are expected to be stable compared to the prior years as we continue to streamline our operations and align our costs with our core operational objectives. Minimizing our overhead burden without compromising the ability to operate effectively has been and continues to be an emphasis.During the three months ended June 30, 2019, we incurred $110,000 in non-cash stock-based compensation expense, compared to $800,000 for the same period in the prior year. In the second quarter of 2018, Sunworks recognized a onetime charge of $640,000, as a result of the retirement of the former Chairman that triggered the immediate vesting of his remaining restricted stock ramps. Additional reductions in stock-based compensation expense resulted from the 2018 departure of members of the Board of Directors and executive management whose options seized vesting resulting in less stock-based compensation expense.Depreciation and amortization expenses for the three months ended June 30th were $91,000, down slightly compared to the same period in the prior year. Interest and other expenses increased to $219,000 for the second quarter of 2019 compared to $150,000 for the same three months in 2018. The increase in interest expense for the current year is primarily due to $3.75 million promissory note from CrowdOut for which interest began accruing in May 2018, plus interest due for delinquent California sales tax for prior year returns.The Company incurred a net loss for the three months ended June 30, 2019 of $77,000 compared to a net loss of $1.8 million for the three months ended June 30, 2018.Turning to our balance sheet. Our unrestricted cash and cash equivalents as of June 30th was $3.1 million compared to $3.6 million at December 31, 2018.As described in our first quarter conference call and 10-Q, our cash and liquidity positions were negatively impacted by our first quarter operating loss compounded by demands from suppliers for deposits and strict adherence to payment terms for module purchases, needed to support our backlog of projects scheduled for 2019 installation. As a result, we consider the combination of debt and/or equity financing to provide greater near-term financial capability.Since our last conference call we extended the maturity date of the CrowdOut loan from June 2020 to January 31, 2021 in exchange for 400,000 shares of common stock. We also filed a registration statement, as Chuck has said, on Form S-3 which became effective on May 31, 2019, eventually allowing Sunworks to sell -- an offer to sell from time to time upto an aggregate of $15 million worth of common stock, a portion of which is being utilized for an At-the-Market offering.As of June 30th, 1.2 million common shares have been sold using the ATM, resulting in net proceeds after issuance cost of approximately $0.8 million. Since June 30th, another approximately $2.4 million common shares are issued and outstanding, resulting in additional net proceeds of about $1.3 million as of yesterday, August 1, 2019.Our working capital shortfall at the end of the second quarter of 2019 was $0.4 million compared to a working capital surplus of $3.8 million at December 31, 2018. Working capital improved during the quarter by approximately $1.1 million compared to the end of the first quarter of 2019. $0.9 million of the $0.4 million working capital shortfall is due to the non-cash implementation of a new accounting pronouncement that became effective on January 1st that requires us to show the present value of future operating lease obligations as a liability on our balance sheet for the first time.During the six months ended June 30, 2019, we used $1 million of cash in operating activities compared to $5 million used in operating activities for the same six-month period in 2018. The cash used in operating activities primarily as a result of the year-to-date net loss. The cash impact of the year-to-date net loss of $4.6 million is offset by cash received from the collection of accounts receivable, customer deposits, inventory reductions, and reductions in contract assets. Cash used in marketing activities does not include the cash impact of the At-the-Market offering.As we discussed in earlier conference calls, we had a high level of inventory on hand at the end of the first quarter of 2018, as a result of a strategy of purchasing or committing to purchase solar modules prior to the enactment of tariffs on important modules. Inventory balances as of the end of June have now declined to $2.1 million that is a $4.5 million decrease from the record high inventory levels of March 31st of last year.Our total non-trade debt as of June 30, 2019 was $4.4 million, compared to $4.9 million at December 31, 2018. The $4.4 million consists of the $3.75 million promissory note and $0.6 million of acquisition and equipment financing. $0.7 million of the debt is current and the remaining $3.7 million is long term.After a slow start for 2019, we believe that our visibility into the next couple of quarters is reasonably good. And we have a solid backlog of projects scheduled for installation. We expect to generate revenue in the range of $19 million to $22 million in the third quarter of 2019 and to generate positive operating income and cash flow.With that, we are now happy to answer any questions.

[Operator:]

[Operator Instructions] We'll go first to Philip Shen with ROTH Capital Partners.

[Philip Shen:]

Hey, guys. Thanks for the questions. Chuck, I think you had mentioned on the conference call or the prepared remarks that you guys booked $7.2 million of resi sales in the quarter, but then the resi revenues recognized in the quarter was actually $5.2 million. So, is it fair to say, of your $17.4 million of bookings -- implied bookings for Q2, $7.2 million came from resi, suggesting the remaining 10ish million came from ACI?

[Chuck Cargile:]

Yes. Actually, about $19 million was the new sales for the quarter. There were a few push-outs and cancellations if you're rolling forward your backlog. So, it’s almost $19 million in total of which $7.2 million was residential.

[Philip Shen:]

Got it. Okay. And when you think about 2020 -- I believe this backlog is for the next 12 months. So, when you think about how much of your availability remains in Q1 and 2 as well as back half of next year, how far do you guys look?

[Chuck Cargile:]

So, as we look into 2020, the new sales that we are going to book in the second half of this year will be what fills the pipeline for 2020. So, I think, if you think of our business as residential on the one hand, and then the commercial and public works on the other hand, as you alluded to earlier, the residential is going to be the turn business. So, it's nice to see the $7 million-plus in new sales for the quarter. If we can start to see that as a run rate, then, maybe you're looking at 2020 at $25 million to $30 million of revenue that comes from residential. And then, the rest of the business will come from the commercial and the public works. Most of the $47 million that we have will be second half revenue. So, if we're -- we guided to $19 million to $22 million in Q3, if Q4 is similar to that, then you would assume that we're going to burn through $40 million of the backlog in the second half of the year. So, that’s indicative that we need to be still in the pipeline for 2020 with the new sales that we generate in the second half of this year. Is that where you were going with the question, Phil?

[Philip Shen:]

Yes. And how does that pipeline look for next year? Do you feel like it’s a big funnel, if you will, so that -- what I'm trying to get at is what kind of growth we could see in 2020 relative to 2019, now that resi is -- it seems like it’s under better control and you spent a number of quarters retooling the team and processes. So, this is not official guidance or anything but I'm just trying to get a sense of your outlook for 2020. Do you expect to see some growth or do you think it could be more flat?

[Chuck Cargile:]

We expect to see growth and we are focused again on growing. I think, you mentioned that we did spend a little bit of time retrenching while we improved our processes to make sure that as we took on new projects and new sales that we’d be able to execute them effectively. I’m pleased to see the execution in Q2, gives me confidence that we can execute at higher levels, and the team continues to get stronger. So, I anticipate us being able to satisfy that. What I think you need to see is over the second half of the year, the new sales numbers instead of being in the high teens need to start to exceed $20 million, which means that the commercial and public works numbers need to be in the low to mid-teen, so start to peak that over $20 million and then we can start to see our way to revenue levels north of $80 million in 2020.

[Philip Shen:]

Great. That’s helpful. Thanks. And then, with that kind of growth profile, and maybe we’ll talk about the back half of the year. How do you expect margins to trend in Q3 and 4? Do you expect to maintain this 19.5%, if not, potentially improve upon them?

[Paul McDonnel:]

Yes. We are focused clearly on improving the margins. The 19.5% was good for the quarter. We still have a bit of anchor or a drag that comes from some of the old projects. In fact, if you put in perspective our revenue in Q2 on the commercial side which from about 75 projects, make up the total revenue on the commercial public works side in the quarter. And there’s about four or five of those projects that linger from prior periods that actually were negative contribution, so ones that we’re just trying to wrap up in the most cases, we have wrapped up in the quarter. But there’s about a $200,000 drag from those handful of projects that we wrapped up. And so, if you say that we don’t have bad projects going forward or we minimized the number of bad projects, if we didn’t have that $200,000 drag in the quarter, the margin would have been 100 basis points higher at 20.5%. So, as we take on better projects and we execute better, there’s no reason to think that we can’t have that margin back over 20%, which is something that we used to talk about before.So with the higher percentage of residential which carries margin over 20% already and the avoidance of bad projects, I think our visibility to over 20% becomes a lot more realistic. So, I don't think it will be a step function change for Q3, but I also wouldn't expect there to be a step down either. So, do we peak at over 20% in Q3? Possibly. But certainly, we're going to stay in that range, I believe. And then, as the projects weed out, and hopefully we'll get to that point where we can expect consistently to be over 20% gross margin.

[Philip Shen:]

Great. That's really helpful color. Thanks. Can you update us on the developing relationships that you're building with new homebuilders? Are you able to -- have you been able to lock down any new homebuilders or at least get on their approved vendor list, so that you can serve as a source of solar for the new homes? Thanks.

[Chuck Cargile:]

Yes. Good question. We’re certainly eyeing that. As you mentioned, it's such -- going to be such a fruitful environment for us in 2020 as the as the rules work in our favor, for homebuilders having to make sure that their all the new developments have access to solar. So, we have been focusing on homebuilders. We have several that we're in advanced stages of negotiation with. We don't have any master sales agreements yet that I can talk about. But, I am confident that with the focus that we have and with the work that Valarie and her team are doing that we will get some benefit from that in 2020. But nothing that I can point to as a definitive design in type agreement at this point.

[Philip Shen:]

Okay, great. I'll pass it on. If there's nobody else, I might jump back on.

[Operator:]

And Mr. Cargile, there appear to be no further questions in the queue at this time. I'll turn the call back over to you for any closing or additional comments.

[Chuck Cargile:]

Okay. Thank you all for joining us 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 any further questions. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time. And have a great day.