Sunworks, Inc.
Q3 2019 Earnings Call Transcript

Published: 31 Oct 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sunworks Third Quarter 2019 Earnings Conference Call. All lines have been placed in a listen-only mode, and the floor will be opened for your questions and comments following the presentation. [Operator Instructions].At this time, it is my pleasure to turn the floor over to your host for today, Mr. Rob Fink of FNK IR. Sir, the floor is yours.

[Rob Fink:]

Thank you, operator, and good morning, everyone. Thank you all for joining Sunworks' third quarter 2019 earnings conference call. Hosting the call today are Chuck Cargile, Chief Executive Officer; and Paul McDonnel, Chief Financial Officer.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 Q&A session. Therefore, in accordance with the Private Securities Litigation Reform Act of 1995, the company claims the protection of the Safe Harbor for forward-looking statements. 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 represent management's estimates as of today, October 31, 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 they filed their third quarter SEC filing on Form 10-Q. We encourage you to review the press release to augment the information provided on this call.With all that said, I’d now like to turn the call over to Sunworks' CEO, Chuck Cargile. Chuck?

[Charles Cargile:]

Thank you, Rob. Good morning, everyone, and thank you for joining our call. Earlier today, we reported our financial results for the third quarter of 2019. Our third quarter financial results were a little bit lower our expectations, but fortunately the shortfall was mainly due to the timing of revenue and gross profit recognition for a few jobs, which merely moved from the third quarter into the fourth quarter.We expect the fourth quarter results to be better than the third as we recognize the benefit of these items that shifted between periods. We continue to win new projects with expected gross margins that are higher than our historical average, which should allow us to generate increasing profitability.In addition, although a number of commercial jobs we anticipated closing in the third quarter was delayed, the 12 commercial projects we did close in Q3 2019 contributed gross margin of approximately 23% for the quarter. As we increase our close rate, we anticipate further improvements in the gross margin.We expect a robust fourth quarter in terms of new sales and installation activity. Last week, we announced the follow-on project worth more than $1 million with our partner Bright Power. Bright Power has proven to be an excellent partner for us and our opportunities with them continue to expand.Together, we’re seeing increasing opportunities in the commercial market as real estate developers and property managers are turning to solar as a cost effective way to improve energy efficiencies, reduce operating costs and most importantly upgrade facilities for their residents. I’m optimistic about abundant future opportunities with Bright Power.We also have provided a large number of proposals to potential customers who are interested in initiating their project in time to get the full investment tax credit. In order to do so, construction activity must have started or payment of 5% of the total contract value must have been by the end of 2019.This catalyst for action is expected to boost our new sales and our cash flow in the fourth quarter. In fact, we’re already off to a fast start in October. We have booked more than $3 million of new orders for our commercial and public workgroups and more than 2 million in residential.We continue to expand our addressable market and diversify our geographical footprint. Our pipeline of new opportunities outside of California is growing and we anticipate closing on another large project in Massachusetts any day now. We’re also close to finalizing a contract for our first project in New Mexico.Turning to residential. I mentioned last quarter that I’m pleased with the progress we’re making. We've augmented our internal team, we’re selectively adding and training new dealers and we have some interesting large initiatives underway. At the macro level, we’re optimistic about the rest of 2019 and are expecting continued tailwinds in 2020.A recent analyst report forecasted 20% growth year-over-year for residential solar in 2020 versus 2019. We believe we’re positioning ourselves well for that growth. Our long-awaited, much-anticipated MAROMA project has finally launched, and we anticipate approximately $300,000 of revenue from this program in the fourth quarter with the potential for another $1.5 million to $3 million in 2020 and beyond.We also continue to have promising dialogue with three different homebuilders about small to medium-sized new developments in California. At Sunworks, we've historically favored the ownership model for our customers and our approach with these particular homebuilders is to educate their prospective buyers on the relative advantages of ownership. We believe that approach is the best for the homebuilder and best for the homeowner.Lastly, as it relates to homebuilders, we’re pleased to be a preferred solar partner with the National Association of Home Builders at the International Builders’ tradeshow in Las Vegas in January of 2020. We’ll be providing more publicity about our involvement in this huge tradeshow as the event draws near.In summary, although our third quarter financial results fell a little below our guidance, we’re continuing to make progress in a position for a strong finish to 2019 and are optimistic about 2020.With that, I’d like to hand it over to Paul to discuss our financial details.

[Paul McDonnel:]

Thank you, Chuck, and good morning, everyone. Before I provide specific details, I want to point out that all share and per share numbers discussed today and included in the press release and the 10-Q filed this morning retrospectively reflect the impact of the 1-for-7 reverse stock split approved by our Board of Directors that was effective as of August 30, 2019.Installation revenue for the third quarter of 2019 was 17.5 million in the quarter compared to 18.3 million in the third quarter of the prior year. The 17.5 million of installation revenue is a 4% decrease from the 18.3 million of revenue for the same period in the prior year.Non-residential revenue, which includes ACI and public works installation revenue, was about 74% of our third quarter revenue or 13 million, down from 13.3 million in the prior year quarter. Residential installation revenue was 26% of quarterly revenue or approximately 4.5 million, down from 5 million in the prior year quarter.In total, our revenue in the third quarter was below the low end of our guidance we had provided at the beginning of the quarter, which was 19 million. The revenue was lower than we expected in our public works and residential groups.Our public works team has been working on a large project for the Fresno Unified School District where we experienced approximately 1.5 million of revenue delay because we had to stop construction and underground work once summer vacation ended.Construction will resume during the Thanksgiving and winter holiday when students are away from campus. Although we were able to mobilize some of our people to other projects, we were not able to offset the full miss.We had also anticipated that our residential team would generate approximately 0.7 million of revenue from the initial 1.7 million commitment on MAROMA projects during the third quarter. Unfortunately, the funding from the State of California was delayed pushing the programs out of the third quarter.Since September 30, 8 of the potentially 65 projects have received the notice to proceed and are in various stages of design, permitting and construction. We anticipate approximately 0.3 million of revenue from these projects in the fourth quarter and at least 1.5 million and as much as 3 million in 2020 and beyond.Third quarter 2019 gross profit was 3 million or 17.1% of revenue, reflecting a $400,000 decline from the 3.4 million or 18.4% of revenue in the same quarter of the prior year. The decrease in gross margin was driven by two factors. First, continuing to work through a few of the low margin jobs contracted prior to 2018; and secondly, the timing of profit recognitions between materials versus installation labor.First, in the third quarter, we recorded 9% gross margin on 2 million of revenue for older contracts putting downward pressure on the gross margin. Secondly, we had 2.6 million of revenue from materials delivered to sites for which no installation profit margin gets recognized. Excluding these items, the remaining revenue carried a gross margin of 21.9%.In any period in which we have a higher percentage of completed jobs, our margins are normally positively impacted. In periods in which we have a higher percentage of materials shipment without project closure, our margins are depressed. In the third quarter, there were a few jobs that did could not close, so the remaining margin on those jobs shifted to Q4 when we expect them to close.We expect our gross margin to rebound in Q4 to approximately 20%, driven by better ACI margins and increases in residential installation activity, which has historically generated gross margins that are higher than the consolidated average.Our total operating expenses for the third quarter of 2019 were 4 million. This reflects a $500,000 increase from the same period in the prior year. A majority of this increase, approximately $300,000, was due to costs and legal fees to settle a two-year-old complaint from a former sales consultant. The purpose of the payment was to avoid incurring additional legal costs necessary for jury trial and to eliminate the risk of an unexpected negative verdict.Selling and marketing expenses for the third quarter of 2019 were 0.8 million or 14.6% below the third quarter of 2018 level. The reduction in selling and marketing expenses primarily resulted from the earlier reorganization of the sales and sales support functions, low commission and promotional expenses and lower advertising expenses.Please keep in mind that costs associated with third party generated sales are included in cost of sales above the gross profit line, whereas internal sales and marketing expenses are recognized as operating expenses below the gross profit line.We continue to evaluate our sales and our marketing efforts in order to balance the efficiency with effectiveness, while at the same time enhancing sales, estimating and proposal processes.We believe the market will be strong as we approach the end of the year with additional demand for battery and for residential systems. The current unreliability of electrical utility services in northern California may provide additional opportunities upon which we are poised to capitalize.Our third quarter 2019 general and administrative expenses increased by $600,000 compared to the year-ago quarter due in part to the legal settlement that I referenced previously. We anticipate that the settlement expense as well as some other small increases in Q3 will not recur in Q4, and that general and administrative expenses will return to the range of 2.5 million to 2.7 million reported in the prior quarters.During the three months ended September 30, we incurred 99,000 in total non-cash stock-based compensation compared to 151,000 for the same period in the prior year and depreciation and amortization expenses for the three months ended September 30 were 87,000, down 9% compared to the prior year period. As a result of all these factors, our third quarter 2019 adjusted EBITDA was a negative 0.8 million.Interest and other expenses were approximately 0.2 million for both the third quarter 2019 and the prior year third quarter. The company incurred a net loss for the three months ended September 30, 2019 of 1.2 million compared to a net loss of 0.4 million for the three months ended September 30, 2018.Turning to our balance sheet. Our unrestricted cash and cash equivalents as of September 30, 2019 were 2.2 million compared to 3.6 million at December 31, 2018. Our cash and liquidity positions were negatively impacted by our operating loss, compounded by over 0.7 million in cash prepayments to module suppliers to steer [ph] modules needed to support our backlog of projects scheduled for 2019 installation and beyond.As discussed in the last conference call, we filed a registration statement on Form S-3 which became effective on May 31, 2019 allowing Sunworks to offer and sell from time to time up to an aggregate of $15 million worth of common stock, a portion of which was being utilized to an aftermarket offering.As of September 30, 2019, 846,000 common shares had been sold using the ATM, resulting in net proceeds after issuance costs of approximately 3.3 million. Since September 30, another approximately 555,000 common shares are issued and outstanding resulting in additional net proceeds of about 1.5 million. In total, as of today, the ATM has been used to issue approximately 1.4 million common shares resulting in net proceeds of approximately $4.8 million.Our working capital surplus at the end of the third quarter of 2019 was 1.1 million, reflecting an improvement of approximately 1.5 million in the quarter. Within current liabilities is 0.9 million of operating lease liabilities due to the non-cash implementation of a new accounting pronouncement that became effective in January 2019, which requires us to show the present value of future operating lease obligations as a liability on our balance sheet for the first time.In addition to the accounts receivable, we anticipate collecting in the fourth quarter. We have deposits or prepayments for inventory which we have either already delivered in the fourth quarter or will soon deliver. These amounts will convert to cash over the next several months.Also included in contract assets are a few large amounts for activities which will convert to receivables and ultimately cash receipts over the next several months. As a result, we anticipate a positive conversion to cash from our working capital in the current quarter.During the nine months ended September 30, 2019, we used 4.2 million of cash in operating activities, which is 1.8 million less than the 6 million used in operating activities for the same nine months in 2018. The cash used in operating activities was primarily the result of the year-to-date net loss.The cash impact for the year-to-date net loss of 5.8 million is offset by cash received from the collection of accounts receivable, reductions in customer deposits, reductions in inventory and contract assets and increases in accounts payable and accrued liabilities.Cash used in operating activities includes the net loss, increases in deposits on materials and decreases in contract liabilities as revenues have been recognized and earned. Cash used in operating activities does not include the net cash impact of the 3.3 million raised through the aftermarket offering during the first nine months of 2019.As described in earlier conference calls, since early 2018, we have been working down from a high level of inventory that we had purchased or committed to purchasing due to the enactment of the tariff on imported modules. The inventory balance has now declined for six consecutive quarters and was 2 million as of September 30, which is more reflective of an appropriate inventory balance for Sunworks.Our total non-trade debt at September 30, 2019 was 4 million compared to 4.9 million at December 31, 2018. The 4 million consists of a net 3.5 million for the CrowdOut promissory note and 0.5 million of acquisition and equipment financing. 0.5 million of the debt is current and the remaining 3.5 million is long term.We expect to regain some top line momentum in the fourth quarter of 2019, but are also aware of the potential impact from the fires in California, potential rains late in the year and of course the holidays.Based on a combination of these factors, we anticipate our fourth quarter revenue to be slightly higher than the third quarter and we expect higher sequential gross margins and lower operating expenses in the fourth quarter of 2019 and we expect to generate positive adjusted EBITDA and cash flow.With that, we are now happy to answer any questions.

[Operator:]

Thank you. [Operator Instructions]. We’ll move first to Philip Shen at ROTH Capital Partners.

[Philip Shen:]

Hi, guys. Thanks for the questions. I’d like to start off with bookings in the quarter. You guys slowed down I think meaningfully relative to Q2. If we have this calculation right I think it’s 10.5 million versus 17.4 million of new bookings. Can you just provide a little bit more color as to the drivers behind that and your thoughts on whether or not you see bookings accelerating as we go through Q4 and into Q1? Thanks.

[Paul McDonnel:]

Sure. First, for the calculation, offline we can work through the role forward, but the Q3 new sales were 12 million, which you’re right. That’s a little bit lower than – quite a bit lower than what we had in Q2. We have picked up – in October there were some things that just shifted into October. So we’ve already booked more than $5 million of new business in the month of October. So not everything closed at September. And I think the important thing for us as we look into 2020 is to have a strong Q4 to start to replenish or increase that backlog so that we can convert in 2020. So Q3 was a little low, but we think that we’ll make it up in Q4. And the quarterly breakup, we don’t always get everything in, in the quarter. So if we look at it over a longer period of time and see how it impacts the backlog for a longer period of time I think is a better way to look at it.

[Philip Shen:]

Okay. And then you guys gave official guidance for Q4, but Chuck if you can for modeling purposes maybe speak to what revenues might look like in Q1 or Q2 or the first half and back half, maybe some kind of cadence as to how the revenues trend, that certainly could be helpful?

[Charles Cargile:]

Sure. Yes, we purposely just gave the guidance for Q4. We’re now in the beginning stages of our end of operating plan and budgeting process, which we’ll present to our Board in December. So for specific guidance and a look at 2020, it’s a little bit premature. From a macro level, I think there’s a lot of reasons to be optimistic about 2020. I mentioned in a report that talks about the growth that we expect to see in the residential market and I think we’re poised for that and we’ve seen that in our pipeline and how we think we’re going to finish this year. We’ve made good progress in a noisy business, so I think we’ll benefit from that. And we also are seeing more business outside of California. I mentioned they didn’t book at Q3, so we don’t have it in the reported numbers but we’ll see it in October and November. So that will position us better for outside of California. Hopefully some of that will help us in Q1. As you know, we generally have a slow Q1 because so much of our business is in central and northern California and it gets slowed down by the rainy weather. So I think although we’re not ready to speak about the specifics, I think we will see growth in 2020. I think we’ll have year-over-year growth in Q1. And I think then as some of these pipeline projects convert, we’ll start to build the width [ph] for Q2, Q3 and Q4.

[Philip Shen:]

Okay. That is helpful, Chuck. You mentioned resi growth and the optimism and the strength there and you mentioned that you are seeing it as well in your pipeline. Can you talk to perhaps how much you think resi as a segment for you guys might be growing next year? We see the market growing as much as 25% overall this year and 25% year-over-year next year. Do you think you can grow as quickly as the market or even potentially better? What are your thoughts there? Thanks.

[Charles Cargile:]

Yes, I do. For 2020, I think we can.

[Philip Shen:]

You can grow better than the market or grow in line with the market?

[Charles Cargile:]

I think in line. I think the 20% number is something that I’ll be looking for internally as we go through our planning process. As you’ve followed us closely, you know we’ve made a lot of changes in 2020 in the residential group. And I think we’re starting to see the benefits from that now. I always think it was book to bill or new sales over revenue and I think we’ll see double-digit growth on that in 2019, which will build the backlog for 2020. And so if we’re going to do close to $20 million in revenue this year to get the kind of growth that we’re talking about, we’d need to do close to 25 million. And I think averaging 6 million, 6.5 million a quarter I think is certainly doable. So I think the 20% plus that you talk about would be a reasonable objective for us.

[Philip Shen:]

Okay, great. And actually we’ve officially put our forecast for the industry to be 25% year-over-year this year and 25% next year. All right, great. So let’s shift to the margin trends in 2020. If you can share it maybe qualitatively how you expect the margins to trend by quarter in 2020? Can you give us any detail on that?

[Charles Cargile:]

Probably not to your satisfaction for quarter-to-quarter. I can talk about it at a higher level because it is very dependent upon revenue. So depending on how you would model and how we would forecast Q1 revenue, it would get good leverage on higher revenue of course. But I think as we’re close now to working through a lot of the pre-2018 jobs, there’s not a lot that’s left there. So I think that improves the margins. And as Paul said in his prepared remarks, as we increase our close rate on projects, we’ll benefit from a better margin as well. I think to put it in context for Q3; even though we reported a 17.1% gross margin, the older jobs accounted for 2 million of that revenue and only had a 9% gross margin. And then we also had $2.6 million of that revenue came from material deliveries. It has no margin on it at all. So if you set those two aside, then the remaining revenue, almost 13 million, had a 22% gross margin. So I think that gives you a bit of visibility into how we envision getting margins over 20%. And the second piece is following on our discussion that we just finished in the strength of residential, our residential business generally carries a gross margin that’s better than the consolidated average. So if the residential business is growing faster than the rest of the business, that will buoy the gross margin as well. So I think all those things considered, whether – without getting into a quarter-to-quarter split, I would say because of those things we would expecting in 2020 a gross margin that would exceed 20%.

[Philip Shen:]

Great. That is very helpful. Thank you. Maybe a last question here from me and then I’ll pass it on. As it relates to your cash balance and need for cash, clearly you guys have been using your ATM with the 1.4 million shares issued total thus far and I’m guessing that’s pre-split, right? So on a go-forward basis, what is the plan with the ATM? Anything with the plan in general for financing and funding your gross?

[Charles Cargile:]

Okay. Just to recap, the shelf registration has $15 million available on it and we’ve used now about 5 million of that. So I think it served the purpose in Q3. Paul talked about some of the items on the balance sheet that we didn’t convert to cash in Q3 that we expect to convert to cash in Q4. So having the ATM allows us to get through that with little disruption. And so now in Q4 as those items convert to cash and as we have a good cash quarter, then I would expect that we would not need to tap into the ATM like we did in Q3. So it’s good to have it there, but we’ll continue to use it prudently because we are keeping the dilution very much in line and we’ll use it to help us make good business decisions. But the idea is to generate cash from the business so that we don’t have to use the ATM.

[Philip Shen:]

Okay, great. Thanks, Chuck. I’ll pass it on.

[Charles Cargile:]

Okay. Thanks, Phil.

[Operator:]

Thank you. Next we’ll go to Jim McIlree at Chardan Capital.

[Jim McIlree:]

Thanks. Good morning.

[Charles Cargile:]

Hi, Jim.

[Jim McIlree:]

Hi. The settlement expense in the quarter, has that been paid or is that cash to be paid in Q4?

[Paul McDonnel:]

That has all been paid.

[Jim McIlree:]

Okay, great. Chuck, you mentioned the impact or you mentioned the fires and how you’ve accounted or tried to account for it in the Q4 outlook. Just a little bit more on that if you could? Have you seen an impact from the fires at all?

[Charles Cargile:]

Yes, thanks for that. The fires are – it’s certainly impactful as you would imagine for the whole – the broad California community throughout the state both southern California and northern California obviously. And I think it’s impactful partly because it weighs heavy on everyone’s minds and it creates uncertainty and disruption in living conditions for our people. A number of our employees have been impacted by either the PG&E shutdowns and/or the evacuations from the fire. So it’s impactful for the team. But we’ve also on the business side had a number of PG&E driven delays for inspections or testing of permits and things like that. So there’s delays that come from that as well. And so where we sit today with the fires, there’s been some delays for PTO. We just don’t know how long it’s going to last. So it’s too early to predict the financial impact for the near term, but it certainly is impactful and it’s disruptive. But I think the flipside is over the long term and if you think of it from a high-level perspective, it actually increases the awareness and the interest in solar combined with battery storage. It prompts discussions and certainly positions independent solar power as a viable and positive option. So it’s a balance. I think the near term, it’s certainly disruptive. Over the long term, it probably shines a better light on solar.

[Jim McIlree:]

Understood. Thank you. And can you give an indication about how much of revenue or backlog is non-California?

[Charles Cargile:]

Yes. We’re still 90% plus California. So this year new sales and revenue have been closer to 95%. I think that that will be closer to 90% next year as I look at the pipeline.

[Jim McIlree:]

Okay. And my last question, maybe you’ve talked about it, I’m trying to figure out if there’s a working capital need in Q4 for cash or are you expecting working capital to generate cash in Q4? I was a little bit confused by the commentary on that.

[Paul McDonnel:]

Yes, we are expecting working capital to be a positive contribution in Q4. And Jim, I’m happy to walk through this with you offline, just looking for balance sheet, but if you look at where we were June 30 and have the balance sheet changed to September 30 and then our ability to collect on the receivables, collect on deposits that we made as we deliver some of the material. And then you’ll see an increase in the contract assets that a large part of that is how we record activity before we paid a milestone for billing. And so now in the month of October, as we hit those billing milestones, that converts to ARR and then should convert to cash. So as we’ve modeled that we do expect working capital positive cash generation in Q4.

[Jim McIlree:]

Okay. I think I think I see what you’re saying. All right, I think I get it. Okay. Fantastic. Thanks a lot. Good luck, guys.

[Charles Cargile:]

Thank you.

[Operator:]

With no other questions, I’ll turn the call back to Mr. Cargile for any additional or closing remarks.

[Charles Cargile:]

Thank you. Thank you all for joining us on this call. And if you have any questions, please don’t hesitate to reach out to Paul or myself or Rob Fink and the FNK IR team at any time. Thank you.

[Operator:]

Ladies and gentlemen, that will conclude today’s call. We thank you for your participation. You may disconnect at this time and have a great day.