Sunworks, Inc.
Q4 2019 Earnings Call Transcript

Published: 31 Mar 2020

[Operator:]

Greetings and welcome to the Sunworks Fourth Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Mr. Rob Fink from FNK Investor Relations. Thank you. You may begin.

[Rob Fink:]

Thank you, operator. Good afternoon, everyone and thank you for joining Sunworks' fourth quarter 2019 earnings conference call. Participating on the call today are Chuck Cargile, Chief Executive Officer; and Paul McDonnel, Interim Chief Financial Officer.Before we start, I would like to remind everyone that during this call 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 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 projection as to the company's future performance, results or actions represent management's estimates and assumptions as of today, March 30, 2020. Sunworks assumes no obligations 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, as well as their annual report on Form 10-K. We encourage you to read both of these documents to augment the information provided on this call.With that said, I would now like to turn the call over to Sunworks' CEO, Chuck Cargile. Chuck?

[Charles Cargile:]

Thank you, Rob. Good afternoon, everyone, and thank you for joining our call. Earlier today, we reported the results for the fourth quarter of 2019 and we detailed the aggressive and necessary actions we are taking to ensure Sunworks is positioned to survive the unprecedented nature of the current environment and emerge as a stronger, more viable company.Before getting into the results of our challenged fourth quarter, it’s important to address the effects of COVID-19 or the Coronavirus. Over the past couple of months, we’ve made substantial changes to the business from both an organizational and cash flow perspective that will allow us to continue operating effectively while installing our $45 million of backlog, which was buoyed by $21 million of new project wins during the fourth quarter.As we noted in our press release, we are authorized to continue serving customers as an essential business as defined by county agencies directives to about shelter-in-place. The energy industry is identified by the federal government as critical or essential.We are conducting business and our employees continue to work although we are carefully abiding by the California Department of Public Health’s guidance on protecting oneself and others during internal and client-facing interaction.That said, some of our customers and subcontractors and suppliers may not be deemed an essential business. Therefore, they are not operating at a similar capacity, which may negatively impact our near-term activities. So the immediate questions we faced are how are we impacted directly? What are we doing about it? And what can you expect from us going forward?Over the course of this call, I hope we’ll provide answers to those questions. First, we are protecting our employees and anyone they interact with. We are thankful that none of the Sunworks team has the Coronavirus.We’ve instructed all of our employees to follow quarantine recommendations if they are sick and/or show any symptoms of the virus. We’ve been diligent in reinforcing the need to disinfect our work locations and vehicles and remind employees of the importance of washing their hands, and bodies to minimize the risk of exposure.We exercise appropriate social distancing both in the field and in our offices. We’ve provided our field teams with instructions on how to safely interact with customers and other Sunworks personnel at job sites, and have provided them with additional safety trainings, sanitizers, gloves and masks.Although the majority of the work we perform at customer locations is done outside, we’ve instructed our teams to be considerate of customers who prefer we not be on their premises. We are also being flexible with our office teams.Although we are authorized to continue operations, many of our internal employees are working remotely. We have and will continue to prioritize the health and safety of our team and all of our partners within our value chain.Second, we are protecting the financial viability of our company. Earlier this month, when we realized the severity of the disruption and the uncertainty of the future, we acted promptly. We established an internal COVID-19 response team that developed a structured communication and action plan, implementing the steps that we identified in our press release last week.We acknowledge that some of our installation activity would be delayed, especially on the residential side of our business.To proactively conserve cash, we strategically made the difficult decision to lay-off about a third of our workforce or 59 people. These layoffs are considered temporary and that the employees can retain their health insurance and be called back to work quickly when business conditions allow.We also reduced 36 positions from full-time to part-time. The majority of these reductions impact our SG&A expenses, reducing our operating spend in Q1 and Q2. Our leadership team recognizes the devastating impact these actions can have on our team members and their families. Therefore, all leadership, directors and above have taken at least a 50% reduction in pay.Additionally, our Board of Directors instructed me to seize their monthly payments. I have taken a 100% reduction in pay and Paul has taken a 65% reduction in pay for the near-term until we have greater clarity.Combined, these actions are expected to result in savings of $450,000 a month. In an attempt to pursue other cost savings measures, we proactively reached out to our various landlords and negotiated rent abatement or reduced rates which are expected to save us an additional $50,000.Separately, but related, as soon as the economic realities presented by COVID-19 became evident, and prior to the approval of the recent stimulus plan, we immediately applied for a small business association loan. This then has broadly reported the government has approved the $2.1 trillion Cares Act which allocates $349 billion to small business forgivable loans.This past weekend I had a conference call with a representative from one of our partnering banks who will be partnering in the lending program. And he is optimistic about the support they can provide to Sunworks. Although many of the details of the program are being finalized, we will update an application this week and based on the conversation, we could expect a potential cash infusion within weeks.The amount and terms and timing are still to be determined, but the cash inflow would be impactful for us. I am proud of how our team has reacted from the field crews all the way to our Board of Directors. Nonetheless, there is so much outside of our control causing a great deal of uncertainty.Many of our employees are feeling distressed. Perhaps they have childcare disruptions or are worried about family members or just overwhelmed by the overall abnormity of the changes in their daily lives.The same goes for our customers and other business partners. And of course our effectiveness is impacted by utility companies, agencies in jurisdictional approval delays. All of this disruption is understandable but negatively impactful.So considering all of this uncertainty, what do we know? Today we filed our 10-K for 2019 and we have a clean opinion from our auditors meaning our independent auditors are comfortable with our ability continue as a going concern and they agreed that the valuation of the company supports our asset value without any adjustment to the carrying value of our $9.5 million of goodwill.We have $45 million of backlog scheduled for installation over the next twelve months. Although the timing of that installation activity is uncertain, we’ve only experienced delay so far, no cancellations. We recognize the need to ensure we have sufficient cash to reconstruct our business toward profitability and cash generation. One way we’ve achieved this was by fully utilizing our aftermarket offering.As of last week, we cancelled our ATM and our shelf registration expired when we filed our 10-K. Although it’s painful to endure the dilution that comes from equity sales, our cash position is currently higher than it was at year-end even after paying $1.5 million or half of the CrowdOut senior secured debt in January.And most importantly, the dilution impact is now behind us. Shareholders can invest without the concern of uncertain future dilution from the ATM.Our strong 2020 backlog, coupled with cost reduction steps we have taken keep us optimistic. We’ve dramatically reduced our breakeven point, protected our cash position, improved our balance sheet, and overall continue to be thankful to sustain business operations during this difficult time.We are not able to predict what the impact of COVID-19 will have in our business and financial results in the future including our current first fiscal quarter or our second quarter. But we are managing our cash diligently to survive through this uncertainty. We will manage our payroll to be efficient but also satisfy customer activity to ensure that the lifeblood billings and collections will pay for our efforts.In summary, based on our cash position, our ability to generate cash from operations, and access to funds made available to the stimulus program, we are confident that we will effectively navigate through the disruptive business environment and emerge as a leaner, more viable business.With that, I’d like to ask Paul to provide more specifics related to our financial results in the quarter.

[Paul McDonnel:]

Thank you, Chuck, and good afternoon, everyone. The fourth quarter of 2019 financial results reflects the headwinds we faced in our continuing effort to create a sustainable, operational improvement to Sunworks.For the fourth quarter of 2019, reported revenue was $14.4 million, down from $19.2 million reported for the fourth quarter of the prior year. ACI and public works revenue combined for a total of $9.6 million or about 56% of total revenue for the quarter. Residential installation revenue of $4.8 million was 34% of the total revenue for the quarter.Compared to the fourth quarter of the prior year, the revenue mix changed. ACI and public works revenue decreased from 70% in the fourth quarter of the prior year to 66% in the fourth quarter of 2019, while residential revenue increased from 30% to 34% of total revenue for the quarter.Gross profit for the quarter was $0.7 million or 4.7% of revenue, a decrease from $3.6 million of gross profit or 18.6% of revenue in the fourth quarter of 2018. Gross margin was negatively impacted by lower revenue and the resulting inability to cover fixed installation costs during the quarter.Our gross margin of 4.7% reflects the inefficiencies in operations resulting from engineering redesign, permitting delays through the authorities having jurisdictions, field executioners, construction rework, and delays achieving permissions to operate from utilities.New projects awarded in 2019 generally drive higher gross margins and those were up in prior periods. During 2019, revenue and margin were impacted by 46 low margin jobs. Jobs are combined for a negative margin of $0.4 million. 25 of these jobs were awarded in 2018, another 20 were awarded in 2016 and 2017.The gross profit in the fourth quarter of 2018 of $3.6 million or 18.6% of revenue was the highest gross profit percentage – margin percentage in the prior six quarters to that point in time. It is important to remember that any costs in excess of project estimates are charged to cost of goods sold as incurred.Cost exceeding estimates occur more frequently – occurred more frequently in the fourth quarter of 2019 compared to the fourth quarter of 2018 when costs exceeding original estimates were minimal.Gross margin and gross profit on residential projects in the fourth quarter declined year-over-year also. Lower than historical margins on residential projects were driven by timing of permits granted from the required jurisdictions and achieving permission to operate from the utilities.Additionally, the residential team had significant sales of residential batteries during the fourth quarter due to the customer reaction to the multi-day power outages experienced in Northern California. The demand for batteries resulted in an operational bottleneck from procurement, and receipt through installation.While much of the installation costs are variable with installation activity, certain costs are fixed and do not decrease at the same rate as revenues may decline. Margins in the residential business were 10.4% in the fourth quarter of 2019, compared to 19.8% in the fourth quarter of 2018.Total operating expenses excluding stock-based compensation and depreciation for the fourth quarter of 2019 were $3.7 million, compared to $3.1 million in the fourth quarter of 2018. This represents a $0.6 million or a 19% increase from the same quarter in the prior year. In the fourth quarter of 2018, operating expenses benefited from a $250,000 reduction in expense as a result of the reversal of a bonus compensation accrual.In contrast to the prior year, in 2019, we had increases in expenses for auto insurance, software licensing and technology, commissions, legal and professional charges, while combined salaries and benefits remained relatively flat compared to the prior year in spite of increases in medical insurance costs.We originally implemented some cost reductions and organizational changes in December 2019 and January 2020. Then as a result of the massive disruption caused by COVID-19, we took the more aggressive steps outlined in last week’s press release and more fully explained by Chuck a few minutes ago.As described more comprehensively in our 10-Qs and 10-K, Sunworks transferred goodwill impairment in the fourth quarter of each year. As in the prior year, we engaged a third-party to perform a valuation study of Sunworks’ goodwill. No goodwill was – no goodwill impairment was required in 2019 compared to the prior year when Sunworks recognized a $1.9 million non-cash charge to reduce the carrying value of goodwill.As a result of recent global and regional events that Chuck described earlier, another goodwill evaluation will be prepared at the end of the first quarter of 2020 consistent with the accounting guidance, which requires us to evaluate goodwill whenever events or circumstances indicate that the carrying amount of the asset exceeds this fair value and may not be recoverable as maybe the case in the current unusual business climate.Stock-based compensation was $100,000 during the quarter compared to $130,000 in the prior year quarter. Interest expense for the fourth quarter of 2019 was $209,000. Interest expense for the quarter is primarily related to the CrowdOut notes. We paid down the $3 million senior CrowdOut note by $1.5 million in late January 2020.Our cash interest expense will be lower going forward as a result of the principal reduction on the senior CrowdOut note and the final payoff of the acquisition-related debt to the MD Energy acquisition done in 2015. However, with January pay down of the CrowdOut debt will require us to recognize a non-cash charge of approximately $106,000 in the first quarter of 2020.The pay down of the debt requires us to accelerate the write-off of the CrowdOut loan issuances cost and extension these and exit these associated with a portion of the loan that was paid off early. The future quarterly amortization expense will also be less over the remaining term of the loan. To a small degree, we are also benefiting from the lower 30-day LIBOR rate, upon which interest payments are calculated.The LIBOR rate has declined approximately a 100 basis points in 2020 to approximately 1%. The net loss for the fourth quarter of 2019 was $3.4 million or $0.59 per basic and diluted share, compared to a net loss of $1.8 million or $0.50 per basic and diluted share in the year ago quarter. The net loss for the fourth quarter of 2018 also included a $1.9 million non-cash impairment charge.Turning to our balance sheet, our unrestricted cash and cash equivalents balance as of December 31, 2019 was $3.2 million, compared to $3.6 million at December 31, 2018. During the first quarter of 2020, we continued to sell stock under the provisions of our aftermarket offering to fund working capital needs, retire debt, and prepare for the business and economic uncertainty caused by COVID-19.Year-to-date in 2020, we sold an additional 9.8 million shares resulting in net proceeds of $7.7 million. Our inventory balance at the end of December 2019 was approximately $3 million, compared to $3.3 million at the end of 2018. Inventory balances remain higher than desired as a result of delayed construction starts in new projects.We expect inventory balances to further decline as we continue to improve operations and project execution. Proper management of cash and working capital is a continual emphasis at Sunworks.Our total debt at December 31, 2019 was $3.8 million. The $3.8 million consists of the $3.75 million CrowdOut promissory note, net of unamortized issuance cost and exit fees and $0.3 million for acquisition and equipment financing. The $0.3 million of debt is considered current and the remaining $3.5 million is long-term.In late January 2020, we paid down $1.5 million of the $3 million senior CrowdOut note balance and have since paid off the remaining balance of the acquisition promissory note of another approximately $0.25 million. As of today, approximately $2.2 million of debt remains outstanding.With that, we are now happy to answer any questions you might have. Chuck?

[Operator:]

[Operator Instructions] Our first question comes from the line of Philip Shen with ROTH Capital Partners. Please proceed with your question.

[Philip Shen:]

Hey, Chuck, Paul, thanks for the questions.

[Charles Cargile:]

You are welcome. Hello, Phil.

[Philip Shen:]

I’d like to start with the outlook maybe by segments. I think you said in the prepared remarks that you are able to operate as an essential service, but some of your customers are not able to. So, I was wondering, if you can talk through how are you getting through your backlog for each segment and I think that as resi ACI and then public works.

[Charles Cargile:]

Sure. Of course any comments about the outlook have to preface with events change every day and we are experiencing that. So, I can tell you what’s happened so far and our best guess of what we think the impact will be. First, in public works, where we are still working on in the forefront project with the Fresno Unified School District and also, we are working on a large state owned prison. We’ve been able to continue to work without much interruption and in fact, with the school district, we’ve been able to deploy more people on the site, because the classes are cancelled. So that’s been favorable. Unfortunately, as you know, we often have to get approvals or work with the utility companies and that hasn’t been working in our favor with the disruption it’s just harder to get them out to do the permits or the approvals that are needed. So, it’s not a matter of the impact of the Coronavirus with the schools I guess if it is, because that’s what’s impacting the utilities. In that instance, we are feeling pretty good about our ability to execute those projects. On the commercial side, we’ve had a few projects be delayed, but for the most part, we still have crews out working on job sites on the commercial side. So that’s been not as impactful as we might have feared. Residential has been impacted. We are not able to get through nearly as many of the projects that we have in backlog that we had expected to be able to execute on in the last month of this quarter, in the month of March, it’s been very much delayed. So our residential revenue will be much lower than what we would have expected it to be even a month ago.

[Philip Shen:]

Okay. And when you talk through revenue in resi, I think you wrote that you haven’t ever seen cancellations, but homeowners are effectively saying, let’s kind of wait this out in maybe a week, not a week but maybe a month or two or something, is that just the general …

[Charles Cargile:]

Yes, it’s waited out until – yes or just waited out until we have better clarity or until.

[Philip Shen:]

How much do you think the resi revenue could be down in Q1 versus, if you look back to Q1 of last year, I am guessing actually how to – you know a good January or maybe even a good February, I guess, I think there was very little rain and snow in the country, rain is more in California. So, do you think you are flattish year-over-year or in that resi segment or do you think you will be down even for resi in Q1 year-over-year?

[Charles Cargile:]

Yes, I think, last year in Q1, we did $3.9 million of revenues and we came into this year because we had really pretty good sales in the second half of last year. So, we came into the quarter with pretty good backlog on the residential side. And prior to the disruption in the month of March, I would have predicted something nicely higher than the $3.9 million.But I don’t think that will be higher than the $3.9 million now, because, as I said, we are only getting a little more than two months worth of work for a three month quarter. So I think that’s going to probably keep us a little bit below although I am reluctant to give any specific guidance yet for Q1 or Q2. But I think the $3.9 million would be – might be hard to get to.

[Philip Shen:]

Got it. Okay. That’s helpful. Thank you. And then, when you talk to your – so when you look at C&I, and public works, do you expect to eventually come up to that a permitting roadblock, if you will, the lack of the ability to get the permit and the lack of the ability to get certain approvals that will just stop projects in the tracks or what’s your sense for how C&I evolves in the coming months?

[Charles Cargile:]

Yes, we’ve been experiencing utility delays and been frustrated by utility delays much of 2019 and certainly in Q4 and that’s one of the reasons why our Q4 revenue was lower than what we expected in just the ability to get the utility to give us approvals. So I don’t see any reason why that’s going to get any better in the near-term.Now fortunately, when the jobs or the approvals get delayed in the Q4 were higher up in the Q, for Q1 that starts to – you get kind of the ones that you expect in Q4, you will get in Q1. But it’s just, the most frustrating part is it’s just very hard to predict and over the course of a project, it doesn’t have that much impact, but it certainly does when you are concerned with your quarterly reporting in your quarterly financial results.

[Philip Shen:]

Okay. So you are seeing friction down with demand looking upstream with the supply chain. Are you seeing any issues there at all? My sense is with Asia mostly back up and running, especially China, that you probably have sufficient products at this point? Are you been getting so much that you need to turn product away. So maybe talk through the inventory as well.

[Charles Cargile:]

Sure. We are fortunate in that most of the backlog that we have certainly for the first half of the year. The projects are either, we either have panels onsite already or product onsite or we have them already procured and in our warehouse. There are some for the second half of the year where we have purchase orders, but we don’t have the product yet and that’s of concern a little bit.As you know a company our size can often be – can have product pulled to go to another customer. We’ve experienced that in the past. So we are always a little apprehensive even if we haven’t approved purchase order if we don’t have the inventory. But for the first half of the year, even with the – even after the Coronavirus disruption, I am not that worried about product for the near-term.If this continues for a period of time and we start to have product that we need in the second half of the year as we look into 2021 then it might be a different story. But that’s not of all the concerns that we have resulting from the Coronavirus that’s not at the top of our list. What has to be more concerned is the dramatic slowdown in new sales.So I mentioned that we had a terrific fourth quarter, $21 million in new sales and with the projects that we had in our pipeline, I was optimistic about a good first quarter. I didn’t expect it to be, maybe not the $21 million, but I thought it would be better, but now in the month of March, there is just – it’s just hard to get customers whether it’s residential or commercial to make commitments in the throughs of such uncertainty.I believe that as we find a new normal, whenever that will be and it will probably be - the new normal will probably have at least a threat of recession and perhaps the surety of recession frequently the sales calls has a little bit more urgency and a little bit more attractiveness when you can talk about how a business or a company or a person can get a return on their investment and lower their costs in a time when they are worried about the overall economics of effects in a recession.So, big drop off now in terms of new sales, hopefully we can get to a new normal and get that accelerated at some point soon.

[Philip Shen:]

Do you see light at the end of the tunnel for a reacceleration of bookings? Or do you expect Q2 to be weak across the board? And what the chance that it spills into Q3?

[Charles Cargile:]

Yes. From where we sit today, I think, and I have no better crystal ball than anybody else, but with the extension of the lockdown, or whatever you want to call it through the end of April, I can imagine that we will see a sea change in the month of April.Some individual customers may start to get more confident and respond, but I think overall, there will still be a reluctance as long as the government is saying we are not sure for the month of April. It will be difficult for individuals to say, oh, but I am sure and so I will place that order. So, that’s going to get us probably in the least half of the quarter.So, again, my expectation is from a revenue and a backlog perspective, we should be able to perform, but new sales would then be filling up our fourth quarter and our momentum into 2021, that’s going to be the concern in the near-term.

[Philip Shen:]

Okay. Shifting over to your balance sheet. Are there any covenants associated with your notes that could be [tripped] and how would you anticipate managing through that situation?

[Charles Cargile:]

Yes. As you know, the debt we have is the CrowdOut note, which we paid off half of the senior secured. So that took from $3 million down to $1.5 million and then there is another 750 of subordinated debt on top of that.So we have the 2.25 and it’s very covenant light. So there is – so, there is no covenants that we were worried about. And clearly, we wouldn’t have been able to conclude the audit and file the K if they were covenant concerns that they had to be worked through. So we got full buyout from the auditors on the debt and our compliance.

[Philip Shen:]

Okay. Thanks, Chuck. And then, as it relates to liquidity, can you just talk through your situation, what kind of working capital needs might you have? It seems like you have the material on in the warehouses for the first half of the year, but what – can you talk through your cash flow from operation expectations and what the other sources of liquidity might be?

[Charles Cargile:]

Sure. So, we – as you can imagine, in this environment, our focus on cash has become even heightened more so than it was before and I felt like we were pretty focused on cash before. But now we are very detailed and reviewing our cash weekly.I have a – just we’ve now begun to have a weekly call with our Board of Directors where we go through the cash outlook. We’ve benefited from being able to fully use the ATM and excess cash. So we are in a better cash position today than we were at the end of the year and when I look at our 13-week cash flow.It shows that we’ll be comfortable through that period and then with the cost reduction steps we’ve taken, the overall cash burn per week is significantly below as we mentioned in the prepared remarks, we have about $500,000 a month of savings that we put in place just over the last couple of weeks. So, we are hypersensitive to the cash position as any practical and responsible company would be.But as we look out, we have a comfort level that we know we can continue to function in the way that we are and then I am optimistic about the – our ability to access a loan from the stimulus program and a loan on very favorable terms and some of the forgivable.So, as I said earlier, I’ve already been in conversation with the bank. In fact while we’ve been on this call, I got a follow-on call from our banker that I will return when we get off this phone. So I feel good about our place and line and that access to that.I don’t know yet what the size would be and what the terms would be or what the timing would be. But I feel good about our position to access that which we would to further augment the balance sheet.

[Philip Shen:]

Okay. Great. Well, I’ll pass it on from here. Thanks.

[Charles Cargile:]

You are welcome. Thank you, Phil.

[Operator:]

Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Cargile for any closing remarks.

[Charles Cargile:]

Thank you very much. We are never able to predict when a crisis will occur, particularly one like the pandemic that we are in now. But I believe in the adage that you should never waste the crisis. And as I look at our outlook going forward, we have to look for a sliver line and in our case, I think the silver lining is two-fold.One is, it caused us to take a harder look at our cost structure and to take a much more dramatic reduction in costs which will allow us to lower our breakeven point and become profitable, at lower level of sales, revenue and sooner in this recovery period.The second is, I believe it’s going to give us access to additional capital on very favorable terms, more so than we have today. So, I thank you all for joining us and if you have any questions, please – any follow-on questions, please don’t hesitate to reach out to Paul or myself or Rob Fink at FNK IR. Thank you very much.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.