Sunworks, Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Greetings. And welcome to Sunworks second quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rob Fink with Hayden IR.

[Rob Fink:]

Thank you, operator. Good afternoon, everyone, and thank you all for joining Sunworks second quarter 2018 earnings conference call. Participating on the call today are Chuck Cargile, Chief Executive Officer, and Phil Radmilovic, 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 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 legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, August 8, 2018. Sunworks assumes no obligations to update these projections in the future as market conditions may change. This afternoon, the company issued a press release with financial information and commentary and its quarterly 10-Q. We'd encourage you to review both to augment the information provided on this call. I would now like to turn the call over Sunworks' CEO, Chuck Cargile.

[Charles Cargile:]

Thank you, Rob. Good afternoon everyone and thank you for joining our call. Today, we reported the results for the second quarter of 2018. Our efforts to transform Sunworks into a business generating sustainable profitability and cash generation continue, but the improvement in our financial results has been delayed. The good news is that we continue to flush old low-margin projects through our backlog. This makes our current period gross margins lower, but gives us the visibility to improve margins in future quarters. To put in context, more than half of our ACI and public works revenue in the second quarter came projects booked in prior years and had a blended gross margin of approximately 10%. The revenue from projects booked in 2018 cater to gross margin in the high teens. In the third quarter of this year, although we're still expecting about half of our ACI and public works revenue to come from project booked in prior years, we have adjusted gross margins in the current quarter. We've already adjusted gross margins in the current quarter. So, the gross margin in Q3 for these projects is expected to be higher than in Q2. In addition, although our residential business continues to generate positive contributed profit, the total revenue from residential has declined as a percentage of the total. And the margins have slipped a little bit as we transition to a more indirect external sales model. The recent gross margins are unsatisfactory and we fully expect to see improvement in Q3 and even greater improvement in Q4 and beyond. This improvement will come as new projects become a greater percentage of the revenue and as we accelerate residential revenue, which generally carries a higher gross margin than ACI and public works. Despite the weaker-than-expected margins, there are parts of the business that provide us optimism and reflect progress on some of our initiatives. I will now discuss three of these. Number one, we're winning new projects. And despite constant price pressure in the marketplace, the projects we win have higher gross margin forecast than older projects. In the first half of 2018, we've won projects with a combined dollar value slightly more than $50 million at a forecasted gross margin slightly above 20%. In addition, in 2018, our proposals for new projects carried a gross margin of approximately 25%. We currently have $52.7 million of backlog scheduled for installation in the next four quarters. $40.2 million of the backlog is scheduled for the second half of this year. In addition, not included in the $52.7 million is approximately $10 million of projects we've won that are either waiting for financing or they've not yet been scheduled. Any of that $10 million of backlog can be pulled into the four-quarter backlog once financing is finalized and/or once a firm schedule is confirmed. To ensure, we continue to win projects that will put us in a position to grow the business even while enhancing our discipline in terms of acceptable profit levels. Second, I'm very enthused by the successful efforts of our public works team. We've been discussing public works for some time now, most notably the very significant multisite project we're engaged in with the Fresno Unified School District. We are in full execution mode on this project, which led to record revenue for this part of our business in the quarter just completed. We believe that the success we're having in Fresno will lead to more similar type engagements. And we continue to leverage our strong relationship with ForeFront, our frequent financing partner. Third, we continue to control our costs. Our first half 2018 operating expenses excluding stop comp declined more than 25% versus the comparable period of 2017 and declined for the fourth consecutive quarter. We expect second half revenue to increase versus the first half of this year and versus the second half of last year, so there will be some increase in variable expenses. However, we anticipate further cost reduction efforts to offset some of this natural increase from variable expenses. With that, I'll ask Phil to provide more specifics related to our financial results in the quarter.

[Philip Radmilovic:]

Thank you, Chuck. And good afternoon, everyone. This is the first call participating in as my role as CFO and I'm happy to join you all. As Chuck discussed in his comments, we experienced some challenges in the second quarter of 2018, but we remain committed to the task at hand and are undeterred in our drive to achieve sustainable profitability and cash generation. For the second quarter of 2018, total revenue was $20.0 million, marking an increase of 49% versus the first quarter of 2018, but a decrease of approximately 20 percent compared to the relatively high level of $25.0 million reported for the second quarter of the prior-year. Most noteworthy, within the $20 million of revenue recognized during the quarter is $8.3 million generated by our public works team. We have been discussing progress and winning public work projects for some time now, and it was encouraging to post the highest quarterly revenue ever for this part of the business. Agriculture, commercial and industrial revenue declined from $16.4 million posted in the year-ago quarter to $6.7 million in the current quarter. The decline in ACI revenue was primarily due to delays in receiving the necessary authorizations from third parties to begin construction or to complete necessary utility interconnections and upgrades. Residential revenue was $5.0 million or 25% of total revenue in the current quarter compared to $6.9 million or 20% of our revenue from the year-ago quarter. The declining residential revenue is reflected of the general tepid overall market conditions and also slower-than-expected traction from some of our new third-party dealers. Gross profit for the quarter was $2.9 million or 14.5% of revenue, a decline from $6.7 million as gross profit or 26.9% of revenue from the second quarter of 2017. Gross margins continue to be impacted due to a high percentage of current period revenue being generated from projects initiated in prior years at low price levels. The most significant item being the $2.3 million inventory sale at zero margin. We originally purchased this inventory under our construction services agreement with the intent to be used on a large public works project. Due to delays in the project, our finance partner purchased the material to use on a different project that is not being completed by Sunworks. The customer will be responsible to procure new materials when the project begins construction. Additionally, the gross margin on residential projects has declined year-over-year. We began transitioning to a dealer sales model for residential markets in 2017. Dealer commissions are recorded as a cost of goods sold and apply downward pressure to gross margin. Residential dealer commissions were $0.8 million or 16% of revenue for the three months ended June 30, 2018 and 0.9 million or 14% of revenue for the three months ended June 30, 2017. It should be noted the higher dealer commissions are offset by lower salaries and operating expenses. Total operating expenses, excluding stock-based compensation, for the second quarter of 2018 were $3.7 million compared to $5.1 million in the second quarter of 2017. This represents a 27% decrease from the same quarter in the prior-year and a 4% decrease from the first quarter. In addition, our total operating expenses, excluding stock-based compensation, for the first half of 2018 declined 26% versus the comparable prior-year period. We anticipate some targeted cost reductions in the second half of 2018 to mitigate some of the increased variable expenses resulting from the expected higher revenue totals. Stock-based compensation was $800,000 during the quarter compared to $317,000 in the prior-year quarter. The second quarter of 2018 included a non-cash, non-recurring expense of $640,000 related to the retirement of our former chairman. Interest expense for the second quarter of 2018 was $142,000, up from $20,000 in the first quarter. The second quarter interest expense includes $121,000 related to the CrowdOut note finalized in April. We expect to incur approximately $170,000 of interest expense each quarter related to this note. Net loss for the second quarter of 2018 was $1.9 million or $0.07 per basic and diluted share compared to net income of $1.1 million or $0.05 per basic share and $0.04 per diluted share in the year-ago quarter. Turning to our balance sheet, our unrestricted cash and equivalents were $4.8 million at the end of June 2018 compared to $6.4 million at December 31, 2017. Cash increased by $3.2 million for the quarter compared to $1.6 million at March 31, 2018. Working capital increased by $2.6 million from March 31. The increase in cash and working capital is attributable to the promissory note payable with CrowdOut Capital that was finalized in 2018, offset by operating losses and principal payments for equipment and acquisition notes payable. Managing cash and working capital continues to be a critical priority for us. As we discussed on the last quarter's call, we have a high level of inventory on hand as a result of a strategy of purchasing or committing to purchase solar modules prior to the enactment of the tariff on imported panels. Inventory balances have declined to $4.3 million, a $2.4 million decline from the record high balance at March 31 and a $0.2 million decline from the December 31 balance. We expect inventory balances to continue to decline and cash and working capital to improve as we convert inventory on hand to cash. Our total debt at June 30, 2018 was $5.3 million, including the $3.75 million promissory note finalized in April, $1 .5 million from acquisition or equipment financing, and a $149,000 convertible note that bears no interest. $1.0 million of the debt is considered current and the remaining $4.3 million is long-term. I'll now turn the call back over to Chuck.

[Charles Cargile:]

Thanks, Phil. We acknowledge that delivery on the financial recovery is taking us longer than we expected and that some of the challenges have been greater than anticipated. Nevertheless, we are making progress and have visibility to improve performance. Although, it's difficult to predict the quarterly timing of installation revenue, we have line of sight to generate more than $40 million of revenue in the second half of 2018 and deliver a slight increase in revenue year-over-year. That expectation is now a little lower than the double-digit revenue we highlighted last quarter, primarily due to the delays of a couple of projects being moved into 2019. Also, we expect to leverage this growing revenue to generate positive adjusted EBITDA for the second half of the year. Lastly, we believe we will generate positive cash flow from operations for the second half of 2018. I would now like to open up the call for questions.

[Operator:]

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

[Philip Shen:]

Hi, everyone. Chuck, thanks for having me. And, Phil, nice to meet you. I want to start with guidance a bit. So, it's looking like the implied annual guidance is going to kind of down year-over-year 5% or something versus what you guys have started with, I think which was 10% to 20% growth in 2018. In terms of bookings for Q2, they looked a little bit like – can you walk us through what the challenges were for Q2 bookings and maybe some pockets of strength as well. And then, how do you expect bookings to continue? How is the pipeline looking for business? Can it pick back up and what will be the driver of that?

[Charles Cargile:]

Okay. So, first, talking about the bookings, because a greater percentage of our business is in ACI and public works which are generally large projects with a long negotiating time, quarter to quarter – I believe, quarter-to-quarter evaluation of the strength or weakness isn't as invaluable is a little bit of a long-term. And Q1 new sales were really, really robust. So, we had $37.5 million in Q1 of this year and then $15.1 million in Q2. So, I don't think $37.5 million is a normal run rate nor do I think $15 million, but something in between is. So, $52 million for the first half is the way I'm considering whether or not we're on track, and that would get us to a run rate of over $100 million, which is kind of an important metric for us internally. So, I do think that Q3, we have a good pipeline. We have some rather large projects that we're working on. Again, will they close by September 30? It's hard to predict. But I do know that we have traction with a number of multimillion dollar projects. So, I do feel good about the pipeline for new sales.

[Philip Shen:]

Great. So, you talked about the greater mix in ACI. Can you tell us what the mix was for Q2? Historically, I think it's been more – something like 80/20 from a dollar standpoint. How would you characterize Q2 and how would you expect that trend in Q3 and Q4?

[Charles Cargile:]

It was about a little over 60% in Q2 for ACI and public works, and that's primarily because we had very, very low public works. We had $21 million of public works in Q1 and that was booking most of the projects that we're scheduled to and now we're working on it. Like I said, we're working on a couple of other large ones. But in Q2, with public works, it was more a matter of execution on the ones that we had. So, it was more revenue-generating and going out and getting new sales. And the residential was about $5.5 million in new sales in Q2.

[Philip Shen:]

And then, Chuck, what do you see for Q3?

[Charles Cargile:]

For Q3, I think we'll see an uptick. I think we'll see an uptick across the board. I think we'll book a couple of the public works programs. That will be a sequential increase over Q2. I think we had a couple of hiccups on the residential business. Normally, in a Q2, I would've been expecting it to be a little bit higher than $5.5 million. As we've transitioned to the indirect third-party sales model, I think that's been a little bit slower than I had hoped. We have brought in a new leader in the organization on the sales side to help manage the distributor network, and so I think we'll start to see some strength from that as opposed to having the president of residential trying to do that in addition to everything else. And now, we've added for a resource for him specifically to manage the dealership. So, that's, I think, going to be a positive for us. We'll start to see some benefit in Q3 and Q4. And also, our single largest dealer had a little bit of a staffing issue early in the quarter and that slowed him down, and then he was able to get that fixed by the end of the quarter and we saw the momentum already in June. So, it started off a little slow and then we saw a better June and we're seeing a better July as well. So, I think we'll see improvement in new sales across the board.

[Philip Shen:]

Okay, great. I'll ask one more and I'll pass it on. As it relates to margins for Q3, I think you said in your prepared remarks, the bookings in the first half were slightly above 20% margin. Would it be fair to kind of use that as the guide for Q3 margins? Guide is maybe a loaded term, but is that a fair way to think about margins for Q3? Or should we be a little bit more conservative?

[Charles Cargile:]

Yeah. I think there's going to be kind of a linear trajectory to get to that level, not a step function, if you know what I mean. So, we still have a high percentage of the old projects at low margins that we'll be fleshing out in Q3. I don't expect to have as many adjustments to the margin as we had this quarter. So, I think I fully expect it to be higher than the 14.5%. But it's probably not until Q4 that we get back to the 19%, 20%, 21% gross margin range. And I think maybe somewhere in between the two for Q3.

[Philip Shen:]

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

[Charles Cargile:]

You're welcome.

[Operator:]

[Operator Instructions]. There are no further questions at this time. At this point, I'd like to turn the call back to Chuck Cargile for closing comments.

[Charles Cargile:]

Well, thank you all for joining us today and for your interest in Sunworks. And thank you also to all the employees of Sunworks. And as always, if anyone has questions after the call, please feel free to call Rob Fink at Hayden IR or myself or Phil. Thank you, again. Good day.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.