Sunworks, Inc.
Q4 2018 Earnings Call Transcript

Published: 12 Mar 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to your Sunworks Fourth Quarter and Full-Year Earnings Call and Webcast. All lines have been placed in a listen-only mode, and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Mr. Rob Fink, Investor Relations with Hayden IR. Sir, the floor is yours.

[Rob Fink:]

Thank you, Operator, and good afternoon everyone. Thank you all for joining Sunworks' Fourth quarter 2018 earnings conference call. Participating on 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 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 projections as to the Company's future performance represent management's estimates as of today, March 12, 2019. 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. We encourage you to review this press release to augment the information provided on this call. I would now like to turn the call over Sunworks' CEO, Chuck Cargile.

[Chuck Cargile:]

Thank you, Rob. Good morning everyone, and thank you for joining our call. Earlier today, we reported our financial results for the fourth quarter of 2018. Our results reflect progress we're making in transforming Sunworks into a business with sustainable profitability and cash generation. Our financial model is improving, with higher gross margins and lower operating expenses, which drove positive adjusted EBITDA for the second consecutive quarter. We continue to be keenly focused on improving our financial results. Our gross margin in the fourth quarter was at the highest level in six quarters, and our operating expenses declined for the ninth consecutive quarter. Our adjusted EBITDA, which we define as net loss excluding interest expense, goodwill impairment, stock compensation, depreciation and amortization was a positive $467,000 for the quarter. Through 2018, our focus was on eliminating financial losses and improving our processes. In light of the progress we've made, we're now reinforcing that emphasis on growing revenue in 2019. There are several areas where we see opportunities for growth and where we've gained traction that supports our optimism. I'd like to discuss a few of those now. The State of California has long been recognized as an early adopter of renewable energy initiatives that promote the expansion of cost-effective clean energy. And increasingly, we're seeing this trend expand across the country as many other state and local governments are taking steps to expand the use of renewable energy. Many of these markets lack established specialized developers, like Sunworks, who have the proven ability to deliver high quality performance-oriented solutions. We now have two full-time employees in the Northeast and are establishing valuable partnerships. Our pipeline of opportunities in these markets is expanding, and should serve as an increasingly important growth driver for Sunworks going forward. During the fourth quarter of 2018, we were awarded engineering procurement and construction contracts in New Jersey and Massachusetts. Also, most recently, in the early part of 2019, we won a $600,000 project for a national automobile dealership in Hawaii. This marks the first of several good opportunities we have in Hawaii. These new project wins outside of California represent our nation penetration into new geographical regions and provide us with the preliminary footing to expand our addressable market and diversify our revenues. National accounts are another area we remain focused on. During the fourth quarter, we announced a new partnership agreement with an existing national grocery store chain to provide engineering procurement and construction for between 10 and 15 stores over the next six to eight quarters. In addition, we expect that the project we won with the automobile dealership in Hawaii will lead to additional projects in other regions of the U.S. as well, making them a strong national account for us. These types of partnerships provide us an opportunity to increase our predictability, while at the same time reducing what is often a lengthy RFP process. Another key recurring customer relationship we have is with Omni Energy. Omni is developing numerous multi-unit low-income housing establishments. In 2018, Omni awarded us 19 projects for approximately $4 million. We believe with excellent execution and strong quality and safety performance we can generate even greater revenue with Omni in 2019 and beyond. The core drivers for solar in the solar in the agriculture sector remains strong, and as I've shared before, the Ag community is one that is tight knit, so each successful installation project we complete serves as a door opener to our next referral. Penetration within and certainly outside of California remains low, so we see a long runway for additional penetration in this sector. Our public works opportunities remain robust, although lumpy due to their large size and complexity. In the first quarter, we won a follow-on project with Butte-Glenn Community College, in California. This project calls for [indiscernible] and is approximately 600 kilowatts and $1.5 million. Our residential business is improving, as evidenced by the $5.8 million in revenue we recorded during the fourth quarter of 2018. That's the highest level of revenue in more than a year in our residential business. We believe the momentum is building, and we're excited about the growth prospects we see in 2019 and the revenue and profitability it can generate. To lead our efforts in growing revenue for all of Sunworks, we hired Christie Sands in the first quarter of this year. This follows closely on the hiring of Valarie Serrato, in December of 2018, to lead our overall residential business. Both Valarie and Christie have experience in the solar industry and the home building industry. We believe their experience will be invaluable in capitalizing on the California Building Standards Commission mandate that require homes built in California in 2020 and beyond to use solar power. In fact, we're in advanced stages of developing relationships and commitments for new business with three homebuilders in California. We believe this new mandate will serve as a catalyst for accelerated growth within the California residential solar market. And as I've shared before, the residential business is an important component of our financial model for many reasons, including the relatively strong operating margins and the quicker cash conversion. Our total backlog of projects scheduled for installation in the next four quarters remains in a healthy level approximately $46 million. We anticipate adding to this backlog in the first quarter of the year and to be positioned for year-over-year revenue growth in 2019 versus 2018. Although given the weather we've experienced in California to-date in 2019 we anticipate a seasonally slow first quarter yet we remain optimistic about a new sales pipeline and the prospects for growth in full year 2019. With that, I'll ask Paul to provide more specifics related to our financial results in the quarter. Paul?

[Paul McDonnel:]

Thank you, Chuck, and good afternoon everyone. The fourth quarter of 2018 financial results reflect the continuing operational improvements we are making at Sunworks most notably excluding the 1.9 million non-cash one-time expense to write-down the carrying value of goodwill. Sunworks was profitable for the fourth quarter and for the second quarter in a row adjusted EBITDA positive. For the fourth quarter 2018, total revenue was 19.2 million essentially unchanged from the 19.3 million reported for the fourth quarter of the prior year. ACI revenues were about 52% of the total fourth quarter revenues at 9.9 million. Residential installation revenues were 30% of the quarterly revenues or about 5.8 million followed by our public works installation revenues of 18% or about 3.5 million. Compared to the fourth quarter of the prior year, the revenue mix changed with ACI revenue increasing from 46% to 52% of fourth quarter revenue. While public works revenues declined from 25% to 18%. Residential revenues remained largely unchanged. Gross profit for the quarter was 3.6 million, or 18.6% of revenue, an increase from 1 million of gross profit or 5.4% of revenue in the fourth quarter of 2017. Gross margin of 18.6% is the highest level in six quarters. Gross margin continue to be negatively impacted by revenue being generated from projects entered into in prior years before our internal controls on pricing and estimating were in place. New projects awarded beginning in 2018 clearly a higher expected gross margin than those booked in prior periods. Gross margins in the fourth quarter of 2017 were low due to significant costs incurred to complete several ACI projects exceeding the original cost estimates. Any costs in excess of estimates are charged to cost of goods sold as incurred. In the fourth quarter 2018, cost exceeding estimates were minimal. The gross margin on residential projects has declined year-over-year lower than historical margins on residential projects were driven by competitive pricing pressures and our inability to cover fixed costs as a result of lower job volume. While much of the installation costs are variable with installation activity, certain costs are fixed and do not decreased at the same rate as revenues may decline. Margins in the residential business did improve in the fourth quarter as anticipated and as described in the last earnings call compared to earlier quarters because of increased revenues but not to the level of the same quarter in the prior year. Total operating expenses excluding stock-based compensation, depreciation and impairment expense for the fourth quarter of 2018 were 3.1 million compared to 3.9 million in the fourth quarter of 2017. This represents a 21% decrease in the same quarter in the prior year. We continue in our efforts to reduce operating expenses while beginning to make strategic cost investments to enable future growth. As described more fully in our 10-Qs and 10-Ks Sunworks test for goodwill impairment in the fourth quarter of each year, as in the prior year, we engaged a third-party to perform evaluation study of Sunworks goodwill amount. As a result of the study, Sunworks recognized a $1.9 million non-cash charge to reduce the carrying value of goodwill. The goodwill balance was originally created by the purchase accounting for acquisitions made in 2015. Stock-based compensation was $130,000 during the quarter compared to $326,000 in the prior year quarter. Interest expense for the fourth quarter was $191,000 and consistent with the third quarter expense. Interest expense is primarily related to the $3.75 million CrowdOut note that was finalized in April of 2018. The prior-year interest expense was primarily the result of the final amortization of the beneficial conversion feature for acquisition debt related to the MD Energy acquisition in 2015 and was a non-cash expense. We expect interest expense to be relatively constant at about $190,000 per quarter going forward unless the 30 day LIBOR rate changes dramatically. The net loss for the fourth quarter of 2018 was $1.8 million after including the $1.9 million impairments charge or $0.07 per basic and diluted share compared to a net loss of $3.4 million or $0.15 per basic and diluted share in the year ago quarter. Turning to our balance sheet, our unrestricted cash and cash equivalents balance as of December 31, 2018, was unchanged from September at $3.6 million compared to $6.4 million at December 31, 2017. 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 the tariff on imported modules. Inventory balances as of the end of December have now declined to $3.2 million. That's a $3.4 million decrease from the record high balance at March 31, and a $1.2 million decrease from the December 31, 2017 balance. We expect inventory balances to further decline as we continue to improve operations and the execution of installation contracts. Proper management of cash and working capital is a continual emphasis at Sunworks. Our total debt at the end of December was $4.9 million. The $4.9 million consists of the $3.75 million promissory note that was finalized in April of 2018, $1.1 million of acquisition or equipment financing and a $100,000 convertible note that bears no interest. $1 million of the debt is considered current and the remaining $3.9 million is long-term. Turning our attention to our outlook, as we noted in our press release, we anticipate a slow start to the year in terms of revenue due to the rainy weather in California. After this slow first quarter, we anticipate returning to profitability in Q2 and for the remaining quarters of the year. With that, we're now happy to answer any questions you may have. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Phil Shen with ROTH Capital Partners. Please go ahead, sir.

[Philip Shen:]

Hi, everyone. Thanks for taking my questions. First one is on the guidance, you talked about positive net income in Q2 and beyond, can you give us a little bit of color around the minimum revenue in margins that you would want to see to be able to get to that level? And from a cadence perspective, how do you expect kind of peak revenues to be in Q4 or maybe Q3, so how do you expect the cadence of revenues to be shaped as we go through the year? Thanks.

[Chuck Cargile:]

Sure. Well, Phil, this is Chuck. Let me take a crack at those one at a time. First, in terms of breakeven, I think what we've reported in the last two quarters is revenue in the high teens, $18 million-$19 million, and then EBITDA positive in Q3, and net income positive excluding the impairment in Q4. So I think that shows that even with the drag that comes from -- in Q4, $3 million of the old contracts with low margin, and Q3 had $6 million of projects, old projects with low margin. And those old projects will be less in Q1 and Q2. So I expect the gross margin to be higher, certainly in Q2 when I would expect the revenue levels to be at or above where they were in Q3 and Q4. So I think with higher margins and continued control of operating expenses, I think that the breakeven point will be even little bit lower than what you see in the second-half of last year, because we should start tracking towards gross margins 20% plus. Again, we'll also get favorable impact as the residential business begins to grow again. You'll recall throughout 2018 that business shrunk in size, and now we're starting to see or have optimism that it's going to resume growing and get back to levels where it may have been in the past, which helps at the margin as well. So that's the way we're expecting to get the breakeven point lower and the profits higher. In terms of cadence, yes, we will see a low Q1, as Paul said in the guidance. Every year I had been here, and even before we've seen a stronger Q2 and Q3, and so I would expect both those quarters to be higher, but hope that we get both of those above $20 million in revenue and then be profitable. And then as far as Q4, it's just a little bit too early for me to try and predict Q4, because more of Q4 revenue will be comprised of things that we're booking right now. And so, until we're ready to report Q1, it'd be a little bit harder to have a visibility into Q4. So, I hope that helps, Phil.

[Philip Shen:]

It does, Chuck. Thank you. You mentioned the resi business should grow this year. From a -- if you think about your resi business in total for 2019 relative to 2018 on a year-over-year basis, what kind of growth do you see for your business, mid-teens or kind of high single-digits, is there a chance to break 20% growth, how is that looking?

[Chuck Cargile:]

Yes. I was encouraged by the $5.8 million of revenue we had in the fourth quarter in residential. We were less than $19 million I think, Paul, for the year in 2018, for residential. And so, if we're just able to annualize [ph] the Q4, then you would be looking at something 20% plus in terms of revenue growth for residential. And although the 20% or 25% increase year-over-year may sound like a long pat [ph], it's a level that we were at just two years ago. And so, I don't see it as a huge step, an important step; don't get me wrong, but I think we can see that type of growth. I'm excited about Valerie stepping into run the business. She's been off to a great start, and now Christy most recently, both of them have a lot of experience with residential sales, and that's why they're here to help us grow that revenue. And I mentioned in the call, the California Building Standards Commission mandate, we're already getting more interest from homebuilders who are planning for that even though it doesn't require until 2020. It certainly gets more focused on residential solar. So, the residential business is important for us, and I think getting it back in a growth trajectory will be good for a lot of reasons, including the better operating margins and cash conversion.

[Philip Shen:]

Okay, great. And we've been writing about how module supply in the U.S. is looking a little bit tight, given the conversion by utility scale and installers to want to just go with Mono PERC technology, are you guys seeing any of that tightness at all? Is there a chance that that could limit your potential growth in '19, or do you feel like you have either the ability to go back to multi or you can get the supplies of Mono PERC that you need?

[Chuck Cargile:]

Yes, it's certainly something that that were focused on and keeping an eye on. We've seen slight increase in prices already. As you know, we have much of our first-half of the year inventory in place for large projects that we have. So that hasn't been a problem for us. We're still seeing currently the delivery time for the panels that we're ordering are reasonable and not giving us concern about being able to satisfy the second-half of the year demand. But we are -- particularly having read your note, we're hypersensitive to it, but you'll recall that we're reluctant to store panels the way we did in the run up to the tariff, because that was a huge trade in our cash flow and that we still paid for -- that we're still paying for. And so, we want to be able to move quickly, but we'll be careful, much more careful with our cash flow even as we consider whether or not there's going to be a squeeze on availability. We'll just have to balance the two competing demands.

[Philip Shen:]

Okay, great. And can you share what the margins were by segment in Q4? Maybe give us a little bit more color there for ACI and resi, and then how do you expect -- I think you talked about margins earlier, Chuck, improving, but is there something useful to share as it relates to the margin trajectory by segment as we go through '19?

[Chuck Cargile:]

Yes. I'm sorry, Phil. As you recall or will remember, we break out the revenue by those three vertical parts of our business, but we don't break out the margins. We'll talk directionally about gross margins, but because we have so much shared operating expenses, and we don't go through the accounting exercise of allocating every cost. So we've not done that. There'll come a time when I think when we will have full P&Ls for those three groups, but we're not there yet. So I can't talk about specific margins by group specifically. I can say that I was particularly pleased with the public works margins versus prior periods. So, I think I had actually seen higher margins than I would have expected a year ago coming out of the public works group. So that's good. Residential, because of the lower revenue, a little disappointing in terms of the margin. So, as we start to see that revenue increase, I'll expect to see an exponential increase in the margins coming from residential. And then the commercial business is where we have most of the old projects that have been a drag, and so we'll see better margins coming from them as well. So, hopefully directionally that gives you a little bit of color that can help you with the modeling.

[Philip Shen:]

Yes, it does. Thanks. And last one from me as it relates to goodwill and the charge you took, can you give us a little bit more color, just remind us what which acquisitions you guys did in '15 and what the overall rationale, was kind of the business opportunity ahead for these acquisitions or these assets just effectively [ph] a fraction of what had been planned, so just some additional color there will be great. Thanks.

[Chuck Cargile:]

Sure. So let me try and give you little bit of background on that, and Paul, if you want to add anything, please do. So, the goodwill is related to the three businesses that were acquired back in 2014-2015 timeframe, the three businesses that were acquired over a one to two-year period. Originally, the goodwill was at about $11.4 million, and we wrote it down to $9.5 million. And as Paul mentioned, we did use a third-party independent appraisal, but one of the constraints if you look back at our stock chart, our stock price was less than $0.30 at the end of the year. So as we're looking from an accounting perspective and coming up with evaluation, part of the parameters of the evaluation is what the market cap is or the enterprise value, and so, you're needing to see if all of your asset values correlate somewhat to what that market cap is. So, you often will see companies have goodwill write-offs when their market caps have sizeable reductions. Of course now that the stock price is up over 50, if we were doing that report now it might have a slightly different -- at least that one of the parameters would be slightly differently. They also look at discounted cash flow of our forecast and also what maybe an acquisition premium. So then they take all of these different machinations and roll them into one and then come back with what they recommend as the value. And that's how they came up with the $1.9 million reduction. It's something that we have to evaluate any time there's been a significant change or at least once a year, so we'll continue to do that. Anything to add, Paul?

[Paul McDonnel:]

We do not track the acquisitions of Elite, MD Energy or Sunworks separately. And so those have been combined into one operating unit. So you cannot specifically identify which of those goodwill contributes from the original purchase is the offender at one to which the adjustment is taken. So I cannot point to one particular acquisition and say that was the one that the business evaluation specialists pointed to saying that is -- requires the write down. It's the whole pot as Chuck described.

[Philip Shen:]

Okay. All right, Chuck, Paul, thank you very much. I'll pass it on.

[Chuck Cargile:]

You're welcome. Thank you.

[Operator:]

And our next question comes from Michael Potter with Monarch Capital Group. Please go ahead.

[Michael Potter:]

Hey, guys, congratulations on a solid quarter. Just can you give us a little refresher on the California residential solar requirements to go into effect next year, that's for every residential property built in 2020?

[Chuck Cargile:]

Yes, there're some qualifications that would allow a development or home to not have to have it. There can be exceptions, for instance, if they're in a shade zone, and you couldn't have effective solar, then that might -- you might not have to have it. There're others that you can utilize community solar as opposed to panels on every single home. So there're different restrictions to it or different exceptions that can be asked for, but by and large, it is for all new developments beginning in 2020.

[Michael Potter:]

Okay. So if a home starts construction, let's say, in the spring time of this year, they most likely won't be finished and put on the market until next year, right, approximately nine months for construction time, would that home be under this requirement?

[Chuck Cargile:]

Mike, I'm not 100% sure on that. Let me make a note, and I'll get the answer and then let you know, because I don't know if it's when the home is sold or when they're putting together the plans and starting the construction. It's a good question, and I'll get the answer.

[Michael Potter:]

Okay. So, staying on this topic then, how many residential homes were built in 2018, do we have that number, in California?

[Chuck Cargile:]

I imagine Valerie or Christy have that number. I don't have that number off the top of my head.

[Michael Potter:]

Okay. I think it's important to understand the potential market size that we're dealing with here in order to understand whether or not we're truly being successful in penetrating that market. And what are we working towards, are we working to for a master service agreement with some of the large developers in California?

[Chuck Cargile:]

Well, our approach to it and strategy is still evolving. And let me tell you, I mentioned in the prepared remarks that we're in rather advanced stages with three -- really with two and then a third following closely on the heels. And our first approach with these three is not -- they're not large multi-state developers. We're a little bit worried if we get in with some of the big guys that the pricing pressure will be much greater than it will be with a smaller homebuilder that might treat us as a partner than as a commodity, but just to put it in perspective of the three that I referred to, we start out with a small sample size of projects that we are bidding on and it could go much larger. And the three that we're talking about could be as many as 200 or more homes, and if the average price on home is $25,000 or $30,000, then you'll be looking at opportunity just with this first wave that we're discussing. That will be an incremental $5 million of revenue. So, I appreciate your question about the overall market size, but I think right now we are looking at it more tactically and executing on these three, which would give us a nice bump in revenue just with them without even thinking of how many other smaller builders we could partner with, but we do want to have some kind of master agreement. Every individual home or project development would have to be different, because they might have different parameters, different returns etcetera, but for the most part we would lock in what the agreements would be, and then the specific pricing would vary.

[Michael Potter:]

Okay. And is this something that we shouldn't -- I'm assuming we should anticipate this in the near-term?

[Chuck Cargile:]

I think you should anticipate us talking about it throughout this year, and there maybe variations in how our strategy to it evolves, and then it should be a positive factor that we continue to report on with real revenue increases in 2020. There is an opportunity for Sunworks to do more with builders even if we didn't have this mandate, the mandate just creates more of a catalyst.

[Michael Potter:]

Got you. Okay, thank you.

[Chuck Cargile:]

You are welcome.

[Operator:]

And this concludes our Q&A session for today. I'll turn it back over to Chuck for closing remarks.

[Chuck Cargile:]

Okay, thank you. Two things I would like to mention before I hang up the call, one is I want to update everyone on what's happened with the de-listing notification that we had from NASDAQ, and then secondly I'll talk about our next IR conference. But first, you may recall that because our stock traded below $1 for 30 trading days last fall NASDAQ put us on their watch list; it's back in September actually, and the cure period for the six months is set to expire next week on March 19. We've had a number of conversations with the appropriate decision-makers at NASDAQ, and earlier this month we officially requested a six-month extension, which based on our conversations with them we are confident it will be officially approved next week. They wait until the expiration period expires, and then they give the notification, but we've been led to believe that we will quality for the six-month extension that would give us until September to avoid any risk of de-list. If the stock doesn't exceed a dollar for 10 trading days and we approached that deadline, then the cure would be to do a reverse stock split, which our Board has already approved a preliminary motion that says we would request that if our stock price doesn't quality between now and the end of September. So, all in all, we have time for the cure, and the optimal cure of course has improved financial results that would drive the share price, but it's not the Board is prepared to do the reverse stock split that would prevent us from being de-listed. Lastly, I want to thank all of you for joining our call and for your continued industry and support of Sunworks, and if investors who will be attending the 31st Annual ROTH Capital Conference in Orange County California, we will be hosting one-on-one meetings at the conference on Tuesday, March 17, and I would love the opportunity to meet with you in person. We're also always accessibly by phone. I'll plan to be on the East Coast this spring, so please don't hesitate to reach out to Paul or myself or Rob Fink of the Hayden IR team at any time if you have any further questions. Thank you.

[Operator:]

And that concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.