Sunworks, Inc.
Q1 2017 Earnings Call Transcript

Published: 11 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sunworks First Quarter 2017 Earnings Call. All lines have been placed on listen-only mode and the floor will be opened for questions and comments following the presentation. [Operator Instructions] At this time, it's my pleasure to turn the floor over to Rob Fink from Hayden IR. Sir, the floor is yours.

[Rob Fink:]

Thank you, operator, and good morning everyone, and thank you for joining the Sunworks First Quarter 2017 Earnings Conference Call. Hosting the call today are; Chuck Cargile, Sunworks' Chief Executive Officer; Paul McDonnel, Chief Financial Officer; and Abe Emard, Chief Operating Officer. Before we start, I would like to remind everyone that in this call, management's prepared 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 as a result 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, May 11, 2017. Sunworks assumes no obligations to update these projections in the future as market conditions may change. This morning, the Company filed its 10-Q with the SEC and issued a press release announcing its financial results. Participants on this call who may not have already done so may wish to look at these documents, as management will provide a summary of these results on this call. With all that said, I'd now like to turn the call over to Sunworks' CEO, Chuck Cargile. Chuck, the call is yours.

[Charles F. Cargile:]

Thank you, Rob. Good morning, everyone. Thank you for joining our call. I'm excited to be hosting my first quarterly earnings call as CEO of Sunworks. I've had the opportunity to get to know more of the people on the Sunworks team and some of you on this call over the last six weeks, and I'm more enthusiastic about the prospects for Sunworks today than I was when I was named CEO in early April. When we last spoke, we mentioned that the first quarter revenue would be a challenge due to the unusually rainy condition that persisted throughout the first quarter. Our expectations were correct as the heavy rains prevented us from installing for most of the quarter. To put a finer point to it, this was the second rainiest season the state of California has seen in 122 years. As a result, revenue in the quarter was $14.4 million versus $19.4 million in the first quarter of last year. The lower revenue led to an operating loss and a net loss for the period, as disclosed in the earnings release and the 10-Q we issued this morning. Nevertheless, there were many highlights during the quarter and our near to mid-term outlook is very favorable. We added $25.7 million of new contracts to our backlog. This level is more than 2.5x the $9.9 million new contract backlog we booked in the first quarter of last year. We exited the quarter with almost $60 million in total backlog. And our momentum in the first five weeks of this second quarter is very strong and our new sales pipeline is robust. These factors lead us to be optimistic about the prospects for Q2 and beyond. Before I turn the call over to Paul to provide more details on the financial results, I'd like to provide an update on some of the successful projects and initiatives we're engaged in that will continue to enhance our business. For our agriculture, commercial and industrial markets, or ACI, we continue to evolve to a greater variable cost model. Quarter to quarter, there are aspects of our business which are outside of our control and they impact the timing of revenue recognition. Examples include weather, permitting and approvals, as well as financing terms and conditions. To mitigate the negative timing impact for the financial statements, we've been transitioning to a more variable cost structure. For example, we're transitioning to channel partners in lieu of a large internal sales team. We launched the channel partners program earlier this year and it's already providing great contribution. We've signed more than 20 partners who have already generated millions of dollars in new sales. More importantly, the pipeline for new sales that's been generated by these channel partners is already close to $40 million. Our channel partners make the introductions and assist us in coordinating with the customer. There, our internal sales support experts work with the customers to customize the optimum solar systems for their business. Channel partners cost Sunworks nothing until revenue materializes. In addition, we hand-select channel partners and only engage with individuals and businesses with solid connections in the solar space. As I said, we're already seeing the benefits from channel partners, even though the program is relatively new. One of our largest new sales in the first quarter came from a customer introduced to us by a channel partner. Specifically, it's a 3 megawatt project with a large dairy in Central California. We anticipate generating more than $100 million in annual sales to customers in the ACI market from our channel partners over the next four to six quarters, with additional profitable growth as the program and our partnerships expand. Even as we focus on increasing revenue, we're closely managing our installation headcount and resources. We have some of the best installation capabilities in the industry and we'll continue to benefit from these outstanding capabilities. However, we will not staff for peak capacity. As we scale, we will use capable third-party installers as opposed to going through periods of boom and bust in terms of internal resources. We will use only the best third-party installers and we'll ensure that they live up to the Sunworks guarantee of quality, customer service and doing what we say we'll do. While reducing our fixed cost footprint for sales, marketing and installation, we're also focused on diversifying our revenue in two important ways. First is regional diversification. To date, the clear majority of our revenue is generated in California. Therefore, with this type of concentration, regional weather patterns have a huge impact on total Company revenue. We're committed to California and we believe there's a great opportunity for many years of growth, but at the same time we believe the model that we've created and the knowledge and expertise that we posses can be leveraged to other regions. We recently opened an office in Oregon and we're making traction with new customers there. In fact, we're engaged in discussions with customers in Oregon which could generate more than $2 million in new sales in the next couple quarters. In Nevada, we're one of the few solar companies who withstood the turmoil created when restrictions were implemented on net metering. Although this short-sighted legislative action slowed the industry significantly in Nevada, it appears the state lawmakers may be reaching a compromise to address the concerns between the rooftop solar customers, the utility and the regulators. The compromise is being referred to as a Solar Bill of Rights for consumers and lays out requirements and disclosure rules for installers. The new proposal enhances transparency in favor of customers, which benefits the direct ownership programs like we've based our model on. If this Bill of Rights passes, it would provide stability to a market poised to benefit from solar power. Currently, installed capacity of rooftop solar is only around 2% in the state. The Sunworks brand has remained active in Nevada through all the turmoil and we're positioned to benefit once clear direction is established by the lawmakers. In addition to Oregon and Nevada where we've established offices, we're currently engaged in ACI programs in New Mexico and Texas. We don't anticipate opening new offices in these locations in the near future, but we do expect to leverage channel and strategic partners to increase our revenue in these favorable locations, and in so doing we'll mitigate some of the heavy dependence on California. Lastly, as it relates to ACI, our focus on national and global accounts is showing great promise. We recently engaged with two large national grocery chains for multi-million dollar installation opportunities. Our non-disclosure agreements with these customers preclude us from using their names, but if we could, they would be immediately recognized. In addition, within the robust pipeline of potential new sales I referred to earlier, we have a handful of multi-million dollar national accounts. We believe we're well-positioned with ACI customers with our brand strength in California augmented by regional expansion and a greater capture rate for national accounts. We're also making progress on many initiatives on the residential side of our business. Similar to our initiatives in the ACI space, we're leveraging relationships with third-party dealers to reduce our sales and marketing spend while still increasing sales opportunities. New dealer sales accounted for approximately 50% of our Q1 residential sales. This reduced dependence on internal resources. It's clear in our financial statements as well. Q1 sales and marketing expenses declined by one-third, from $2.6 million in the first quarter of last year to $1.7 million in this year's first quarter. As we keep a clear eye towards profitability, strict attention to costs and effective leverage of our dealers is critical. A key component of the dealer partnering strategy is the effective rollout of our new PowerPay application. The PowerPay mobile app makes it possible for anyone to sign up as a referral partner. This then allows them to make solar customer referrals to Sunworks easily and directly from their smartphones. The mobile app provides the referral partner with a user-friendly interface and effortless experience without encumbering those being referred. A person being referred by a friend simply accepts or declines the invitation, and subsequently if they hire Sunworks, the referral partner receives a payment. Launched just last month, the app is being very well received in the residential solar community, and is indicative of Sunworks' ability to leverage internal and external resources to expand our presence and gain market share. Our residential team is also making progress in expanding to other regions outside of California. Specifically, we've gained a foothold for emerging business in the state of Washington and have established key relationships for future sales in the state of Texas. Both regional areas offer great promise for us in 2017. To summarize, the weather resulted in low revenue for the quarter, but Sunworks team continues to build and improve on the business for the future. Our pipeline of potential new sales is robust and our backlog is at an all-time high. Our cost structure is improved and we're positioning the Company for healthy revenue growth and profitability. Now Paul will discuss the financial results. Paul?

[Paul McDonnel:]

Thank you, Chuck, and good morning everyone. I'm pleased to be joining you today on this conference call to review Sunworks' 2017 consolidated operating results and financial position for the first quarter ended March 31, 2017. As previously mentioned, the operating results for the first quarter were heavily impacted by the unusually heavy and persistent rains in Northern California during the month of January and February of the reporting period. The normally robust commercial activity of our Chico location was the most heavily impacted. Not only were several of the job sites inaccessible for much of the quarter, but our facility and its employees were under forced evacuation during parts of the period because of being downstream of the Oroville Dam and its problems which were heavily publicised during the first quarter. While our facility sustained no physical damage, the installed revenues from that location were severely impacted. During the first quarter of 2017, Chico operations generated only $0.5 million of installed revenues, in contrast to $6.2 million of installed revenues during the same quarter of 2016. It is also important to note that only $122,000 of that total was attributable to ACI installations, while $409,000 came from residential installations. As a reminder, following rains, it can take several days and even weeks before our crews and equipment can access the muddy field for large ground-mounted ACI installations. For the first quarter of 2017, total revenues were $14.4 million, a decrease of 26% or $5 million compared to $19.4 million reported in the first quarter of 2016. Residential revenues were 39% of total revenues and equal to $5.6 million for the quarter. This represents a decrease of approximately $0.8 million, or 14% less than the same period in the prior year. ACI revenues were 61% of our total revenues and equal to $8.8 million for the quarter. This represents a decrease of approximately $4.2 million, or 33% less than the same period in the prior year. Typically, our ACI revenues exceed residential revenues and that will continue. Please remember that ACI projects are more complex than residential projects. ACI projects take longer to design, to engineer, permit and complete. ACI projects are also more prone to delays in receiving approvals, permits and final inspections. Only upon the receipt of a final inspection, can 100% of the revenue from an ACI project be recognized. Our cost of goods sold for the first quarter of 2017 totaled $11.6 million. As a percentage of revenue, our cost of goods sold was 80.6%, equating to a gross margin percentage of 19.4%. The gross margin was also negatively impacted by a few lower-profit jobs being recognized in this quarter. Direct materials accounted for over 41% of the cost of goods sold as a percentage of revenues, by far the largest cost, followed by the cost for subcontractors at 13%. The remaining costs in descending order were; financing and finder's fees, direct installation labor, other direct installation cost, and installation overheads. As the weather warms and dries, we expect the relationship among these costs to change, with installation labor and subcontracted cost becoming a larger percentage of our cost of goods sold. As installation revenues increase, the percentage of fixed costs and overheads will decline as a percentage of revenues and gross margin percentages will improve. Gross profit for the quarter was $2.8 million, or 19.4% of revenue, for the three months ended March 31, compared to $5.6 million or 28.7% of revenue for the three months ended March 31, 2016. Lower revenues amplified the percentage swings as fixed charges make up a greater percentage of the cost of goods sold. Total operating expenses, including depreciation and stock-based compensation, for the first quarter of 2017 were $5.4 million, compared to $5.5 million in the first quarter of 2016. Selling and marketing expenses were $1.7 million, or $0.8 million less than the $2.6 million spent in the same quarter of last year. On a percentage basis, selling and marketing expenses were 12.2% of revenue in the first quarter, compared to 13.2% of revenue in the same quarter in 2016. Selling and marketing expenses decreased quarter over quarter, primarily due to our more disciplined approach to spending on advertising and a greater reliance on third-party sales generation. We have also reorganized the ACI sales organization and reduced headcount. The selling and marketing expenses for 2017 relative to 2016 will continue to decrease because of the higher cost incurred in 2016 with the establishment of the call center and the aggressive expansion of the ACI sales team in the second and third quarters of 2016, which are nonrecurring. General and administrative expenses were $3.3 million, or 23.2% of total revenue, in the first quarter of 2017, compared to $2.9 million or 14.8% of the total revenue in the first quarter of last year. Stock-based compensation was $217,000 during the quarter, compared to $28,000 in the prior year. This expense is anticipated to increase in future quarters with the amortization of the restricted stock grant for the new CEO and potential future option grants. Depreciation was $103,000 for the first quarter, up from $21,000 in the prior year, because of gross depreciable assets acquired in 2016 totaling $1.3 million. In contrast to 2016, this quarter, the leasehold improvements and capital equipment additions totaled only $40,000. The net loss for the first quarter of 2017 was $2.9 million, compared to a net loss of $0.4 million in the year ago quarter. Turning to the balance sheet, our cash and cash equivalents were $4.2 million at the end of March, compared to $11 million at December 31, 2016. Cash decreased by $9.6 million during the quarter compared to a $5.1 million decrease in the first quarter of the prior year. The first quarter is typically cash consuming and follows the seasonality of the business. Working capital decreased by $2.7 million during the quarter, consistent with the operating loss for the quarter. Total debt outstanding at the end of the first quarter was $2.2 million, of which $1.6 million is for convertible notes, a portion of which bears no interest. The remaining debt, $660,000, is a result of acquisition and equipment financing. Nothing was outstanding on our $2.5 million revolving line as of the end of March. As it relates to our outlook going forward, due to the uncertainty of the exact timing of recognizing revenue, we will not be providing full-year guidance. Nonetheless, we do expect second quarter revenues and new sales to increase sequentially over prior quarters. In addition, our record backlog coupled with growing new sales gives us confidence in increased revenues beyond the second quarter. And lastly, with our enhanced focus on effective cost management, we continue to expect to be profitable for the second half of this year. With that, I would like to now turn the call over to the operator for questions.

[Operator:]

[Operator Instructions] Our first question comes from Jeff Osborne from Cowen and Company. You may now state your question.

[Jeffrey Osborne:]

Good morning guys and thanks for all the detail about the weather and the impact of C&I. That was helpful. A couple of questions here, but did you find with the delays in installation that any of the backlog itself or contracts that you had were perishable or were people kind of willing to roll with the punches on the delayed installations?

[Charles F. Cargile:]

Our backlog is secure, and another thing that's worth noting is, we have a very low cancellation rate in backlog in general, particularly in the ACI business where we looked at numbers the other day and it's barely even 1%. So, the backlog is strong. It's just a matter of when we can get the installs done.

[Jeffrey Osborne:]

Got it, that's helpful. And I understand completely not giving guidance for the year, but any sense about the June quarter in terms of the pace of recovery? Was April a tough month for you and May is when you caught up? I'm just trying to get a better sense of appreciation of the pace of recovery. I clearly recognize you're trying to telegraph that things are improving.

[Charles F. Cargile:]

Yes, things are definitely improving. As we highlighted, with the $25-plus million in new sales, was really strong, the backlog is strong, we are executing on that. So, I think we're confident in significantly higher revenue in Q2. And even though the sales were good in Q1, with the pipeline we have and the customer engagements that we are involved in now, we expect the new sales to be higher in the quarter as well. So both will be higher, revenues significantly so and sales will also be higher.

[Jeffrey Osborne:]

Got it. And then with the channel partner strategy, that certainly makes a lot of sense just given the challenges the broader solar industries had with customer acquisition costs and now with managing a workforce when you can't do installations. So, appreciate the strategy there, but I just wanted to understand better the financial ramifications of that. So can you talk about what things that you can control, so in particular the OpEx run rate with this new strategy in the remainder of the year? And then also as we look out to gross margins relative to prior years for your Company, obviously you have to pay these people a finder's fee, which I think you called out as one of the sources of cost of goods, but can you just talk about in a steady-state normalized environment what you think maybe with a two-third/one-third mix of C&I versus residential, what the gross margin level of the Company would be and then also what the right OpEx run rate should be?

[Charles F. Cargile:]

That's a lot of questions all rolled into one. First, I'll talk about channel partners a little bit, and then you may have to remind me on all the other business model questions there. First, I think it's important to note that the channel partner strategy itself, even though it was announced as a program in the first quarter, the philosophy has been one that Sunworks has leveraged for many years. Much of the work that we get on the ACI side comes from referrals and comes from our deep, deep relationships in the communities where solar is still important, particularly on the ag side. And so, we've been getting referrals and use the referral network effectively forever, but we formalized it more in the quarter and referred to the channel partners, and now have people actively signed up and have the commitments and are working more formally with them, but it's a practice that we've had for a long time. And the way it works, as I said in the prepared remarks, is we'll get a channel partner who knows a customer that's interested in solar or that should be interested in solar. Once they know that they are, then they will refer them to our team, and then it's a collaborative effort and one for which the channel partner knows that there is no compensation for them until we get the business. So once we sign an engagement and get to work on it, then we'll pay the channel partner. So, there's no payments that precede the revenue, which is what we're looking for. And so those…

[Jeffrey Osborne:]

And so just to be clear, sorry to interrupt, but just to be clear, let's just say that 3 megawatt project in the dairy farm that you spoke of, for argument's sake let's say the channel partner got $0.10 a watt, where would that show up? So when the revenue is recorded, would that entirely be in cost of goods or would a portion of that be in OpEx?

[Charles F. Cargile:]

The payment, first of all, it would be recorded in cost of sales and there is no payment until we start to recognize revenues. So, it coincides with when we see the revenue, we'd run the cost to the cost of sales.

[Jeffrey Osborne:]

So, if this is a bigger portion of your mix, then in theory, gross margin should be a little bit lower with the resumption of growth of your Company than maybe prior years, which would be completely offset by a reduction in OpEx, which in the past, if I understand you right, the OpEx expense, the sales commission, would have been paid to the salesperson that was captive to Sunworks prior to the revenue being recognized. Is that a fair characterization?

[Charles F. Cargile:]

Yes, because first of all they would have probably had some base salary, and so there would have been some salary that was being recorded all the time, and that salary goes away and then it becomes a variable expense. And I think you raise a very important point that I think we'll be talking about more and more as we go forward. I know there's always a tremendous amount of attention on the gross margin line. I think it's more important to focus on the operating expense. And when we get back to being profitable, a focus on the operating margin to me is going to be a more important metric than the pure gross margin.

[Jeffrey Osborne:]

Got it. And maybe just one last one for me, so you highlighted being profitable in the second half of the year, is there a particular revenue range where you think that that would play out with this business model that we just discussed?

[Charles F. Cargile:]

I think you can play around with it in your modelling, but if you think, the quarter we had a $2.9 million loss and at under $15 million in sales. If the incremental margin on sales is 25% or 30% even, even if it's a low incremental margin on every dollar of increasing sales, you can see if we were at our – if our revenue level was at the level that our sales was in the quarter, $25 million, you'd probably be able to model that to be profitable. Now, we're also in a position where our operating costs are going down. So I think a combination of cost reduction and revenue matching the sales level will get us back to a level where we'll be profitable. We see that for sure in the way we are looking at the year, in the second half of the year, and perhaps if the installations accelerate in the quarter, we could see in the second quarter as well, but the clear line of sight is for the second half of the year.

[Jeffrey Osborne:]

Understand. Appreciate all the detail. Thank you.

[Operator:]

Our next question comes from Jim McIlree from Chardan. You may now state your question, Jim.

[James McIlree:]

So I'm looking at the backlog statistics, specifically two items, the total new megawatts sold and the ending backlog. And so, if I look at those items on a per megawatt basis, it's been a pretty sharp decline over the past four to five quarters. So for instance, total new megawatt sold went from $3.09 per megawatt down to $2.06 in the last quarter and ending backlog went from a little over $3 to a little over $2.50 in the last quarter. And I'm just wondering, is this a normal decline that's taking place in the industry or is this a function of anything that you are doing or is it weather-related or a lot of everything or something completely different?

[Paul McDonnel:]

I think the decline we are seeing is a combination of two things. One is the mix in sales, because the cost per megawatt on residential is assumed to be higher, and also with the larger ACI projects, the prices that we are able to garner there are lower, and that's coupled with the decline in the module prices that have occurred over the last year specifically.

[James McIlree:]

Okay. And so the decline going forward, do you have a view on what might happen to those two items going forward?

[Paul McDonnel:]

It is our impression that the prices of the modules cannot drop much more than where they are currently at, and so we see a stabilization closer to the number that you see in there now, in the neighborhood of between $2 and $2.50.

[Charles F. Cargile:]

Depends on our mix.

[Paul McDonnel:]

Then it's also a function of the mix that we have between the residential and the commercial.

[James McIlree:]

Of course. Okay, great. Then I just want to make sure I'm understanding all the dynamics that are going on, because I think I'm conflating a couple of things. So when we look at the revenue over the past couple of quarters, you pointed out the weather as the – seems like the proximate cause or the biggest cause of the decline in revenues over the past couple of quarters. But then at the same time we are talking about restructuring, the sales force and the channel, and it just seems like it's a confusing message that if everything is weather-related, then why the change in the sales force. Is there something else going on that's resulted in the change in the channel or maybe there is something else going on besides the weather that's been the cause of the revenue in the past couple of quarters, can you help me out with that?

[Charles F. Cargile:]

Sure. I think, first of all, it's important to distinguish between the revenue and the sales. So the revenue is absolutely directly impacted by the rain and the fact that the last two quarters, Q4 and Q1, were very, very unusually high levels of rain. And so, quite simply, we don't have people able to install in wet muddy ground or on wet rooftops. And so, when we are not installing, we are not recording revenue. So that's the direct relation that you see there. The question that you're asking is, is there something disrupting the sales force that's causing the revenue to be down? If you were seeing the same type of declining trend in new sales, then I think your question would be more appropriate. But the fact that we had over $25 million of new sales in the period in which we already were making the change to dealers and to channel partners, then I think it's pretty clear that that change still is effective in the marketplace, we're still getting the new sales, we're still building the backlog. Now if we have the right weather conditions, we'll install those and it will turn to revenue. The other important piece of that is, we're confident that that channel will be effective and we're equally and more confident that it will be more economical. It will be more economical, so it will cost us less, and it will be more variable in relation to the revenue that we record. So it's important on all three aspects, it has to be effective in bringing in new sales, it has to be more economical, and it has to vary along with the sales in order to keep it more predictable in the financial statements.

[James McIlree:]

Okay, great. That's very helpful. Thank you.

[Operator:]

Our next question comes from Philip Shen from ROTH Capital Partners. Philip, you may now state your question.

[Philip Shen:]

I had a follow-up on the Q2 outlook. If you were to compare your expected Q2 this year relative to last year, could you see revenue higher than the Q2 period from last year or in line or perhaps might it fall short?

[Charles F. Cargile:]

Phil, you mean revenue specifically?

[Philip Shen:]

Yes, revenue specifically relative to last year's Q2 period.

[Charles F. Cargile:]

I could see the sales number being at that level. I don't know if we'll convert revenue at a pace that would get us to $31 million. It's possible, because as you can see we have the backlog, but it would be a lot of installation effort in the second half of this quarter. So, we are confident that there will be a real nice increase over the $14 million-and-change that we did this quarter. We also are on a trajectory where we'll start recording regularly revenue levels over $30 million. We just may not be able to get there in Q2.

[Philip Shen:]

Okay, that's helpful color. Thanks. And when we look at your backlog, can you share the mix between ag and then typical C&I but not ag, and then resi?

[Charles F. Cargile:]

Abe, why don't you take that? I think you've got a better view of the backlog.

[Abe Emard:]

So our backlog, around $60 million, is made up of, if you compare ACI versus residential, it's more 80% ACI and 20% residential. The mix between agricultural and C&I would probably be 70% agriculture and 30% C&I.

[Philip Shen:]

Okay, that's really helpful. And then as it relates to your resi business, which is a much smaller percentage, when we look at the California stats that are published every month, we see a lot of your peers really decreasing installation volumes on a year-on-year basis. And yet when we look at your volumes, you guys are pretty stable and even growing nicely. So, can you just help us understand, what are you guys doing that's different? Now clearly you guys, the volume levels are lower, right, but the reality is the trends are healthier. Do you expect to be able to continue to grow year-on-year your California IOU installation volumes or do you expect that to trend downwards as well? And if you are continuing to expect that growth, help us understand what you guys do differently and well relative to these larger companies that are seeing this sharp decline. Thanks.

[Abe Emard:]

This is Abe. A great question. What we're trying to focus on is profitability in residential. So we are more focused on slower growth, learning from the mistakes from the large national companies that we've been seeing, creating more of a dealer network where we are utilizing originators and installers to grow our residential business outside of the regional business we are currently in. So we are really focused on slow growth in residential, but profitability.

[Philip Shen:]

Okay, good. So let's unpack that a little bit. Slow growth and profitability, I can imagine those other guys want to be profitable as well. So what do you think that you are doing differently relative to what they are doing?

[Abe Emard:]

I think what we are doing differently is we are learning from their mistakes and we plan to not make the same mistakes they did. One thing we'll be able to talk about in the future as we continue to develop our true growth residential strategy is through our dealer network originator and installer program where we are utilizing a variable cost structure, mostly third-party participation, and we'll have I think more details that we can share probably next quarter.

[Philip Shen:]

Okay, great, Abe. We'll look forward to that. Thanks Chuck and Paul and I'll pass it on.

[Operator:]

Our next question comes from Carter Driscoll from FBR. Carter, you may now state your question.

[Carter Driscoll:]

First question here is, you talked about kind of sticking it out in Nevada despite the challenges to the net metering program and anticipating essentially positive outcome in terms of the related interested parties coming to a settlement to promote the industry again. Could you maybe talk about some of other states you are targeting and the environment you are seeing there, positively or negatively? Then I have a couple of follow-ups.

[Charles F. Cargile:]

Sure. We are very pleased with the way things are developing in Nevada. It's been a tough couple of years and the legislation is still in progress right now and there's probably about four more weeks of deliberations before some of the things that they are talking about now become formal, but at least the wind seems to be blowing in the right direction. And the fact that we have stayed in the state when others left is going to be a real benefit for us. So we are happy about Nevada. I appreciate you mentioning that. We also, as I mentioned before, we are seeing progress in Oregon where we have established a sales office. And we haven't put bricks and mortar into New Mexico and Texas, but we have some really good progress and some jobs in the pipeline there that our expectation is that we'll be talking about those as 'landed new sales' in the second quarter. So, those are the areas that we're probably the most excited about.

[Carter Driscoll:]

Okay. Maybe switching gears a little bit, Tesla out touting on the affordability, that new solar roof being cheaper than existing modules. Maybe your initial take, and if it were to be such a product, could that be potentially disruptive to the traditional installation business for either ACI or resi?

[Charles F. Cargile:]

I'm sorry, would you state the first part of that again?

[Carter Driscoll:]

I'm just saying that Tesla was out there today making a claim that the new solar roof is cheaper than the existing modules installation using existing technology. Maybe just your comment on – we've heard a lot of claims in the past about such a product and they've really been either too expensive or outright didn't function as properly. Just trying to get a sense of have you seen this technology, have you seen anything that would disrupt the traditional supply chain, and/or how could you potentially react to it?

[Abe Emard:]

This is Abe. We are learning more about the product in and of itself, but it's kind of older technology that's been around. It's less efficient than the conventional panelling system. And so, we don't see this as disrupting the industry or our business in particular. But they have also claimed their fab, panel fab they bought in Buffalo, Ney York was going to produce 24% solar efficiency. That didn't happen either. So, I think it's a lot of just talking big and not real action there. So, we'll just see how it plays out, but we don't see any disruption at this time.

[Carter Driscoll:]

Got it. And then maybe just a comment on the potential for the claims that Silevo has made in terms of trying to impact the importation of Chinese panels and potentially what that could do to, if that were really to be successful, to your installed cost?

[Abe Emard:]

I could take that one. We're following it, but where the jobs are, are in the installation business, which employs over 250,000 employees in the United States. So, we are not that concerned about it, but we are following it and we'll see what happens. It doesn't have a lot of legs yet, but who knows. So, our stance is that the true value in the industry is in the installation side of the business, if that helps.

[Carter Driscoll:]

Absolutely. Okay, I'll take the rest of my questions offline. I appreciate answering.

[Operator:]

Our next question comes from [Tim Stovold] [ph]. Tim, you may now state your question.

[Tim:]

I'm a shareholder. The stock, looking at what everyone is here for, to a large degree just to make money, and the stock is at a three year low here, and I've been a fan of the strategy here on the growth story, and I guess I'm wondering, can you speak to I guess I'll respectfully say the white elephant in the room, which is three-year low of the stock and do you have the faith that this is a company that for the long-term is a double-digit grower or something that with the business model we have can be successful in gaining share and in creating value for shareholders in the long run, and frankly, will you put your money where your mouth is and will we see some insiders buying stock after the window opens here shortly? I doubt you can do a buyback, but I guess I'll ask that question too. Is there any possibility of a Company stock buyback? Thank you.

[Charles F. Cargile:]

You're welcome and thanks for your patience and your resiliency in staying with the stock as a shareholder. As you know, I'm a new shareholder myself, having just come in a month ago in the CEO role, and I would say that there is a lot of confidence that this business can continue to grow. I think we've shown the ability to grow the top line. I think it's clear to see that that top line growth can continue. I think what's going to be different in the future is that we will be profitable, consistently profitable. And so, you may talk about say revenue growth and percentage numbers, but it will be exponentially higher in terms of profit growth. And like I said, we are determined to do that by the second half of the year. We could see that as early as Q2. And I think when you start to see consistent profit generation and cash generation, I think that will present a different picture for investors and should be very favorable to the share price. I can't speak to insider buying. I understand the question and I know that that would be perceived well by shareholders to see insider buying, but I think that there's a lot of confidence on this team and with this Board that the profits and the cash will continue. Any time you talk about a buyback, you have to look at all the alternative uses of cash and how you can use that cash to drive shareholder value, and we'll certainly be sensitive to that as well. So, again, I appreciate the question and we are determined to drive increasing shareholder value.

[Tim:]

Okay. Thank you very much and thank you for the accountability and taking shareholder questions and not just analysts. I respect and appreciate that.

[Operator:]

Our next question comes from Jim McIlree from Chardan Capital. You may now state your question.

[James McIlree:]

Thanks again. Can you address working capital needs as you grow your revenue base? I know you had a big consumption of working capital this quarter. I'm just wondering what happens when you start growing.

[Charles F. Cargile:]

Let me hit it, make a comment, and then I'll let Paul talk a little bit more specifically about it. The Q1 cash is not unusual. You can look back historically and it's always a high use of cash quarter. And so, I think the March 31 balance is a low watermark. We have already generated more than $1 million of cash in the month of April. The cash balance is higher and it will be higher at the end of June. So, I think it would be a little bit nearsighted to only focus on the March 31 balance. The cash and the working capital position is already much better in the quarter and will be by the time we report the June quarter. As for working capital in general, maybe I'll let Paul talk a little bit more specifically about that.

[Paul McDonnel:]

I think one of the things that we bring out in terms of being able to fund growth, one, there is not a significant CapEx requirement for growth at this point in time. We made investments last year which do not need to be made again, nor is it requisite in order to sustain a much higher level of sales activity. We have done a better job of reducing our cash to cash cycle. There are opportunities in our inventory management. We have about $1.5 million more in inventory than we'd like to see and we have a plan for eliminating that and that's designated for certain jobs. And so there is cash mining that we can do on the balance sheet itself. And as we become more disciplined in our structure of our contracts and our milestone payments, we've actually been able to, like Chuck said, we've generated $1 million since March. And you'll notice from the first quarter where was the cash used, obviously to reduce our payables and it is detailed in our cash flow statement for the first quarter. And so, if we wanted the cash to be higher at the end of the quarter, yes, there are certain things that we could do to manipulate that, but that's not the intent. It's to operate the business and operate it profitably, because that's going to be how we'll fund our future growth.

[James McIlree:]

Okay, great. Thank you.

[Operator:]

Thank you. I will now turn the floor back over to CEO, Chuck Cargile, for closing remarks.

[Charles F. Cargile:]

Thanks again to all of you for your participation in this call. I also want to mention, for those of you interested, we'll be presenting at two investor conferences this month. First on May 24, we'll present at the 18th Annual B. Riley Conference in Santa Monica. And then on May 31, we'll present at the Cowen and Company Sustainable Energy & Technology Forum in New York City. So we look forward to seeing some of you there, and again, we thank you for your participation in the call.

[Operator:]

Thank you. This does conclude today's conference call. Please disconnect your lines at this time and have a great day.