Sunworks, Inc.
Q1 2016 Earnings Call Transcript

Published: 11 May 2016

[Operator:]

Good day everyone and welcome to the Sunworks First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] It is now my pleasure to turn today's program over to Rob Fink of Hayden IR. Please go ahead.

[Rob Fink:]

Thank you, operator and good morning everyone. Thank you for joining Sunworks First Quarter 2016 Earnings Conference Call. Joining me today are Jim Nelson, Chief Executive Officer, and Tracy Welch, Chief Financial Officer. Before we start, I would like to remind everyone that in this call management’s prepared remarks contains 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, 2016. Sunworks assumes no obligations to update these projections in the future as market conditions may change. This morning the Company filed its 10-K 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 those documents, as we provide a summary of the results on this call. I would now like to turn the call over to Sunworks CEO, Jim Nelson. Jim?

[Jim Nelson:]

Thanks Rob, and good morning to everyone thanks for joining the call and welcome. First quarter 2016 was a good one for Sunworks financially we more than tripled our top-line compared to last year's first quarter. We also overcame the loss of 20 installation days, due to the climate weather to deliver organic growth of over 100%. As a reminder that first quarter has historically been a seasonally lower quarter in the solar industry, and we are immune to those seasonal impacts but I am encouraged by our financial and operational performance. We improved our net income by over $1 million in that same timeframe, we closed the quarter with contracted backlog of nearly $40 million which is more than twice as much as we had a year ago. We believe we are well positioned to achieve and exceed our 2016 guidance of $100 million. We are also confident that there is leverage in our business so we expect we will also see stronger profitability for our 2016 fiscal year which is calendar year. It is important to note that our total revenue for the quarter is the first to include a whole three months of Elite Solar’s operations. It is however equally important to highlight that the operating entities of Solar United Networks and MD Energy our two previous acquisitions have both achieved exponential organic top-line growth on a year-over-year basis with those two divisions growing over 125% in aggregate. This demonstrates that while we are certainly bolstering our growth with strategic acquisitions we are also achieving significant organic growth in our existing businesses. Our fully integrated company is increasingly leveraging the benefits of additional market share, and an expanded footprint in California to agriculture and commercial markets driving improved top-line and bottom-line results. Kurt Short who is now overseeing the commercial business across our company is an exemplary membership of our leadership team. He and his team continues to exceed budgeted expectations and we are confident that we have the leader and team in place to capitalize in commercial markets, these exceptional combination of our divisions into a united and unified organization under the brand identity Sunworks further reinforces the effectiveness of our highly selective acquisition strategy. We will continue to evaluate and consider additional acquisitions to expand our commercial and residential coverage in our target markets, using the same criteria that led us to our previous selections. Picking acquisitions that we will have immediate, positive impact for our consolidated financials, while spreading our footprint, leadership and operational capabilities remain the key component of our growth strategy. We also continue to make specific investments in our organization and infrastructure through efficiency of our business. We are focused on several initiatives this year. In the first quarter we opened and staffed new offices in California including key markets such as Turlock, Chico and South Bay as well as a design centre in Rocklin. We have also spent over past few quarters and in Q1 again using our new enterprise reporting management system that provides better control and enhanced reporting to manage our business. We have also invested in re-branding our Company on four separate brands to be inclusive under the Sunworks’ branding as you know. We believe these investments will better position us to accelerate growth as well as improve our cost reduction and also believe us towards increased market share gains and stronger profitability across all of our regions. One example of investments we are making in our own efficiency that seems to be leading us to opportunistic growth path is our ground mount racking system that came to us in the acquisition on Elite Solar. Not only does the racking system give us visibility into calling direct cost savings over the next month and years in our installations, and has opened a way for substantial growth by marketing this but do not compared to integrators in outer markets including utility scaled businesses. We will continue to innovate other products and methods of bringing our own cost down. And support customer value and increased profitability that will continue to drive widespread adoption of solar. In addition we also made inroads to the small and medium sized business market which historically has been overlooked and under served. In conjunction with our financial partners we recently developed solutions that makes solar a fiscally viable option to businesses that previously found it cost prohibited. This is just one of the ways that we're bringing innovation to market outside of the realm of systems integration. We look forward to -- there is still opportunity to further extend our yield and grow some potential customers to include small and medium sized businesses, looking for effective ways to subsidize their utility cost in an environmentally friendly way. As we discussed before one of the primary ways Sunworks differentiates itself in the market is by putting our customers first, by delivering cost effective solutions in a reliable and dependable manner. Because of this we have built our sales model around customer ownership because we believe quite simply that this provides the greatest value for our customers. Homeowners who lease solar systems are unable to utilize the solar investment tax credit or ITC follow to purchase a system and take advantage of this credit. In addition studies have shown that purchasing a solar system adds value to a property. While the data that we have seen indicates that lease intends to decrease the property's value since the seller would need to find a buyer who is willing to accept all the lease terms. As other solar installation companies have created a sales culture based on leasing and car purchase agreements. We see the market turning toward customer's ownership as it becomes increasingly clear to all that ownership is the best path for the customer. And this has been our business model from the beginning. We will not have to undergo a complete paradigm shift to align ourselves with our target customers as other companies will ultimately need to do if they decide to adopt this model. This is just one example of how our core customer centric values have proven to be a strong foundation on which to build an industry leading company. While our primary focus continues to be on integration our legacy solar 3D technology still remains part of our company, securing a manufacturer who can help commercialize this technology and assist it in bringing it to market has taken longer and proven to be more challenging than we expected. Still our outlook for commercialization remains optimistic, but at this stage next step are contingent upon securing a partner as we have announced in the past. Our primary focus remains on our solutions business while the commercial, agricultural segment is expanding and the residential segment enjoys conditions that are conducive to considerable growth and we continue to identify and take advantage of this internal organic opportunity. The extension of the ITC for solar illustrates continuing national support for the solar initiative, net metering our solar customers' ability to solve the excess of that generated power back to grid continues to be widely accepted. While our buyer level concerns lay a foundation for the unidirectional trend towards further, furthering alternative energy production it is the continuous improvement in economics of solar that will drive its widespread adoption. Solar allowed the customer to take advantage, and take back control of his own of energy production and pricing continues to become more favorable, it becomes feasible for our increasingly larger audience. These trends show no sign of reversal with less than 1% penetration of a nationwide addressable market we see an uncommonly robust opportunity for our business to enjoy an impressive growth trajectory for the foreseeable future. I'll now turn the call over to Tracy to review some of our financial data.

[Tracy Welch:]

Thank you, Jim and good morning everyone. Let me begin with a review of the financial results for the first quarter ended March 31, 2016. For the first quarter of 2016 our total revenues were $19.6 million or an increase of 246% over the $5.7 million reported in the first quarter of 2015. Our revenue increased primarily as a result of significant year-over-year organic sales growth in our existing business plan, in our existing business plus the addition of the full three months of Elite operations. Our revenue was down from as Jim mentioned by 20 rain days during the quarter in Northern California. Sales from the commercial and agricultural markets were again stronger in the first quarter and represented approximately two-thirds of our total revenue while the remaining one-thirds came from the residential side of our business. Our gross profit was $5.8 million or 29.9% of our revenue for the three months ended March 31, 2016. This compares to 1.9 million or 34.3% of the revenue for the three months ended March 31, 2015. The decline in our gross margin percentage was due primarily to a higher mix of commercial projects which tend to have a correspondingly tighter margins than that of residential projects and as the size increases the margins tend to go down. Looking forward we expect gross margins to remain in the range of 30%. Our total operating expenses for the first quarter of 2016 were $5.7 million compared to the $3 million in the first quarter of 2015. Our selling and marketing expenses were $1.2 million or 6.2% of revenue compared to approximately $1.1 million or 19.7% for the first quarter of 2016. General and administrative expenses were $4.5 million or 23% of total revenue in the first quarter of 2016 and this compared to approximately $1.8 million or 32% of total revenue in the first quarter last year. Our G&A expenditures increased primarily due to the inclusion of the full quarter of Elite Solar's expenses and plus incremental expenses related to higher sales volume. Also last year we began to transition somewhat our previously commissioned sales staff to Sunworks’ employees, while commissions are paid or accounted for in our sales and marketing expenses, employee payroll costs are included in our G&A cost expenses, so we've seen a shift between the two categories, year-over-year. Our total operating expenses of 29.1% of revenue in the first quarter of this year versus 52% in the first quarter last year, approximately 1.2 million of the G&A expenses in first quarter of 2015 are non-recurring and were associated with our stock offering and our uplifting to NASDAQ. If we backed out these one-time costs to compare our total adjusted operating expenses year-over-year, we show a slight decline to the 29.1% of revenue in the first quarter of this year versus an adjusted 30.4% in the first quarter of last year, so we're pretty much in line, a little bit down. Our other expenses for the first quarter of 2016, were approximate $530,000 which is primarily non-cash interest expense as well as some cash taxes we paid to the state of California. In the first quarter of 2015, we had 392,000 of other expenses, which also included a gain from the settlement of debt. Our net income for the first quarter of this year, sorry, not income, our net loss was 378,000 or $0.02 per basic and diluted shares, and this compares favorably to our loss of $1.4 million or $0.10 per basic and diluted shares for the first quarter of 2015. Turning to our balance sheet, our cash and cash equivalents were 6.4 million as of March 31, 2016 which compares to 12 million at the end of March 31, 2015. An increase of nearly 5 million in accounts receivable this quarter reflects billings associated with jobs, that starting later in the quarter and beyond, and beyond. In preparation of these we also had $1.4 million increase in inventory and a $3.5 million increase in cost and accessibilities. Our net working capital from the end of December 2015 to the end of March was essentially flat. So with that, I'd like to turn the call back over to Jim.

[Jim Nelson:]

Thank you very much, Tracy. 2016 promises to be another great year for Sunworks, we will continue to govern our actions and the actions of our Company by our principles of doing what is best for the company, providing the best value in the industry and doing what we say, we would do. We will also continue to drive our business by targeting rapid growth and profitability. We believe that our unique culture, amazing management team and dedication will continue to allow us to drive our performance in a way that companies without such a culture cannot, we believe that driving our performance will ultimately drive shareholder value as more and more people recognize that we are doing nearly something special here at Sunworks. We look forward to continuing to support operational efficiencies within our fully integrated company, we will continue to invest in further improving the policy efficiency, scaling from organic growth and seeking additional acquisitions. We will continue to strive to do the most efficient of all solar integrators and demonstrate industry leadership by setting a standard value and service to our customers. With that, I’ll turn the call over to the operator for our question-and-answer session.

[Operator:]

Thank you. [Operator Instructions] And we’ll take our first question from Jeff Osborne with Cowen and Company. Your line is open.

[Jeff Osborne:]

So a couple of questions from my end Jim, I was wondering if you could touch on the M&A pipeline you alluded to in the closing remarks with us, evaluating acquisition, really touch on where we are at?

[Jim Nelson:]

You bet, we're actually in serious negotiations with a number of companies right now, three, to be exact I think could say that. So, we think that we have an opportunity to do some pretty special things. Now actually, each of those acquisitions will bring something that we don’t currently have in the company and so far it would -- if we are able to do all three of them it will add additional elements to the company and which would be very interesting that offspring as time goes on.

[Jeff Osborne:]

I assume geographic diversification was the part of that or are you looking for broader presence in that [Multiple Speakers]?

[Jim Nelson:]

Yes, I’ve actually said, I can say that because I’ve said it publicly that yes geographic expansion is definitely one of our focuses.

[Jeff Osborne:]

Got it.

[Jim Nelson:]

And also two of those companies would add dramatically to our ability to more efficiently install and then a couple of them also have really strong sales engine. So, in all areas it would be an upgrade than what we currently have and adds a really positive effect to our company.

[Jeff Osborne:]

And actually install costs are one of the questions I wanted to ask about just regarding to Tracy’s comments about some of the larger commercial products being lower gross margin but associated for 30 for the year. Can you just talk about what like in terms of your ability to take cost out of the employees’ process out within the Energy and Elite to add related projects that you are doing?

[Jim Nelson:]

Yes, let me. Tracy maybe you have some specifics but let me give you an overall statement on that Jeff because we’ve seen opportunity to reduce cost on a continual basis, and how was that accomplished a little while a ago where we had a conversation with some manufacturers who actually have visibility for the next couple of years and to 8% reduction on the cost savings. We also through some of I mentioned on the phone call, our racking system, our racking system from ground mount on commercial jobs, has -- we have the ability to reduce our cost on a continuous basis over the next couple of years and actually reduced our cost by about 10% today from where we were before. So we think that they will offer 10 also we have some other inventions that we’re doing both on a residential side that we’ve moved now as well as commercial, that we have visibility into additional cost reduction over the course of the next 18 to 24 months. So we feel really good about our ability to be very efficient on the operational side. In fact as we see the Company’s numbers, we think we stack out very favorably to enter a lot, including the biggest companies in the industry. Tracy do you got anything specific, do you want to say about that?

[Tracy Welch:]

I’ll just say we continue to be very efficient in our ground mount systems we probably want to leave that combined with our as you mentioned our racking systems. That makes us very-very efficient in commercial Ag side of the business. As we integrate and we’ve also increased our efficiency in some of the residential installations we are moving that in some cases we are tuned for two jobs a day so in addition improving our back office functions which makes us a much more efficient and leaner company.

[Jeff Osborne:]

That’s great to hear. And speaking of lean, you mentioned opening a couple of new offices in Turlock, Chico and South Bay I think you said Tracy just any comments you alluded to leveraging the model for the year. How should we think about the cadence of OpEx increases relative to obviously your very strong revenue growth?

[Tracy Welch:]

I think we’ve built in locations that we’re not in and we’ve got what we need for the most part in place, I don’t think we’ll see a big increase we’ll have I think we have probably got the level that we’re going to running for the rest of the year at. So in fact we are looking for ways to improve some of our focus and centralized functions.

[Jim Nelson:]

[Multiple Speakers] I had mentioned on one thing Jeff is that we have a low volume growth somebody asked that what Abe and I were doing earlier in the day just to get a sense of how we operate and I said Abe and I were working on zero based budgeting and so in the past four weeks I would say we’ve reduced about $400,000 of salaries out of our G&A cost. So just on the basis of zero based budgeting and it eliminates what we did save. So we’re always working on that so it’s going well.

[Jeff Osborne:]

I will also that I appreciated the comments about the balances with third-party ownership and what not. But can you just touch on given this transition in the market, is this more accustomed to the actually outlook -- owning systems dollar rates. It’s kind of two part question. One is who your partners are on the loan side, it’s the one who doesn’t have the considerable $20,000 give or take to buy a solar system for their home. And then also what you’re seeing on the pricing side for out rate versus sale across your key markets?

[Jim Nelson:]

Sure. I’ll address in the sequence. First of all on the direct ownership as opposed to third-party ownership it’s interesting as some of these other companies struggle and of course we get their opportunity to introduce some of their best people as they get disappointed by their options or whatever else as the companies that are going bankrupt or having trouble. And we talk to them and everyone -- we say look can you guys transition from a third-party ownership model to a ownership model and all of them say that it is easy to sell the third-party ownership model because all you have to do is say -- you are paying the $0.18 per kilowatt hour we will give it to you at $0.14 per kilowatt hour and that’s a easy sel. And then we say but there it is so much better for the customer to own it they say and everybody knows it is better for the customer to own the system it’s a bit easier to sell it. So the transition is an issue and so somebody asked me yesterday is it harder upfront? It’s a harder sell upfront but in the long run it is better is that correct and that is correct and so we find that it really is moving our way. Customers as they become more sophisticated the low hanging fruit is taken away. Customers are more sophisticated they start comparing more and as all of a sudden, our model emerges as the to go for customers so we use mosaic a lot and we are finding that there're other people also who offer really good systems that is getting them sold in the bay area and Tracy you may want to add into that but we also find a lot of commercial banks, our lending to solar more and more as well. Who else could we review historically on the direct question [Multiple Speakers]?

[Tracy Welch:]

Admirals and mosaic are the two of the biggest ones probably remaining for now.

[Jeff Osborne:]

And then [Multiple Speakers] prices that you are charging the customer is that fairly flattish or how do we think about this annual ASP declines on a parallel basis?

[Jim Nelson:]

As our costs come down we’d certainly share that with the customer, we are as you know in our commercial business we have used a variety of different types of modules and we are finding that, that’s good cost there and our prices are coming down consistent with the cost. On the residential side we used mostly SunPower and again our costs are kind of creeping down there and as are our prices so we have specifics on that Tracy that if we can share.

[Tracy Welch:]

No I mean for this year our price is -- we used for the most part as you said SunPower for residential as we grow and we increase our leverage and we think we have got pretty favorable pricing terms, but we are going to continue to drive that down.

[Operator:]

Thank you. We will move next to Philip Shen with ROTH Capital. Your line is open.

[Philip Shen:]

Hi I wanted to touch base on the mix of commercial versus resi in Q1 I was wondering if you might be able share that with us on other in megawatt basis and sort of dollar basis and then how do you expect that to trend in Q2 and then for the full year as well? Thanks.

[Jim Nelson:]

Sure, it is about two-thirds and a third, two thirds commercial one third residential we think that we did nothing that’s probably how it ends up in the year for the year however we are doing something both internally and in terms of acquisitions and depending on how those acquisitions come out we don’t know but for now we think in terms of two thirds commercial and a third residential.

[Philip Shen:]

So that makes us bringing the same borrowings on new additions to the company?

[Jim Nelson:]

Right, and like OCC process about it and we will tell you how would affect it at that time.

[Philip Shen:]

Shifting to the residential business can you talk to us about what your sales your capitalized in the customer acquisition cost were in Q1 and then how do you expect that to trend I am guessing it may be coming down but that said we saw one of the largest players recently talk about it at very high sales per watt number, so how is that-- what was that in Q1 and how do you expect that to [Multiple Speaker]?

[Jim Nelson:]

Sure we think in terms of dollars per customer of course and when we compare it to the major players in the industry specifically we know of the cost that is flowing through in others we are about 25% to 33% lower our apple to apples cost per customer acquisition is about $3,200. We are not sure if that will track lower for this only this reason. We are experimenting with a variety of different ways to drive business and some of those rates might be a bit more expensive some might be a little bit less expensive and so we think that’s possibly till a good number. Obviously it can be economics where we are and even a little bit more expensive to add customers. But we will be very cautious and make sure that we can do so. When we open new markets for example obviously we see an increasing customer acquisition cost for a short period of time as we become better now and bring down those costs. So from time to time as we grow, we’ll see a little bump up, but at the same time our referral business is just getting more and more robust which pulls it down. So those two different forces will be working together, so our assumption going forward is it will stay about the same recognizing that there is always a possibility of some variation around it means.

[Tracy Welch:]

obviously also that we are experimenting a different things and obviously our customers referral program that something that we have returned at development we have just at a finishing up a very successful program where we which is referrals and they are doing it test on next later this month and task from those acquisition were about $1200 so we were just trying to find the right mix.

[Jim Nelson:]

In terms of your guidance for full year most to that growth is experimenting the different things and obviously our customer referral that is something that we are trying to develop and we have just -- but finishing up by a very successful where we have with it referrals and given away a tennis lawn on our next later this month and as a consequence those acquisitions were about $1,200 so, and we are just trying to find the right mix there.

[Philip Shen:]

Okay that sounds like a conflict in there, so in terms of your guidance for the full year most of that growth is expected to be organic can you just remind us what the contribution of Elite might be to that 100 million of revenue?

[Jim Nelson:]

Sure. Let me talk about Elite last year first. Last year we did about almost 50 million in sales, we made a very profitable just at the bottom-line it did about 1.6 million. Going forward we've just merged the whole thing into Sunworks, and so we're not going to really know exactly how it works, especially because the CEO of Elite now runs all of our commercial business it's all one organization, but we do think that that will contribute and so if it was 15 last year we think that that organic growth will be at least 100% so if you think about that, that's 15 million in sales over what they did last year so, Elite can be strong but we also think that there is a real strong organic growth in our existing business. So to be real frank $100 million was real conservative. We think that Elite is going to be very strong with that and we think instead of it we can measure it properly which we will make every attempt to do. Organic growth will continue to be in the high double-digits or low triple-digits.

[Philip Shen:]

So just to confirm the revenue of Elite from 2015 was 15 million, 1-5?

[Jim Nelson:]

Right.

[Philip Shen:]

Because I thought I may have heard, okay 50. Okay 1-5.

[Jim Nelson:]

1-5, yes.

[Operator:]

Thank you. We'll go next to Gregg Hillman with First Wilshire. Your line is open.

[Gregg Hillman:]

Hi first of all, Tracy on the -- what percentage of your installs were done by outside contractors as opposed to your own install owners?

[Tracy Welch:]

Well virtually all of them were done internally. We have it is only business quality who run in Southern California where we use third-party contractors, for the most part we use them to supplement but for the most part of the first quarter virtually all internal.

[Gregg Hillman:]

Okay, and were your crews just like 100% utilization or was it underutilized at all.

[Tracy Welch:]

We think they can always work a little harder, but.

[Jim Nelson:]

It was the rain that was really the issue, right at the end of -- in the first quarter because we had 20 days which is essentially a full month where they would have been underutilized and you may or may not know that in California if you're not able to warn your crews a day in advance you end up spending extra, you have to pay them for half a day if they show up and they get rained out. So there was some inefficiency as a result of that.

[Tracy Welch:]

Exactly.

[Gregg Hillman:]

Okay, and concerning you're reducing your cost given the units themselves, how are you engaging with the manufacturing whereby do you think you're coming up with designs that require fewer parts that are easier to install, can you do that and the number of parts necessary to install you know the paddles, are you able to drive that down?

[Jim Nelson:]

I had mentioned that how we think that one the keys in efficiency is to standardize the panel that you use. So we use primarily SunPower on our residential so as a result as you get really used to putting out the same panel with same parts with the same racking system and so forth, so it goes, it really goes quickly. So if you look at our improvement in our installations in fact we’re going to have a little announcement about this perhaps early next week but our efficiency has really improved as a result of using a single panel system. Also we have a great relationship with SunPower so we are -- as one of their largest partners. We talk with them all the time about how we can make them more efficient so we have a good relationship with them. Our other panel manufacturers were not as big or as significant a customer with there is four or five others that we used, so we don’t have quite the same relationship but I should say that standardization is one of the big pieces.

[Tracy Welch:]

And I think to reiterate that a little bit some part of the great partner we were their number one commercial dealer last year, we'll be their number one combo dealer this year. They've got a element of -- commercial side they've got a more efficient system which is more modular called Helix and on the residential Equinox which kind of makes it a little more simple and quicker to install those systems so where we can we use those installations.

[Gregg Hillman:]

Okay, and are there any advantages like when you read the PowerPoint for -- what was the Elon Musk's company called?

[Tracy Welch:]

I missed it, what did you say there Gregg, I'm sorry?

[Gregg Hillman:]

What's the name of Elon Musk's company?

[Tracy Welch:]

Oh yes, SolarCity.

[Gregg Hillman:]

Yes SolarCity when you read their PowerPoint it's like they're trying to drive across balance sheet kind of just achieved this one by far in the United States but I take it there must be limits in terms of the efficiency and so at some point there's not a benefit from being big you know in terms of just the cost of the thing is that true do you think or do you think [Multiple Speakers]?

[Tracy Welch:]

That is true, they're a couple of things that being good does for you one is it allows you to hire the great people, great people want to be there. We have great people too and even though we are just $100 million company I’d put out people up if any of theirs and anybody else in the industry in terms of being able to be efficient. The other part of it is that you get to the flat part of the cost curve when you have a relationship with our panel manufacturers and being the most efficient, sometimes our people look at the cost of installing and partner efficiency is buying the cheapest canals and other companies try to do that. It’s always staying right to try to become the most efficient, but the fact is we’re much smaller than them in terms number of megawatts installed, but our cost for a lot is very close to theirs and so we found that we’re able to be almost and in fact not knowing the exact numbers to go apples-to-apples with we know that we are very close to being as efficient as them and despite the fact that we are because we’re on flat part of the curve have great efficiency and processes in place as well.

[Operator:]

Thank you. We’ll go now to now to Jim McIlree with Chardan Capital. Your line is open.

[Jim McIlree:]

Hi Tracy I just want to make sure I understand your comments regarding OpEx for the rest of the year when you were talking about flattish, are you referring to that as a percentage of sales or you’re referring to that as a dollar amount?

[Tracy Welch:]

Dollar amount, so I mean we’ve kind of built the business around what we need to run $100 million business.

[Jim McIlree:]

And so as we go through the year, the improvements that you talked a couple of times about improvements in efficiency and installed and things along that line, is that likely to have an impact more on the gross margin percentage or is that an OpEx number where it will help quarterly as well?

[Tracy Welch:]

There is a combination of both. So when we talk about efficiency, we’re talking about overall cost, obviously traditionally you think in terms of for example. If you go for installing three or four per week to seven or eight per week, that’s a direct cost to efficiency but it also has an impact on supervision costs as a percentage and so we think that we’ll be able to more efficiently use our fixed costs because we’re going to leverage it up on the basis of improved efficiency on the variable cost. So both costs as a percentage we hope to be driving down.

[Jim McIlree:]

And let’s ignore acquisitions for now so just on the current mix, if you went from 100 million in sales to 150 million or 200 million in sales, how much more could you get out of that gross margin percentage, it is 30%, kind of what you're going to get or can you drive that higher [Multiple Speakers]?

[Tracy Welch:]

Yes I think, we could but again we have forces that are pulling us each way so we think in terms of 30% to 32% but one other thing that happens as you become bigger and more well known and have a better reputation so increasingly you have people who want to give you bigger and bigger job, so as with a $10 million job, let’s say, we're going to access the job that might have a 22% margin instead of a 30% margin and that will pull us down, another job for example that we've been looking at, is the big job where we have virtually an opportunity to lead a job and get a smaller margin of that job, just because we're involved although we wouldn't have much of our work, or much of our resource involved it is just bringing close -- bring some trough technology to us but gain it would be smaller gross margin it falls down. So bottom line is, we treat them from a gross margin seriously but what we're really interested in is the ultimate leverage of our people in creating dollar profits and so, it's possible that large commercial jobs and opportunistic other jobs might bring that margin down slightly but it would be a conscious decision on our part to increase the profit as a result.

[Jim McIlree:]

Okay, great, that's helpful. And then lastly, Tracy on the balance sheet with the increase in inventory and the accounts receivables, what is an optimal level for you, or what's your target either in terms of DSOs, or inventory turns or net working capital as a percent of sales, I mean how do you want to decline them what is your target for your working capital needs going forward?

[Tracy Welch:]

Yes, and part of the growth that we saw at the end of the quarter is, as we indicated we had significant rain days in the first two months of the quarter, were fairly slow because of that, so a lot of that is a result of timing, and the fact that some of those jobs started late in the quarter, so we haven’t had time to collect and we have got a new job starting, so we're gearing up inventory to get us to do those in the beginning in April, our DSO we’d probably like to keep around the 45 day level, we cut fairly quickly on residential side, the commercial jobs can take a little longer and as we get into more public workshops, it can be even lengthen out beyond that, so it is probably a good target for that, and on the inventory, it's a little bit possible, we have tried to carry as little inventory as needed, and we want to -- particularly for a commercial job is job specific inventory tends to get dropped at the job site and we don't even take the possession of it in our location so, I don’t see that increasing at all probably driving, and it's going down for me than what we saw here in the first quarter.

[Operator:]

Thank you. We'll move now to Derek Poloncic. Your line is open.

[Unidentified Analyst:]

Just want you to talk a little bit further about the Solar Design Center, is that a bit of an experiment or is it bearing fruit, or is it signing on expanding that throughout your region, just talk a little bit further about that?

[Jim Nelson:]

Yes, Derek thanks, yes anytime we do something like that it’s both an experiment with anticipation of positive results. We have seen real positive results with it, we have able to sell a lot of customers who have just come in to talk to us and it's a great place also to support our sales activity in Sacramento Area, so it's been a real boom to the business, our anticipation is that it will have a several months instead of a couple of year payback, we'll probably have a payback on profits within six to seven months is our anticipation and so, as this crews out successfully, we will certainly examine the possibility of expanding these to other market, the other thing is that anytime we do the first one of these it tends to be more expensive because expand ramping with banks and then adjusting and so forth, and in the future, we think we will be able to poppy it up for pretty cheap where ever we go, so it is an experiment it is ongoing and evaluations are ongoing but we're certainly really pleased with our initial results.

[Operator:]

Thank you. We will take our final question today from Nigel Chadwick. Your line is open.

[Unidentified Analyst:]

Thanks for taking the call here again and congratulations on the noticed growth. It's indicative of hard work, I believe of both of you but also all the installers too so congrats to them.

[Jim Nelson:]

Yes, great, thanks.

[Unidentified Analyst:]

My question is, I remember when you spoke in Florida, you spoke of your model that you looked for when you do, go searching for the acquisitions, has that evolved at all, do you think in the troubles that are in the solar network, would you look at any smaller public companies?

[Jim Nelson:]

Well, then it have to be really priced nicely, and frankly smaller public companies, we have looked at a couple of smaller companies and the value versus profitability, just didn’t seem to be there and frankly, most of the profitable companies tend to be private, except for First Solar and SunPower and asked if they wanted us to acquire them and both of them said no, so, they thought they were too big for us. Nonetheless, so we're primarily focused on profitable private companies to acquire.

[Unidentified Analyst:]

Okay the other questions that I had have actually been amply covered, so I just want to say thanks again and look forward to the next call.

[Operator:]

And this does conclude our Q&A session for today. I'd turn the call back to Jim Nelson for closing remarks today.

[Jim Nelson:]

We're very pleased that all of you could join us today. Thank you so much for the questions for those who asked. We are really positive about our company, we are very, very confident that we are building something that is going to last 30 years and going to be a part of this big growth we anticipate and have spoken publically about the fact that our unique business model in the solar business is not unique in the world, it is based on doing what's right for the customer, providing great value and coming through on our promises and people have been running successful businesses like us for centuries, we think that's the way to go and not to try and address our company up to be anything other than that. And so, we're going to drive the company, stick to our principles and hopefully our performance will drive shareholder value and we're so grateful to all of you for being shareholders. So, thanks for joining the call.

[Operator:]

This does conclude today's conference. Thank you for you for your participation. You may disconnect at any time.