Sunworks, Inc.
Q3 2016 Earnings Call Transcript

Published: 10 Nov 2016

[Operator:]

Good day, everyone and welcome to today’s Sunworks Third 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 the conference over to Mr. Rob Fink of Hayden IR. Please go ahead, sir.

[Rob Fink:]

Thank you, operator. Good morning, everyone and thank you for all for joining us for the Sunworks third quarter 2016 earnings conference call. Joining me on the call today are Jim Nelson, Chief Executive Officer, and Paul McDonnel, Chief Financial Officer and Abe Emard, Chief Operating Officer. Before we start, I would like to remind everyone that 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 and 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, November 10, 2016. 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 have not already done so may wish to look at those documents, as we provide a summary of these results on this call. So, now, I would like to turn the call over to Jim. Jim?

[Jim Nelson:]

Thank you, Rob. Good morning and welcome to Sunworks third quarter 2016 earnings call. Thank you all for joining us. The strong momentum driving our growth continued in the third quarter, and our sales have increased nearly 90% in the first nine months of this year, demonstrating our strong position in the solar market. We’re guiding to a record year, nearly doubling our full year revenues and a strong fourth quarter, giving us momentum into 2017. In the third quarter, installation timing impacted our ability to recognize approximately $15 million of revenues from orders that we expected to install during the third quarter. These orders remain in our backlog and we expect to recognize these revenues in the fourth quarter and into 2017. This push out will have an impact on our full year 2016 guidance, given that there are only a few weeks remaining for installations in 2016, and the holidays and possible poor weather are upon us. I will discuss our outlook in greater detail shortly. Demand for our solutions and our positioning with commercial and residential customers in the markets we serve remain at all-time highs, and we look to end the year and move into 2017 with strong momentum. Indeed the fundamentals of our business are very strong and solid. And we continue to make investments to capitalize on the momentum we’re seeing in both, our Company the industry. We’re expanding our addressable market, which we believe will further drive accelerated and profitable long term growth. During the third quarter, we advanced a number of strategic initiatives that strengthened our Board of Directors, our management team and enhanced our organization, so that we can effectively scale our business and capitalize on the growing opportunity we see in the market. While we’re not satisfied with our Q3 results, this was strictly a timing issue, similar to that which has been experienced by many solar companies. And we’re confident in our outlook beyond short-term quarterly fluctuations. We’re taking proactive steps to capitalize on the growth opportunity in front of us. We’re strengthening our organization and implementing the systems and processes needed to more efficiently and effectively scale our business. Let me explain. As we shared on last quarterly earnings call, our commercial and agricultural business has benefited from high referral rates from existing customers, expanded market penetration, and strong overall demand in the markets we serve. This trend shows no signs of slowing in the third quarter and we continue to be encouraged. To further capitalize on our commercial and agricultural market opportunities, we invested in a world-class experienced team of sales professionals with a track record of producing over $200 million in annual sales in the very same markets we serve. We began integrating this 10-person sales team into our organization in the early part of the third quarter and we expect them to contribute to our incremental new sales beginning in the current quarter and ramp up meaningfully in the early part of 2017. We’re excited to have brought this talented team on-board and are confident they will significantly contribute to our long-term growth. While we still opportunistically seek accretive acquisitions and we have made number of offers on companies this year, we have determined that our existing expertise and infrastructure in place, it may be more economical and effective to bring in strong sales teams to build our business, rather than acquiring entire ongoing enterprises. While it will add expense in the early months of this strategy, over time, bringing in the sales teams will provide much stronger returns on investment while strengthening our existing culture. In addition, we have invested in new business licensing to expand our footprint into new regions where we see a strategic opportunity and a target-rich environment for expansion. Our expanded footprint will now include states in the northeast and in the southwest, and we’re likely to begin seeing additional sales in some of these states as early as Q4 2016. We have also made significant investments in our operations to support the anticipated sales growth of 2017. These investments include equipment, in-house installation management teams, operations managers and maintenance crews that will enable us to accommodate more concurrent projects at a larger backlog. Complementing these investments is our recently announced strategic relationship with Elevation Solar of Gilbert, Arizona, a company that delivers value-added energy solutions to both the commercial and residential markets. Together, we will go to market as Sunworks Elevation LLC to capture opportunities for solar projects in the commercial building industry and expand our customer footprint into states such as Arizona, Texas, New Mexico and Utah. Individually, we each have a track record of successful solar implementations. And combined, we expect to see the new LLC formation will add to and further diversify our revenue going forward. Sunworks Elevation will be co-managed by both companies to streamline project integration and accelerate our fulfillment schedules for commercial customers throughout the southwest. The growth of our commercial business continues to outpace the growth in our residential business. We expect this trend to continue in the near-term as we capitalize on the growing momentum we are driving in the commercial markets. The performance of our residential business was relatively in line with our expectations and we are advancing initiatives to further optimize the installation and fulfillment of our residential teams. We feel that we have a strong competitive advantage in installation and customer service in the residential business, and we strongly believe that we can bring cost down even as we enhance our customers’ experience. Our position as economic and quality operations the scarce resources residential solar business nationwide. We have found that there’re many sales centric companies in the residential solar business in desperate need of quality installation. Our intention is to partner with an ever-increasing number of these independent sales engines who will represent us in the residential market. With this approach, we will have the ability to scale and grow into new locations. We’ll be able to maintain margins based on our strong operational management and efficiency, and the cost of customer acquisition will be borne by our partners. Markets into which we have expanded our residential services already include Southern California, Oregon, and California Central Valley. We also see an emerging market opportunity in Nevada. As we all know, in 2015, the Nevada Public Utilities Commission decided to change the rules of net metering which coupled with higher service fees, dramatically reduced the value of energy being generated by residential solar systems. When the decision was made by the Nevada PUC to disallow net metering, most solar companies vanished from the state, as the ruling made it nearly impossible to make a physically viable case for residential solar. We however decided not to leave the state and continued doing business on a commercial basis with foresight that one day the decision would be reversed as the demand from the consumer would drive back residential demand. At the end of September, the Nevada Public Utilities Commission made a decision to allow home owners with active net metering applications dated before January 1, 2016, the ability to revert back to a full credit net metering rate structure. The decision to grandfather these homeowners with active NEM applications, many of which were orphaned by their previous solar providers, created the opportunity for Sunworks to reach out to nearly 15,000 eligible Nevada residents who have the desire to acquire premium solar system. Immediately following the Nevada PUC decision, we began seeking out grandfathered residents through low cost marketing methods to sign them up for a Sunworks contract. We’re also successfully assisting many previous SolarCity customers in transitioning from a lease to our ownership model. We expect to build on progress in the state of Nevada in Q4 and continue our efforts well into 2017. Our expectation is to add residential sales in Nevada incrementally this quarter without additional overhead and that we have an opportunity to capitalize on at least part of finite but identifiable market that could be as big as $375 million in the market as a whole. Meantime, we have also been strategically working to strengthen our organization so that we can more efficiently and effectively scale our business. It’s important to remember that just two and a half years ago, we were a pre-revenue development company with no customer facing operations. Strengthening our Board of Directors, our management team and enhancing our organization with the necessary skill set, processes and systems needed for accelerated growth is and was required. Adding to the strength of our management team, we brought Paul McDonnel on-board as our Chief Financial Officer. Paul brings more than 30 years of senior management experience at Sunworks including an extensive background with public company finance and accounting, operations management, acquisitions and sales. We’re excited to have Paul on the team as he has a proven and successful track record of taking companies to the next level. During the third quarter, Paul quickly acclimated himself to his new position, demonstrating leadership amongst the team and identify processes and controls necessary to scale our business. I look forward to turning the call over to Paul in just a moment. In addition to Paul, we have significantly enhanced our financing, and by adding Charles Cargile to our Board of Directors. Chuck has an extensive background in financial and strategic planning, public company mergers and acquisitions, operations, information technology and capital structure management. He brings more than 20 years of public experience to Sunworks. We very much look forward to working with him. We’re also excited to have announced subsequent to the end of the third quarter the addition of Rhone Resch to our Board. Rhone served as President and CEO of the Solar Energy Industries Association or SEIA, representing the entire value chain from manufactures to developers to financiers all the way to the end users. Rhone managed all aspects of the trade association and was responsible for its daily operations working daily with the CEOs of the top solar companies in the U.S. and in the world. Rhone served as the voice of the solar industry in the U.S. as he represented the industry to Congress, the White House, the financial community and the media. Having Rhone on our team will prove invaluable as he brings a wealth of experience, a deep working knowledge of solar, contact throughout the industry and insights necessary to keep us positioned as pioneers in our business going forward. We’re very fortunate to have him working closely with us. While all of this progress was not reflected in the third quarter financial results, we’re confident in our long-term outlook and prospects for organic growth. In addition, we continue to explore strategic and accretive acquisition targets opportunistically that meet our stringent criteria. As we have discussed, we are targeting complementary businesses that can accelerate growth with our current footprint as well as targets that can expand our market and geographical reach. We look for companies that meet growth parameters and profitability profile, but just as importantly, have a strong management team that share corporate values. We have been in discussions with multiple management teams over the past few months, and while we have chosen not to pursue some of these options, we’re in ongoing discussions with key candidates that could have substantial strategic benefit to our organization. As we look ahead into the remainder of the year and into the next, we believe the investments we are making in the company will give us a long-lasting competitive advantage. The talent we have added to our will be transformative to our ability to reach our goals of scaling the Company into a major competitor for many years to come, delivering the results that our shareholders expect. I’d like to remind you that we’re building a Company to be strong for 30 years not just something that is a quick money making opportunity. In the near-term trough and as a result of the order timing I discussed earlier, we have reduced our guidance for the full year of 2016 from the previous range we provided of a $110 million to a $115 million to $95 million to a $105 million. I’d now like to turn the call over to Paul McDonnel, our Chief Financial Officer, to review the financials. Paul?

[Paul McDonnel:]

Thank you, Jim, and good morning, everyone. I’m pleased to be joining you today on this call. Since arriving at Sunworks in early September, it has been my pleasure to find that I’m working with good people. The finance team is conscientious and dedicated to supporting the rapidly growing sales and installation operations. As a team, we are striving to fully implement the new enterprise-wide accounting and financial reporting system. We are determined to exploit the system’s full capabilities across the organization. Good information supports good decision making. It is an exciting opportunity FOR the entire team. I also appreciate and acknowledge the efforts of those that have preceded me in this position. As is often said, we drink from wells we have not dug, and I am the beneficiary of their efforts. It is now my responsibility to briefly review the financial results for the three and the nine months ended September 30, 2016. Consolidated revenues for the third quarter of 2016 totaled $17.6 million compared to $19.7 million in the third quarter of 2015. As Jim mentioned earlier, approximately $15 million of projects, which were expected to be completed in the third quarter, were pushed to the fourth quarter and some into 2017. Of the revenues recognized during the third quarter, about 57% were commercial and agricultural, and about 43% came from residential installations. Gross profit for the quarter was $4.7 million or 27% of revenue compared to $5.3 million and 27% of revenue for the three months in 2015. Please be aware that certain reclassifications of prior period expenses have been made on the operating statement to conform the current period presentation. The largest of these reclassifications involves sales, specific salaries and related cost that have historically been included in general and administrative expense. These sales, salaries and related costs are now included in the sales and marketing expense line on the operating statements for the current and for the prior period. Selling and marketing expenses were $2.1 million or 12% of revenue, compared to approximately $1.8 million or 9% in the third quarter 2015. This quarter, sales and marketing expenses are higher. In the third quarter, sales and marketing expenses include both the remaining media and call center salaries and operating expenses, together with the initial expense related to the new 10-member commercial and agricultural sales team that Jim spoke about earlier. General and administrative expenses were $4.2 million or 24% of total revenue in the third quarter of 2016, compared to approximately $1.7 million or 9% of total revenue in the third quarter of last year. G&A expenses increased primarily due to the inclusion of Elite Solar, which was acquired in December of 2015 and is now included in the operating segment. The increase in G&A is also driven by additional administrative and accounting salaries and benefits, four new facilities, more vehicles, more equipment and increases in general business insurances, plus hires workers’ compensation insurance and professional services, such as legal, accounting and investor relations. Total operating expenses were $10.4 million or 59% of revenue in the third quarter of 2016 versus $3.6 million or 18.4% of revenue in the third quarter of 2015. Included in the operating expenses this quarter is $3.9 million of stock-based compensation expense. The majority of this expense is associated with the vesting of a 2014 performance-based restricted stock grants and the 2015 performance grants issued to the former CFO. The 2014 and 2015 grants are expensed based upon the calculated value at the date of grant. In 2014, the Company was then known as Solar3D and was a penny stock at the time of grant. That was prior to the 26 to 1 reverse stock split. The result is that the weighted average share value used to determine the amount to expense in the current quarter is $5.03 per share. This results in a high stock-based compensation expense but less dilution as fewer shares are actually issued. The first one-third or one 1.8 million in interest expense related to these restricted stock grants was included in last quarter’s results. The final two-thirds of this stock-based compensation expense or approximately 3.6 million is included in the current quarter expense. Other expenses for the third quarter of 2016 were approximately $408,000 which is primarily the non-cash amortization of a beneficial conversion feature for convertible notes, interest on equipment note and corporate taxes. The net loss for the third quarter of 2016 was $6.1 million or $0.29 per basic and diluted share. This compares to net income of $1.4 million or $0.08 per basic and $0.06 per diluted share in the third quarter of 2015. Adjusted EBITDA for the third quarter was a loss of $1.9 million compared to EBITDA income of $1.7 million in the corresponding quarter in 2015. The difference is attributed primarily to the combination of lower quarterly revenues and the additional expenses to build an organizational foundation in the operations, sales, marketing and administrative functions required to support future growth. Shifting now to the comparative year-to-date results, revenues for the nine months ending September 30, 2016, increased 87% to $68 million compared to $36.4 million in the nine months ending September 30, 2015. The increase was in part the result of the acquisition of Elite Solar in late 2015 and strong organic growth in commercial and agricultural markets. Gross profit was $19.8 million at a gross margin of 29.2% of revenues, for the first nine months of 2016, compared to a gross profit of $10.7 million at a gross margin of 29.5% of revenues for the first nine months of last year. This is a three-tenths of 1% decrease in margin between periods. The year to date net loss of $5.7 million or $0.29 per basic and diluted share is in contrast to a net loss of $123,000 or $0.01 per basic and diluted share for the same period last year. Adjusted EBITDA income for the first nine months of 2016 was $989,000, this compares to $1,022,000 of EBITDA income in the corresponding period in 2015, or a $33,000 decrease for the current versus the prior nine-month period. Turning to our balance sheet, our cash and cash equivalents were $6.7 million as of September 30, compared to $12 million as of December 31, 2015. Remember that year-to-date sales have grown 87% as compared to the same period in the prior year. As of September 30, 2016, receivables inventory and costs in excess of billing have grown on a combined basis by $16.2 million since the beginning of the year from $10.4 million to $26.6 million. In correlation to the $16.2 million increase in receivables, inventories and costs in excess of billings, accounts payable, accrued liabilities and billings in excess of costs, have grown on a combined basis by $13.1 million from $7 million to $20.1 million. Overall, working capital since the beginning of the year has increased $1.1 million or 9% from $11.7 million at the beginning of the year to $12.8 million as of September 30th. With the completion of the current project and process, cash balances and working capital are anticipated to improve, reducing the balances in each of the accounts mentioned previously. Jim, I’ll now turn the call back to you.

[Jim Nelson:]

Alright Paul, thanks very much. We’re not satisfied with the results of this quarter, I’m sure you understand that. Every management team will love to report growth quarter-over-quarter, year-over-year and profitability growth as well. But nothing has dampened our enthusiasm for the future of this Company. We feel very strongly that we’re going to have strong results in Q4 and terrific results, perhaps unparalleled results in 2017. The results of this quarter are almost exclusively as a result of timing of contracts that got pushed into future quarters. We’re extremely enthusiastic about the future. We think we have built a machine to create a great opportunity going forward and a great opportunity for building shareholder value. And with that, I’ll turn it back over to Rob Fink. Rob?

[Rob Fink:]

Operator, can you start Q&A.

[Operator:]

Of course. [Operator Instructions] And we will take our first question from Jeff Osborne with Cowen and Company. Please go ahead.

[Jeff Osborne:]

Quite a few questions from my end, if you don’t mind. But on the delays, I think the 10-Q references, utility interconnects and land permit approvals. Can you just kind of flush out the rational for the $15 million of push-outs?

[Jim Nelson:]

Sure. I’m going to have Abe talk to that, Jeff.

[Abe Emard:]

Good morning, Jeff. A lot of the contracts pushed out due to utility interconnection issues, some financing issues, just different related issues that pushed out the contracts, from Q2 to Q3 -- Q3 to Q4.

[Jim Nelson:]

Q3 to Q4, and some into 2017. And frankly, some of them also, Jeff, were just customers deciding to push off their projects into the future. It’s interesting, you know Rhone real while and you know that Rhone Resch, our Board member, understands the market as well as anybody. And his point of view, when we were talking about it was, look, everybody’s had to push some projects, and this is part of what you had to do and it’s part of being in this business right now. We hope to not have that happening much in the future.

[Jeff Osborne:]

Understand. And then just referencing the machine, as you referred to it, on the backend, it sounds like quite a few changes. So, first of all, where did the 10 folks come from on the C&I side in terms of new sales people? And then, you also made reference in the 10-Q of changing the approach on residential from a call center and media approach more to a direct model. And so, can you just talk about the timing of that? And in aggregate, between those two changes, how do we think about modeling OpEx in Q4, but more importantly on a quarterly basis in 2017 with these pretty pronounced changes in the go-to-market strategy.

[Jim Nelson:]

Sure, let’s start with the sales team. So, the sales team came from -- we don’t want to mention the specific company but much of the 10-person sales team came from an individual company where they had built sales and they felt like they wanted to join our team because they understood our culture a little bit better and felt like this is the place they wanted to be in and we’re delighted to have them come over. And then, other people that were drawn from other companies within our market area have joined as well. So that’s essentially where they came. The core of the team came from one company and they had worked together before. It was great opportunity, great success I should say. On the residential side, we’re still working through that approach, but we’ve determined that that is the approach we’re going to take where we’re going to be working with outside sales engines and do primarily installation. We don’t think that that’s going to affect Q4 but our anticipation is beginning in the -- early in the year, we’ll be taking that approach. And as it flushes itself out, we’ll be able to give you much more detail on how we’re going to do it. So, if it’s okay with you, I’d be really happy to talk to you offline as we get closer to the 1st of the year.

[Jeff Osborne:]

Got it. And then, maybe lastly, how should we be thinking about modeling the stock-based comp expense going forward, just given the last two quarters have had some one time issues? Is it a couple of $100,000 a quarter, are there any other kind of catch-up payments out there from other acquisitions we need to be thinking about?

[Jim Nelson:]

Let me tell you tell you first that the stock-based compensation, which we paid in the last couple of quarters was a result of a grant that we gave early in the process. So, this -- in 2014, we bought the original Sunworks. And in order to retain and incentivize their management team, we gave a stock-based grant, restricted stock grant, at that time, with the idea to retain and incentivize the people. Look, we retained them; that was a good thing. And going forward, we had -- the way the stock was going to be vested was on a performance basis. And so, they had three tranches of performance that we anticipated would stretch out, while they all happened at once obviously or at least really close upon each other. And so, now, we’ve paid those out last quarter and this quarter. That is now done. So, there will be no more expense related to that particular grant. Other stock-based grants, options and so on, yes. What is it, Paul?

[Paul McDonnel:]

The range for each quarter going forward based upon the current configuration will be between a $150,000 and $200,000 stock-based compensation expense that’s not considering any adjustments for forfeitures going forward though. So, as far as what’s currently in place of a range between 150 to 200 by quarter.

[Operator:]

We’ll take our next question from Jim McIlree with Chardan Capital. Please go ahead.

[Jim McIlree:]

The $15 million in push-outs, I know you said it’s multiple projects, but is it concentrated in one project or is it one or two...

[Jim Nelson:]

No, it’s really multiple projects, two of the projects represent probably about 40% of that push-out and then there are whole bunch of medium-size once.

[Jim McIlree:]

And is it associated with any specific geography or sales person or sales office?

[Jim Nelson:]

No, it’s random. So, there is -- we can’t identify any particular problem we have internally, we think it’s market and customer decision.

[Jim McIlree:]

Okay. The guidance for the year is reduced by $10 million to $15 million range, but you talked about a $15 million delay in orders. So, it sounds like, I mean almost all of those orders are getting pushed into next year. Am I missing something on the math?

[Jim Nelson:]

No, I think that’s probably right. I think we’re going to experience -- some of those will get fulfilled this quarter and frankly probably have already been fulfilled this quarter and then some of it is going to be pushed out. But also, we’re trying to be conservative, recognizing that we have December that we’ve got to face with this possible weather implication. So that’s the way we see it at this point.

[Jim McIlree:]

And since it’s possible to get pushed into next year, I’m trying to understand why you’re so confident that they’re not just going to get cancelled altogether or at least some of them won’t get cancelled altogether?

[Jim Nelson:]

Well A, we have signed contracts; B, some of these people are customers that we’ve done business with before and we have experience with some of these folks pushing-out smaller projects. We just had real visibility and we’re on these contracts and there is no indication from them that they are at risk.

[Jim McIlree:]

Okay. The other thing that I thought was striking was the new sales in the quarter were down 50% from Q2, which I know was the strong quarter, but also down from the year ago quarter. Is that part of the same kind of thing you’re saying with the push-outs; is that there has just been a push-out and it’s affected both the backlog that you had as well as new sales for the quarter, or is it something else going on?

[Jim Nelson:]

No, there is nothing else going on, Jim. But, I do think that -- as you know, this is a lumpy business and sometimes things rush into door and sometimes things are more deliberate. And our sense is that we expected to be able to sell more last quarter, but we’re working on a lot of large and medium-sized and large contracts. So, it could be that we do $17 million in sales last quarter and a whole bunch more next quarter. And so, it’s the lumpiness of the business that doesn’t surprise us, because we have good visibility into large pipeline that we’ve got that we think will produce really strong sales in the next two quarter and even stronger beyond.

[Jim McIlree:]

Okay. And finally this, the 10 additional sales people that you talked about. I’m little bit confused. Is that one team or is that core of that 10 one team and then you just added some other people that are…

[Jim Nelson:]

I will give you as specific as I can. Seven people from one team and three or four others that we’ve been able to bring in from other sources.

[Jim McIlree:]

And that’s added to that team or that’s just added to…

[Jim Nelson:]

To that team. And we’ve actually built our entire -- organizationally now, we’ve built our entire commercial sales group around that team. So, one of the fellows who came over from the other company has been named the Vice President of Sales for Commercial. He’s a terrific fellow named Don Carlson and he will now lead our entire commercial sales team.

[Jim McIlree:]

Okay. And just in terms of the timing of when they would have an impact. Just it’s reasonable to think that it’s going to take them, let’s call it, six months before we start seeing revenue from them, maybe we’ll see some sales activity this quarter. But I mean, we’re looking at like a two quarter timeframe before we see revenue from that team. Is that reasonable way to think?

[Jim Nelson:]

Yes. Jim. I think that’s good and reasonable assumption. I think we’ll see sales and we’re seeing sales this quarter really in terms of the great big ramp up that we expect. We think that Q1, they’ll really start being effective and I think will gain momentum throughout the year. And as I told you, our objective next year -- you’ll probably laugh, but we think we can do really great stuff next year.

[Jim McIlree:]

And now, what is the total C&I team as we stand today in numbers?

[Jim Nelson:]

How many people?

[Jim McIlree:]

Yes, how many people.

[Jim Nelson:]

We’re counting, 20. So, we doubled it.

[Jim McIlree:]

You doubled it? Okay.

[Jim Nelson:]

Yes.

[Jim McIlree:]

Great. Thanks a lot and good luck to everyone.

[Jim Nelson:]

Thanks Jim.

[Abe Emard:]

Jim, this is Abe, to add some color on those contracts that moved from quarter-to-quarter. A lot of these projects we have started, parts of construction are being delayed by a lot of the utility companies. So, when you spoke about what -- how do we feel about those contracts, we feel absolutely 100% confident and the 100% of those contracts not canceling, we’re passed that stage.

[Jim McIlree:]

Okay. That’s very helpful. Thank you for that addition.

[Abe Emard:]

Yes, you bet.

[Jim Nelson:]

Great. Thank you, Jim.

[Operator:]

[Operator Instructions] We’ll take our next question from Brad Meikle with Craig-Hallum. Please go ahead.

[Brad Meikle:]

Good morning. How are you?

[Jim Nelson:]

Brad, everybody has a new way of pronouncing your last name I’ve noticed. So, anyways good to hear you.

[Brad Meikle:]

Yes. Nobody seems to get it right; it’s Meikle, but thank you. So, the residential guys so far, Vivint, SolarCity basically guided down for the second half of the year, in terms of their installations. Are you seeing residential business slow down?

[Jim Nelson:]

We don’t and one of the things that I’ve expressed to some other people who maybe on the call is that for somebody like SolarCity, who is trying to grow off of a base that’s a lot larger than our base, to continue a growth rate that they’re projected is really difficult. For us, to continue a strong growth rate on residential, it’s not nearly as difficult. So, we haven’t yet seen it. We still see strong demand on that side. And we think that our new approach to residential is really going pay great benefit, allowing us to move into new areas and with new sales partners.

[Brad Meikle:]

And how many states you plan to be in, in residential in 2017?

[Jim Nelson:]

Say that again. I’m sorry Brad.

[Brad Meikle:]

How many states do you plan to be operating in, in residential next year?

[Jim Nelson:]

We anticipate 8 to 10 next year.

[Brad Meikle:]

Right. And how much [indiscernible] policy caps in California or other regions?

[Jim Nelson:]

Well, California, it’s important obviously and that’s part of what we track, as we choose what states to go into. And in California, obviously we have visibility into what’s happening in the next at least two plus years. And in other places, we’re tracking carefully so that we can ramp up or down as we need to in these various states, just like we figured out Nevada relatively quickly. We think we can -- as we go into other states, we will be able to figure them out quickly too. But we think that is great opportunity in many states. And we think that will expand over time.

[Brad Meikle:]

And from a price standpoint, obviously monitor [ph] prices are down, $0.20 in the last few months. What are you seeing in terms of pricing in the market on commercial and residential price pressure?

[Jim Nelson:]

We haven’t seen price pressure yet. We anticipate that for some early period of time, we will be able to maintain a lower decrease in our residential price than we have seen a decrease in our residential costs, which should expand residential margins in the short, medium term. Over time, economics take over obviously. And we will obviously share some of those savings with the consumer. So far no problem.

[Brad Meikle:]

Great. And what percentage of resi and commercial would be cash sales versus equity finance otherwise?

[Jim Nelson:]

Virtually everything on the commercial is -- on the residential side we do with cash or loan. And as you know we’re real strong on encouraging people to own their own systems, as we think the economics for virtually everyone is better on that side. On the commercial side, most of the people we do business with one the commercial side, know how they like to do the business. So we go into a situation where the buyer of the system says I want to do a PPA or I want to do a loan or cash. And we don’t have to influence them. Frankly, each individual, commercial business has a good reason for doing one or the other, and we’re happy to conform. Residential business, we’re very strongly on the ownership side.

[Brad Meikle:]

And so, if you look at the agricultural business and industrial side, 85,000 farms [ph] in California. How many of them are suitable for solar and then out of those, how many do you feel like have evaluated it or turned down or otherwise untapped out of the market?

[Jim Nelson:]

Okay. Abe is going to talk to that one.

[Abe Emard:]

Yes. I would say -- I think we spoke about this before but I would say -- I don’t remember the exact numbers but I remember something around 60% to 70% would actually be viable for solar opportunity. And of that I think we have the ability to capture a significant amount in the next five to ten years.

[Brad Meikle:]

And then of the 70%, how many have -- you don’t see the -- continue with SolarCity very much I guess. How many of these guys do you think are actively considering kind of moving that direction? Just to get a sense, so if you look at the new sold [ph] numbers, it doesn’t seem like there is a kind of momentum to next year. But I’m just trying to get a sense as to where you seem to have a lot confidence in ability to grow next year and just trying to get a sense for what the drivers of that.

[Jim Nelson:]

We think that the driver on the side of the agriculture is who has done a great job. We have a near perfect record in terms of quality, installations that we have done in the agricultural market. And in the past, we’ve almost haven’t done any marketing because we’ve had so much referral business. Even if the businesses are referred to us, the way people buy on the agricultural side is to find out who has used who and how they did. And so now we are out getting a much larger sales team going out and really finding out where the jobs are and promoting our strong record of quality customer service and quality installation. The biggest competitors are not the biggest companies in the industry. We find that the biggest solar companies in the industry are not very good at commercial. Our biggest competitors on the commercial side tend to be more regional companies that are specialists and there are some quality companies out there obviously; we just think we are the best and we are very competitive.

[Brad Meikle:]

Excellent. And just last question, so the states that you are active in residential and C&I, how -- what do you think the rate of growth is for the overall industry next year?

[Jim Nelson:]

I think C&I next year will grow in the 30% range, maybe even more than that. I know that SEIA had predicted that this year and next, this year would be about 31 and next year would be high 20s. But I think actually there is momentum and economics that indicate that the C&I will be stronger. So, I think overall, I think there is going to be strong demand on the C&I basis. I think it might even be stronger on agriculture. So, we’re looking at agricultural states where we can expand our footprint and take our expertise to compete there. On the residential side, look, some people have talked about flat residential and some people have talked -- of course few months ago there was a prediction that residential next year would be in the 30% to 35% range. I believe that over time -- it may be flat but a lot of the demand on residential has been driven by these big companies going out really pushing. And so, with SolarCitys and Vivints and formerly SunEdisons and Sungevity and other companies like that who have grown really fast on a push basis, it may flatten now because there are some -- there is a more sophisticated customer now who’s heard the story and now they want to make sure that they get it right. And I think that positions itself perfectly for us because we really believe in getting it right for the customer and not doing just a quick sell and move on. We believe in doing a really thorough presentation and making sure people are satisfied. And we think that’s the way it always should have been and certainly will be in the future. So, if demand flattens out this next year, there is no question in our minds that it will be a temporarily flattening and that it will take back off. And we think that both residential and commercial solar will be among the fastest growing industries for 10 years to come.

[Brad Meikle:]

Right. I mean the SolarCity and Vivint are down or flat, try to offset that. So, the regional focus guys like yourself could grow a lot quicker than the overall numbers. Well, thanks so much.

[Jim Nelson:]

Okay, Brad. Thanks, good. We will talk to you soon. See you on Tuesday.

[Operator:]

We will take our next question from Carter Driscoll with FBR. Please go ahead.

[Unidentified Analyst:]

Hi, this is Nate Mitchell on for Carter. Thanks for taking my question, guys. Just wondering, have you guys seen any push into storage on the commercial side? Just any color on there, what you are seeing would be greatly appreciated. Thanks.

[Jim Nelson:]

Nate, we really believe in storage going forward. As you certainly know right now, there aren’t a lot of situations in which storage is really broadly economic. However, we have installed storage here and there. And we think that there is strong future for storage in the future. We think it will grow, there is -- obviously people are talking about it. When they see numbers, they kind of -- there is a box sometime, but sometimes we’re able to use storage to go into a situation where we can change the marginal rate or change the marginal consumption and then getting a terrific payback for customers based on storage. Going forward to have it broadly accepted, broadly adopted, it’s still got to get a lot cheaper. And that probably means new technology, there is a lot -- as you know, as everybody knows, there is lot of technologies being worked on out there. And we hope that one of them is the one that ends up doing all the things required by storage that is reducing the cost of the unit, increasing the time that it holds the charge, decreasing the time that it takes to charge, and decreasing the footprint. So something will come up, it does that, and when it does, it’s going to be a monumental game changer.

[Operator:]

And we will take our next question from Nigel Chadwick, [ph] a private investor. Please go ahead.

[Jim Nelson:]

Hello Nigel.

[Operator:]

Are you online? Check your mute function on your phone. Nigel?

[Jim Nelson:]

It sounds like we lost him.

[Operator:]

Okay. We have no further questions then.

[Jim Nelson:]

Alright, thanks to all. Thank you very much for joining us.

[Operator:]

And this does conclude today’s program. Thank you for your participation. You may now disconnect.