Sunworks, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Greetings and welcome to Solar3D’s Second Quarter 2015 Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this teleconference is being recorded. It is now my pleasure to introduce Andrew Haag, Managing Director and Partner at IRTH Communications. Mr. Haag, you may begin.

[Andrew Haag:]

Thank you very much, operator and good afternoon, everyone and congratulations Jim and Tracy on a great quarter. I’d like to welcome all of you to Solar3D’s second quarter 2015 conference call. With us today are Solar3D’s CEO, Jim Nelson and the company’s CFO, Tracy Welch. Before I turn the call over Jim, I’d like to remind all of you 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 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 personal and changes in legal and regulatory requirements. In addition any projections as to the company’s future performance represent Management’s estimates as of today August 6, 2015. Solar3D assumes no obligations to update these projections in the future as market conditions may change. The afternoon the company filed its 10-Q with the SEC and issued a press release announcing its financial results. So participants in this call who may not have already done so may wish to look at those documents as we provide a summary of those results on this call. I would like to now turn the call over to Solar3D’s CEO, Jim Nelson, who will give an overview of the company’s business activities and developments in the second quarter 2015. Jim will then turn the call over Tracy Welch, the CFO, who will provide an overview of the company’s key financial performance and operating metrics and we will pass the call back on to Jim for a few comments before we open up for Q&A. Jim?

[Jim Nelson:]

Thanks Andrew. Hello everyone and thanks for joining our call today. For those of you who are new to our story or to our company, thanks for your interest and for those of you who have been following us, we're really truly grateful for your continued support. As you know, we're in the business of providing photovoltaic solar power systems and solutions and we've developed a highly efficient solar cell, which we're now seeking to commercialize. Through our subsidiary SUNworks in Roseville Californian and MD Energy in Rancho Cucamonga, we're focused on design installation and management of solar power systems for commercial, agricultural, industrial and residential customers. We feel really strongly that this is a great time to be in the solar business, all of you I am sure know this that solar is booming and especially in the Western region where we're specifically focused in California and Nevada and possibly other adjacent states, it makes sense from a growth standpoint and profitability standpoint for management to concentrate our efforts in corporate initiatives in these areas. Besides our focus on rapidly -- growing rapidly and profitably, we're also committed to acquiring strong companies in our market area. We have very focused criteria for those companies. We're looking for companies with sales between $10 million and $50 million that are profitable. They must be competing in commercial and residential space and of course in our geographic focus. Most importantly, we're looking for management teams that will be willing to continue to run their companies as part of our company and collaborate with our terrific management team. We've been really grateful for the collaboration and melding of the two companies that we have so far led by Danny Mitchell at MD Energy and Abe Emard at SUNworks, both terrific fellows and they've both developed great management teams. So what's driving our growth today? While our management team has done a phenomenal job and this quarter we're pleased to announce another strong quarter highlighted by three key themes. First, we've been able to generate consistent organic growth SUNworks and MD Energy operating divisions and have a lot going on there. For those of you who have seen our metrics you know we have an incredibly strong backlog and the backlog is getting only stronger. Second, we continue investing in our infrastructure to build the necessary management and back office teams to handle this rapid organic growth we're going through and to continue our mandate to target new interesting acquisitions candidates that we can hang on the framework that we're already developing. When we do acquire a company, we'll be in a position where they will be able to come on, add their profit and management team to us without a substantial increase in back office support and probably reduction and overhead cost. Third, our strong management team is lead experienced industry veterans with extensive knowledge and every construction, clean tech, finance, private equity, global marketing and strategy. Solar3D's executives and the subsidiary leaders have high positions in top organizations and their involvement has included the expansion of multibillion dollar companies gaining access to billions in capital and running their own successful companies and contributing to the expansion of the energy market. These factors combined put us on a trajectory for growth in the booming solar industry. We're very strong right now. We're gaining market and gaining market share I should say and getting stronger. Our business has undergone tremendous growth both organically and as a result of accretive investments we have made, which have given us better visibility enabling us to provide more operational metrics, we believe our company offers a compelling business and value proposition. So let me give you a couple of second quarter highlights. First of all, as you've seen in the releases that we just put out, our second quarter was strong as we generated 47% growth year-over-year and 94% versus the previous quarter, with $11 million in sales in this quarter. This is not only due to the acquisitions, but also to the growth within these acquisitions that Tracy will elaborate on a little bit later. SUNworks has had a great quarter. They've achieved great residential sales by closing 69 design and installation projects and that's going up dramatically. They've also been able to secure numerous contracts in the $1 million to $3 million range, which obviously helps our sales greatly and we've been able to make these sales due to excellent customer service and flexible cost savings for large commercial organization. MD Energy, this was the first full quarter that we've had MD Energy as part of our organization and we're thrilled with the results so far. They've been able to add to our topline and also to contribute to our profitability. Also MD Energy brings a unique opportunity to us in that the collaboration of the two organizations allows us to bid on new jobs that we couldn’t bid on individually either company could not bid on them individually and the collaboration is allowing us to approach some of these bigger opportunities. Let me just talk a little bit about the metrics that we track for this quarter. The beginning sales backlog in the same quarter last year was $2.3 million, this year's beginning backlog was $14.7 million. Total new sales in the quarter, same quarter in 2014 was $7.6 million. This year it was $19 million, for 250% increase. Total sales backlog was $9.9 million last year, $33.7 million this year. Earned revenue of course $7.5 million last year, $11 this year and the MD backlog, which is what I really want to focus on here, last year it was $2.4 million, this year it was $22.7 million nearly nine times as high as last year. We feel really good about that and that's bearing out the fact that our team is executing the strategy and achieving great results as a result of their performance. Let's talk about -- just for a minute about the market landscape, like I said before, we just couldn’t be more thrilled to be in the solar business right now. Or course a rising tide lifts all boats. In addition to that, we're gaining share because of the strength of our organization and so we're experiencing this powerful trend and solar companies generally, the solar industry continues to grow and be one of the fastest sectors in the world. In fact, I would actually say that we believe, one of our company's beliefs is that over time, over the next 20 years this will be fastest growing industry in the world or at least certainly among the fastest growing. Thus far distributor solar has penetrated less than 1% in the world and in the United States of the total addressable market in residential and commercial. So there is a lot of room to grow. In mid-May, we cited a report issued by Bernstein Research that predicted that solar will become cheaper than retail power by 2018. You can imagine what those kind of economics will do to the growth of the industry. If fact for those of you who have been following us for some years you know that we've talked often about the fact that it's economics is not government policy, it's not -- the fact that it's fashionable is economics that will drive widespread adoption of Solar throughout the country and throughout the world and that's what's happening before our eyes. The solar industry being the highly fragmented with high demand in California we continue to focus our acquisitions in California and Nevada and possibly on adjacent states since there is a critical math and there are lots of companies that we can focus on there. In the past, utility providers around the country and world have tended to look for ways to challenge solar. Soon they will be looking for ways to integrate solar. We believe that our Solar 2.1 business model is representative of the type of economics driver reference in this report. Our approach to this business as well as the rising demand of solar will help us achieve revenue growth in the company and provide long term value to our shareholders, which is obviously our primary concern. Another study chronicle in an article by Bloomberg placed trillions of dollars already invested and provide the forecast for the renewable energy boom for the global power market through 2040. One key takeaway highlights following solar prices that could represent the cheapest form of power by 2026, that's a powerful statement. According to BNEF $3.7 trillion will be spent on solar investments between now and 2040 accounting for more than one third of new power capacity worldwide. This study also presents data that indicates that by 2040 Roof Top Solar will be cheaper than electricity from the grid in every major economy due to the result of high electricity prices. So, we -- again, let me just reemphasize, this is a great market to be in and it will be for years to come and our objective is to create a super competitor within our current market and creating a critical mass in this current market we will grow outward from there and we think we have a great strategy and are gaining shares which burst that out. Let me talk a little bit about the status very briefly about the status of our acquisition initiative. We're currently in discussions with a number of companies probably a dozen different companies and as we close on some of these deals or as we execute agreements with some of these companies for whom we have great regard we will keep you updated. We hope to have something for to you in the very near future to give you a good update of what's going on there. Now there are a couple of items that I want to address upfront before I hand the call over to Tracy to have them talk to you specifically about some of our specific financial performance. First of all let me talk about insider selling. The founders and owners of Solar3D and the companies that we have purchased are purchasing -- they believe strongly in the company we are building. In fact, the evidence for that is the fact that they take stocking compensation instead of cash and so our whole acquisition module is to give more equity than cash when we buy a company. And as a result these founders and owners and the companies that we buy and our key management sometimes need to liquid some of these shares for a variety of different reasons. For example, they may have to pay taxes or they have a new house to buy or something like that. From time to time members of the team may sell some stock. The reasons are in innumerable that they might. But that doesn't mean that anybody is nervous about how the company is doing or its stock. According to SEC guidelines for insiders, there are very strict rules for how they sell and when they can sell. Furthermore, we have a real strong insider training policy as well designed to minimize any impact of insider selling on shareholder value. It is the right of the companies especially the people whose companies we buy and give stocking compensation to sell some of their stock from time to time. But anytime they sell any of their stock it is simply a small percentage of the holdings that they have and only for specific reasons other than trying to cash out or to pump and dump and none of those are reasons that we look to do that. It's important that we all have our goals of building shareholder value and then we are aligned. We believe strongly that Management newly acquired companies should be incentivized with a equity base performance. So their objectives and their success and wellbeing are all based on the success of Solar3D. And as Solar3D succeeds that success can only benefit all of our shareholders. In this we're all one in participating in this success of 3D all of our shareholders and all of our management. We want our shareholders see that everyone on our team is behind the company and the stock and we want see all the greatest value for all of our shareholders. The second issue I wanted to address is delusion. The delusion sometimes comes up as an issue. As a struggling development company back in the day we used to seek whatever financing we could find in anticipation of a brighter future when we can develop a strong business. The organizations that invested in us took a rest leaving that we as a team at some point make something happen. We've been fortunate to be able to build a strong business. Not from nothing, but we've come a long ways as those who have followed us know. We're grateful that these organizations helped us get here and happy that they are rewarded for with a good return on their investment. Concerns sometimes come out about these legacy notes that we're used to fund our growth and development early on. But these are just that legacy notes used the fund the company in an early stage of development. We don't seek these types of notes anymore obviously. The fact is that any delusion that comes from these notes has been disclosed in ever ahead a lot of different queues and case all that queues and case that we've submitted over a long time have disclosed and exposed the delusion that might come and the effect has certainly or almost certainly been taking into account by the market. This is what I remember our investment professors and schools used to teach us that Wall Street is a perfect market and when the information is out there it's priced into this -- it's taken into account. Like you, we are shareholders and we would like to see as little delusion as possible. That being said, we would rather not raise any additional equity. Though if we feel would add value to the company we will look to do so under the best possible terms. Having been in the private equity business I have seen more businesses stagnate and lose value because the ownership was unwilling to raise capital it needed to create a great business. We feel strongly that the equity raise that we did with Cowen and Company for whom we have great respect moved us into the realm of being a real company and has helped us advance our growth as we have listed to NASDAQ. As you see us apply that capital and grow the business, we feel that current and new investors will see that we're being good stewards of that capital and not being wasteful. If we do raise capital or equity or some other form of capital, it will only be because we think it adds value to our collective shareholders. The acquisitions that we do, we anticipate will be accretive every time we do them, which means that when we buy them we will pay an appropriate amount of money that will help add value to the form in excess to the amount of money that we have spent. Finally, wanted to address press now. I know many of you are interested in that. I know that people were disappointed that the decision was put off and there is going to another meeting on the 20th of August. We were too obviously. But we are wholeheartedly supporting our client, which is the Department of Public Utilities in Fresno in the process of getting approval from their City Council. As we did before, we have offered and provided data and our local services and anything else that they need. We also suggested then and now that we cannot participate in answering any questions that might come up in the City Council meeting, but out client suggested that our presence would be somewhat counterproductive and may be raise more questions. And therefore, we're going to follow their lead. We are in support of them. We support their determination and we'll all that we can to help them get their project approved and then we will provide them with the absolute best project they could -- product they could possibly have. The next hearing is scheduled for August 20th. Bottom line is we believe this year will be another great year for Solar3D. We think we're in a great market of solar. We think we're developing great strategy. We're executing that strategy as been borne out and we're on the path to becoming a great solar powerhouse. So I'll turn it over Tracy now to cover some of our financial results for the quarter.

[Tracy Welch:]

Hey thanks Jim. This is Tracy Welch. So for the second quarter, we just finished ending June 30, we reported revenue of $11 million, which would increased as Jim said 47% of over the $7.5 million that we reported for the quarter ended June 30, 2014. For the second quarter this year, we reported null operating income of $134,000 with an overall net loss of $122,000 pending a share loss. Our total operating expenses were $3.3 million for the quarter compared to $1.3 million for the second quarter last year. Increase came mainly from higher sales and marketing expenses connected with efforts to increase the sales growth and some business as well as additional expenses from our recently acquired MD Energy acquisition. Much of the $800,000 year-over-year increase in sales and marketing expenses related to SUNworks' push to increase their sales, which required additional staffing and related cost. The results for the quarter show that our backlog at June 30 last year was $2.4 million as Jim mentioned. At the end of this year second quarter our sales backlog is now $22.6 million a $20 million increase. We expect most of this sales backlog will be completed during the rest of this year second half. Our G&A expenses increased from $0.8 million in the second quarter of 2014 to $2 million in the quarter just ended. The year-over-year increase is partially related to one-off and non-cash items totaling $0.7 million this quarter plus additional staffing cost and related cost to grow the business plus the acquisition of MD Energy in the first quarter. We also added additional administrative expenses like myself and corporate controller to handle financial and administrative manners and to manage the future and we move forward. So we've been adding the right levels of staff to handle both the increased organic and future acquisition growth. Other expenses fell by $282,000 to just little over $250,000 for the three months ended June 30, 2015, compared to $0.5 million of the corresponding quarter last year. This decrease was primarily due to lower interest of $266,000 compared to $828,000 from lower beneficial conversion feature on the convertible notes. This is recognized as interest expense. During this quarter there was no gain or loss related to the fair value derivative liabilities, but in the second quarter, we have nearly -- 2014 we had nearly a $300,000 gain. So the net loss again for the quarter ended June 30, 2015, was a $122,000 or $1 a share -- diluted share compared to net income of $224,000 or $0.02 a share for the quarter ended last year. From our balance sheet standpoint our cash and cash equivalents for the company were $9.3 million on June 30 of this year compared to $11.2 million at the end of March and up $414,000 at the end of 2014. So we've had a little bit of slight decrease in working capital and cash as it takes that to fund the businesses we grow. Big portion of that was an increase in receivables, which were about $2 million. We're working currently with our suppliers to try and increase our credit lines to help them facilitate our expected sales growth going forward. Our derivative liability at June 30 was zero compared to $68,000 at the end of 2014 and that was $3 million at the end of June 30, 2014 a year ago. So just a brief comment about our first half Solar3D had revenue of $16.7 million which is almost double the $8.5 million we reported for the first half of 2014. In the first six months of this year, we reported gross profit of $5.4 million with a 32% gross profit margin compared to $2.3 million and a 27% gross profit margin for the first half of 2014. Our net loss of $1.5 million on $0.09 per share in the first half of this year compared to a net loss of $3.8 million or $0.37 per share in the first half of 2014. This time we're looking things on a pro forma consolidated basis. We had significant growth but if we -- if we compared -- if we would have included both SUNworks and MD Energy if own them as the beginning of 2014, the revenue would have been $11.2 million last year compared to $18.2 for 2015 which shows a still very healthy 63% growth. Jim mentioned we had some metrics we were tracking to demonstrate how we did a year ago. So new sales for the second quarter of 2014 roughly what we look like as what we booked $7.5 million. These sales during the second quarter of this year 2015 present works in MD Energy combined were $19 million and we recorded $11 million of that in revenue during the quarter. Our earnings sales backlog for what we had owned just SUNworks last year at end of June was $2.4 million and again as I mentioned previously R&D backlog at June 30 for SUNworks and MD Energy combined is $22.6 million but most of that is commercial. During the beginning of the third quarter we've announced new contracts totaling another $6 million and that's exclude the personal contract that Jim talked about earlier. So, we're still very confident in our previous guidance in the $40 million to $45 million range for the full year 2015. So with that I'd like to turn it back over to Jim for some concluding comments.

[Jim Nelson:]

Okay. One thing I'd like to mention, I know we've mentioned our net loss of the net income line, but if you adjust out non-cash items and one-time items that were related to either acquisitions or the Cowen offering, our adjusted EBIDTA is actually positive $600,000 and we believe that will get better over time and as you probably saw in our press release the reason why we've invested so much in our infrastructure is to accommodate great growth going forward. And as I mentioned before we feel it's a great time to be in the solar business. We've really enjoying working with our team and the team that we're assembling in the company and we believe that we're talking to like minded individuals at the companies that we hope to add to our company who would really augment our Management team and give us -- round out the team and give us additional strength, very excited about that. We've started the year strong and we certainly expect that to continue hopefully in terms of we've seen nothing yet. So we have our fingers crossed on that and we feel strongly about that. We raised $12.5 million in capital and listed on NASDAQ. So we have a stock currency that we can use to incentivize new companies to join us and help build our brand and build our company. We completed the MD Energy acquisition. We delivered $60.7 million in revenue in the first half. We're guiding to $45 million in sales and certainly we feel like that's good number at a minimum. We hope to be able to exceed that. We got listed onto the Russell Microcap Growth Index, which is great and it reflects the Company's execution of a great strategic plan that has led to significant growth and now widens the visibility of our investment profile to a broader group of investors. We are planning and hope to have more institutional average, talking with more investment banks about coverage. We have some confusion about coverage from the Western banks. As we grow we will seek to get more and more coverage from banks and funds to broaden our exposure to invest, I should say banks and funds to broaden our exposure to investors. Some people have tried to twist the fact that we've gotten coverage as a negative on the contrary receiving buyer recommendations within months of listing and a target price that's well above where we're trading is a positive. Currently one investment bank is covering us and we hope to see that expends. Every investment bank that covers us will have some kind of disclaimer that they hope to do business with us in more ways than just providing coverage. But there have been no commitments made to additional funds to be raised nor do we have specific plans of doing that. We have also not paid for -- of course we don't pay for coverage, we just don't. We believe this year will be another record year in revenue for Solar 3D and that we're on the path to building the next solar powerhouse. Now we'll open it up for questions. So Jessica, I'll turn it back over to you.

[Operator:]

Thank you. Due to the overwhelming amount of questions from investors on the last company's conference call, and the company's goal of maturing to stronger institutional ownership the Q&A will be focused on analysts and professional investors. We ask that when queuing for questions participants please sure you have given your company name and affiliation. [Operator Instructions] Our first question today is from Philip Shen with ROTH Capital Partners. Please proceed with your question.

[Philip Shen:]

Hey guys great job on accelerating your backlog to nearly $23 million.

[Jim Nelson:]

Thanks Phillip, how are you doing?

[Philip Shen:]

Doing well, thanks. I was wondering if you could provide some color on how you win your business. On what basis are you winning business? Is it pricing, service products all of the above something else?

[Jim Nelson:]

Yes, all of the above actually. I think we are able to price very competitively. But we don't win on the basis of price all the time. I think we have developed a really great reputation for providing a quality product, delivering it well and on time and on budget. And with good follow-up we follow up very carefully and so -- and then also as you know, we're a sun power dealer. So it can't be on price all the time, but there is lot of time we can show real value as a result of using sun power and of course we use other quality count providers as well. So a combination of all those things, but we're not a low price provider.

[Philip Shen:]

Great. Thanks Jim. When, just one more here from me and I'll jump back in the queue. How many acquisitions could you see in the remainder of '15 and potentially how many in 2016 and perhaps if you can address the types of the acquisitions that you are seeking as well would be helpful.

[Jim Nelson:]

Sure. All depends on which is signed up to a certain extent. We could see another two or three this year if the stars align and certainly within the next 16 to 18 months, we see -- we would like to do five or six acquisitions. The types of companies that we're looking at there's kind of a broad spectrum. All of them of course are focused on exactly what we're focused on which is commercial and industrial and residential companies. Some of the companies that we look at, we look at in order to fill out areas that we're already in, but they provide us a strategic strength that really help us. So that's one type. Another type is we're looking to fill up areas where we aren't yet and so we're looking for companies like that. We're also looking for companies that have some sort of monitoring technology and other companies that have asset management as well and so those are the types of things that we're looking at. But all companies, we're not looking just for strictly and installers. We're looking for integrators and then additional things that they have as well.

[Philip Shen:]

Okay. If I can I'll squeeze one more in. We have six more quarters of the ITC through the end of 2016. As we get into 2017, what is your strategy for step down of ITC between 30% down to 10%.

[Jim Nelson:]

Well, first of all let me let you our philosophy of that. The way we design the growth of our company is that we believe that we can grow quickly. We can scale up very quickly to accept much bigger volume and new companies and also we can scale back quickly. Part of this because we use sub-contractors on the margin. We have of course a lot of employees that do our installations as well but using subcontracts of course, we can scale back the direct labor and so as a result if the volume does go down, as a result of the change in ITC we think we can still remain profitable and strong. That said we also believe that and in fact this borne out by the report that you've seen that's been put out by the Department of Energy in conjunction with the SEIA where they've said that, yeah, there will be a cut back in solar at the end of 2017. But over 100% of that come back will be in the utility scale business. At least that is their perspective. We believe that as well. We think that there will be some emotion that goes into both the second half of next year and the first half of the year after where people say oh the ITC is going away and therefore we got a really bulk up on our purchases and then the next year, they will say well the ITC is gone and they'll have to come back. But in the long run, the economics two years from now are going to be the same as they are today without the ITC. So we believe that the economics will still push this market forward so that even if there is a flat spot in that period of time right around the end of 2017 for a few months it 8will get back on track.

[Philip Shen:]

Great. Thank you, Jim.

[Jim Nelson:]

Thank you very much. Jessica, there we go. Did we lose…

[Operator:]

We did, bear with me one moment.

[Jim Nelson:]

Okay. Sure.

[Operator:]

Jay are you online?

[Unidentified Analyst:]

I am.

[Jim Nelson:]

Jay. While she is working on the other call. Let's you and I talk. How are you doing Jay?

[Unidentified Analyst:]

I am good. Just had a few questions Jim. So as you look at the segments you're operating in specifically the commercial and residential and agricultural segment what -- which one of them do you think gives you the most opportunity for growth?

[Jim Nelson:]

Well I think it's hard to say. You look at the numbers and it looks like residential has grown fastest over short period of time last couple of years it may grow faster during the next period and time as well and a lot of that's done by easy financing and so forth. But as things get more competitive and that people start realizing that a lot of companies have big premiums built into their leases or loans and as a result they also can build in big premiums on their systems, I think the residential people will become more discriminated on the residential. I think there will still be strong growth, but I think that as soon as people start looking at people like us or companies like us that can provide an alternative that's much more economical I think we'll get a lot of growth out of that and I think that's going to happen. So we see that as real growth area. But we also see the commercial sector as extremely powerful in that these are folks who are really analytical and understand what kind of benefit there can be out of solar and so in the long run we think that both areas are real strong. We find equal gross margins in both companies and in both of parts of our business. So we're going to continue to focus on both and build both businesses almost as separate companies where we drive the business and we think they will both grow strongly.

[Unidentified Analyst:]

Okay. You mentioned looking at accretive acquisitions and trying to stay away from having any deluded event, but looking at your balance sheet and cash position, I am a little positive how you hope to accomplish that? What is your strategy in terms of acquiring company with good balance sheets and income statement and good funnel for growth and funding with the amount you've gotten and your balance sheet.

[Jim Nelson:]

Sure. We as I mentioned on the phone call, if we do have to raise additional capital for some of these acquisitions we want to do it because the acquisition will be accretive and because it we'll find the best terms we can for the money raising. I also said on the previous conversation that one of the things I saw in private equity was when people were really stingy with their equity they tended to have a really tough time to making their business strong because they wanted to hold on too tight. And so as long as the acquisition and any kind of money raising will be accretive and positive for the shareholder value. We'll obviously be willing to look at additional money raising if we have to get an ideal acquisition.

[Unidentified Analyst:]

Okay. Thank you, good luck.

[Jim Nelson:]

Okay Jay. Thank you.

[Operator:]

Thank you. Our next question is from [Ashok Kumar] [ph] with Agest Financial. You may begin.

[Unidentified Analyst:]

Yeah. Jim and Tracy congratulations, couple of questions first just piggybacking on the earlier question the composition of revenues 55-45 in favor of commercial versus two thirds, one thirds in Q1 and Jim had mentioned earlier that over the course of the year, you see that split evening out with any upside coming from commercial jobs and I assume that's still the case with any upside to your 45 guidance would come on the commercial side. And also the composition you had mentioned in the commercial side besides of the projects vary quite a bit from $200 million to few million. Are you seeing the sweet spot move up as you get scale on the business and on the residential I assume those metrics will remain static right the 1,400 cost of acquisition and $30,000 being the average of residential project?

[Jim Nelson:]

Yeah. I actually think our cost of acquisition will grow up a little bit because we're going to experiment with some additional ways of attracting companies in attracting new customers. Doesn't mean they're not going to be profitable but we've been able to attract companies or customers in such inexpensive ways so far. Our cost of customer acquisition is so much lower than anybody else in the industry or at least the companies we know of in the industry that there is almost nowhere to go but as we experiment with other types of customer acquisition approaches, I suspect it will ease up just because those other approaches are slightly more expensive. But yes we think that over time, we're seeing great response to our residential product. Residential is growing rapidly, but frankly I still believe that our upside in the $40 million to $45 million will come primarily from commercial, industrial, agricultural because we can get those pieces of business and big blocks, whereas residential grows in a more smooth curve and without substantial investment in driving that business faster we can probably only grow at a 100% a year.

[Unidentified Analyst:]

And Jim in terms of gross margins even though you had a sequential dip about 300 basis points assume you have bank to a level of sustainable operating profitability and you had indicated that you now have infrastructure to support much higher sales target and I was wondering how do that translate to operating leverage in the model?

[Jim Nelson:]

I think this is sustainable where we are now 31-32 wherever the points is and in terms operating leverage, I think as we grow and push forward, now some of the bigger jobs will actually price at a slightly gross margin. But some of those bigger jobs of course are it's still an opportunity to see substantial profit as a result of doing larger jobs they are required basically the same amount of engineering and some of the same amount of other things we do. But to get the leverage just by growing the business in rapid chunks we'll be able to increase the amount of profit that we get as well out of any individual job and as a result it will contribute to bottom line substantially I think.

[Unidentified Analyst:]

And Jim in terms of acquisition target, it appears that you know how the infrastructure as well as the talent pool to target and integrate the large acquisition. Is that one of the reasons you're looking at? You had indicated you're looking at annual sales target up to $50 million versus prior. I think it indicated $40 million to $45 million right, do you feel more comfortable at larger acquisition targets?

[Jim Nelson:]

Yes. That's exactly right. One of the things that happens and private equity is to talk about this too, but if you buy a small company you have management team that doesn’t quite have the focus of world-class performance or the opportunity to access world-class talent to come in and drive -- help driver their business. And we're really looking for people who can come in and raise the level of talent within our company. We've great people in our company. And they're extremely talented and have had a world class experience, but we want to bring in people who are equal to those people and we think we'll do that as we increase the level of company that we buy to.

[Unidentified Analyst:]

One lat question Jim and Tracy on the 3D sale, I think you have indicated you're still under development stage. Do you have any updated timeline for commercialization? Thank you.

[Jim Nelson:]

Thanks very much Ashok. We don't really talk a lot about it right now, but we are working actively at trying to get it commercialized. I will tell you this that I am just in the process of -- we've typically so far at any rate we've relied on me going out and talking to a number of these -- of the folks who could work with us in commercializing the solar sale and we are now about to engage somebody who can focus specifically and professionally on getting that thing going in commercialized. So it is active and we are serious about it but I don't have a time like for you right now.

[Unidentified Analyst:]

Thank you very much.

[Jim Nelson:]

In the mean time what I will tell you is this and I have told you this before, we ask people don't give us too much credit for that because there's always risk in technology. But focus on the business that we're building and when and if the solar sale is commercialized and does really well that will be a huge bonus for everybody.

[Unidentified Analyst:]

Thank you.

[Jim Nelson:]

Thank you. Nigel?

[Operator:]

Our next question is from Nigel Chadwick, Private Investor. You may proceed with your question.

[Nigel Chadwick:]

Yes. Good afternoon and again congratulations on such large backlog Jim.

[Jim Nelson:]

Thanks Nigel. How are you?

[Nigel Chadwick:]

Very well. Just a quick question I would like to ask on the subject of acquisitions. Are you able to enlighten us a little bit as to the tone people ringing your doorbell or are you having to go around town how hard of condense is it? Just wanted if you could just -- more about that the tone of acquisitions?

[Jim Nelson:]

Sure. That's a great question. Thank you. We are both reaching out and being reached out too. I will tell you this that I think we have a relatively tight screen and so unlike some people who go out to buy additional companies for their company who just buy whatever is available. We have a pretty tight screen specifically on the type of people that we want to do business with because one of keys here is just the culture of the company and the ability to grow the company inside a culture that really works for people. And so we've walked away from some deals where we didn't think that there would be good culture. So we're looking for great management teams and that's the screen and we found a number of them that we just think the world of and so we'll see how it goes and we'll keep you posted on a current basis.

[Nigel Chadwick:]

Okay. Does include adjacent state as you say?

[Jim Nelson:]

I am sorry. What did you say Nigel I am sorry.

[Nigel Chadwick:]

I was wondering would those locations include an adjacent state?

[Jim Nelson:]

Yes.

[Nigel Chadwick:]

Okay. Thanks very much and nice talking to you Jim.

[Jim Nelson:]

Okay. You take care now.

[Operator:]

Thank you. Our next question is from [Melanie Galenty] [ph] Private Investor. You may proceed with your question.

[Unidentified Analyst:]

Hi, Jim. I don't have question Jim, but I just wanted to say that you guys are doing a great job and we're just so happy with everything you've done and we're proud to be part of this. I've been in from the beginning and I couldn't be happier with you and so SUNworks and MD, everything is wonderful. I am so happy Jim.

[Jim Nelson:]

Well. Thank you so much Melanie. Thanks for your support.

[Unidentified Analyst:]

I am always going to support you Jim.

[Jim Nelson:]

I appreciate it.

[Unidentified Analyst:]

Thanks. Bye, bye.

[Jim Nelson:]

All right. You take care bye, bye.

[Operator:]

With that, I would like to turn the conference back over to Andrew Haag for closing comments.

[Andrew Haag:]

So I would like to thank everyone for joining the call and congratulate the company again on a great quarter and look forward to hearing and seeing from all of you again next quarter. Thank you.

[Operator:]

Thank you. The teleconference has now concluded. You may disconnect your lines at this time. Thank you for your participation.