Sunworks, Inc.
Q3 2015 Earnings Call Transcript

Published: 8 Nov 2015

[Operator:]

Greetings and welcome to Solar3D's Third 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 conference is being recorded. It is now my pleasure to introduce Debra Chen from IRTH Communications. Ms. Chen, you may begin.

[Debra Chen:]

Good afternoon, everyone. I would like to welcome you to Solar3D's third 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 would like to remind 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 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 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 November 5, 2015. Solar3D assumes no obligations to update these projections in the future as market conditions may change. This morning the company filed its 10-Q with SEC and issued a press release announcing its financial results. So 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 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 for the third quarter 2015. Jim will then turn the call over Tracy Welch, our CFO, who will provide an overview of the company's key financial performance and operating metrics. Tracy will then pass the call back to Jim for final comments before we open up the call for Q&A. Jim?

[Jim Nelson:]

Thanks, Debra. Hello everyone, and thank you for joining our call. As you can tell, my voice is a little off today, I've been under the weather but I'm feeling better. My voice is not better, so forgive me. And - but I'll read my remarks and be prepared for your questions afterwards. We're pleased to be speaking to another strong record quarter for Solar3D, one that exceeded our expectations. On this call we will walk you through some highlights, notable achievements, both on the corporate and financial front that cements our position as one of the leading providers of affordable solar systems and solutions. Our third quarter was an important quarter for Solar3D. We continued to secure a large multi-million dollar contract and projects through our two divisions; SUNworks and MD Energy in the agricultural, commercial and residential markets. It also marked a major milestone as we announced ar major acquisition which we anticipate closing at the end of this month. We are excited to integrate leading solar company, Elite Solar, which is yet another profitable entity that will immediately boost our topline revenues, as well as our earnings and add capabilities. Going forward, we are really proud to have Kirk Short and his team join our management team. We've had a very positive year-to-date based on what we have reported and how things are shaping up. We are confident that we will exceed the current guidance for 2015. The success of our business model and one that differentiates us from our competition is that we have an aggressive plan that identifies and implements profitable consolidation strategy to accelerate acquisitions to build Solar3D into the next solar power house in a fractured industry. We believe it is a great time to be in the solar business, and that our geographic focus in the western region, specifically California and Nevada is a great investment opportunity from a growth and profitability standpoint for our shareholders. Tracy, I'm going to have you take it from here.

[Tracy Welch:]

Sure. [Indiscernible]. So I'll talk a little bit about our growth engine that's important for us to provide some transparency into our metrics and what the power for our growth engine is. There are really three key themes that we're focused on for building long-term shareholder value. First, is to generate a steadily growing cash flow stream through both our SUNworks and MD Energy operating divisions which we have continued to do so on a consistent basis. Second, is to invest in our infrastructure to build the necessary management and back office teams to handle our organic growth and to facilitate interesting acquisition candidates quickly and to capture their operating and financial inefficiencies. Third, our strong management team is led by experienced industry veterans with extensive knowledge in energy, construction, clean-tech, finance and marketing strategy. Our executives and our division leaders have held high level positions in top organizations and their involvement has included the expansion of multi-million dollar companies, paid in excess to billions in capital to run their own successful companies and have contributed to the energy industry. Our business has undergone huge growth both organically and as a result of the accretive acquisitions that we've made. This has given us a better visibility enabling us to provide more operational metrics. We believe our company offers a compelling business and value proposition. We utilize a much disciplined approach in our growth strategy that includes strategic acquisitions as being an efficient model to fuel our growth. We identify potential solar companies from our - for our consolidation strategy which requires a vigorous due diligence process that our team takes very seriously. Our target companies must provide synergistic value to our other existing divisions. An important part of our consolidation strategy is to build an ecosystem where all of our divisions, current and future, leverage the expertise and resources through their relationship with one another resulting in a Solar3D enterprise with stronger offerings, a bigger market presence and poised for tremendous revenue growth. For the third quarter we generated 208% year-over-year growth increase in our topline and the 79% growth over our most recent second quarter. This is all due to organic growth within our divisions. I'll talk a little about the quarter - some of the highlights. During the last quarter the company announced our entry into the merger agreement to acquire Elite Solar or that we expect to dominate California's agricultural sector and to establish ourselves as a premier solar provider in the commercial and agricultural sectors. Our SUNworks division secured several large California agricultural and commercial projects that totaled over $10 million and over five megawatts of solar power systems during the quarter. Our SUNworks division also achieved record month in July - we achieved $4 million in residential sales which was a record for the company for that division. The SUNworks division also secured its first large commercial project in Nevada, a $1 million contract. It was the first time since we've open the office in Reno earlier this year. In terms of the market landscape, we think Solar3D is on the forefront of powerful market trends and the solar industry continues to be one of the most fastest growing sectors out there. Thus for distributed solar has penetrated only less than 1% of its total addressable market in the residential and commercial spaces. Solar industry is being - is still fairly fractured and fragmented with a very high demand, particularly in the western regions. California and Nevada remain our largest markets. We have had a spike in installs over the last several quarters. Speaking of California alone, it's a major market for us and a great opportunity for our shareholders. In fact, according to the clean energy states alliance, California is the world's eighth largest economy for solar deployment and to the population that is projected to grow from about 39 million today to over 50 million by the year 2015. For the past several decades California has staked out a leadership position in addressing climate change. It has one of the most ambitious renewable portfolio standard in the nation, and it has adopted a goal of cutting greenhouse gas emissions 80% below 19.90 levels by the year 2015. To meet these targets state agencies are spending billions of dollars and using many policy tools to promote clean energy development. At the end of March 2015 California had more than 10,000 megawatts of installed solar generating capacity, far more than any other state. Let's talk a little bit about the acquisition initiative of Elite Solar. As we mentioned previously, Jim had a little bit of voice left. We made the announcement to acquire 100% of leading solar power company, Elite Solar which will further complement our capabilities and allow us to dominate the California agricultural and commercial sector. We have agreed to extend the original closing date, we were expecting to on November 1 by - November 1 or November 2 and we would extend that a month and hope to close it before the end of the month. We are pending on their financial statements. Let's completed we're merging another profitable energy that will help boost our top line revenue, as well as our operating and bottom line. We also recently announced the appointment of Shane Mace, Board of Directors. Shane founded Track Utilities, which was a utility infrastructure development company that provided critical electrical and telecommunications infrastructure services in the northwest and inner mountain west. Shane held financial positions of multiple companies serving as Controller and General Manager, before becoming Chief Financial Officer for Masco, Inc. His experience in agriculture and organizational infrastructure and operations will help prove pivotal and important as we help the company to grow through our acquisitions. Shane's operational leadership and financial know how also add a lot to our company as we continue to pursue additional solar companies. Let me talk just a little bit more about the third quarter. Get into the financial nuts and bolts here. So for the third quarter ended September 30, we reported revenue $19.7 million which was over tripled of $6.4 million reported for the third quarter of 2014. This also represents 79% growth over our second quarter of 2015 revenue. Our revenue increased primarily as a result of significant year-over-year sales growth in our SUNworks division plus an inclusion of a full quarter's worth of operations for MD Energy. Our gross profit also more than tripled to $5.3 million for the third quarter compared to $1.7 million for the third quarter last year. Our gross profit percentage was the same at 27% for both third quarter periods, both this year and last year. Sales on the commercial agricultural markets were especially strong during the third quarter, with approximately 65% of our revenue came from this sector, and above 35% of our sales came from the residential market. The higher percentage of commercial sales relative to residential sales resulted in slightly lower gross margins compared to our earlier quarters earlier this year. Our total operating expenses for the third quarter were $3.6 million compared to the $1.7 million in the third quarter of 2014. Selling and marketing expenses of nearly $1.6 million or 7.9% of revenue compared to $0.4 million or 6.4% for the third quarter of 2014. Our selling and marketing expenses increased year-over-year primarily due to SUNworks increased activity to promote traditional growth which also included the start-up of our operations in Reno [ph] this year. We also incurred $2 million of general and administrative expenses in the third quarter and this compares to $1.3 million for the third quarter last year. Our G&A expenses increased primarily due to the inclusion of MD Energy's expenses this year which we didn't have last year plus incremental expenses SUNwork to related to their higher volume. Club G&A cost increased by $0.8 million year-over-year. On a percentage basis it was 10.4% of revenue for the third quarter of 2015 or about half of the 19.7% of revenue in the third quarter of last year. A lower percentage of revenue year-over-year was primarily a result of more efficient operations, keeping control over headcount and spreading costs across a larger base of operations year-over-year. Our other expenses for the third quarter of this year we're $0.3 million which was all interest expense, most of which was non-cash related to the beneficial conversion feature or acquisition notes. This compares to $13.8 million of other expense in the third quarter of 2014 with $12.9 million of that as a non-cash loss under change in per value of derivative liabilities and $0.8 million in primarily non-cash interest expense. So for the third quarter of 2015 we reported a net income of $1.4 million or $0.08 per basic share and $0.06 per diluted share for the third quarter. This is a significant increase when compared to our net loss of $13.7 million or $1.14 per diluted share a year ago in the third quarter. Turning to our balance sheet our cash and cash equivalents were $9.3 million at the end of September which was nearly flat from our June 30 number and that versus the $1.3 million in September 30, 2014. Our accounts receivable has grown along with our revenue with a balance at the end of September of $6.7 million. As mentioned on our call last quarter, our derivative liability is zero as of the end of the third quarter compared to $68,000 the end of last year. In terms of our first nine months, year-to-date, we, as a company have had revenue of $36.4 million which is more than double the $15 million reported for the first nine months of 2014. In the first nine months this year we reported gross profit of $10.7 million compared to $4 million for the same period last year. Our year-to-date 2015 net loss of $123,000 or near breakeven was $0.01 a share on a diluted basis. And this compares to a loss - net loss of $17.6 million or $1.61 per diluted share for the for the first nine months of 2014, a dramatic turnaround year-over-year. Now I'd like to about some of our metrics to demonstrate how we compare versus a year ago. Our net sales during the third quarter of 2014 were roughly $1 million which was just SUNworks alone or roughly what we've booked in revenue about $6.4 million. Our new sales during the third quarter of this year which included both SUNworks and MDE, combined, was $26.6 million and we reported $19.7 million of that in revenue Our ending sales backlog for just SUNworks for the end of September last year was $1.1 megawatts or $2.7 million while our ending September 30 backlog from both, SUNworks and MD Energy, combined, this year is 9.5 megawatts and $29.5 million, an increase of nearly $7 million from just last quarter alone. And if we look at there any backlog year-over-year is over 1000% in free [ph], so very significant backlog for us. So finally with a record quarter for both revenue a net income we are very confident about our future. As Jim indicated earlier, we expect to see and exceed probably the high end of our prior guidance for this year, exclusive of Elite Solar acquisition. With that, Jim, want to take the floor?

[Jim Nelson:]

Yes, I will. So I hope you could all understand me even if it doesn't sound very nice. We feel it's a great time to be in the solar business and we have started the year strong and we keep getting stronger, and we expect it to continue. We reported record sales this quarter and record net income. We have a positive year-to-date that remains strong; we guided the market to $40 million to $45 million in revenue in 2015. And obviously if being at this point is very conservative. We have a great sales backlog as Tracy mentioned $29 million plus which is higher than last quarter which is a great. The upcoming acquisition of Elite - once we finish that audit it's going to be a great acquisition, not just to our revenue and profit but also to our management and our technical capabilities. We will aggressively be going after continued acquisition and we're in serious conversations with numerous other companies. And we will continue to do more institutional outreach and we are talking to numerous investment banks about further coverage on our stock. So now I'm going to do my best to answer your questions. Please be patient with my voice. I really want to take these questions myself so, operator.

[Operator:]

Thank you. [Operator Instructions] The first question is from Mr. Jeff Osborne, Cowen and Company. Please go ahead.

[Jeff Osborne:]

Good afternoon, I hope you feel better, Jim. Just a couple of questions. Maybe I'll start with one for Tracy to let you rest but just with EPS, are you backing out the $301,000 for fair warrant - the fair value warrant adjustments to bequeath people back that out as man gap. So when the EPS have been $0.08 on a diluted basis without that?

[Tracy Welch:]

Well, we didn't include any of the warrant in the diluted shares, Jeff. We were not above the strength price of $4.15 as there in the quarter. That may change as time goes on. We hope to that will. We really only included the options and the conversion from the convertible notes. Those were factored in. So we've got five million shares.

[Jeff Osborne:]

Got in, and then what - are we closing - what type of share account guidance would you have us assuming that will obviously take that cash out but the close date I should notice but it is with the $4.15 million in stock. Are you assuming the day the stock price was announced or as of the close date, I wasn't sure what's in the paperwork?

[Jim Nelson:]

The way was signed the paperwork Jeff is that, it will be there as an adjustment period of five days before the deal is done. If the stock price is below $4, it will adjust based on the closing price in the last five days prior to closing.

[Jeff Osborne:]

Okay. And then, maybe Jim just for you, what's been the trend line in - I know commercial has been strong in agriculture but on the ready side, what's been the trend line with customer acquisition costs?

[Jim Nelson:]

I wish I had to talk to you about them but it's basically flat, part of it is that we've driven the cost down by our low cost methodology. But we've also experimented without additional methodology. So somebody once asked me, what do you anticipate for customer acquisition costs and the answer is that we think we're going to continue to experiment and once we sail along, next time we'll continue to drive it down but for now it's flat.

[Jeff Osborne:]

Got it and just a couple other and then pick one here. The R&D took a big step down; was there any material changes in your cell development or licensing strategy? I know it's not really the focus of the company but just the drop - I wasn't sure if you there has been change.

[Jim Nelson:]

We are specifically focused on going to finding manufacturing partner right now. So we're not really working on technical elements because we have a clear next step that requires our manufacturing partner.

[Jeff Osborne:]

Got it. And then any update on the patent process there?

[Jim Nelson:]

I know that we have had positive developments overseas; we're still patent - our patent pending here in America. But it looks like we're going to be able to have some positive developments that we could announce relatively soon in Asia.

[Jeff Osborne:]

Got it. And just somewhat inter-related question, the last one for me is, just you've got a AB 327 and the net metering program that your CPUC is evaluating. Do you intend to wait for the outcome of that before pursuing any other acquisitions, just given the economics of solar in California, potentially could materially change with that, that's part one of the question. Part two is just, one of your larger competitors Solar City has announced it's kind of stepping up the gas a little bit and focusing more on cash flow generation, obviously you're already there with your business model being profitable but just how do we think about with the exploration of the tax credit and the economics of solar for your three constituencies; residential, commercial and agriculture that you focus on, more looking into 2017?

[Jim Nelson:]

Sure. Let me take the first one first. We're going to continue to talk to people that we're talking to. And if something materially changes while we're negotiating with the companies that we are interested in buying, we'll certainly revaluate but it's our assumption for now that any of these acquisitions will be positive for us in terms of what happens after 2017. We believe that even if - we believe with the Department of Energy Goldman Sachs and the Solar Energy Industry Association that even if the invested a tax credit reversed what it's scheduled to change to, we believe that at worst case - not worst case but we believe that the industry may suffer a pullback but 100% of that pullback we believe will be in utilities - the utility grade solar. Now even if there is an industry adjustment, we believe that our company will unabated through 2017 as we are gaining share, and our economics are extremely good with or without the investment tax credit, so if you're looking about the future.

[Jeff Osborne:]

Got it, thanks for the details and I hope you feel better.

[Jim Nelson:]

Thanks a lot, Jeff. Good talking to you.

[Operator:]

[Operator Instructions] The next question is from Bhakti Pavani, Euro Pacific Capital. Please go ahead sir.

[Bhakti Pavani:]

Good afternoon, guys. I'm sorry I didn't get the breakdown but for the third quarter what was the breakdown of sales between commercial and residential?

[Jim Nelson:]

We haven't really published that. Commercial was slightly larger than residential.

[Tracy Welch:]

Jim, I did say in my remarks [ph]. It was about 65% commercial on agriculture and about 35% residential.

[Bhakti Pavani:]

Okay. I'm sorry, I missed that. Also the other question was from your acquisition of MD Energy. Have you guys fully utilized the cost synergies or do you think there is further more room for cost reductions.

[Jim Nelson:]

We think there is more room for cost reduction but the fact is that for each acquisition, we believe that we can gain profitability by the cost synergies, a real synergy that we see which is a little bit of a surprise to us is that we're able to bid on a lot more jobs that are interesting. So we're planning a marketing and sales synergy allowing us to experience more explosive growth as a result of coming together as a company. The other synergy that we see - so there is cost synergy, there is marketing synergy and the other synergy that we see is that we - as we buy these companies we bring in new, very smart management and as a result are thinking together to make this considerably better. So we just - it's just almost taken me by surprise that we seem to be experiencing real positive synergy and EBIT growth as a result of coming together.

[Bhakti Pavani:]

Okay, thanks. With regards to the acquisition of Elite Solar, I guess you guys are trying to turn in more of agricultural business. Just kind of curious to know how did the margins differ between commercial and agricultural installations?

[Jim Nelson:]

We plumb those together in our analysis. Frankly, they are about the same. And so we find the real difference in commercial is when we bid on very big jobs where we might drop the margin down a little bit because it's appropriate to do so in terms of percentages. But agriculture and commercial are such like the same.

[Bhakti Pavani:]

Okay. Just last question on the backlog, just kind of curious to know, how quickly can you turn backlog into revenues?

[Jim Nelson:]

Well, it depends on what's in the backlog but majority of that backlog is turned into revenue in the first 30 days - the first 90 days I should say. Some of it obviously spills over because some of the jobs are bigger. And so most of that is done within 90 days.

[Tracy Welch:]

I'll add a little bit to that but sometimes the delay is not that we are making, we're ready to go and get these jobs, it's waiting on permits and getting the approvals to go ahead and start the installation process. So most of these jobs are relatively quick, and as Jim mentioned with 90 days to get the installation completed. So sometimes of waiting beforehand to just left the cause of this delay.

[Bhakti Pavani:]

So when you talk about permit, is it more on the commercial side I'm assuming or on the residential?

[Tracy Welch:]

We have to get permits for both but the lengthy delays tend to be more on the commercial side.

[Bhakti Pavani:]

Okay, perfect. That's it, thank you very much guys.

[Jim Nelson:]

Thank you very much.

[Operator:]

[Operator Instructions] We have one more question from Mr. Jeff Osborne.

[Jeff Osborne:]

Thanks for squeezing me, I had one follow-up. Just given the backlog growth, is there any reason why Q4 should be seasonally down? I assume you don't have a lot of the winter jobs at the Lake Karoo [ph].

[Jim Nelson:]

We don't have any real guidance for you there Jeff. I wish we could be more definitive but we are going to consider increasing our guidance.

[Jeff Osborne:]

Got it, yet just more specificity there would be certainly helpful I think as investors look at the stock. Last question for you Jim, just any thoughts on that $10 million project that got delayed at the City Council meeting, what's the latest on that?

[Jim Nelson:]

It's going to be rebid. And so we're still in the mix, it's not gone but the City Council wanted to make some significant changes to it, so we'll see how it goes.

[Jeff Osborne:]

Got it, best of luck. Take care.

[Jim Nelson:]

Thank you. Karen [ph], you there?

[Unidentified Analyst:]

Yes, I am.

[Jim Nelson:]

Okay, go ahead.

[Unidentified Analyst:]

My question was just answered about the first City Council.

[Jim Nelson:]

Okay, great. All right, thanks for calling in.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Debra Chen for closing remarks. Please go ahead ma'am.

[Debra Chen:]

So with that I would like to thank you all Solar3D shareholders for their participation on today's call, and their support for the company. If you did not get a chance to ask a question please feel free to reach out to IRTH Communications directly, and if applicable, we can set up a call with management. This concludes our call for today. Thank you everyone.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.