Sunworks' (SUNW) CEO Charles Cargile on Q2 2017 Results - Earnings Call Transcript

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About: Sunworks, Inc. (SUNW)
by: SA Transcripts

Sunworks, Inc. (NASDAQ:SUNW) Q2 2017 Earnings Conference Call August 10, 2017 10:00 AM ET

Executives

Rob Fink - IR, Hayden IR

Charles Cargile - CEO

Paul McDonnel - CFO

Abe Emard - COO

Analysts

Phillip Shen - ROTH Partners

Jeffrey Osborne - Cowen and Company

James McIlree - Chardan & Capital

Pavel Molchanov - Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Sunworks Second Quarter 2017 Earnings Conference Call. All lines have been placed on a listen-only mode. [Operator Instructions].

At this time, it is my pleasure to turn the floor over to your host, Rob Fink of Hayden IR. Sir, the floor is yours.

Rob Fink

Thank you, operator, and good morning, everyone. And thank you all for joining Sunworks second quarter 2017 earnings conference call.

Joining me on the call today are; Chuck Cargile, Sunworks' Chief Executive Officer; Paul McDonnel, Chief Financial Officer; and Abe Emard, Chief Operating Officer.

Before we start, I would like to remind everyone that in this call, management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors not limited to general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, and changes in legal and regulatory requirements.

In addition, any projections as to the Company's future performance represent management's estimates as of today, August 10, 2017. Sunworks assumes no obligations to update these projections in the future as market conditions may change.

This morning, the Company filed its 10-Q with the SEC and issued a press release announcing its financial results. So, participants on this call who may not have already done so may wish to look at those documents, as provide a summary of these results on these calls.

With all that said, I would now like to turn the call over Sunworks CEO, Chuck Cargile.

Charles Cargile

Thank you, Rob, and good morning, everyone. Thank you for joining our call.

When we last spoke, we mentioned that we expected our second quarter revenues to rebound from the seasonally weak first quarter and we reinforced our focus of returning to profitability.

I am pleased to report that the revenue did rebound. In fact, our revenue increased 72% sequentially to $25 million. And even more noteworthy, our net income was $1.1 million for the quarter. We now have a stable platform for profitable growth and I believe the growth and revenue and increasing portability are sustainable as we go forward.

I'll first provide an update on some of the projects and initiatives we're engaged in to enhance our business and then Paul will discuss more details about our financial results.

Our primary focus is increasing profitability, which we believe is the key to unlocking and enhancing shareholder value. The results in the second quarter reflect a two-pronged approach to deliver in this profitability, increased revenue and lower costs.

Looking forward, we will continue to focus on both and I'd like to discuss them separately in more detail.

On the revenue front, we believe there is ample opportunity for us to continue to expand our successful penetration with agricultural customers particularity in Central and Northern California. We also will continue to expand and grow our sales beyond California Ag.

We're beginning to capture opportunities outside of California. In the second quarter, approximately $3.3 million of our new sales for ACI were in Nevada and Oregon, marking approximately 20% of the total.

We expect even greater contribution from these two states in the future. In addition, we recently added direct sales resources in Texas and Florida. These resources will be charged with driving direct sale as well as establishing channel partners to enhance our penetration of additional sales in these two new geographic areas.

Strategically, we're expanding our geographical footprint to diversify our revenues. We're also broadening the types of customers we serve. During the second quarter, we generated almost $3 million in new sales from Public Works customers. These programs tend to involve design and operational complexity, which matches well with our core capabilities as an organization and the strength of our engineering and sales team.

Opportunities in the Public Works sector tend to be larger dollar programs and we believe that the $3 million we captured in Q2 is merely scratching the surface. We're engaged in advanced discussions for a number of a significant programs that we help to discuss in more detail in the second half of the year, with the few announcements potentially as earlier this month.

Please remember that the timing of ACI project is difficult to predict on a monthly or even quarterly basis. That said, we're enthusiastic about the overall pipeline and the different growth sectors that we're cultivating.

On the cost side, we're reducing the total fixed costs, while transitioning to a greater percentage of variable costs. Paul will provide more specifics in a minute, but it's clear that our operating cost have declined since the end of the last year, particularly on the sales and marketing side. We believe there are more opportunity to optimize our cost structure even while accommodating the revenue growth we envisioned.

During the second quarter, ACI represented about three quarters of our business. The other quarter was residential.

Due to the nature of shared resources and common corporate costs, we don't break out the results separately, but the residential business was nicely profitable in the second quarter.

It's also important to note that our residential business to some degree feeds off of our ACI business by gaining referrals from our larger customers. Examples include employees of our larger business becoming interested in the solar power for their homes after seeing the benefits of solar in their workplace.

We've automated and enhanced this linkage through our PowerPay program, which we announced earlier this year. PowerPay makes it possible for anyone to sign up as a referral partner. This then allows them to make solar customer referrals to Sunworks easily and directly from their smartphones. The mobile app provides the referral partner with a user-friendly interface and effortless experience encumbering those being referred.

Although only launched in April of this year, we've generated more than 160 leads and more than $1.5 million revenues specifically to PowerPay.

We are also continuing the leverage and economical sales dealer network which reduces our fixed cost and better matches cost with revenue but the cancellation rate below 10% and a predictable time from customer commitment capacity in section, the best dealers in the industry want to work for Sunworks.

Also like the ACI part of our business, we are expanding our residential footprint outside of California, albeit at a measured and economical place. As we mentioned last quarter, the Nevada legislature passed the Solar Bill of Rights in Q2. And the solar industry is beginning a slow rebound there. We were one of the only residential installers to remain in Nevada during the difficult period and have already begun to see our patience being rewarded with new business.

In addition, we performed our first installations in Washington and Oregon during the second quarter and we are optimistic that our well-planned expansion efforts will continue.

In summary, our teams executed well in the second quarter. Our revenue rebounded as we expected and our profit performance slightly exceeded even our own expectations. We planned to continue to be disciplined in our drive for greater revenue and profitability.

Before I turn the call over to Paul, I'd like to touch on the dynamics related to the Suniva case being considered by the International Trade Commission.

Many of you who follow the industry closely are aware the case, which proposes a tear up on all non-American solar cells and modules imported into the country. The petition to the ITC request of tariff of $0.40 per watt on sales and $0.78 per watt on the modules. The ITC will decide by September 22nd, if relief order. And if so, we'll make a recommendation to President Trump by November 13.

The President then has 60 days that. Presidential action can support the relief order, if the ITC can ignore it and go in a completely different direction.

It should be noted that Solar Energy Industry Association vehemently opposes this new position. ACI along with the Bloomberg new energy finance, Clearview Energy Partners and Goldman Sachs have all provided studies that indicates the Suniva proposal would be harmful to solar industry.

Well, we are hopeful that the ITC will agree with those thoughtful studies. The current uncertainty has caused disruption in the supply chain per panel. We have seen a mild uptick in panel pricing and a greater shortage of supply.

As a result, we've chosen to purchase more panels in advance or earlier than we might normally purchase them. In addition, we have been forced to buy panels from more manufacturers than we have historically. The strain on the supply chain and the early purchase of panels is reflected in our lower cash balance and impacts our working capital.

Fortunately, we have been able to fund the transactions with our internal cash generation and did not tap into our credit line. We expect the uncertainty to continue through Q3 as the initial decision is not scheduled until the end of September.

Today, the uncertainty has not had a significant impact on our new sales or cost in process.

Our model has always been diagnostic related to the manufacture and the cost of the panel is pass through to the customer.

Within our agriculture business even if the full tariffs were granted, the difference in pricing would have only a minor impact on the return on investment analysis our customers use in making their decisions on solar.

We are watching the developments closely and working with ACI to express our opinions on the right things for the overall solar industry.

Now, Paul will discuss the financial result, Paul?

Paul McDonnel

Thank you, Chuck and good morning, everyone.

I am pleased to be joining you today on this conference call to review Sunworks 2017 consolidated operating results and financial position for the second quarter ending June 30, 2017.

For the second quarter of 2017, total revenues were $25 million, marking the second largest quarterly revenue in our history. That is only to the record $31 million reported in the second quarter of 2016. The $25 million also reflect the significant rebound from the seasonally low level of revenue in the first quarter of this year. Agriculture, commercial and industrial or ACI as we call it, revenues were $18.1 million or 72% of our total revenue. And residential revenues were $6.9 million or approximately 28% of the total.

I would like to remind everyone that ACI projects have more complex than residential projects. ACI projects often include additional construction to facilitate the installation of the solar system. These additional construction requirements currently include the construction of park [indiscernible], roads, fencing, exhibition, warping, switch gear in addition to the normal transformer and service upgrades required.

ACI projects take longer to design, engineer, permit and complete. ACI projects are also more problem to delays and receiving approvals, permits and final inspections. Only a firm received a final inspection can 100% of the revenue from an ACI project we recognized.

Our gross margin for the second quarter of 2017 was 26.9%. This gross margin is below the 29.4% recorded in the same quarter of 2016 which shows a market improvement over the 19.4% recorded in the first quarter of this year.

Margins will fluctuate because of changes in volume, project compensation and variations and our use of subcontractors to complete certain elements of solar installations.

Direct materials continue to be the largest component of cost of sales. In the second quarter 2017, direct material cost grew 35% of revenues versus 41% in the first quarter of this year. The contractor cost was 17% of revenues and increased from 13% in the first quarter. The remaining cost in descending order we're financing and bankruptcies, direct installations labor, other direct installation cost and installation overhead.

As expected, with increasing installation activity the relationship among these costs changed and subcontracted cost and installation labor became a larger percentage of our cost of goods sold. As installation revenues increased, we expect the percentage of total cost and overhead to decline as a percentage of revenues being to higher gross margins.

Over the past several quarters, we have made a conservative effort to reduced our operating expenses. Our results in the second quarter of this year reflect our progress in this effort. Total operating expenses including depreciation and stock based compensation for the second quarter of 2017 were $5.4 million, reflecting a 33% decline compared to the $8.1 million in the second quarter of 2016.

Selling and marketing expenses were $1.8 million or $1.5 million less than the $3.3 million stands in the same quarter of the prior year. On a percentage basis, selling and marketing expenses were 7.2% of revenue in the second quarter, compared to 10.6% of revenue in the same quarter of 2016.

Selling and marketing expenses decreased quarter-over-quarter, primarily due to our more disciplined approach to spending on advertising, and a greater reliance on third-party sales generation. We've also reorganized the commercial sales organization and recued headcount.

The selling and marketing expenses for 2017 relative to 2016 will continue to decrease because of higher cost incurred in 2016 with the establishment of the call center and the aggressive expansion of the commercial sales team in the second and third quarters of 2015.

General and administrative expenses were $3.2 million or 12.8% of the total revenue in the second quarter of 2017 compared to $2.9 million or 9.3% of the total revenue in the second quarter of last year.

Stock-based compensation was $317,000 during the quarter, compared to $1.8 million in the prior year quarter. The prior year quarter included a $1.7 million expense for the first milestone being achieved for the 2014 and 2015 performance based restricted stock grant. The stock-based compensation expense is anticipated to be far less volatile in future quarters.

Net income for the second quarter of 2017 was $1.1 million compared to a net income of $0.7 million in the year ago quarter. We were pleased with the net income increasing versus the prior year despite the lower sales. We believe the positive net income reflects the progress from our focus on cost containment, profitable sales and revenue growth.

Turning to our balance sheet, the biggest impact on the quarter was our strategic decision to accelerate the purchase received shipment and warehousing of PV modules because of the industry wide supply constraint and limited availability at module. The short-term impact of disposition not only affects our cash balance but also nearly every current asset and liability including accounts receivable, inventory cost in excess of billing, other current assets, accounts payable and billings in excess of cost.

Having a sufficient supply where a sufficient inventory PV module is critical to the continuous timing performance and completion of projects and process and the shuffle ready projects in our backlog. Our cash and cash equivalents were $4.2 million at the end of June, compared to $11 million at the end of December 2016. Cash decreased by $6.9 million during the first six months of 2017 compared to a decrease of $4.4 million during the six months of 2016. The second and third quarters are typically cash generating and follow the seasonality of the business.

Working capital decreased $1 million during the first six months, consistent with the year-to-date operating loss adjusted for non-cash items. Total debt outstanding at the end of the second quarter was $1.9 million, of which $1.6 million is for convertible notes, a portion of which bears no interest. The remaining debt, $606,000 and is the result of acquisition and equipment financing. Nothing was outstanding on our $2.5 million revolving line at the end of June.

As it relates to our outlook going forward, our pipeline of new sales opportunities is robust. We expect to capitalize on projects across all aspects of our business including agriculture, - works and residential. Our backlog remains strong. We are active in many current installations. As we have said before the timing of various approval and milestones required to recognize installation revenues or to book new sales is difficult to predict. Nonetheless, we expect installation revenues and new sales for the third quarter of 2017 to increase significant on a year-over-year basis.

Furthermore, we will continue to focus on effective cost management, which we expect will drive increasing profit and earnings per share. We also expect to reduce our cash balance during the third quarter and the second half of 2017.

That concludes our prepared remarks and now Chuck and I would like to open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Phillip Shen of ROTH Partners. Phillip you're live.

Philip Shen

Hi, everyone. Thank you for the questions. Hey Paul, I would like to start with you given what you just said about Q3. You talked about revenue increasing significantly and profitability being nice as well as an increase in cash balance. I know you haven't given specific numbers, but to what degree that you can give us some more detail that would be helpful. Can you bracket a range perhaps the revenue increased as well as the cash balance increase that we could see in Q3?

Paul McDonnel

I'm going to defer that question to Chuck because he has completed a review of some of these things. But as we said in our comments, we expect a year-over-year improvement in the third quarter, and Chuck can add more flavor.

Charles Cargile

Hey, Phil. Yes, I think if you - the first thing we looked at was the year-over-year comparison and are confident that we're going to do better both in sales and revenues than we did a year ago. I think on the new sales front we've had $23 million of new sales in Q2 and we believe we'll be above that level in Q3.

It is a little bit hard to predict the timing of the new sales as I said a couple of times in the prepared remarks, but we have a lot more opportunities in front of us now that we would expect to close in the next two months, certainly then we've had since I have been on board.

So, I feel very good about that, you never know if some are going to fall on September 30th or October 1st and that impacts the quarter bit, nonetheless we're feeling very good about some of the projects that we're bidding on.

The revenue of course is always a factor of how much backlog we already have that we're expecting to shift and then top of that new projects that come in that will convert to revenue.

So, we have a pretty good feel for the backlog that we expect to convert to revenue in the quarter and that's a little bit higher than what we had and we entered this quarter, so that gives us some comfort.

But it's just a little bit unpredictable again on how quickly we can get the new sales to convert they've been delayed a little bit with ITC noise, so some of those are closing slower than it might have historically.

But if we can have a conversion rate similar to what we had this quarter then we should be at or above the same revenue level that we were in Q2. And that would be a real nice step function improvement over where we were a year ago.

Philip Shen

Indeed, that's a decent color. Thank you. In terms of you highlighted the mix of three quarters, one quarter between ACI and resi, how do you expect that trend to continue in the quarter's ahead?

Charles Cargile

I believe I think overtime we will - the way we're positioned today. I would expect the ACI would grow a little bit faster. We have larger programs I mentioned the Public Works, which is really catching fire right now. Those will be some big programs for us and we don't have similar sized programs in residential. So, I think our residential business will be more predictable and more steady and profitable but we won't get multi-million-dollar opportunities in residential like we get in commercial.

Philip Shen

Okay. And can you talk about the margin or profitability profile between the two segments as well ACI and resi?

Charles Cargile

The residential has a little bit higher gross margin, as I mentioned before that sometimes the larger programs will have a slightly lower gross margin, but the operating margin is still very good, because a large Public Works program or a large agricultural program won't require incremental amount of sales or marketing effort, so, the operating costs are leveraged very well.

So, if we do have a higher mix of residential you might see slight uptick in the gross margin or vice versa, but there is not a huge impact on the operating margin either way. As I mentioned before, residential was nicely profitable in the quarter at the level of visibility that we do have to it.

Philip Shen

Good, okay. Couple more from me, one on Ag, it sounds like the ACI business is developing nicely with your progress in Nevada and Oregon. Can you talk to us about the competitive environment, who do you guys go up against, how many players are there typically? Is it still - it seems like it's a nice niche business and on what basis do you guys win the business?

Charles Cargile

I'm going to ask Abe to transfer that one, because he battles it out in trenches every day.

Abe Emard

Good morning, Phil and everyone. So, I'm on the weather slightly. To your question we do face some competitive environment in California. It's a slew of competitors, but we feel is our kind of our niche in the competitive advantage due to our company's experience in large commercial industrial contracting. We also are able to leverage our residential business through our agriculture and commercial and industrial customers.

Now in tier 2 state expansions, we do not have a hardly any competitions, that's because the economics have just turned in favor of the customers where the projects now have become financially viable. So, we're kind of pioneering these tier 2 states with little to no competitions in lot of our projects could be so sourced opportunities. Hope that answers your question.

Philip Shen

Absolutely. Thanks, Abe. That's definitely helpful. And I really like this part of business for you guys. The last question I have here and then I'll pass it on, in terms of the Section 201 Paul you mentioned that you guys pre-bought a bunch of modules. Can you quantify in any way the degree of the pre-buy? How many months of the inventory do you think you bought when we are adding to solar about a month back now. We're talking with some folks and they were talking about maybe a month and a half, two months of additional inventory. Would you expect that to be carrying that kind of inventory or more or less. Thanks, Paul.

Charles Cargile

Phil, it's Chuck. I'm going to take one that as well. We did pre-fund inventory in many cases. Normally, our preference is to when we buy the panels is to ship them directly to a customer that's revenue immediately and cash is remitted immediately.

That practice was disrupted in the quarter for the reasons that we mentioned. And we estimate that we spent somewhere between $3.5 million and $4 million of incremental cash than in the normal course we wouldn't have.

I think a couple of things to note however. One is none of the purchase inventories were of a speculative nature, so we only purchased inventory for projects that we already have on the books. So, we know that the inventories will be used.

The other thing that Paul referenced that may have been lost on you or others is the purchases aren't all directly in inventory. So, you won't see $4 million increase in the inventory balance. But they're in selected other items on the balance sheet as well. Some of them we were able to convert to revenue so some of them are in the $25 million some of them are in the other areas of the balance sheet.

We have a deposit you'll see a deposit on the balance sheet for inventory that was already paid for that we have and even recorded for the revenue yet. So, it's in different areas at the balance sheet but we estimate it was between $3.5 million and $4 million that in normal quarters you'd see that directly in our cash balance. So, the cash balance would be $8 million plus instead of $4 million plus.

Philip Shen

Great. Thank you, Chuck, Ed and Paul. I'll pass it on.

Operator

Thank you. Our next question comes from Jeffrey Osborne of Cowen and Company. Jeff, you're live.

Jeffrey Osborne

Hey, great. One question just to answer there. I wanted to get a sense of the entrance in the Florida and Texas. Is that entirely focused on ACI or do you expect some residential exposure there as well?

Charles Cargile

I think, let me answer that at a higher level before we speak specifically to those two states and I'm just going to piggyback on something that Abe referenced and also, I may have mentioned that in the prepared remarks.

One of the advantages that we have and having a strong ACI business on a strong residential business is the synergy that comes between the two. We very, very often, more often than that, we'll get follow-on residential business from ACI customers. So, when we specifically to Texas and Florida, the people that we have put in place there are primarily focused on ACI and there are people that we know and have a proven track record in capturing those types of accounts.

But we fully expect for every time we get a new customer, an ACI customer, there is going to be residential business that follows. And our residential team is ready to follow those leads into those states to develop both of them simultaneously and that's a very important part of the Sunwork's model.

Jeffrey Osborne

Makes sense. I'm just trying to get a sense, it looks like book-to-bill was below 1. So, you've talked about the year-over-year comparisons for Q3. How do we think about Q4? I would think there would be a pretty nice sequential revenue growth there but I just wanted to as part of that question I guess get a sense of perspective of what you're seeing in the ACI segment as it relates to the lag from when order or a contract is signed to when revenue as recorded. Do you have any kind of historical frame of reference for that lag?

Charles Cargile

Well, first let me address the book-to-bill slightly less than one. We mentioned the impact of the trade commission and that impacts our new revenue less than it does our new sales. So, revenue as I mentioned before much of the revenue is converted from backlog that's already in place.

The new sales, if you'd have asked me at the beginning of the quarter, what I thought we would do? I would have expected a little bit more than $23 million in new sales. But we had more projects delayed as people trying to figure out what they think is going to happen with the ITC delayed more programs that we might have expected at the beginning of the quarter.

So, our opportunities or what we call our pipeline is still very, very robust. The closure rate might be a little bit lower than what we would expect because of the uncertainty. I think some of the programs that could have been in Q2 to increase that $23 million are going to fall - some have already fallen in Q3 and some of the big ones as I alluded to on the Public Works side, I think are eminent.

So, I expect the new sales to be larger than the $23 million in Q3 and I expect the book-to-bill if you will or the new sales to be larger than the revenue in Q3 as well. You mentioned Q4, but we didn't really - it's hard to predict more than a quarter out, so I won't touch on what I expect for Q4 yet.

Jeffrey Osborne

Can you just address the lag from what you've seen historically from when a new sale comes in the door for ACI to when revenues recorded, what that time period is?

Charles Cargile

Yeah, it can be over several quarters. Maybe a better way to answer the question or maybe it's better for me because I know how to answer it better. When we enter a quarter will have a little bit more than half of that quarters new revenue expectation will be in backlog, a little less than half will be things that we booked during the quarter and are able to convert to revenue. But it's not unusual maybe Abe I'll let you put a little color on it. But it's not unusual for sale and backlog to convert to revenue over several quarters. Is that right, Abe?

Abe Emard

Yeah, it's correct.

Jeffrey Osborne

I just had two more, one, your comment about the ITC investigation delaying potential sales. I've been hearing from other installers that are actually was accelerating the commercial business because people were fearful of the $0.78 number and the 10 than higher prices for modules could be absorbed to your point. So, can you just talk about what you're seeing from the other side of the table? The customers you're talking to Abe, as it relates to their decision to differ that?

Abe Emard

Yes. We have seen some acceleration in sales. I think Chuck was referring to the coming quarter of how the ITC could essentially affect our business. What we believe it could be kind of perceived perception of how the ITC could affect the industry, which could in turn affect our ability to close quicker like we're accustomed to. So, I think that what Chuck was referring to.

But in our current state, we are seeing some acceleration in sales, I think that what we think about going forward and let's say Q4, the impact of ITC could just be what we feel just perceived perceptions from our customer base, but once we get in front of that economic still work. I hope that makes sense.

Jeffrey Osborne

Yeah, just to clear, it's more of a 3Q acceleration that you're seeing in the current quarter, but not something that you saw in the month of May and June, is that fair?

Abe Emard

Correct. Yes, sir.

Jeffrey Osborne

Got it. Perfect. And the last question I had is just can you touch on the residential side, what you're seeing in terms of customer acquisition trends, I know you've been very disciplined on that historically but as you enter new markets, I assume that the discipline is still there, but I just wanted to double check on both legacy markets as well as new markets?

Abe Emard

Yeah, are you referring to our customer acquisition costs?

Jeffrey Osborne

Correct. If you could compare California vis-à-vis the other states that you're entering?

Abe Emard

Yeah, so we're kind of if you've been following our transition from basic internal sales developers to more external reliant on the external dealer networks. So, we essentially buy contracts from the dealer network and install them. So, we're not really buying on that customer acquisition cost. It has changed and transitioned our business model, which has reflected in higher profitability, now we have dealer cost, but not the high customer acquisition cost that industry has been accustomed to. So - and we can provide more color on that as the new business model evolves.

Jeffrey Osborne

Got it. Thanks so much for the details. Appreciate it.

Operator

Thank you. Our next question comes from Jim McIlree of Chardan & Capital. Jim you're live.

James McIlree

Thank you. Good morning. I think you've kind of danced around this question a couple of times so I thought I'd try it once more. How much of backlog typically converts to revenue in a quarter?

Charles Cargile

It's hard to say, I think even if you just look at the numbers Jim we have almost $60 million of backlog and we had that entered in the quarter and we did $25 million of new revenue and as I said before less than half of that comes from new backlog that you add during the quarter. So, I think if you just do the math that way you figure at the highest level it's going to be, the backlog will convert if you just do the churn numbers the backlog would convert on average over a three-quarter period.

Some of the projects will be longer than that, some of them get delayed because of the utility company or other reasons but on average I think you can figure three or slightly more than three quarters of conversion time.

James McIlree

I'll play that back and then you talked about revenue in Q3 did you address gross margins in Q3 as well is there any special features we should be aware of that what result in significantly different gross margins in Q3 versus Q2?

Charles Cargile

No, I don't think so I think there's always going to be some movement based on final mix of product and also if there are certain jobs that we took for strategic reasons at a lower margin there can be some mix factor, but by and large I think you can expect the margins to be relatively similar. The gross margin will be relatively similar.

James McIlree

Right. And the panel that you purchased were at similar prices as well so we're not going to be facing some changes in cost of sale because of that, are we?

Charles Cargile

Yeah, you're not going to see a step change, some of the - most of the time we're passing through the cost of the panel to the customer so that wouldn't have much of an impact and just so just to be on record we were paying between in the low 30s maybe $0.33 to $0.35 a lot per panel and now we're probably low to mid-40s that's what we're seeing. So, it has gone up, but I don't expect that to impact the gross margin significantly.

James McIlree

Good. And then lastly, can you share with us the amount of your business not I don't care if you do sales or installations, the amount of your business that's coming from California in Q2 versus I don't know let's call it 2016?

Charles Cargile

Well, there is certainly more as I mentioned in the prepared remarks. There is certainly more business coming outside of California than there was a year ago and it's coming in a measured pace. I think that that might accelerate a little bit of what we're doing now in Florida and Texas.

It's still in the single-digits, I don't have the number right in front of me Jim it's a number that we have so I'll look that up and provide that to you so it's larger than it was but I don't have the point specific number it's probably still less than 10% of the total. But I'll confirm that for you.

James McIlree

Okay, that's helpful. Thanks a lot.

Charles Cargile

You're welcome.

Operator

Thank you. [Operator Instructions]. Our next question comes from Pavel Molchanov of Raymond James. Pavel, you're live.

Pavel Molchanov

Thanks for taking the question, guys. Kind of a macro question about the residential market, several of the trade publications, GTM and so on have written how the top three residential players SolarCity, Vivint and Sunrun are essentially giving up share to the so-called payoff rate everybody outside the top three and as a member of the long list that's outside the top three, I wanted to see if you are observing that same market share dynamic?

Paul McDonnel

Yes. We are seeing some of that and we are benefiting from than giving up market share which is allowing us to grow and spend.

Pavel Molchanov

Okay. Interesting and then geographically, how many states are you currently actively present in and how do you think that number of states will change may be over the next 12 months?

Charles Cargile

Yeah. We have generated revenue outside of California, in Nevada, in Oregon, in Washington and as I mentioned before we now have added sales people in Florida and Texas. We're licensed do business in probably twice that many states, or unencumbered in moving into those states and we'll do that at better states, we'll use the examples of Florida and Texas now and leverage off of what we've learned in Nevada and Oregon and to continue to expand and do in a way that's economical and profitable and not just changing new states and new growth for the sake of growth, sake of profit and cash that's shareholder value.

Pavel Molchanov

Right. Appreciate it, guys.

Operator

Thank you. And I'll turn the call back over to CEO, Chuck Cargile.

Charles Cargile

Thank you, everyone for your interest and for taking the time this morning to join us on the call. If you have any further questions, please don't hesitate to reach out to our team at Hayden Investor Relations or to those of us at Sunworks directly. Thanks a lot.

Operator

Thank you. This does conclude today's conference call. We thank you for your participation. You may now disconnect your lines at this time and have a great day.