Sunworks, Inc. (NASDAQ:SUNW) Q1 2019 Earnings Conference Call May 14, 2019 5:00 PM ET
Rob Fink - Hayden IR
Chuck Cargile - CEO
Paul McDonnel - CFO
Conference Call Participants
Justin Clare - ROTH Capital Partners
Greetings and welcome to the Sunworks First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Robert Fink. Thank you, Mr. Fink, you may begin.
Thank you, operator, good afternoon everyone. And thank you all for joining Sunworks' first quarter 2019 earnings conference call. Participating on the call today are Chuck Cargile, Chief Executive Officer; and Paul McDonnel, Chief Financial Officer.
Before we start, I would like to remind everyone that during this call, management's remarks may 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 because of certain factors not limited to general, economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, and changes in legal and regulatory requirements.
In addition, any projections as to the Company's future performance represent management's estimates as of today, May 14 of 2019. Sunworks assumes no obligation to update these projections in the future as market and business conditions may change. Today, after the close, we issued a press release with financial information and commentary. We encourage you to review the press release to augment the information that is provided on this call. I would like to now turn the call over Sunworks' CEO, Chuck Cargile. Chuck?
Thank you, Rob. Good afternoon everyone and thank you for joining our call. Earlier today, we reported our financial results for the first quarter of 2019. Our results reflect expected seasonally slow first quarter which was exacerbated by a number of negative impacts to gross profit including unexpected rework leading to cost overruns and a number of customer concessions for construction delays. We also incurred expenses in the quarter for the renegotiation of terms for several older projects with unfavorable provisions agreed to in prior years. While we've made significant personnel and structural changes to our organization to address these issues, our first quarter results were negatively impacted by these adjustments.
Accordingly, we’ve taken specific steps to address these issues. In the first quarter, we combined our public works and commercial operations to take advantage of stronger leadership and field teams in our public works group, our public works team has a consistent track record for executing projects on time and on budget.
So while this decision led to a change out of several of the former leaders in the commercial operations, it was a necessary step in our transition. In addition, we negotiated final pricing on three of our older more troubled jobs and adjusted for the full cost of the settlement in the first quarter of this year.
Lastly, we had an unusually high amount of negative adjustments related to cost overruns with one particular key customer. In this case, we believe the concessions addressed issues in the field and making the required cost adjustment promotes our ability to win more business in the future with this customer. Although, we are disappointed in the financial results for the quarter, we believe that they do not reflect our go forward financial position. Although the loss was larger than we anticipated given the nature of many of the adjustments made in the first quarter, we remain confident of profitability and cash generation for the remainder of the year. In fact, our confidence is supported by new project wins in 2019 and positive overall near and long-term market conditions.
First, I'll discuss new project wins on our pipeline. We’re excited about the projects we've won in 2019 and the press release we issued today includes a summary of some of the impactful ones including a $1.7 million project win with a key agriculture customer in Northern California, a $1.5 million follow-on project with our key public works partner ForeFront Capital and we're also finalizing the terms on the next tranche of new projects, we anticipate ForeFront awarding to us in the coming months, a $1.2 million project with the Northern California Water District.
We also have multiple follow-on projects with The International Church of the Foursquare Gospel. We believe our relationship with Foursquare is strong and there's still a very long runway of projects that we anticipate partnering with them on, we had a follow-on project for another Aldi grocery store as part of the partnership agreement that we announced in the fourth quarter of 2018. We’re having discussions on terms for the next tranche of projects with Omni, our partner for low income multi-tenant housing projects which qualify for California state grants.
On the residential front, we've been selected as a partner for a new residential development with a California homebuilder. We expect this to lead to more than a million dollars of incremental revenue in 2019. We anticipate this partnership being even more valuable in 2020 when all new residential developments will be subject to the California Building Standards Commission Mandate which requires homes built in California in 2020 and beyond to use solar power.
Also in our residential business, we've been awarded more projects from Aroma Energy, a developer for low income weatherization programs. These projects are expected to begin installation this summer and add more than $3 million in revenue over the next 12 to 15 months. It's also worth noting that although we didn't book any new projects in the Northeast region in the first quarter of this year, our pipeline there continues to grow.
In Massachusetts, we continue to make progress in a market that’s very solar friendly. In New York, we’ve signed our first letter of intent with a local grocery store chain. This particular LOI is for five locations and we're optimistic that we can convert the LOI to a new project win sometime over the next several months.
We also had preliminary discussions with the potential partner in the Carolina region which could help us accelerate expansion into the Southeastern part of the United States, the project wins we've secured in 2019 reflect our successful focus on key accounts and follow-on business with major customers to augment our ongoing success with agriculture and commercial customers. This coupled with the opportunities we're pursuing for regional expansion provides us with optimism about continuing to build our pipeline for new projects and our backlog for 2019 and beyond.
From an external market position, there appears to be positive tailwinds in many areas. We anticipate the California Mandate for residential solar on all new developments in 2020 will bring a boost to our business and the step down in the investment tax credit in 2020 is expected to motivate some of our large commercial customers to launch projects before the end of the year. I believe it's important to view the solar industry from a long-term perspective as well.
A recent study by Wood Mackenzie Power & Renewables and the Solar Energy Industry Association caught my attention. The study revealed that the U.S. is now home to more than two million solar PV installation, this two million milestone was achieved just three years after the industry completed its one-millionth installation. That feat took 40 years to accomplish.
In addition, according to the Solar Energy Industry Association, the $17 billion solar industry is on track to double again in just five years. Wood Mackenzie forecasts that there'll be three million installations in 2021 and four million in 2023, continuing the rapid advancement of solar. And by 2024, does expect to be one solar installation per minute up from the current rate of one every 10 minutes. It's fair to say that the solar industry has advanced rapidly and has endured numerous fits and starts that come from an evolving industry. But the runway is very long for sustainable high levels of industry growth, strong companies will have years of opportunities ahead of them and long-term patient shareholders will benefit.
At Sunworks, we're positioned ourselves to be part of this long-term growth industry. With that, I'll ask Paul to provide more specifics related to our financial results in the quarter.
Thank you, Chuck and good afternoon everyone. After two consecutive quarters of positive results on an adjusted EBITDA basis, the first quarter of the 2019 financial results reflect the temporary financial setback for Sunworks. Installation revenues for the first quarter of 2019 were low at $9.3 million, a 31% decrease from the $13.4 million reported for the first quarter of the prior year. ACI and Public Works installation revenues were about 58% of total first quarter revenues at $5.3 million.
Residential installation revenues were 42% of quarterly revenues or about $3.9 million. Cost of goods sold for the three months ended March 31, 2019 was $9.9 million or 10.2% below the $11 million reported for the same three months of the prior year. Revenue and gross profit in the first quarter of 2019 were negatively impacted by the seasonally rainy conditions in California which prohibited installation activity for many of the larger ACI and Public Works projects. Chuck already discussed other costs adjustments made in the first quarter.
Some of these costs may be recoverable in the future, such recovery is uncertain and as such we only recorded the expenses related to these activities. Any recovery of these costs would be expected to be reported in the future periods in which they are finalized. Lower revenues and higher construction costs resulted in a gross loss of $0.6 million for the quarter ended March 31, 2019.
This compares to $2.4 million of gross profit from the same quarter of the prior year. The gross margin was a negative 6.9% in the first quarter of 2019 compared to a positive 17.9% in the same quarter of 2018.
Turning our attention to operating expenses, our total operating expenses for the first quarter of 2019 were $3.7 million. This reflects an 11% reduction from the same period in the prior year. Within our operating expenses, selling and marketing expenses for the first quarter of 2019 were $0.8 million or 30% below the first quarter 2018 level. The reduction in selling and marketing expenses primarily resulted from a reorganization of the sales and sales support functions, lower commission and promotion expenses and lower advertising expenses.
Since December 2018, we have hired a new Vice President of Sales for the company and a new Head for our residential operations. Our focus is on growing revenues and becoming excellent in operational execution. We continue to refine our marketing efforts, third-party revenue generators and tracking systems. Our goal is to minimize customer acquisition costs while finding the optimal balance between third-party generated sales and in-house sales.
Our total general and administrative expenses were essentially flat in the first quarter of 2019 compared to the year-ago quarter. Although the total dollars spent on general and administrative expenses is flat year-over-year, the composition has changed from the prior year quarter as a result of an emphasis on improving talent and using technology to improve construction management systems and processes while at the same time reducing discretionary general and administrative expenses.
Operating expenses including stock-based compensation for 2019 are expected to be stable or decrease compared to prior years as we continue to streamline our operations and align our costs with our core operational objectives, reducing our overhead burden without compromising our ability to operate effectively has been and continues to be an emphasis. During the three months ended March 31, 2019 we incurred $124,000 in total non-cash stock based compensation expense compared to $232,000 for the same period in the prior year. The reduction is primarily due to the discontinuance of stock-based compensation expense for former members of the board of directors and executive management who are no longer part of the company.
Depreciation and amortization expenses for the three months ended March 31, 2019 were $92,000 essentially flat compared to the same period in the prior year. Interest and other expenses increased to $217,000 for the first quarter of 2019 compared to the $25,000 for the same months in 2018. The increase in interest expense for the current year is due to the $3.7 million promissory note from CrowdOut which interest began in the second quarter of 2018. The company incurred a net loss for the three months ended March 31, 2019 at $4.5 million compared to a net loss of $1.7 million for the three months ended March 31, 2018.
Turning to our balance sheet, our unrestricted cash and cash equivalents balance as of March 31, 2019 was $1.5 million compared to $3.6 million at December 31, 2018. Our recent cash and liquidity positions have been negatively impacted by our first quarter operating losses compounded by demands from suppliers for deposits and strict payment terms for module purchases needed to support our backlog of projects scheduled for 2019 installation.
As a result, we are considering debt and or equity financing to provide us greater near-term financial capability. We are considering various alternatives and at present, it is too early to identify the exact timing or type of financing we may determine to be optimal. Our working capital is impacted by weak results from the seasonal nature of our business and the first quarter of 2019 was no exception. At the end of the first quarter of 2019, our working capital shortfall was $1.5 million compared to a working capital surplus of $3.8 million at December 31, 2018, $0.9 million of the $1.5 million working capital shortfall was due to the non-cash implementation of a new accounting pronouncement that became effective on January 1, 2019 which requires us to show the present value of future operating lease obligations as a liability on our balance sheet for the first time.
During the three months ended March 31, 2019 we used $1.9 million of cash in operating activities compared to $4.7 million used in operating activities for the same period in 2018. The cash used in operating activities was primarily the result of the current year net loss. The cash impact of the net loss was offset by cash received from the collection of accounts receivable and contract assets together with the extension in accounts payable and accrued liabilities.
As we discussed in earlier conference calls, we had a high level of inventory on hand at the end of the first quarter 2018 as a result of the strategy of purchasing or committing to purchase solar modules prior to the enactment of the tariff on imported modules. Inventory balances as of the end of March 2019 have now declined to $3 million, that’s a $3.6 million decrease from the record high balance of March 31 of last year.
Our total non-trade debt as of March 31, 2019 was $4.7 million compared to $4.9 million at December 31, 2018. The $4.7 million consists of the $3.75 million promissory note, $0.9 million of acquisition or equipment financing and a $0.1 million convertible note which was converted to common stock in April of this year, $1 million of the debt is current, the remaining $3.7 million is long-term.
Although we’re off to a slow start for 2019, we believe we have cleared the deck in many respects. Our visibility for the next couple of quarters is reasonably good. We have a large backlog of projects scheduled for installation and we expect to generate revenue in the range of $18 million to $22 million in each of the next two quarters and to generate positive operating income. With that, we are now happy to answer any questions.
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Philip Shen of ROTH Capital Partners. Please proceed with your question.
Hi everyone. This is Justin Clare on for Phil today.
Hi, so first off can you share the reason that rework was needed on some of your projects in Q1. So were these older projects that were not performing as in as expected or were these recently installed projects that that may have not met specifications. And then as a follow-on to that, have you solved the issue that caused the rework for these projects?
Yes, Justin. Good question, so when I think of the adjustments that I referred to, I think it's important there’s two different issues. And let me talk about both of them even though you only asked about one of them. We had approximately $2 million of expenses that I consider exclusive to the quarter and not expected to carry into the future, about half of it came from what I anticipate being the final settlement on three very large projects that we originally contracted with in early 2017. These projects in total were almost $13 million in gross contract value and two of them are almost a 100% completed and one has been lingering due to lengthy delays by PG&E. But it's in full progress now. In each of these three cases, there were some disagreements over terms that we weren't very precise on when we entered into them and we negotiated them at the end of 2016 and finalized it in early 2017.
We reached settlement in all three cases in the first quarter and made the large adjustments like I said about half of the $2 million. So that part is old jobs like we've referred to before and hopefully we've got them settled now. The other half of the adjustments resulted from overruns and delays and the ones that you were referring to in your question. Those were -- those were not old jobs, those were new jobs and they were due not entirely but basically to our own fault.
And we recorded the full negative impact of these in the quarter. There may be some positive change orders that we're negotiating now that will allow us to recoup some of the expense in future quarters. But we're not able to record, we record the losses when we had any visibility to them. We can't record the positives until they actually occur. So hopefully, we'll get some good news in the future quarters as we finalize those.
It's also important to note that none of the overruns or the inefficiencies occurred from our public works teams and they're the ones now that have taken control or oversight over all of our projects commercial and public works. So we think we're going to see, we already are seeing improved execution on those projects.
For the largest one where we had the rework and the cost overruns, it’s been a customer with many, many different projects and since we made the change in operations, all of those projects have come off under the estimates either for where we are to-date or for -- or in the case of ones that are complete under what was projected at the start. And we already are being awarded new contracts with that customer. So although it's terribly painful in the quarter, it appears that we've salvaged it and we're it's better now since we made the change.
Okay. That's very helpful. So then it sounds like there hasn't been too much impact to your ability to win additional projects and your customer relationships remain solid but can you speak to that a little bit. Do you see any impact going forward to customer relationships or are things going pretty smoothly at this point?
There was stress during the first quarter on I would say probably four of our key customers and in each of those instances in all four instances, we'd either signed follow-on orders since we made the changes or we're negotiating follow-on orders now and I attribute that and thankful for the way that the public works people stepped in and took over those projects.
The each -- I think one of the dynamics I've been talking for a long time and Justin you've been following us a long time, so you know that I see real value in having these larger customers that will give us recurring orders, so that we're not letting off of we can only eat what we kill every quarter and it's only one-off. What comes with that is much more demanding customers, we've learned. And so we have to be better at what we do in order to win the follow-on work. And so there was like I said lots of stress during the quarter.
But in each instance, we've been able to turn the corner and I can't say that we're completely out of the woods yet but like I said in every case, we have received follow-on orders we’re negotiating them now and so hopefully over time, the fact that we recognize the weaknesses and address them quickly will give us credibility.
Great, okay. And then can you share what the total impact to your backlog was in terms of the projects cancelled in the quarter. We're calculating an implied bookings number of $10 million in the quarter. But considering some projects fell out of the backlog, it sounds like bookings could have been above $10 million. So could you share what fell out and then what the bookings in the quarter were?
Yes, the bookings number was north of $10 million, the new projects north of $10 million. I haven't in our backlog today is $47.2 million, we have about a little more than $4 million, that's in our backlog but it's beyond four quarters. It's currently not scheduled for four quarters. Some of that and that's as of March 31. Some of that four plus million since 3/31 in the last six weeks, we have pulled that into the fourth quarter. So it's a little bit higher than that now. But I don't have the roll forward in front of me, Justin. So I don't know if that helps reconcile it for you or not.
Yes, that’s helpful. Maybe just one more from me. You said in your prepared remarks you're considering debt or equity financing. Can you talk about how much capital you think you might want to access and just the range of possibilities that you're considering in terms of that financing?
Yes, we wanted to go public with the fact that we were looking at alternatives. It's still early for us. And so we haven't decided on what type of financing that will be or the timing. We’re going to -- we’ll keep you posted on that but it's something that we're looking into, we're going to look into a wide range of alternatives to make sure that we can select the one that's the most advantageous for us and the most efficient as well. So it's something that we'll be doing over the coming weeks. But it’s a little bit too early to commit to size or type or terms.
Okay, thanks very much. I will pass it on.
At this time, there are no further remarks over the Q&A session. I would like to turn the conference back over to management for closing remarks.
Thank you very much. One other issue that I wanted to touch on before we hang up, we were hit with a little bit of disappointing news from NASDAQ, we learned yesterday afternoon that we’re not removed from the watch list even though our stock has traded above a $1 for 13 consecutive days. They indicated that while the staff determination notice calls out a 10-day period to regain compliance that there's language that says they had the discretionary authority to review it for 20 days.
Due to the volatility in our stock price over the last month or so, they notified us that they're going to extend the watch. In the meantime, we're still working on the extension provided to us in March which carries us until September of this year. If you have any questions about that or any other matters that we covered today, I would encourage you to call either Paul or myself or Rob Fink in the Hayden IR team at any time. Thank you very much.
This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time, have a wonderful rest of your day.