Sunworks Inc (SUNW) 2019 Q4 法說會逐字稿

Greetings, and welcome to the Sunworks fourth quarter 2019 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Rob Fink from FNK Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining Sunworks fourth quarter 2019 earnings conference call. Participating on the call today are Chuck Cargile, Chief Executive Officer; and Paul McDonnel, Interim Chief Financial Officer.

Before we start, I'd like to remind everyone that during this call, management's 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 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, results, or actions represent management's estimates and assumptions as of today, March 30, 2020. Sunworks assumes no obligations to update these projections in the future as market and business conditions may change.

Today, the company issued a press release with financial information and commentary as well as their annual report on Form 10-K. We encourage you to read both of these documents to augment the information provided on this call.

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

Thank you, Rob. Good afternoon, everyone, and thank you for joining our call. Earlier today, we reported the results for the fourth quarter of 2019, and we detailed the aggressive and necessary actions we're taking to ensure Sunworks is positioned to survive the unprecedented nature of the current environment and emerge as a stronger more viable company.

Before getting into the results of our challenged fourth quarter, it's important to address the effects of COVID-19 or the coronavirus. Over the past couple of months, we've made substantial changes to the business from both an organizational and a cash flow perspective that will allow us to continue operating effectively, while installing our $45 million of backlog, which was buoyed by $21 million of new project wins during the fourth quarter.

As we noted in our press release, we're authorized to continue serving customers as an essential business as defined by county agencies directives to -- about shelter in place. The energy industry is identified by the federal government as critical or essential. We're conducting business and our employees continue to work, although we are carefully abiding by the California Department of Public Health's guidance on protecting oneself and others during internal and client facing interactions.

That said, some of our customers and subcontractors and suppliers may not be deemed an essential business. Therefore, they're not operating at a similar capacity which may negatively impact our near term activities. So the immediate questions we face are, how are we impacted directly? What are we doing about it? And what can you expect from us going forward? Over the course of this call, I hope we'll provide answers to those questions.

First, we're protecting our employees and any one they interact with. We're thankful that none of the Sunworks team have the coronavirus. We've instructed all of our employees to follow quarantine recommendations if they're sick and/or show any symptoms of the virus. We've been diligent in reinforcing the need to disinfect our work locations and vehicles, and remind employees of the importance of washing their hands and bodies to minimize the risk of exposure.

We exercise appropriate social distancing, both in the field and in our offices. We provided our field teams with instructions on how to safely interact with customers and other Sunworks personnel at job sites, and have provided them with additional safety training, sanitizers, gloves, and masks. Although the majority of the work we perform at customer locations is done outside, we have instructed our teams to be considerate of customers who prefer we not beyond their premises.

We're also being flexible with our office teams. Although we are authorized to continue operations, many of our internal employees are working remotely. We have and will continue to prioritize the health and safety of our team and all of our partners within our value chain.

Second, we're protecting the financial viability of our company. Earlier this month when we realized the severity of the disruption and the uncertainty of the future we acted promptly. We established an internal COVID-19 response team that developed a structured communication and action plan, implementing the steps that we identified in our press release last week.

We acknowledge that some of our installation activity would be delayed, especially on the residential side of our business. To proactively conserve cash we strategically made the difficult decision to lay off about a third of our workforce, or 59 people. These layoffs are considered temporary and that the employees can retain their health insurance and be called back to work quickly when business conditions allow. We also reduced 36 positions from full-time part-time.

The majority of these reductions impact our SG&A expenses, reducing our operating spend in Q1 and Q2. Our leadership team recognizes the devastating impact these actions can have on our team members and their families. Therefore, all leadership, directors and above, have taken at least a 50% reduction in pay. Additionally, our Board of Directors instructed me to cease their monthly payments.

I've taken a 100% reduction in pay, and Paul has taken a 65% reduction in pay for the near term until we have greater clarity. Combined, these actions are expected to result in savings of $450,000 a month. In an attempt to pursue other cost savings measures, we proactively reached out to our various landlords and negotiated rent abatement or reduced rates, which are expected to save us an additional $50,000.

Separately but related as soon as the economic realities presented by COVID-19 became evident and prior to the approval of the recent stimulus plan, we immediately applied for a Small Business Association loan. Since then, as broadly reported, the government has approved the $2.1 trillion CARES Act, which allocates $349 billion to small business forgivable loans.

This past weekend I had a conference call with a representative from one of our partnering banks who will be partnering in the lending program, and he's optimistic about the support they can provide to Sunworks. Although many of the details of the program are being finalized, we will update an application this week. And based on the conversation, we could expect a potential cash infusion within weeks. The amount and terms and timing are still to be determined, but the cash inflow would be impactful for us.

I'm proud of how our team has reacted, from the field crews all the way to our Board of Directors. Nonetheless, there's so much outside of our control causing a great deal of uncertainty. Many of our employees are feeling distressed. Perhaps they have childcare disruptions or worried about family members or just overwhelmed by the overall enormity of the changes in their daily lives. The same goes for our customers and other business partners.

And of course, our effectiveness as impacted by utility companies, agencies, and jurisdictional approval delays. All of this disruption is understandable, but negatively impactful. So considering all of this uncertainty what do we know? Today, we filed our 10-K for 2019, and we had a clean opinion from our auditors, meaning our independent auditors are comfortable with our ability to continue as a going concern, and they agreed that the valuation of the company supports our asset value without any adjustment to the carrying value of our $9.5 million of goodwill.

We have $45 million of backlog scheduled for installation over the next 12 months. Although the timing of that installation activity is uncertain, we've only experienced delays so far, no cancellations. We recognize the need to ensure we have sufficient cash to reconstruct our business toward profitability and cash generation. One way we've achieved this was by fully utilizing our at-the-market offering.

As of last week, we canceled our ATM and our shelf registration expired when we filed our 10-K. Although it was painful to endure the dilution that comes from equity sales our cash position is currently higher than it was at year end, even after paying $1.5 million or half of the crowd-out senior secured debt in January. And most importantly, the dilution impact is now behind us. Shareholders can invest without the concern of uncertain future dilution from the ATM.

Our strong 2020 backlog, coupled with the cost reduction steps we've taken keep us optimistic. We've dramatically reduced our breakeven point, protected our cash position, improved our balance sheet, and overall continue to be thankful to sustain business operations during this difficult time. We're not able to predict what the impact of COVID-19 will have on our business and financial results in the future, including our current first fiscal quarter or our second quarter.

But we're managing our cash diligently to survive through this uncertainty. We'll manage our payroll to be efficient but also satisfy customer activity to ensure that the lifeblood, billings, and collections will pay for our efforts.

In summary, based on our cash position, our ability to generate cash from operations, and access to funds made available through the stimulus program, we're confident that we will effectively navigate through the disrupted business environment and emerge as a leader, more viable business.

With that, I'd like to ask Paul to provide more specifics related to our financial results in the quarter.

Thank you, Chuck, and good afternoon, everyone. The fourth quarter of 2019 financial results reflect the headwinds we faced and our continuing efforts to create a sustainable -- the operational improvements at Sunworks.

For the fourth quarter of 2019, total revenue was $14.4 million, down from $19.2 million reported for the fourth quarter of the prior year. ACI and public works revenue combined for a total of $9.6 million, for about 56% of total revenue for the quarter. Residential installation revenue of $4.8 million was 34% of the total revenue for the quarter.

Compared to the fourth quarter of the prior year The revenue mix changed. ACI and public works revenue decreased from 70% in the fourth quarter of the prior year to 66% in the fourth quarter of 2019. While residential revenue increased from 30% to 34% of total revenue for the quarter.

Gross profit for the quarter was $0.7 million or 4.7% of revenue, a decrease from $3.6 million of gross profit or 18.6% of revenue in the fourth quarter of 2018. Gross margin was negatively impacted by lower revenue and the resulting inability to cover fixed installation costs during the quarter.

Our gross margin of 4.7% reflects the inefficiencies in operations resulting from engineering redesign, permitting delays through the authorities having jurisdiction, field execution errors, construction rework, and delays achieving permissions to operate from utilities.

New projects awarded in 2019 generally drive a higher gross margin and those booked in prior periods. During 2019, revenue and margin were impacted by 46 low margin jobs. Jobs are combined for a negative margin of $0.4 million. 25 of these jobs were awarded in 2018; another 20 were awarded in 2016 and 2017. The gross profit in the fourth quarter of 2018, $3.6 million or 18.6% of revenue, was the highest gross profit percentage, margin percentage in the prior six quarters to that point in time.

It is important to remember that any costs in excess of project estimates are charged to cost of goods sold as incurred. Cost [exceeding] estimates occur more frequently or occurred more frequently in the fourth quarter of 2019, compared to the fourth quarter of 2018 when costs exceeding original estimates were minimal. Gross margin and gross profit on residential projects in the fourth quarter declined year over year also.

Lower than historical margins on residential projects were driven by timing of permits granted from the required jurisdiction and achieving permission to operate from utilities. Additionally, the residential team had significant sales of residential batteries during the fourth quarter due to the customer reaction to the multi-pay power outages experienced in Northern California.

The demand for batteries resulted in an operational bottleneck from procurement and receipt through installation. While much of the installation costs are variable with installation activity, certain costs are fixed and do not decrease at the same rate as revenues may decline.

Margins in the residential business were 10.4% in the fourth quarter of 2019, compared to 19.8% in the fourth quarter of 2018. Total operating expenses excluding stock-based compensation and depreciation for the fourth quarter of 2019 were $3.7 million, compared to $3.1 million in the fourth quarter of 2018. This represents $0.6 million or 19% increase from the same quarter in the prior year.

In the fourth quarter of 2018, operating expenses benefited from a $250,000 reduction in expense as a result of the reversal of a bonus compensation accrual. In contrast to the prior year, in 2019 we had increases in expenses for auto insurance, software licensing and technology, commissions, legal and professional charges, while combined salaries and benefits remained relatively flat compared to the prior year, in spite of increases in medical insurance costs.

We originally implemented some cost reductions and organizational changes in December 2019 and January 2020. Then as a result of the massive disruption caused by COVID-19 we took the more aggressive steps outlined in last week's press release and more fully explained by Chuck a few minutes ago. As described more comprehensively in our 10-Qs and 10-Ks Sunworks tests for goodwill impairment in the fourth quarter of each year.

As in the prior year, we engaged a third party to perform a valuation study of Sunworks's goodwill. No goodwill impairment was required in 2019, compared to the prior year when Sunworks recognized a $1.9 million non-cash charge to reduce the carrying value of goodwill. As a result of recent global and regional events that Chuck described earlier another goodwill evaluation will be prepared at the end of the first quarter of 2020, consistent with the accounting guidance.

Which requires us to evaluate goodwill whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable as may be the case in the current unusual business climate.

Stock-based compensation was $100,000 during the quarter compared to 130,000 in the prior year quarter. Interest expense for the fourth quarter of 2019 was $209,000. Interest expense for the quarter is primarily related to the crowd-out note. We paid down the $3 million senior crowd-out note by $1.5 million in late January 2020. Our cash interest expense will be lower going forward as a result of the principal reduction on the senior crowd-out note, and the final payoff of the acquisition related debt to the NV Energy acquisition done in 2015.

However, the January paydown of the crowd-out debt will require us to recognize a non-cash charge of approximately $106,000 in the first quarter of 2020. The paydown of the debt requires us to accelerate the write-off of the crowd-out loan issuances costs and extension fees and exit fees associated with a portion of a loan that was paid off early.

The future quarterly amortization expense will also be less over the remaining term of a loan. To a small degree we are also benefiting from the lower 30 day LIBOR rate upon which interest payments are calculated. The LIBOR rate has declined approximately 100 basis points in 2022 to approximately 1%.

The net loss for the fourth quarter of 2019 was $3.4 million or $0.59 per basic and diluted share, compared to a net loss of $1.8 million or $0.50 per basic and diluted share in the year-ago quarter. Net loss for the fourth quarter of 2018 also included a $1.9 million non-cash impairment charge.

Turning to our balance sheet, our unrestricted cash and cash equivalents balance as of December 31, 2019, was $3.2 million compared to $3.6 million at December 31, 2018. During the first quarter of 2020, we continued to sell stock under the provisions of our at-the-market offering to fund working capital needs, retire debt, and prepare for the business and economic uncertainty caused by COVID-19.

Year to date, in 2020, we sold an additional 9.8 million shares, resulting in net proceeds to $7.7 million. Our inventory balance at the end of December 2019 was approximately $3 million compared to $3.3 million at the end of 2018. Inventory balances remain higher than desired as a result of delayed construction starts and new projects. We expect inventory balances to further decline as we continue to improve operations and project execution.

Proper management of cash and working capital is a continual emphasis it Sunworks. Our total debt at December 31, 2019, was $3.8 million. The $3.8 million consists of the $3.75 million crowd-out promissory notes, net of unamortized issuance costs and exit fees, and $0.3 million for acquisition and equipment financing. The $0.3 million of debt is considered current and the remaining $3.5 million is long term.

In late January 2020, we paid down $1.5 million of the $3 million senior crowd-out note balance, and have since paid off the remaining balance of the acquisition promissory note of another approximately $0.25 million. As of today, approximately $2.2 million of debt remains outstanding. With that, we are now happy to answer any questions that you might have. Chuck?

(Operator Instructions) Philip Shen, Roth Capital Partners.

Hey, Chuck, Paul. Thanks for the questions.

You're welcome. Hello, Phil.

I'd like I'd like to start with the outlook, maybe by segments. I think you said in the prepared remarks that you were able to operate as an essential service but some of your customers are not able to. So I was wondering if you can talk through how you're getting through your backlog for each segment. And I think of that as [Resi], ACI, and then public works.

Sure. [Of course], any comments about the outlook have to be prefaced with -- events change every day. We're all experiencing that. So I can tell you what's happened so far and our best guess of what we think the impact will be. First in public works, where we're still working on the forefront project with the [Presona] Unified School District, and also we're working on a large state owned prison.

We've been able to continue to work without much interruption. And in fact, with the school district we've been able to deploy more people on the site because the classes are canceled. So that's been favorable. Unfortunately, as you know, we often have to get approvals or work with the utility companies. And that hasn't been working in our favor.

With the disruption it's just harder to get them out to do the permits, or the approvals that are needed. So it's not a matter of the impact of the coronavirus with the schools. I guess it is because that's what's impacting the utilities. But in that instance, we're feeling pretty good about our ability to execute those projects.

On the commercial side, we've had a few projects be delayed, that for the most part we still have crews out working on job sites on the commercial side. So that's been not as impactful as we might have feared. Residential has been impacted.

We're not able to get through nearly as many of the projects that we have in backlog that we had expected to be able to execute on in the last month of this quarter, in the month of March. It's been very much delayed. So our residential revenue will be much lower than what we would have expected it to be even a month ago.

Okay. And when you talk through revenue in Resi -- yeah, I think you wrote that you haven't received any cancellations, but homeowners are effectively saying, let's wait this out -- maybe a week. Well, not a week, but maybe a month or two or something. Is that (multiple speakers)

Yeah, (inaudible) or just wait it out until we have better clarity or [detail].

How much do you think the Resi the revenue could be down in Q1 versus -- I think if you look back to Q1 of last year -- I'm guessing you actually had a good January, maybe even good February. Because I think there was very little rain and snow in the country -- and no rain is [more] in California. So do you think you're flattish year over year in the Resi segment? Or do you think you'll be down even for Resi in Q1 year over year?

Yeah, I think last year in Q1, we did $3.9 million of revenue and we came into this year because we had really pretty good sales, the second half of last year. So we came into the quarter with pretty good backlog on the residential side. And prior to the disruption in the month of March, I would have predicted something nicely higher than the $3.9 million.

But I don't think that will be higher than the $3.9 million now. Because as I said, we're only getting a little more than two months' worth of work for a three-month quarter. So I think that's going to probably keep us a little bit below, although I'm reluctant to give any specific guidance yet for Q1 or Q2. But I think the [three-nine] would be -- might be hard to get to.

Got it. Okay, that's helpful. Thank you. So when you look at [C&I] and public works, do you expect it to eventually come up to that -- a permitting roadblock, if you will, the lack of the ability to get the permits and the lack of the ability to get certain approvals that will just stop projects in their tracks? Or what's your sense for how C&I evolves in the coming months?

Yeah, we've been experiencing utility delays and been frustrated by utility delays much of 2019 and certainly in Q4. And that's one of the reasons why our Q4 revenue was lower than what we expected. It's just the ability to get the utility to give us approvals. So I don't see any reason why that's going to get any better in the near term.

Now fortunately, when the jobs or the approvals get delayed into Q4 we're higher up in the queue -- for Q1, so it starts to -- you get some of the ones that you expect in Q4 you'll get in Q1. But it's just -- the most frustrating part is it's just very hard to predict. And over the course of a project it doesn't have that much impact, but it certainly does when you're concerned with your quarterly reporting and your quarterly financial results.

Okay. So you're seeing friction down with demand, looking upstream with the supply chain. Are you seeing any issues there at all? My sense is with Asia mostly back up and running, especially China that you probably have sufficient product at this point. Or you've been getting so much you need a term product away. So maybe talk through the inventories as well.

Sure. We are fortunate in that most of the backlog that we have certainly for the first half of the year, the projects are either -- we either have panels on site already or product on site, or we have them already procured and in our warehouse. There are some for the second half of the year where we have purchase orders, but we don't have the product yet, and that's of concern a little bit.

As you know, a company our size can often be -- can have product pulled to go to another customer. We've experienced that in the past. So we're always a little apprehensive even if we have an approved purchase order if we don't have the inventory. But for the first half of the year, even as -- after the coronavirus disruption, I'm not that worried about product for the near term.

If this continues for a period of time and we start to have product that we need in the second half of the year as we look into 2021, then it might be a different story. But that's not -- of all the concerns that we have resulting from the coronavirus that's not at the top of our list. What has me more concerned is the dramatic slowdown in new sales.

So I mentioned that we had a terrific fourth quarter, $21 million in new sales. And with the projects that we had in our pipeline, I was optimistic about a good first quarter. I didn't expect it to be -- maybe not the $21 million, but I thought it would be better. But now in the month of March, it's just hard to get customers whether it's residential or commercial to make commitments in the throes of such uncertainty.

I believe that as we find a new normal, whenever that will be and it will probably -- the new normal will probably have at least the threat of recession and perhaps the surety of recession. Frequently, the sales calls have a little bit more urgency and a little bit more attractiveness and when you can talk about how a business or a company or a person can get a return on their investment and lower their costs in a time when they're worried about the overall economics of effects in a recession. So big drop off now in terms of new sales. But hopefully we can get to a new normal and get that accelerated some point soon.

Do you see a light at the end of the tunnel -- for a -- in a reacceleration of bookings? Or do you expect Q2 to be weak across the board? And then what's the chance that it spills into Q3?

Yeah. From where we sit today, I think I have no better crystal ball than anybody else. But with the extension of the lockdown and whatever you want to call it through the end of April, I can't imagine that we'll see a sea change in the month of April. Some individual customers may start to get more confident and respond. But I think overall they'll still be as reluctance as long as the government is saying, we're not sure for the month of April. It will be difficult for individuals to say oh, but I'm sure, and so I'll place that order.

So that's going to get us probably into at least half of the quarter. So again, my expectation is from a revenue and a backlog perspective, we should be able to perform the new sales that would then be filling up our fourth quarter and our momentum into 2021. That's going to be the concern in the near term.

Okay. Shifting over to your balance sheet, are there any covenants associated with their notes that can be tripped? And how would you anticipate managing through that situation?

Yes. As you know, the debt we have is the crowd-out note which we paid off half of the senior secured. So that took from $3 million to $1.5 million, and then there's another [750] of subordinated debt on top of that. We have the [2.25], and it's very covenant-light. So there's no covenants that we were worried about. Clearly, we wouldn't have been able to conclude the audit and file the K if there were covenant concerns that had to be worked through. So we got full buyout from the auditors on the debt and our compliance.

Okay, thanks, Chuck. And then as it relates to liquidity, can you just talk through your situation -- what kind of working capital needs might you have? It seems like you have the material in the warehouses for the first half of the year. But what's -- can you talk through your on cash flow from operation, expectations, and what the other sources of liquidity might be?

Sure. So as you can imagine, in this environment, our focus on cash has become even heightened, more so than it was before. And I felt like we were pretty focused on cash before. But now we are very detailed and reviewing our cash weekly. We've now begun to have a weekly call with our Board of Directors where we go through the cash outlook. We've benefited from being able to fully use the ATM and excess cash. So we're in a better cash position today than we were at the end of the year.

And when I look at our 13-week cash flow, it shows that we'll be comfortable through that period. And then with the cost reduction steps we've taken the overall cash burn per week is significantly below. As we mentioned in the prepared remarks, we have are $500,000 a month of savings that we put in place just over the last couple of weeks.

So we're hypersensitive to the cash position as any practical and responsible company would be. But as we look out, we have a comfort level that we know we can continue to function in the way that we are. And then I'm optimistic about our ability to access a loan from the stimulus program and a loan on very favorable terms and some of them forgivable.

So as I said earlier, we have already been in conversations with the bank. In fact, while we've been on this call, I got a follow-on call from our banker that I'll return when we get off this phone. So I feel good about our place in line and the access to that. I don't know yet what the size would be, or what the terms would be, or what the timing would be. But I feel good about our position to access that which we would to further augment the balance sheet.

Okay, great. Well, I'll pass it on from here. Thanks.

You're welcome. Thank you, Phil.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Cargile for any closing.

Thank you very much. We're never able to predict when a crisis will occur, particularly one like the pandemic that we're in now. But I believe in the adage that you should never waste a crisis. And as I look at our outlook going forward, you have to look for a silver lining.

And in our case, I think the silver lining is twofold. One is, it's caused us to take a harder look at our cost structure and to take a much more dramatic reduction in costs, which will allow us to lower our breakeven point and become profitable at a lower level of sales and revenue and sooner in this recovery period. The second is, I believe it's going to give us access to additional capital on very favorable terms, more so than we have today.

So I thank you all for joining us. And if you have any questions, please -- any follow-on questions, please don't hesitate to reach out to Paul or myself or Rob Fink at FNK IR. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.