Q4 2019 Earnings Call
[music].
Greetings and welcome to the Sunworks fourth quarter 2019 earnings call. At this time, all participants are any listen only mode. A brief question and answer session on all the while presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now.
My pleasure introduce your host Mr. Rob Thanks, [laughter] K Investor Relations. Thank 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 true cargo Chief Executive Officer, Paul Mcdonnell interim Chief Financial Officer.
Before we start I'd like to remind everyone. 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 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, we're developing plans.
The ability to attract and retain weight retained qualified personnel and changes in legal and regulatory requirements.
In addition, any projection as to the company's future performance results or action represent management's estimates and assumptions as of today March Thirtyth 2020.
Sunworks assumes no obligations to update these products projections in the future as market and business can be 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 reap both of these documents to augment the information provided on this call.
With that said I wouldn't I like to turn the call over that Sunworks and C O Chuck cargo 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 at a stronger more viable company.
Before getting into the results of our challenge fourth quarter, it's important to address the effects of covert 19 or the crowd of Iris.
Over the past couple of months, we've made substantial changes to the business from both an organizational and the cash flow perspective that will allow us to continue operating effectively.
While install it our $45 million a backlog.
Which was buoyed by $21 million of new project wins during the fourth quarter.
As we noted in our press release were 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 is critical for central.
We're conducting business and our employees continue to work, although we are carefully abiding by the California Department of public health guidance on protecting oneself and others, there an internal and client facing interaction.
That said some of our customers and subcontractors and suppliers may not be deemed and 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 or how are we impacted directly.
What do we doing about it and what can you expect from us going forward.
Over the course of this call I hope will provide answers to those questions.
First what particular employees at any one they interact with.
We're thankful that none of the Sunworks team have the crowd of Iris.
Weve instructed all of our employees to follow quarantine recommendations that 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 vehicle and remind employees of the importance of washing their hands and bodies to minimize the risk of exposure.
We exercise appropriate social distance team both in the field and in our offices.
We've provided a field teams with instructions on how to safely interact with customers and other sunworks personnel that job sites and that 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've been structured our teams to be considerate of customers, who prefer we not beyond their premises.
We're also being flexible what our office team.
Although we are authorized to continue operations many of our internal employees are working remotely.
We had and well 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 realize the severity of the disruption and the uncertainty of the future we acted probably.
We established an internal cobot 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 to part time.
The majority of these reductions impact our SGN a expenses.
Reducing our operating spend in Q1 in Q2.
Our leadership team recognizes the devastating impact these actions can have on our team members and their families.
Therefore, all leadership directories and above have taken at least a 50% reduction and pay.
Additionally, our board of directors instructed me to cease their monthly payment.
I've taken a 100% reduction and pay and Paul has taken a 65% reduction and pay for the near term until we have greater clarity.
Combined these actions are expected to result in savings of $450000 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.
What's your expected to save us an additional $50000.
Separately, but related.
Soon as the economic realities presented by Cobot 19 became evident.
And prior to the approval of the recent stimulus plan.
We immediately applied for small business Association loan.
Since then as broadly reported the government has approved the 2.1 trillion dollar 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 and the lending program.
And he is 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 to potential cash infusion within weeks.
The amount and terms and timing are still to be determined that 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 are 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 is 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 continue has 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 a backlog scheduled for installation over the next 12 months.
Although the timing of that installation activity is uncertain.
We have 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 cancel our ATM and our shelf registration expired when we filed our 10-K.
Although it's 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 <unk> dilution from the ATM.
Our strong 2020 backlog, coupled with cost reductions steps, we've taken keep us optimistic.
We've dramatically reduced our breakeven point.
Protected our cash position.
We 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 Cobot 19 will have on our business and financial results in the future.
Including a current first fiscal quarter.
For 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 disruptive 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.
<unk>.
Thank you Chuck.
And good afternoon, everyone.
The fourth quarter of 2019 financial results.
Reflects the headwinds we faced in our continuing effort.
You create a sustainable.
Operational improvements in some more.
For the fourth quarter 2019, the total revenue was 14.4 million.
Down from 19.2 million.
Reported for the fourth quarter of the prior year.
Yeah in public works revenue combined for a total of 9.6 million.
Well, we're about 56% a portal revenue for the quarter.
Residential installation revenue were 4.8 million.
It was 34% of the total revenue for the quarter.
Compared to the fourth quarter to prior year, the revenue mix changed.
Asia in public works revenue decreased from 70% in the fourth quarter to prior year.
To 66% into fourth quarter of 2019.
Well residential revenue increased from 30% to 34% of total revenue for the quarter.
Gross profit for the quarter.
What's the point 7 million.
For.
4.7% of revenue.
The 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 in ability to cover fixed installation costs during the quarter.
Our gross margin of 4.7% reflects the inefficiencies in operation.
Resulting from engineering redesign.
Permitting delays through the authority southern jurisdiction.
Field execution errors construction rework.
And delays achieving permissions to operate from utilities.
New projects awarded in 2019, Gentlemanly drive a higher gross margin and those booked in prior periods.
During 2019 revenue margin were impacted by 46 Morton jobs.
You also combined for a native marketing margin <unk> point 4 million.
25 of these jobs were awarded in 2018. Another 20 were awarded in 2016 in 2007.
The gross profit in the fourth quarter of 2018, or 3.6 million or 18.6% to revenue.
What is the highest gross profit percentage.
The margin percentage in the prior six quarters to that point in time.
It is important to remember that in call and that's that's a project estimates are charged to cost of goods sold as incurred.
Talk to TD estimates accrue more frequently occurred more frequently in the fourth quarter of 2019.
Compared to the fourth quarter 2018, when cost excluding original estimates were minimal.
Gross margin gross profit on residential projects in the fourth quarter declined year over year also.
Lower than historical margins on residential projects.
And by the timing of permits.
Grants 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 power outages experience northern California.
The demand for batteries resulted in an operational bottleneck.
From procurement and receipt through installation.
Well much of the installation costs, all variable with inflation activity.
Certain costs optics, and do not be screens at the same rate as revenues may decline.
Margins in the residential business were 10.4% in the fourth quarter 2019.
Compared to 19.8% in the fourth quarter of 2000.
Excuse me 2018.
Total operating expenses, excluding stock based compensation and depreciation for the fourth quarter 2019.
With 3.7 million.
Compared to 3.1 million in the fourth quarter of 2018.
This represents 80.6 million for a 19% increase from the same quarter in the prior year.
Then the fourth quarter 2018.
Operating expenses benefited from a 250000 dollar reduction and expense.
As a result of the reversal of the bonus compensation accrual.
In contrast, the prior year.
In 2019 real increases expenses for auto insurance.
Software licensing the technology.
Commissions legal and professional charges.
Well 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 December 2019, and January 2020.
Then as result of the massive disruption caused by cobot 19.
We took the more aggressive steps outlined and last week's press release and.
And more fully explain inch by truck a few minutes ago.
That's the slide more comprehensively and our 10-Q's and thinking.
Sunworks close for the goodwill impairment in the fourth quarter each year.
That's in the prior year Reengaged with third party to perform evaluation studies Sunworks goodwill.
No goodwill was required no goodwill impairment was required in 2019.
Over the prior year when Sunworks recognized a one point.
9 million.
Non cash charge to reduce the carrying value of goodwill.
As a result of recent global and regional events.
Chuck described earlier.
Another good will be valuation 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 them out.
Yep.
Exceeds its full dog and.
That may not be recoverable.
Maybe the case in the current unusual business climate.
Stock based compensation was $100000 during the quarter compared to 130000 in the prior year quarter.
Interest expense for the fourth quarter of 2019 was $209000.
Interest expense for the quarter is primarily related to the crowd out.
We paid down 3 million dollar seen you called 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 put all of the acquisition related debt to the MD energy acquisition done in 2015.
However.
The January pay down of the crowd out debt will require us to recognize a noncash charge of approximately $106000 in the first quarter of 2020.
The pay down the debt.
Requires us to accelerate the write off of the crowd out loan issuance costs an extension.
And that's it things associated.
With a portion of the loan that was paid off early.
The future quarterly amortization expense will also be last over the remaining term of alone.
It was small degree we're 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 approximately 1%.
The net loss for the fourth quarter 2019 was 3.4 million for 59 cents per basic and diluted share compared to a net loss of 1.8 million.
Or 50 cents per basic and diluted share in the year ago quarter.
Net loss for the fourth quarter 2018 also included a 1.9 million noncash impairment charge.
Turning to our balance sheet.
Our unrestricted cash and cash equivalents balance as of December 31st 2019 was 3.2 million then.
Compared to 3.6 million at December 31st 2018.
During the first quarter 2020, we continue to shelf stock under the provisions of our aftermarket offering.
To fund working capital needs.
Higher debt.
And prepare for the business and economic uncertainty caused by Cobot 90.
Year to date and 2020, we sold an additional 9.8 million shares.
Resulting in net proceeds of $7.7 billion.
Our inventory balance at the end of December 2019 was approximately 3 million.
Third the 3.3 million at the end of 2018.
Inventory balances remain higher than desired.
The result of delayed construction starts in new project.
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 at some works.
Our total debt at December 31st 2019 was 3.8 million.
The 3.8 million consists of.
3.75 million crowd out promissory note.
Net of unamortized issuance Austin exit fees.
And point 3 million for acquisition in equipment financing.
The point 3 million of debt is considered current and the remaining 3.5 million as long term.
In late January 2020, we paid down 1.5 million up with 3 billion senior crowd out note balance.
I don't have since paid off the remaining balance of the acquisition promissory note.
I have another approximately.
0.2 5 million.
As of today.
Approximately 2.2 million of debt remains outstanding.
With that we're now happy to answer any questions that you might up.
Chuck.
Thank you will now be conducting a question and answer session.
I'd like to ask the question. Please press star one and your telephone keypad. It confirmation Tom will indicate your line is in the question can you make Chrysler two if you like sort of your question from Nick you for participants using speaker equipment, maybe necessary to pick up your hands that before passing the start Keith one honestly the we pull for your question.
Our first question comes from the line I, Philip Shen with Roth Capital Partners. Please proceed with your question.
Hey, Chuck Paul Thanks for the questions.
You're welcome Hello, Phil.
I'd like to start with Oh.
The outlook, maybe by segment I think you said in the prepared remarks that.
You are able to operate has an essential service, but some of your customers are not able to so was wondering you can talk through.
How you're getting through your backlog for each segment and I think of that as you know Reggie.
And then public works.
Sure.
Of course any comments about the outlook has to be preface swift.
Events change every day, we're all experiencing that so I can tell you what's happened so far at our best guess of what we think the impact will be.
First in public works, where we're still working on and the forefront project for depression, a unified School district.
I'd 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 that.
The school district, we've been able to.
Deploy more people on the site because the classes or our cancel so thats 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.
What's the disruption it just harder to get them out to do the permits are there or the approvals that are needed. So it's not a matter of.
The impact of the current of Iris with the schools I guess it is because it that's what's impacting the utility.
In that instance, where we're feeling pretty good about our ability to execute those projects on the commercial side, we've had a few projects.
Be delayed.
But for the most part we still have crews out working on on job sites on the commercial side, So thats been.
Not as impactful as we might have feared.
Residential has been impacted where we're not able to get to get through nearly as many of the projects that we haven't backlog that we had expected to be able to execute on in the last month this quarter in them at the March it's been very much delayed so our residential revenue will be much lower than what we would have expected to be.
Even a month ago.
Okay, and when you talk through revenue rosy.
Hi.
Yeah, I think you wrote that you haven't received any cancellations, but.
Homeowners are thought to be saying, let's let's kind of wait wait this out and maybe a week.
Not a week, but maybe a month or two or something is that or just generally as wait it out yeah. Just waited out until we yeah. We're just waited out until we have better clarity or hotel.
How much do you think it Ramsey.
Revenue could be.
HM down.
In Q1 versus I think look back to Q1 of last year.
I'm guessing you actually had.
Good January and maybe even good February Oh, because I think there's very little ran and so.
On the country.
Iran is born in California. So do you think your flattish year over year or.
And that segment or do you think you'll you'll be on even.
During Q1 year over year.
Yeah I think.
Last year in 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 thats going to probably keep us a little bit below though.
Elected to give any specific guidance yet for Q1 or Q2, but I think the three nine would be might be hard to get too.
Got it okay.
Hi.
That's helpful. Thank you.
And then or.
When you.
Talk to yours. So when you look at Cnine [laughter] and public works.
You expect to eventually come up to that a permitting.
Roadblock, if you will you know the lack of the ability to get the permit and the lack of the ability to get certain approvals that will just stop projects and that tracks or what's your sense, a perhaps she and I evolves in the coming.
Okay.
Yeah, we've been.
We've been experiencing utility delays and been frustrated by utility delays.
Much of 19, and certainly in Q4 and Thats one of the reasons why our Q4 revenue was lower than what we expected. It's just the ability to get.
Get the utilities to give us approval.
So I don't see any reason why that's going to get any better in the near term now Fortunately.
When the when the jobs or the approvals get delayed into Q4 were higher up in the Q.
For Q1 click starts to you know you get you get kind of the ones that you expect into Q4, you'll get in Q1.
But.
It 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 you're correct 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 and my sense is with.
Asia, mostly back up and running.
Especially China.
That you probably have.
Sufficient product at this point or do you are you've been getting so much so you need to turn product away.
Maybe talk through the inventory 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 onsite already or product on site, where we have them already procured and in our warehouse.
There are some for the second half of the year, where we.
We have purchase orders, but we don't have the product yet and that's of concern a little bit as you know accompany our size can often be.
I 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 had an approved purchase order if we don't have the inventory.
But for the first half of the year, even with the even as it as after.
The current a virus 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 that it might be a different story, but that's not at all the concerns that we have resulting from the current a virus thats not at the top of our list what what has been more concerned is the.
Dramatic slowdown in new sales. So I mentioned that we had a terrific fourth quarter $21 million and new sales.
And.
With the projects that we had our pipeline that was optimistic about a good first quarter I didnt expected to be maybe not the 21 million, but I thought it would be better that now in the month of March.
It's just it's just hard to get customers, whether its residential or commercial.
To make commitments in the throws of such uncertainty I believe that as we find a new normal whenever that will be and it will probably in the new normal we'll probably have.
At least the threat of recession, and perhaps the surety of recession frequently the sales calls have a little bit more urgency in a little bit more attractiveness. When you can talk about how a business for a company or a person I can get a return on their investment and lower their costs in a time when they're worried about.
What about the overall economics effects in a recession so.
Big.
Big drop off now in terms of new sales and hopefully we can get to a new normal and gets gift that accelerated.
Endpoints soon.
You see.
Right at the end of the title.
Just for a.
We are celebration of bookings or do you do you expect a Q2.
To be weak across the board and then.
What what's the chance that spills into Q3.
Yeah from where we sit today, I think and I had no better crystal ball than anybody else that.
With the extension of the of the lock down or 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 a reluctance as long as the government is saying we're not sure for the month of April will be difficult for individuals to say open I'm sure and saw a place that order so.
Thats going to get us probably in the at least half of the quarter. So again.
My expectation is from a revenue in a backlog perspective, we should be able to perform but new sales.
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.
You know are there any covenants associated with their notes that can be trip and and how would you anticipate managing through that situation.
Yes, the yen that.
As you know that the debt we have is the the crowd out note.
Which we paid off half of the senior secured so that took from 3 million down to 1.5, and then there's another 750 of subordinated debt on top of that's where the 2.25 and it's very covenant Lite.
So there is.
So there's no covenants that we were worried about it.
Clearly, we wouldn't have been able to conclude the audit and file the K. If there were covenant concerns that they had to be worked through so we got full buyout from the auditors on on the debt than our compliance.
Okay. Thanks, Chuck and then as it relates to liquidity.
Can you just talk through your situation.
You know what kind of working capital needs.
Right you have it seems like you have the material on.
In the warehouses for the first half the year, but.
What are you talk through.
Sure cash from operation expectations.
And.
What the other sources of liquidity might be.
Sure.
So we.
As you can imagine in 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 in reviewing our cash weekly.
I have a.
Just we've now begun to have a weekly call with our board of directors, where we where we go through the cash outlook.
Huh.
We 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 will 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.
That $500000 a month of savings that we put in place just over the last couple of weeks, So we'll get where hyper sensitive to the cash position has 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.
And the way that we are.
And then I'm optimistic about the our ability to access alone.
From the stimulus program.
And alone on very favorable terms and some of that forgivable. So we're as I said, so as I said earlier I have already been in conversation with the bank in fact, while we've been on this call I got to follow on call from our banker that I'll return when we get up this phone so I feel good about our place in line and that net access.
After that I don't know yet what the size would be or what the terms would be or what's 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 off from here. Thanks.
You're welcome Thank you Phil.
Thank you we reached the end of our question and answer session I'd like to turn the call back over to Mr. carbajal for any closing remarks.
Thank you very much.
We're never able to predict when a crisis will occur.
Particularly one like depend demick 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.
To look for a silver lining and in our case I think the silver lining this 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 breakeven point and become profitable at a lower level of sales revenue and sooner and this recovery period.
The second as 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 Ftn K 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 and have a wonderful guy.