The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements as of and for the three and nine months ended
September 30, 2019 and September 30, 2018 and related notes included in Part 1,
Item 1 of this Quarterly Report on Form 10-Q. The following discussion and
analysis should also be read together with our audited consolidated financial
statements and related notes for the year ended December 31, 2018.
Forward-Looking Statements
This discussion and analysis contains forward-looking statements about our plans
and expectations of what may happen in the future. Forward-looking statements
are based on a number of assumptions and estimates that are inherently subject
to significant risks and uncertainties, and our actual results could differ
materially from the results anticipated by our forward-looking statements. Our
future results and financial condition may also differ materially from those
that we currently anticipate as a result of the factors described in the
sections entitled "Risk Factors" in the filings that we make with the U.S.
Securities and Exchange Commission (the "SEC"). Throughout this section, unless
otherwise noted, "we," "us," "our" and the "Company" refer to The Peck Company
Holdings, Inc.
Business Introduction / Overview
The Peck Company Holdings, Inc., the principal office of which is located in
Burlington, Vermont, is one of the largest commercial solar engineering,
procurement and construction ("EPC") companies in the country and is expanding
across the Northeastern United States ("U.S."). The Company is a
second-generation family business founded under the name Peck Electric Co.
("Peck Electric") in 1972 as a traditional electrical contractor. The Company's
core values are to align people, purpose, and profitability, and since taking
leadership in 1994, Jeffrey Peck, the Company's Chief Executive Officer, has
applied such core values to expand into the solar industry. Today, the Company
is guided by the mission to facilitate the reduction of carbon emissions through
the expansion of clean, renewable energy and we believe that leveraging such
core values to deploy resources toward profitable business is the only
sustainable strategy to achieve these objectives.
The world recognizes the need to transition to a reliable, renewable energy grid
in the next 50 years. Vermont and Hawaii are leading the way in the U.S. with
renewable energy goals of 75% by 2032 and 100% by 2045, respectively. California
committed to 100% carbon-free energy by 2045. The majority of the other states
in the U.S. also have renewable energy goals regardless of current Federal solar
policy. We are a member of Renewable Energy Vermont, an organization that
advocates for clean, practical and renewable solar energy. The Company intends
to use near-term incentives to take advantage of long-term, sustainable energy
transformation with a commitment to the environment and to its shareholders. Our
triple bottom line, which is geared towards people, environment, and profit, has
always been our guide since we began installing renewable energy and we intend
that it remain our guide over the next 50 years as we construct our energy
future.
After installing more than 125 megawatts of solar energy, we believe that we are
well-positioned for what we believe to be the coming transformation to an all
renewable energy economy. As a result of the completion of our business
combination transaction with Jensyn Acquisition Corp. ("Jensyn") on June 20,
2019, pursuant to which we acquired Peck Electric Co. (the "Merger"), we have
now opened our family company to the public market as part of our strategic
growth plan. We are expanding across the Northeastern U.S. to serve the
fast-growing demand for clean renewable energy. We are open to partnering with
others to accelerate our growth process, and we are expanding our portfolio of
company-owned solar arrays to establish recurring revenue streams for many years
to come. We have established a leading presence in the market after five decades
of successfully serving our customers, and we are now ready for new
opportunities and the next five decades of success.
We have a three-pronged growth strategy that includes (1) organic expansion
across the Northeastern United States, (2) conducting accretive merger and
acquisition transactions to expand geographically, and (3) investing into
company-owned solar assets.
Equity and Ownership Structure
On June 20, 2019, Jensyn consummated the Recapitalization, which resulted in the
acquisition of 100% of the issued and outstanding equity securities of Peck
Electric by Jensyn, and in Peck Electric becoming a wholly-owned subsidiary of
Jensyn. Jensyn was originally incorporated as a special purpose acquisition
company, formed for the purpose of entering into a merger, share exchange, asset
acquisition, stock purchase, recapitalization, reorganization or other similar
Recapitalization. Simultaneously with the Merger, we changed our name to "The
Peck Company Holdings, Inc." We conduct all of our business operations
exclusively through our wholly-owned subsidiary, Peck Electric. Unless the
context otherwise requires, "we," "us," "our" and the "Company" refers to The
Peck Company Holdings, Inc. and its subsidiaries after June 20, 2019, and "Peck
Electric" refers to the business of Peck Electric before June 20, 2019.
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Critical Accounting Policies
The following discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include estimates
used to review the Company's, impairments and estimations of long-lived assets,
revenue recognition on percentage of completion type contracts, allowances for
uncollectible accounts, valuations of non-cash capital stock issuances and the
valuation allowance on deferred tax assets. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable in the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition
Revenue from fixed-price and modified fixed-price contracts is recognized on the
basis of the Company's estimates of the percentage of completion of individual
contracts, measured by the percentage of costs incurred to date to estimated
total costs for each contract. Revenue for individual contracts uncompleted at
the end of any period is based on the Company's estimate of the
percentage-of-completion applied to total revenue estimated to be realized from
the contract. At the time a loss on a contract becomes apparent, a provision is
made for the entire amount of the estimated loss. Revenue for time and materials
contracts is recognized currently as the work is performed.
Revisions in cost and profit estimates, during the course of the contract, are
reflected in the accounting period in which the facts, which require the
revision, become known. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
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Contract assets represent revenues recognized in excess of amounts billed on
contracts in progress. Contract liabilities represent billings in excess of
revenues recognized on contracts in progress.
Union Labor
The Company uses union labor in order to construct and maintain the solar,
electric and data work that comprise the core activities of its business. As
such, contributions were made by Company to the National Joint Apprenticeship
and Training Committee, the National Electrical Benefit Funds, Union Pension
Plans and a union Health and Welfare Fund. Each employee contributes monthly to
the International Brotherhood of Electrical Workers, contract expires May 31,
2022.
The Company's management believes that access to unionized labor provides a
unique advantage for growth, because workforce resources can be scaled
efficiently utilizing labor unions in other states to meet specific project
needs in other states without substantially increasing fixed costs for the
Company.
Business Insurance / Captive Insurance Group
In 2018, Peck Electric joined a captive insurance group. The Company's
management believes that belonging to a captive insurance group will stabilize
business insurance expenses and will lock in lower rates that are not subject to
change from year-to-year and instead are based on the Company's favorable
experience modification rate.
Revenue Drivers
The Company's business includes the design and construction of solar arrays for
its customers. Revenue is recognized for each construction project on a
percentage of completion basis. From time to time, the Company constructs solar
arrays for its own account or purchases a solar array that must still be
constructed. In these instances, no revenue is recognized for the construction
of the solar array. In instances where the Company owns the solar array, revenue
is recognized for the sale of the electricity generated to third parties. As a
result, depending on whether it is building for others or for its own account,
the Company's revenue is subject to significant variation.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2018
REVENUE AND COST OF GOODS SOLD
Consolidated revenue for the three months ended September 30, 2019 increased
194% to $11.7 million, compared to $3.9 million in the corresponding period in
2018.
Gross profit increased 30.2% to $1.4 million for the three months ended
September 30, 2019, compared to $1.1 million in the corresponding period in
2018. Gross margin as a percentage of sales was 12.30% for the three months
ended September 30, 2019, compared to 27.7% in the corresponding period in 2018.
Lower gross margin for the three months ended September 30, 2019 was the result
of increased material costs driven by market demand in the quarter during the
Company's peak season.
Total operating expenses for the three months ended September 30, 2019 were
$1.26 million, or 10.7% of sales, compared to $0.6 million in the corresponding
period in 2018, or 14.1% of sales. The increase in operating expenses for the
three months ended September 30, 2019 was the result of higher depreciation
relating to equipment and solar arrays, of which the majority was placed into
service for the three months ended September 30, 2019.
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Income taxes for the three months ended September 30, 2019 were $48,468 compared
to the corresponding period of $250 in 2018.
Backlog for the three months ended September 30, 2019 was $16 million, compared
to the corresponding period in 2018 of $9.25 The Company expects to realize
nearly all of the backlog within the next 12 months.
SELLING AND MARKETING EXPENSES
The Company relies on referrals from customers and on its industry reputation,
and therefore has not historically budgeted for selling and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative ("G&A") expenses were $967,196 for the three
months ended September 30, 2019, compared to $380,153 for the three months ended
September 30, 2018. As a percentage of revenue, G&A expenses decreased slightly
to 8.2% of revenue in the three months ended September 30, 2019, compared to
9.5% in the three months ended September 30, 2018. In total dollars, G&A expense
increased primarily due to activities related to administrative expenses costs
of becoming a public company as well as supporting infrastructure expansion in
the three months ended September 30, 2019, compared to the three months ended
September 30, 2018.
DEPRECIATION AND AMORTIZATION
Depreciation expenses for the three months ended September 30, 2019 were
$155,169, compared to $96,329 for the three months ended September 30, 2018.
Depreciation expenses increased primarily due to the purchase of additional
equipment for the construction of the Company's solar array assets compared to
the three months ended September 30, 2018.
OTHER EXPENSES
Warehousing and other operating expenses were $294,154 for the three months
ended September 30, 2019, compared to $182,193 for the three months ended
September 30, 2018. Warehousing and other operating expenses include
Company-owned solar array depreciation and salaries associated with
Company-owned solar arrays, general warehousing costs, project-related travel
and performance related expenses.
NET INCOME
The net income for the three months ended September 30, 2019 was $76,155,
compared to a net profit of $496,932 for the three months ended September 30,
2018. The change was primarily due to a lower profit margin generated as a
result of purchasing the development rights for several future projects.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2018
REVENUE AND COST OF GOODS SOLD
Consolidated revenue for the nine months ended September 30, 2019 increased 68%
to $21.9 million, compared to $13.0 million in the corresponding period in 2018.
Gross profit increased 28% to $4.0 million for the nine months ended September
30, 2019, compared to $3.1 million in the corresponding period in 2018. Gross
margin as a percentage of sales was 18.4%, compared to 24.1% in the
corresponding period in 2018. Lower gross margin in the period was the result of
increased material costs driven by market demand during the third quarter during
the Company's peak season.
Total operating expenses in the nine months ended September 30, 2019 were $3.0
million, or 13.8% of sales, compared to $1.8 million in the corresponding period
in 2018, or 13.5% of sales. The increase in operating expenses was the result of
higher depreciation relating to equipment and solar arrays, of which the
majority was placed into service in the second quarter of 2019.
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SELLING AND MARKETING EXPENSES
The Company relies on referrals from customers and on its industry reputation,
and therefore has not historically budgeted for selling and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
Total G&A expenses were $2.0 million for the nine months ended September 30,
2019, compared to $1.2 million in the corresponding period in 2018. As a
percentage of revenue, G&A expenses decreased slightly to 9.1% of revenue in the
nine months ended September 30, 2019, compared to 9.4% in the nine months ended
September 30, 2018. In total dollars, G&A expense increased primarily due to
activities related to administrative expenses and costs of becoming a public
company as well as supporting infrastructure expansion in the nine months ended
September 30, 2019, compared to the nine months ended September 30, 2018.
DEPRECIATION AND AMORTIZATION
Depreciation expenses for the nine months ended September 30, 2019 were
$466,222, compared to $296,125 for the nine months ended September 30, 2018.
Depreciation expenses increased primarily due to the purchase of additional
equipment for the construction of the Company's solar array assets compared to
the nine months ended September 30, 2018.
OTHER EXPENSES
Warehousing and other operating expenses were $1.0 million for the nine months
ended September 30, 2019, compared to $0.5 million for the nine months ended
September 30, 2018. Warehousing and other operating expenses include
Company-owned solar array depreciation and salaries associated with
Company-owned solar arrays, general warehousing costs, project-related travel
and performance related expenses.
NET INCOME
The net loss for the nine months ended September 30, 2019 was $0.7 million,
compared to a net income of $1.3 million for the nine months ended September 30,
2018. The change was primarily due to the provision for income taxes required
after the Company's change from an S-corporation to a C-corporation as part of
the Merger. In addition, the Company has purchased the development rights for
several future projects and continues to evaluate the use in alignment with its
short and long term strategy.
Certain Non-GAAP Measures
We periodically review the following key non-GAAP measures to evaluate our
business and trends, measure our performance, prepare financial projections and
make strategic decisions.
EBITDA, Adjusted EBITDA and Earnout Adjusted EBITDA
Included in this presentation are discussions and reconciliations of earnings
before interest, income tax and depreciation and amortization ("EBITDA") and
EBITDA adjusted for certain non-cash, non-recurring or non-core expenses
("Adjusted EBITDA") to net income in accordance with GAAP. Adjusted EBITDA
excludes certain non-cash and other expenses, certain legal services costs,
professional and consulting fees and expenses, and one-time Merger expenses and
certain adjustments. We believe that these non-GAAP measures illustrate the
underlying financial and business trends relating to our results of operations
and comparability between current and prior periods. We also use these non-GAAP
measures to establish and monitor operational goals.
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These non-GAAP measures are not in accordance with, or an alternative to, GAAP
and should be considered in addition to, and not as a substitute or superior to,
the other measures of financial performance prepared in accordance with GAAP.
Using only the non-GAAP financial measures, particularly Adjusted EBITDA, to
analyze our performance would have material limitations because such
calculations are based on a subjective determination regarding the nature and
classification of events and circumstances that investors may find significant.
We compensate for these limitations by presenting both the GAAP and non-GAAP
measures of our operating results. Although other companies may report measures
entitled "Adjusted EBITDA" or similar in nature, numerous methods may exist for
calculating a company's Adjusted EBITDA or similar measures. As a result, the
methods that we use to calculate Adjusted EBITDA may differ from the methods
used by other companies to calculate their non-GAAP measures.
The reconciliations of EBITDA, Adjusted EBITDA to net (loss) income, the most
directly comparable financial measure calculated and presented in accordance
with GAAP, are shown in the table below:
Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Net income (loss) $ 76,155 $ 496,932 $ (697,909 ) $ 1,288,975
Depreciation and amortization 155,169 96,329 466,222 296,125
Other (income) expense, net 54,671 46,785 158,217 91,639
Income Tax 48,468 0 1,555,330 250
EBITDA 334,643 640,046 1,481,860 1,676,989
Other costs 78,388 0 243,819 0
Adjusted EBITDA 413,031 640,046 1,725,679 1,676,989
Weighted Average shares outstanding 5,474,695 3,234,501 4,071,497 3,234,501
Adjusted EPS 0.08 0.20 0.42 0.52
Other costs consist of one-time expenses of financial audits and other legal and
professional fees associated with the Merger.
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LIQUIDITY AND CAPITAL RESOURCES
The Company had $28,700 in cash at September 30, 2019, as compared to $313,217
at December 31, 2018.
As of September 30, 2019, The Company's working capital deficit was $76,693,
compared to a working capital deficit of $276,258 at December 31, 2018. The
Company believes that the aggregate of its existing cash and cash equivalents
will be sufficient to meet its operating cash requirements for at least the next
12 months.
Certain of the Company's loan agreements contain a clause requiring lender
approval for changes to the guarantor under such agreements. If this clause is
implicated, such lenders may require outstanding indebtedness to become
immediately due.
Cash flow used in operating activities was $3,590,369 for the nine months ended
September 30, 2019, compared to $596,087 of cash provided by operating
activities in the nine months ended September 30, 2018. The decrease in cash
provided by operating activities was primarily the result of the increase in
accounts receivable of approximately $5.1 million and the increase in costs and
estimated earnings in excess of billings of $2.7 million, offset by the net loss
and increase in accounts payable.
Net cash used in investing activities was $142,295 for the nine months ended
September 30, 2019, compared to $2,880,381 used in the nine months ended
September 30, 2018. This decrease was primarily related to the decreased
construction activity relating to Company-owned solar array assets. For the nine
months ending September 30, 2018, there were two 500 kilowatt solar development
projects which incurred costs. One of the projects began in 2017 and was
completed in the first quarter of 2018, incurring $550,506 of development costs.
The second 500 kilowatt solar development project began in the first quarter of
2018 and was completed in the second quarter of 2018 and incurred $875,000 of
development costs in the first quarter of 2018. There were also $2,041 of small
equipment purchases in the first quarter of 2018, for a total of $1,427,547 of
capitalized solar development costs and equipment purchases. There were no
capitalized solar development costs in the first three quarters of 2019, as
there were no owned solar projects under construction. There were $39,243 of
small equipment purchases in the first nine months of 2019.
Net cash provided by financing activities was $3,448,147 for the nine months
ended September 30, 2019 compared to $1,741,867 for the nine months ended
September 30, 2018. Cash provided by financing activities in the first three
quarters of 2019 consisted of funds received as proceeds from line of credit
increase and was partially offset by principal payments for equipment notes.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably
likely to have a current or future effect on its financial condition, revenues,
results of operations, liquidity, or capital expenditures.
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THE PECK COMPANY HOLDINGS, INC. 
