SunWorks Inc (SUNWQ)

[Intotheblack]

Acquisitions Are Coming For Solar3D (NASDAQ:SLTD)

At present, Solar3D (NASDAQ: OTC:SLTD) is not a household name. You probably haven't heard of their current two wholly owned subsidiaries either Solar United Networks, AKA SUNworks, or MD Energy. Slowly however, word is spreading on the street. There is a new player in the solar integration business, and they do mean business. Earlier this year, Solar3D achieved what many companies only dream of, being listed on the NASDAQ stock exchange. CEO Jim Nelson decided the move was necessary to bring increased liquidity, credibility and exposure to the company, as well as bring in cheaper financing for the road ahead.

Nelson, who's credentials include over 20 years of private equity experience including but not limited to Bain Capital as well as marketing for Banana Republic recently worked with Cowen and Company, completing a public offering for $12.5 million. According to Nelson, almost all of the proceeds of this offering are anticipated to be used to further Solar3D's "Growth by Acquisition" strategy, which is the company's present focus. The most recent 10-K stated,"Our acquisition candidates primarily consist of small independent companies that generate between $10 million to $30 million of revenues profitably".

According to a recent PR's, "Solar3D's growth plan is to continue to consolidate the fragmented California and Nevada solar market, which is estimated to continue experiencing growth due to increased demand for solar power among residential and commercial customers. Historically, the Company has funded acquisitions using a combination of cash and convertible notes, a strategy attractive to Solar3D and its shareholders, as well as the acquired companies. This structure offers equity upside, while creating incentives for retained management teams to drive further growth, thus aligning with the objectives of each stakeholder." "The Company has also provided 2015 guidance for revenue ranging from $40 million to $45 million compared to $20.2 million in 2014. Management expects to generate positive EBITDA in 2015 and has earmarked a portion for continued strengthening of balance sheet in addition to overall financial metrics."

Prior to the acquisition strategy, the company was focused on the development of proprietary photovoltaic cells (PV Solar cells). Nelson worked with University of California Santa Barbara and his technology team, Nadir Dagli, Ph.D., and Changwan Son, Ph.D., submitting international patents for the technology in 2013, being followed up by national patent applications in the US, China, Singapore and India. There has been somewhat of a lack of communication on the technology side of the business since the patent applications, however, Nelson is continuously speaking to cell manufacturers in attempt to license the technology.

Should he be able to capitalize on an additional revenue stream from licensing the "3D" cell, the company would transform into a hybrid, integrator/technology business. The rewards of licensing the technology would not only reduce total cost of ownership, further incentivizing customers to "purchase" their systems outright as the sales model Solar3D boasts, but also increases the profit margin through vertical integration. The cell technology however, is viewed by some as completely priced out of the stock. A quick glance at the chart shows that the financials, as well as acquisitions moves the ticker, not "cell news".

(click to enlarge)

One thing to remember though is that technology and patents can creep up on investors and licensing deals can appear to come out of the clear blue sky. Just because we aren't seeing it or hearing it, doesn't mean it's not happening in the background.

In January 2014 Nelson completed the first integrator acquisition of Roseville based SUNworks. By November of the same year they had entered into a definitive agreement to purchase their second installer, MD Energy. In early 2015, after just 11 months on the books the 10-K shows Solar3D posted annual sales of 20.1 mil. As the MD Energy deal just closed in late February 2015, only a single month of revenue will reflect on the first quarters books. The solar industry in the US shows regular seasonably light first quarter numbers across the board, therefore SLTD may be light as well even while showing "record" increases year over year. However the year doesn't appear to be starting off too slowly for Solar3D, "during the month of March SUNworks generated new residential sales of over $2.1 million", and also in March, "announced that its MD Energy subsidiary has secured a $2.4 million contract from the Rancho Mirage Public Library".

If MD Energy continues to produce increases under Nelson similar to SUNworks, 2015 will not only be another record breaking year, but set a precedence of explosive growth that will be very rewarding for investors if it can be maintained. In order to assist in this growth, the Solar3D investor relations presentation listed on their website mentions a new "Enterprise management system" being implemented in 2015 for more efficient integration of acquisitions.

Consolidating the "fragmented" market is a good thing, what is great about it is the companies so far have been sought out by Nelson for their profitability and integrity. Profits are something of a rare breed in the larger solar names, SolarCity (NASDAQ: SCTY) and Vivint Solar (NASDAQ: VSLR) all are burning cash for the foreseeable future in hopes that all these tiny lease payments will continue to trickle in over a couple decades. These non-profitable lease based entities also rely heavily on government subsidies, which could potentially be phased out in the near term future depending on the political tides. This is in stark contrast with Solar3D's profitable sales approach that neither relies on the government hand-outs, nor worries about the never ending decreasing cost of solar power. The cheaper solar power becomes, not only does the Solar3D sales model become more and more attractive and affordable to the average customer, leasing becomes less attractive.

As system costs drop, the subsidies will eventually be phased out, creating a tailwind for Solar3D while putting more pressure on the giants top and bottom line. Solar3d's revenue should increase on par percentage wise with the leasing models though as the industry is just beginning to bloom and customers are lining up in California and Nevada.

Putting more boots on the ground, the company recently added Tracy Welch as Chief Financial Officer to the team. According to a recent Newsletter from the company, "Mr. Welch has held CFO and Treasurer roles in several large companies, including multi-billion dollar energy companies KN Energy and Smith International. His experience in identifying, financing and integrating over 35 M&A transactions ranging from $10 million to $500 million makes him the ideal CFO for Solar3D."

Even more recently, the company brought on Brigham Tomco as the newest member of its Board of Directors. The company states, "Mr. Tomco previously served as the Chairman and Founder of Zylun Global, a private equity backed investment holding company. His experience also includes positions with Ocean Road Advisors and Meyer Ventures, an $800+ million portfolio." Zylun, Tomco's startup was so successful the company had over 500 employees in its first year of operation. In a single month the company hired 200 people. This sounds like the "aggressive" growth strategy Nelson is pursuing.

After two successful acquisitions prior to uplisting to NASDAQ, a third while on the senior exchange using proceeds from the recent offering will not only validate the strategy, but show that this company is expanding even faster than the rest of the industry. Capitalizing on the vast experience the new team members bring to the table to successfully implement such rapid growth, Welch with his dozens of acquisitions, and Tomco with his amazing team building, it's clearly only a matter of time before Nelson realizes his own ambitions of being the next powerhouse in the solar industry via Solar3D and it's strategically acquired subsidiaries.

Disclosure: The author is long SLTD, CSIQ, RGSE, ASTI.


Source:
http://seekingalpha.com/instablog/10941931-mooonshine199/3951016-acquisitions-are-coming-for-solar3d-nasdaq-sltd