NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH
31, 2019
(in
thousands, except share and per share data)
References
herein to “we,” “us,” “Sunworks,” and “the Company” are to Sunworks, Inc. and
its wholly-owned subsidiaries Sunworks United, Inc. (“Sunworks United”), MD Energy, Inc. (“MD Energy”),
and Elite Solar Acquisition Sub, Inc. (“Elite Solar”).
1.
BASIS OF PRESENTATION
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of
management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results
for the three months March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December
31, 2019. The financial statements should be read in conjunction with the audited financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting
policies of the Company is presented to assist in understanding the Company’s financial statements. These accounting
policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and have
been consistently applied in the preparation of the financial statements.
There have been no significant
changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended
December 31, 2018, except for the policies described below in relation to the adoption of Accounting Standards Update (“ASU”)
2016-02,
Leases (Topic 842),
discussed below in the section titled “
Accounting Pronouncements Recently Adopted
.”
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries,
Sunworks United, Inc. (d/b/a Sunworks United), MD Energy, Inc., and Elite Solar Acquisition Sub, Inc. All material intercompany
transactions have been eliminated upon consolidation of these entities.
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. Actual results could differ from those estimates. Significant estimates
include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition
on construction contracts, allowances for uncollectible accounts, operating lease right-of-use-assets and liabilities,
warranty reserves, inventory valuation, debt beneficial conversion features, 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
Revenues
and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in
accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606,
revenue and associated profit, will be recognized as the customer obtains control of the goods and services promised in the contract
(i.e., performance obligations). The cost of uninstalled materials or equipment will generally be excluded from our recognition
of profit, unless specifically produced or manufactured for a project, because such costs are not considered to be a measure of
progress. All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred.
However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined.
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.
Accounts
Receivables
Accounts
receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are
collectible upon completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts
currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion
of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs.
Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of $847 and $1,234
were included in the balance of trade accounts receivable as of March 31, 2019, and December 31, 2018, respectively.
The
Company performs ongoing credit evaluation of its customers. Management monitors outstanding receivables based on factors surrounding
the credit risk of specific customers, historical trends, age of receivables and other information, and records bad debts using
the allowance method. Accounts receivable are presented net of an allowance for doubtful accounts of $325 at March 31, 2019, and
$325 at December 31, 2018. During the three months ended March 31, 2019 and 2018, $23 and $11 was recorded as bad debt
expense, respectively.
Customer
Deposits
Customer
deposits are recorded for funds remitted by our customers in advance of progress billings being completed.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted
Cash
The
Company considers restricted cash to be cash balances that have legal and/or contractual restrictions imposed by a third party
and are restricted as to withdrawal or use except for the specified purpose.
Concentration
Risk
Cash
includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (FDIC) limits.
At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of
March 31, 2019, the cash balance in excess of the FDIC limits was $1,434. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk in these accounts.
Inventory
Inventory
is valued at the lower of cost or market and is determined by the first-in, first-out method. Inventory primarily consists of
panels, inverters, and mounting racks and other materials. The Company also carries a reserve for inventory obsolescence that
may arise from technological advancement or changes in government regulation. Inventory is presented net of an allowance of $50
at March 31, 2019, and $50 at December 31, 2018.
Property
and Equipment
Property and equipment are stated
at cost. Depreciation for property and equipment commences when property and equipment are put into service and are depreciated
using the straight-line method over the property and equipment’s estimated useful lives:
|
Machinery
& equipment
|
3-7 Years
|
|
Furniture &
fixtures
|
5-7 Years
|
|
Computer equipment
|
3-5 Years
|
|
Vehicles
|
5-7 Years
|
|
Leaseholder improvements
|
3-5 Years
|
Depreciation
expense for the three months ended March 31, 2019 and 2018 was $92 and $95, respectively.
Leases
The
Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and
short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet. If the Company
had finance lease ROU assets, such assets would be presented within other assets, and finance lease liabilities would be
presented as appropriates.
ROU
assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation
to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date
based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit
rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the
present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms
may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements
with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less
than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and it recognizes such lease
payments on a straight-line basis over the lease term.
Advertising
and Marketing
The
Company expenses advertising and marketing costs as incurred. Advertising and marketing costs include primarily printed material,
sponsorships, tradeshow costs, magazine, and catalog advertisement. Included within selling and marketing expenses are advertising
and marketing costs for the three months ended March 31, 2019 and 2018 of $43 and $84, respectively.
Warranty
Liability
The
Company establishes warranty liability reserves to provide for estimated future expenses as a result of installation and product
defects, product recalls and litigation incidental to the Company’s business. Liability estimates are determined based on
management’s judgment, considering such factors as historical experience, the likely current cost of corrective action,
manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, and consultations with
third party experts such as engineers. Solar panel manufacturers currently provide substantial warranties between ten to twenty-five
years with full reimbursement to replace and install replacement panels while inverter manufacturers currently provide warranties
covering ten to fifteen-year replacement and installation. The warranty liability for estimated future warranty costs is $351
and $321 at March 31, 2019 and December 31, 2018, respectively.
Stock-Based
Compensation
The
Company periodically issues stock options and warrants to employees and non-employees. The Company accounts for stock option and
warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards
Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts
for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial
Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either
a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity
instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line
basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately
vested and the total stock-based compensation charge is recorded in the period of the measurement date.
Basic
and Diluted Net (Loss) per Share Calculations
(Loss)
per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed
by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings
per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares
were dilutive. The shares for employee options, restricted stock, warrants and convertible notes were not used in the calculation
of the net loss per share.
A
net loss causes all outstanding common stock options, warrants, convertible preferred stock, and convertible notes to be anti-dilutive.
As a result, the basic and diluted losses per common share are the same for the three months ended March 31, 2019 and 2018.
As
of March 31, 2019, the potentially dilutive securities that have been excluded from the computations of weighted average shares
outstanding include 952,500 stock options, 180,554 restricted stock grants, 2,997,000 warrants, and shares underlying convertible
notes.
As
of March 31, 2018, the potentially dilutive securities have been excluded from the computations of weighted average shares outstanding
include 1,633,155 stock options, 1,134,615 restricted stock grants, 2,997,000 warrants, shares underlying convertible notes and
preferred stock.
Dilutive
per share amounts are computed using the weighted-average number of common shares outstanding and potentially dilutive securities,
using the treasury stock method, if their effect would be dilutive.
Long-Lived
Assets
The
Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Indefinite
Lived Intangibles and Goodwill Assets
The
Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business
Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and
liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available,
and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset
valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the
tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill
The
Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events
or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance
with its policies, the Company performed a quantitative assessment of indefinite lived intangibles and goodwill at December 31,
2018. At December 31, 2018, the Company determined that the carrying amount of goodwill exceeded its fair value and, as a result,
recorded an impairment of $1,900.
Fair
Value of Financial Instruments
Disclosures
about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the
balance sheet, where it is practicable to estimate that value. As of March 31, 2019, the amounts reported for cash, accrued interest
and other expenses, and notes payable approximate the fair value because of their short maturities.
We account for financial instruments
measured as fair value on a recurring basis under ASC Topic 820. ASC Topic 820 defines fair value, established a framework for
measuring fair value in accordance with GAAP and expands disclosures about fair value measurements.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes
the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
These tiers include:
|
|
●
|
Level 1, defined
as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
|
|
|
|
●
|
Level 2, defined
as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices
for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active;
and
|
|
|
|
|
|
|
●
|
Level 3, defined
as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions,
such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers
are unobservable.
|
Business
Combinations
We
allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets
acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of
these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates
and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include,
but are not limited to, future expected cash flows from acquired customer lists, acquired technology, and trade names from a market
participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from
estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets
acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any
subsequent adjustments are recorded to earnings.
Income
Taxes
The
Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on
provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based
on the amount of tax benefits that, based on available evidence, is not expected to be realized.
Reclassifications
Certain
reclassifications have been made to prior year’s financial statement to conform to classifications used in the current year.
Segment
Reporting
Operating
segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly
by the chief operating decision maker, or decision making group, in deciding the method to allocate resources and assess performance.
The Company currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.
New
Accounting Pronouncements
In
January 2017, the Financial Accounting Standards Board (“FASB” issued ASU No. 2017-04, Simplifying
the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the
goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the
performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including
unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets
acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill
impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment
charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes
effective for the Company on January 1, 2020. The amendments in this ASU should be applied on a prospective basis. Early
adoption is permitted for interim or annual goodwill impairment tests performed. We are currently evaluating the impact ASU
No. 2017-04 will have on our consolidated financial statements and associated disclosures.
Adopted
Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, to increase transparency and comparability among organizations
by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months
and disclosing key information about leasing transactions. Leases are classified as either operating or financing, with such classification
affecting the pattern of expense recognition in the income statement. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic
842) - Targeted Improvements
, which provided an optional transition method to apply the new lease requirements through a cumulative-effect
adjustment in the period of adoption.
We
adopted ASU 2016-02 in the first quarter of 2019 using the optional transition method and elected certain practical expedients
permitted under the transition guidance, which, among other things, allowed us to not reassess prior conclusions related to contracts
containing leases or lease classification. The adoption primarily affected our condensed consolidated balance sheet through the
recognition of $2.1 million of right-of-use assets and $2.1 million of lease liabilities as of January 1, 2019. The adoption did
not have a significant impact on our results of operations or cash flows. See Note 4. “Leases” to our condensed consolidated
financial statements for further discussion of the effects of the adoption of ASU 2016-02 and the associated disclosures.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), to clarify the principles of recognizing
revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under
ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that
reflects the consideration expected to be received in exchange for such goods or services. In addition, ASC 606 requires disclosure
of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASC was effective
for fiscal years beginning after December 15, 2017. The Company has adopted ASC 606 beginning on January 1, 2018 using the modified
retrospective approach for contracts not substantially complete at that date by recognizing a cumulative adjustment to the opening
balance of accumulated deficit. See Note 3 for additional disclosures in accordance with the new revenue recognition standard.
Management
reviewed currently issued pronouncements during the three months ended March 31, 2019, and believes that any other recently issued,
but not yet effective, accounting standards, if currently adopted, would not have a material effect on the accompanying consolidated
financial statements.
3.
REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenues
and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in
accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized
as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). The cost of
uninstalled materials or equipment will generally be excluded from our recognition of profit, unless specifically produced or
manufactured for a project, because such costs are not considered to be a measure of progress.
The
following table represents a disaggregation of revenue by customer type from contracts with customers for the three months ended
March 31, 2019 and 2018:
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Agricultural, Commercial, and Industrial (ACI)
|
|
$
|
4,037
|
|
|
$
|
7,834
|
|
|
Public Works
|
|
|
1,318
|
|
|
|
1,565
|
|
|
Residential
|
|
|
3,913
|
|
|
|
4,048
|
|
|
Total
|
|
|
9,268
|
|
|
|
13,447
|
|
In
adopting ASC 606, we had the following significant changes in accounting principles:
(i)
Timing of revenue recognition for uninstalled material
s - We previously recognized the majority of our revenue from the installation
or construction of commercial & public works projects using the percentage-of-completion method of accounting, whereby revenue
is recognized as we progress on the contract. The percentage-of-completion for each project was determined on an actual cost-to-estimated
final cost basis. Under ASC 606, revenue and associated profit, is recognized as the customer obtains control of the goods and
services promised in the contract (i.e., performance obligations). The cost of uninstalled materials or equipment is generally
excluded from our recognition of profit, unless specifically produced or manufactured for a project, because such costs are not
considered to be a measure of progress.
(ii)
Completed contracts
- We previously recognized the majority of our revenue from the installation of residential projects using
the completed contract method of accounting whereby revenue was recognized when the project is completed. Under, ASC 606, revenue
is recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations).
Revenue
recognition for other sales arrangements such as the sales of materials will remain materially consistent.
The
adoption of the new revenue recognition standard resulted in a cumulative effect adjustment to retained earnings of approximately
$1,405 as of January 1, 2018. The details of this adjustment are summarized below.
|
|
|
Balance at
|
|
|
Adjustments
|
|
|
Balance at
|
|
|
|
|
December 31, 2017
|
|
|
Due to ASC 606
|
|
|
January 1, 2018
|
|
|
Contract assets
|
|
$
|
3,790
|
|
|
$
|
(584
|
)
|
|
$
|
3,206
|
|
|
Contract liabilities
|
|
|
7,288
|
|
|
|
821
|
|
|
|
8,109
|
|
|
Accumulated deficit
|
|
|
(56,365
|
)
|
|
|
(1,405
|
)
|
|
|
(57,770
|
)
|
The
following tables summarize the impact of the adoption of ASC 606 on our condensed consolidated statement of operations and condensed
consolidated balance sheet for the three months ended and as of March 31, 2018:
|
|
|
For the Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
Without Adoption
|
|
|
Impact of Adoption
|
|
|
|
|
As Reported
|
|
|
of ASC 606
|
|
|
of ASC 606
|
|
|
Revenue
|
|
$
|
13,447
|
|
|
$
|
12,686
|
|
|
$
|
(761
|
)
|
|
Cost of goods sold
|
|
|
11,036
|
|
|
|
10,454
|
|
|
|
(582
|
)
|
|
Gross profit
|
|
|
2,411
|
|
|
|
2,232
|
|
|
|
(179
|
)
|
|
|
|
March
31, 2018
|
|
|
|
|
|
|
|
Without
Adoption
|
|
|
Impact
of Adoption
|
|
|
|
|
As
Reported
|
|
|
of
ASC 606
|
|
|
of
ASC 606
|
|
|
Contract assets
|
|
$
|
3,716
|
|
|
$
|
5,525
|
|
|
$
|
1,809
|
|
|
Contract liabilities
|
|
|
4,805
|
|
|
|
4,318
|
|
|
|
(487
|
)
|
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. At March 31, 2019 and December 31, 2018, the contract asset balances
were $3,028 and $6,153, and the contract liability balances were $5,134 and $5,069, respectively.
4.
Leases
The
Company has operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining
lease terms of 1 year to 5 years, some of which include options to extend.
The
Company’s lease expense for the three months ended March 31, 2019 was entirely comprised of operating leases and amounted
to $299. Operating lease payments, which reduced operating cash flows for the three months ended March 31, 2019 amounted
to $299. The difference between the ROU asset amortization of $183 and the associated lease expense of $299
consists of interest and new vehicle and office equipment leases originated during the first three months of 2019.
Supplemental
balance sheet information related to leases was as follows:
|
|
|
March 31, 2019
|
|
|
|
|
(in thousands)
|
|
|
Operating lease right-of-use assets
|
|
$
|
1,970
|
|
|
|
|
|
|
|
|
Operating lease liabilities—short term
|
|
|
905
|
|
|
Operating lease liabilities—long term
|
|
|
1,065
|
|
|
Total operating lease liabilities
|
|
$
|
1,970
|
|
As
of March 31, 2019, the weighted average remaining lease term was 1.3 years and the discount rates for the Company’s leases
was 10.0%.
Maturities
for leases were as follows:
|
|
|
Operating Leases
|
|
|
|
|
(in thousands)
|
|
|
Remainder of 2019
|
|
$
|
790
|
|
|
2020
|
|
|
807
|
|
|
2021
|
|
|
565
|
|
|
2022
|
|
|
27
|
|
|
2023
|
|
|
5
|
|
|
Thereafter
|
|
|
-
|
|
|
Total lease payments
|
|
$
|
2,194
|
|
|
Less: imputed interest
|
|
|
224
|
|
|
Total
|
|
$
|
1,970
|
|
5.
LOANS PAYABLE
Plan
B, a subsidiary of the Company, entered into a business loan agreement, prior to being acquired by the Company, with Tri Counties
Bank dated March 14, 2014, in the original amount of $131 bearing interest at 4.95%. The loan agreement called for monthly payments
of $2 and matured on March 14, 2019 and was paid in full. Proceeds from the loan were used to purchase a pile driver and related
equipment and was secured by the equipment. At March 31, 2019, there is no remaining loan balance.
Plan
B entered into a business loan agreement prior to being acquired by the Company with Tri Counties Bank dated April 9, 2014, in
the original amount of $250 bearing interest at 4.95%. The loan agreement calls for monthly payments of $5, matured on April 9,
2019 and was paid in full. Proceeds from the loan were used to purchase racking inventory and related equipment. The loan was
secured by the inventory and equipment. The outstanding balance at March 31, 2019, was $4, prior to repayment.
On
January 5, 2016, the Company entered into a loan agreement for the acquisition of a pile driver in the principal amount of $182
bearing interest at 5.5%. The loan agreement calls for monthly payments of $4 and is scheduled to mature on January 15, 2020.
The loan is secured by the equipment. The outstanding balance at March 31, 2019, is $41.
On
September 8, 2016, the Company entered into a loan agreement for the acquisition of a pile driver in the principal amount of $174
bearing interest at 5.5%. The loan agreement calls for monthly payments of $4 and is scheduled to mature on September 15, 2020.
The loan is secured by the equipment. The outstanding balance at March 31, 2019, is $70.
On
November 14, 2016, the Company entered into a 0% interest loan agreement for the acquisition of an excavator in the principal
amount of $59. The loan agreement calls for monthly payments of $1 and is scheduled to mature on November 13, 2020. The loan is
secured by the equipment. The outstanding balance at March 31, 2019, is $24.
On
December 23, 2016, the Company entered into a loan agreement for the acquisition of modular office systems and related furniture
in the principal amount of $172 bearing interest at 4.99%. The loan agreement calls for 16 quarterly payments of $12 and is scheduled
to mature in September 2020. The loan is secured by the equipment. The outstanding balance at March 31, 2019, is $69.
As
of March 31, 2019 and December 31, 2018, loans payable are summarized as follows:
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Business loan agreement dated March 14, 2014
|
|
$
|
-
|
|
|
$
|
7
|
|
|
Business loan agreement dated April 9, 2014
|
|
|
4
|
|
|
|
19
|
|
|
Equipment notes payable
|
|
|
204
|
|
|
|
241
|
|
|
Subtotal
|
|
|
208
|
|
|
|
267
|
|
|
Less: Current position
|
|
|
(151
|
)
|
|
|
(179
|
)
|
|
Long-term position
|
|
$
|
57
|
|
|
$
|
88
|
|
6.
ACQUISITION CONVERTIBLE PROMISSORY NOTES
On
February 28, 2015, the Company issued a 4% convertible promissory note in the aggregate principal amount of $2,650 as part of
the consideration paid to acquire 100% of the total outstanding stock of MD Energy. The note was convertible into shares of common
stock on or after each of the following dates: November 30, 2015, November 30, 2016 and November 30, 2017. The conversion price
was $2.60 per share. A beneficial conversion feature of $3,262 was calculated but capped at the $2,650 value of the note. The
beneficial conversion feature was calculated by multiplying the difference between the fair value of stock at the date of the
note, $5.80, less the conversion price of $2.60 multiplied by the maximum number of share subject to conversion,
1,019,231. In November 2015, the Company issued 339,743 shares of common stock upon conversion of the principal amount of $883.
Commencing on March 31, 2015, and each quarter thereafter during the first two (2) years of the note, the Company made quarterly
interest only payments to the shareholder for accrued interest on the Note during the quarter. Commencing with the quarter ending
on June 30, 2017, the Company began to make quarterly payments of interest accrued on the convertible note during the prior quarter
plus $151 with the final payment of all outstanding principal and accrued but unpaid interest on the convertible note due and
payable on February 28, 2020 (the maturity date). The debt discount is fully amortized and has zero balance at December 31, 2018.
The Company recorded interest expense of $7 and $13 during the three months ended March 31, 2019 and 2018, respectively. The outstanding
balances at March 31, 2019 and December 31, 2018 were $707 and $858, respectively.
We
evaluated the foregoing financing transactions in accordance with ASC Topic 470,
Debt with Conversion and Other Options
,
and determined that the conversion feature of the convertible promissory note was afforded the exemption for conventional convertible
instruments due to its fixed conversion rate. The convertible promissory notes had explicit limits on the number of shares issuable,
so they did meet the conditions set forth in current accounting standards for equity classification. The convertible promissory
notes were issued with non-detachable conversion options that were beneficial to the investors at inception because the conversion
option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The accounting
for the beneficial conversion feature required that the beneficial conversion feature be recognized by allocating the intrinsic
value of the conversion option to additional paid-in-capital, resulting in a discount on the convertible notes, which was amortized
and recognized as interest expense.
7.
CONVERTIBLE PROMISSORY NOTES
On January 31, 2014, the Company
entered into a securities purchase agreement providing for the sale of a 10% convertible promissory note in the principal amount
of up to $750 for consideration of $750. The proceeds were restricted and were used for the purchase of Solar United Network,
Inc., now operating as Sunworks United. The note was convertible into shares of common stock of the Company at a price
equal to a variable conversion price equal to the lesser of $1.30 per share, or fifty percent (50%) of the lowest trading price
after the effective date. As of September 30, 2014, the note was exchanged for a new convertible note with a fixed conversion
price of $0.338. Per ASC 815, the derivative liability on the note was extinguished and the new note was re-valued per ASC 470
as a beneficial conversion feature, which was expensed in the statement of operations during 2014. The note originally matured
on October 28, 2014, was extended three months to January 31, 2015, was extended to September 30, 2016, and in March 2016 was
subsequently extended to June 30, 2019 with zero interest. During the year ended December 31, 2016, the noteholder made a partial
conversion of principal and accrued interest in the amount of $196 and $45 respectively in exchange for 711,586 shares of common
stock, with a remaining principal balance of $554. During the year ended December 31, 2017, the noteholder made a partial conversion
of principal in the amount of $505 in exchange for 1,494,083 shares of common stock, with a remaining principal balance of $49.
During the year ended December 31, 2018, the noteholder made a partial conversion of principal in the amount of $49 and accrued
interest of $69 in exchange for 349,112 shares of common stock, with a remaining principal balance of $0.
On
February 11, 2014, the Company entered into a securities purchase agreement providing for the sale of a 10% convertible promissory
note in the principal amount of $100. The note was convertible into shares of common stock of the Company at a price equal to
a variable conversion price equal to the lesser of $1.30 per share, or fifty percent (50%) of the lowest trading price after the
effective date. As of September 30, 2014, the note was exchanged for a new convertible note with a fixed conversion price of $0.338.
Per ASC 815, the derivative liability on the note was extinguished and the new note was re-valued per ASC 470 as a beneficial
conversion feature. The note matured on various dates from the effective date of each advance with respect to each advance. At
the sole discretion of the lender, the lender was able to modify the maturity date to be twelve (12) months from the effective
date of each advance. The note matured on various dates in 2014, and was extended to September 30, 2016, and in March 2016 was
subsequently extended to June 30, 2019 with zero interest. The Company recorded no interest since March 2016.
2
The
convertible promissory note balance at March 31, 2019 and December 31, 2018 is $100. On April 10, 2019, the note holder
converted the remaining $161 of principal plus accrued interest in exchange for 476,574 shares of common stock as more
fully described in Subsequent Events.
8.
PROMISSORY NOTES PAYABLE
On April 27, 2018, the Company
entered into a Loan Agreement (the “Loan Agreement”) with CrowdOut Capital, Inc. pursuant to which the Company issued
an aggregate of $3,750 in promissory notes (the “Notes”), of which $3,000 are Senior Notes and $750 are Subordinated
Notes (the “Promissory Notes Payable”). The Subordinated Notes were funded by the Company’s Chief Executive
Officer, Charles Cargile and the Company’s Vice President of Business Development, Kirk Short.
The
Notes bear interest at the rate of the one-month LIBOR plus 950 basis points and mature on June 30, 2020. The Notes may not be
prepaid before the first anniversary of issuance and thereafter may be prepaid in whole without the consent of the lender or in
part with the consent of the lender. In the event the Notes are prepaid in full prior to the maturity date, the Company shall
pay the holder of the Senior Notes an exit fee of $375 if prepaid prior to March 31, 2020 or $435 if prepaid after March 31, 2020
but prior to the maturity date. The Company is accruing the exit fee of $435 over life of the Loan Agreement and recognizing the
exit fee as interest expense. For the three months ended March 31, 2019, exit fee recorded as interest expense was $50.
In
connection with the issuance of the Senior Notes, the Company entered into a security agreement (the “Security Agreement”)
pursuant to which the Company granted to the holder of the Senior Notes a security interest in certain of the Company’s
assets to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the Senior
Notes. The Company also entered into a subordination agreement with the holders of the Subordinated Notes and the Senior Notes
pursuant to which the Subordinated Notes are subordinated to the Senior Notes.
The
Loan Agreement contains certain customary Events of Default including, but not limited to, default in payment of any sum payable
thereunder, breaches of representations or warranties thereunder, the occurrence of an event of default under the transaction
documents, change in control of the Company, filing of bankruptcy and the entering or filing of certain monetary judgments against
the Company. Upon the occurrence of an Event of Default the outstanding principal amount of the Notes, plus accrued but unpaid
interest and other amounts owing in respect thereof, shall become, at the giving of notice by Lender, immediately due and payable.
Interest on overdue payments upon the occurrence of an Event of Default shall accrue interest at a rate equal to the lesser of
18% per annum or the maximum rate permitted under applicable law. The Company has obtained a waiver through September 16, 2019
for an event of default which is deemed to have occurred because of the Company’s failure to maintain compliance with the
Nasdaq Stock Market’s minimum bid price requirement. Additionally, the Loan Agreement includes a subjective acceleration
clause if a “material adverse effect” occurs in our business that could result in an Event of Default. We believe
that the likelihood of the lender exercising this right is remote and have classified the debt as long term.
In
conjunction with the Loan Agreement, the Company recorded $118 of capitalized debt issuance costs. The debt issuance costs are
being amortized over the life of the Loan Agreement and recognized as interest expense. The Note payable balance is reported net
of the unamortized portion of the debt issuance costs. The Company recorded amortization of the debt issuance cost of $13 as interest
expense during the three months ended March 31, 2019.
Promissory
notes payable at March 31, 2019 and December 31, 2018 are as follows:
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Promissory notes payable
|
|
$
|
3,750
|
|
|
$
|
3,750
|
|
|
Less, debt issuance costs
|
|
|
(68
|
)
|
|
|
(81
|
)
|
|
Promissory notes payable, net
|
|
$
|
3,682
|
|
|
$
|
3,669
|
|
9.
CAPITAL STOCK
Common
Stock
During the three months ended March
31, 2019, 41,667 shares of common stock were issued to Charles Cargile pursuant to the terms of a restricted stock grant agreement
(the “March 2017 RSGA”) effective March 29, 2017 which is described below in Note 10.
Preferred
Stock
On
November 25, 2015, the Company designated 1,700,000 shares, of its authorized preferred stock, as Series B Preferred Stock, $0.001
par value per share. Pursuant to the Certificate of Designation filed with the Secretary of State of the State of Delaware, and
subject to the rights of any other series of preferred stock that may be established by the Board of Directors, holders of Series
B Preferred Stock (the “Holders”) will have liquidation preference over the holders of the Company’s Common
Stock in any distribution upon winding up, dissolution, or liquidation. Holders will also be entitled to receive dividends, if,
when and as declared by the Board of Directors, which dividends shall be payable in preference and priority to any payment of
any dividend to holders of Common Stock. Holders will be entitled to convert each share of Series B Preferred Stock into one (1)
share of Common Stock and will also be entitled to vote together with the holders of Common Stock on all matters submitted to
shareholders at a rate of one (1) vote for each share of Series B Preferred Stock. In addition, so long as at least 100,000 shares
of Series B Preferred Stock are outstanding, the Company may not, without the consent of the Holders of at least a majority of
the shares of Series B Preferred Stock then outstanding: (i) amend, alter or repeal any provision of the Certificate of Incorporation
or bylaws of the Company or the Certificate of Designation so as to adversely affect any of the rights, preferences, privileges,
limitations or restrictions provided for the benefit of the Holders or (ii) issue or sell, or obligate itself to issue or sell,
any additional shares of Series B Preferred Stock, or any securities that are convertible into or exchangeable for shares of Series
B Preferred Stock. 1,506,024 shares of Series B Preferred Stock, at a fair value of $4,500 were issued in December 2015 in connection
with the acquisition of Elite Solar. On May 2, 2018, the Holders converted 1,506,024 shares of Series B Preferred Stock
into the same number of shares of the Company’s Common Stock. As of December 31, 2018 there were no outstanding shares of
Preferred Stock.
10.
STOCK OPTIONS, RESTRICTED STOCK, AND WARRANTS
Options
As
of March 31, 2019, the Company has 952,500 non-qualified stock options outstanding to purchase 952,500 shares of common stock,
per the terms set forth in the option agreements. The stock options vest at various times and are exercisable for a period of
five to seven years from the date of grant at exercise prices ranging from $0.30 to $3.10 per share, the market value of the Company’s
common stock on the date of each grant. The Company determined the fair market value of these options by using the Black Scholes
option valuation model.
|
|
|
March 31, 2019
|
|
|
|
|
Number
|
|
|
Weighted average
|
|
|
|
|
of Options
|
|
|
exercise price
|
|
|
Outstanding, beginning December 31, 2018
|
|
|
1,568,885
|
|
|
$
|
1.73
|
|
|
Granted
|
|
|
129,000
|
|
|
|
0.30
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(745,385
|
)
|
|
|
1.64
|
|
|
Outstanding, end of March 31, 2019
|
|
|
952,500
|
|
|
|
1.56
|
|
|
Exercisable at the end of March 31, 2019
|
|
|
541,134
|
|
|
|
2.12
|
|
During
the three months ended March 31, 2019 and 2018, the Company charged a total of $62 and $95, respectively, to operations to recognize
stock-based compensation expense for stock options.
Restricted
Stock Grant to CEO
With an effective date of March
29, 2017, subject to the Sunworks, Inc. 2016 Equity Incentive Plan, (the “2016 Plan”) the Company entered into the
RSGA with its Chief Executive Officer, Charles Cargile. All shares issuable under the RSGA are valued as of the grant date
at $1.50 per share. The RSGA provides for the issuance of up to 500,000 shares of the Company’s common stock. The restricted
shares shall vest as follows: 166,667 of the restricted shares shall vest on the one (1) year anniversary of the effective date,
and the balance, or 333,333 restricted shares, shall vest in twenty-four (24) equal monthly installments commencing on the one
(1) year anniversary of the effective date.
In the three months ended March
31, 2019 and 2018 stock-based compensation expense of $62 and $63, respectively was recognized for the March 2017 RSGA.
During the year ended December
31, 2013, the Company entered into an RSGA with its then Chief Executive Officer, James B. Nelson (the “December
2013 RSGA”), intended to provide and incentivize Mr. Nelson to improve the economic performance of the Company and to
increase its value and stock price. All shares issuable under the RSGA were performance-based shares, valued as of the grant date
at $0.47 per share. The RSGA provided for the issuance of up to 769,230 shares of the Company’s common stock to Mr. Nelson
provided certain milestones are met in certain stages. As of September 30, 2014, two of the milestones were met, when the Company’s
market capitalization exceeded $10 million and the consolidated gross revenue, calculated in accordance with GAAP, equaled or
exceeded $10 million for the trailing twelve-month period. The Company issued 384,615 shares of common stock to Mr. Nelson at
fair value of $786,000 during the year ended December 31, 2014. In conjunction with Mr. Nelson’s retirement in April 2018,
the remaining 384,615 shares of the Company’s common stock vested and were issued to Mr. Nelson and expensed during the
second calendar quarter of 2018.
In
the three months ended March 31, 2019 and 2018, stock-based compensation expense was insignificant to the December 2013 RSGA.
In recognition of the efforts of
James B. Nelson, the Company’s Chairman, in leading the Company through the uplisting and financing transaction consummated
by the Company in 2015, on August 31, 2016, the Company granted Mr. Nelson a restricted stock grant of 250,000 shares of the Company’s
common stock pursuant an RSGA on the terms of the 2016 Plan (the “August 2016 RSGA”). All shares issuable
under the RSGA are valued as of the grant date at $2.90 per share. The restricted stock grant to Mr. Nelson was to vest upon the
earlier of (i) January 1, 2021, (ii) a Change of Control as defined in the 2016 Plan (iii) upon Mr. Nelson’s retirement
or (iv) upon Mr. Nelson’s death. “Change of Control” as defined in the 2016 Plan means (i) a sale of all or
substantially all of the Company’s assets or (ii) a merger with another entity or an acquisition of the Company that results
in the existing shareholders of the Company owning less than fifty percent (50%) of the outstanding shares of capital stock of
the surviving entity following such transaction. Mr. Nelson’s retirement in April 2018 resulted in the RGSA being vested
in full and expensed during the second calendar quarter of 2018.
In
the three months ended March 31, 2019 and 2018, stock-based compensation expense of $0 and $42, respectively, was recognized for
the August 2016 RSGA.
The
total combined option and restricted stock compensation expense recognized, in the statement of operations, during the three months
ended March 31, 2019 and 2018 was $124 and $232, respectively.
Warrants
As
of March 31, 2019, the Company had 2,997,000 common stock purchase warrants outstanding with an exercise price of $4.15 per share.
The warrants have an issuance date of March 9, 2015 and expire on March 9, 2020.
11.
SUBSEQUENT EVENTS
On April 10, 2019, the remaining
principal and accrued interest due under the convertible promissory notes dated January 31, 2014 and February 11, 2014 were converted
into 476,574 shares of common stock. The balances converted included $100 of principal and $61 of accrued interest.