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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022.

 

Or

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________

 

Commission File Number 001-36868

 

SUNWORKS, INC.

(Name of registrant in its charter)

 

Delaware   01-0592299

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

1555 Freedom Boulevard

Provo, UT 84604

(Address of principal executive offices) (Zip Code)

 

(385) 497-6955

(Registrant’s telephone Number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Ticker symbol(s)   Name of each exchange on which registered
Common stock, par value $0.001 per share   SUNW   The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
  Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐ No ☒

 

The number of shares of registrant’s common stock outstanding as of May 13, 2022 was 32,856,525.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
PART I - FINANCIAL INFORMATION  
   
ITEM 1. FINANCIAL STATEMENTS (Unaudited) 4
   
Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021 4
   
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 5
   
Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2022 and 2021 6
   
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 7
   
Notes to the Unaudited Condensed Consolidated Financial Statements 8
   
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
   
ITEM 4. CONTROLS AND PROCEDURES 24
   
PART II - OTHER INFORMATION  
   
ITEM 1. LEGAL PROCEEDINGS 25
   
ITEM 1A. RISK FACTORS 25
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 25
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
   
ITEM 4. MINE SAFETY DISCLOSURES 25
   
ITEM 5. OTHER INFORMATION 25
   
ITEM 6. EXHIBITS 25
   
SIGNATURES 26

 

2

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this Quarterly Report) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report except for statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

 

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that might cause these differences in actual results include the impacts on us, our operations, or our future financial and operational results; discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (our Annual Report), and the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (SEC). In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

3

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

SUNWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2022 AND DECEMBER 31, 2021

(in thousands, except share and per share data)

 

   March 31, 2022   December 31, 2021 
   (Unaudited)     
Assets          
Current Assets:          
Cash and cash equivalents  $19,455   $19,719 
Restricted cash   323    323 
Accounts receivable, net   5,940    4,568 
Inventory   14,101    10,219 
Contract assets   16,005    14,498 
Other current assets   3,555    4,154 
Total Current Assets   59,379    53,481 
Property and equipment, net   2,919    3,195 
Finance lease right-of-use assets, net   1,513    1,407 
Operating lease right-of-use assets   2,293    2,502 
Deposits   134    132 
Intangible assets, net   7,147    7,910 
Goodwill   32,186    32,186 
Total Assets  $105,571   $100,813 
           
Liabilities and Shareholders’ Equity          
Current Liabilities:          
Accounts payable and accrued liabilities  $14,088   $11,127 
Contract liabilities   13,183    12,201 
Finance lease liability, current portion   438    424 
Operating lease liability, current portion   947    993 
Total Current Liabilities   28,656    24,745 
           
Long-Term Liabilities:          
Finance lease liability, net of current portion   601    542 
Operating lease liability, net of current portion   1,346    1,509 
Warranty liability   1,311    1,251 
Total Long-Term Liabilities   3,258    3,302 
Total Liabilities   31,914    28,047 
           
Commitments and contingencies   -    - 
           
Shareholders’ Equity:          
Preferred stock Series B, $0.001 par value, 5,000,000 authorized shares; no shares issued and outstanding   -    - 
Common stock, $0.001 par value; 50,000,000 authorized shares; 32,073,268 and 29,193,772 shares issued and outstanding, at March 31, 2022 and December 31, 2021, respectively   32    29 
Additional paid-in capital   197,092    187,997 
Accumulated deficit   (123,467)   (115,260)
Total Shareholders’ Equity   73,657    72,766 
           
Total Liabilities and Shareholders’ Equity  $105,571   $100,813 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 

 

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands, except share and per share data)

 

           
   Three Months Ended 
   March 31, 2022   March 31, 2021 
         
Revenue, net  $31,196   $6,169 
           
Cost of Goods Sold   17,164    6,078 
           
Gross Profit   14,032    91 
           
Operating Expenses:          
Selling and marketing   12,229    1,231 
General and administrative   7,437    3,452 
Stock-based compensation   1,284    151 
Depreciation and amortization   1,283    65 
           
Total Operating Expenses   22,233    4,899 
           
Operating Loss   (8,201)   (4,808)
           
Other (Expense) Income          
Other income, net   2    4 
Interest expense   (8)   (9)
           
Total Other Expense, net   (6)   (5)
           
Loss Before Income Taxes   (8,207)   (4,813)
           
Income Tax Expense   -    - 
           
Net Loss  $(8,207)  $(4,813)
           
LOSS PER SHARE:          
Basic  $(0.28)  $(0.19)
Diluted  $(0.28)  $(0.19)
           
WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING          
Basic   29,502,905    25,233,586 
Diluted   29,502,905    25,233,586 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5

 

 

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED March 31, 2022 and 2021

(in thousands, except share data)

 

           Additional         
   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Capital   Deficit   Total 
Balance at December 31, 2021   29,193,772   $29   $187,997   $(115,260)  $72,766 
Stock-based compensation   -    -    1,284    -    1,284 
Issuance of common stock under terms of restricted stock grants   121,666    -    -    -    - 
Sales of common stock pursuant to S-3 registration statement, net   2,757,830    3    7,811    -    7,814 
Net loss for the three months ended March 31, 2022   -    -    -    (8,207)   (8,207)
Balance at March 31, 2022   32,073,268   $32   $197,092   $(123,467)  $73,657 

 

           Additional         
   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Capital   Deficit   Total 
Balance at December 31, 2020   23,835,258   $24   $122,668   $(88,635)  $34,057 
Stock-based compensation   -    -    151    -    151 
Sales of common stock pursuant to S-3 registration statement, net   3,212,486    3    48,855    -    48,858 
Net loss for the three months ended March 31, 2021   -    -    -    (4,813)   (4,813)
Balance at March 31, 2021   27,047,744   $27   $171,674   $(93,448)  $78,253 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6

 

 

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED March 31, 2022 and 2021

(in thousands)

 

           
   Three Months Ended 
   March 31, 2022   March 31, 2021 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(8,207)  $(4,813)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   1,283    65 
Amortization of right-of-use asset   263    205 
Stock-based compensation   1,284    151 
Bad debt expense   68    5 
Changes in Operating Assets and Liabilities:          
Accounts receivable   (1,440)   (1,009)
Inventory   (3,882)   (290)
Deposits and other current assets   597    (1,159)
Contract assets   (1,507)   197 
Accounts payable and accrued liabilities   2,961    1,207 
Contract liabilities   982    191 
Warranty liability   60    30 
Operating lease liability   (263)   (205)
NET CASH USED IN OPERATING ACTIVITIES   (7,801)   (5,425)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (168)   (15)
NET CASH USED IN INVESTING ACTIVITIES   (168)   (15)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Principal payments on finance lease liabilities   (109)   - 
Proceeds from sales of common stock, net   7,814    48,858 
NET CASH PROVIDED BY FINANCING ACTIVITIES   7,705    48,858 
           
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH   (264)   43,418 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR   20,042    39,339 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF YEAR  $19,778   $82,757 
           
Cash and cash equivalents  $19,455   $82,409 
Restricted cash   323    348 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF YEAR  $19,778   $82,757 
           
CASH PAID FOR:          
Interest  $8   $1 
           
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS          
Right-of-use assets obtained in exchange for new operating lease liability  $54   $437 
Right-of-use assets obtained in exchange for new finance lease liability  $

182

   $- 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

7

 

 

SUNWORKS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(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”), Commercial Solar Energy, Inc. (“CSE”), and Solcius LLC. (“Solcius”)

 

1. ORGANIZATION AND BASIS OF PRESENTATION

 

We provide photovoltaic (“PV”) and battery based power and storage systems for the residential and commercial markets. Commercial projects include commercial, agricultural, industrial and public works projects. We operate in several residential and commercial markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, Rhode Island, New York, Pennsylvania, New Jersey and South Carolina. Through our operating subsidiaries, we design, arrange financing, integrate, install, and manage systems ranging in size from 2kW (kilowatt) for residential projects to multi-MW (megawatt) systems for larger commercial and public works projects. Commercial installations have included installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and higher education institutions.

 

On April 8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United (the “Buyer”), acquired all of the issued and outstanding membership interests (the “Solcius Acquisition”) of Solcius, from Solcius Holdings, LLC (“Seller”). Located in Provo, Utah, Solcius is a full-service, residential solar systems provider. The Company believes the Solcius Acquisition enhances economies of scale, leading to better access to suppliers, vendors and financial partners, as well as marketing and customer acquisition opportunities.

 

The Solcius Acquisition was consummated on April 8, 2021 pursuant to a Membership Interest Purchase Agreement, dated as of April 8, 2021 (the “Purchase Agreement”), by and between Buyer and Seller. The purchase price for Solcius consisted of $51,750 in cash, subject to post-closing adjustments related to working capital, cash, indebtedness and transaction expenses. The acquired assets and operating results of Solcius are included in these consolidated financial statements and footnotes since the date of acquisition through March 31, 2022 (see Note 3).

 

8

 

 

The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP 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 ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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 December 31, 2021.

 

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 GAAP and have been consistently applied in the preparation of the condensed consolidated 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, 2021.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Sunworks, Inc., and its wholly-owned operating subsidiaries: Sunworks United Inc., Commercial Solar Energy, Inc. and Solcius LLC. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

Segment Reporting

 

We currently operate in three segments based upon our organizational structure and the way in which our operations are managed and evaluated. The largest segment is residential operations which are projects smaller in size and shorter in duration. Our second operating segment is commercial operations which includes projects that are commonly larger in size and longer in duration serving commercial, industrial, agricultural and public works customers. Our third segment is the corporate office that is responsible for general company oversight and management. Separating the corporate costs from the residential and commercial operations simplifies the performance evaluation of the Residential and Commercial segments.

 

Use of Estimates

 

The preparation of condensed consolidated 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 condensed consolidated 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, intangibles, impairments and estimations of long-lived assets, revenue recognition on construction contracts recognized over time, fair value of assets acquired and liabilities assumed in a business combination, allowances for uncollectible accounts, finance lease right-of-use assets and liabilities, operating lease right-of-use assets and liabilities, warranty reserves, inventory valuation, 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.

 

9

 

 

Revenue Recognition

 

Revenue 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, engineering, procurement and construction (“EPC”) projects for residential and smaller commercial systems that require us to deliver functioning solar power systems are generally completed within two to twelve months from commencement of construction. Construction on larger commercial projects may be completed within eighteen to thirty-six months, depending on the size and location. We recognize revenue from commercial EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer.

 

For residential contracts, the Company recognizes revenue upon completion of the job as determined by final inspection. We recognize revenue for systems operations and maintenance over the term of the service period.

 

For commercial projects, we commence recognizing performance revenue when work starts on the job and continue recognizing revenue over time as work is performed based on the ratio of costs incurred, excluding modules and components, compared to the total estimated non-materials costs at completion of the performance obligations.

 

Judgment is required to evaluate assumptions including the amount of net contract revenue and the total estimated costs to determine the Company’s progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If estimated total costs on any contract are greater than the net contract revenue, the Company recognizes the entire estimated loss in the period the loss becomes known.

 

Changes in estimates for commercial projects occur for a variety of reasons, including, but not limited to (i) construction plan accelerations or delays, (ii) product cost forecast changes, (iii) change orders, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect in the Company’s condensed consolidated statements of operations. The table below outlines the impact on revenue of net changes in estimated transaction prices and input costs for systems related sales contracts (both increases and decreases) for the three months ended March 31, 2022 and 2021 as well as the number of projects that comprise such changes. For purposes of the following table, only projects with changes in estimates that have an impact on revenue and or cost of at least $100, calculated on a quarterly basis during the periods, were presented. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.

 

            
  

Three Months

Ended		 
(In thousands, except number of projects)  March 31, 2022    March 31, 2021 
Increase in revenue from net changes in transaction prices  $457    $9 
Increase (decrease) in revenue from net changes in input cost estimates   (461)    3 
Net increase (decrease) in revenue from net changes in estimates  $(4)   $12 
            
Number of projects   3     2 
            
Net change in estimate as a percentage of aggregate revenue for associated projects   (0.1)%    0.4%

 

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Contract Assets and Liabilities

 

Contract assets consist of (i) the earned, but unbilled, portion of a project for which payment is deferred by the customer until certain contractual milestones are met; (ii) direct costs, including commissions, labor related costs and permitting fees paid prior to recording revenue, and (iii) unbilled receivables which represent revenue that has been recognized in advance of billing the customer, which is common for larger construction contracts. Contract liabilities consist of deferred revenue, customer deposits and customer advances, which represent consideration received from a customer prior to transferring control of goods or services to the customer under the terms of a contract. Total contract assets and contract liabilities balances as of the respective dates are as follows:

 

   As of 
(In thousands)  March 31, 2022   December 31, 2021 
Contract Assets  $16,005   $14,498 
Contract Liabilities   13,183    12,201 

 

During the quarter ended March 31, 2022, the Company recognized revenue of $1,403 that was included in contract liabilities as of December 31, 2021. During the quarter ended March 31, 2021, the Company recognized revenue of $1,470 that was included in contract liabilities as of December 31, 2020.

 

The following table represents the average percentage of completion as of March 31, 2022 for EPC projects that the Company is constructing. The Company expects to recognize $16,186 of revenue upon transfer of control of the projects.

 

Project  Revenue Category  Expected Years Revenue Recognition Will Be Completed  Average Percentage of Revenue Recognized 
Various Projects  EPC services  2022 - 2023   64.3%

 

Basic and Diluted Net (Loss) per Share Calculations

 

(Loss) per Share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share are computed by dividing income (loss) available to holders of common stock by the weighted-average number of shares of common stock outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if the additional shares of common stock 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 and unvested restricted stock units (“RSUs”) 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, 2022 and 2021, respectively.

 

As of March 31, 2022, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 282,433 stock options and 1,226,430 unvested RSUs.

 

As of March 31, 2021, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 88,411 stock options and 210,000 unvested RSUs.

 

Dilutive per share amounts are computed using the weighted-average number of shares of common stock outstanding and potentially dilutive securities, using the treasury stock method, if their effect would be dilutive.

 

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New Accounting Pronouncements

 

Management reviewed currently issued pronouncements during the three months ended March 31, 2022, and believes that any recently issued, but not yet effective, accounting standards, if currently adopted, would not have a material effect on the accompanying condensed consolidated financial statements.

 

3. BUSINESS ACQUISITION

 

On April 8, 2021, pursuant to the Purchase Agreement, the Company, through its operating subsidiary Sunworks United Inc., acquired all of the issued and outstanding membership interests of Solcius from the Seller. Located in Provo, Utah, Solcius is a full-service residential solar systems provider.

 

The purchase price for Solcius consisted of $51,750 in cash subject to post-closing adjustments related to working capital, cash, indebtedness and transaction expenses. The Solcius Acquisition was accounted for under ASC 805 and the financial results of Solcius have been included in the Company’s condensed consolidated financial statements since the date of the Solcius Acquisition.

 

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Purchase Price Allocation

 

Under the purchase method of accounting, the transaction was valued for accounting purposes at $52,111 which was the fair value of Solcius at the time of acquisition. The assets and liabilities of Solcius were recorded at their respective fair values as of the date of acquisition. The Company utilized the services of a valuation specialist to assist in identifying $15,600 of separately identifiable intangible assets. Any difference between the cost of Solcius and the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The acquisition date estimated fair value of the consideration transferred consisted of the following:

 

   (in thousands) 
Base purchase price  $51,750 
Working capital shortfall   (1,131)
Cash surplus   1,492 
Total purchase price paid  $52,111 
      
Cash  $1,492 
Accounts receivable   1,729 
Inventory   3,833 
Contract assets   7,336 
Prepaids and other current assets   1,603 
Property and equipment   143 
Deposits   91 
Operating lease right-of-use asset   1,885 
Finance lease right-of-use assets   1,200 
Other intangible assets   15,600 
Identifiable assets acquired   34,912 
Accounts payable and accrued liabilities   (6,957)
Contract liabilities   (5,273)
Operating and finance lease liabilities   (2,757)
Liabilities assumed   (14,987)
Net identifiable assets acquired   19,925 
Goodwill   32,186 
Net assets acquired  $52,111 

 

During the three months ended March 31, 2021, we recorded total transaction costs related to the Solcius Acquisition of $710. These expenses were accounted for separately from the net assets acquired and were included in general and administrative expense for the three months ended March 31, 2021.

 

We will continue to conduct assessments of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. We expect that our assessment will be finalized in the second quarter of 2022.

 

Pro Forma Information (Unaudited)

 

The results of operations for the Solcius Acquisition since the April 8, 2021 closing date have been included in our consolidated financial statements. The following unaudited pro forma financial information represents a summary of the condensed consolidated results of operations for the quarters ended March 31, 2022 and 2021, assuming the Solcius Acquisition had been completed as of January 1, 2020. The pro forma financial information includes certain non-recurring pro forma adjustments that were directly attributable to the business combination. The proforma adjustments include the elimination of Solcius Acquisition transaction expenses totaling $710 incurred in the first quarter of 2021, and adjustments to recognize amortization of intangible assets, retention stock-based compensation programs and retention bonus accruals in 2022 and 2021. The retention bonus expense is recognized over the first year following the Solcius Acquisition. The pro forma financial information is not necessarily indicative of the results of operations that would have been achieved if the Solcius Acquisition had been effective as of these dates, or of future results.

 

   March 31, 2022   March 31, 2021 
   Three Months Ended 
   March 31, 2022   March 31, 2021 
         
Revenue, net  $31,196   $30,811 
           
Net Loss  $(6,819)  $(4,132)

 

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4. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

The following table represents a disaggregation of revenue by customer type from contracts with customers for the three months ended March 31, 2022 and 2021:

 

   2022   2021 
  

Three Months Ended

March 31,

 
   2022   2021 
Residential  $26,999   $1,530 
Commercial   2,788    2,995 
Public Works   1,409    1,644 
Total  $31,196   $6,169 

 

Contract assets represent revenues recognized in excess of amounts invoiced on contracts in progress. Contract liabilities represent billings in excess of revenues recognized on contracts in progress. At March 31, 2022 and December 31, 2021, the contract asset balances were $16,005 and $14,498, and the contract liability balances were $13,183 and $12,201, respectively.

 

5. OPERATING SEGMENTS

 

In Q1 2022 the Company assessed its operating segment disclosure based on ASC 280, Segment Reporting guidance. As a result, the following segments were established: Residential Solar, Commercial Solar Energy, and Corporate.

 

Residential Solar

 

Through our Solcius operating subsidiary, we design, arrange financing, integrate, install, and manage systems, primarily for residential homeowners. We sell residential solar systems through multiple channels, through our network of sales channel partners, as well as, a growing direct sales channel strategy. We operate in several residential markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, and South Carolina. We have direct sales and/or operations personnel in California, Nevada, Utah, Arizona, New Mexico, Texas, Colorado, South Carolina, Wisconsin and Minnesota.

 

Commercial Solar

 

Through our Commercial Solar Energy subsidiary, we design, arrange financing, integrate, install, and manage systems ranging in size from 50kW (kilowatt) to multi-MW (megawatt) systems primarily for larger commercial and public works projects. Commercial installations have included installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and higher education institutions. Historically, the Commercial Solar Energy subsidiary participated in the California Residential solar market.  Following the Solcius Acquisition, all new residential sales are managed under the Solcius brand.  Due to materiality, the company will continue to report the remaining backlog of Residential projects in the Commercial Solar Energy segment, which is expected to be fulfilled within the next year. Commercial Solar primarily operates in California.

  

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Segment net revenue, segment operating expenses and segment contribution (loss) information consisted of the following for the three months ended March 31, 2022.

 

    Solcius    CSE    Corporate    Total 
  

Three Months Ended

 
   

March 31, 2022

 
   Residential Solar   Commercial Solar   Corporate   Total 
Net revenue  $26,394   $4,802   $-   $31,196 
Cost of sales   13,193    3,971    -    17,164 
Gross profit   13,201    831         14,032 
                     
Operating expenses                    
Selling and marketing   11,132    851    246    12,229 
General and administrative   4,397    1,468    1,572    7,437 
Segment loss   (2,328)   (1,488)   (1,818)   (5,634)
                     
Stock-based compensation   705    35    544    1,284 
Depreciation and amortization   1,241    42    -    1,283 
Operating loss   $(4,274)  $(1,565)  $(2,362)  $(8,201)

 

6. RIGHT-OF-USE OPERATING LEASES

 

The Company has Right of Use (“ROU”) 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 operating lease expense for the three months ended March 31, 2022 and 2021 amounted to $427 and $314, respectively. Operating lease payments, which reduced operating cash flows for the three months ended March 31, 2022 and 2021 amounted to $427 and $314, respectively. The difference between the ROU asset amortization of $263 and the associated lease expense of $427 consists of short-term leases excluded from the ROU asset calculation, basic operating lease expenses included in the lease expense for property and sales taxes, triple net and common area charges for facilities and other equipment and vehicle lease related charges.

 

Supplemental balance sheet information related to leases is as follows:

 

   March 31, 2022 
    (in thousands) 
Operating lease right-of-use assets  $2,293 
      
Operating lease liabilities—short term   947 
Operating lease liabilities—long term   1,346 
Total operating lease liabilities  $2,293 

 

As of March 31, 2022, the weighted average remaining lease term was 3.4 years and the discount rate for the Company’s leases was 3.1%.

 

Minimum payments for the operating leases are as follows:

 

   Operating Leases 
   (in thousands) 
2022 – Remainder of Year  $

777

 
2023   700 
2024   324 
2025   306 
2026   281 
Thereafter   - 
Total lease payments  $2,388 
Less: imputed interest   

95

 
Total  $2,293 

 

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7. RIGHT-OF-USE FINANCE LEASES

 

The Company has finance leases for vehicles. The Company’s finance leases have remaining lease terms of 1 year to 5 years.

 

Supplemental balance sheet information related to finance leases is as follows:

 

   March 31, 2022 
    (in thousands) 
Finance lease right-of-use asset cost  $2,152 
Finance lease right-of-use accumulated amortization   (639)
Finance lease right of use asset, net  $1,513 
      
Finance lease obligation—short term  $438 
Finance lease obligation—long term   601 
Total finance lease obligation  $1,039 

 

As of March 31, 2022, the weighted average remaining lease term was 2.6 years and the weighted average discount rate for the Company’s leases was 4.3%.

 

Minimum finance lease payments for the remaining lease terms are as follows:

 

   March 31, 2022 
    (in thousands) 
Remainder of 2022  $382 
2023   331 
2024   196 
2025   166 
2026   28 
Thereafter   - 
Total lease payments  $1,103 
Less: imputed interest   64 
Total  $1,039 

 

8. INTANGIBLE ASSETS, NET

 

The Company’s intangible assets at March 31, 2022 consist of the following:

 

   Amortization
periods		  Cost   Accumulated amortization   Net carrying value 
Trademarks  10 Years  $5,200   $(520)  $4,680 
Backlog of projects  9 Months   2,000    (2,000)   - 
Covenant not-to-compete  3 Years   2,400    (800)   1,600 
Software (included in property and equipment)  3 Years   3,400    (1,133)   2,267 
Dealer relationships  18 Months   2,600    (1,733)   867 
      $15,600   $(6,186)  $9,414 

 

Intangible assets are stated at their original estimated value at the date of acquisition. The amortization of intangible assets commences upon acquisition. The intangible assets are being amortized using the straight-line method over the intangible asset’s estimated useful life:

 

Amortization expenses for intangible assets for the three months ended March 31, 2022 was as follows:

 

   For the 
  

Three Months

Ended

 
   March 31, 2022 
Trademarks  $130 
Covenant not-to-compete   200 
Software   283 
Dealer relationships   433 
Amortization expenses for intangible assets  $1,046 

 

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Estimated future amortization expense for the Company’s intangible assets as of March 31, 2022 is as follows:

 

Years ending December 31,    
Remainder of 2022  $2,707 
2023  $2,453 
2024  $1,004 
2025  $520 
2026  $520 
Thereafter  $2,210 

 

Depreciation and amortization expense on property and equipment and intangible assets for the three months ended March 31, 2022 and 2021 was $1,283 and $65, respectively.

 

9. CAPITAL STOCK

 

On February 10, 2021, the Company entered into a Sales Agreement (the “Roth Sales Agreement”) with Roth Capital Partners, LLC (the “Agent RCP”), pursuant to which the Company could offer and sell from time to time, through the Agent RCP, shares of the Company’s common stock, registered under the Securities Act, pursuant to the Registration Statement filed on Form S-3.

 

On October 21, 2021, the Company filed a prospectus supplement with the SEC, pursuant to which the Company could offer and sell from time to time, through the Agent RCP, shares of the Company’s common stock, registered under the Securities Act, pursuant to the Registration Statement.

 

In accordance with the terms of the Roth Sales Agreement, we may offer and sell shares of our common stock under this prospectus supplement having an aggregate offering price of up to $25,000 million (the “Placement Shares”) from time to time through or to Agent RCP, as sales agent or principal.

 

Sales of shares pursuant to the Roth Sales Agreement are deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act. The Agent RCP has agreed to act as sales agent and use commercially reasonable efforts to sell on the Company’s behalf all of the shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the Agent RCP and the Company.

 

2,757,830 shares of common stock were sold under the Roth Sales Agreement between March 16, 2022 and March 29, 2022. Total gross proceeds for the Placement Shares were $7,974 or $2.89 per share. Net proceeds after brokerage costs, professional, registration and other fees were $7,814 or $2.83 per share.

 

10. STOCK-BASED COMPENSATION

 

Options

 

As of March 31, 2022, the Company has incentive stock options and non-qualified stock options outstanding to purchase 282,433 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 years from the date of grant at exercise prices ranging from $2.52 to $12.15 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. Option forfeitures are accounted for as they occur.

 

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A summary of the Company’s stock option activity and related information follows:

 

SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS ACTIVITY 

   March 31, 2022 
       Weighted 
   Number   Average 
   of   Exercise 
   Options   Price 
Outstanding, at December 31, 2021   290,684   $11.65 
Granted   -    - 
Exercised   -    - 
Forfeited   (8,251)   8.38 
Expired   -    - 
Outstanding and expected to vest as of March 31, 2022   282,433   $11.75 
Exercisable at March 31, 2022   20,899   $7.40 
Weighted average fair value of options granted during period       $- 

 

The following summarizes the options to purchase shares of the Company’s common stock which were outstanding at March 31, 2022:

 

            Weighted 
            Average 
            Remaining 
Exercisable   Stock Options   Stock Options   Contractual 
Prices   Outstanding   Exercisable   Life (years) 
$10.50    5,713    5,713    0.13 
$8.68    7,142    7,142    1.12 
$7.63    2,142    2,142    1.16 
$3.07    3,071    2,730    2.38 
$2.52    4,365    3,172    2.51 
$12.15    260,000    -    4.04 
      282,433    20,899      

 

Aggregate intrinsic value of options outstanding and exercisable at March 31, 2022 and December 31, 2021 was $0 and $2, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $2.52 and $3.07 as of March 31, 2022 and December 31, 2021, respectively, and the exercise price multiplied by the number of options outstanding.

 

The Company recorded stock-based compensation expense for stock options of $671 and $12 for the three months ended March 31, 2022 and 2021, respectively.

 

Restricted Stock Units

 

The following table summarizes the Company’s restricted stock unit activity during the three months ended March 31, 2022:

 

SCHEDULE OF STOCK-BASED COMPENSATION, RESTRICTED STOCK UNIT ACTIVITY 

   March 31, 2022 
       Weighted Average 
   Number Of Shares  

Grant Date

Value per Share

 
Unvested, beginning December 31, 2021   1,185,889   $5.11 
Granted   152,208   $2.48 
Vested   (111,667)  $8.25 
Forfeited   -   $- 
Unvested at the end of March 31, 2022  1,226,430   $4.50 

 

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The total combined stock option, RSU compensation and restricted stock expense recognized in the condensed consolidated statements of operations during the three months ended March 31, 2022 and 2021 was $1,284 and $151, respectively.

 

11. COMMITMENTS AND CONTINGENCIES

 

Litigation

 

From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a negative impact on the Company’s financial position.

 

12. SUBSEQUENT EVENTS

 

Between April 1, 2022 and April 7, 2022, 783,257 shares of common stock were sold, issued and trades settled under the Roth Sales Agreement. Total gross proceeds for the shares were approximately $2,080 or $2.66 per share. Net proceeds after issuance costs were approximately $2,038 or $2.60 per share.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this Quarterly Report) and the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 (our Annual Report). This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled “Risk Factors” in Part II, Item 1A, and “Cautionary Note Regarding Forward-Looking Statements” included in this Quarterly Report.

 

Unless otherwise noted, (1) “Sunworks” refers to Sunworks, Inc., (2) “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Sunworks, Inc., and its wholly-owned operating subsidiaries, Sunworks United Inc., Commercial Solar Energy, Inc. and Solcius LLC. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

All amounts presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, unless otherwise noted, are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.

  

The financial and operating results for the three months ended March 31, 2022 include the operating results of Solcius acquired on April 8, 2021, with no corresponding contribution for the three months ended March 31, 2021.

 

Overview

 

On April 8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United (the “Buyer”), acquired all of the issued and outstanding membership interests (the “Solcius Acquisition”) of Solcius, from Solcius Holdings, LLC (“Seller”). Located in Provo, Utah, Solcius is a full-service, residential solar systems provider. The transaction creates a national solar power provider with a presence now in 15 states, including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, Rhode Island, New York, Pennsylvania, New Jersey and South Carolina. The Company believes the transaction enhances economies of scale, leading to better access to suppliers, vendors and financial partners, as well as marketing and customer acquisition opportunities.

 

The Solcius Acquisition was consummated on April 8, 2021 pursuant to a Membership Interest Purchase Agreement, dated as of April 8, 2021 (the “Purchase Agreement”), by and between Buyer and Seller. The purchase price for Solcius consisted of $51.75 million in cash, subject to post-closing adjustments related to working capital, cash, indebtedness and transaction expenses.

 

Residential Solar

 

Through our Residential Solar operating subsidiary, we design, arrange financing, integrate, install, and manage systems, primarily for residential homeowners. We sell residential solar systems through multiple channels, including our network of sales channel partners, and our growing direct sales channel strategy. We operate in several residential and commercial markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin and South Carolina. We have direct sales or operations personnel in California, Nevada, Utah, Arizona, New Mexico, Texas, Colorado, South Carolina, Wisconsin and Minnesota.

 

Commercial Solar

 

Through our Commercial Solar Energy operating subsidiaries, we design, arrange financing, integrate, install, and manage systems ranging in size from 2kW (kilowatt) for residential projects to multi-MW (megawatt) systems for larger commercial and public works projects. Commercial installations have included installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and higher education institutions. Commercial Solar primarily operates primarily in California.

 

For the first three months of 2022, approximately 87% of our revenue was from installations for the residential market and approximately 13% of our revenue was from installations for the commercial and public works markets.

 

For the first three months of 2021 approximately 75% of our revenue was from installations for the commercial and public works markets and approximately 25% of our revenue was from installations for the residential market.

 

IMPACT OF COVID-19 ON OUR BUSINESS

 

The continued global novel coronavirus and its variants (COVID-19) pandemic, has resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions and business shutdowns. The uncertain macroeconomic environment created by the COVID-19 pandemic has had and may continue to have a significant, adverse impact on our business. To assist readers in reviewing management’s discussion and analysis of financial condition and results of operations, we provide the following discussion regarding the effects COVID-19 has had on the Company, what management expects the future impact to be, how we are responding to evolving circumstances and how we are planning for further COVID-19 uncertainties.

 

20

 

 

State and local directives, guidelines, and other restrictions, as well as consumer behavior, continue to impact our operations in the regions in which we operate, particularly California. During 2022 and 2021 we continued to serve customers. COVID-19 and the governmental directives materially disrupted the operations of the local and state governments by closing or restricting operations at city, county and state offices for design reviews, permitting projects, and inspections of projects. Utility companies have been unable to provide timely shutdowns, inspections and interconnection approvals. This disruption negatively impacts our ability to complete projects, generate revenue on projects in backlog and causes many customers to delay decisions on new projects.

 

Our revenue and gross profit for the first three months of 2022 were negatively impacted by governmental responses to the COVID-19 pandemic, which delayed pre-construction approvals and installation activity for our larger public works, agriculture and commercial projects by delaying approvals. Earlier governmental orders and social distancing guidelines slowed our sales process, as our customers avoided interacting with our sales and installation personnel and delayed buying decisions.

 

We received a loan under the Paycheck Protection Program of $2,847 which was used to pay for payroll costs, interest on debt, rent, utilities, and group health care benefits, allowing the Company to focus on revenue generating activities in an effort to mitigate some of the impact COVID-19 has on our business. The entire principal of the loan and all accrued interest was forgiven in June of 2021.

 

Although there is uncertainty around the continued impact and severity the COVID-19 pandemic has had, and will continue to have, on our operations, these developments and measures have negatively affected our business, including a negative impact on the supply chain upon which we rely on to operate. We will continue to manage the impact through appropriate operational measures.

 

As the COVID-19 pandemic and its effects evolve, we are monitoring our business to ensure that our expenses are in line with expected cash generation. The extent to which our results are affected by the COVID-19 pandemic will largely depend on future developments which cannot be accurately predicted and are uncertain, but the COVID-19 pandemic has had and will continue to have an adverse effect on our business, operations, financial condition, results of operations, and cash flows.

 

Critical Accounting Estimates

 

We prepare our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses recorded in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carry values of assets and liabilities that are not readily apparent from other sources.

 

These estimates may change as new events occur and additional information is obtained. Actual results may differ from these estimates under different assumptions and conditions.

 

There were no significant changes in our critical accounting estimates during the three months ended March 31, 2022 compared to those previously disclosed in “Critical Accounting Policies” and “Use of Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

 

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2021

 

REVENUE AND COST OF GOODS SOLD

 

For the three months ended March 31, 2022, revenue increased to $31,196 compared to $6,169 for the same quarter in the prior year. The increase in residential revenue is a result of the Solcius Acquisition in April 2021. Approximately 87% of revenue was from installations for the residential markets, or $26,999, compared to 25% of revenue, or $1,530 for the same quarter in the prior year. Commercial and public works revenue was approximately 13% of total revenue or $4,197 for the three months ended March 31, 2022 compared to 75% or $4,639 of revenue in the same period in the prior year.

 

Cost of goods sold for the three months ended March 31, 2022, was $17,164 compared to $6,078 reported for the three months ended March 31, 2021. The increase in cost of goods sold is primarily the result of increase in revenue compared to the prior period and the Solcius Acquisition.

 

Gross profit was $14,032 for the three months ended March 31, 2022 compared to $91 for the prior year period. The gross margin improved to 45.0% in the first quarter of 2022 compared to 1.5% in the first quarter 2021. The margin improvement is the result of the Solcius Acquisition combined with improved margin within the Commercial Solar Energy Segment in 2022. Prior year operating results were negatively impacted by COVID 19 and one time, project interconnection charges not required in the current year.

 

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SELLING AND MARKETING EXPENSES

 

For the three months ended March 31, 2022, the Company’s selling and marketing expenses were $12,229 compared to $1,231 for the same three months in 2021. As a percentage of revenue, selling and marketing expenses were 39.2% of revenue in the first quarter of 2022 compared to 20.0% of revenue in the same period in 2021. The increased expenses were largely related to the Solcius Acquisition and additional marketing spend for dealer commissions, advertising and branding. The Solcius sales and marketing model focuses on lead generation and effective interaction with a network of authorized dealers and third-party sales organizations. During the quarter we continued to invest in sales and marketing to expand our lead generation efforts and improve brand awareness. Additionally, these investments are targeted at positively impacting our ability to grow our in-house sales capability for residential markets.

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

Total G&A expenses of $7,437 for the three months ended March 31, 2022, increased compared to $3,452 for the same period in the prior year. The G&A expenses increased from the prior year primarily as a result of the Solcius Acquisition in April 2021 and corporate overhead compensation cost.

 

STOCK-BASED COMPENSATION EXPENSES

 

During the three months ended March 31, 2022 we incurred $1,284 in total non-cash stock-based compensation expense, compared to $151 for the prior year period. The year over year increase in stock-based compensation is the result of the Company expanding RSU and stock option grants as part of the compensation structure to a broader population of employees.

 

DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense for the three months ended March 31, 2022, was $1,283, compared to $65 for the prior year period. Depreciation and amortization expenses increased as a result of the identified intangible assets related to the Solcius Acquisition. The intangible assets are being amortized over the estimated useful lives of the specific assets, which have useful lives ranging from nine months to ten years. The amortization expense from the April 2021 Solcius Acquisition for the first three months of 2022 was $1,046.

 

OTHER EXPENSE

 

Other expense was $6 for the three months ended March 31, 2022, compared to $5 for the same three months in 2021. Interest expense for the first three months of 2021 was $9 for the Paycheck Protection Program loan. The 2022 interest expense is related to the ROU finance leased assets.

 

NET LOSS

 

The net loss for the three months ended March 31, 2022 was $8,207, compared to a net loss of $4,813 for the three months ended March 31, 2021.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity and Capital Resources

  

We had $19,455 in unrestricted cash at March 31, 2022, as compared to $19,719 at December 31, 2021. We believe that our existing cash and cash equivalents is sufficient to meet our operating cash requirements and strategic objectives for growth for at least the next year. To satisfy our capital requirements, including acquisitions and ongoing operations, 12 months and longer into the future, we will likely seek to raise additional financing through debt and equity financings.

 

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On January 27, 2021, the Company filed a Registration Statement on Form S-3 (File No. 333-252475) (the “Registration Statement”), with the SEC. The Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate initial offering price not to exceed $100 million. The Registration Statement was declared effective by the SEC on February 3, 2021. From January 1, 2022 through the date of this filing we sold 3,541,087 shares with gross proceeds of approximately $10 million. Approximately $27 million of the $100 million total is available for future offerings pursuant to the Registration Statement.

 

As of March 31, 2022, our working capital surplus was $30,723 compared to a working capital surplus of $28,736 at December 31, 2021.

 

During the three months ended March 31, 2022, we used $7,801 of cash in operating activities compared to $5,425 used in operating activities for the prior year period. The cash used in operating activities was primarily the result of the current year net loss combined with investments in working capital to secure inventory to support growth and minimize the impacts of supply chain disruption.

 

Net cash used in investing activities totaled $168 for the three months ended March 31, 2022, for acquisition of vehicles and equipment. The cash used in investing activities for the same period in 2021 totaled $15 for minor equipment purchases.

 

Net cash provided by financing activities during the three months ended March 31, 2022 was $7,705. This increase was primarily due to net proceeds from sales of our common stock during the first three months of the current year.

 

Net cash provided by financing activities during the first three months of 2021 was $48,858. This was due entirely to net proceeds from the At the Market offerings

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity, or capital expenditures.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not Applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods specified in the SEC rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Controls

 

Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, the design of any system of controls is based on assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies and procedures may deteriorate. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

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Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal first quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a negative impact on the Company’s financial position.

 

ITEM 1A. RISK FACTORS

 

The disclosure below supplements our risk factors from those disclosed in Part I, Item 1A in the Form 10-K. These risks and uncertainties, along with those previously disclosed, could materially adversely affect our business or financial results

 

Rising inflation may adversely affect us by increasing costs of materials, labor and other costs beyond what we can recover through price increases.

 

Inflation may adversely affect us by increasing the costs of materials, subcontractor costs, labor and other costs required to service customers, manage and grow our business. In the current inflationary environment, depending on the terms of our construction contracts and other economic conditions, we may be unable to raise contract prices enough to keep up with the rate of inflation, which would reduce our profit margins on jobs. If we are unable to increase our contract prices to offset the effects of inflation, our business, results of operations and financial condition could be materially and adversely affected.

 

In addition, inflation is often accompanied by higher interest rates. The impact of COVID-19 may increase uncertainty in the global financial markets, as well as the possibility of high inflation and extended economic downturn, which could reduce our ability to incur debt or access capital and impact our results of operations and financial condition even after these conditions improve. Further, inflation and rising interest rates may reduce home purchases and the spending power of the consumer, thus deterring future customers from engaging our services.

 

We depend on a limited number of suppliers, for certain critical raw materials, components and finished products, including our modules. Any supply interruption or delay could adversely affect our business, prevent us from delivering products to our customers within required timeframes, and could in turn result in sales and installation delays, cancellations, penalty payments, or loss of market share.

 

Our supply chain is subject to natural disasters and other events beyond our control, such as raw material, component, and labor shortages, global and regional shipping and logistics constraints, global conflicts or wars, work stoppages, epidemics or pandemics, earthquakes, floods, fires, volcanic eruptions, power outages, or other natural disasters, and the physical effects of climate change, including changes in weather patterns (including floods, fires, tsunamis, drought, and rainfall levels), water availability, storm patterns and intensities, and temperature levels. Human rights concerns, including forced labor and human trafficking, in foreign countries and associated governmental responses have the potential to disrupt our supply chain and our operations could be adversely impacted. For example, the U.S. Department of Homeland Security issued a withhold release order on June 24, 2021 applicable to silica-based products made by a major producer of polysilicon used by manufacturers of solar panels in China’s Xinjiang Uygur autonomous region, over allegations of widespread, state-backed forced labor in the region. Although we do not believe that raw materials used in the products we sell are sourced from this or other regions with forced labor concerns, any delays or other supply chain disruption resulting from these concerns, associated governmental responses, or a desire to source products, components or materials from other manufacturers or regions could result in shipping, sales and installation delays, cancellations, penalty payments, or loss of revenue and market share, any of which could have a material adverse effect on our business, results of operations, cash flows, and financial condition.

 

In addition, the United States currently imposes antidumping and countervailing duties on certain imported crystalline silicon PV cells and modules from China and Taiwan. Such antidumping and countervailing duties can change over time pursuant to annual reviews conducted by the U.S. Department of Commerce, and a decline in duty rates could have an adverse impact on our operating results. In February 2022, Auxin Solar Inc., a U.S. producer of crystalline silicon PV products, petitioned the U.S. Department of Commerce (“USDOC”) to investigate alleged circumvention of antidumping and countervailing duties on Chinese imports by crystalline silicon PV cells and module imports assembled and completed in Cambodia, Malaysia, Thailand, and Vietnam. We cannot predict what actions USDOC will take with respect to that petition. Our operating results could be adversely impacted if USDOC declines to investigate or makes negative circumvention determinations. Conversely, affirmative circumvention determinations could positively impact our operating results.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

None.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

 

Exhibit No.   Description
31.1*   Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2*   Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1**   Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**   XBRL Instance Document.
101.SCH**   XBRL Taxonomy Extension Schema Document.
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document.
104   Cover Page Interactive Data File (embedded within the XBRL document)

 

* Filed herewith.
   
** Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
   
# Portions of this exhibit have been redacted in accordance with Item 601(b)(10) of Regulation S-K.

 

25

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Provo, State of Utah, on May 16, 2022.

 

  Sunworks, Inc.
     
Date: May 16, 2022 By: /s/ Gaylon Morris
    Gaylon Morris, Chief Executive Officer
    (Principal Executive Officer)
     
Date: May 16, 2022 By: /s/ Jason Bonfigt
    Jason Bonfigt, Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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