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2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statements
This Form 10-Q contains financial projections and other “forward-looking statements,” as that term is used in federal securities laws, about Solar3D, Inc.’s (“Solar3D,” “we,” “us,” or the “Company”) financial condition, results of operations and business. These statements include, among others: statements concerning the potential for revenues and expenses and other matters that are not historical facts. These statements may be made expressly in this Form 10-Q. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions used in this Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause the Company’s actual results to be materially different from any future results expressed or implied by the Company in those statements. The most important facts that could prevent the Company from achieving its stated goals include, but are not limited to, the following:
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(a)
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inability to complete research and development of the new Solar3D technology with limited working capital;
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(b)
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volatility or decline of our stock price;
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(c)
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potential fluctuation in quarterly results;
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(d)
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our failure to earn revenues or profits;
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(e)
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inadequate capital to continue business;
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(f)
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barriers to raising the additional capital or to obtaining the financing needed to implement our business plans;
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(g)
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lack of demand for our products and services;
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(h)
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rapid and significant changes in markets;
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(i)
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litigation with or legal claims and allegations by outside parties;
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(j)
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insufficient revenues to cover operating costs;
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(k)
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inability to start or acquire new businesses, or lack of success of new businesses started or acquired by us, if any;
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(l)
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dilution experienced by our shareholders in their ownership of Solar3D because of the issuance of additional securities by us, or the exercise of outstanding convertible securities;
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(m)
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inability to effectively develop or commercialize our new Solar3D technology;
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(n)
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inability to obtain patent or other protection for our proprietary intellectual property;
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(o)
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loss of key personnel;
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(p)
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effect of significant competition which is intense in the solar industry; and,
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(q)
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elimination of key drivers of SUNworks’ business, including but not limited to loss of media exposure, elimination of government subsidies for solar power, or a reduction in utility prices.
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Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. The Company cautions you not to place undue reliance on the statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that the Company or persons acting on its behalf may issue.
The Company does not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances arising after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our condensed financial statements and notes to those statements. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking information that involves risks and uncertainties.
Overview
On August 5, 2010, the holders of a majority of our outstanding voting stock voted by written consent to (1) effect a one-for-five reverse stock split, and (2) change our name to Solar 3D, Inc. From that date until January 31, 2014, our business focus has centered on the development and commercialization of our new proprietary technology, which seeks to significantly increase the efficiency and energy production of solar photovoltaic cells that are currently offered in the market and that may be developed in the future. In furtherance of our business, we applied for patents covering a novel three-dimensional solar cell technology that is designed to maximize the conversion of sunlight into electricity. We believe our new technology will dramatically increase the efficiency of solar cells. Unlike conventional solar cells where sunlight passes through one time, our 3D solar cell design is planned to use myriad 3D micro-cells that trap sunlight inside photovoltaic structures where photons bounce around until they are all converted into electricity. Our three-dimensional technology is expected to combine thin-film and thick-film technologies to achieve the high efficiencies of crystalline at the lower cost of thin film. Our development division has two full time employees, our chief executive officer and our director of technology, and a part time office manager. We also retain the services of several research consultants who are responsible for product development
As of January 31, 2014, Solar3D, Inc. acquired 100% of the outstanding capital stock of Solar United Networks, Inc. (“SUNworks”). SUNworks is engaged in the business of the design, installation, and management of solar systems for commercial, agricultural, and residential customers in California. SUNworks designs, finances, and installs systems ranging in size from 2KW (kilowatt) for residential loads to multi MW (megawatt) systems for larger commercial projects. SUNworks currently employs approximately 40 personnel involved in the operations and administration of the business. It also utilizes outside subcontractors to assist with providing solar systems to its customers.
We currently have 44 full time employees, our chief executive officer, our director of technology, three managers at SUNworks, along with 6 sales people and 33 other employees at SUNworks. We also retain the services of several research consultants who are responsible for product development
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of property, plant and equipment, intangible assets, deferred tax assets and fair value computation using the Black Scholes option pricing model. We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
Use of Estimates
In accordance with accounting principles generally accepted in the United States, management utilizes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectability of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation expense and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.
Fair Value of Financial Instruments
Our cash, accounts receivable and accounts payable are stated at cost which approximates fair value due to the short-term nature of these instruments.
Revenue Recognition
We recognize revenue on construction contracts using the percentage-of-completion method of accounting based on the proportion of costs incurred on the contract to total estimated contract costs, except that material estimated losses which become apparent prior to completion are provided for in their entirety. Claims for additional contract compensation due the Company are not reflected in the accounts until the year in which such claims are allowed.
Direct contract costs included all direct labor and labor burden, materials, subcontractors, and other direct costs. Selling, general, and administrative costs are charged to expense as incurred.
The asset, “Costs and estimated earnings in excess of billings”, represents revenues recognized in excess of amounts billed on contracts in progress. The liability, “Billings in excess of costs and estimated earnings”, represents billings in excess of revenues recognized on contracts in progress.
Provision For Sales Returns, Allowances and Bad Debts
We will continue to maintain a provision for sales allowances, returns and bad debts. Sales returns and allowances result from equipment damaged in delivery or customer dissatisfaction, as provided by agreement. The provision will continue to be provided for by reducing gross revenue by a portion of the amount invoiced during the relevant period. The amount of the reduction will continue to be estimated based on historical experience.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2013
REVENUE AND COST OF SALES
For the three months ended June 30, 2014, the Company had revenue of $7,471,042 from the sale of solar systems at SUNworks. Three months of SUNworks sales were consolidated into the Company’s financial statements for the period. Cost of sales for the three months ending June 30, 2014, was $5,438,473.
SELLING AND MARKETING EXPENSES
For the six months ended June 30, 2014, the Company had selling and marketing expenses (“S&M”) expenses of $432,605, compared to $0 for the prior three months ended June 30, 2013. S&M expenses increased primarily due to the acquisition of SUNworks.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (“G&A”) expenses increased by $527,950 to $803,751, compared to $275,801 for the prior three months ended June 30, 2013. G&A expenses increased primarily due to the expenses incurred from January 31, 2014 to June 30, 2014 by SUNworks, our recently acquired wholly owned subsidiary, in the amount of $456,641, professional fees in the amount of $7,329 incurred in connection with the purchase of SUNworks, outside services in the amount of $11,573, non-cash stock compensation of $94,379 and an overall decrease in G&A expenses of $41,972.
RESEARCH AND DEVELOPMENT
Research and development (“R&D”) costs for the three months ended June 30, 2014 and 2013 were $31,919 and $33,629, respectively. The Company’s focus was on increasing its revenue through a purchase acquisition, which closed on January 31, 2014 when SUNworks became a wholly owned subsidiary of the Company.
OTHER INCOME/(EXPENSES)
Other income and (expenses) increased by $236,491 to $538,395 for the three months ended June 30, 2014, compared to $301,904 for the prior three months ended June 30, 2013. The increase was the result of an increase in interest income of $34, gain on settlement of debt of $1,342, the loss on change in fair value of the derivative instruments of $435,369, amortization of debt discount in the amount of $625,834, penalties of $6,670 and an increase of interest expense in the amount of $38,048. The increase in other income and (expenses) was due to the Company entering into debt financing with convertible promissory notes.
NET LOSS
Net loss decreased by $835,540 to $223,643 for the three months ended June 30, 2014, compared to an increase in loss of $611,897 for the prior three months ended June 30, 2013. The decrease in net loss was the result of a net increase of other income and (expenses) of $236,491, and an increase of operating expenses of $960,438, with an increase in gross profit of $2,032,569. Currently, operating costs exceed revenue because sales have not yet commenced at the parent company, we only recently acquired SUNworks, our wholly owned subsidiary, and substantial costs were incurred by the Company in the course of acquiring SUNworks. We cannot assure when or if revenue will exceed operating costs.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2013
REVENUE AND COST OF SALES
For the six months ended June 30, 2014, the Company had revenue of $8,518,458 from the sale of solar systems at SUNworks. Only five months of SUNworks sales were consolidated into the Company’s financial statements since the acquisition took place on January 31, 2014. Cost of sales for the six months ending June 30, 2014, was $6,210,530.
SELLING AND MARKETING EXPENSES
For the three months ended June 30, 2014, the Company had selling and marketing expenses (“S&M”) expenses of $618,876, compared to $0 for the prior six months ended June 30, 2013. S&M expenses increased primarily due to the acquisition of SUNworks.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (“G&A”) expenses increased by $1,192,407 to $1,759,199, compared to $566,792 for the prior six months ended June 30, 2013. G&A expenses increased primarily due to the expenses incurred from January 31, 2014 to June 30, 2014 by SUNworks, our recently acquired wholly owned subsidiary, in the amount of $728,160, professional fees in the amount of $238,609 incurred in connection with the purchase of SUNworks, outside services in the amount of $12,960, non-cash stock compensation of $304,657 and an overall decrease in G&A expenses of $91,979.
RESEARCH AND DEVELOPMENT
Research and development (“R&D”) costs for the six months ended June 30, 2014 and 2013 were $60,758 and $57,352, respectively. The Company’s focus was on increasing its revenue through a purchase acquisition, which closed on January 31, 2014 when SUNworks became a wholly owned subsidiary of the Company.
OTHER INCOME/(EXPENSES)
Other income and (expenses) increased by $3,595,852 to $3,680,724 for the six months ended June 30, 2014, compared to $84,872 for the prior six months ended June 30, 2013. The increase was the result of an increase in interest income of $148, an increase in gain on settlement of debt of $45,880, the loss on change in fair value of the derivative instruments of $1,782,205, amortization of debt discount in the amount of $1,779,632, penalties of $6,670 and an increase of interest expense in the amount of $73,373. The increase in other income and (expenses) was due to the Company entering into debt financing with convertible promissory notes.
NET LOSS
Net loss increased by $3,104,940 to $3,815,082 for the six months ended June 30, 2014, compared to $710,142 for the prior six months ended June 30, 2013. The increase in net loss was the result of a net increase of other income and (expenses) of $3,595,852, and an increase of operating expenses of $1,817,016, with an increase in gross profit of $2,307,928. Currently, operating costs exceed revenue because sales have not yet commenced at the parent company, we only recently acquired SUNworks, our wholly owned subsidiary, and substantial costs were incurred by the Company in the course of acquiring SUNworks. We cannot assure when or if revenue will exceed operating costs.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2014, we had a working capital deficit of $3,454,528 as compared to a working capital deficit of $3,479,284 at December 31, 2013. This increase in working capital deficit was due primarily to an increase in accrued expenses, derivative liability, equity financing through the issuance of convertible promissory notes, accounts payable, and other payables.
Cash flow provided in operating activities was $341,862 for the six months ended June 30, 2014, as compared to cash used of $296,738 for the six months ended June 30, 2013. This increase of cash provided in operating activities of $638,600 was primarily attributable to the acquisition of SUNworks, accounts receivable, inventory, prepaid expenses, accounts payable, other liabilities, non cash stock compensation, amortization of debt discount recognized as interest expense, gain on settlement of debt and derivative liability, with a decrease in other assets, and accrued expenses.
Cash used in investing activities was $1,077,989 for the six months ended June 30, 2014, compared to $18,925 for the six months ended June 30, 2013. The increase in the use of cash in investing activities was due to the purchase of SUNworks, our wholly owned subsidiary, and expenditures for fixed assets during the current period.
Cash provided from financing activities during the six months ended June 30, 2014 was $1,955,061 as compared to cash provided of $320,000 for the six months ended June 30, 2013. The increase of $1,635,061 was primarily due to an increase in equity financing through the issuance of convertible promissory notes, and the cash received from the subsidiary.
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.