CONDENSED
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE
30, 2016
(in
thousands, except share and per share data)
1.
BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2016. For further information refer to the consolidated financial statements
and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2015.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies of Sunworks, Inc. is presented to assist in understanding the Company’s financial
statements. The financial statements and notes are representations of the Company’s management, which is responsible for
their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States
of America and have been consistently applied in the preparation of the financial statements.
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of Sunworks, Inc., and its wholly owned operating
subsidiaries, Sunworks United, Inc., MD Energy, Inc., and Elite Solar Acquisition Sub, Inc. All material intercompany transactions
have been eliminated upon consolidation of these entities.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review
the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion
type contracts, allowances for uncollectible accounts, inventory valuation, debt beneficial conversion features, valuations of
non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
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Revenue
Recognition
Revenues
and related costs on construction contracts are recognized using the “percentage of completion method” of accounting
in accordance with ASC 605-35, Accounting for Performance of Construction-Type and Certain Production Type Contracts (“ASC
605-35”). Under this method, contract revenues and related expenses are recognized over the performance period of the contract
in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include
direct material, direct labor, subcontract labor and any allocable indirect costs. All un-allocable indirect costs and corporate
general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen,
the Company will recognize the loss, as it is determined. 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.
The
Asset, “Costs in excess of billings”, represents revenues recognized in excess of amounts billed on contracts in progress.
The Liability, “Billings in excess of costs”, represents billings in excess of revenues recognized on contracts in
progress. At June 30, 2016 and December 31, 2015, the costs in excess of billings balance were $13,441 and $2,130, and the billings
in excess of costs balance were $5,242 and $1,990, respectively.
Cash
and Cash Equivalent
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Concentration
Risk
Cash
includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (FDIC) limits.
At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of
June 30, 2016, the cash balance in excess of the FDIC limits was $8,262. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk in these accounts.
Inventory
Inventory
is valued at the lower of cost or market and is determined by the first-in, first-out method. Inventory primarily consists of
panels and other materials.
Selling
and Marketing
The
Company expenses selling and marketing costs as incurred. Selling and marketing costs include printed material, direct mail, radio,
telemarketing, tradeshow costs, magazine and catalog advertisement. Selling and marketing costs for the three months ended June
30, 2016 and 2015 were $1,670 and $1,241, respectively, and for the six months ended June 30, 2016 and 2015 were $2,872 and $2,354,
respectively.
Research
and Development Costs
Research
and development costs are expensed as incurred. These costs consist primarily of consulting fees, salaries and direct payroll
related costs. The costs for the three months ended June 30, 2016 and 2015 were $0 and $22, respectively, and for the six months
ended June 30, 2016 and 2015 were $0 and $47, respectively.
Warranty
Liability
The
Company establishes warranty liability reserves to provide for estimated future expenses as a result of installation and product
defects, product recalls and litigation incidental to the Company’s business. Liability estimates are determined based on
management’s judgment, considering such factors as historical experience, the likely current cost of corrective action,
manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third
party experts such as engineers, and discussions with the Company’s general counsel and outside counsel retained to handle
specific product liability cases. Solar panel manufacturers currently provide substantial warranties between ten to twenty-five
years with full reimbursement to replace and install replacement panels while inverter manufacturers currently provide warranties
covering ten to fifteen-year replacement and installation. Warranty costs and associated liabilities for the three months ended
June 30, 2016 and 2015 were $0 and $0, respectively, and for the six months ended June 30, 2016 and 2015 were $13 and $0, respectively.
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Stock-Based
Compensation
The
Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for
services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based
on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured
on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and
vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the
value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee
stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances
where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based
compensation charge is recorded in the period of the measurement date.
Basic
and Diluted Net Income (Loss) per Share Calculations
Income
(Loss) per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share
are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted
earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. The shares for employee options, warrants and convertible notes were used in the calculation of the
income per share.
For
the period ended June 30, 2016, the Company has excluded 671,924 options and 2,997,000 warrants outstanding because they’re
below the period ending stock price. We’ve also excluded Series B preferred stock convertible into 1,506,024 shares of common
stock due to trading restrictions. For the period ended June 30, 2015, the Company has excluded 957,266 options, 2,997,000 warrants
outstanding, and notes convertible into 5,443,746 shares of common stock because their impact on the loss per share is anti-dilutive.
Contracts
Receivable
The
Company performs ongoing credit evaluation of its customers. Management closely monitors outstanding receivables based on factors
surrounding the credit risk of specific customers, historical trends, and other information, and records bad debts using the direct
write-off method. Generally accepted accounting principles require the allowance method be used to reflect bad debts, however,
the effect of the use of the direct write-off method is not materially different from the results that would have been obtained
had the allowance method been followed. Accounts receivable are presented net of an allowance for doubtful accounts of $0 at June
30, 2016, and 2015.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation for property and equipment commences when it’s put into service and are depreciated
using the straight line method over its estimated useful lives:
Machinery
& equipment
|
|
5
Years
|
Furniture
& fixtures
|
|
5-7
Years
|
Computer
equipment
|
|
3-5
Years
|
Vehicles
|
|
5-7
Years
|
Leaseholder
improvements
|
|
3-5
Years
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Depreciation
expense for the six months ended June 30, 2016 and 2015 was $113 and $16 respectively.
Long-Lived
Assets
The
Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Indefinite
Lived Intangibles and Goodwill Assets
The
Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business
Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and
liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available,
and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset
valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the
tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The
Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events
or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance
with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at December 31,
2015 and determined there was no impairment of indefinite lived intangibles and goodwill.
Fair
Value of Financial Instruments
Disclosures
about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the
balance sheet, where it is practicable to estimate that value. As of June 30, 2016, the amounts reported for cash, accrued interest
and other expenses, and notes payable approximate the fair value because of their short maturities.
We
adopted ASC Topic 820 as of January 1, 2008 for financial instruments measured as fair value on a recurring basis. ASC Topic 820
defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted
in the United States and expands disclosures about fair value measurements.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes
the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements).
These tiers include:
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●
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Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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|
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●
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Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as
quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active; and
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●
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Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
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Segment
Reporting
Operating
segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly
by the chief operating decision maker, or decision making group, in deciding the method to allocate resources and assess performance.
The Company currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.
Recently
adopted pronouncements
In
January 2016, FASB amended the guidance for recognition and measurement of financial assets and liabilities. These amendments
address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The adoption of this
guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early
adoption of certain provisions of this guidance is permitted as of the beginning of the fiscal year of adoption. Entities should
apply these amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year
of adoption. The amendments related to equity securities without readily determinable fair value should be applied prospectively
to equity investments that exist as of the date of adoption. The Company does not expect this guidance to have a significant impact
on the results of operations, financial condition, or cash flows.
In
March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation (Topic 816).” ASU 2016-09 simplifies
several aspects of accounting for share-based compensation including the tax consequences, classification of awards as equity
or liabilities, forfeitures and classification on the statement of cash flows. The ASU is effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years with early adoption permitted. The Company is currently
evaluating the effects of adoption this ASU. The Company does not expect this guidance to have a significant impact on the results
of operations, financial condition, or cash flows.
Management
reviewed currently issued pronouncements during the three months ended June 30, 2016, and does not believe that any other recently
issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed
financial statements.
3.
BUSINESS ACQUISITION
MD
Energy, LLC (MDE)
On
March 2, 2015, the Company acquired 100% of the tangible and intangible assets of MD Energy, LLC (MD Energy), for cash in the
amount of $850, a convertible promissory note in the principal amount of $2,650, and payment of working capital surplus in the
amount of $437. The acquisition was accounted for under ASC 805. MD Energy designs, monitors and maintains solar systems, but
outsources the physical construction of the systems. MD Energy is now a wholly-owned subsidiary of the Company.
Under
the purchase method of accounting, the transactions were valued for accounting purposes at $3,937, which was the fair value of
MD Energy at the time of the acquisition. Since the Company determined there were no other separately identifiable intangible
assets, any difference between the cost of the acquired entity 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:
Closing cash payment
|
|
$
|
850
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Working capital surplus
|
|
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437
|
|
Convertible promissory
notes
|
|
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2,650
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|
Total purchase price
|
|
$
|
3,937
|
|
|
|
|
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|
Tangible assets acquired
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|
$
|
1,442
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|
Liabilities assumed
|
|
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(799
|
)
|
Net tangible assets
|
|
|
643
|
|
Goodwill
|
|
|
3,294
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Total purchase price
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$
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3,937
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Plan
B Enterprises, Inc. (Plan B)
On
December 1, 2015, the Company acquired 100% of the issued and outstanding stock of Plan B Enterprises, Inc., a California corporation
and d/b/a Elite Solar, Universal Racking Solutions (collectively, “Plan B”) whereby Plan B was merged with and into
Elite Solar Acquisition Sub, Inc., a wholly owned subsidiary of the Company (“Acquisition Sub”) for $2,500 cash, net
of recoverable of $137, and by issuance of 1,506,024 shares of convertible preferred stock in the principal amount of $4,500.
The acquisition was accounted for under ASC 805. Plan B provides solar photovoltaic installation and consulting services to residential,
commercial and agricultural properties.
Under
the purchase method of accounting, the transactions were valued for accounting purposes at $7,000, which was the fair value of
Plan B at the time of the acquisition. The assets and liabilities of Plan B were recorded at their respective fair values as of
the date of acquisition. Since the Company determined there were no other separately identifiable intangible assets, any difference
between the cost of the acquired entity 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:
Closing cash payment, net
of recoverable of $137.
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|
$
|
2,363
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Preferred share value / Series
B
|
|
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4,500
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|
Total purchase price
|
|
|
6,863
|
|
|
|
|
|
|
Tangible assets acquired
|
|
|
5,203
|
|
Liabilities assumed
|
|
|
(3,674
|
)
|
Net tangible assets
|
|
|
1,529
|
|
Goodwill
|
|
|
4,834
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Other intangible
assets
|
|
|
500
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|
Total purchase price
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$
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6,863
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|
The
above estimated fair value of the intangible assets of MDE and Plan B is based on final and preliminary purchase price allocations
prepared by management, respectively. As a result, during the preliminary purchase price allocation period, which may be up to
one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. After the preliminary purchase price allocation period, we record adjustments to assets acquired
or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the
adjustments were determined.
Pro
forma results
The
following tables set forth the unaudited pro forma results of the Company as if the acquisition of MDE and Plan B had taken place
on the first day of the periods presented. These combined results are not necessarily indicative of the results that may have
been achieved had the companies been combined as of the first day of the periods presented.
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|
Six
months ended,
June 30,
2015
|
|
Total revenues
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|
$
|
23,737
|
|
Net loss
|
|
|
(1,043
|
)
|
Basic and diluted net loss per common
share
|
|
$
|
(0.06
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)
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4.
LOANS PAYABLE
Plan
B, a subsidiary of the Company, established a line of credit prior to the acquisition on March 10, 2014, with Tri Counties Bank
to borrow up to $200 maturing on March 10, 2015. The maturity date was subsequently extended to March 10, 2016. The minimum monthly
payment is dependent upon the outstanding balance due. This was a variable rate revolving line of credit with a minimum interest
rate of 4.75%. The outstanding balance at December 31, 2015 was $137. The outstanding balance was paid in full before the maturity
date.
Plan
B, a subsidiary of the Company, entered into a business loan agreement prior to the acquisition with Tri Counties Bank dated March
14, 2014, in the original amount of $130, bearing interest at 4.95%. The loan agreement called for monthly payments of $2 and
was scheduled to mature on March 14, 2019. Proceeds from the loan were used to purchase a pile driver and related equipment and
is secured by the equipment. The outstanding balance at June 30, 2016, is $76.
Plan
B, a subsidiary of the Company, entered into a Business loan agreement prior to the acquisition with Tri Counties Bank dated April
9, 2014, in the original amount of $250, bearing interest at 4.95%. The loan agreement calls for monthly payments of $5 and is
scheduled to mature on April 9, 2019. Proceeds from the loan were used to purchase racking inventory and related equipment. The
loan is secured by the inventory and equipment. The outstanding balance at June 30, 2016, is $149.
MDE,
a subsidiary of the Company, entered into notes payable in October 2014, secured by transportation equipment, requiring combined
monthly payments of $1, including principal and interest at various rates of interest per annum. Principal and any accrued interest
are payable until September 2019. One note was cancelled with the disposition of the vehicle and another note was paid in full
during the quarter ended June 30, 2016.
On
December 31, 2015, the Company entered into a $2.5 million Credit Facility or the Credit Agreement with JPMorgan Chase Bank, N.A.
Availability under the Credit Facility is a Line of Credit with a Letter of Credit Sublimit up to $2.5 million. Upon execution
the Company accessed $1.8 million that was repaid in full on January 5, 2016. The Company had no borrowings during the quarter
ended June 30, 2016. The Note matures on November 30, 2017, but may be cancelled at any time by the Company. Loans are secured
by a security interest in the Company’s account held with the Lender. Interest on any unpaid balance accrues at the Prime
Rate, as defined in the Credit Agreement; provided that, on any given day, shall not be less than the Adjusted One Month LIBOR
rate. Until the maturity date, the Company shall pay monthly interest only. The Credit Facility provides for the payment of certain
fees, including fees applicable to each standby letter of credit and standard transaction fees with respect to any transactions
occurring on account of any letter of credit. Subject to customary carve-outs, the Credit Agreement contains customary negative
covenants and restrictions for agreements of this type on actions by the Company including, without limitation, restrictions on
indebtedness, liens, investments, loans, consolidation, mergers, dissolution, asset dispositions outside the ordinary course of
business, change in business and restriction on use of proceeds. In addition, the Credit Agreement requires compliance by the
Company with covenants including, but not limited to, furnishing the lender with certain financial reports. The Credit Agreement
contains customary events of default, including, without limitation, non-payment of principal or interest, violation of covenants,
inaccuracy of representations in any material respect and cross defaults with certain other indebtedness and agreements.
5.
ACQUISITION CONVERTIBLE PROMISSORY NOTES
On
January 31, 2014, the Company issued 4% convertible promissory notes in the aggregate principal amount of $1,750 as part of the
consideration paid to acquire 100% of the issued and outstanding stock of Sunworks United. The notes are convertible at any time
after issuance into shares of fully paid and non-assessable shares of common stock. The conversion price is $0.52 per share until
March 30, 2015, which was amended to extend to March 31, 2016. The Notes were five (5) year notes and bore interest at the rate
of 4% per annum. In February and March 2014, $625 of the notes was converted into 1,201,923 shares of common stock, leaving a
remaining balance of $1,125 as of December 31, 2014. During the twelve months ended December 31, 2015, the Company issued 721,154
shares of common stock upon conversion of principal in the amount of $375. The principal balance remaining as of December 31,
2015 was $750. The Company recorded amortization of the beneficial conversion feature as interest expense in the amount of $0
and $234 during the six months ended June 30, 2016 and 2015, respectively. As of March 31, 2016, the notes were fully converted
to 1,442,308 shares of common stock.
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On
February 28, 2015, the Company issued a 4% convertible promissory note in the aggregate principal amount of $2,650 as part of
the consideration paid to acquire 100% of the total outstanding stock of MD Energy. The note is convertible into shares of common
stock on or after each of the following dates: November 30, 2015, November 30, 2016 and November 30, 2017. The conversion price
shall be $2.60 per share. A beneficial conversion feature of $2,650 was calculated and capped at the value of the note based on
effective conversion price of $3.20. In November 2015, the Company issued 339,743 shares of common stock upon conversion of the
principal amount of $883. Commencing on March 31, 2015, and each quarter thereafter during the first two (2) years of the note,
the Company will make quarterly interest only payments to the shareholder for accrued interest on the Note during the quarter.
Commencing with the quarter ending on June 30, 2017, the Company will make quarterly payments of interest accrued on the Note
during the prior quarter plus $221, with the final payment of all outstanding principal and accrued but unpaid interest on the
Note due and payable on February 28, 2020 (the maturity date). The Company recorded amortization of the beneficial conversion
feature as interest expense in the amount of $240 during the three months ended June 30, 2016 and 2015, respectively, and $484
and $322 during the six months ended June 30, 2016 and 2015, respectively. The debt discount will be amortized over the life of
the Convertible Note, or until such time that the Convertible Notes are converted, in full or in part, into shares of common stock
of the Company with any unamortized debt discount continuing to be amortized in the event of any partial conversion thereof and
any unamortized debt discount being expensed at such time of full conversion thereof.
We
evaluated the foregoing financing transactions in accordance with ASC Topic 470, Debt with Conversion and Other Options, and determined
that the conversion feature of the convertible promissory note was afforded the exemption for conventional convertible instruments
due to its fixed conversion rate. The convertible promissory notes have explicit limits on the number of shares issuable so they
did meet the conditions set forth in current accounting standards for equity classification. The convertible promissory notes
were issued with non-detachable conversion options that are beneficial to the investors at inception, because the conversion option
has an effective strike price that is less than the market price of the underlying stock at the commitment date. The accounting
for the beneficial conversion feature requires that the beneficial conversion feature be recognized by allocating the intrinsic
value of the conversion option to additional paid-in-capital, resulting in a discount on the convertible notes, which will be
amortized and recognized as interest expense.
6.
CONVERTIBLE PROMISSORY NOTES
On
March 1, 2013, the Company entered into a securities purchase agreement providing for the sale of a 5% convertible promissory
note in the aggregate principal amount of $8, for consideration of $8. The note was convertible into shares of common stock of
the Company at a price equal to a variable conversion price equal to the lesser of $0.52 per share or the lowest closing price
after the effective date. The note matured on March 31, 2015 and the Company issued 16,987 shares of common stock for principal
in the amount of $8, plus accrued interest of $1.
On
January 29, 2014, the Company entered into a securities purchase agreement providing for the sale of a 10% convertible promissory
note in the principal amount of up to $100. Upon execution of the note, the Company received an initial advance of $90. On December
4, 2014, the Company issued 192,543 shares of common stock upon conversion of $60 in principal, plus interest of $5. As of December
31, 2014, the remaining balance was $30. The note was convertible into shares of common stock of the Company at a price equal
to a variable conversion price equal to the lesser of $0.338 per share, or fifty percent (50%) of the lowest trading price after
the effective date. The Company issued 97,633 shares of common stock upon conversion of principal in the amount of $30, plus accrued
interest of $3 during the six months ended June 30, 2015
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On
January 31, 2014, the Company entered into a securities purchase agreement providing for the sale of a 10% convertible promissory
note in the principal amount of up to $750, for consideration of $750. The proceeds were restricted and were used for the purchase
of Solar United Network, Inc. The note was convertible into shares of common stock of the Company at a price equal to a variable
conversion price equal to the lesser of $1.30 per share, or fifty percent (50%) of the lowest trading price after the effective
date. As of September 30, 2014, the note was exchanged for a new note with a fix price of $0.338, and convertible into shares
of common stock. Per ASC 815, the derivative liability on the note was extinguished and the new note was re-valued per ASC 470
as a beneficial conversion feature, which was expensed in the statement of operations during the prior year. The note originally
matured on October 28, 2014, was extended three months to January 31, 2015, was extended to June 30, 2016, and in March 2016 was
subsequently extended to June 30, 2019 with zero interest. The Company recorded interest expense in the amount of $11 and $60
during the six months ended June 30, 2016 and 2015, respectively. During the period ended June 30, 2016, the noteholder made a
partial conversion of principal and accrued interest in the amount of $196 and $45, respectively with a remaining principal balance
of $554.
On
February 11, 2014, the Company entered into a securities purchase agreement providing for the sale of a 10% convertible promissory
note in the principal amount of up to $100. Upon execution of the note, the Company received an initial advance of $20. In February
and March, the Company received additional advances in an aggregate amount of $80 for an aggregate total of $100. The note was
convertible into shares of common stock of the Company at a price equal to a variable conversion price equal to the lesser of
$1.30 per share, or fifty percent (50%) of the lowest trading price after the effective date. As of September 30, 2014, the note
was exchanged for a new note with a fixed price of $0.338, and convertible into shares of common stock. Per ASC 815, the derivative
liability on the note was extinguished and the new note was re-valued per ASC 470 as a beneficial conversion feature. The note
matured on various dates from the effective date of each advance with respect to each advance. At the sole discretion of the lender,
the lender was able to modify the maturity date to be twelve (12) months from the effective date of each advance. The note matured
on various dates in 2014, and was extended to June 30, 2016, and in March 2016 was subsequently extended to June 30, 2019 with
zero interest. The Company recorded interest expense in the amount of $1 and $8, during the six months ended June 30, 2016 and
2015, respectively.
At
the time of issuance, the Company evaluated the financing transactions in accordance with ASC Topic 815, Derivatives and Hedging,
and determined that the conversion feature of the convertible promissory note was not afforded the exemption for conventional
convertible instruments due to its variable conversion rate. The notes had no explicit limit on the number of shares issuable
so they did not meet the conditions set forth in current accounting standards for equity classification. The Company elected to
recognize the note under paragraph 815-15-25-4, whereby, there would be a separation into a host contract and derivative instrument.
The Company elected to initially and subsequently measure the note in its entirety at fair value, with changes in fair value recognized
in earnings. The derivative liability was adjusted periodically according to the stock price fluctuations.
7.
CAPITAL STOCK
Reverse
Stock Split
On
February 25, 2015, the Company effected a 26:1 reverse stock split on its issued and outstanding shares of common stock. All share
and per share dollar amounts have been retrospectively revised to reflect the twenty- six-for-one (26:1) reverse stock split.
Common
Stock
During
the six months ended June 30, 2016, the Company issued 1,442,309 shares of common stock at a price of $0.52 per share for conversion
of principal for three convertible promissory notes in the aggregate amount of $750.
During
the six months ended June 30, 2016, the Company issued 711,586 shares of common stock at a price of $0.338 per share for partial
conversion of principal and interest for a convertible promissory note in the aggregate amount of $241.
During
the six months ended June 30, 2016, the Company issued 379,491 shares of restricted common stock per terms of the RSGA awards
and recorded stock compensation costs at fair value of $1,775.
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Preferred
Stock
On
November 25, 2015, the Company established a new series of the authorized preferred stock designated as Series B Preferred Stock,
$0.001 par value per share, which consists of 1,700,000 shares. The Certificate of Designation was filed with the Secretary of
State of the State of Delaware. Pursuant to the Certificate of Designation and subject to the rights of any other series of preferred
stock that may be established by the Board of Director, holders of Series B Preferred Stock (the “Holders”) will have
liquidation preference over the holders of the Company’s Common Stock in any distribution upon winding up, dissolution,
or liquidation. Holders will also be entitled to receive dividends, if, when and as declared by the Board of Director, which dividends
shall be payable in preference and priority to any payment of any dividend to holders of Common Stock. Holders will be entitled
to convert each share of Series B Preferred Stock into one (1) share of Common Stock, and will also entitled to vote together
with the holders Common Stock on all matters submitted to shareholders at a rate of one (1) vote for each share of Series B Preferred
Stock. In addition, so long as at least 100,000 shares of Series B Preferred Stock are outstanding, the Company may not, without
the consent of the Holders of at least a majority of the shares of Series B Preferred Stock then outstanding: (i) amend, alter
or repeal any provision of the Certificate of Incorporation or bylaws of the Company or the Certificate of Designation so as to
adversely affect any of the rights, preferences, privileges, limitations or restrictions provided for the benefit of the Holders
or (ii) issue or sell, or obligate itself to issue or sell, any additional shares of Series B Preferred Stock, or any securities
that are convertible into or exchangeable for shares of Series B Preferred Stock. 1,506,024 shares of Series B Preferred stock,
at a fair value of $4,500, were issued in December 2015 in connection with the acquisition of Plan B.
8.
STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS
Options
As
of June 30, 2016, the Company has 1,494,574 non-qualified stock options outstanding to purchase 1,494,574 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
seven years from the date of grant at exercise prices ranging from $0.26 to $4.42 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.
|
|
June
30, 2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
|
Options
|
|
|
price
|
|
Outstanding, beginning January 1, 2016
|
|
|
899,574
|
|
|
$
|
1.30
|
|
Granted
|
|
|
595,000
|
|
|
|
2.68
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding, end of June 30, 2016
|
|
|
1,494,574
|
|
|
|
1.85
|
|
Exercisable at the end of June
30, 2016
|
|
|
897,221
|
|
|
|
1.13
|
|
During
the six months ended June 30, 2016 and 2015, the Company charged a total of $88 and $75, respectively, to operations related to
recognized stock based compensation expense for stock options.
Restricted
Stock CEO
During
the year ended December 31, 2013, the Company entered into a restricted stock grant agreement or RSGA with its Chief Executive
Officer, James B. Nelson, intended to provide and incentivize Mr. Nelson to improve the economic performance of the Company and
to increase its value and stock price. All shares issuable under the RSGA are performance-based shares. The RSGA provides for
the issuance of up to 769,230 shares of the Company’s common stock to Mr. Nelson provided certain milestones are met in
certain stages. As of September 30, 2014, two of the milestones were met, when the Company’s market capitalization exceeded
$10,000, and the consolidated gross revenue, calculated in accordance with GAAP, equaled or exceeded $10,000 for the trailing
twelve-month period. The Company issued 384,615 shares of common stock to Mr. Nelson at fair value of $786 during the year ended
December 31, 2014. If the Company’s consolidated net profit, calculated in accordance to GAAP, equals or exceeds $2,000
for a trailing twelve-month period and
the
sooner of Mr. Nelson’s retirement, change of control, or January 2019
,
the Company will issue an additional 384,615 shares of the Company’s common stock to Mr. Nelson. We have not recognized
any cost associated with the second milestone due to not being able to estimate the probability of it being achieved. As the performance
goals are achieved, the shares shall become eligible for vesting and issuance.
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Restricted
Shares to Shareholders
During
the year ended December 31, 2014, the Company entered into RSGAs with the three Shareholders of Sunworks United (Sunworks United
Shareholders), intended to provide incentive to the recipients to ensure economic performance of the Company. All shares issuable
under the RSGAs are performance based shares. Each of the RSGAs provide for the issuance of up to 276,924 shares of the Company’s
common stock in the aggregate to the Sunworks United Shareholders provided certain milestones are met in certain stages as follows:
a) If the Company’s aggregate net income from operations, for any trailing four (4) quarters equals or exceeds $2,000, the
Company will issue each Sunworks United Shareholder 92,308 shares of common stock and 276,924 shares in the aggregate; b) If the
Company’s aggregate net income from operations, for any trailing four (4) quarters exceeds $3,000, the Company will issue
each Sunworks United Shareholder 92,308 shares and 276,924 shares of common stock in the aggregate; c) If the Company’s
aggregate net income from operations, for any trailing four (4) quarters exceeds $4,000, the Company will issue each Sunworks
United Shareholder 92,307 and 276,924 shares in the aggregate. Based on the probability that the first milestone would be achieved
the Company recognized $100 in stock compensation expense during the year 2015. As of June 30, 2016 the Company issued 276,924
shares in aggregate associated with the first milestone. As the performance goals are achieved, the additional shares shall become
eligible for vesting and issuance.
Restricted
Shares to Employees
During
the year ended December 31, 2014, the Company entered into RSGAs with certain employees of Sunworks United, intended to provide
incentive to the recipients to ensure certain economic performance of the Company. All shares issuable under the RSGA are performance
based shares. Each of the RSGAs provides for the issuance of up to 38,462 shares of the Company’s common stock provided
certain milestones are met in certain stages as follows: a) If the Company’s aggregate net income from operations, for any
trailing four (4) quarters equals or exceeds $2,000, the Company will issue to each employee 12,821 shares of common stock and
64,105 shares in the aggregate; b) If the Company’s aggregate net income from operations, for any trailing four (4) quarters
exceeds $3,000, the Company will issue each employee 12,821 shares of common stock and 64,105 shares in the aggregate; c) If the
Company’s aggregate net income from operations, for any trailing four (4) quarters exceeds $4,000, the Company will issue
each employee 12,820 and 64,100 shares in the aggregate. Based on the probability that the first milestone would be achieved the
Company recognized $33 in stock compensation expense during the year 2015. As of June 30, 2016 the Company issued 64,105 shares
to employees in aggregate associated with the first milestone. As the performance goals are achieved, the additional shares shall
become eligible for vesting and issuance.
Restricted
Shares to CFO
On
February 1, 2015, the Company entered into a RSGA with its Chief Financial Officer, intended to provide incentive to the CFO to
ensure certain economic performance of the Company. All shares issuable under the RSGA are performance-based shares and none have
yet vested nor have been issued. The RSGA provides for the issuance of up to 115,385 shares of the Company’s common stock
provided certain milestones are met in certain stages as follows: a) If the Company’s aggregate net income from operations,
for any trailing four (4) quarters equals or exceeds $2,000, the Company will issue 38,462 shares of common stock; b) If the Company’s
aggregate net income from operations, for any trailing four (4) quarters exceeds $3,000, the Company will issued 38,462 shares
of common stock; c) If the Company’s aggregate net income from operations, for any trailing four (4) quarters exceeds $4,000,
the Company will issue 38,461. As of June 30, 2016 the Company issued 38,462 shares to the CFO associated with the first milestone.
As the performance goals are achieved, the additional shares shall become eligible for vesting and issuance.
The
Company issued 379,491 shares of common stock in the six months ended June 30, 2016 and the total stock-based compensation expense
recognized in the statement of operations during the six months ended June 30, 2016 and 2015 was $1,863 and $75, respectively.
Warrants
As
of June 30, 2016, the Company had 2,997,000 common stock purchase warrants outstanding with an exercise price of $4.15 per share.
9.
SUBSEQUENT EVENTS
None
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