The accompanying notes
are an integral part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
1. ORGANIZATION AND LINE OF BUSINESS
Organization
Sunworks, Inc. (the “Company”)
was incorporated in the state of Delaware on January 30, 2002. The Company, based in Santa Barbara, California, began operations
on January 30, 2002. We were originally formed in January 2002 as MachineTalker, Inc. in order to pursue the development of new
wireless process control technology. In September 2010, we shifted our engineering and research focus to developing a new means
for generating solar-produced electrical power, which we planned to patent and perfect for use in the manufacture of highly efficient
solar cells. In July 2010, we changed our company name to Solar3D, Inc. and in March 2016, we changed our company name to Sunworks,
Inc. in order to better reflect our new business plan.
Line of Business
Through the acquisitions of Sunworks United,
Inc. (d/b/a Sunworks United), MD Energy, LLC, and Elite Solar Acquisition, Inc. the Company provides solar photovoltaic installation
and consulting services to residential, commercial, and agricultural properties. The work is performed under fixed price bid contracts,
cost-plus contracts and negotiated price contracts. The Company performed all of its work in California and Nevada in 2015 and
in 2016 expanded into Oregon, Arizona and New Mexico.
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 consolidated financial statements
include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries, Sunworks United, Inc. (d/b/a Sunworks United),
MD Energy, Inc., and Elite Solar Acquisition Sub, Inc. All material intercompany transactions have been eliminated upon consolidation
of these entities.
Use of Estimates
The preparation of financial statements in
conformity with 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, warranty reserves, inventory valuation, debt beneficial conversion features, valuations of non-cash capital stock issuances
and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Revenue Recognition
Revenues and related costs on construction
contracts are recognized 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.
Revisions in cost and profit estimates during
the course of the contract are reflected in the accounting period in which the facts, which require the revision, become known.
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final
contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
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 December 31, 2016 and December
31, 2015, the costs in excess of billings balance were $4,306,700 and $2,129,900, and the billings in excess of costs balance were
$4,997,200 and $1,989,500, respectively.Residential contract revenues are recognized
using the “completed contract” method of accounting.
Contract receivables are recorded on contracts
for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion of the contracts.
Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or
materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative
expenses are charged to operations as incurred and are not allocated to contract costs. Retention receivable is the amount withheld
by a customer until a contract is completed. Retention receivables of $354,400 and $218,000 were included in the balance of trade
accounts receivable as of December 31, 2016, and 2015, respectively.
Contract Receivable
The Company performs ongoing credit evaluation
of its customers. Management monitors outstanding receivables based on factors surrounding the credit risk of specific customers,
historical trends, age of receivables and other information, and records bad debts using the allowance method. Accounts receivable
are presented net of an allowance for doubtful accounts of $50,000 at December 30, 2016, and $0 at December 31, 2015. During calendar
year 2016, $105,500 was recorded as bad debt expense compared to $0 in 2015.
Cash and Cash Equivalent
The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
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
|
|
3-7 Years
|
Furniture & fixtures
|
|
5-7 Years
|
Computer equipment
|
|
3-5 Years
|
Vehicles
|
|
5-7 Years
|
Leaseholder improvements
|
|
3-5 Years
|
Depreciation expense as of December 31, 2016
and 2015 was $323,100 and $51,100, respectively.
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 December 31, 2016, the cash balance in excess
of the FDIC limits was $10,560,100. The Company has not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk in these accounts.
Inventory
Inventory is valued at the lower of cost or
market and is determined by the first-in, first-out method. Inventory primarily consists of panels, inverters, mounting racks
and other materials.
Advertising and Marketing
The Company expenses advertising and marketing
costs as incurred. Advertising and marketing costs include printed material, direct mail, radio, telemarketing, tradeshow costs,
magazine, and catalog advertisement. Advertising and marketing costs for the years ended December 31, 2016 and 2015 were $3,436,500
and $2,915,000, 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 years
ended December 31, 2016 and 2015 were $0 and $53,400, 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 years ended December 31, 2016 and 2015 were $116,200 and $44,700, respectively.
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 (Loss) Income
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 net (loss) income per share.
A net loss causes all outstanding common
stock options, warrants, convertible preferred stock and convertible notes to be anti-dilutive. As a result, the basic and diluted
losses per common share are the same for the year ended December 31, 2016.
As of December 31,
2016, the potentially dilutive securities have been excluded from the computations of weighted average shares outstanding
include 1,634,574 stock options, 1,811,539 restricted stock grants, shares underlying convertible
notes and preferred stock.
Dilutive per share amounts are computed using
the weighted-average number of common shares outstanding and potentially dilutive securities, using the treasury stock method if
their effect would be dilutive.
The following schedule reconciles the denominators
of the Company’s calculation for basic and diluted net income per share:
|
|
Twelve
months
ended
|
|
|
|
December
31, 2015
|
|
Shares
used in basic per share computation
|
|
|
16,966,921
|
|
Effect
of dilutive common stock options outstanding
|
|
|
599,677
|
|
Effect
of dilutive conversion options
|
|
|
4,636,588
|
|
Effect
of dilutive conversion of Series B Preferred Stock
|
|
|
1,506,024
|
|
Shares
used in diluted per share computation
|
|
|
23,709,210
|
|
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, 2016 and 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 December 31,2016, 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:
|
●
|
Level 1, defined
as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
|
|
●
|
Level 2, defined
as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices
for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active;
and
|
|
|
|
|
●
|
Level 3, defined
as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions,
such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers
are unobservable.
|
Business Combinations
We allocate the fair value of purchase consideration
to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess
of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired
customer lists, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management’s
estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable
and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition
date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon
the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Income Taxes
The Company uses the liability method of accounting
for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to financial
statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law. The measurement
of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available
evidence, is not expected to be realized.
Reclassifications
Certain reclassifications have been made to prior year’s financial statement
to conform to classifications used in the current year.
Segment Reporting
Operating segments are defined as components
of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision
maker, or decision making group, in deciding the method to allocate resources and assess performance. The Company currently has
one reportable segment for financial reporting purposes, which represents the Company’s core business.
New Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-2, which creates ASC Topic 842, “Leases.” This update increases transparency
and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. This guidance is effective for interim and annual reporting periods beginning after December
15, 2018. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of
operations, cash flows or financial disclosures.
In
March 2016, the FASB issued ASU No. 2016-9, which amends ASC Topic 718, “Compensation – Stock Compensation.”
This amendment simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective
for interim and annual reporting periods beginning after December 15, 2016. We are evaluating what impact, if any, the adoption
of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In
August 2016, the FASB issued ASU No. 2016-15 which amends ASC Topic 230, “Classification of Certain Cash Receipts and Cash
Payments.” The amendments in this Update address eight specific cash flow issues with the objective of reducing the existing
diversity in practice. The update outlines the classification of specific transactions as either cash inflows or outflows from
financing activities, operating activities, investing activities or non-cash activities. This guidance is effective for interim
and annual reporting periods beginning after December 15, 2017. We are evaluating what impact, if any, the adoption of this guidance
will have on our financial condition, results of operations, cash flows or financial disclosures.
In
November 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted
Cash. Historically, there has been a diversity in practice in how changes in restricted cash are presented and classified in the
statement of cash flows. The amendments in this update require that a statement of cash flows explain the change during the period
in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore,
amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments
in this update are effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. Early adoption is permitted. We are evaluating what impact, if any, the adoption of this guidance will have
on our financial condition, results of operations, cash flows or financial disclosures.
Management reviewed currently issued pronouncements
during the year ended December 31, 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 consolidated financial statements.
3. BUSINESS ACQUISITION
MD Energy, LLC (MD Energy)
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 $850,000 a convertible promissory
note in the principal amount of $2,650,000 and payment of working capital surplus in the amount of $437,000. 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 $3,937,000 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, 000
|
|
Working capital surplus
|
|
|
437,000
|
|
Convertible promissory notes
|
|
|
2,650,000
|
|
Total purchase price
|
|
$
|
3,937,000
|
|
|
|
|
|
|
Tangible assets acquired
|
|
$
|
1,442,000
|
|
Liabilities assumed
|
|
|
(799,000
|
)
|
Net tangible assets
|
|
|
643,000
|
|
Goodwill
|
|
|
3,294,000
|
|
Total purchase price
|
|
$
|
3,937,000
|
|
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 $2,500,000 cash, net of recoverable of $137,000 and by issuance
of 1,506,024 shares of convertible preferred stock in the principal amount of $4,500,000. The acquisition was accounted for under
ASC 805. Plan B provides solar photovoltaic installation and consulting services for residential, commercial and agricultural properties.
Under the purchase method of accounting, the
transactions were valued for accounting purposes at $7,000,000 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 $137,000.
|
|
$
|
2,363,000
|
|
Preferred share value / Series B
|
|
|
4,500,000
|
|
Total purchase price
|
|
|
6,863,000
|
|
|
|
|
|
|
Tangible assets acquired
|
|
|
5,203,000
|
|
Liabilities assumed
|
|
|
(3,674,000
|
)
|
Net tangible assets
|
|
|
1,529,000
|
|
Goodwill
|
|
|
5,334,000
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
6,863,000
|
|
The above estimated fair value of the intangible
assets of MD Energy and Plan B is based on final and preliminary purchase price allocations prepared by management, respectively.
The preliminary purchase price allocation period has ended and the final purchase assessment has been completed
without adjustment to the original allocation. Now any adjustment that could be found will be recorded in our operating
results in the period in which the adjustment was determined.
Pro forma results
The following tables
set forth the unaudited pro forma results of the Company as if the acquisition of MD Energy 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.
|
|
Year ended,
December 31, 2015
|
|
Total revenues
|
|
$
|
66,981,000
|
|
Net Income
|
|
|
1,858,000
|
|
Basic and diluted net income per common share
|
|
$
|
0.10
|
|
4. PROPERTY AND EQUIPMENT, NET
Property and equipment is summarized as follows
at December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Leasehold improvements
|
|
$
|
420,200
|
|
|
$
|
48,200
|
|
Vehicles & trailers
|
|
|
247,100
|
|
|
|
221,000
|
|
Machinery & equipment
|
|
|
844,900
|
|
|
|
273,900
|
|
Office equipment & furniture
|
|
|
396,600
|
|
|
|
277,600
|
|
Computers and software
|
|
|
118,600
|
|
|
|
65,600
|
|
|
|
|
2,027,400
|
|
|
|
886,300
|
|
Less accumulated depreciation
|
|
|
(353,400
|
)
|
|
|
(141,100
|
)
|
|
|
$
|
1,674,000
|
|
|
$
|
745,200
|
|
Depreciation expense for the years ended December
31, 2016 and 2015 was $323,100 and $51,100, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at
December 31, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Trade payables
|
|
$
|
11,797,200
|
|
|
$
|
4,273,100
|
|
Accrued payroll, vacation and taxes
|
|
|
498,700
|
|
|
|
216,500
|
|
Accrued expenses and commissions
|
|
|
682,900
|
|
|
|
542,600
|
|
Total
|
|
$
|
12,978,800
|
|
|
$
|
5,032,200
|
|
6. LOANS PAYABLE
Plan B, a subsidiary of the Company, prior
to its acquisition by the Company, established a line of credit on March 10, 2014, with Tri Counties Bank to borrow up to $200,000
with a maturity date of March 10, 2015. The maturity date was subsequently extended to March 10, 2016. The minimum monthly
payment was 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 $137,000. 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
$131,000 bearing interest at 4.95%. The loan agreement called for monthly payments of $2,500 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 December 31, 2016, is $62,700.
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 $250,000
bearing interest at 4.95%. The loan agreement calls for monthly payments of $4,700 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 December 31, 2016, is $124,500.
MD Energy, a subsidiary of the Company, entered
into notes payable in October 2014, secured by transportation equipment, requiring combined monthly payments of $1,500 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 the other note was paid in full during 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 under the Credit Agreement as of December 31, 2016. The Credit
Agreement 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 cash accounts 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 on loans. 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.
On January 5, 2016, the Company entered into
a loan agreement for the acquisition of a pile driver in the principal amount of $182,000 bearing interest at 5.5%. The
loan agreement calls for monthly payments of $4,200 and is scheduled to mature on January 15, 2020. The loan is secured by the
equipment. The outstanding balance at December 31, 2016, is $143,400.
On September 8, 2016, the Company entered
into a loan agreement for the acquisition of a pile driver in the principal amount of $174,000 bearing interest at 5.5%.
The loan agreement calls for monthly payments of $4,000 and is scheduled to mature on January 15, 2020. The loan is secured by
the equipment. The outstanding balance at December 31, 2016, is $164,100.
On November 14, 2016, the Company entered
into a 0% interest loan agreement for the acquisition of an excavator in the principal amount of $58,600. The loan agreement
calls for monthly payments of $1,200 and is scheduled to mature on November 13, 2020. The loan is secured by the equipment. The
outstanding balance at December 31, 2016, is $56,400.
On December 23, 2016, the Company entered
into a loan agreement for the acquisition of modular office systems and related furniture in the principal amount of $172,000
bearing interest at 4.99%. The loan agreement calls for 16 quarterly payments of $11,900 and is scheduled to mature in September
2020. The loan is secured by the equipment. The outstanding balance at December 31, 2016, is $162,300.
As of December 31, 2016 and December 31, 2015,
loans payable are summarized as follows:
|
|
2016
|
|
|
2015
|
|
Business line dated March 10, 2014
|
|
$
|
0
|
|
|
$
|
137,000
|
|
Business loan agreement dated March 14, 2014
|
|
|
62,700
|
|
|
|
88,000
|
|
Business loan agreement dated April 9, 2014
|
|
|
124,500
|
|
|
|
174,000
|
|
Equipment notes payable
|
|
|
526,200
|
|
|
|
61,000
|
|
Line of credit
|
|
|
0
|
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
713,400
|
|
|
|
2,260,000
|
|
Less: Current position
|
|
|
(217,700
|
)
|
|
|
(2,028,000
|
)
|
|
|
|
|
|
|
|
|
|
Long-term position
|
|
$
|
495,700
|
|
|
$
|
232,000
|
|
7. ACQUISITION CONVERTIBLE PROMISSORY NOTE
On January 31, 2014, the Company issued 4%
convertible promissory notes in the aggregate principal amount of $1,750,000 as part of the consideration paid to acquire 100%
of the issued and outstanding stock of Sunworks United. The notes are convertible into shares of fully paid and non-assessable
shares of common stock. The conversion price was $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, $625,000 of
the notes was converted into 1,201,923 shares of common stock, leaving a remaining note balance of $1,125,000 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 $375,000. The principal note balance remaining as of December 31, 2015 was $750,000. On February 29, 2016, the
$750,000 balance remaining was fully converted into 1,442,308 shares of common stock. The Company recorded amortization of the
beneficial conversion feature as interest expense in the amount of $0 and $234,000 during the year ended December 31, 2016 and
2015, respectively.
On February 28, 2015, the Company issued a
4% convertible promissory note in the aggregate principal amount of $2,650,000 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 is $2.60 per share. A beneficial conversion
feature of $3,261,500 was calculated but capped at the $2,650,000 value of the note. The beneficial conversion feature was calculated
by multiplying the difference between the fair value of stock at the date of the note $5.80 less the conversion price of $2.60
multiplied by the maximum number of share subject to conversion, 1,019,231. In November 2015, the Company issued 339,743 shares
of common stock upon conversion of the principal amount of $883,000. 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 convertible note during the prior quarter plus $221,000 with the final payment of all outstanding principal
and accrued but unpaid interest on the convertible note due and payable on February 28, 2020 (the maturity date). The Company recorded
amortization of the beneficial conversion feature as interest expense in the amount of $959,500 and $952,000 during the years ended
December 31, 2016 and 2015, respectively. The debt discount will be amortized over the life of the convertible note, or until such
time that the convertible note is 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.
8. CONVERTIBLE PROMISSORY NOTES
Convertible promissory note at December 31,
2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Convertible promissory notes payable
|
|
$
|
654,000
|
|
|
$
|
850,000
|
|
Less, debt discount
|
|
|
-
|
|
|
|
-
|
|
Convertible promissory notes payable, net
|
|
$
|
654,000
|
|
|
$
|
850,000
|
|
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
$8,000 for consideration of $8,000. 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 $8,000 plus accrued interest
of $800.
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 $100,000.
Upon execution of the note, the Company received an initial advance of $90,000. On December 4, 2014, the Company issued 192,543
shares of common stock upon conversion of $60,000 in principal, plus interest of $5,000. As of December 31, 2014, the remaining
balance was $30,000. 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 $30,000 plus accrued interest of $3,000
during the year ended December 31, 2015.
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 $750,000
for consideration of $750,000. 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 convertible note with a fixed conversion price of $0.338. Per ASC 815, the derivative
liability on the note was extinguished and the new note was re-valued per ASC 470 as a beneficial conversion feature, which was
expensed in the statement of operations during 2014. The note originally matured on October 28, 2014, was extended three months
to January 31, 2015, was extended to September 30, 2016, and in March 2016 was subsequently extended to June 30, 2019 with zero
interest. The Company recorded interest expense in the amount of $11,000 and $75,000 during the years ended December 31, 2016
and 2015, respectively. During the year ended December 31, 2016, the noteholder made a partial conversion of principal and accrued
interest in the amount of $196,000 and $45,000 respectively in exchange for 711,586 shares of common stock, with a remaining principal
balance of $554,000.
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 $100,000. Upon execution of the note, the Company received an initial advance of $20,000. In February and March, the Company
received additional advances in an aggregate amount of $80,000 for an aggregate total of $100,000. The note was convertible into
shares of common stock of the Company at a price equal to a variable conversion price equal to the lesser of $1.30 per share,
or fifty percent (50%) of the lowest trading price after the effective date. As of September 30, 2014, the note was exchanged
for a new convertible note with a fixed conversion price of $0.338. Per ASC 815, the derivative liability on the
note was extinguished and the new note was re-valued per ASC 470 as a beneficial conversion feature. The note matured on various
dates from the effective date of each advance with respect to each advance. At the sole discretion of the lender, the lender was
able to modify the maturity date to be twelve (12) months from the effective date of each advance. The note matured on various
dates in 2014, and was extended to September 30, 2016, and in March 2016 was subsequently extended to June 30, 2019 with zero
interest. The Company recorded interest expense in the amount of $0 and $10,000 during the years ended December 31, 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.
9. CAPITAL STOCK
Reverse Stock Split
On February 25, 2015, the Company effected
a 26:1 reverse stock split of 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
Twelve months ended December 31, 2016
During the year ended December 31, 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 $750,000.
During the year ended December 31,2016, 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 $241,000.
During the year ended December 31,2016, the
Company issued 379,491 shares of restricted common stock per terms of the performance-based RSGA awards and another 746,153
vested shares of restricted common stock were issued in March 2017. The Company recorded stock based compensation costs at
fair value as of the date of grant of $5,584,000. The $5,584,000 is part of the total stock based compensation expense
for 2016 of $6,041,000.
Twelve months ended December 31, 2015
During the year ended December 31, 2015, the
Company issued 3,000,000 shares of common stock at $4.15 per share in an underwritten offering. The net proceeds to the Company
were $11,579,000.
During the year ended December 31, 2015, the
Company issued 1,175,517 shares of common stock conversion of principal for convertible promissory notes in the amount of $1,300,000.
During the year ended December 31, 2015, the
Company issued 57,529 shares of restricted common stock valued at $239,000 for services.
During the year ended December 31, 2015, the
Company issued 11,583 shares of common stock valued at $3,000 in conversion of restricted common stock for commitment fees.
During the year ended December 31, 2015, the
Company issued 3,000 shares of common stock valued at $12,000 in exercise of common stock warrants.
During the year ended December 31, 2015, the
Company issued 53,649 shares of common stock for the cashless exercise of options.
During the year ended December 31, 2015, the
Company received $39,000 in contributed capital which was the disgorged profits related to Company stock transactions by an officer
within a 180 day period.
During the year ended December 31, 2015, the
Company issued 3,004 shares of common stock for rounding associated with the 26:1 reverse split.
Preferred Stock
On November 25, 2015, the Company designated
1,700,000 shares, of its authorized preferred stock, as Series B Preferred Stock, $0.001 par value per share. 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 Directors, holders of Series B Preferred
Stock (the “Holders”) will have liquidation preference over the holders of the Company’s Common Stock in any
distribution upon winding up, dissolution, or liquidation. Holders will also be entitled to receive dividends, if, when and as
declared by the Board of Directors, which dividends shall be payable in preference and priority to any payment of any dividend
to holders of Common Stock. Holders will be entitled to convert each share of Series B Preferred Stock into one (1) share of Common
Stock, and will also be entitled to vote together with the holders 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 $4,500,000 were issued in December 2015 in connection with
the acquisition of Plan B.
10. STOCK OPTIONS, RESTRICTED STOCK AND
WARRANTS
Options
As of December 31, 2016, the Company has 1,634,574
non-qualified stock options outstanding to purchase 1,634,574 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.
A summary of the Company’s
stock option activity and related information follows:
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
|
Options
|
|
|
price
|
|
|
Options
|
|
|
price
|
|
Outstanding, beginning January 1, 2016
|
|
|
|
899,574
|
|
|
$
|
1.30
|
|
|
|
957,266
|
|
|
$
|
2.20
|
|
Granted
|
|
|
|
785,000
|
|
|
|
2.71
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(53,649
|
)
|
|
|
0.26
|
|
Forfeited
|
|
|
|
(50,000
|
)
|
|
|
2.68
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,043
|
)
|
|
|
0.26
|
|
Outstanding, end of December 31, 2016
|
|
|
|
1,634,574
|
|
|
|
1.93
|
|
|
|
899,574
|
|
|
|
1.30
|
|
Exercisable at the end of December 31, 2016
|
|
|
|
1,043,212
|
|
|
|
1.45
|
|
|
|
822,650
|
|
|
|
1.13
|
|
Weighted average fair value of options granted during period
|
|
|
|
|
|
|
|
2.71
|
|
|
|
|
|
|
|
4.42
|
|
The following summarizes
the options to purchase shares of the Company’s common stock which were outstanding at December 31, 2016:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
Exercisable
|
|
|
Stock Options
|
|
|
Stock Options
|
|
|
Contractual
|
Prices
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life (years)
|
$
|
1.30
|
|
|
|
576,923
|
|
|
|
576,923
|
|
|
0.58
|
$
|
0.26
|
|
|
|
192,308
|
|
|
|
192,308
|
|
|
2.00
|
$
|
0.47
|
|
|
|
53,419
|
|
|
|
53,419
|
|
|
3.73
|
$
|
4.42
|
|
|
|
76,924
|
|
|
|
52,969
|
|
|
4.94
|
$
|
2.68
|
|
|
|
545,000
|
|
|
|
147,208
|
|
|
4.28
|
$
|
3.03
|
|
|
|
40,000
|
|
|
|
5,778
|
|
|
4.58
|
$
|
2.88
|
|
|
|
50,000
|
|
|
|
8,403
|
|
|
4.67
|
$
|
3.10
|
|
|
|
50,000
|
|
|
|
4,167
|
|
|
4.84
|
$
|
2.39
|
|
|
|
50,000
|
|
|
|
2,037
|
|
|
4.88
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,634,574
|
|
|
|
1,043,212
|
|
Aggregate intrinsic
value of options outstanding and exercisable at December 31, 2016 and 2015 was $573,300 and $2,042,000, 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 $2.00 and $3.70 as of December 31, 2016, and 2015, respectively, and the exercise price multiplied by the number
of options outstanding.
The Company recorded stock based compensation
for issued options of $457,000 and $136,000 for the years ended December 31, 2016 and 2015, respectively.
Restricted Stock Grant to 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 and are valued as of the grant date at $0.47
per share. 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 million and the consolidated gross revenue, calculated in accordance with GAAP, equaled or exceeded
$10 million for the trailing twelve-month period. The Company issued 384,615 shares of common stock to Mr. Nelson at fair value
of $786,000 during the year ended December 31, 2014. If the Company’s consolidated net profit, calculated in accordance to
GAAP, equals or exceeds $2 million 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 third milestone due to the inability to estimate the probability of it being
achieved. As the final performance goal is achieved, the shares shall become eligible for vesting and issuance.
In recognition of
the efforts of James B. Nelson, the Company’s Chief Executive Officer, in leading the Company through the uplisting and financing
transaction consummated by the Company in 2015, on August 31, 2016, the Company granted Mr. Nelson a restricted stock grant of
250,000 shares of the Company’s common stock pursuant to the terms of the Company’s 2016 Equity Incentive Plan (the
“2016 Plan”). All shares issuable under the RSGA are valued as of the grant date at $2.90 per share. The restricted
stock grant to Mr. Nelson will vest upon the earlier of (i) January 1, 2021, (ii) a Change of Control as defined in the 2016 Plan
(iii) upon Mr. Nelson’s retirement or (iv) upon Mr. Nelson’s death. “Change of Control” as defined in the
2016 Plan means (i) a sale of all or substantially all of the Company’s assets or (ii) a merger with another entity or an
acquisition of the Company that results in the existing shareholders of the Company owning less than fifty percent (50%) of the
outstanding shares of capital stock of the surviving entity following such transaction.
In the year ended
December 31, 2016, four month’s or $55,800 of stock based compensation expense was recognized for the August 31, 2016 RSGA.
Restricted Stock Grants to Sunworks
United 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
and are valued as of the grant date at $5.12 per share. 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 million, 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 million,
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 million, 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 $100,000 in stock compensation expense during the year 2015. As of September 30, 2016
the Company achieved each of the three milestones. During the quarter ended June 30, 2016 the Company issued 276,924 shares in
aggregate associated with the first milestone. The issuance of the remaining 553,845 shares will be completed during the fourth
quarter of 2016. The stock based compensation expense associated with the achievement of the second and third milestones totaled
$2,837,000 and was recognized in the quarter ended September 30, 2016. No additional compensation expense will be required with
the issuance March 2017 issuance of the 553,846 common shares.
Restricted Stock Grants 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 and are valued as
of the grant date at $5.12 per share. Each of the RSGAs provides for the issuance of up to 38,462 shares of the Company’s
common stock to each employee 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 million, 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 million, 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 million, the Company will issue each employee 12,820 and 51,280 shares in the aggregate. Based on the probability that the first
milestone would be achieved the Company recognized $33,000 in stock compensation expense during the year 2015. As of September
30, 2016 the Company achieved each of the three milestones. During the quarter ended June 30, 2016 the Company issued 64,105 shares
in aggregate associated with the first milestone. The issuance of the remaining 115,385 shares will be completed during the fourth
quarter of 2016. The stock based compensation expense associated with the achievement of the second and third milestones totaled
$591,000 and was recognized in the quarter ended September 30, 2016. No additional compensation expense will be required with the
March 2017 issuance of the 115,385 common shares.
Restricted Stock Grant to Former CFO
On February 1, 2015, the Company entered into
a RSGA with its former Chief Financial Officer, intended to provide incentive to the former CFO to ensure certain economic performance
of the Company. All shares issuable under the RSGA are performance-based shares and are valued as of the grant date at $4.21 per
share. 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 million, 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 million, 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 million, the
Company will issue 38,461. As of September 30, 2016 the Company achieved each of the three milestones. During the quarter ended
June 30, 2016 the Company issued 38,462 shares associated with the first milestone. The issuance of the remaining 76,723 shares
will be completed during the fourth quarter of 2016. The stock based compensation expense associated with the achievement of the
second and third milestones totaled $324,000 and was recognized in the quarter ended September 30, 2016. No additional compensation
expense will be required with the March 2017 issuance of the 76,923 common shares.
Under the terms of the RSGA, the Company issued
379,491 shares of restricted common stock in May 2016. Another 746,153 shares of restricted common stock vested and were
issued in March 2017.
The total combined option and restricted stock
compensation expense recognized, in the statement of operations, during the years ended December 31, 2016 and 2015 was $6,041,400
and $136,000, respectively.
Warrants
As of December 31, 2016, the Company had 2,997,000
common stock purchase warrants outstanding.
During the year ended December 31, 2015, the
Company issued 3,000,000 common stock purchase warrants. The warrants were issued as part of the units sold by the Company in a
public offering in March 2015. The warrants are exercisable at a price of $4.15 per share.
A summary of the Company’s
warrant activity and related information follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
Warrants
|
|
|
price
|
|
|
Warrants
|
|
|
price
|
|
Outstanding, beginning of period
|
|
|
2,997,000
|
|
|
|
|
|
|
|
-
|
|
|
$
|
|
|
Granted
|
|
|
-
|
|
|
|
4.15
|
|
|
|
3,000,000
|
|
|
|
4.15
|
|
Exercised
|
|
|
-
|
|
|
|
4.15
|
|
|
|
(3,000
|
)
|
|
|
4.15
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Outstanding, end of period
|
|
|
2,997,000
|
|
|
$
|
4.15
|
|
|
|
2,997,000
|
|
|
$
|
4.15
|
|
Exercisable at the end of period
|
|
|
2,997,000
|
|
|
$
|
4.15
|
|
|
|
2,997,000
|
|
|
$
|
4.15
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
$
|
4.15
|
|
|
|
|
|
|
$
|
4.15
|
|
11. INCOME TAXES
The Company files income tax returns in the
U.S. federal jurisdiction and the state of California. With few exceptions, the Company is no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for years before 2013.
Deferred income taxes have been provided by
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against the deferred tax assets for amounts when
the realization is uncertain. Included in the balances at December 31, 2016 and 2015, are no tax positions for which the ultimate
deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Because of the impact
of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect
the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company’s policy is to recognize
interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the periods
ended December 31, 2016 and 2015, the Company did not recognize interest and penalties.
The income tax provision differs from the amount
of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the year
ended December 31, 2016 and 2015 due to the following:
|
|
2016
|
|
|
2015
|
|
Net
income (loss)
|
|
$
|
(3,705,000
|
)
|
|
$
|
415,000
|
|
Depreciation
and amortization
|
|
|
128,000
|
|
|
|
301,000
|
|
Stock
Compensation Expense
|
|
|
2,386,000
|
|
|
|
53,000
|
|
(Gain)
Loss on Derivative
|
|
|
-
|
|
|
|
(27,000
|
)
|
Amortization
of Debt Discount
|
|
|
379,000
|
|
|
|
466,000
|
|
Gain/Loss
on Settlement of Debt
|
|
|
-
|
|
|
|
-
|
|
Research
and development costs
|
|
|
-
|
|
|
|
-
|
|
Acquisition
change in tax method
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
Valuation
Allowance
|
|
|
812,000
|
|
|
|
(1,208,000
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible differences and operating loss and tax credit carry-forwards and
deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the
reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
At December 31, 2016, the Company had net
operating loss carry-forwards of approximately $7.2 million that may be offset against future taxable income through 2036.
No tax benefit has been reported in the December 2016 financial statements, since the potential tax benefit is offset by a valuation
allowance of the same amount.
Net deferred tax assets consist of
the following components as of December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL carryover
|
|
$
|
2,473,000
|
|
|
$
|
1,761,000
|
|
R&D carryover
|
|
|
172,000
|
|
|
|
167,000
|
|
Other
|
|
|
125,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(180,000
|
)
|
|
|
(180,000
|
)
|
|
|
|
2,590,000
|
|
|
|
1,778,000
|
|
Less valuation allowance
|
|
|
(2,590,000
|
)
|
|
|
(1,778,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Due to the change in ownership provisions of
the Tax Reform Act of 1986, net operating loss carry-forwards for federal income tax reporting purposes are subject to annual limitations.
Should a change in ownership occur, net operating loss carry-forwards may be limited as to use in future years.
12. COMMITMENTS AND CONTINGENCIES
Sunworks United leases 27,530 square feet of
mixed used space consisting of office and warehouse facilities in Roseville, California, at a monthly lease rate of $19,800. The
lease expires in December 2021.
Sunworks United leases 2,846 square feet of
retail space consisting in Rocklin, California, at a monthly lease rate of $8,555. The lease expires in May 2021.
Sunworks United leases 5,304 square feet of
office space in Rocklin, California, at a monthly lease rate of $5,569. The lease expires in May 2021. Sunworks is the sublessor
through May 2021. Sublessee’s monthly payments begin in August 2017 at a monthly rate of $5,304.
Sunworks United leases 7,000 square feet of
mixed used space consisting of office and warehouse facilities in Reno, Nevada at monthly lease rate of $4,200. The lease
expires in December 2018.
Sunworks United (formerly MD Energy) leases
approximately 3,179 square feet of mixed used space consisting of office and warehouse facilities in Rancho Cucamonga, California,
at a monthly lease rate of $4,046. The lease expires in October 2017.
Sunworks United (formerly Elite Solar) leases
15,600 square feet of mixed used space consisting of office and warehouse facilities from an entity controlled by the former sole
shareholder of Plan B Enterprises, Inc. and current Series B Preferred Shareholder of the Company in Durham, California, at a monthly
lease rate of $8,000. The initial lease expires in December 2018.
Sunworks United leases 2,437 square feet of
mixed used space consisting of office and warehouse facilities in Turlock, California at monthly lease rate of $1,200. The lease
expires in January 2019.
Sunworks United leases 5,000 square feet of
mixed used space consisting of office and warehouse facilities in Tulare, California at monthly lease rate of $4,250. The lease
expires in July 2019.
Sunworks United leases 3,560 square feet of
mixed used space consisting of office and warehouse facilities in San Jose, California at monthly lease rate of $1,826.
The lease expires in January 2017.
Sunworks United leases 800 square feet of mixed used space consisting of office and warehouse facilities in
White City, Oregon at monthly lease rate of $800. The lease expires in June 2017.
Sunworks United leases various vehicles to perform installations and other purposes on 36 to 60 month terms
with lease payments less than $1,000 monthly.
Sunworks United leases office space in
Palm Springs, California at monthly lease rate of $490. The lease expires in April 2018.
At December 31, 2016, commitments
for minimum property rental were as follows:
For the twelve months ended:
|
|
|
|
|
2017
|
|
|
$
|
722,500
|
|
2018
|
|
|
|
688,700
|
|
2019
|
|
|
|
515,200
|
|
2020
|
|
|
|
495,100
|
|
2021 and thereafter
|
|
|
|
370,000
|
|
Total
|
|
|
$
|
2,791,500
|
|
At December 31, 2016, commitments
for minimum vehicle payments were as follows:
For the twelve months ended:
|
|
|
|
|
2017
|
|
|
$
|
431,800
|
|
2018
|
|
|
|
367,800
|
|
2019
|
|
|
|
125,000
|
|
2020
|
|
|
|
23,700
|
|
2021 and thereafter
|
|
|
|
21,700
|
|
Total
|
|
|
$
|
970,000
|
|
13. MAJOR CUSTOMER/SUPPLIERS
For the years ended December 31, 2016 and 2015
we had no customers that represented more than 10% of sales.
For the years ended December 31, 2016 and 2015
the following suppliers represented more than 10% of direct material costs:
|
|
2016
|
|
|
2015
|
|
SunPower
|
|
|
36.3
|
%
|
|
|
22.9
|
%
|
Canadian Solar
|
|
|
4.7
|
%
|
|
|
10.7
|
%
|
14. RELATED PARTY TRANSACTIONS
In October 2015, the Company entered into a
consulting agreement with John Van Slooten, a Board member. The consulting services included, but are not be limited to, consulting
on and assisting with sourcing, assessing, modeling, due diligence and documentation with respect to potential acquisition candidates
for the Company. The agreement was subject to the provisions for termination with the term of the Agreement commencing on October
1, 2015, and continuing until September 30, 2018. The Company agreed to pay Mr. Van Slooten, $33,000 upon signing and $9,300 per
month plus out-of-pocket expenses during the term of the Agreement. The Company terminated this Agreement during the fourth quarter
of 2016.
15. SUBSEQUENT EVENTS
On March 1, 2017, pursuant to the terms of
a convertible note, the Company issued 798,817 shares of common in stock to the note holder. Under the terms of the convertible
note, the conversion price is fixed at $0.338 per share. The conversion of the note results in a $270,000 outstanding principal
reduction in the note from $554,000 to $284,000.
On
March 28, 2017, pursuant to the terms of the Restricted Stock Grant Agreement awards, the Company issued 746,153 shares of restricted
common stock. The recorded stock compensation costs at fair value was $3,752,000 and was expensed in the quarter ended September
30, 2016.