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 for the three months ended September 30, 2017 and 2016 was $102,000 and $101,000, respectively. Depreciation expense for
the nine months ended September 30, 2017 and 2016 was $308,000 and $218,000, respectively.
Advertising
and Marketing
The
Company expenses advertising and marketing costs as incurred. Advertising and marketing costs include printed material, billboards,
sponsorships, direct mail, radio, telemarketing, tradeshow costs, magazine, and catalog advertisement. Included within selling
and marketing expenses are advertising and marketing costs for the three months ended September 30, 2017 and 2016 of $123,600
and $725,300, respectively. Advertising and marketing costs for the nine months ended September 30, 2017 and 2016 were $807,500
and $2,705,100, 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 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 reserve liability as of September 30, 2017 and December 31, 2016 is $216,000
and $116,000, respectively.
Stock-Based
Compensation
The
Company periodically issues stock options, restricted stock, and warrants to employees and non-employees in non-capital raising
transactions for services and for financing costs. The Company accounts for stock option, restricted stock 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 where 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, restricted stock, warrants and convertible notes were not
used in the calculation of the net loss per share.
A
net loss causes all outstanding common stock options, restricted stock, 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 nine months ended September
30, 2017 and 2016.
As
of September 30, 2017, the potentially dilutive securities that have been excluded from the computations of weighted average shares
outstanding include 811,924 stock options, 1,134,615 restricted stock grants, 2,997,000 warrants, and 3,589,978 shares underlying
convertible notes and preferred stock.
As
of September 30, 2016, the potentially dilutive securities that have been excluded from the computations of weighted average shares
outstanding include 938,188 stock options and 2,997,000 warrants because they were below the period ending stock price. We also
excluded 1,506,024 shares of Series B preferred stock convertible into common stock at a 1 to 1 ratio because of trading restrictions.
Dilutive
per share amounts are computed using the weighted-average number of common shares outstanding and potentially dilutive securities,
using the treasury stock method if their effect would be dilutive.
Long-Lived
Assets
The
Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Indefinite
Lived Intangibles and Goodwill Assets
The
Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business
Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and
liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available,
and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset
valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the
tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The
Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events
or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance
with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at December 31,
2016.
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 September 30, 2017, 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.
Segment
Reporting
Operating
segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly
by the chief operating decision maker, or decision-making group, in deciding the method to allocate resources and assess performance.
The Company currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.
New
Accounting Pronouncements
In
January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement
of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step
2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets
and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining
the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require
the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment
charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however,
the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes effective
for the Company on January 1, 2020. The amendments in this ASU should be applied on a prospective basis. Early adoption is permitted
for interim or annual goodwill impairment tests performed. We are currently evaluating the impact ASU No. 2017-04 will have on
our consolidated financial statements and associated disclosures.
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. ASU 2016-18 requires
that the 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 when reconciling the beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017. From January 1,
2018 we will begin including amounts generally described as restricted cash and restricted cash equivalents with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations
by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.
Leases will be classified as either operating or financing, with such classification affecting the pattern of expense recognition
in the income statement. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December
15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial
statements and associated disclosures.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles of recognizing
revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under
ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount
that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09 requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The
ASU is effective for fiscal years beginning after December 15, 2017. The new revenue standard is principle based and interpretation
of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation,
industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard. The
Company is still in the process of evaluating the effect of the new standard on the Company’s historical financial statements
and disclosures. As the Company completes its evaluation of this new standard, new information may arise that could change the
Company’s current understanding of the impact to revenue and expense recognized. Additionally, the Company will continue
to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession
and adjust the Company’s assessment and implementation plans accordingly.
3.
LOANS PAYABLE
Plan
B, a subsidiary of the Company, entered into a business loan agreement, prior to being acquired by the Company, with Tri Counties
Bank dated March 14, 2014, in the original amount of $131,000 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 September 30, 2017, is $42,500.
Plan
B, entered into a business loan agreement prior to being acquired by the Company, with Tri Counties Bank dated April 9, 2014,
in the original amount of $250,000 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 September 30, 2017, is $86,000.
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 Agreement 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 of borrowings under the Credit
Agreement as of September 30, 2017 and 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 September 30, 2017, is $110,700.
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 September 30, 2017, is $134,000.
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 September 30, 2017, is $45,600.
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 September 30, 2017,
is $132,200.
As
of September 30, 2017 and December 31, 2016, loans payable are summarized as follows:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Business
loan agreement dated March 14, 2014
|
|
$
|
42,500
|
|
|
$
|
62,700
|
|
Business
loan agreement dated April 9, 2014
|
|
|
86,000
|
|
|
|
124,500
|
|
Equipment
notes payable
|
|
|
422,500
|
|
|
|
526,200
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
551,000
|
|
|
|
713,400
|
|
Less:
Current position
|
|
|
(227,900
|
)
|
|
|
(217,700
|
)
|
|
|
|
|
|
|
|
|
|
Long-term
position
|
|
$
|
323,100
|
|
|
$
|
495,700
|
|
4.
ACQUISITION CONVERTIBLE PROMISSORY NOTES
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 the Company’s fully paid and non-assessable common stock at a conversion price of $0.52 per share and was originally
due on March 30, 2015, which was amended to extend to September 30, 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.
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 began to make quarterly payments of interest accrued on the convertible note during the prior quarter plus
$151,429. The final payment of all outstanding principal and accrued but unpaid interest on the convertible note is 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 $220,000 and $210,000 during the three months ended September 30, 2017 and 2016, respectively. The Company recorded
amortization of the beneficial conversion feature as interest expense in the amount of $657,000 and $693,000 during the nine months
ended September 30, 2017 and 2016, 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.
5.
CONVERTIBLE PROMISSORY NOTES
Convertible
promissory note at September 30, 2017 and December 31, 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Convertible
promissory notes payable
|
|
$
|
384,000
|
|
|
$
|
654,000
|
|
Less,
debt discount
|
|
|
-
|
|
|
|
-
|
|
Convertible
promissory notes payable, net
|
|
$
|
384,000
|
|
|
$
|
654,000
|
|
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. At 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, 2017, 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 during the year ended December
31, 2016 prior to the note being extended at zero interest. During the year ended December 31, 2016, the noteholder made a partial
conversion of principal and accrued interest in the amount of $196,000 and $45,000 respectively in exchange for 711,586 shares
of common stock, with a remaining principal balance of $554,000. On March 1, 2017, the Company issued 798,817 shares of common
stock to the note holder at the fixed conversion price of $0.338 per share. The partial conversion of the note results in a $270,000
outstanding principal reduction in the note from $554,000 to $284,000.
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 of 2014, 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 no interest expense in 2016 prior to the note being extended.
6.
CAPITAL STOCK
Common
Stock
On
February 17, 2017, the Company issued 41,773 shares of common stock for the cashless exercise of 53,419 options at an exercise
price of $0.468 per share.
On
March 1, 2017, the Company issued 798,817 shares of common stock at a conversion price of $0.338 per share for partial conversion
of principal for a convertible promissory note in the aggregate amount of $270,000.
On
March 16, 2017, the Company issued 746,153 shares of restricted common stock per terms of the performance-based RSGA awards. The
Company had previously recorded stock based compensation costs at fair value as of the date of grant of $3,751,500 related to
the vesting of these awards in the year ended December 31, 2016.
On
May 18, 2017, the Company issued 15,000 shares of common stock at $1.43 per share in the aggregate amount of $21,450 as payment
for executive recruiting services.
Preferred
Stock
On
November 25, 2015, the Company designated 1,700,000 shares, of its authorized preferred stock, as Series B Preferred Stock, $0.001
par value per share. Pursuant to the Certificate of Designation 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”) have liquidation
preference over the holders of the Company’s Common Stock in any distribution upon winding up, dissolution, or liquidation.
Holders are also 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 are also be entitled to vote together with the holders
of the Company’ 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.
7.
STOCK OPTIONS, RESTRICTED STOCK, AND WARRANTS
Options
As
of September 30, 2017, the Company has 1,905,155 non-qualified stock options outstanding to purchase 1,905,155 shares of common
stock, per the terms set forth in the option agreements. The stock options vest at various times, and are exercisable for a period
of five to seven years from the date of grant at exercise prices ranging from $0.26 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.
|
|
September
30, 2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
|
Options
|
|
|
price
|
|
Outstanding,
beginning January 1, 2017
|
|
|
1,634,574
|
|
|
$
|
1.93
|
|
Granted
|
|
|
324,000
|
|
|
|
1.50
|
|
Exercised
|
|
|
(53,419
|
)
|
|
|
0.47
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding,
end of September 30, 2017
|
|
|
1,905,155
|
|
|
|
1.90
|
|
Exercisable
at the end of September 30, 2017
|
|
|
1,316,321
|
|
|
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1.75
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During
the three months ended September 30, 2017 and 2016, the Company charged a total of $194,700 and $136,000 respectively, to operations
related to recognized stock based compensation expense for stock options. During the nine months ended September 30, 2017 and
2016, the Company charged a total of $582,400 and $223,000 respectively, to operations related to recognized stock based compensation
expense for stock options.
Restricted
Stock Grants
With
an effective date of March 29, 2017, subject to the Sunworks, Inc. 2016 Equity Incentive Plan, (the “2016 Plan”) the
Company entered into a restricted stock grant agreement or RSGA with its new Chief Executive Officer, Charles F. Cargile. All
shares issuable under the RSGA are valued as of the grant date at $1.50 per share. The RSGA provides for the issuance of up to
500,000 shares of the Company’s common stock. The restricted shares shall vest as follows: 166,667 of the restricted shares
shall vest on the one (1) year anniversary of the effective date, and the balance, or 333,333 restricted shares, shall vest in
twenty-four (24) equal monthly installments commencing on the one (1) year anniversary of the effective date
In
the three months and nine months ended September 30, 2017, $62,500 and $125,000 of stock based compensation expense was recognized
for the March 29, 2017 RSGA.
During
the year ended December 31, 2013, the Company entered into a restricted stock grant agreement or RSGA with its then 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 Chairman, in leading the Company through the uplisting and
financing transaction consummated by the Company in 2015, on August 31, 2016, the Company granted Mr. Nelson a restricted stock
grant of 250,000 shares of the Company’s common stock pursuant to the terms of 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 three months and nine months ended September 30, 2017, $41,800 and $125,500 of stock based compensation expense was recognized
for the August 31, 2016 RSGA.
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 were performance based shares and were valued as of the grant date at $5.12 per share. Each of the RSGAs provided
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 were met in certain stages as follows: a) If the Company’s aggregate net income from operations,
for any trailing four (4) quarters equaled or exceeded $2 million, the Company would 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 exceeded $3 million, the Company would 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 exceeded $4 million, the Company would 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 September 30, 2016 the Company issued 276,924 shares in aggregate associated with the first milestone. The issuance of the
remaining 553,845 shares was completed on March 16, 2017. 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 was required with the March 16, 2017 issuance of the 553,845 common shares.
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 were performance
based shares and were valued as of the grant date at $5.12 per share. Each of the RSGAs provided for the issuance of up to 38,462
shares of the Company’s common stock to each employee provided certain milestones were met in certain stages as follows:
a) If the Company’s aggregate net income from operations, for any trailing four (4) quarters equaled or exceeded $2 million,
the Company would 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 exceeded $3 million, the Company would 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 exceeded $4 million, the Company would 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 September 30, 2016 the Company issued 64,105 shares in aggregate associated with the first milestone. The issuance of the
remaining 115,385 shares was completed on March 16, 2017. 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 was required with the March 16, 2017 issuance of the 115,385 common shares.
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 were performance-based shares
and were valued as of the grant date at $4.21 per share. The RSGA provided for the issuance of up to 115,385 shares of the Company’s
common stock provided certain milestones were met in certain stages as follows: a) If the Company’s aggregate net income
from operations, for any trailing four (4) quarters equaled or exceeded $2 million, the Company would issue 38,462 shares of common
stock; b) If the Company’s aggregate net income from operations, for any trailing four (4) quarters exceeded $3 million,
the Company would issue 38,462 shares of common stock; c) If the Company’s aggregate net income from operations, for any
trailing four (4) quarters exceeded $4 million, the Company would issue 38,461. As of September 30, 2016, the Company achieved
each of the three milestones. During the quarter ended September 30, 2016 the Company issued 38,462 shares associated with the
first milestone. The issuance of the remaining 76,723 shares was completed on March 16, 2017. 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 was required with the March 16, 2017 issuance of the 76,923 common shares.
The
total combined option and restricted stock compensation expense recognized, in the statement of operations, during the three months
ended September 30, 2017 and 2016 was $299,000 and $3,902,000, respectively. The total combined option and restricted stock compensation
expense recognized, in the statement of operations, during the first nine months of 2017 and 2016 was $833,000 and $5,764,000,
respectively
Warrants
As
of September 30, 2017, the Company had 2,997,000 common stock purchase warrants outstanding with an exercise price of $4.15 per
share. The warrants have an issuance date of March 9, 2015 and expire on March 9, 2020.
8.
SUBSEQUENT EVENTS
None.