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 June 30, 2018 and 2017 was $97 and $103, respectively. Depreciation expense for the six months
ended June 30, 2018 and 2017 was $193 and $206, 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 June 30, 2018 and 2017 of $60 and $270,
respectively. Advertising and marketing costs for the six months ended June 30, 2018 and 2017 were $144 and $701, 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, and consultations with
third party experts such as engineers. 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. The warranty liability for estimated future warranty costs is $306
at June 30, 2018 and $246 at December 31, 2017.
Stock-Based
Compensation
The
Company periodically issues stock options to employees and directors. The Company accounts for stock option 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 grants issued to non-employees in accordance with the authoritative guidance of the Financial Accounting
Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the
date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments
is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line
basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately
vested and the total stock-based compensation charge is recorded in the period of the measurement date.
Basic
and Diluted Net Income (Loss) per Share Calculations
Income
(Loss) per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share
are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted
earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. The shares for employee options, 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, 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 three and six months ended June 30, 2018 and the
six months ended June 30, 2017.
As
of June 30, 2018, the potentially dilutive securities that have been excluded from the computations of weighted average shares
outstanding include 1,647,385 stock options, 305,555 restricted stock grants, 2,997,000 warrants, and shares underlying convertible
notes.
As
of June 30, 2017, the potentially dilutive securities that have been excluded from the computations of weighted average shares
outstanding include 1,125,924 stock options, 1,134,615 restricted stock grants, 2,997,000 warrants, and 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.
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,
2017.
Fair
Value of Financial Instruments
Disclosures
about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the
balance sheet, where it is practicable to estimate that value. As of June 30, 2018, the amounts reported for cash, accrued interest
and other expenses, and notes payable approximate the fair value because of their short maturities.
We
account for financial instruments measured as fair value on a recurring basis under ASC Topic 820. 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 1 measurements) 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 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
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. We elected to adopt ASU
2016-18 retrospectively as of January 1, 2017 and have applied to all periods presented herein. The adoption of ASU 2016-18 did
not have a material impact to our consolidated financial statements. The effect of the adoption of ASU 2016-18 on our consolidates
statements of cash flows was to include restricted cash balances in the beginning and end of period balances of cash, cash equivalents,
and restricted cash. The change in restricted cash was previously disclosed in operating activities in the consolidated statements
of cash flows.
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
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), to clarify the principles of recognizing
revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under
ASC 606, 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, ASC 606 requires disclosure
of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASC is effective
for fiscal years beginning after December 15, 2017. The Company has adopted ASC 606 beginning on January 1, 2018 using the modified
retrospective approach for contracts not substantially complete at that date by recognizing a cumulative adjustment to the opening
balance of accumulated deficit. See Note 3 for additional disclosures in accordance with the new revenue recognition standard.
Management
reviewed currently issued pronouncements during the three months ended June 30, 2018, and believes that any other recently issued,
but not yet effective, accounting standards, if currently adopted, would not have a material effect on the accompanying consolidated
financial statements.
3.
REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenues
and related costs on construction contracts are recognized as the performance obligations are satisfied over time in accordance
with ASC 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will be recognized as the customer
obtains control of the goods and services promised in the contract (i.e., performance obligations). The cost of uninstalled materials
or equipment will generally be excluded from our recognition of profit, unless specifically produced or manufactured for a project,
because such costs are not considered to be a measure of progress.
The
following table represents a disaggregation of revenue by customer type from contracts with customers for the three and six months
ended June 30, 2018 and 2017:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017 (1)
|
|
|
2018
|
|
|
2017 (1)
|
|
Agricultural, Commercial, and Industrial (ACI)
|
|
$
|
6,686
|
|
|
$
|
16,417
|
|
|
$
|
14,520
|
|
|
$
|
25,218
|
|
Public Works (2)
|
|
|
8,333
|
|
|
|
1,706
|
|
|
|
9,898
|
|
|
|
1,706
|
|
Residential
|
|
|
4,975
|
|
|
|
6,888
|
|
|
|
9,023
|
|
|
|
12,438
|
|
Total
|
|
|
19,994
|
|
|
|
25,011
|
|
|
|
33,441
|
|
|
|
39,362
|
|
(1)
Prior period has not been modified for ASC 606.
(2)
Public Works customers were not tracked separately until the second quarter of 2017.
In
adopting ASC 606, we had the following significant changes in accounting principles:
(i)
Timing of revenue recognition for uninstalled material
s - We previously recognized the majority of our revenue from the installation
or construction of commercial & public works projects using the percentage-of-completion method of accounting, whereby revenue
is recognized as we progress on the contract. The percentage-of-completion for each project was determined on an actual cost-to-estimated
final cost basis. Under ASC 606, revenue and associated profit, is recognized as the customer obtains control of the goods and
services promised in the contract (i.e., performance obligations). The cost of uninstalled materials or equipment is generally
excluded from our recognition of profit, unless specifically produced or manufactured for a project, because such costs are not
considered to be a measure of progress.
(ii)
Completed contracts
- We previously recognized the majority of our revenue from the installation of residential projects using
the completed contract method of accounting whereby revenue was recognized when the project is completed. Under, ASC 606, revenue
is recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations).
Revenue
recognition for other sales arrangements such as the sales of materials will remain materially consistent.
The
adoption of the new revenue recognition standard resulted in a cumulative effect adjustment to retained earnings of approximately
$1,405 as of January 1, 2018. The details of this adjustment are summarized below.
|
|
Balance at
|
|
|
Adjustments
|
|
|
Balance at
|
|
|
|
December 31, 2017
|
|
|
Due to ASC 606
|
|
|
January 1, 2018
|
|
Contract assets
|
|
$
|
3,790
|
|
|
$
|
(584
|
)
|
|
$
|
3,206
|
|
Contract liabilities
|
|
|
7,288
|
|
|
|
821
|
|
|
|
8,109
|
|
Accumulated deficit
|
|
|
(56,365
|
)
|
|
|
(1,405
|
)
|
|
|
(57,770
|
)
|
The
following tables summarize the impact of the adoption of ASC 606 on our condensed consolidated statement of operations and condensed
consolidated balance sheet for the three and six months ended and as of June 30, 2018:
|
|
For the Six Months Ended June 30, 2018
|
|
|
|
|
|
|
Without Adoption
|
|
|
Impact of Adoption
|
|
|
|
As Reported
|
|
|
of ASC 606
|
|
|
of ASC 606
|
|
Revenue
|
|
$
|
33,441
|
|
|
$
|
32,417
|
|
|
$
|
(1,024
|
)
|
Cost of goods sold
|
|
|
28,132
|
|
|
|
27,447
|
|
|
|
(685
|
)
|
Gross profit
|
|
|
5,309
|
|
|
|
4,970
|
|
|
|
(339
|
)
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
|
|
|
|
Without Adoption
|
|
|
Impact of Adoption
|
|
|
|
As Reported
|
|
|
of ASC 606
|
|
|
of ASC 606
|
|
Revenue
|
|
$
|
19,994
|
|
|
$
|
19,735
|
|
|
$
|
(259
|
)
|
Cost of goods sold
|
|
|
17,095
|
|
|
|
16,992
|
|
|
|
(103
|
)
|
Gross profit
|
|
|
2,899
|
|
|
|
2,743
|
|
|
|
(156
|
)
|
|
|
June 30, 2018
|
|
|
|
|
|
|
Without Adoption
|
|
|
Impact of Adoption
|
|
|
|
As Reported
|
|
|
of ASC 606
|
|
|
of ASC 606
|
|
Contract assets
|
|
$
|
3,928
|
|
|
$
|
4,576
|
|
|
$
|
648
|
|
Contract liabilities
|
|
|
5,622
|
|
|
|
5,237
|
|
|
|
(385
|
)
|
Contract
assets represent revenues recognized in excess of amounts billed on contracts in progress. Contract liabilities represent billings
in excess of revenues recognized on contracts in progress. At June 30, 2018 and December 31, 2017, the contract asset balances
were $3,928 and $3,790, and the contract liability balances were $5,622 and $7,288, respectively.
4.
LOANS PAYABLE
Elite
Solar, 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 bearing interest at 4.95%. The loan agreement called for monthly payments
of $2 and is scheduled to mature on March 14, 2019. Proceeds from the loan were used to purchase a pile driver and related equipment
and is secured by the equipment. The outstanding balance at June 30, 2018, is $22.
Elite
Solar 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 bearing interest at 4.95%. The loan agreement calls for monthly payments of $5 and is scheduled
to mature on April 9, 2019. Proceeds from the loan were used to purchase racking inventory and related equipment. The loan is
secured by the inventory and equipment. The outstanding balance at June 30, 2018, is $46.
On
January 5, 2016, the Company entered into a loan agreement for the acquisition of a pile driver in the principal amount of $182
bearing interest at 5.5%. The loan agreement calls for monthly payments of $4 and is scheduled to mature on January 15, 2020.
The loan is secured by the equipment. The outstanding balance at June 30, 2018, is $77.
On
September 8, 2016, the Company entered into a loan agreement for the acquisition of a pile driver in the principal amount of $174
bearing interest at 5.5%. The loan agreement calls for monthly payments of $4 and is scheduled to mature on September 15, 2020.
The loan is secured by the equipment. The outstanding balance at June 30, 2018, is $102.
On
November 14, 2016, the Company entered into a 0% interest loan agreement for the acquisition of an excavator in the principal
amount of $59. The loan agreement calls for monthly payments of $1 and is scheduled to mature on November 13, 2020. The loan is
secured by the equipment. The outstanding balance at June 30, 2018, is $35.
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 bearing interest at 4.99%. The loan agreement calls for 16 quarterly payments of $12 and is scheduled
to mature in September 2020. The loan is secured by the equipment. The outstanding balance at June 30, 2018, is $101.
As
of June 30, 2018 and December 31, 2017, loans payable are summarized as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Business loan agreement dated March 14, 2014
|
|
$
|
22
|
|
|
$
|
36
|
|
Business loan agreement dated April 9, 2014
|
|
|
46
|
|
|
|
73
|
|
Equipment notes payable
|
|
|
315
|
|
|
|
387
|
|
Subtotal
|
|
|
383
|
|
|
|
496
|
|
Less: Current position
|
|
|
(217
|
)
|
|
|
(229
|
)
|
Long-term position
|
|
$
|
166
|
|
|
$
|
267
|
|
5.
ACQUISITION CONVERTIBLE PROMISSORY NOTES
On
February 28, 2015, the Company issued a 4% convertible promissory note in the aggregate principal amount of $2,650 as part of
the consideration paid to acquire 100% of the total outstanding stock of MD Energy. The note is convertible into shares of common
stock on or after each of the following dates: November 30, 2015, November 30, 2016 and November 30, 2017. The conversion price
is $2.60 per share. A beneficial conversion feature of $3,262 was calculated but capped at the $2,650 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. Commencing on March 31, 2015,
and each quarter thereafter during the first two (2) years of the note, the Company made 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 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 $0 and $437 during the six months ended June 30, 2018 and 2017, respectively. The debt discount was fully amortized and has
zero balance at December 31, 2017 and June 30, 2018.
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 had 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 were 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 required 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 was amortized
and recognized as interest expense.
6.
CONVERTIBLE PROMISSORY NOTES
On
January 31, 2014, the Company entered into a securities purchase agreement providing for the sale of a 10% convertible promissory
note in the principal amount of up to $750 for consideration of $750. The proceeds were restricted and were used for the purchase
of Solar United Network, Inc. The note was convertible into shares of common stock of the Company at a price equal to a variable
conversion price equal to the lesser of $1.30 per share, or fifty percent (50%) of the lowest trading price after the effective
date. As of September 30, 2014, the note was exchanged for a new 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. During the year ended December 31, 2016, the noteholder made a partial conversion of principal and accrued
interest in the amount of $196 and $45 respectively in exchange for 711,586 shares of common stock, with a remaining principal
balance of $554. During the year ended December 31, 2017, the noteholder made a partial conversion of principal in the amount
of $505 in exchange for 1,494,083 shares of common stock, with a remaining principal balance of $49.
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 $100. The note was convertible into shares of common stock of the Company at a price equal to
a variable conversion price equal to the lesser of $1.30 per share, or fifty percent (50%) of the lowest trading price after the
effective date. As of September 30, 2014, the note was exchanged for a new 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. As of June 30, 2018, the remaining principle balance was $100.
Convertible
promissory note balance at June 30, 2018 and December 31, 2017 is $149.
7.
PROMISSORY NOTES PAYABLE
On
April 27, 2018, the Company entered into a Loan Agreement (the “Loan Agreement”) with CrowdOut Capital, Inc. pursuant
to which the Company issued an aggregate of $3,750 in promissory notes (the “Notes”), of which $3,000 are Senior Notes
and $750 are Subordinated Notes. The Subordinated Notes were funded by the Company’s Chief Executive Officer, Charles Cargile
and the Company’s President of Commercial Operations, Kirk Short.
The
Notes bear interest at the rate of the one-month LIBOR plus 950 basis points and mature on June 30, 2020. The Notes may not be
prepaid before the first anniversary of issuance and thereafter may be prepaid in whole without the consent of the lender or in
part with the consent of the lender. In the event the Notes are prepaid in full prior to the maturity date, the Company shall
pay the holder of the Senior Notes, $375 if prepaid prior to March 31, 2020 or $435 if prepaid after March 31, 2020 but prior
to the maturity date. The Company is accruing an exit fee of $435 over life of the Loan Agreement and recognized as interest expense.
In
connection with the issuance of the Senior Notes, the Company entered into a security agreement (the “Security Agreement”)
pursuant to which the Company granted to the holder of the Senior Notes a security interest in certain of the Company’s
assets to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the Senior
Notes. The Company also entered into a subordination agreement with the holders of the Subordinated Notes and the Senior Notes
pursuant to which the Subordinated Notes are subordinated to the Senior Notes.
The
Loan Agreement contains certain customary Events of Default (including, but not limited to, default in payment of any sum payable
thereunder, breaches of representations or warranties thereunder, the occurrence of an event of default under the transaction
documents, change in control of the Company, filing of bankruptcy and the entering or filing of certain monetary judgments against
the Company). Upon the occurrence of an Event of Default the outstanding principal amount of the Notes, plus accrued but unpaid
interest and other amounts owing in respect thereof, shall become, at the giving of notice by Lender, immediately due and payable.
Interest on overdue payments accruing upon the occurrence of an Event of Default shall accrue at an interest rate equal to the
lesser of 18% per annum or the maximum rate permitted under applicable law. Additionally, the Loan Agreement includes a
subjective acceleration clause if a “material adverse effect” occurs in our business that could result in an Event
of Default. We believe that the likelihood of the lender exercising this right is remote and have classified the debt as long
term.
In
conjunction with the Loan Agreement, the Company recorded $118 of capitalized debt issuance costs. The debt issuance costs will
be amortized over the life of the Loan Agreement and recognized as interest expense. The Note payable balance is reported net
of the unamortized portion of the debt issuance costs. The Company recorded amortization of the debt issuance cost as interest
expense in the amount of $9 during the six months ended June 30, 2018.
Note
payable at June 30, 2018 and December 31, 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Promissory notes payable
|
|
$
|
3,750
|
|
|
$
|
-
|
|
Less, debt issuance costs
|
|
|
(109
|
)
|
|
|
-
|
|
Notes payable, net
|
|
$
|
3,641
|
|
|
$
|
-
|
|
8.
CAPITAL STOCK
Common
Stock
On
May 2, 2018, the Company converted 1,506,024 shares of its Series B Preferred Stock into the same number of shares of the Company’s
common stock.
In
the six months ending June 30, 2018, 634,615 and 194,445 shares of common stock were issued to James Nelson and Charles Cargile,
respectively, from previously entered into RSGAs. In May 2018, James Nelson exercised 192,308 options and was issued the equivalent
number of shares of common stock.
There
were no other common stock conversions, issuances, option exercises, or restricted grants during the six months ended June 30,
2018.
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 filed with the Secretary of State of the State of Delaware, 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 of Common Stock on all matters submitted to
shareholders at a rate of one (1) vote for each share of Series B Preferred Stock. In addition, so long as at least 100,000 shares
of Series B Preferred Stock are outstanding, the Company may not, without the consent of the Holders of at least a majority of
the shares of Series B Preferred Stock then outstanding: (i) amend, alter or repeal any provision of the Certificate of Incorporation
or bylaws of the Company or the Certificate of Designation so as to adversely affect any of the rights, preferences, privileges,
limitations or restrictions provided for the benefit of the Holders or (ii) issue or sell, or obligate itself to issue or sell,
any additional shares of Series B Preferred Stock, or any securities that are convertible into or exchangeable for shares of Series
B Preferred Stock. 1,506,024 shares of Series B Preferred Stock, at a fair value of $4,500 were issued in December 2015 in connection
with the acquisition of Elite Solar. On May 2, 2018, the holder converted 1,506,024 shares of Series B Preferred Stock into the
same number of shares of the Company’s Common Stock. As of June 30, 2018 there were no outstanding shares of Preferred Stock.
9.
STOCK OPTIONS, RESTRICTED STOCK, AND WARRANTS
Options
As
of June 30, 2018, the Company has 1,647,385 stock options outstanding to purchase 1,647,385 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 $0.93 to $4.42 per share, the market value of the Company’s
common stock on the date of each grant. The Company determined the fair market value of these options by using the Black Scholes
option valuation model.
|
|
June 30, 2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
|
Options
|
|
|
price
|
|
Outstanding, beginning December 31, 2017
|
|
|
1,875,155
|
|
|
$
|
1.80
|
|
Granted
|
|
|
295,000
|
|
|
|
1.07
|
|
Exercised
|
|
|
(192,308
|
)
|
|
|
0.26
|
|
Forfeited
|
|
|
(330,462
|
)
|
|
|
2.56
|
|
Outstanding, end of June 30, 2018
|
|
|
1,647,385
|
|
|
|
1.67
|
|
Exercisable at the end of June 30, 2018
|
|
|
1,075,036
|
|
|
|
1.89
|
|
During
the three months ended June 30, 2018 and 2017, the Company charged a total of $98 and $202, respectively, to operations to recognize
stock-based compensation expense for stock options. During the six months ended June 30, 2018 and 2017, the Company charged a
total of $225 and $388 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 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
Stock-based
compensation expense recognized for the March 29, 2017 RSGA in the three and six months ended June 30, 2018, was $63 and $125,
respectively.
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. In conjunction with Mr. Nelson’s retirement
in April 2018, the remaining 384,615 shares of the Company’s common stock were issued to Mr. Nelson. Stock-based compensation
expense of $179 was recognized in the quarter ending June 30, 2018.
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 was to 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. Mr. Nelson’s retirement in April 2018 resulted in the RGSA being vested in full.
Stock-based
compensation expense recognized for the August 31, 2016 RSGA in the three and six months ended June 30, 2018, was $460 and $502,
respectively.
The
total combined option and restricted stock compensation expense recognized, in the statement of operations, during the three months
ended June 30, 2018 and 2017 was $800 and $317, respectively. The total combined option and restricted stock compensation expense
recognized, in the statement of operations, during the six months ended June 30, 2018 and 2017 was $1,032 and $534, respectively.
Warrants
As
of June 30, 2018, 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.
10.
SUBSEQUENT EVENTS
None.