NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
(dollars
in thousands, except share and per share data)
References
herein to “we,” “us,” “Sunworks,” and “the Company” are to Sunworks, Inc. and its
wholly owned subsidiaries Sunworks United, Inc. (“dba Sunworks United”), MD Energy, Inc. (“MD Energy”), Plan
B Enterprises, Inc. (“Plan B”) and Solcius LLC (“Solcius”).
1.
BASIS OF PRESENTATION
Sunworks,
Inc. (NASDAQ:SUNW) through its wholly owned subsidiaries is a provider of high-performance solar power systems. Sunworks sells, engineers,
procures materials, constructs and maintains photo-voltaic solar power systems for customers in a wide range of industries including
residential, agricultural, commercial and industrial, state and federal, and public works. Systems
range in size from 2 kilowatt to multi-megawatt in size.
On April
8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United Inc. (the “Buyer”), acquired all of the issued
and outstanding membership interests (the “Acquisition”) of Solcius LLC, a California limited liability company
(“Solcius”), from Solcius Holdings, LLC (“Seller”). Located in Provo, Utah, Solcius is a full-service,
residential solar systems provider. The transaction creates a national solar power provider with a presence in 12 states, including
California, Oregon, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, New Jersey, Hawaii and
South Carolina. The transaction enhances economies of scale, leading to better access to suppliers, vendors and financial partners,
as well as marketing and customer acquisition opportunities.
The Acquisition was consummated on
April 8, 2021 pursuant to a Membership Interest Purchase Agreement, dated as of April 8, 2021 (the “Purchase Agreement”),
by and between Buyer and Seller. The purchase price for Solcius consisted of $51,750 in cash, subject to post-closing adjustments related
to working capital, cash, indebtedness and transaction expenses. The acquired assets and operating results of Solcius are included in
these unaudited condensed consolidated financial statements (“financial statements”) and footnotes since the date of acquisition
through June 30, 2021 (see Note 3).
The
accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary
for a fair presentation have been included. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2021. The financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2020.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements.
These accounting policies conform to GAAP 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, MD Energy, Plan B and Solcius. All material intercompany transactions have been eliminated upon consolidation of these entities.
Reclassifications
Certain
reclassifications have been made to prior year’s financial statements to conform to classifications used in the current year.
Sales commissions, finders’ fees and financing fees paid to third parties have been reclassified from cost of goods sold to
selling and marketing in the condensed consolidated statements of operations with no change in the previously reported net
losses. Customer deposits have been reclassified and included in contract liabilities.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
include estimates used to assess the realizability of the Company’s goodwill, impairments and estimations of long-lived
assets, revenue recognition on construction contracts recognized over time, fair value of assets acquired and liabilities assumed
in a business combination, allowances for uncollectible accounts, operating and finance lease right-of-use assets and liabilities,
warranty reserves, inventory valuation, 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
Revenue
and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance
with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated
profit, engineering, procurement and construction (“EPC”) projects for residential and smaller commercial systems that require
us to deliver functioning solar power systems are generally completed within two to twelve months from commencement of construction.
Construction on larger commercial projects may be completed within eighteen to thirty-six months, depending on the size and location.
We recognize revenue from EPC services over time as our performance creates or enhances an energy generation asset controlled by the
customer.
The
cost of 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. 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 in the period 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. We use an input method based on costs incurred as we believe that this method most accurately reflects our
progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed-price construction contracts
is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance
obligations. 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.
Contract assets represent revenue recognized
in excess of amounts invoiced to customers on contracts in progress together with commissions paid to third-party sales partners prior
to revenue being recognized on residential projects. Contract liabilities represent amounts invoiced to and deposits paid by
customers in excess of revenue recognized on contracts in progress.
Accounts
Receivable
Accounts
receivable are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible
upon completion of the contracts. Retention receivable is the amount withheld by a customer until a contract is completed. Retention
receivables of $262 and $392 were included in the balance of trade accounts receivable as of June 30, 2021 and December 31, 2020, respectively.
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 at June 30, 2021 of $295
and at December 31, 2020 of $253.
During the three months ended June 30, 2021, $134
of uncollectible accounts receivable was written
off against the allowance for doubtful accounts. Additionally, during the three months ended June 30, 2021, $183
was recorded as bad debt expense compared
to $158 in
the prior year period. During the six months ended June 30, 2021 and 2020, $188
and $280,
respectively, was recorded as bad debt expense.
Inventory
Inventory
is valued at lower of cost or net realizable value determined by the first-in, first-out method. Inventory primarily consists of panels,
inverters, and mounting racks and other materials. The Company reviews the cost of inventories against their estimated net realizable
value and records write-downs if any inventories have costs in excess of their net realizable values.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation for property and equipment commences when property and equipment are put into service
and are depreciated using the straight-line method over the property and equipment’s estimated useful lives:
SCHEDULE OF PROPERTY AND EQUIPMENT ESTIMATED USEFUL LIVES
Machinery & equipment
|
|
3-7 Years
|
Office equipment & fixtures
|
|
5-7 Years
|
Computers & software
|
|
3-5 Years
|
Vehicles & trailers
|
|
3-7
Years
|
Leaseholder improvements
|
|
3-5 Years
|
Intangible
Assets
The Company’s intangible assets
at June 30, 2021 consist of the following:
SCHEDULE OF INTANGIBLE ASSETS
|
|
Amortization
periods
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net
carrying value
|
|
Trademarks
|
|
10
Years
|
|
$
|
5,200
|
|
|
$
|
(130
|
)
|
|
$
|
5,070
|
|
Backlog
of projects
|
|
9
Months
|
|
|
2,000
|
|
|
|
(667
|
)
|
|
|
1,333
|
|
Covenant
not-to-compete
|
|
3
Years
|
|
|
2,400
|
|
|
|
(200
|
)
|
|
|
2,200
|
|
Software (included in property and equipment)
|
|
3
Years
|
|
|
3,400
|
|
|
|
(283
|
)
|
|
|
3,117
|
|
Dealer
relationships
|
|
18
Months
|
|
|
2,600
|
|
|
|
(433
|
)
|
|
|
2,167
|
|
|
|
|
|
$
|
15,600
|
|
|
$
|
(1,713
|
)
|
|
$
|
13,887
|
|
Intangible
assets are stated at their original estimated value at the date of acquisition. The amortization of intangible assets
commences upon acquisition. The intangible assets are being amortized using the straight-line method over the intangible asset’s
estimated useful life:
Amortization expenses for intangible
assets for the three and six months ended June 30, 2021 was as follows:
SCHEDULE OF AMORTIZATION EXPENSES
|
|
For
the
|
|
|
For
the
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2021
|
|
|
June
30, 2021
|
|
Trademarks
|
|
$
|
130
|
|
|
$
|
130
|
|
Backlog
of projects
|
|
|
667
|
|
|
|
667
|
|
Covenant
not-to-compete
|
|
|
200
|
|
|
|
200
|
|
Software
|
|
|
283
|
|
|
|
283
|
|
Dealer
relationships
|
|
|
433
|
|
|
|
433
|
|
|
|
$
|
1,713
|
|
|
$
|
1,713
|
|
Estimated future amortization expense
for the Company’s intangible assets as June 30, 2021 is as follows:
SCHEDULE OF ESTIMATED FUTURE
AMORTIZATION EXPENSE
|
|
2021
|
|
Years ending December 31,
|
|
|
|
Remainder of 2021
|
|
$
|
3,427
|
|
2022
|
|
$
|
3,753
|
|
2023
|
|
$
|
2,453
|
|
2024
|
|
$
|
1,004
|
|
2025
|
|
$
|
520
|
|
Thereafter
|
|
$
|
2,730
|
|
Depreciation
and amortization expense for the three months ended June 30, 2021 and 2020 was $1,905
and $83,
respectively. Depreciation and amortization expense for the six months ended June 30, 2021 and 2020 was $1,970
and $164,
respectively.
Leases
The
Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term
and long-term lease liabilities are included in the condensed consolidated balance sheet. With the acquisition of Solcius in April
2021, the Company has finance lease ROU assets and finance lease liabilities, which are presented appropriately in
the condensed consolidated balance sheet.
ROU
assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation
to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement
date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit
rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining
the present value of lease payments. The operating and finance lease ROU asset also excludes lease incentives. The Company’s
lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease
and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the
Company has elected the short-term lease measurement and recognition exemption, and the Company recognizes such lease payments on a straight-line
basis over the lease term.
Stock-Based
Compensation
The
Company periodically issues stock options and restricted stock units (“RSU”) to employees and non-employees. The Company
accounts for stock option and RSU grants issued and vesting to employees based on the authoritative guidance provided by the Financial
Accounting Standards Board (“FASB”) 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 RSU grants issued and vesting to non-employees in accordance with
the authoritative guidance of the FASB 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) per Share Calculations
(Loss)
per Share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share
are computed by dividing income (loss) 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 and RSUs were not used in the calculation of the net loss per share.
A
net loss causes all outstanding common stock options and unvested RSUs 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, 2021 and 2020, respectively.
As
of June 30, 2021, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding
include 329,914
stock options and 287,500
unvested
RSUs.
As
of June 30, 2020, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding
include 128,411 stock options.
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.
Business
Combinations and Goodwill
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 retains a valuation consulting firm to test for goodwill impairment in the fourth quarter of each year and whenever events or
circumstances indicate that the carrying amount of an asset exceeds its fair value and may not be recoverable. Early in 2020, as a result
of the events and circumstances resulting from the COVID-19 pandemic, the Company’s outlook for revenue, profitability and cash
flow had deteriorated. Therefore, the Company performed a quantitative assessment of goodwill at March 31, 2020. It was determined
that the carrying value of goodwill exceeded its fair value at March 31, 2020. As a result, the Company recorded an impairment
of $4,000.
In accordance with the Company’s policies, the Company performed a quantitative assessment of goodwill at December 31, 2020
and no impairment was found.
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, 2021, 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 and
established a framework for measuring fair value in accordance with GAAP and also 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.
|
New
Accounting Pronouncements
Management
reviewed currently issued pronouncements during the six months ended June 30, 2021, 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 condensed
consolidated financial statements.
3.
BUSINESS ACQUISITION
On April 8, 2021, pursuant to the Purchase
Agreement, the Company, through its operating subsidiary Sunworks United Inc. acquired all of the issued and outstanding membership interests of Solcius from the Seller. Located in Provo, Utah, Solcius is a full-service residential solar systems
provider.
The purchase price for Solcius consisted of $51,750 in cash subject to post-closing adjustments related to working capital, cash, indebtedness
and transaction expenses. The Acquisition was accounted for under ASC 805 and the financial results of Solcius have been included in the Company’s financial statements since the date
of the Acquisition.
Purchase
Price Allocation
Under
the purchase method of accounting, the transaction was valued for accounting purposes at $52,111 which was the fair value of Solcius
at the time of acquisition. The assets and liabilities of Solcius were recorded at their respective fair values as of the date of acquisition.
The Company used a valuation consultant who identified $15,600 of separately identifiable intangible assets. Any difference between the
cost of Solcius 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
SCHEDULE
OF BUSINESS ACQUISITION LIABILITIES AND ASSETS ACQUIRED
|
|
(in thousands)
|
|
Base purchase price
|
|
$
|
51,750
|
|
Working capital shortfall
|
|
|
(1,131
|
)
|
Cash surplus
|
|
|
1,492
|
|
Total purchase price paid
|
|
$
|
52,111
|
|
|
|
|
|
|
Cash
|
|
$
|
1,492
|
|
Accounts receivable
|
|
|
1,729
|
|
Inventory
|
|
|
3,833
|
|
Contract assets
|
|
|
7,336
|
|
Prepaids and other current assets
|
|
|
1,603
|
|
Property and equipment
|
|
|
139
|
|
Deposits
|
|
|
91
|
|
Operating lease right-of-use asset
|
|
|
1,885
|
|
Finance lease right-of-use assets
|
|
|
1,200
|
|
Other intangible assets
|
|
|
15,600
|
|
Identifiable assets acquired
|
|
|
34,908
|
|
Accounts payable
and accrued liabilities
|
|
|
(6,957
|
)
|
Contract liabilities
|
|
|
(5,273
|
)
|
Operating and finance lease liabilities
|
|
|
(2,757
|
)
|
Liabilities assumed
|
|
|
(14,987
|
)
|
Net identifiable assets acquired
|
|
|
19,921
|
|
Goodwill
|
|
|
32,190
|
|
Net assets acquired
|
|
$
|
52,111
|
|
During
the three and six months ended June 30, 2021, we recorded total transaction costs related to the Acquisition of $40 and $750,
respectively. These expenses were accounted for separately from the net assets acquired, and are included in
general and administrative expense.
We
will continue to conduct assessments of the net assets acquired and recognized amounts for identifiable assets acquired and
liabilities assumed at their estimated acquisition date fair values.
We expect that it may take into late 2021 until all post-closing assessments and adjustments are finalized.
Pro
Forma Information
The
results of operations for the Acquisition since the April 8, 2021 closing date have been included in our June 30, 2021 condensed
consolidated financial statements and include approximately $22,812
of total revenue. The following unaudited pro forma financial information represents a summary of the consolidated results of
operations for the three months and six months ended June 30, 2021 and 2020, assuming the acquisition had been completed as of
January 1, 2020. The pro forma financial information includes certain non-recurring pro forma adjustments that were directly
attributable to the business combination. The proforma adjustments include the elimination of Acquisition transaction expenses
totaling $750
incurred in 2021, and adjustments to recognize amortization of intangible assets, retention stock-based compensation programs and
retention bonus accruals in 2020. The retention bonus expense is recognized over the first year following the Acquisition. The pro
forma financial information is not necessarily indicative of the results of operations that would have been achieved if the
acquisition had been effective as of these dates, or of future results.
SCHEDULE OF BUSINESS ACQUISITION PROFORMA STATEMENTS OF OPERATIONS
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
33,532
|
|
|
$
|
30,775
|
|
|
$
|
64,344
|
|
|
$
|
69,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(282
|
)
|
|
$
|
(2,424
|
)
|
|
$
|
(4,414
|
)
|
|
$
|
(11,225
|
)
|
4.
REVENUE FROM CONTRACTS WITH CUSTOMERS
The
following table represents a disaggregation of revenue by customer type from contracts with customers for the three and six months ended
June 30, 2021 and 2020:
SCHEDULE OF DISAGGREGATION OF REVENUE
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Commercial
|
|
$
|
6,221
|
|
|
$
|
5,152
|
|
|
$
|
9,216
|
|
|
$
|
9,762
|
|
Public Works
|
|
|
940
|
|
|
|
2,717
|
|
|
|
2,584
|
|
|
|
6,695
|
|
Residential
|
|
|
24,930
|
|
|
|
1,801
|
|
|
|
26,460
|
|
|
|
5,574
|
|
Total
|
|
$
|
32,091
|
|
|
$
|
9,670
|
|
|
$
|
38,260
|
|
|
$
|
22,031
|
|
Contract
assets represent revenue recognized in excess of amounts invoiced on contracts in progress. Contract liabilities represent billings in
excess of revenue recognized on contracts in progress. At June 30, 2021 and December 31, 2020, the contract asset balances were $9,824
and $2,397,
and the contract liability balances were $12,911
and $6,260,
respectively. During the three and six months ended June 30, 2021, the Company recognized revenue of approximately $2,335 and $3,846
from the $6,260 contract liabilities balance as of December 31, 2020, respectively.
5.
OPERATING SEGMENTS
The
acquisition of Solcius was completed in April 2021. Solcius is a separate segment for management reporting purposes. Segment net revenue,
segment operating expenses and segment contribution (loss) information consisted of the following for the three months ended June 30,
2021.
SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30, 2021
|
|
|
|
Solcius
|
|
|
Sunworks
|
|
|
Total
|
|
Net revenue
|
|
$
|
22,812
|
|
|
$
|
9,279
|
|
|
$
|
32,091
|
|
Cost of sales
|
|
|
9,745
|
|
|
|
7,208
|
|
|
|
16,953
|
|
Gross profit
|
|
|
13,067
|
|
|
|
2,071
|
|
|
|
15,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling & marketing
|
|
|
8,861
|
|
|
|
1,304
|
|
|
|
10,165
|
|
General & administrative
|
|
|
3,531
|
|
|
|
3,207
|
|
|
|
6,738
|
|
Segment contribution (loss)
|
|
|
675
|
|
|
|
(2,440
|
)
|
|
|
(1,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
967
|
|
|
|
146
|
|
|
|
1,113
|
|
Depreciation and amortization
|
|
|
1,870
|
|
|
|
35
|
|
|
|
1,905
|
|
Operating income (loss)
|
|
$
|
(2,162
|
)
|
|
$
|
(2,621
|
)
|
|
$
|
(4,783
|
)
|
|
|
1
|
|
|
2
|
|
|
3
|
|
|
|
For
the Six Months Ended
June
30, 2021
|
|
|
|
Solcius
|
|
|
Sunworks
|
|
|
Total
|
|
Net
revenue
|
|
$
|
22,812
|
|
|
$
|
15,448
|
|
|
$
|
38,260
|
|
Cost
of sales
|
|
|
9,745
|
|
|
|
13,286
|
|
|
|
23,031
|
|
Gross
profit
|
|
|
13,067
|
|
|
|
2,162
|
|
|
|
15,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
& marketing
|
|
|
8,861
|
|
|
|
2,535
|
|
|
|
11,396
|
|
General
& administrative
|
|
|
3,531
|
|
|
|
6,659
|
|
|
|
10,190
|
|
Segment
contribution (loss)
|
|
|
675
|
|
|
|
(7,032
|
)
|
|
|
(6,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
967
|
|
|
|
297
|
|
|
|
1,264
|
|
Depreciation
and amortization
|
|
|
1,870
|
|
|
|
100
|
|
|
|
1,970
|
|
Operating
income (loss)
|
|
$
|
(2,162
|
)
|
|
$
|
(7,429
|
)
|
|
$
|
(9,591
|
)
|
6.
RIGHT-OF-USE OPERATING LEASES
The
Company has ROU operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining
lease terms of 1
year to 6
years, some of which include options to extend.
The
Company’s operating lease expense for the three and six months ended June 30, 2021 amounted to $444
and $758,
respectively. Operating lease payments, which reduced operating cash flows for the three and six months ended June 30, 2021 amounted
to $444 and
$758, respectively.
The difference between the ROU asset amortization of $484
and the associated lease expense of $758
consists of early cancellation of a facility
lease obligation, new facility leases, short-term leases excluded from the ROU asset calculation, basic operating lease expenses
included in the lease expense for property and sales taxes, triple net and common area charges for facilities and other equipment
and vehicle lease related charges.
Supplemental
balance sheet information related to leases is as follows:
SCHEDULE
OF OPERATING LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION
|
|
June 30, 2021
|
|
|
|
(in thousands)
|
|
Operating lease right-of-use assets
|
|
$
|
2,479
|
|
|
|
|
|
|
Operating lease liabilities—short term
|
|
|
860
|
|
Operating lease liabilities—long term
|
|
|
1,619
|
|
Total operating lease liabilities
|
|
$
|
2,479
|
|
As
of June 30, 2021, the weighted average remaining lease term was 2.46
years and the weighted average discount rate
for the Company’s leases was 3.9%.
Minimum
payments for the operating leases are as follows:
SCHEDULE OF MATURITIES FOR OPERATING LEASES LIABILITIES
|
|
Operating Leases
|
|
|
|
(in thousands)
|
|
Remainder of 2021
|
|
$
|
565
|
|
2022
|
|
|
716
|
|
2023
|
|
|
478
|
|
2024
|
|
|
312
|
|
2025
|
|
|
294
|
|
Thereafter
|
|
|
269
|
|
Total lease payments
|
|
$
|
2,634
|
|
Less: imputed interest
|
|
|
155
|
|
Total
|
|
$
|
2,479
|
|
7.
RIGHT-OF-USE FINANCE LEASES
The
Company has finance leases for vehicles. The Company’s finance leases have remaining lease terms of 1 year to 4 years.
Supplemental
balance sheet information related to finance leases is as follows:
SCHEDULE
OF FINANCE LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION
|
|
June 30, 2021
|
|
|
|
(in thousands)
|
|
Finance lease right-of-use asset cost
|
|
$
|
1,280
|
|
Finance lease right-of-use accumulated amortization
|
|
|
(138
|
)
|
Finance lease right of use asset, net
|
|
$
|
1,142
|
|
|
|
|
|
|
Finance lease obligation—short term
|
|
$
|
415
|
|
Finance lease obligation—long term
|
|
|
409
|
|
Total finance lease obligation
|
|
$
|
824
|
|
As
of June 30, 2021, the weighted average remaining lease term was 2.05
years and the weighted average discount rate
for the Company’s leases was 4.9%.
Minimum
finance lease payments for the remaining lease terms are as follows:
SCHEDULE OF MATURITIES FOR FINANCE LEASES LIABILITIES
|
|
June 30, 2021
|
|
|
|
|
(in thousands)
|
|
Remainder of 2021
|
|
$
|
268
|
|
2022
|
|
|
360
|
|
2023
|
|
|
179
|
|
2024
|
|
|
43
|
|
2025
|
|
|
16
|
|
Thereafter
|
|
|
-
|
|
Total lease payments
|
|
$
|
866
|
|
Less: imputed interest
|
|
|
42
|
|
Total
|
|
$
|
824
|
|
8.
PAYCHECK PROTECTION PROGRAM LOAN PAYABLE
On
April 28, 2020 the Company’s operating subsidiary, Sunworks United, Inc., received a loan under the Paycheck Protection Program
(“PPP”), which was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), of $2,847.
As modified by the subsequent PPP Flexibility Act of 2020, proceeds from the loan were used to cover documented expenses related to payroll,
rent and utilities, during the 24-week period after the cash was received by the Company. The 24-week period ended on October 12, 2020.
The loan was accounted for as a financial liability in accordance with FASB ASC 470 until June 29, 2021 when the $2,847
loan was fully forgiven, together with $34
of accrued interest. As a result, the Company recorded a gain on extinguishment of
the debt which is included in other income on the condensed consolidated statements of operations for the three and six months ended
June 30, 2021.
9.
CAPITAL STOCK
Common
Stock
On
January 27, 2021, the Company filed a Registration Statement on Form S-3 (File No. 333-252475) (the “Registration Statement”)
with the Securities and Exchange Commission (the “SEC”). The Registration Statement allows the Company to offer and sell,
from time to time in one or more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate
initial offering price not to exceed $100 million. The Registration Statement was declared effective by the SEC on February 3, 2021.
On
February 10, 2021, the Company entered into a Sales Agreement (the “Roth Sales Agreement”) with Roth Capital Partners, LLC
(the “Agent RCP”), pursuant to which the Company could offer and sell from time to time, through the Agent RCP, shares of
the Company’s common stock, registered under the Securities Act, pursuant to the Registration Statement filed on Form S-3.
Sales
of shares pursuant to the Roth Sales Agreement are deemed to be “at the market offerings” as defined in Rule 415 promulgated
under the Securities Act. The Agent RCP has agreed to act as sales agent and use commercially reasonable efforts to sell on the Company’s
behalf all of the shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed
terms between the Agent RCP and the Company.
3,212,486
shares of common stock (the “Placement Shares”) were sold under the Roth Sales Agreement between February 11, 2021 and February
23, 2021, pursuant to a prospectus supplement that was filed with the SEC on February 10, 2021. Total gross proceeds for the Placement
Shares were $49,937 or $15.54 per share. Net proceeds after brokerage costs, professional, registration and other fees were $48,858 or
$15.21 per share.
10.
STOCK-BASED COMPENSATION
Options
As
of June 30, 2021, the Company has non-qualified stock options outstanding to purchase 329,914 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 years from the date
of grant at exercise prices ranging from $2.10 to $21.70 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.
On
April 12, 2021, subject to the 2016 Plan, the Company granted eight members of Solcius management incentive stock options for a total
of 260,000
shares of common stock. The entire 260,000
options vest on April 8, 2022, the one-year
anniversary date of the Solcius acquisition. The exercise price of each option share is $12.15,
the closing price of Sunworks stock on April 12, 2021. The Company determined the fair market value of these options at $10.30
per share by using the Black Scholes option
valuation model. The annualized volatility is 126.0
percent with an annual risk-free interest
rate of 1.69
percent. The options mature and expire in five
years from date of grant.
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS ACTIVITY
|
|
June 30, 2021
|
|
|
|
Number
|
|
|
Weighted average
|
|
|
|
of Options
|
|
|
exercise price
|
|
Outstanding, beginning December 31, 2020
|
|
|
88,441
|
|
|
$
|
11.02
|
|
Granted
|
|
|
260,000
|
|
|
$
|
12.15
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(6,385
|
)
|
|
$
|
6.14
|
|
Expired
|
|
|
(12,142
|
)
|
|
$
|
18.76
|
|
Outstanding at the end of June 30, 2021
|
|
|
329,914
|
|
|
$
|
11.72
|
|
Exercisable at the end of June 30, 2021
|
|
|
63,780
|
|
|
$
|
10.83
|
|
During
the three months ended June 30, 2021 and 2020, the Company charged a total of $738 and $23, respectively, to operations to recognize
stock-based compensation expense for stock options.
During
the six months ended June 30, 2021 and 2020, the Company charged a total of $750
and $58,
respectively, to operations to recognize stock-based compensation expense for stock options.
RSU
to CEO
On
January 11, 2021, subject to the Sunworks, Inc. 2016 Equity Incentive Plan, (the “2016 Plan”), the Company entered into a
RSU grant agreement with its Chief Executive Officer, Gaylon Morris (the “January 2021 RSUGA”). All shares issuable
under the January 2021 RSUGA are valued as of the grant date at $7.95
per share. The
January 2021 RSUGA provides for the issuance of up to 210,000
shares of the Company’s common stock. The RSUs
will vest as follows: 70,000
of the RSUs will vest on the one-year
anniversary of the effective date, and the balance, or 140,000
RSUs will vest in 24 equal monthly installments
commencing on the one-year anniversary of the effective date.
During
the three and six months ended June 30, 2021, stock-based compensation expense of $139
and $278, respectively,
was recognized for the January 2021 RSUGA.
RSUs
to Solcius Employees
On
April 12, 2021, subject to the 2016 Plan, the Company entered into RSU grant agreements with seven members of Solcius management
(the “April 2021 RSUGAs”). All shares issuable under the April 2021 RSUGAs are valued as of the grant date at $12.15
per share. The
April 2021 RSUGAs provide for the total combined issuance of up to 77,500
shares of the Company’s common stock. The entire
77,500
RSUs
vest on April 8, 2022, the one-year anniversary of the Solcius acquisition.
During
the three months ended June 30, 2021, stock-based compensation expense of $236
was recognized for the April 2021 RSUGAs.
The
total combined option and RSU compensation expense recognized in the condensed consolidated statements of operations
during the three months ended June 30, 2021 and 2020 was $1,113
and $23,
respectively.
The
total combined option and RSU compensation expense recognized in the condensed consolidated statements of operations
during the six months ended June 30, 2021 and 2020 was $1,264
and $121,
respectively.
11.
RELATED PARTY TRANSACTIONS
The
Company rents a facility in Durham, California from Plan D Enterprises, Inc., an entity controlled by the Company’s President of
Commercial Operations, for $9 per month.
12.
COMMITMENTS AND CONTINGENCIES
Litigation
From
time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant
legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a negative impact on
the Company’s financial position except as noted below:
On
October 12, 2020, a putative class complaint was filed by a purported stockholder of Sunworks regarding the contemplated but terminated
merger among iSun, Inc. (formerly The Peck Company Holdings, Inc.), Peck Mercury, Inc. and Sunworks (the “Merger”). The complaint
names, as defendants, each of the Sunworks’ Board of Directors (the “Directors”) and asserts that the Directors breached
their fiduciary duties. The plaintiff alleges that the consideration to be received by stockholders of Sunworks was inadequate and that
the Registration Statement on Form S-4 contained materially incomplete and misleading information regarding the proposed Merger. On November
24, 2020, the parties filed a joint stipulation to dismiss the action without prejudice with a reservation for plaintiff to seek attorneys’
fees and costs; the Court granted that stipulation and ordered the dismissal on November 25, 2020. On May 17, 2021, the Court granted
a stipulation by the parties for plaintiff’s counsel to receive an award of $500
as a mootness fee which was promptly paid
by the Company. The had been recorded as an accrued liability as of December 31, 2020. As part of the stipulation, the Company did
not admit any liability or wrongdoing and the case was closed.
There
were seven other actions related to the same proposed transaction, all of which have been voluntarily dismissed by
the respective plaintiffs.