NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
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. (“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 (the “Buyer”), acquired all of the issued
and outstanding membership interests (the “Acquisition”) of 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 14 states, including California, Oregon, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin,
Massachusetts, New Jersey, Hawaii and South Carolina. The Company believes 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 September 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 nine months ended September 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.
For
residential contracts, the Company recognizes revenue upon completion of the job as determined by final inspection. We
recognize revenue for systems operations and maintenance over the term of the service period.
For
EPC revenue, we commence recognizing performance revenue when work starts on the job and continue recognizing revenue over
time as work is performed based on the ratio of costs incurred, excluding modules and components, compared to the total estimated non-materials costs at completion of the performance obligations.
Judgment
is required to evaluate assumptions including the amount of net contract revenue and the total estimated costs to determine the Company’s
progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If estimated total costs
on any contract are greater than the net contract revenue, the Company recognizes the entire estimated loss in the period
the loss becomes known.
Changes
in estimates for EPC services occur for a variety of reasons, including but not limited to (i) construction plan accelerations or delays,
(ii) product cost forecast changes, (iii) change orders, or (iv) changes in other information used to estimate costs. Changes in estimates
may have a material effect in the Company’s consolidated statements of operations. The table below outlines the impact
on revenue of net changes in estimated transaction prices and input costs for systems related sales contracts (both increases and decreases)
for the three and nine months ended September 30, 2021 and 2020 as well as the number of projects that comprise such changes. For purposes
of the following table, only projects with changes in estimates that have an impact on revenue and or cost of at least $100, calculated
on a quarterly basis during the periods, were presented. Also included in the table is the net change in estimate as a percentage of
the aggregate revenue for such projects.
SCHEDULE OF CHANGES IN ESTIMATE AGGREGATE REVENUE
(In thousands, except number of projects)
|
|
September
30, 2021
|
|
|
September
30, 2020
|
|
|
September
30, 2021
|
|
|
September
30, 2020
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In thousands, except number of projects)
|
|
September
30, 2021
|
|
|
September
30, 2020
|
|
|
September
30, 2021
|
|
|
September
30, 2020
|
|
Increase in revenue from net changes in transaction prices
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
190
|
|
|
$
|
200
|
|
Increase (decrease) in revenue from net changes in input cost estimates
|
|
|
1,307
|
|
|
|
83
|
|
|
|
985
|
|
|
|
369
|
|
Net increase in revenue from net changes in estimates
|
|
$
|
1,307
|
|
|
$
|
83
|
|
|
$
|
1,175
|
|
|
$
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of projects
|
|
|
4
|
|
|
|
3
|
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in estimate as a percentage of aggregate revenue for associated projects
|
|
|
17.3
|
%
|
|
|
1.1
|
%
|
|
|
11.3
|
%
|
|
|
5.2
|
%
|
Contract
Assets and Liabilities
Contract
assets consist of (i) the earned, but unbilled, portion of a project for which payment is deferred by the customer until certain contractual
milestones are met; (ii) direct costs, including commissions, labor related costs and permitting fees paid prior to recording revenue,
and (iii) unbilled receivables which represent revenue that has been recognized in advance of billing the customer, which is common for
larger construction contracts. Contract liabilities consist of deferred revenue, customer deposits and customer advances, which
represent consideration received from a customer prior to transferring control of goods or services to the customer under the terms of
a contract. Total contract assets and contract liabilities balances as of the respective dates are as follows:
SCHEDULE OF CONTRACT ASSETS AND LIABILITIES
|
|
As of
|
|
(In thousands)
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Contract Assets
|
|
$
|
12,418
|
|
|
$
|
2,397
|
|
Contract Liabilities
|
|
|
11,883
|
|
|
|
6,260
|
|
During
the three and nine months ended September 30, 2021, the Company recognized revenue of $1,942
and $4,376,
respectively, that was included in contract liabilities as of June 30, 2021 and December 31, 2020, respectively. During the three and
nine months ended September 30, 2020, the Company recognized revenue of $922
and $3,249,
respectively, that was included in contract
liabilities as of June 30, 2020 and December 31, 2019, respectively.
The
following table represents the average percentage of completion as of September 30, 2021 for EPC projects that the Company
is constructing. The Company expects to recognize $17,900
of revenue upon transfer of control of the projects.
SCHEDULE OF REVENUE RECOGNIZE
UPON TRANSFER CONTROL OF PROJECTS
Project
|
|
Revenue Category
|
|
Expected Years Revenue Recognition Will Be Completed
|
|
Average Percentage of Revenue Recognized
|
|
Various Projects
|
|
EPC services
|
|
2021
- 2022
|
|
|
55.5
|
%
|
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 $295 and $392 were included in the balance of trade accounts receivable as of September 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 September 30, 2021 of $491
and at December 31, 2020 of $253.
During the three months ended September 30, 2021, $132
of uncollectible accounts receivable was
written off against the allowance for doubtful accounts. Additionally, during the three months ended September 30, 2021, $74
was recorded as bad debt expense compared
to $0 in
the prior year period. During the nine months ended September 30, 2021 and 2020, $255
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, optimizers 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
|
Leasehold improvements
|
|
3-5 Years
|
Intangible
Assets
The
Company’s intangible assets at September 30, 2021 consist of the following:
SCHEDULE OF INTANGIBLE ASSETS
|
|
Amortization
periods
|
|
Cost
|
|
|
Accumulated amortization
|
|
|
Net carrying value
|
|
Trademarks
|
|
10 Years
|
|
$
|
5,200
|
|
|
$
|
(260
|
)
|
|
$
|
4,940
|
|
Backlog of projects
|
|
9 Months
|
|
|
2,000
|
|
|
|
(1,334
|
)
|
|
|
666
|
|
Covenant not-to-compete
|
|
3 Years
|
|
|
2,400
|
|
|
|
(400
|
)
|
|
|
2,000
|
|
Software (included in property and equipment)
|
|
3 Years
|
|
|
3,400
|
|
|
|
(566
|
)
|
|
|
2,834
|
|
Dealer relationships
|
|
18 Months
|
|
|
2,600
|
|
|
|
(866
|
)
|
|
|
1,734
|
|
|
|
|
|
$
|
15,600
|
|
|
$
|
(3,426
|
)
|
|
$
|
12,174
|
|
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 nine months ended September 30, 2021 was as follows:
SCHEDULE OF AMORTIZATION EXPENSES
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2021
|
|
|
September 30, 2021
|
|
Trademarks
|
|
$
|
130
|
|
|
$
|
260
|
|
Backlog of projects
|
|
|
667
|
|
|
|
1,334
|
|
Covenant not-to-compete
|
|
|
200
|
|
|
|
400
|
|
Software
|
|
|
283
|
|
|
|
566
|
|
Dealer relationships
|
|
|
433
|
|
|
|
866
|
|
|
|
$
|
1,713
|
|
|
$
|
3,426
|
|
Estimated
future amortization expense for the Company’s intangible assets as of September 30, 2021 is as follows:
SCHEDULE
OF ESTIMATED FUTURE AMORTIZATION EXPENSE
|
|
2021
|
|
Years ending December 31,
|
|
|
|
Remainder of 2021
|
|
$
|
1,713
|
|
2022
|
|
$
|
3,753
|
|
2023
|
|
$
|
2,453
|
|
2024
|
|
$
|
1,004
|
|
2025
|
|
$
|
520
|
|
Thereafter
|
|
$
|
2,731
|
|
Depreciation
and amortization expense for the three months ended September 30, 2021 and 2020 was $1,930 and $82, respectively. Depreciation and amortization
expense for the nine months ended September 30, 2021 and 2020 was $3,900 and $246, 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 nine months ended September 30, 2021 and 2020, respectively.
As
of September 30, 2021, the potentially dilutive securities that have been excluded from the computations of weighted average shares
outstanding include 307,698 stock options,
and 317,500 unvested RSUs.
As
of September 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. There were no events or circumstances that indicated impairment of goodwill at September 30, 2021.
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, 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 nine months ended September 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 nine months ended September 30, 2021, we recorded total transaction costs related to the Acquisition of $25
and $774,
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 September 30, 2021 condensed
consolidated financial statements and include approximately $46,191 of total revenue. The following unaudited pro forma financial information
represents a summary of the consolidated results of operations for the three months and nine months ended September 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 $774 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
|
|
|
September 30, 2021
|
|
|
|
September 30, 2020
|
|
|
|
September 30, 2021
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine months ended
|
|
|
|
|
September 30, 2021
|
|
|
|
September 30, 2020
|
|
|
|
September 30, 2021
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
31,220
|
|
|
$
|
28,717
|
|
|
$
|
95,564
|
|
|
$
|
98,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,380
|
)
|
|
$
|
(3,436
|
)
|
|
$
|
(8,806
|
)
|
|
$
|
(14,535
|
)
|
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 nine months ended
September 30, 2021 and 2020:
SCHEDULE OF DISAGGREGATION OF REVENUE
|
|
Three Months Ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Commercial
|
|
$
|
4,795
|
|
|
$
|
3,683
|
|
|
$
|
14,011
|
|
|
$
|
13,445
|
|
Public Works
|
|
|
1,841
|
|
|
|
1,633
|
|
|
|
4,425
|
|
|
|
8,328
|
|
Residential
|
|
|
24,584
|
|
|
|
1,988
|
|
|
|
51,044
|
|
|
|
7,562
|
|
Total
|
|
$
|
31,220
|
|
|
$
|
7,304
|
|
|
$
|
69,480
|
|
|
$
|
29,335
|
|
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 and nine months
ended September 30, 2021.
SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT
|
|
Solcius
|
|
|
Sunworks
|
|
|
Total
|
|
|
|
For the Three Months Ended
September 30, 2021
|
|
|
|
Solcius
|
|
|
Sunworks
|
|
|
Total
|
|
Net revenue
|
|
$
|
23,379
|
|
|
$
|
7,841
|
|
|
$
|
31,220
|
|
Cost of sales
|
|
|
10,377
|
|
|
|
6,427
|
|
|
|
16,804
|
|
Gross profit
|
|
|
13,002
|
|
|
|
1,414
|
|
|
|
14,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling & marketing
|
|
|
9,226
|
|
|
|
846
|
|
|
|
10,072
|
|
General & administrative
|
|
|
4,316
|
|
|
|
3,347
|
|
|
|
7,663
|
|
Segment contribution (loss)
|
|
|
(540
|
)
|
|
|
(2,779
|
)
|
|
|
(3,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
905
|
|
|
|
301
|
|
|
|
1,206
|
|
Depreciation and amortization
|
|
|
1,880
|
|
|
|
50
|
|
|
|
1,930
|
|
Operating income (loss)
|
|
$
|
(3,325
|
)
|
|
$
|
(3,130
|
)
|
|
$
|
(6,455
|
)
|
|
|
Solcius
|
|
|
Sunworks
|
|
|
Total
|
|
|
|
For the Nine months ended
September 30, 2021
|
|
|
|
Solcius
|
|
|
Sunworks
|
|
|
Total
|
|
Net revenue
|
|
$
|
46,191
|
|
|
$
|
23,289
|
|
|
$
|
69,480
|
|
Cost of sales
|
|
|
20,122
|
|
|
|
19,714
|
|
|
|
39,836
|
|
Gross profit
|
|
|
26,069
|
|
|
|
3,575
|
|
|
|
29,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling & marketing
|
|
|
18,087
|
|
|
|
3,381
|
|
|
|
21,468
|
|
General & administrative
|
|
|
7,847
|
|
|
|
10,006
|
|
|
|
17,853
|
|
Segment contribution (loss)
|
|
|
135
|
|
|
|
(9,812
|
)
|
|
|
(9,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
1,810
|
|
|
|
660
|
|
|
|
2,470
|
|
Depreciation and amortization
|
|
|
3,749
|
|
|
|
151
|
|
|
|
3,900
|
|
Operating income (loss)
|
|
$
|
(5,424
|
)
|
|
$
|
(10,623
|
)
|
|
$
|
(16,047
|
)
|
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 nine months ended September 30, 2021 amounted to $394
and $1,086,
respectively. Operating lease payments, which reduced operating cash flows for the three and nine months ended September 30, 2021 amounted
to $394 and
$1,086,
respectively. The difference between the ROU asset amortization of $762
and the associated lease expense of $1,086
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
|
|
September 30, 2021
|
|
|
|
|
(in thousands)
|
|
Operating lease right-of-use assets
|
|
$
|
2,446
|
|
|
|
|
|
|
Operating lease liabilities—short term
|
|
|
918
|
|
Operating lease liabilities—long term
|
|
|
1,528
|
|
Total operating lease liabilities
|
|
$
|
2,446
|
|
As
of September 30, 2021, the weighted average remaining lease term was 2.5
years and the weighted average discount rate
for the Company’s leases was 3.8%.
Minimum
payments for the operating leases are as follows:
SCHEDULE OF MATURITIES FOR OPERATING LEASES LIABILITIES
|
|
Operating Leases
|
|
|
|
|
(in thousands)
|
|
Remainder of 2021
|
|
$
|
296
|
|
2022
|
|
|
854
|
|
2023
|
|
|
518
|
|
2024
|
|
|
312
|
|
2025
|
|
|
294
|
|
Thereafter
|
|
|
270
|
|
Total lease payments
|
|
$
|
2,544
|
|
Less: imputed interest
|
|
|
98
|
|
Total
|
|
$
|
2,446
|
|
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
|
|
September 30, 2021
|
|
|
|
|
(in thousands)
|
|
Finance lease right-of-use asset cost
|
|
$
|
1,520
|
|
Finance lease right-of-use accumulated amortization
|
|
|
(297
|
)
|
Finance lease right of use asset, net
|
|
$
|
1,223
|
|
|
|
|
|
|
Finance lease obligation—short term
|
|
$
|
452
|
|
Finance lease obligation—long term
|
|
|
430
|
|
Total finance lease obligation
|
|
$
|
882
|
|
As
of September 30, 2021, the weighted average remaining lease term was 2.2 years and the weighted average discount rate for the Company’s
leases was 4.5%.
Minimum
finance lease payments for the remaining lease terms are as follows:
SCHEDULE OF MATURITIES FOR FINANCE LEASES LIABILITIES
|
|
September 30, 2021
|
|
|
|
|
(in thousands)
|
|
Remainder of 2021
|
|
$
|
165
|
|
2022
|
|
|
402
|
|
2023
|
|
|
221
|
|
2024
|
|
|
84
|
|
2025
|
|
|
56
|
|
Thereafter
|
|
|
-
|
|
Total lease payments
|
|
$
|
928
|
|
Less: imputed interest
|
|
|
46
|
|
Total
|
|
$
|
882
|
|
8.
PAYCHECK PROTECTION PROGRAM LOAN PAYABLE
On
April 28, 2020 the Company’s operating subsidiary, Sunworks United, 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, together with $34 of accrued interest,
was fully forgiven. 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 nine months
ended September 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 September 30, 2021, the Company has non-qualified stock options outstanding to purchase 307,698
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 one to 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.
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS ACTIVITY
|
|
September 30, 2021
|
|
|
|
Number
|
|
|
Weighted average
|
|
|
|
of Options
|
|
|
exercise price
|
|
Outstanding, beginning December 31, 2020
|
|
|
88,441
|
|
|
$
|
11.02
|
|
Granted
|
|
|
260,000
|
|
|
$
|
12.15
|
|
Exercised
|
|
|
(2,218
|
)
|
|
|
2.10
|
|
Forfeited
|
|
|
(13,527
|
)
|
|
$
|
8.44
|
|
Expired
|
|
|
(24,998
|
)
|
|
$
|
16.62
|
|
Outstanding at the end of September 30, 2021
|
|
|
307,698
|
|
|
$
|
11.70
|
|
Exercisable at the end of September 30, 2021
|
|
|
47,698
|
|
|
$
|
9.22
|
|
The
following table summarizes the Company’s restricted stock unit activity during the nine months ended September 30,2021:
SCHEDULE
OF STOCK-BASED COMPENSATION, RESTRICTED STOCK UNIT ACTIVITY
|
|
September
30, 2021
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
Number
Of
Shares
|
|
|
Grant
Date Value per Share
|
|
Unvested,
beginning December 31, 2020
|
|
|
0
|
|
|
$
|
0.00
|
|
Granted
|
|
|
327,500
|
|
|
$
|
9.08
|
|
Vested
|
|
|
(10,000
|
)
|
|
$
|
9.07
|
|
Forfeited
|
|
|
0
|
|
|
|
0
|
|
Unvested
at the end of September 30, 2021
|
|
|
317,500
|
|
|
$
|
9.08
|
|
The
total combined option and RSU compensation expense recognized in the condensed consolidated statements of operations during the three
months ended September 30, 2021 and 2020 was $1,206 and $16, respectively.
The
total combined option and RSU compensation expense recognized in the condensed consolidated statements of operations during the nine
months ended September 30, 2021 and 2020 was $2,470 and $137, 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 former 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. This amount 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.
13.
SUBSEQUENT EVENTS
On
October 21, 2021, the Company filed a prospectus supplement with the SEC, 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.
In
accordance with the terms of the Roth Sales Agreement, we may offer and sell shares of our common stock under this prospectus
having an aggregate offering price of up to $25
million (the “New Placement Shares”)
from time to time through or to Agent RCP, as sales agent or principal.
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.
Subsequent
to September 30, 2021 and through November 10, 2021 the sale and issuance of the New Placement Shares pursuant to the Roth
Sales Agreement totaled 2,035,025 additional common shares issued and outstanding resulting in net proceeds of $12,222.