(dollars in thousands, except share and per share data)
The following discussion of our financial condition and results of operations
should be read together with our unaudited condensed consolidated financial
statements and related notes included in Part I, Item 1 of this Quarterly Report
on Form 10-Q (this Quarterly Report) and the audited consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2020 (our Annual Report). This section contains forward-looking statements that
are based on our current expectations and reflect our plans, estimates, and
anticipated future financial performance. These statements involve numerous
risks and uncertainties. Our actual results may differ materially from those
expressed or implied by these forward-looking statements as a result of many
factors, including those set forth in the sections entitled "Cautionary Note
Regarding Forward-Looking Statements" included in this Quarterly Report.
Unless otherwise noted, (1) "Sunworks" refers to Sunworks, Inc., a Delaware
corporation formerly known as Solar3D, Inc. (2) "Company," "we," "us," and
"our," refer to the ongoing business operations of Sunworks and its
Subsidiaries, whether conducted through Sunworks or a subsidiary of Sunworks,
and (3) "Subsidiaries" refers collectively to Sunworks United, Inc. (Sunworks
United), MD Energy, Inc. (MD Energy), Plan B Enterprises (Plan B) and Solcius
LLC (Solcius).
Overview
We provide photovoltaic (PV) based power systems for the commercial, public
works, and residential markets in California, Nevada, Massachusetts, Oregon, New
Jersey, Utah, Arizona, Colorado, New Mexico, Texas, South Carolina, Wisconsin,
Minnesota and Hawaii. We have direct sales and/or operations personnel in
California, Nevada, Massachusetts, Utah, Arizona, New Mexico, Texas, Colorado,
South Carolina, Wisconsin and Minnesota. Through our operating subsidiaries, we
design, arrange financing, integrate, install, and manage systems ranging in
size from 2kW (kilowatt) for residential projects to multi-MW (megawatt) systems
for larger commercial and public works projects. Commercial installations have
included installations at office buildings, manufacturing plants, warehouses,
service stations, churches, and agricultural facilities such as farms, wineries,
and dairies. Public works installations have included school districts, local
municipalities, federal facilities and higher education institutions. We provide
a full range of installation services to our solar energy customers including
design, system engineering, procurement, permitting, construction, grid
connection, warranty, system monitoring and maintenance.
We currently operate in two segments based upon our organizational structure and
the way in which our operations are managed and evaluated. Our Solcius segment
is responsible for the vast majority of our residential market revenue and our
Sunworks segment services primarily commercial and public works markets.
As a result of the Solcius acquisition in April 2021, the portion of our
consolidated revenue from residential installations has increased significantly.
For the first nine months of 2021, approximately 73% of our 2021 revenue was
from installations for the residential market. For the same period,
approximately 27% of our revenue was from installations for the commercial and
public works markets.
For the first nine months of 2020, approximately 26% of our revenue was from
installations for the residential market and approximately 74% of our 2020
revenue was from installations for the commercial and public works markets.
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IMPACT OF COVID-19 ON OUR BUSINESS
The continued global novel coronavirus and its variants (COVID-19) pandemic, has
resulted in significant governmental measures being implemented to control the
spread of the virus, including quarantines, travel restrictions and business
shutdowns. The uncertain macroeconomic environment created by the COVID-19
pandemic has had and will continue to have a significant, adverse impact on our
business. To assist readers in reviewing management's discussion and analysis of
financial condition and results of operations, we provide the following
discussion regarding the effects COVID-19 has had on the Company, what
management expects the future impact to be, how we are responding to evolving
circumstances and how we are planning for further COVID-19 uncertainties.
State and local directives, guidelines, and other restrictions, as well as
consumer behavior, continue to impact our operations in the regions in which we
operate, particularly California. During the three months and nine months ended
September 30, 2021, we continued to serve customers. COVID-19 and the
governmental directives materially disrupted the operations of the local and
state governments by closing or restricting operations at city, county and state
offices for design reviews, permitting projects, and inspections of projects.
Utility companies have been unable to provide timely shutdowns, inspections and
interconnection approvals. This disruption negatively impacts our ability to
complete projects, generate revenue on projects in backlog and causes many
customers to delay decisions on new projects.
Our revenue and gross profit in the three and nine months ended September 30,
2021 were negatively impacted by governmental responses to the COVID-19
pandemic, which delayed pre-construction approvals and installation activity for
our larger public works, agriculture and commercial projects by delaying
approvals and restricting our employees' access to our work sites. Earlier
governmental orders and social distancing guidelines slowed our sales process,
as our customers avoided interacting with our sales and installation personnel
and delayed buying decisions.
We received a loan under the Paycheck Protection Program of $2,847 which was
used to pay for payroll costs, interest on debt, rent, utilities, and group
health care benefits, allowing the Company to focus on revenue generating
activities in an effort to mitigate some of the impact COVID-19 has on our
business. The entire principal of the loan and all accrued interest was forgiven
in June of 2021.
Although there is uncertainty around the continued impact and severity the
COVID-19 pandemic has had, and will continue to have, on our operations, these
developments and measures have negatively affected our business. We will
continue to manage the impact through appropriate operational measures. Of
concern is how the COVID-19 pandemic continues to spread and could continue to
adversely impact our ability to source materials used in our operations or
affect our ability to complete ongoing installations in a timely manner. Several
of our personnel have been subject to Company-imposed quarantine restrictions
based upon possible contact with individuals who have tested positive. We are
encouraging our personnel to wear masks and use social distancing and we believe
we are taking appropriate sanitization measures. We cannot predict whether any
one of our key executives or other personnel could become incapacitated by
COVID-19 and its variants.
As the COVID-19 pandemic and its effects evolve, we are monitoring our business
to ensure that our expenses are in line with expected cash generation. In March
2020, we formed an internal task force to evaluate the ongoing impact of
COVID-19 on our business. This task force reviews and analyzes ongoing
developments related to COVID-19 as they impact our business and operations. The
extent to which our results are affected by the COVID-19 pandemic will largely
depend on future developments which cannot be accurately predicted and are
uncertain, but the COVID-19 pandemic has had and will continue to have an
adverse effect on our business, operations, financial condition, results of
operations, and cash flows.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue on construction contracts recognized over time, fair value of assets
acquired and liabilities assumed in a business combination, expenses, and
related disclosures of contingent assets and liabilities. On an ongoing basis,
we evaluate our estimates, including those related to impairment of property,
plant and equipment, intangible assets, operating and finance lease right-of-use
assets and liabilities, deferred tax assets, costs to complete projects, and
fair value computation using the Black Scholes option pricing model. We base our
estimates on historical experience and on various other assumptions, such as the
trading value of our common stock and estimated future undiscounted cash flows,
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions; however,
we believe that our estimates, including those for the above-described items,
are reasonable.
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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 our 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. We
base our 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, we 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 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; and (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 and 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.
Leases
We determine if an arrangement is a lease at inception. Operating lease
right-of-use assets and short-term and long-term lease liabilities are included
on the face of the condensed consolidated balance sheet. Finance lease ROU
assets are presented within other assets, and finance lease liabilities
presented as short-term or long-term finance lease liabilities.
ROU assets represent the right to use an underlying asset for the lease term and
lease liabilities represent our obligation to make lease payments arising from
the lease. Operating 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 our leases do not provide an implicit rate, we use an
incremental borrowing rate based on the information available at commencement
date in determining the present value of lease payments. The operating lease ROU
asset also excludes lease incentives. Our lease terms may include options to
extend or terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense for lease payments is recognized on a
straight-line basis over the lease term. We have 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, we have elected the short-term
lease measurement and recognition exemption, which recognizes such lease
payments on a straight-line basis over the lease term.
Indefinite Lived Intangibles and Goodwill Assets
We account 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.
We test 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.
22
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2020
REVENUE AND COST OF GOODS SOLD
For the three months ended September 30, 2021, revenue increased to $31,220
compared to $7,304 for the three months ended September 30, 2020. The revenue
increase is the result of the April 8, 2021 acquisition of Solcius. Solcius
contributed $46,191 of revenue since acquisition and $23,379 during the three
months ended September 30, 2021. Solcius contributed 75% to our consolidated
revenue for the period. Overall, approximately 79% of revenue in the third
quarter of 2021 was from installations for the residential market. Commercial
and public works markets contributed 21% of revenue in the period. In contrast,
for the same period in 2020, prior to the Solcius acquisition, residential
revenue represented 27% of total revenue while commercial and public works
revenue was 73% of total revenue.
Cost of goods sold for the three months ended September 30, 2021, was $16,804,
or 53.8% of revenue compared to $5,670 or 77.6% percent of revenue for the three
months ended September 30, 2020. The increase in cost of goods sold is primarily
the result of the April 8, 2021 acquisition of Solcius.
Gross profit was $14,416 for the quarter ended September 30, 2021, compared to
$1,634 of gross profit for the same quarter of the prior year. The gross margin
was 46.2% in the third quarter of 2021 compared to 22.4% in the same quarter of
2020. The margin improvement is the result of the Solcius acquisition and the
related gross margin on residential projects combined with improved margin on
commercial projects completed during the period.
SELLING AND MARKETING EXPENSES
For the three months ended September 30, 2021, our selling and marketing
expenses were $10,072 compared to $1,069 for the three months ended September
30, 2020. The significant increase in expense period over period is primarily
the result of the higher revenue and dealer commission expenses related to the
Solcius acquisition. Additionally, during the quarter we incurred additional
marketing costs to expand lead generation efforts and broaden our brand
awareness.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative (G&A) expenses were $7,663 for the three months
ended September 30, 2021, compared to $3,161 for the three months ended
September 30, 2020. G&A expenses primarily increased with the addition of
Solcius. During the same quarter of the prior year, Sunworks had reduced
salaries and reduced overall spending in response to the COVID-19 restrictions.
The increase in G&A expenses versus the prior year quarter included compensation
related expenses, general insurance expenses, and executive recruiting fees.
STOCK-BASED COMPENSATION EXPENSES
During the three months ended September 30, 2021 we incurred $1,206 in total
non-cash stock-based compensation expense compared to $16 for the same period in
the prior year. The period over period increase in stock-based compensation is
the result of the company expanding RSU and stock option grants as part of the
compensation structure to a wider population of employees.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended September 30,
2021 was $1,930 compared to $82 for the same period in the prior year.
Depreciation and amortization expenses increased as a result of $15,600 of
intangible assets identified in the April 2021 Solcius acquisition.
Additionally, the Solcius property and equipment acquired increased depreciation
expense for the period.
OTHER (EXPENSE), NET
Other expense was a net $5 for the three months ended September 30, 2021,
compared to a net expense of $158 for the same three months in 2020. Interest
expense for the quarter ended September 30, 2021 was $10, primarily related to
the interest paid on financing leases. Interest expense for the quarter ended
September 30, 2020 was $159 and was the result of interest for the remaining
balance of a $2.25 million promissory note repaid in December of 2020.
NET LOSS
The net loss for the three months ended September 30, 2021 was $6,460 compared
to a net loss of $2,852 for the three months ended September 30, 2020.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2020
REVENUE AND COST OF GOODS SOLD
For the nine months ended September 30, 2021, revenue increased to $69,480
compared to $29,335 for the nine months ended September 30, 2020. Approximately
73% of revenue in the first nine months of 2021 was from installations for the
residential markets at $51,044 compared to 26% of revenue or $7,562 for the same
period in the prior year. The increase is a result of the Solcius acquisition in
April 2021. Commercial and public works revenue was 27% of total revenue or
$18,436 for the first nine months of 2021, compared to 74% or $21,773 of revenue
in the same period of the prior year. Public works revenue was $3,903 higher
during the first nine months of 2020. The higher 2020 revenue was the result of
a larger project under construction and nearing completion during the same
period in the prior year.
Cost of goods sold for the nine months ended September 30, 2021, was $39,836 or
57.3% of revenue compared to $23,468 or 80.0% of revenue reported for the nine
months ended September 30, 2020. The increase in cost of goods sold is primarily
the result of the April 8, 2021 acquisition of Solcius.
Gross profit was $29,644 for the nine months ended September 30, 2021. This
compares to $5,867 of gross profit for the same period of the prior year. The
gross margin improved to 42.7% in the first nine months of 2021 compared to
20.0% in the same nine-month period of 2020. The margin improvement is the
result of the Solcius acquisition and the related gross margin on residential
projects combined with improved margin on commercial projects completed during
the period.
Revenue and gross profit in the nine months ended September 30, 2021 were
positively impacted by the Solcius acquisition and improving market conditions.
In contrast, the prior year operating results were negatively impacted COVID 19
and the governmental responses to the pandemic.
SELLING AND MARKETING EXPENSES
For the nine months ended September 30, 2021, the Company's selling and
marketing expenses were $21,468 compared to $3,864 for the nine months ended
September 30, 2020. As a percentage of revenue, selling and marketing expenses
were 30.9% of the first nine months revenue in 2021 compared to 13.2% of the
same period of 2020. The vast majority of the expense increase resulted from the
Solcius acquisition and additional marketing spend for advertising and branding.
The Solcius sales and marketing model focuses on lead generation and effective
interaction with third-party sales organizations. During the period, we invested
in sales and marketing to expand our lead generation efforts and improve brand
awareness. Additionally, these investments are targeted at positively impacting
our ability to enter additional markets and grow our in-house sales capability
for residential markets.
GENERAL AND ADMINISTRATIVE EXPENSES
Total G&A expenses of $17,853 for the nine months ended September 30, 2021
increased compared to $8,135 for the nine months ended September 30, 2020. The
G&A expenses increased from the prior year nine-month period primarily as a
result of the Solcius acquisition in April of 2021. During the same period in
2020, we reduced headcount and discretionary spending in response to the COVID
pandemic. G&A expenses will fluctuate as we pursue benefits from the costs
savings of more fully integrating Solcius operations while compensation,
insurance and employee benefit costs have increased year over year.
GOODWILL IMPAIRMENT
Goodwill impairment recorded for the nine months ended September 30, 2021 and
2020 was $0 and $4,000, respectively. In March 2020, as a result of the events
and circumstances resulting from the COVID-19 pandemic, our outlook for revenue,
profitability and cash flow deteriorated. Therefore, we 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 and, as a result, we
recorded an impairment of $4,000 during the first nine months of 2020.
24
STOCK-BASED COMPENSATION EXPENSES
During the nine months ended September 30, 2021 we incurred $2,470 in total
non-cash stock-based compensation expense, compared to $137 for the same period
in the prior year. The period over period increase in stock-based compensation
is the result of the company expanding RSU and stock option grants as part of
the compensation structure to a wider population of employees.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the nine months ended September 30,
2021 was $3,900 compared to $246 for the same period in the prior year.
Depreciation and amortization expenses increased as a result of the Solcius
acquisition and $15,600 of identified intangible assets of Solcius. The total
$15,600 balance of intangible assets is being amortized over the estimated
useful lives of the specific assets. The estimated useful lives range from nine
months to ten years. The amortization expense from the April 2021 Solcius
acquisition through September 2021 was $3,426.
OTHER INCOME (EXPENSE), NET
Other income was $2,907 for the nine months ended September 30, 2021, compared
to an expense of $544 for the same nine months in 2020. Other income is
primarily the result of the June 2021 forgiveness of the Paycheck Protection
Program loan of $2,847 and $34 of accrued loan interest. Interest expense for
the first nine months of 2021, was $40 compared to $555 during the first nine
months of 2020. The 2020 interest expense was primarily related to the interest
paid on a $2.25 million loan balance outstanding pursuant to a senior promissory
note plus the amortization of a $435 exit fee and the origination loan fees that
were both shown as interest expense in the prior year period.
NET LOSS
The net loss for the nine months ended September 30, 2021 was $13,140. The net
loss for the nine months ended September 30, 2020 was $11,059 including the
$4,000 goodwill impairment expense.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
We had $11,219 in unrestricted cash at September 30, 2021, as compared to
$38,991 at December 31, 2020. We believe that the aggregate of our existing cash
and cash equivalents, in addition to cash raised through our at the market
offering and cash generated in operations will be adequate for us to maintain
sufficient liquidity and cash balances for the next twelve months or more.
At September 30, 2021, our working capital was a surplus of $21,211 compared to
a working capital surplus of $30,890 at December 31, 2020.
During the nine months ended September 30, 2021, we used $25,331 of cash in
operating activities compared to $7,268 used in operating activities for same
period in 2020. The cash used in operating activities was used to reduce
payables by taking advantage of purchase discounts for materials, build higher
inventory levels to proactively address industry-wide supply chain challenges
and to fund the current year net loss which included the legal, accounting and
consulting costs incurred for the Solcius acquisition and the settlement of the
stockholder lawsuit and mootness fee paid.
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Net cash used in investing activities totaled $51,093 for the nine months ended
September 30, 2021 including $50,619 net cash used to complete the Solcius
acquisition and $535 of cash used to purchase trucks, vans and construction
equipment to replace leased vehicles and rental equipment. The cash used in
investing activities in the same period of 2020 totaled $26 for minor equipment
purchases.
Net cash provided by financing activities during the nine months ended September
30, 2021 was $48,652. This increase was primarily due to net proceeds from sales
of our common stock in February 2021.
Net cash provided by financing activities during the nine months ended September
30, 2020 was $8,746. Net cash received through sales of our common stock totaled
$7,736 during the nine months ended September 30, 2020. The cash provided by
financing activities during the nine months of 2020 was primarily used to pay
$1,500 of principal for a senior promissory note. $337 of cash was used to pay
off an acquisition convertible promissory note, vehicle and equipment debt.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, revenue, results of
operations, liquidity, or capital expenditures.
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