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,
2019 (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 "Risk Factors" in
Part II, Item 1A, and "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,
(3) "Subsidiaries" refers collectively to Sunworks United, Inc. (Sunworks
United), MD Energy, Inc. (MD Energy) and Plan B Enterprises (Plan B).
Overview
We provide photovoltaic (PV) based power systems for the agricultural,
commercial, industrial (ACI), public works, and residential markets in
California, Nevada, Massachusetts, Oregon, New Jersey and Hawaii. We have direct
sales and/or operations personnel in California, Massachusetts, and Oregon.
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 ACI and public works
projects. ACI 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.
Based upon our organizational structure and the way in which our operations are
managed and evaluated, we currently operate in one segment.
For the three months ended March 31, 2020, approximately 69% of our 2020 revenue
was from installations for the ACI and public works markets and approximately
31% of our revenue was from installations for the residential market.
For the three months ended March 31, 2019 approximately 58% of our revenue was
from installations for the ACI and public works markets and approximately 42% of
our revenue was from installations for the residential market.
At our Annual Meeting of Stockholders on August 7, 2019, our stockholders
approved a reverse stock split of our issued and outstanding common stock at a
ratio not less than 1-for-3 and not greater than 1-for-10. On August 29, 2019,
our board of directors approved the reverse stock split at a ratio of 1-for-7
which went into effect at the open of trading on August 30, 2019. At the
effective time of the reverse stock split, every seven shares of our issued and
outstanding common stock were converted into one share of our issued and
outstanding common stock. The authorized shares of 200,000,000 and the par value
of $0.001 remain the same. All shares and related financial information in this
Quarterly Report are retroactively stated to reflect this 1-for-7 reverse stock
split.
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IMPACT OF COVID-19
The recent outbreak of COVID-19 has spread globally, including to the United
States, which has resulted in significant governmental measures being
implemented to control the spread of the virus, including quarantines, travel
restrictions and business shutdowns. To assist readers in reviewing management's
discussion and analysis of financial condition and results of operations, we
provide the following discussion about 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.
The California stay at home order has impacted our operations. We continue to
serve customers based on our qualification as an "Essential Business" as defined
by county agencies' "shelter-in-place" directives. As an Essential Business, our
employees are allowed to leave their residences to continue working. We operate
in the energy industry, which is identified as a critical infrastructure sector
by the Federal Homeland Security Cybersecurity and
Infrastructure Security Agency (CISA). Therefore, we are able to conduct
business despite the California Department of Public Health's mandate that all
individuals living in the State of California must stay at their place of
residence. Although we are permitted to continue our operations as an Essential
Business, COVID-19 and the "shelter-in-place" directives have materially
disrupted the operations of the government, utility companies, various
authorities having jurisdiction over our business and our customers. This
disruption negatively impacts our ability to generate revenue on projects in
backlog and causes many customers to delay decisions on new projects. As a
result, we have implemented temporary cost and headcount reductions. Although we
continue working with our reduced workforce, these cost savings are offset by an
expected decline in revenues from the disruption impacting our customers.
Although we cannot predict the impact and severity of COVID-19 to our
operations, these developments and measures have negatively affected our
business already. We will continue to manage the impact through appropriate cost
cutting measures. Of concern is how severely the COVID-19 outbreak could
adversely impact our ability to source materials used in our operations or
affect our ability to complete ongoing installations in a timely manner. It is
also possible that any one of our key executives or other personnel could become
incapacitated by COVID-19. COVID-19 has also caused a decline in demand for our
products and services. To help offset the financial impact, we have received a
loan under the Paycheck Protection Plan of $2,847 which we will utilize to
return personnel to the field to focus on revenue generating activities and
mitigating the impact COVID-19 has on our business.
As the situation around COVID-19 evolves, we are monitoring our business to
ensure that our expenses are in line with expected cash generation. We have an
internal team that evaluates the ongoing impact of COVID-19 on our business and
is reacting to changes daily, as need arises. We are focused on the best
possible outcome for the Company as we navigate through these uncertain times.
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.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
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, 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates include estimates used to review our goodwill, impairments
and estimations of long-lived assets, revenue recognition on percentage of
completion type contracts, allowances for uncollectible accounts, 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
Revenues and related costs on construction contracts are recognized as the
performance obligations are satisfied over time in accordance with Accounting
Standards Codification (ASC) 606, Revenue from Contracts with Customers. Under
ASC 606, revenue and associated profit will be recognized as the customer
obtains control of the goods and services promised in the contract (i.e.,
performance obligations). The cost of uninstalled materials or equipment will
generally be excluded from our recognition of profit, unless specifically
produced or manufactured for a project, because such costs are not considered to
be a measure of progress. 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 as 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. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. 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. Contract liabilities represent amounts
invoiced to customers in excess of revenue recognized on contracts in progress.
Leases
We determine 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 on the face of the condensed consolidated balance sheet. If we had
finance lease ROU assets, such assets would be presented within other assets,
and finance lease liabilities would be presented appropriately.
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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.
In accordance with our policies, we performed a quantitative assessment of
indefinite lived intangibles and goodwill at December 31, 2019. At December 31,
2019, we retained an independent valuation consulting firm to test for
indefinite lived intangibles and goodwill impairment. Based on the valuation
assessment, we determined that the carrying value of the assets did not exceed
the fair value and, therefore, there was no impairment of assets. As a result of
the events and circumstances resulting from the COVID-19 pandemic, we now expect
our near-term revenue, profitability and cash flow to be lower than we
anticipated in our previous review. Therefore, we performed another quantitative
assessment of indefinite lived intangibles and 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. The
primary driver of the $4,000 impairment at March 31, 2020 compared to no
impairment at December 31, 2019, was lowered revenue projections for 2020 due to
the impact of COVID-19, combined with the ATM sales in the first quarter of
2020, which resulted in a higher carrying value of the net assets of the
Company.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets
acquired, liabilities assumed and intangible assets acquired based on their
estimated fair values. The excess of the fair value of purchase consideration
over the fair values of these identifiable assets and liabilities is recorded as
goodwill. Such valuations require management to make significant estimates and
assumptions, especially with respect to intangible assets. Significant estimates
in valuing certain intangible assets include, but are not limited to, future
expected cash flows from acquired customer lists, acquired technology, and trade
names from a market participant perspective, useful lives and discount rates.
Management's estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates. During the measurement period,
which is one year from the acquisition date, we may record adjustments to the
assets acquired and liabilities assumed, with the corresponding offset to
goodwill. Upon the conclusion of the measurement period, any subsequent
adjustments are recorded to earnings.
Stock-Based Compensation
We periodically issue stock options to employees and directors. We account for
stock option 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.
We account for stock grants issued 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.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2019
REVENUE AND COST OF GOODS SOLD
For the three months ended March 31, 2020, revenue increased 33.4% to $12,361
compared to $9,268 for the three months ended March 31, 2019. Cost of goods sold
for the three months ended March 31, 2020 was $11,405, or 15.1% above the $9,912
reported for the three months ended March 31, 2019.
Increased revenue, along with lower cost of goods sold resulted in a gross
profit of $956 for the quarter ended March 31, 2020. This compares to $(644) of
gross loss for the three months ended March 31, 2019, or an improvement of
$1,600. The gross margin was 7.7% for the three months ended March 31, 2020
compared to a negative gross margin of (6.9%) for the three months ended March
31, 2019. Approximately 69% of revenue for the three months ended March 31, 2020
was from installations for the ACI and public works markets compared to 58% of
revenue for the three months ended March 31, 2019.
SELLING AND MARKETING EXPENSES
For the three months ended March 31, 2020, selling and marketing (S&M) expenses
were $657 compared to $782 for the three months ended March 31, 2019. As a
percentage of revenue, S&M expenses were 5.3% of first quarter revenue in 2020
compared to 8.4% in the first quarter of 2019. First quarter S&M expenses were
$125 less than the same period in the prior year. Most of the decrease resulted
from a reduction in personnel in the sales and sales support functions, lower
commission and promotional expenses and lower advertising expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative (G&A) expenses were $2,599 for the three months
ended March 31, 2020, compared to $2,676 for the three months ended March 31,
2019. As a percentage of revenue, G&A expenses were 21.0% of first quarter
revenue in 2020 compared to 28.9% in the first quarter of 2019. Headcount
reductions between periods resulted in savings in salaries and employee benefits
that were partially offset by increases in bad debt expense, vehicle insurance,
transportation and recruiting. There is a continuing emphasis on improving
talent and using technology to improve construction management systems and
processes while at the same time reducing G&A expenses.
Operating expenses, including stock-based compensation, for 2020 are expected to
decrease as we have made cuts in our headcount and other operating expenses due
to COVID-19. The total impact on our financial statements related to COVID-19 is
unknown as the pandemic continues evolve.
GOODWILL IMPAIRMENT
Goodwill impairment recorded for the three months ended March 31, 2020 and 2019
was $4,000 and $0, respectively. We retain an independent valuation consultant
to perform a quantitative assessment of indefinite lived intangibles and
goodwill at December 31, 2019 and March 31, 2020. In accordance with our
policies, we performed a quantitative assessment of indefinite lived intangibles
and goodwill at December 31, 2019, no impairment was found. As a result of the
events and circumstances resulting from the COVID-19 pandemic, our outlook for
revenue, profitability and cash flow have deteriorated. Therefore, we performed
another quantitative assessment of indefinite lived intangibles and 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.
STOCK-BASED COMPENSATION EXPENSES
During the three months ended March 31, 2020 we incurred $98 in total non-cash
stock-based compensation expense compared to $124 for the same period in the
prior year.
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We entered into a restricted stock grant agreement with our Chief Executive
Officer, Charles Cargile, in March 2017 (the March 2017 RSGA). All shares
issuable under the March 2017 RSGA are valued as of the grant date at $10.50 per
share. For the three months ended March 31, 2020 and 2019, stock-based
compensation expense of $63 and $62, respectively, was recognized for the March
2017 RSGA. There will be no further stock-based compensation expense for the
March 2017 RSGA. This grant was expensed on a straight-line basis over 36
months.
Stock-based compensation, excluding the March 2017 RSGA, related to employee and
director options totaled $35 and $62 for the three months ended March 31, 2020
and 2019, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and Amortization expenses for the three months ended March 31, 2020
were $81 compared to $92 for the same period in the prior year. Depreciation and
Amortization expenses decreased primarily due to the depreciable life of assets
having been met since the 2014 - 2015 acquisitions of Solar United Network, MD
Energy and Plan B.
OTHER EXPENSES (INCOME)
Other (income) expenses were $269 for the three months ended March 31, 2020,
compared to $217 for the three months ended March 31, 2019. Interest expense for
the three months ended March 31, 2020 was $259, primarily related to the
interest paid for the $3.75 million promissory note issued to CrowdOut (the
Senior Note) plus the amortization of both the $435 exit fee and the additional
accelerated write-off of the issuance fees of $98, resulting from the $1,500
principal payment on the Senior Note. Both the exit fee accrual and the
amortization of the issuance costs are shown as interest expense. Interest
expense for the three months ended March 31, 2019 was $209 and was the result of
CrowdOut interest plus interest on the acquisition debt for the MD Energy
acquisition and for debt related to various equipment financings. See Note 5,
"Loans Payable" for more information.
NET LOSS
The net loss for the three months ended March 31, 2020 was $6,748 compared to a
net loss of $4,535 for the three months ended March 31, 2019.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
We had $5,471 in unrestricted cash at March 31, 2020, as compared to $3,154 at
December 31, 2019. We believe that the aggregate of our existing cash and cash
equivalents, in addition to funds generated in operations will be adequate for
us to maintain sufficient liquidity and cash position for the next twelve months
or more.
On April 28, 2020, we received a loan under the Paycheck Protection Plan of
$2,847. Proceeds from the loan used to cover documented expenses related to
payroll, rent and utilities during the 8-week period, subsequent to the cash
being received by us are eligible to be forgiven. The forgiveness amount allows
for not more than 25% of the forgiveness to be for non-payroll items and is
subject to reduction if employees are terminated or wages are reduced. The
remaining unforgiven amount of the loan bears interest at 1% per annum and
matures on April 28, 2022. Initial principal payments are deferred for the first
six months; however, interest still accrues during this time. There are no
collateral requirements or prepayment penalties associated with the loan.
Currently, we cannot be certain of the type of additional future financing,
terms and conditions or actual timing of any debt or equity financing. To the
extent that we raise additional funds by issuing equity securities, our
stockholders may experience dilution. Debt financing may involve agreements that
include high interest costs and restrictive covenants. Continuing effects of the
COVID-19 pandemic could have an adverse effect on our liquidity and cash.
Additionally, the COVID-19 pandemic may adversely affect our ability to access
future debt or equity financings. If we are unable to raise additional capital
when required or on acceptable terms, we may have to adjust our cost structure
and/or delay execution of projects in backlog.
At March 31, 2020, our working capital was a surplus of $3,117 compared to a
working capital surplus of $1,460 at December 31, 2019.
The Loan Agreement for the Senior Note contains a subjective Event of Default
clause based on CrowdOut determining, in the exercise of its reasonable
discretion, that an event has occurred that would reasonably be expected to have
a "Material Adverse Effect." If any Event of Default occurs and is continuing,
CrowdOut reasonably determines that a "Material Adverse Effect" in our business
has occurred, CrowdOut may declare that an Event of Default has occurred and the
outstanding indebtedness to be immediately due. See Note 8, "Promissory Notes
Payable" for more information regarding the Senior Note.
During the three months ended March 31, 2020, we had $3,609 of cash used in
operating activities compared to $1,873 used in operating activities for same
period in 2019. The cash used in operating activities was primarily the result
of the current year net loss. The cash impact of the net loss was offset by
collection of cash from accounts receivables and contract assets, reductions in
inventory together with extension in accounts payable and accrued liabilities.
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Net cash used in investing activities for the three months ended March 31, 2020
and 2019 was insignificant.
Net cash provided by financing activities during the three months ended March
31, 2020 was $5,953. The cash was primarily used to pay $1,500 of principal on
the Senior Note, offset the cash used in operating activities and to payoff the
acquisition convertible promissory note and existing vehicle and equipment debt.
Net cash received through the sale of our common stock pursuant to an At Market
Issuance Sales Agreement we entered into with B. Riley FBR, Inc. (the ATM
Agreement) totaled $7,736. We have sold the maximum amount allowed under the
prospectus supplement we filed with the U.S. Securities and Exchange Commission
(SEC) related to the ATM Agreement and no further shares will be sold under the
ATM Agreement without us filing an additional prospectus supplement with the
SEC. Our shelf registration statement on Form S-3 was filed in reliance on
Instruction I.B.6. of Form S-3, which imposes a limitation on the maximum amount
of securities that we may sell pursuant to the registration statement during any
twelve-month period. At the time we sell securities pursuant to the registration
statement, the amount of securities to be sold plus the amount of any securities
we have sold during the prior twelve months in reliance on Instruction I.B.6.
may not exceed one-third of the aggregate market value of our outstanding common
stock held by non-affiliates as of a day during the 60 days immediately
preceding such sale as computed in accordance with Instruction I.B.6. At March
31, 2020, we did not have any additional availability under our existing S-3
under the 1/3 limitation calculations set forth in Instruction I.B.6 of Form
S-3. Furthermore, Instruction I.B.6. of Form S-3 requires that the issuer have
at least one class of common equity securities listed and registered on a
national securities exchange. If we are not able to maintain compliance with
applicable Nasdaq rules, we will no longer be able to rely upon that
Instruction, which may negatively impact our ability to raise funds through an
equity financing.
On March 13, 2020, we received a letter from The Nasdaq Stock Market LLC
(Nasdaq) indicating that we have failed to comply with the minimum bid price
requirement of Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2)
requires that companies listed on the Nasdaq Capital Market maintain a minimum
closing bid price of at least $1.00 per share. Under Nasdaq Listing Rule
5810(c)(3)(A), we have a 180-calendar-day grace period to regain compliance by
meeting the continued listing standard. To regain compliance, our closing bid
price must meet or exceed $1.00 per share for a minimum of ten consecutive
business days during this grace period. Given the current extraordinary market
conditions, Nasdaq has determined to toll the compliance periods for bid price
and market value of publicly held shares requirements through June 30, 2020.
Therefore, we will have until November 23, 2020 to regain compliance with the
minimum bid price requirement. We are monitoring the bid price of our common
stock and will consider options available to us to achieve compliance.
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, revenues, results of
operations, liquidity, or capital expenditures.
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