You should read the following discussion and analysis of our financial condition
and results of operations together with our consolidated financial statements
and related notes appearing elsewhere in this annual report on Form 10-K. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this annual report on Form 10-K.
Amounts in thousands, except share and per share data
Overview
Sunworks provides PV based power systems for the agricultural, commercial,
industrial, 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 loads to
multi MW (megawatt) systems for larger ACI and public works projects. ACI
installations have included installations at office buildings, manufacturing
plants, warehouses, 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. The Company provides 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 one segment based upon our organizational structure and
the way in which our operations are managed and evaluated. Approximately 69% of
our 2019 revenue was from sales to the ACI and public works markets and
approximately 31% of our revenue was from sales to the residential market.
Approximately 72% of our 2018 revenue was from sales to the ACI and public works
markets and approximately 28% of our revenue was from sales to the residential
market.
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 the Company's 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. 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
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, the Company will recognize the loss as
it is determined.
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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 revenues recognized in excess of amounts invoiced to
customers on contracts in progress. Contract liabilities represent amounts
invoiced to customers in excess of revenues recognized on contracts in progress.
Indefinite Lived Intangibles and Goodwill Assets
The Company accounts for business combinations under the acquisition method of
accounting in accordance with ASC 805, "Business Combinations," where the total
purchase price is allocated to the tangible and identified intangible assets
acquired and liabilities assumed based on their estimated fair values. The
purchase price is allocated using the information currently available, and may
be adjusted, up to one year from acquisition date, after obtaining more
information regarding, among other things, asset valuations, liabilities assumed
and revisions to preliminary estimates. The purchase price in excess of the fair
value of the tangible and identified intangible assets acquired less liabilities
assumed is recognized as goodwill.
The Company tests for indefinite lived intangibles and goodwill impairment in
the fourth quarter of each year and whenever events or circumstances indicate
that the carrying amount of the asset exceeds its fair value and may not be
recoverable. In accordance with its policies, the Company performed a
quantitative assessment of indefinite lived intangibles and goodwill at December
31, 2019 and 2018. At December 31, 2019, the Company determined that the
carrying amount of goodwill did not exceed its fair value and, as a result, no
impairment was recorded. At December 31, 2018, the Company determined that the
carrying amount of goodwill exceeded its fair value and, as a result, recorded
an impairment of $1,900.
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
The Company periodically issues stock options to employees and directors. The
Company accounts for stock option grants issued and vesting to employees based
on the authoritative guidance provided by the Financial Accounting Standards
Board whereas the value of the award is measured on the date of grant and
recognized over the vesting period.
The Company accounts for stock grants issued to non-employees in accordance with
the authoritative guidance of the Financial Accounting Standards Board whereas
the value of the stock compensation is based upon the measurement date as
determined at either a) the date at which a performance commitment is reached,
or b) at the date at which the necessary performance to earn the equity
instruments is complete. Non-employee stock-based compensation charges generally
are amortized over the vesting period on a straight-line basis. In certain
circumstances where there are no future performance requirements by the
non-employee, option grants are immediately vested and the total stock-based
compensation charge is recorded in the period of the measurement date.
Accounts Receivable
Accounts receivables 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 $1,027 and
$1,234 were included in the balance of trade accounts receivable as of December
31, 2019, and 2018, 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 of $350 at December 31,
2019, and $325 at December 31, 2018. During the year ended December 31, 2019,
$111 was recorded as bad debt expense compared to $91 in 2018.
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Inventory
Inventory is valued at a weighted average cost method. Inventory primarily
consists of panels, inverters, and mounting racks and other materials. The
company also carries a reserve for inventory obsolescence that may arise from
technological advancement or obsolescence. Inventory is presented net of an
allowance of $50 at December 31, 2019, and $50 at December 31, 2018.
Warranty Liability
The Company establishes warranty liability reserves to provide for estimated
future expenses as a result of installation and product defects, product recalls
and litigation incidental to the Company's business. Liability estimates are
determined based on management's judgment, considering such factors as
historical experience, the likely current cost of corrective action,
manufacturers' and subcontractors' participation in sharing the cost of
corrective action, and consultations with third party experts such as engineers.
Solar panel manufacturers currently provide substantial warranties between ten
to twenty-five years with full reimbursement to replace and install replacement
panels while inverter manufacturers currently provide warranties covering ten to
fifteen-year replacement and installation. Warranty liabilities for the years
ended December 31, 2019 and 2018 were $441 and $321, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to financial statements carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry-forwards. The measurement of deferred tax assets and liabilities is based
on provisions of applicable tax law. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance based on the amount of tax
benefits that, based on available evidence, is not expected to be realized.
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. Although we cannot presently predict the
scope and severity of COVID-19, these developments and measures could adversely
affect our business and our results of operation and financial condition,
particularly if the COVID-19 outbreak adversely impacts our ability to source
materials used in our operations or adversely affects our ability to complete
ongoing installations in a timely manner, or at all. COVID-19 could also
potentially cause a decline in demand of our products and services. Market
volatility and conditions could limit our ability to raise additional capital to
finance our business plans on attractive terms, or at all. We may suffer
negative impacts to operations that may be vulnerable as a result of government
or company measures taken to control the spread of COVID-19, including potential
shutdowns of government agencies that issue permits related to our
installations. Additionally, any one of our key executives or other personnel
could become incapacitated by COVID-19.
In response to the economic downturn, and the uncertain impact of COVID-19 on
our business, we have implemented proactive steps to try and protect our
business, including but not limited to: as of March 30, 2020, terminating or
temporarily laying off 59 employees, representing a 33% reduction from the
beginning of the year headcount, reducing an additional 23 employees to part
time, and temporarily eliminating salaries for members of our board of directors
and our Chief Executive Officer and reducing other management individual's
salaries by at least 50%.
The extent to which COVID-19 impacts our business, operations or financial
results will depend on future developments, which are highly uncertain and
cannot be predicted with confidence, such as the duration of the outbreak, new
information that may emerge concerning the severity of COVID-19 or the nature or
effectiveness of actions to contain COVID-19 or treat its impact, among others.
We cannot presently predict the scope and severity of any potential business
shutdowns or disruptions. If we or any of the third parties with whom we engage,
however, were to experience shutdowns or other business disruptions, our ability
to conduct our business could be materially and negatively affected, which could
have a negative impact on our business, results of operation and financial
condition.
Results of Operations for the Years Ended December 31, 2019 and 2018
REVENUE AND COST OF REVENUES
For the year ended December 31, 2019, revenue declined 15.7% to $59,830 compared
to $70,965 for the year ended December 31, 2018. The largest driver of the
decrease year over year is a drop in Public Works revenues of $5,858. The
decline in revenue in 2019 was primarily driven by fewer new project wins
converting to revenue in the current year as well as delays in recognizing
installation revenue at our Fresno Unified School District project due to
conflicts with the school schedules. ACI revenue declined $4,253 primarily
driven by delays in permitting and in achieving utility and other agency
approvals. Residential revenues declined $1,024 due to lower sales from our
leading third-party sales generator primarily due to competitive forces in
Northern California. Although we continue to add new third-party sales
generators, their impact on revenue in 2019 was not significant enough to
overcome the decline in our primary sales channel. We also experienced very low
revenues for ACI, Public Works and Residential in the first quarter of 2019 due
to extremely rainy weather in California. Cost of goods sold for year ended
December 31, 2019 was $53,167 or 88.9% of revenues, compared to $58,701 or 82.7%
of revenues for the year ended December 31, 2018. The increase in cost of goods
sold as a percentage of revenues resulted from a combination of redundant
overhead in the first quarter of 2019 when our field teams were unable to work
due to weather delays; significant amounts of rework in engineering design and
permit application processes; and inefficiencies in construction activities on a
number of jobs, primarily in the fourth quarter of 2019.
Approximately 69% of our 2019 revenue was from installations for the ACI and
public works markets and approximately 31% was from residential system
installations. Larger ACI projects take longer to sell, design, engineer, permit
and construct than residential projects. Some current projects may take more
than a year to complete from the time that the sales agreement is signed, and
revenue is fully recognized with the installation and receipt of final
inspection documents.
Gross profit for the year ended December 31, 2019 was $6,663 or 11.1% of
revenues compared to $12,264 or 17.3% of revenues for the year ended December
31, 2018.
Gross margin in 2019 was lower than the prior year due to the reduction in
revenue for all three business groups, ACI, Public Works and Residential
creating under absorption of fixed costs coupled with the increase in cost of
goods sold as described above.
SELLING AND MARKETING EXPENSES
Selling and marketing ("S&M") expenses for the year ended December 31, 2019 were
$2,992 compared to $3,824 for the year ended December 31, 2018. The 21.8%
decline in S&M expenses was primarily due to decreases in employee headcount and
related costs, commissions, and media advertising expenses compared to the prior
year. As a percentage of revenues S&M expenses decreased to 5.0% of revenues in
2019 compared to 5.4% in 2018. The decrease was primarily due to a reduction in
headcount and lower commissions owed due to lower new sales.
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses for the year ended December 31, 2019
were $11,213 compared to $10,001 for the year ended December 31, 2018. As a
percentage of revenue, G&A expenses increased to 18.7% of revenues during the
2019 compared to 14.1% in 2018. In total dollars, G&A expense increased
primarily due to increased legal costs of approximately $312, a bonus expense of
$0 in 2019 compared to a reversal of a bonus accrual of $497 in 2018, an
increase in employment costs of $257 and an increase in state taxes and bond
premiums of $109.
Operating expenses are expected to be slightly lower going forward as we benefit
from cost reduction efforts implemented in the fourth quarter of 2019 and the
first quarter of 2020.
GOODWILL IMPAIRMENT
Goodwill impairment recorded for the years ended December 31, 2019 and 2018 was
$0 and $1,900, respectively. The Company retained a valuation consultant who
performed a quantitative assessment of indefinite lived intangibles and goodwill
at December 31, 2019 and 2018. At December 31, 2019, the Company determined that
the carrying amount of goodwill did not exceed its fair value and, as a result,
no impairment was recorded. At December 31, 2018 the Company determined that the
carrying amount of goodwill exceeded its fair value and as a result, recorded an
impairment of $1,900.
STOCK BASED COMPENSATION EXPENSES
During the year ended December 31, 2019, we incurred approximately $434 in
non-cash stock compensation costs associated with Restricted Stock Grant
Agreements and stock options compared to $1,313 during the year ended December
31, 2018.
For the years ended December 31, 2019 and 2018, stock-based compensation of $250
and $250, respectively, is for the March 2017 grant of 71,429 restricted shares
to our CEO at the per share value at the date of grant of $10.50. This grant is
being expensed on a straight-line basis over 36 months, expiring in March 2020.
Stock-based compensation, excluding restricted stock grant agreements, related
to employee and director options totaled $184 and $381 for the years ended
December 31, 2019 and 2018, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and Amortization expenses for the year ended December 31, 2019 were
$353 compared to $384 for the year ended December 31, 2018. Depreciation and
Amortization expenses decreased primarily due certain equipment becoming fully
depreciated.
OTHER INCOME/(EXPENSES)
Other income/(expenses) increased for the year ended December 31, 2019 to ($857)
compared to ($582) for the year ended December 31, 2018. Interest expense for
the year ended December 31, 2019 increased to $863 from $544 for year ended
December 31, 2018. Approximately $780 and $473 of the interest expense for the
years ended December 2019 and 2018, respectively, was from the Loan Agreement
entered into in April 2018.
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NET LOSS
The Company had a consolidated net loss of $9,186 for the year ended December
31, 2019 compared to a net loss of $5,740 for the year ended December 31, 2018.
Liquidity and Capital Resources
We had $3,154 in cash at December 31, 2019, as compared to $3,628 at December
31, 2018. We believe that the aggregate of our existing cash and cash
equivalents, in addition to funds generated in operations and cash proceeds from
our "At the Market" (ATM) equity sales, will be sufficient to meet our operating
cash requirements for at least the next 12 months. Estimates about the adequacy
of funding for our activities are based upon certain assumptions. There can be
no assurance that changes in our business will not result in accelerated or
unexpected expenditures. To satisfy our capital requirements, including ongoing
future operations, we may seek to raise additional financing through debt and
equity financings.
As of December 31, 2019, our working capital surplus was $1,460 compared to a
working capital surplus of $3,791 at December 31, 2018.
The Loan Agreement for the Promissory Notes Payable contains a subjective
acceleration clause based on the lender determining that an event has occurred
that, in the exercise of its reasonable discretion, would reasonably be expected
to have a "material adverse effect" on our business or our ability to perform
our obligations under the Loan Agreement. If this clause is applied, and an
Event of Default is determined to have occurred, the outstanding indebtedness
could become immediately due. We believe that the likelihood of a material
adverse effect being determined to have occurred is remote.
During the year ended December 31, 2019, we used $6,456 of cash in operating
activities compared to $5,752 used in operating activities for the prior year
ended December 31, 2018. The cash used in operating activities was primarily the
result of the current year net loss combined with changes in working capital
accounts
Net cash provided by investing activities was $11 in the year ended December 31,
2019 compared to $3 used in investing activities in the year ended December 31,
2018. The cash provided by investing activities was from proceeds from the sale
of assets.
Net cash provided by financing activities during the year ended December 31,
2019 was $5,909. This is due to net proceeds of $6,694 received from the At the
Market offering, partially offset by principal payments on acquisition and
equipment debt totaling $785. Cash provided by financing activities during the
year ended December 31, 2018 was $2,999. The cash was primarily used to provide
financial flexibility and to pay principal payments on existing debt. Since
January 1, 2020 until March 30, 2020, we have sold an additional 9,817,343
Placement Shares resulting in additional net proceeds of approximately $7,737.
On January 29, 2020, we entered into a Loan Amendment with CrowdOut Capital,
Inc. and paid $1.5 million of the $3.0 million outstanding on the Senior Notes
held by CrowdOut Capital, Inc.
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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