UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
Or
For the transition period from _______________ to _______________
Commission
File Number
(Name of registrant in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone Number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker symbol(s) | Name of each exchange on which registered | ||
| The
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
The number of shares of registrant’s common stock outstanding as of November 8, 2022 was .
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report except for statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.
The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that might cause these differences in actual results include the risks and uncertainties discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “Annual Report”), and the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (SEC). In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
| 3 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SUNWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2022 AND DECEMBER 31, 2021
(in thousands, except share data)
| September
30, 2022 | December
31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Contract assets | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Finance lease right-of-use assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Deposits | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Contract liabilities | ||||||||
| Finance lease liability, current portion | ||||||||
| Operating lease liability, current portion | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities: | ||||||||
| Finance lease liability, net of current portion | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Warranty liability | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Shareholders’ Equity: | ||||||||
| Preferred stock, $ par value, authorized shares; shares issued and outstanding | ||||||||
| Common stock, $ par value; authorized shares; and shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
SUNWORKS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 and 2021
(in thousands, except share and per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September
30, 2022 | September
30, 2021 | September
30, 2022 | September
30, 2021 | |||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Other income (expense), net | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on disposal of property and equipment | ||||||||||||||||
| Total Other Income (Expense), net | ( | ) | ||||||||||||||
| Loss before Income Taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income Tax Expense | ||||||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| LOSS PER SHARE: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
SUNWORKS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE AND Nine months ended September 30, 2022 and 2021
(in thousands, except share data)
| Additional | ||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Issuance of common stock under terms of restricted stock grants | ||||||||||||||||||||
| Sales of common stock pursuant to S-3 registration statement, net | ||||||||||||||||||||
| Net loss for the three months ended March 31, 2022 | - | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2022 | ( | ) | ||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Issuance of common stock under terms of restricted stock grants | ||||||||||||||||||||
| Tax withholdings related to net share settlements of equity awards | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Sales of common stock pursuant to S-3 registration statement, net | ||||||||||||||||||||
| Net loss for the three months ended June 30. 2022 | - | ( | ) | ( | ) | |||||||||||||||
Balance at June 30, 2022 | ( | ) | ||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Issuance of common stock under terms of restricted stock grants | ||||||||||||||||||||
| Tax withholdings related to net share settlements of equity awards | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Sales of common stock pursuant to S-3 registration statement, net | ||||||||||||||||||||
| Net loss for the three months ended September 30, 2022 | - | ( | ) | ( | ) | |||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation for options | - | |||||||||||||||||||
| Sales of common stock pursuant to S-3 registration statement | ||||||||||||||||||||
| Net loss for the three months ended March 31, 2021 | - | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2021 | ( | ) | ||||||||||||||||||
| Stock-based compensation for options | - | |||||||||||||||||||
| Net loss for the three months ended June 30, 2021 | - | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2021 | ( | ) | ||||||||||||||||||
| Stock-based compensation for options | - | |||||||||||||||||||
| Issuance of common stock for cashless exercise of options | ||||||||||||||||||||
| Net loss for the three months ended September 30, 2021 | - | ( | ) | ( | ) | |||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
SUNWORKS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE Nine months ended September 30, 2022 and 2021
(in thousands)
| Nine Months Ended | ||||||||
| September
30, 2022 | September
30, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Gain on sale of equipment | ( | ) | ( | ) | ||||
| Paycheck Protection Program loan forgiveness | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Bad debt expense | ||||||||
| Changes in Operating Assets and Liabilities, net of acquisition | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Deposits and other current assets | ( | ) | ||||||
| Contract assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Contract liabilities | ||||||||
| Warranty liability | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of Solcius LLC, net of cash acquired | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of equipment | ||||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Principal payments on finance lease liabilities | ( | ) | ( | ) | ||||
| Proceeds from sale of common stock, net | ||||||||
| Payments for taxes related to net share settlement of equity awards | ( | ) | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | ( | ) | ( | ) | ||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH BEGINNING OF PERIOD | ||||||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD | $ | $ | ||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD | $ | $ | ||||||
| CASH PAID FOR: | ||||||||
| Interest | $ | $ | ||||||
| Franchise and corporate excise taxes | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS | ||||||||
| Increase in operating right-of-use assets and liabilities due to lease modification | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new finance lease liability | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new operating lease liability | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
SUNWORKS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(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”), Commercial Solar Energy, Inc. (“CSE”), and Solcius LLC (“Solcius”).
1. BASIS OF PRESENTATION
We provide photovoltaic (“PV”) and battery-based power and storage systems for the residential and commercial markets. Commercial projects include commercial, agricultural, industrial and public works projects. We operate in several residential and commercial markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, Rhode Island, New York, Pennsylvania, New Jersey and South Carolina. 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.
On April 8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United (the “Buyer”), acquired all of the issued and outstanding membership interests (the “Solcius Acquisition”) of Solcius, from Solcius Holdings, LLC (“Seller”). Located in Provo, Utah, Solcius is a full-service, residential solar systems provider. The Company believes the Solcius Acquisition enhances economies of scale, leading to better access to suppliers, vendors and financial partners, as well as marketing and customer acquisition opportunities.
The
Solcius 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 $
The accompanying unaudited condensed consolidated financial statements (“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, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021.
| 8 |
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 condensed consolidated financial statements.
There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries: Sunworks United Inc., Commercial Solar Energy, Inc. and Solcius LLC. All material intercompany transactions have been eliminated upon consolidation of these entities.
Reclassifications
Certain prior period amounts have been reclassified
to conform to the current presentation. The reclassifications impact historical cost of goods sold, depreciation, amortization and general
and administrative expenses. During the quarter ended September 30, 2021, $
Change in Accounting Estimate
In
July 2022, we completed an assessment of the contract fulfillment costs that give rise to an asset for residential contracts. We determined that additional specifically
identifiable costs related directly to residential contracts can be capitalized, in accordance with Accounting Standards Codification
(“ASC”) Section 340-40. The additional capitalized costs of approximately $
Segment Reporting
We currently operate in three segments based upon our organizational structure and the way in which our operations are managed and evaluated. Our largest segment is Residential Solar which are projects smaller in size and shorter in duration. Our second operating segment is Commercial Solar Energy which includes projects that are commonly larger in size and longer in duration serving commercial, industrial, agricultural and public works customers. Our third segment is the Corporate, which is responsible for general company oversight and management. Disaggregating the corporate costs from the residential and commercial operations simplifies the performance evaluation of the Residential Solar and Commercial Solar Energy segments.
Use of Estimates
The preparation of condensed consolidated 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 condensed consolidated 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, intangibles, 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, finance lease right-of-use assets and liabilities, operating 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.
| 9 |
Revenue Recognition
Revenue and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with 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 commercial 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 commercial projects, 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 commercial projects 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 condensed 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, 2022 and 2021 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, are presented. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands, except number of projects) | September 30, 2022 | September
30, 2021 | September
30, 2022 | September
30, 2021 | ||||||||||||
| Increase in revenue from net changes in transaction prices | $ | $ | $ | $ | ||||||||||||
| Increase (decrease) in revenue from net changes in input cost estimates | ( | ) | ||||||||||||||
| Net increase (decrease) in revenue from net changes in estimates | $ | $ | $ | ( | ) | $ | ||||||||||
| Number of projects | - | |||||||||||||||
| Net change in estimate as a percentage of aggregate revenue for associated projects | % | % | ( | )% | % | |||||||||||
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 all installation materials, commissions, installation labor, benefit 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:
| As of | ||||||||
| (In thousands) | September
30, 2022 | December
31, 2021 | ||||||
| Contract Assets | $ | $ | ||||||
| Contract Liabilities | $ | $ | ||||||
During
the three and nine months ended September 30, 2022, the Company recognized revenue of $
| 10 |
The
following table represents the average percentage of completion as of September 30, 2022 for EPC projects that the Company is constructing.
The Company expects to recognize $
| Project | Revenue Category | Expected
Years Revenue Recognition Will Be Completed | Average
Percentage of Revenue Recognized | |||||
| % | ||||||||
(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 holders of common stock by the weighted-average number of shares of common stock outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if the additional shares of common stock were dilutive. The shares for employee options, restricted stock, warrants and convertible notes were not used in the calculation of the net loss per share.
A net loss causes all outstanding common stock options and unvested restricted stock units (“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, 2022 and 2021, respectively.
As of September 30, 2022, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include stock options and unvested RSUs.
As of September 30, 2021, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding includestock options and unvested RSUs.
Dilutive per share amounts are computed using the weighted-average number of shares of common stock outstanding and potentially dilutive securities, using the treasury stock method, if their effect would be dilutive.
New Accounting Pronouncements
Management reviewed currently issued pronouncements during the nine months ended September 30, 2022, and believes that any 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, 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 $
| 11 |
Purchase Price Allocation
Under
the purchase method of accounting, the transaction was valued for accounting purposes at $
| (in thousands) | ||||
| Base purchase price | $ | |||
| Working capital shortfall | ( | ) | ||
| Cash surplus | ||||
| Total purchase price paid | $ | |||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventory | ||||
| Contract assets | ||||
| Prepaids and other current assets | ||||
| Property and equipment | ||||
| Deposits | ||||
| Operating lease right-of-use asset | ||||
| Finance lease right-of-use assets | ||||
| Other intangible assets | ||||
| Identifiable assets acquired | ||||
| Accounts payable and accrued liabilities | ( | ) | ||
| Contract liabilities | ( | ) | ||
| Operating and finance lease liabilities | ( | ) | ||
| Liabilities assumed | ( | ) | ||
| Net identifiable assets acquired | ||||
| Goodwill | ||||
| Net assets acquired | $ | |||
During
the three and nine months ended September 30, 2022, we recorded
We conducted an assessment of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values and concluded that no additional adjustment to the purchase price allocation or accounting was required from the original purchase accounting.
Pro Forma Information (Unaudited)
The
results of operations for the Solcius Acquisition since the April 8, 2021 closing date have been included in our consolidated
financial statements. The following unaudited pro forma financial information represents a summary of the condensed consolidated
results of operations for three and nine months ended September 30, 2022 and 2021, assuming the Solcius 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 pro forma adjustments include the elimination of Solcius Acquisition
transaction expenses totaling $
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September
30, 2022 | September
30, 2021 | September
30, 2022 | September
30, 2021 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 12 |
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, 2022 and 2021:
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Residential | $ | $ | $ | $ | ||||||||||||
| Commercial | ||||||||||||||||
| Public Works | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
5. OPERATING SEGMENTS
Beginning in 2022, the Company assessed its operating segment disclosure based on ASC 280, Segment Reporting, guidance. As a result, the following segments were established: Residential Solar, Commercial Solar Energy, and Corporate.
Residential Solar
Through our Solcius operating subsidiary, we design, arrange financing, integrate, install, and manage systems, primarily for residential homeowners. We sell residential solar systems through multiple channels, through our network of sales channel partners as well as a growing direct sales channel strategy. We operate in several residential markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, and South Carolina. We have direct sales and/or operations personnel in California, Nevada, Utah, Arizona, New Mexico, Texas, Colorado, South Carolina, Wisconsin and Minnesota.
Commercial Solar Energy
Through our CSE subsidiary, we design, arrange financing, integrate, install, and manage systems ranging in size from 50kW (kilowatt) to multi-MW (megawatt) systems primarily 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. Historically, the CSE subsidiary participated in the California Residential solar market. Following the Solcius Acquisition, all new residential sales are managed under the Solcius brand. Due to materiality, the Company will continue to report the remaining backlog of residential projects from CSE in the Commercial Solar Energy segment, which is expected to be fulfilled within the next year. CSE primarily operates in California.
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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, 2022.
| Three months ended September 30, 2022 | ||||||||||||||||
| Residential Solar | Commercial Solar | Corporate | Total | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit (loss) | ( | ) | ||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Segment contribution (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Stock-based compensation | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Operating loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Nine months ended September 30, 2022 | ||||||||||||||||
| Residential Solar | Commercial Solar | Corporate | Total | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ( | ) | ||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Segment loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Stock-based compensation | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Operating loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Assets by operating segment are as follows:
| September
30, 2022 | ||||
| (in thousands) | ||||
| Operating Segment: | ||||
| Residential Solar | $ | |||
| Commercial Solar | ||||
| Corporate | ||||
| Total Consolidated Assets | $ | |||
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6. RIGHT-OF-USE OPERATING LEASES
The
Company has right-of-use (“ROU”) operating leases for offices, warehouses, vehicles, and office equipment. The Company’s
leases have remaining lease terms of
The
Company’s operating lease expense for the three and nine months ended September 30, 2022 amounted to $
Supplemental balance sheet information related to leases is as follows:
| September
30, 2022 | ||||
| (in thousands) | ||||
| Operating lease right-of-use assets | $ | |||
| Operating lease liabilities—short term | ||||
| Operating lease liabilities—long term | ||||
| Total operating lease liabilities | $ | |||
As
of September 30, 2022, the weighted average remaining lease term was
Minimum payments for the operating leases are as follows:
| Operating Leases | ||||
| (in thousands) | ||||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less: imputed interest | ||||
| Total | $ | |||
7. RIGHT-OF-USE FINANCE LEASES
The
Company has finance leases for vehicles. The Company’s finance leases have remaining lease terms of
Supplemental balance sheet information related to finance leases is as follows:
| September
30, 2022 | ||||
| (in thousands) | ||||
| Finance lease right-of-use asset cost | $ | |||
| Finance lease right-of-use accumulated amortization | ( | ) | ||
| Finance lease right of use asset, net | $ | |||
| Finance lease obligation—short term | $ | |||
| Finance lease obligation—long term | ||||
| Total finance lease obligation | $ | |||
As
of September 30, 2022, the weighted average remaining lease term was
| 15 |
Minimum finance lease payments for the remaining lease terms are as follows:
| September
30, 2022 | ||||
| (in thousands) | ||||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | $ | |||
| Less: imputed interest | ||||
| Total | $ | |||
8. INTANGIBLE ASSETS, NET
The Company’s intangible assets at September 30, 2022 consist of the following:
| Amortization
periods | Cost | Accumulated amortization | Net
carrying value | |||||||||||
| Trademarks | $ | $ | ( | ) | $ | |||||||||
| Backlog of projects | ( | ) | ||||||||||||
| Covenant not-to-compete | ( | ) | ||||||||||||
| Software (included in property and equipment) | ( | ) | ||||||||||||
| Dealer relationships | ( | ) | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||||
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 expense for intangible assets for the three and nine months ended September 30, 2022 was as follows:
| For the | For the | |||||||
| Three
Months Ended | Nine
Months ended | |||||||
| September
30, 2022 | September
30, 2022 | |||||||
| Trademarks | $ | $ | ||||||
| Covenant not-to-compete | ||||||||
| Software | ||||||||
| Dealer relationships | ||||||||
| $ | $ | |||||||
Estimated future amortization expense for the Company’s intangible assets as of September 30, 2022 is as follows:
| Years ending December 31, | ||||
| Remainder of 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| 2026 | $ | |||
| Thereafter | $ | |||
Depreciation
and amortization expense on property and equipment and intangible assets for the three and nine months ended September 30, 2022 was $
| 16 |
9. PAYCHECK PROTECTION PROGRAM LOAN PAYABLE
On
April 28, 2020, the Company’s operating subsidiary, Sunworks United received a loan of $
10. CAPITAL STOCK
Roth/Northland Sales Agreement At The Market Offering
On
June 8, 2022, the Company entered into a Sales Agreement (the “Roth/Northland Sales Agreement”) with Roth Capital Partners,
LLC and Northland Securities, Inc. (each an “Agent” and collectively, the “Agents”), pursuant to which the Company
may offer and sell from time to time up to an aggregate of $
The June 2022 Placement Shares have been registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Registration Statement on Form S-3 (File No. 333-252475) (the “2021 Registration Statement”), which was originally filed with the SEC on January 27, 2021 and declared effective by the SEC on February 3, 2021, the base prospectus contained within the 2021 Registration Statement, and the 2022 Prospectus Supplement. The June 2022 Placement Shares may be sold by the Company in “at the market offerings,” as defined in Rule 415 promulgated under the Securities Act, through the Agents.
During the third quarter of 2022, of the June 2022 Placement Shares were sold under the Roth/Northland Sales Agreement. Total gross proceeds for the sales were $ and such shares were sold at an average sale price of $ per share. Net proceeds from such sales, after brokerage costs, professional, registration and other fees were $ or $ per share.
Roth Sales Agreement At The Market Offering
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, (“the 2021 Placement Shares”), registered under the Securities Act, pursuant to the 2021 Registration Statement.
On October 21, 2021, the Company filed a prospectus supplement with the SEC, (the “2021 Prospectus Supplement”) pursuant to which the Company could offer and sell from time to time, through the Agent RCP, up to $ of the 2021 Placement Shares pursuant to the 2021 Registration Statement in “at the market offerings,” as defined in Rule 415 promulgated under the Securities Act.
During the first quarter of 2022, of the 2021 Placement Shares were sold under the Roth Sales Agreement. Total gross proceeds from the sales were $ at an average sale price of $ per share. Net proceeds after brokerage costs, professional, registration and other fees were $ or $ per share.
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During
the second quarter of 2022,
shares of common stock were sold under the Roth Sales Agreement. Total gross proceeds for the sales were $
In connection with the filing of the 2022 Prospectus Supplement for June 2022 Placement Shares, the Roth Sales Agreement and the 2021 Prospectus Supplement were terminated.
2022 Registration Statement
On
June 1, 2022, the Company filed a Registration Statement on Form S-3 (File No. 333-265336) (the “2022 Registration Statement”)
with the SEC. The 2022 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 $
Options
As of September 30, 2022, the Company has incentive stock options and non-qualified stock options outstanding to purchase 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 from the date of grant at exercise prices ranging from $ to $ per share, based on 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. Option forfeitures are accounted for as they occur.
| Weighted | ||||||||
| Number | Average | |||||||
| of | Exercise | |||||||
| Options | Price | |||||||
| Outstanding, at December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ( | ) | ||||||
| Expired | ( | ) | ||||||
| Outstanding and expected to vest as of September 30, 2022 | $ | |||||||
| Exercisable at September 30, 2022 | $ | |||||||
| Weighted average fair value of options granted during period | $ | |||||||
| Weighted | ||||||||||||||
| Average | ||||||||||||||
| Remaining | ||||||||||||||
| Exercise | Stock Options | Stock Options | Contractual | |||||||||||
| Prices | Outstanding | Exercisable | Life (years) | |||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
Aggregate intrinsic value of options outstanding and exercisable at September 30, 2022, and December 31, 2021 was $ and $, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $ and $ as of September 30, 2022 and December 31, 2021, respectively, and the exercise price multiplied by the number of options outstanding.
The Company recorded stock-based compensation expense for stock options of $ and $ for the three and nine months ended September 30, 2022, respectively. The Company recorded stock-based compensation expense for stock options of $ and $ for the three and nine months ended September 30, 2021, respectively.
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Restricted Stock Units
| Weighted
Average | ||||||||
| Number Of Shares | Grant Date Value
per | |||||||
| Unvested, beginning December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Unvested at September 30, 2022 | $ | |||||||
The Company recorded RSU compensation expense for RSUs of $ and $ for the three and nine months ended September 30, 2022, respectively. The Company recorded RSU compensation expense of $ and $ for the three and nine months ended September 30, 2021, respectively.
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.
13. SUBSEQUENT EVENTS
Subsequent events have been evaluated from the condensed consolidated balance sheet date of September 30, 2022 through the date of this Quarterly Report. Based on management’s evaluation, there are no events that required recognition or disclosure in the Company’s accompanying condensed consolidated financial statements or the related notes thereto.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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, 2021 (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 Item 1A of our Annual Report and Part II, Item 1A of our Quarterly Report for the quarter ended March 31, 2022, and “Cautionary Note Regarding Forward-Looking Statements” included in this Quarterly Report.
Unless otherwise noted, (1) “Sunworks” refers to Sunworks, Inc., (2) “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Sunworks, Inc., and its wholly owned operating subsidiaries, Sunworks United Inc., (“Sunworks United”), Commercial Solar Energy, Inc. (“CSE”), and Solcius LLC (“Solcius”). All material intercompany transactions have been eliminated upon consolidation of these entities.
All amounts presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, unless otherwise noted, are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.
The financial and operating results for the three and nine months ended September 30, 2022, include the operating results of Solcius acquired on April 8, 2021, with only a partial contribution for the three and nine months ended September 30, 2021.
Overview
On April 8, 2021, Sunworks, through its operating subsidiary Sunworks United, acquired all of the issued and outstanding membership interests (the “Solcius 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 now in 15 states, including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, Rhode Island, New York, Pennsylvania, New Jersey 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 Solcius 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 Sunworks United and Seller. The purchase price for Solcius consisted of $51,750 in cash.
Residential Solar
Through our Residential Solar operating subsidiary, we design, arrange financing, integrate, install, and manage systems, primarily for residential homeowners. We sell residential solar systems through multiple channels, including our network of sales channel partners, and our growing direct sales channel strategy. We operate in several residential and commercial markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin and South Carolina. We have direct sales or operations personnel in California, Nevada, Utah, Arizona, New Mexico, Texas, Colorado, South Carolina, Wisconsin and Minnesota.
Commercial Solar Energy
Through our CSE operating subsidiary, 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. Historically, our CSE subsidiary participated in the California residential solar market. Following the Solcius Acquisition, all new residential sales are managed under the Solcius brand. Due to materiality, the Company will continue to report the remaining backlog of residential projects in the Commercial Solar Energy segment, which is expected to be fulfilled within the next year. CSE primarily operates in California.
For the third quarter of 2022, approximately 92% of our revenue was from installations for the residential market and approximately 8% of our revenue was from installations for the commercial and public works markets.
For the third quarter of 2021 approximately 79% of our revenue was from installations for the residential market and approximately 21% of our revenue was from installations for the commercial and public works markets. Solcius revenue was only included since its acquisition date of April 8, 2021.
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Strategic Update
Increase the velocity of installation. We believe a reduction in the time required to install a residential solar installation improves both pricing power with third-party channel relationships and customer retention. During the second and third quarters of 2022, we decentralized all design, permitting and scheduling activities to local and regional Company hubs, while continuing to leverage the benefits of scale across shared services. We will continue to utilize lean principles and practices to optimize workflow and improve installation timelines.
Expand cost-efficient direct sales channel. We have embarked on a multi-year initiative to develop a robust, direct sales team designed to complement our third-party channel partners. This direct sales team is incentivized to develop business across the residential markets where we operate, with an emphasis on rooftop solar installations. During the third quarter of 2022, the direct sales team was responsible 24% of total installation revenue, versus approximately 4% in the prior-year period.
Drive efficient sourcing and procurement. We intend to shift an increased proportion of our sourcing away from foreign, third-party distribution channels toward U.S. based original equipment manufacturers, an approach that will allow for improved surety of supply. By year-end 2024, we intend to source a significant share of our panel and component inventory from U.S. based producers, whereas no materials are currently sourced domestically. During the third quarter of 2022, we grew total inventory by $8,100 on a sequential quarter basis to $26,900, thereby ensuring product availability during a period of elevated customer demand.
Drive sustained margin expansion. We believe key drivers of margin expansion include programmatic price increases; market share gains in both our core California commercial market and new geographic regions; reductions in lead times; optimization of our sales channel partner network; an increased mix of revenue derived from our direct sales force; increased productivity resulting from recent headcount investments; and the adoption of lean principles to reduce cost and drive continuous improvement. We expect to achieve improved margin realization in the fourth quarter 2022, when compared to the first nine months of 2022, as recent performance improvement initiatives are further implemented.
Orders and Backlog
For the quarter ended September 30, 2022, our combined backlog was $110,000, representing an increase of 116% compared to the third quarter of 2021.
Residential Solar segment originations increased 48% in the three months ended September 30, 2022, compared to the prior year period, driven by growth in both dealer and direct channels. Within this segment, originations generated from the direct sales channel were approximately 24%, in the three months ended September 30, 2022, compared to approximately 3% in the prior period, due to execution against our stated goal to diversify our sources of originations. As a result of these improvements, the Residential Solar backlog increased to $70,000, during the third quarter of 2022 which is double the prior year quarter and up approximately 18% on a sequential quarter basis. We expect to execute against our Residential Solar segment backlog over the next 1-5 months, as project complexity, jurisdictional requirements, materials and labor availability each influence timelines for completion.
Commercial Solar segment orders were approximately $8,000 during the three months ended September 30, 2022, compared to approximately $6,000 during the comparable period in 2021. The Commercial Solar segment backlog increased to approximately $40,000, during the third quarter of 2022, which represents an increase of over double the prior year period. We expect to execute against this backlog over the next 3-18 months, subject to receiving timely authorizations to proceed with construction from the various stakeholders.
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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 may 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 2022 and 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 for the first nine months of 2022 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. 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, including a negative impact on the supply chain upon which we rely on to operate. We will continue to attempt to mitigate the impact through appropriate operational measures.
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. 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 Estimates
We prepare our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses recorded in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carry values of assets and liabilities that are not readily apparent from other sources.
These estimates may change as new events occur and additional information is obtained. Actual results may differ from these estimates under different assumptions and conditions.
There were changes in our critical accounting estimates during the third quarter. In July 2022, we completed an assessment of the contract fulfillment costs that give rise to an asset for residential contracts. We determined that additional specifically identifiable costs related directly to residential contracts can be capitalized, in accordance with Accounting Standards Codification (“ASC”) Section 340-40. The additional capitalized costs of approximately $2,794 as of September 30, 2022, include the allocation of costs that relate directly to the residential contracts. This change in estimate is an update of the estimates previously disclosed in “Critical Accounting Policies” and “Use of Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report. For the three and nine months ended September 30, 2021, these related amounts were immaterial.
| 22 |
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2021
CONSOLIDATED RESULTS
Revenue and Cost of Goods Sold
For the three months ended September 30, 2022, revenue increased to $40,713 compared to $31,220 for the same quarter in the prior year. Approximately 92% of revenue was from installations for the residential markets, or $37,253, compared to 79% of revenue, or $24,854, for the same quarter in the prior year. The increase in residential revenue is a result of organic growth and the inclusion of the Residential Solar segment (Solcius) revenue. Within the Residential Solar segment, revenue from the direct salesforce accounted for approximately 24% of revenue for the three months ended September 30, 2022, compared to approximately 4% in the prior year. Commercial and public works revenue was approximately 8% of total revenue or $3,460, for the three months ended September 30, 2022, compared to 21%, or $6,636 of revenue in the same period in the prior year. The reduction is primarily driven by lower new orders in the preceding quarters.
Cost of goods sold for the three months ended September 30, 2022, was $21,204, compared to $18,150 reported for the three months ended September 30, 2021. The increase in cost of goods sold is primarily the result of increase in revenue compared to the prior year period and inflationary pressures on material and labor costs.
Gross profit was $19,509 for the three months ended September 30, 2022, compared to $13,070 for the prior year period. The gross margin increased to 47.9% in the third quarter of 2022, compared to 41.9% in the third quarter of 2021. The margin percentage increase is the result of a higher mix of Residential Solar projects as well as inflationary pressures on materials and labor. The change in estimate for the capitalization of additional specifically identifiable costs related directly to in-process residential installation contracts increased gross profit by approximately $2,794 during the third quarter of 2022.
Selling and Marketing Expenses
For the three months ended September 30, 2022, our selling and marketing expenses were $14,773, compared to $10,072 for the same three months in 2021. As a percentage of revenue, selling and marketing expenses were 36.3% of revenue in the third quarter of 2022, compared to 32.3% of revenue in the same period in 2021. The increased expenses in the current year period were largely related to additional marketing spend for dealer commissions and investment in the residential direct salesforce.
General and Administration Expenses
Total G&A expenses of $8,718 for the three months ended September 30, 2022 increased compared to $7,185 for the same period in the prior year. The G&A expenses increased in the current year period due to investments in salaries and related benefits to support the revenue growth of the business.
Stock-Based Compensation Expense
During the three months ended September 30, 2022, we incurred $364 in total non-cash stock-based compensation expense, compared to $1,206 for the prior year period. The year over year decrease in stock-based compensation is the result of the vesting of the Solcius Acquisition related RSUs and stock options in April 2022. Partially offsetting the reduction in stock-based compensation expense is the non-cash expenses for expanding RSU grants as part of the compensation structure to a broader population of employees.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended September 30, 2022 was $1,232, including $176 recorded within cost of goods sold, compared to $1,930, including $868 recorded within cost of goods sold for the prior year period. Depreciation and amortization expenses decreased as a result of the identified intangible asset for the acquired order backlog related to the Solcius Acquisition having been fully amortized within the first nine months of the transaction. The intangible assets are being amortized over the estimated useful lives of the specific assets, which have original useful lives ranging from nine months to ten years.
Other Income (Expense)
Other income was $9 for the three months ended September 30, 2022, compared to an expense of $(5) for the same three month period in 2021. A gain of $65 was recognized on the sale of surplus equipment during 2022. Interest expense for the third quarter of 2022 was $50 compared to $10 for the same quarter in 2021. The 2022 interest expense is primarily related to the ROU finance leased assets.
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Net Loss
The net loss for the three months ended September 30, 2022 was $5,393, compared to a net loss of $6,460 for the three months ended September 30, 2021.
RESIDENTIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net Total Originations (Watts in thousands) | 15,249 | 11,101 | ||||||
| Installation (Watts in thousands) | 8,703 | 5,805 | ||||||
| Average Project Size Installed (Watts) | 6,689 | 6,072 | ||||||
| Revenue | $ | 36,659 | $ | 23,379 | ||||
| Gross Margin | 53.2 | % | 52.9 | % | ||||
| Operating (Loss) | $ | (328 | ) | $ | (3,259 | ) | ||
| Operating (Loss) % | (0.9 | )% | (13.9 | )% | ||||
COMMERCIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net Total Orders | $ | 8,193 | $ | 5,841 | ||||
| Revenue | $ | 4,054 | $ | 7,841 | ||||
| Gross Margin | 0.0 | % | 16.1 | % | ||||
| Operating (Loss) | $ | (1,898 | ) | $ | (1,037 | ) | ||
| Operating (Loss) % | (46.8 | )% | (13.2 | )% | ||||
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2021
CONSOLIDATED RESULTS
Revenue and Cost of Goods Sold
For the nine months ended September 30, 2022, revenue was $108,306 compared to $69,480 for the nine months ended September 30, 2021. Approximately 90% of revenue in the first nine months of 2022 was from installations for the residential markets at $97,416, compared to 73% of revenue or $51,044 for the same period in the prior year. Residential Solar segment revenue increased as a result of the full period inclusion of the Solcius Acquisition, which was completed in April 2021 and the expansion of our direct sales force and growth across the traditional dealer channel. Commercial Solar Energy segment revenue was 10% of total revenue, or $10,890, for the first nine months of 2022, compared to 27%, or $18,436, of revenue in the same period of the prior year. The reduction was primarily driven by lower new orders in the preceding quarters.
Cost of goods sold for the nine months ended September 30, 2022 was $59,030, or 54.5% of revenue, compared to $42,348, or 60.9% of revenue, reported for the nine months ended September 30, 2021.
Gross profit was $49,276 for the nine months ended September 30, 2022. This compares to $27,132 of gross profit for the same period of the prior year. Gross margin improved to 45.5% in the first nine months of 2022 compared to 39.1% in the same nine-month period of 2021. The gross margin improvement in the current year period is predominantly driven by a mix of higher margin residential revenue, partially offset by inflationary pressures on materials and labor. The change in estimate for the capitalization of an additional specifically identifiable costs related directly to in-process residential installation contracts increased gross profit by approximately $2,794 for the nine months ended September 30, 2022.
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Revenue and gross profit in the nine months ended September 30, 2022 were positively impacted by the Solcius Acquisition. In contrast, the prior year Solcius results were only included from the April 8, 2021 acquisition date through the end of the third quarter of 2021.
Selling and Marketing Expenses
For the nine months ended September 30, 2022, our selling and marketing expenses were $41,320, compared to $21,468 for the nine months ended September 30, 2021. As a percentage of revenue, selling and marketing expenses were 38.2% of the first nine months revenue in 2022, compared to 30.9% of revenue in the same period of 2021. Selling and marketing expenses increased in the current year period as a result of higher residential revenue, as the residential business model focuses on lead generation and effective interaction with third-party sales organizations.
General and Administrative Expenses
Total G&A expenses for the nine months ended September 30, 2022 was $24,025, compared to $17,081 for the nine months ended September 30, 2021. The G&A expenses increased from the prior year period as a result of the Solcius Acquisition, which was completed in April 2021, and increases in salaries and benefits in support of the revenue growth.
Stock-Based Compensation Expense
During the nine months ended September 30, 2022, we incurred $2,019 in total non-cash stock-based compensation expense, compared to $2,470 for the same period in the prior year. The year over year decrease in stock-based compensation is the result of the vesting of the Solcius Acquisition related RSUs and stock options granted in April 2022. Partially offsetting the reduction in stock-based compensation expense is the non-cash expense for expanding RSU grants as part of the compensation structure to a broader population of employees.
Depreciation and Amortization Expenses
Depreciation and amortization expense for the nine months ended September 30, 2022 was $3,827, including $650 recorded in cost of goods sold compared to $3,900, including $1,740 recorded in cost of goods sold for the same period in the prior year. Depreciation and amortization expenses decreased in the current year period as a result of a portion of the $15,600 of identified intangible assets of Solcius being amortized within the first nine months since the closing of the Solcius Acquisition in April 2021. 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.
Other Income (Expense)
Other income was $174 for the nine months ended September 30, 2022, compared to $2,907 for the same period in 2021. Other income in the 2022 period was the result of equipment sales, most of which were fully depreciated. Other income in the prior year period was primarily the result of the June 2021 forgiveness of the PPP loan of $2,847 and $34 of accrued loan interest. Interest expense is primarily for interest on finance leases. Interest expense for the nine months ended September 30, 2022, was $115, compared to $40 during the nine months ended September 30, 2021.
Income Tax Expense
Income tax expense was $94 for the nine months ended September 30, 2022, compared to no income tax expense in the prior year period. The income tax expense in the current period is attributable to the Texas margin tax related to our Texas based operations, which we acquired as a result of the Solcius Acquisition in April 2021.
Net Loss
The net loss for the nine months ended September 30, 2022 was $21,185. The net loss for the nine months ended September 30, 2021 was $13,140.
RESIDENTIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net Total Originations (Watts in thousands) | 43,927 | 29,702 | ||||||
| Installation (Watts in thousands) | 23,003 | 17,766 | ||||||
| Average Project Size Installed (Watts) | 6,552 | 6,051 | ||||||
| Revenue | $ | 95,570 | $ | 46,191 | ||||
| Gross Margin | 50.1 | % | 54.1 | % | ||||
| Operating (Loss) | $ | (7,868 | ) | $ | (4,424 | ) | ||
| Operating (Loss) % | (8.2 | )% | (9.6 | )% | ||||
COMMERCIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net Total Orders | $ | 34,737 | $ | 3,720 | ||||
| Revenue | $ | 12,737 | $ | 23,289 | ||||
| Gross Margin | 10.6 | % | 13.8 | % | ||||
| Operating (Loss) | $ | (5,462 | ) | $ | (4,579 | ) | ||
| Operating (Loss) % | (42.9 | )% | (19.7 | )% | ||||
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
We had $14,273 in unrestricted cash at September 30, 2022, as compared to $19,719 at December 31, 2021. We believe that our existing cash and cash equivalents is sufficient to meet our operating cash requirements and strategic objectives for growth for at least the next year. To satisfy our capital requirements, including acquisitions and ongoing operations, 12 months and longer into the future, we will likely seek to raise additional financing through debt and equity financings.
On January 27, 2021, the Company filed a Registration Statement on Form S-3 (File No. 333-252475) (the “2021 Registration Statement”), with the SEC. The 2021 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 $100,000. The 2021 Registration Statement was declared effective by the SEC on February 3, 2021. From January 1, 2022 through the date of this filing we sold 5,754,161 shares with gross proceeds of approximately $17,500 under the 2021 Registration Statement. Approximately $19,400 of the $100,000 total is available for future offerings pursuant to the 2021 Registration Statement.
On June 1, 2022, the Company filed a Registration Statement on Form S-3 (File No. 333-265336) (the “2022 Registration Statement”), with the SEC. The 2022 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 $75,000. The 2022 Registration Statement was declared effective by the SEC on August 5, 2022. No shares have been sold under the 2022 Registration Statement.
As of September 30, 2022, our working capital surplus was $29,830, compared to a working capital surplus of $28,736 at December 31, 2021.
During the nine months ended September 30, 2022, we used $22,102 of cash in operating activities, compared to $25,331 used in operating activities for the nine months ended September 30, 2021. The cash used in operating activities during the current year period was primarily the result of the current year net loss combined with investments in working capital to secure solar panel and inverter inventory to support growth and minimize the impacts of supply chain disruption.
Net cash used in investing activities totaled $121 for the nine months ended September 30, 2022 and was primarily used for the acquisition of vehicles and equipment. The cash used in investing activities for the same period in 2021 totaled $51,093 as a result of the purchase of Solcius, which required net cash of $50,619, and the purchase of vehicles, property and equipment.
Net cash provided by financing activities during the nine months ended September 30, 2022, was $16,702 primarily due to net proceeds from sales of our common stock during the first nine months of the current year.
Net cash provided by financing activities during the nine months ended September 30, 2021 was $48,652. Net cash was provided primarily by financing activities includes the net proceeds of $48,858 from sales of our common stock.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods specified in the SEC rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, the design of any system of controls is based on assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies and procedures may deteriorate. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS
Interest Rate Volatility
Volatility and increases in interest rates could adversely impact our business. While interest rates have been at long-term historic lows in recent years, they have recently increased, and may continue increasing in the near future. While we do not provide company branded financing solutions to our customers, we partner with a diverse group of funding partners. Rising interest rates increases the cost of capital for our funding partners, which are typically passed onto our customers. As a result of the increase in the cost of our products and services, there might be less adoption of solar systems and our cash flow might be negatively impacted.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
| Exhibit No. | Description | |
| 31.1* | Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
| 31.2* | Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | |
| 32.1** | Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS** | Inline XBRL Instance Document. | |
| 101.SCH** | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL** | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB** | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE** | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
| * | Filed herewith. |
| ** | Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Provo, State of Utah, on November 8, 2022.
| Sunworks, Inc. | ||
| Date: November 8, 2022 | By: | /s/ Gaylon Morris |
| Gaylon Morris, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 8, 2022 | By: | /s/ Jason Bonfigt |
| Jason Bonfigt, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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