SunWorks Inc (SUNWQ)

[SandridgeEnergy]

I base that assertion in relation to the promissory note that was created around the same time SUNworks was purchased. If you recall the shares were trading for around $3.00 a share at the time, and the note allowed the owners to buy shares at $0.338 a share at will. These notes allowed the owners to make well over 1000% profits on some of the shares they sold, which were of course sold in conjunction with company PR statements.

If the stock is at $3.00 and the CEO is surreptitiously* handing out shares at $0.338 to his buddies, that in my opinion is grounds for action. I would find it highly unlikely that Nelson would be able to make a convincing argument that giving his friends a bunch of shares at $0.338 was the best use of shareholder capital. If people were willing to buy the stock at $3 on the open market, the company should be able to get better than $0.338 off the open market. In my opinion it is fraud plain and simple.

*Surreptitiously because the notes appeared to have a higher conversion rate, they however included a clause (which was NOT included in the original filing**) that would reduce the conversion rate to the lowest future rate of conversion. Conveniently, the owners of these notes already owned a note at the $0.338 conversion price. This allowed them to simply convert at small part of that note at will and then have the ability to convert the much larger note at whatever price they chose.

**

Effective on January 31, 2104, Solar3D, Inc., a Delaware corporation ("S3D" or the "Company"), borrowed $1,250,000 from two accredited investors ("Investors") in order to finance the Company's acquisition of Solar United Networks, Inc., a California corporation ("SUN"). The loan is evidenced by two promissory notes bearing simple interest at the rate of 10% per annum, payable in full on or before October 31, 2014 unless the maturity date is extended in the sole discretion of the Investors until January 31, 2015, and convertible into shares of the Company's common stock at a rate equal to the lesser of $0.05 per share or 50% of the lowest trade price recorded on any trade date after January 31, 2014 prior to the conversion of the promissory notes.

(Those are pre-split prices, split was 1:26, .05 * 26 = $1.30. Still pretty bad when stock is at $3, but not as bad as the true conversion rate of $0.338)

That was the original disclosure. It was not until the 1Q 10-Q that the note was disclosed to have a feature that would reduce the conversion rate:

On January 31, 2014, the Company entered into a securities purchase agreement providing for the sale of a 10% convertible promissory note in the principal amount of up to $750,000, for consideration of $750,000. The proceeds were restricted and were used for the purchase of Solar United Network, Inc. The note is convertible into shares of common stock of the Company at a price equal to a variable conversion price equal to the lesser of $0.05 per share, or fifty percent (50%) of the lowest trading price after the effective date. Also, if the Company issues any common stock resulting from conversion of another security, whether issued and outstanding before or after the effective date, at a net effective price per share below the conversion price issued to the lender, the price shall be adjusted to the lower conversion price. The note matures nine (9) months from the effective date of the note. The Company recorded amortization of debt discount, which was recognized as interest expense in the amount of $163,889 at March 31, 2014.

This leaves two scenarios:

1. A clause which caused a material amount of addition dilution was not disclosed to investors when SUNworks was purchased, which is grounds for legal action.

2. The clause was added later, which also be grounds for legal action, since it would have simply caused dilution for no benefit to shareholders.

The fact that the key beneficiaries of these changes are people close to Nelson makes it much worse. The auditors at the time of the creation have lost their license for another issue since then. One of them changed jobs from that firm and is now head of the audit committee of Sunworks. He is also related to Jim Nelson.

Is that normal? Is this something that investors should not be at least aware of? Should the person who informs investors of this be held legally liable?

I personally have no standing to sue the company because I haven't lost any money, but if I had this is what I would start with. Although that is far from where I would end.