UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 20172019.

Or

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number001-36868

SUNWORKS, INC.

(Name of registrant in its charter)

1030 Winding Creek Road, Suite 100

Roseville, CA 95678

(Address of principal executive offices)

Issuer’s telephone Number:(916) 409-6900

(Former Address if Changed Since Last Report)

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.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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).

Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

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 [  ] No [X]

Indicate the number of shares outstanding of eachSecurities registered pursuant to Section 12(b) of the issuer’s classes of common stock as of the latest practicable date.Act:

The number of shares of registrant’s common stock outstanding as of November 14, 2017October 31, 2019 was 22,455,664.5,281,279

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 on Form 10-Q except for historical information 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. Readers should carefully review the factors identified in this report under the caption “Risk Factors” as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including our most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q. 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.

PART I –- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

SUNWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 20172019 AND DECEMBER 31, 20162018

(in thousands, except share and per share data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SUNWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 20172019 AND 20162018

(in thousands, except share and per share data)

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SUNWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(in thousands, except share and per share data)

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SUNWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 20162019 and 2018

(in thousands, except share and per share data)

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SUNWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 and 2018

(in thousands, except share and per share data)

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SUNWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SEPTEMBER 30, 20172019

(in thousands, except share and per share data)

Unless otherwise noted, (1) “Sunworks” refersReferences herein to “we,” “us,” “Sunworks,” and “the Company” are to Sunworks, Inc., a Delaware corporation formerly known as Solar3D, Inc. (2) the “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Sunworks and its Subsidiaries, whether conducted through Sunworks or a subsidiary of Sunworks, (3) “Subsidiaries” refers collectively towholly-owned subsidiaries Sunworks United, Inc. (“dba Sunworks United”), MD Energy, Inc. (“MD Energy”), and Elite Solar Acquisition Sub,Plan B Enterprises, Inc. (“Elite Solar”Plan B”), (4) “Common Stock” refers to Sunworks’ Common Stock, and (5) “Stockholder(s)” refers to the holders of Sunworks’ Common Stock..

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 footnotesnotes required by generally accepted accounting principles for complete financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 20172019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to2019. The financial statements should be read in conjunction with the consolidatedaudited financial statements and footnotesnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.

At the Company’s Annual Meeting of Stockholders on August 7, 2019, the stockholders of the Company approved a reverse stock split of our issued and outstanding common stock at a ratio not less than 1-for-3 and not greater than 1-for-10. On August 29, 2019, the board of directors of the Company approved the reverse stock split at a ratio of 1-for-7 which went into effect at the open of trading on August 30, 2019. At the effective time of the reverse stock split, every seven shares of issued and outstanding common stock was converted into one share of issued and outstanding common stock. The authorized shares of 200,000,000 and the par value of $0.001 remain the same. All shares and related financial information in this Form 10-Q is retroactively stated to reflect this 1-for-7 reverse stock split.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Sunworks, Inc.the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and have been consistently applied in the preparation of the 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, 2018, except for the policies described below in relation to the adoption of Accounting Standards Update (“ASU”) 2016-02,Leases (Topic 842),discussed below in the section titled “Accounting Pronouncements Recently Adopted.”

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries, Sunworks United, Inc. (d/b/a Sunworks United), MD Energy, Inc., and Elite Solar Acquisition Sub, Inc.Plan B. All material intercompany transactions have been eliminated upon consolidation of these entities.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP 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, project construction costs, revenue recognition on percentage of completion typeconstruction contracts, allowances for uncollectible accounts, operating lease right-of-use-assets and liabilities, warranty reserves, inventory valuation, debt beneficial conversion features, 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.

Reclassifications and Corrections

Certain reclassifications have been made to conform prior period data to the current presentation. In addition, the Company identified an error and revised its financial statements for the three months and nine months ended September 30, 2016 related to the elimination of certain intercompany revenues. Management concluded that the errors had no material impact on any of the Company’s previously issued financial statements, are immaterial to the Company’s results for the first, second, and third quarters of 2016 and full year 2016 results, and had no material effect on the trend of the Company’s financial results. As a result of the immaterial errors discussed above, the unaudited condensed consolidated financial statements reflect the following adjustments for the three months ended September 30, 2016: a reduction in revenue of $6,000, an increase in cost of goods sold of $75,000 and a net decrease in Operating Expenses and Other Expenses of $81,000. The effect of the reclassifications and immaterial errors had no effect on reported net loss. The unaudited condensed consolidated financial statements reflect the following adjustments for the nine months ended September 30, 2016: an increase in cost of goods sold of $460,000 and a net decrease in Operating Expenses and Other Expenses of $460,000. The effect of the reclassifications and immaterial errors had no effect on reported net loss for the nine months ended 2016.

Revenue Recognition

Revenues and related costs on construction contracts are recognized usingas the “percentage of completion method” of accountingperformance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 605-35, Accounting for Performance of Construction-Type606, revenue and Certain Production Type Contracts (“ASC 605-35”). Under this method, contract revenues and related expenses areassociated profit, will be recognized overas the performance periodcustomer obtains control of the goods and services promised in the contract in direct proportion(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 the costs incurred asbe a percentagemeasure of total estimated costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs.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 asin the period it is determined.

Revisions in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts, which require the revision, become known. 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.

The Asset, “Costs in excess of billings”, represents revenues recognized in excess of amounts billed on contracts in progress. The Liability, “Billings in excess of costs”, represents billings in excess of revenues recognized on contracts in progress. At September 30, 2017Accounts Receivables and December 31, 2016, the costs in excess of billings balance were $5,314,000 and $4,307,000, and the billings in excess of costs balance were $7,210,000 and $4,997,000, respectively. Residential contract revenues are recognized using the “completed contract” method of accounting.Accounts Payable

ContractAccounts 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. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract. General and administrative expenses are charged to operations as incurred and are not allocated to contract costs.

Contract Receivable Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of $983 and $1,234 were included in the balance of trade accounts receivable as of September 30, 2019, and December 31, 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 of $350 at September 30, 2019, and $325, for doubtful accounts of $240,000 at September 30, 2017, and $50,000 at December 31, 2016.2018. During the three months ended September 30, 2019 and 2018, $25 and $(54) was recorded as bad debt expense, respectively. During the nine months ended September 30, 2019 and 2018, $67 and $36 was recorded as bad debt expense, respectively.

Customer Deposits

Customer deposits are recorded for funds remitted by our customers in advance of progress billings being completed.

Cash and Cash EquivalentEquivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted Cash

The Company considers restricted cash to be cash balances that have legal and/or contractual restrictions imposed by a third party and are restricted as to withdrawal or use except for the specified purpose.

Concentration Risk

Cash includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (FDIC)(the “FDIC”) limits. At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of September 30, 2017,2019, the cash balance in excess of the FDIC limits was $6,060,000.$2,404. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in these accounts.

Inventory

average on aInventory is valued at the lower of cost or market and is determined by the first-in, first-out method. Inventory primarily consists of modules,panels, inverters, and mounting racks and other materials, andmaterials. The Company also carries a reserve for inventory obsolescence that may arise from technological advancement or changes in government regulation. Inventory is recordedpresented net of an estimated allowance of $100,000 for obsolesce, shrink and spoilage as of$50 at September 30, 20172019, and $0 as of September 30,2016.$50 at December 31, 2018.

Property and Equipment

Property and equipment are stated at cost. Depreciation for property and equipment commences when it’sproperty and equipment are put into service and are depreciated using the straight-line method over itsthe property and equipment’s estimated useful lives:

Depreciation expense for the three months ended September 30, 20172019 and 20162018 was $102,000$87 and $101,000,$96, respectively. Depreciation expense for the nine months ended September 30, 20172019 and 20162018 was $308,000$269 and $218,000,$289, respectively.

Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet. If the Company had finance lease ROU assets, such assets would be presented within other assets, and finance lease liabilities would be presented appropriately within liabilities.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and the Company recognizes such lease payments on a straight-line basis over the lease term.

Advertising and Marketing

The Company expenses advertising and marketing costs as incurred. Advertising and marketing costs include primarily printed material, billboards, sponsorships, direct mail, radio, telemarketing, tradeshow costs, magazine, and catalog advertisement. Included within selling and marketing expenses are advertising and marketing costs for the three months ended September 30, 20172019 and 20162018 of $123,600$18 and $725,300,$56, respectively. Advertising and marketing costs for the nine months ended September 30, 20172019 and 2016 were $807,5002018 was $69 and $2,705,100,$201, respectively.

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, and discussions with the Company’s outside counsel retained to handle specific product liability cases.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 reserveThe warranty liability as offor estimated future warranty costs is $411 and $321 at September 30, 20172019 and December 31, 2016 is $216,000 and $116,000,2018, respectively.

Stock-Based Compensation

The Company periodically issues stock options restricted stock, and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs.non-employees. The Company accounts for stock option restricted stock and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (the “FASB”) whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereFASB 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.

Basic and Diluted Net (Loss) Income per Share Calculations

Income (Loss) per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares 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, restricted stock, warrants, convertible preferred stock, and convertible notes to be anti-dilutive. As a result, the basic and diluted losses per common share are the same for the three months and nine months ended September 30, 20172019 and 2016.2018, respectively.

As of September 30, 2017,2019, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 811,924155,978 stock options, 1,134,61511,904 restricted stock grants, 2,997,000 warrants, and 3,589,978 shares underlying convertible notes and preferred stock.428,143 warrants.

As of September 30, 2016,2018, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 938,188221,055 stock options, and 2,997,00037,699 restricted stock grants, 428,143 warrants, because they were below the period ending stock price. We also excluded 1,506,024 shares of Series B preferred stockunderlying convertible into common stock at a 1 to 1 ratio because of trading restrictions.notes.

Dilutive per share amounts are computed using the weighted-average number of common shares outstanding and potentially dilutive securities, using the treasury stock method, if their effect would be dilutive.

Long-Lived Assets

The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

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.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 qualitativequantitative assessment of indefinite lived intangibles and goodwill at December 31, 2016.2018. 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.

Fair Value of Financial Instruments

Disclosures about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of September 30, 2017,2019, the amounts reported for cash, accrued interest and other expenses, and notes payable approximate the fair value because of their short maturities.

We adopted ASC Topic 820 as of January 1, 2008account for financial instruments measured as fair value on a recurring basis.basis under ASC Topic 820. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United StatesGAAP and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements)1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

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.

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.

Reclassifications

Certain reclassifications have been made to prior year’s financial statement to conform to classifications used in the current year.

Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding the method to allocate resources and assess performance. The Company currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.

New Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes effective for the Company on January 1, 2020. The amendments in this ASU should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed. We are currently evaluating the impact ASU No. 2017-04 will have on our consolidated financial statements and associated disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017. From January 1, 2018 we will begin including amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.months and disclosing key information about leasing transactions. Leases will beare classified as either operating or financing, with such classification affecting the pattern of expense recognition in the income statement. In July 2018, the FASB issued ASU 2018-11,Leases (Topic 842) - Targeted Improvements, which provided an optional transition method to apply the new lease requirements through a cumulative-effect adjustment in the period of adoption.

We adopted ASU 2016-02 is effective for fiscal yearsin the first quarter of 2019 using the optional transition method and interim periods within those years beginning after December 15, 2018,elected certain practical expedients permitted under the transition guidance, which, among other things, allowed us to not reassess prior conclusions related to contracts containing leases or lease classification. The adoption primarily affected our condensed consolidated balance sheet through the recognition of $2.1 million of right-of-use assets and early$2.1 million of lease liabilities as of January 1, 2019. The adoption is permitted. We are currently evaluating thedid not have a significant impact ASU 2016-02 will have on our results of operations or cash flows. See Note 4. “Leases” to our condensed consolidated financial statements for further discussion of the effects of the adoption of ASU 2016-02 and the associated disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic(ASC 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASU 2014-09,ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU isASC was effective for fiscal years beginning after December 15, 2017. The Company has adopted ASC 606 beginning on January 1, 2018 using the modified retrospective approach for contracts not substantially complete at that date by recognizing a cumulative adjustment to the opening balance of accumulated deficit. See Note 3 for additional disclosures in accordance with the new revenue standard is principle basedrecognition standard.

Management reviewed currently issued pronouncements during the nine months ended September 30, 2019, and interpretationbelieves that any other recently issued, but not yet effective, accounting standards, if currently adopted, would not have a material effect on the accompanying consolidated financial statements.

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenues 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, will be recognized as the customer obtains control of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice,the goods and guidance may evolve as companies and the accounting profession work to implement this new standard. The Company is stillservices promised in the processcontract (i.e., performance obligations). The cost of evaluatinguninstalled 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.

The following table represents a disaggregation of revenue by customer type from contracts with customers for the effectthree months and nine months ended September 30, 2019 and 2018:

In adopting ASC 606, we had the following significant changes in accounting principles:

(i) Timing of revenue recognition for uninstalled materials - We previously recognized the majority of our revenue from the installation or construction of commercial & public works projects using the percentage-of-completion method of accounting, whereby revenue is recognized as we progress on the contract. The percentage-of-completion for each project was determined on an actual cost-to-estimated final cost basis. Under ASC 606, revenue and associated profit, is 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 is generally 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.

(ii) Completed contracts - We previously recognized the majority of our revenue from the installation of residential projects using the completed contract method of accounting whereby revenue was recognized when the project is completed. Under, ASC 606, revenue is recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations).

Revenue recognition for other sales arrangements such as the sales of materials will remain materially consistent.

The adoption of the new revenue recognition standard resulted in a cumulative effect adjustment to retained earnings of approximately $1,405 as of January 1, 2018. The details of this adjustment are summarized below.

The following tables summarize the impact of the adoption of ASC 606 on our condensed consolidated statement of operations and condensed consolidated balance sheet for the three and nine months ended and as of September 30, 2018:

Contract assets represent revenue recognized in excess of amounts billed on contracts in progress. Contract liabilities represent billings in excess of revenue recognized on contracts in progress. At September 30, 2019 and December 31, 2018, the contract asset balances were $5,747 and $6,153, and the contract liability balances were $2,678 and $5,069, respectively.

4.Leases

The Company has operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining lease terms of 1 year to 5 years, some of which include options to extend.

The Company’s lease expense for the three months and nine months ended September 30, 2019 was entirely comprised of operating leases and amounted to $345 and $967, respectively. Operating lease payments, which reduced operating cash flows for the three months and nine months ended September 30, 2019 amounted to $345 and $967 respectively. The difference between the ROU asset amortization of $458 and the associated lease expense of $967 consists of interest, new vehicles, new facilities and lease extensions, office and office equipment leases originated during the first nine months of 2019.

Supplemental balance sheet information related to leases was as follows:

As of September 30, 2019, the weighted average remaining lease term was 1.5 years and the discount rates for the Company’s historical financial statements and disclosures. As the Company completes its evaluation of this new standard, new information may arise that could change the Company’s current understanding of the impact to revenue and expense recognized. Additionally, the Company will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust the Company’s assessment and implementation plans accordingly.leases was 10.0%.

Maturities for leases were as follows:

3.

5. LOANS PAYABLE

Plan B, a subsidiary of the Company, entered into a business loan agreement, prior to being acquired by the Company, with Tri Counties Bank dated March 14, 2014, in the original amount of $131,000$131 bearing interest at 4.95%. The loan agreement called for monthly payments of $2,500$2 and was scheduled to maturematured on March 14, 2019.2019 when it was paid in full. Proceeds from the loan were used to purchase a pile driver and related equipment and iswas secured by the equipment. The outstanding balance atAt September 30, 2017,2019, there is $42,500.no remaining loan balance.

Plan B entered into a business loan agreement prior to being acquired by the Company with Tri Counties Bank dated April 9, 2014, in the original amount of $250,000$250 bearing interest at 4.95%. The loan agreement callscalled for monthly payments of $4,700 and is scheduled to mature$5, matured on April 9, 2019.2019 when it was paid in full. Proceeds from the loan were used to purchase racking inventory and related equipment. The loan iswas secured by the inventory and equipment. The outstanding balance atAt September 30, 2017,2019, there is $86,000.

On December 31, 2015, the Company entered into a $2.5 million Credit Facility or the Credit Agreement with JPMorgan Chase Bank, N.A. Availability under the Credit Agreement is a Line of Credit with a Letter of Credit Sublimit up to $2.5 million. Upon execution, the Company accessed $1.8 million that was repaid in full on January 5, 2016. The Company had no of borrowings under the Credit Agreement as of September 30, 2017 and December 31, 2016. The Credit Agreement matures on November 30, 2017, but may be cancelled at any time by the Company. Loans are secured by a security interest in the Company’s cash accounts held with the Lender. Interest on any unpaid balance accrues at the Prime Rate, as defined in the Credit Agreement; provided that, on any given day, shall not be less than the Adjusted One Month LIBOR rate. Until the maturity date, the Company shall pay monthly interest only on loans. The Credit Facility provides for the payment of certain fees, including fees applicable to each standby letter of credit and standard transaction fees with respect to any transactions occurring on account of any letter of credit. Subject to customary carve-outs, the Credit Agreement contains customary negative covenants and restrictions for agreements of this type on actions by the Company including, without limitation, restrictions on indebtedness, liens, investments, loans, consolidation, mergers, dissolution, asset dispositions outside the ordinary course of business, change in business and restriction on use of proceeds. In addition, the Credit Agreement requires compliance by the Company with covenants including, but not limited to, furnishing the lender with certain financial reports. The Credit Agreement contains customary events of default, including, without limitation, non-payment of principal or interest, violation of covenants, inaccuracy of representations in any material respect and cross defaults with certain other indebtedness and agreements.remaining loan balance.

On January 5, 2016, the Company entered into a loan agreement for the acquisition of a pile driver in the principal amount of $182,000$182 bearing interest at 5.5%. The loan agreement calls for monthly payments of $4,200$4 and is scheduled to mature on January 15, 2020. The loan is secured by the equipment. The outstanding balance at September 30, 2017,2019, is $110,700.$17.

On September 8, 2016, the Company entered into a loan agreement for the acquisition of a pile driver in the principal amount of $174,000$174 bearing interest at 5.5%. The loan agreement calls for monthly payments of $4,000$4 and is scheduled to mature on JanuarySeptember 15, 2020. The loan is secured by the equipment. The outstanding balance at September 30, 2017,2019, is $134,000.$46.

On November 14, 2016, the Company entered into a 0% interest loan agreement for the acquisition of an excavator in the principal amount of $58,600.$59. The loan agreement calls for monthly payments of $1,200$1 and is scheduled to mature on November 13, 2020. The loan is secured by the equipment. The outstanding balance at September 30, 2017,2019, is $45,600.$17.

On December 23, 2016, the Company entered into a loan agreement for the acquisition of modular office systems and related furniture in the principal amount of $172,000$172 bearing interest at 4.99%. The loan agreement calls for 16 quarterly payments of $11,900$12 and is scheduled to mature in September 2020. The loan is secured by the equipment. The outstanding balance at September 30, 2017,2019, is $132,200.$47.

As of September 30, 20172019 and December 31, 2016,2018, loans payable (“Loans Payable”) are summarized as follows:

4.6. ACQUISITION CONVERTIBLE PROMISSORY NOTES

On January 31, 2014, the Company issued 4% convertible promissory notes in the aggregate principal amount of $1,750,000 as part of the consideration paid to acquire 100% of the issued and outstanding stock of Sunworks United. The notes are convertible into shares of the Company’s fully paid and non-assessable common stock at a conversion price of $0.52 per share and was originally due on March 30, 2015, which was amended to extend to September 30, 2016. The Notes were five (5) year notes and bore interest at the rate of 4% per annum. In February and March 2014, $625,000 of the notes was converted into 1,201,923 shares of common stock, leaving a remaining note balance of $1,125,000 as of December 31, 2014. During the twelve months ended December 31, 2015, the Company issued 721,154 shares of common stock upon conversion of principal in the amount of $375,000. The principal note balance remaining as of December 31, 2015 was $750,000. On February 29, 2016, the $750,000 balance remaining was fully converted into 1,442,308 shares of common stock.

On February 28, 2015, the Company issued a 4% convertible promissory note in the aggregate principal amount of $2,650,000$2,650 as part of the consideration paid to acquire 100% of the total outstanding stock of MD Energy. The note iswas convertible into shares of common stock on or after each of the following dates: November 30, 2015, November 30, 2016 and November 30, 2017. The conversion price is $2.60was $18.20 per share. A beneficial conversion feature of $3,261,500$3,262 was calculated but capped at the $2,650,000$2,650 value of the note. The beneficial conversion feature was calculated by multiplying the difference between the fair value of stock at the date of the note, $5.80$40.60, less the conversion price of $2.60$18.20 multiplied by the maximum number of shareshares subject to conversion, 1,019,231.145,605. In November 2015, the Company issued 339,74348,535 shares of common stock upon conversion of the principal amount of $883,000.$883. Commencing on March 31, 2015, and each quarter thereafter during the first two (2) years of the note, the Company will makemade quarterly interest only payments to the shareholder for accrued interest on the Note during the quarter. Commencing with the quarter ending on June 30, 2017, the Company began to make quarterly payments of interest accrued on the convertible note during the prior quarter plus $151,429. The$151 with the final payment of all outstanding principal and accrued but unpaid interest on the convertible note is due and payable on February 28, 2020 (the maturity date). The debt discount is fully amortized and has zero balance at December 31, 2018. The Company recorded amortization of the beneficial conversion feature as interest expense in the amount of $220,000$4 and $210,000$10 during the three months ended September 30, 20172019 and 2016,2018, respectively. The Company recorded amortization of the beneficial conversion feature as interest expense in the amount of $657,000$17 and $693,000$35 during the nine months ended September 30, 20172019 and 2016,2018, respectively. The debt discount will be amortized over the life of the convertible note, or until such time that the convertible note is converted, in full or in part, into shares of common stock of the Company with any unamortized debt discount continuing to be amortized in the event of any partial conversion thereofoutstanding balances at September 30, 2019 and any unamortized debt discount being expensed at such time of full conversion thereof.December 31, 2018 were $404 and $858, respectively.

We evaluated the foregoing financing transactions in accordance with ASC Topic 470,Debt with Conversion and Other Options, and determined that the conversion feature of the convertible promissory note was afforded the exemption for conventional convertible instruments due to its fixed conversion rate. The convertible promissory notes havehad explicit limits on the number of shares issuable, so they did meet the conditions set forth in current accounting standards for equity classification. The convertible promissory notes were issued with non-detachable conversion options that arewere beneficial to the investors at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The accounting for the beneficial conversion feature requiresrequired that the beneficial conversion feature be recognized by allocating the intrinsic value of the conversion option to additional paid-in-capital, resulting in a discount on the convertible notes, which will bewas amortized and recognized as interest expense.

5.7. CONVERTIBLE PROMISSORY NOTES

Convertible promissory note at September 30, 2017 and December 31, 2016 are as follows:

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$750 for consideration of $750,000.$750. The proceeds were restricted and were used for the purchase of Solar United Network, Inc., now operating as Sunworks United. The note was convertible into shares of common stock of the Company at a price equal to a variable conversion price equal to the lesser of $1.30$9.10 per share, or fifty percent (50%) of the lowest trading price after the effective date. AtAs of September 30, 2014, the note was exchanged for a new convertible note with a fixed conversion price of $0.338.$2.37. Per ASC 815, the derivative liability on the note was extinguished and the new note was re-valued per ASC 470 as a beneficial conversion feature, which was expensed in the statement of operations during 2014. The note originally matured on October 28, 2014, was extended three months to January 31, 2015, was extended to September 30, 2017,2016, and in March 2016 was subsequently extended to JuneSeptember 30, 2019 with zero interest. The Company recorded interest expense in the amount of $11,000 during the year ended December 31, 2016 prior to the note being extended at zero interest. During the year ended December 31, 2016, the noteholder made a partial conversion of principal and accrued interest in the amount of $196,000$196 and $45,000$45 respectively in exchange for 711,586101,656 shares of common stock, with a remaining principal balance of $554,000. On March 1,$554. During the year ended December 31, 2017, the Company issued 798,817noteholder made a partial conversion of principal in the amount of $505 in exchange for 213,441 shares of common stock, towith a remaining principal balance of $49. During the note holder atyear ended December 31, 2018, the fixed conversion price of $0.338 per share. Thenoteholder made a partial conversion of the note results in a $270,000 outstanding principal reduction in the note from $554,000 to $284,000.amount of $49 and accrued interest of $69 in exchange for 49,873 shares of common stock, with a remaining principal balance of $0.

On February 11, 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 $100,000. Upon execution of the note, the Company received an initial advance of $20,000. In February and March of 2014, the Company received additional advances in an aggregate amount of $80,000 for an aggregate total of $100,000.$100. The note was convertible into shares of common stock of the Company at a price equal to a variable conversion price equal to the lesser of $1.30$9.10 per share, or fifty percent (50%) of the lowest trading price after the effective date. As of September 30, 2014, the note was exchanged for a new convertible note with a fixed conversion price of $0.338.$2.37. Per ASC 815, the derivative liability on the note was extinguished and the new note was re-valued per ASC 470 as a beneficial conversion feature. The note matured on various dates from the effective date of each advance with respect to each advance. At the sole discretion of the lender, the lender was able to modify the maturity date to be twelve (12) months from the effective date of each advance. The note matured on various dates in 2014, and was extended to September 30, 2016, and in March 2016 was subsequently extended to JuneSeptember 30, 2019 with zero interest. The Company recorded no interest expensesince March 2016.

The convertible promissory note balance at December 31, 2018 was $100. On April 10, 2019, all remaining principal and accrued interest due under the convertible promissory notes dated January 31, 2014 and February 11, 2014 were converted into 68,082 shares of common stock. The balances converted included $100 of principal and $61 of accrued interest with a remaining principal balance of $0.

8. PROMISSORY NOTES PAYABLE

On April 27, 2018, the Company entered into a Loan Agreement (the “Loan Agreement”) with CrowdOut Capital, Inc. (“CrowdOut”) pursuant to which the Company issued an aggregate of $3,750 in 2016promissory notes (the “Notes”), of which $3,000 are Senior Notes and $750 are Subordinated Notes (the “Subordinated Notes”). The Subordinated Notes were funded by the Company’s Chief Executive Officer, Charles Cargile and the Company’s Vice President of Business Development, Kirk Short.

The Notes bear interest at the rate of the one-month LIBOR plus 950 basis points and originally matured on June 30, 2020.

On June 3, 2019, the Company entered into an amendment to its Loan Agreement (the “Amendment”), pursuant to which the maturity date of the $3,000 Senior Note and $750 Subordinated Note was extended from June 30, 2020 to January 31, 2021. In connection with entering into the Amendment, the Company agreed to issue to CrowdOut, as the holder of the Senior Note, 57,143 shares of common stock as an amendment fee (the “Amendment Fee”) pursuant to the Company’s shelf registration statement on Form S-3.

Based upon the closing price of the Company’s common stock on June 17, 2019, the day of issuance, the 57,143 shares are valued at $344. The $344 Amendment Fee plus $7 for CrowdOut Amendment related legal fees have been added to the debt issuance costs and are being amortized over the remaining life of the loan. The Notes may be prepaid in whole without the consent of the lender or in part with the consent of the lender. In the event the Notes are prepaid in full prior to the note being extended.maturity date, the Company shall pay CrowdOut, as the holder of the Senior Notes an exit fee of $375 if prepaid prior to March 31, 2020 or $435 if prepaid after March 31, 2020 but prior to the maturity date. The Company is accruing the exit fee of $435 over the extended remaining life of the Loan Agreement and recognizing the exit fee as interest expense. For the three months ended September 30, 2019 and 2018, exit fee recorded as interest expense was $33 and $50, respectively. For the nine months ended September 30, 2019 and 2018, exit fee recorded as interest expense was $127 and $84, respectively.

In connection with the issuance of the Senior Notes, the Company entered into a security agreement (the “Security Agreement”) pursuant to which the Company granted to CrowdOut, as the holder of the Senior Notes a security interest in certain of the Company’s assets to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the Senior Notes. The Company also entered into a subordination agreement with the holders of the Subordinated Notes and the Senior Notes pursuant to which the Subordinated Notes are subordinated to the Senior Notes.

The Loan Agreement contains certain customary events of default including, but not limited to, default in payment of any sum payable thereunder, breaches of representations or warranties thereunder, the occurrence of an event of default under the transaction documents, change in control of the Company, filing of bankruptcy and the entering or filing of certain monetary judgments against the Company. Upon the occurrence of an event of default the outstanding principal amount of the Notes, plus accrued but unpaid interest and other amounts owing in respect thereof, shall become, at the giving of notice by CrowdOut, as the lender, immediately due and payable. Interest on overdue payments upon the occurrence of an event of default shall accrue interest at a rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. An event of default, for which the Company obtained a waiver through September 16, 2019, was deemed to have occurred due to the Company’s failure to Maintain compliance with the Nasdaq Stock Market’s minimum bid price requirement. The minimum bid price requirement was achieved by an August 30, 2019 reverse stock split of the Company’s issued and outstanding common stock at a ratio of 1-for-7 which is described below in Note 9, as such no extension to the waiver was needed. Additionally, the Loan Agreement includes a subjective acceleration clause if a “material adverse effect” occurs in the Company’s business that could result in an event of default. The Company believes that the likelihood of the lender exercising this right is remote and have classified the debt as long term.

6.In conjunction with the Amendment to the Loan Agreement, the Company added another $351 to the original $118 of capitalized debt issuance costs. The unamortized portion of debt issuance costs total $389 and is being amortized over the life of the Loan Agreement and recognized as interest expense. The Promissory Note Payable balance is reported net of the unamortized portion of the debt issuance costs. The Company recorded amortization of the debt issuance cost of $61 and $105 as interest expense during the three months and nine months ended September 30, 2019. The Company recorded amortization of the debt issuance cost of $14 and $23 as interest expense during the three months and nine months ended September 30, 2018.

Promissory notes payable at September 30, 2019 and December 31, 2018 are as follows:

9. CAPITAL STOCK

At the Company’s Annual Meeting of Stockholders on August 7, 2019, the stockholders of the Company approved a reverse stock split of our issued and outstanding common stock at a ratio not less than 1-for-3 and not greater than 1-for-10. On August 29, 2019, the board of directors of the Company approved the reverse stock split at a ratio of 1-for-7 which went in to effect at the open of trading on August 30, 2019. At the effective time of the reverse stock split, every seven shares of issued and outstanding common stock was converted into one share of issued and outstanding common stock. The authorized shares of 200,000,000 and the par value of $0.001 remain the same. All shares and related financial information in this Form 10-Q is retroactively stated to reflect this 1-for-7 reverse stock split.

Common Stock

On February 17, 2017,During the Company issued 41,773nine months ended September 30, 2019, 17,857 shares of common stock forwere issued to Charles Cargile pursuant to the cashless exerciseterms of 53,419 options at an exercise price of $0.468 per share.a restricted stock grant agreement (the “March 2017 RSGA”) effective March 29, 2017 which is described below in Note 10.

On March 1, 2017,April 10, 2019, the remaining principal of $100 and accrued interest of $61 due under the convertible promissory notes dated January 31, 2014 and February 11, 2014 were converted into 68,082 shares of common stock.

In connection with the June 3, 2019 Amendment to the Loan Agreement, the Company issued 798,817agreed to issue 57,143 shares of common stock to CrowdOut, as the holder of the $3,000,000 Senior Note. The shares were issued pursuant to the Company’s shelf registration on Form S-3 on June 17, 2019 at a conversionmarket value of $344 based upon a closing price of $0.338$6.01 per share for partial conversion of principal for a convertible promissory note in the aggregate amount of $270,000.common share. (See Note 8)

On March 16, 2017,Pursuant to an At Market Issuance Sales Agreement (the “ATM Agreement”) with B. Riley FBR, Inc. (the “Agent”), the Company issued 746,153may offer and sell from time to time up to an aggregate of $15,000,000 of shares of restrictedthe Company’s common stock, par value $0.001 per termsshare (the “Placement Shares”), through the Agent.

The Placement Shares have been registered under the Securities Act of 1933, as amended, pursuant to the Registration Statement on Form S-3 (File No. 333-231653), which was originally filed with the Securities and Exchange Commission (“SEC”) on May 21, 2019 and declared effective by the SEC on May 31, 2019, the base prospectus contained within the Registration Statement, and a prospectus supplement that was filed with the SEC on June 6, 2019.

Placement Shares sold between June 6, 2019 and September 30, 2019 total 845,975 shares. Total gross proceeds for the shares were $3,460, or $4.09 per share, as of September 30, 2019. Net proceeds, less issuance, costs were $3,264 or $3.86 per share as of September 30, 2019.

Sales of the performance-based RSGA awards.Placement Shares, if any, pursuant to the ATM Agreement, may be made in sales deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act. The Company had previously recorded stock based compensation costs at fair valueAgent will act as sales agent and will use commercially reasonable efforts to sell on the Company’s behalf all of the date of grant of $3,751,500 relatedPlacement Shares requested to be sold by the vesting of these awards inCompany, consistent with its normal trading and sales practices, on mutually agreed terms between the year ended December 31, 2016.Agent and the Company.

On May 18, 2017,The Company has no obligation to sell any of the Placement Shares under the ATM Agreement, and may at any time suspend offers under the ATM Agreement or terminate the ATM Agreement. The Company issued 15,000 sharesintends to use the net proceeds from this offering for general corporate purposes, including, without limitation, sales and marketing activities, product development, making acquisitions of common stock at $1.43 per share in the aggregate amountassets, businesses, companies or securities, capital expenditures, repayment of $21,450 as paymentindebtedness, and for executive recruiting services.working capital needs.

Preferred Stock

On November 25, 2015, the Company designated 1,700,000242,857 shares, of its authorized preferred stock as Series B Preferred Stock, $0.001 par value per share. Pursuant to the Certificate of Designation filed with the Secretary of State of the State of Delaware, and subject to the rights of any other series of preferred stock that may be established by the Boardboard of Directors,directors of the Company, holders of Series B Preferred Stock (the “Holders”) will have liquidation preference over the holders of the Company’s Common Stock in any distribution upon winding up, dissolution, or liquidation. Holders arewill also be entitled to receive dividends, if, when and as declared by the Boardboard of Directors,directors of the Company, which dividends shall be payable in preference and priority to any payment of any dividend to holders of Common Stock. Holders will be entitled to convert each share of Series B Preferred Stock into one (1) share of Common Stock and arewill also be entitled to vote together with the holders of the Company’ Common Stock on all matters submitted to shareholders at a rate of one (1) vote for each share of Series B Preferred Stock. In addition, so long as at least 100,00014,286 shares of Series B Preferred Stock are outstanding, the Company may not, without the consent of the Holders of at least a majority of the shares of Series B Preferred Stock then outstanding: (i) amend, alter or repeal any provision of the Certificate of Incorporation or bylaws of the Company or the Certificate of Designation so as to adversely affect any of the rights, preferences, privileges, limitations or restrictions provided for the benefit of the Holders or (ii) issue or sell, or obligate itself to issue or sell, any additional shares of Series B Preferred Stock, or any securities that are convertible into or exchangeable for shares of Series B Preferred Stock. 1,506,024215,146 shares of Series B Preferred stock,Stock, at a fair value of $4,500,000$4,500 were issued in December 2015 in connection with the acquisition of Plan B. On May 2, 2018, the Holders converted 215,146 shares of Series B Preferred Stock into the same number of shares of the Company’s Common Stock. As of December 31, 2018, there were no outstanding shares of Preferred Stock.

7.10. STOCK OPTIONS, RESTRICTED STOCK, AND WARRANTS

Options

As of September 30, 2017,2019, the Company has 1,905,155155,978 non-qualified stock options outstanding to purchase 1,905,155155,978 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 five to seven years from the date of grant at exercise prices ranging from $0.26$2.10 to $4.42$21.70 per share, 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.model that uses assumptions for expected volatility, expected term, and the risk-free interest rate. Expected volatility is based on historical volatility of the Company’s common stock over the expected term of the options. The expected term of the options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield.

During the three months ended September 30, 20172019 and 2016,2018, the Company charged a total of $194,700$37 and $136,000$89, respectively, to operations related to recognized stock basedrecognize stock-based compensation expense for stock options. During the nine months ended September 30, 20172019 and 2016,2018, the Company charged a total of $582,400$147 and $223,000$314, respectively, to operations related to recognized stock basedrecognize stock-based compensation expense for stock options.

Restricted Stock GrantsGrant to CEO

With an effective date of March 29, 2017, subject to the Sunworks, Inc. 2016 Equity Incentive Plan, (the “2016 Plan”) the Company entered into a restricted stock grant agreement orthe March 2017 RSGA with its new Chief Executive Officer, Charles F. Cargile. All shares issuable under the RSGA are valued as of the grant date at $1.50$10.50 per share. The RSGA provides for the issuance of up to 500,00071,429 shares of the Company’s common stock. The restricted shares shall vest as follows: 166,66723,810 of the restricted shares shall vest on the one (1) year anniversary of the effective date, and the balance, or 333,33347,619 restricted shares, shall vest in twenty-four (24)24 equal monthly installments commencing onafter the one (1) year anniversary of the effective datedate.

In the three months ended September 30, 2019 and 2018 stock-based compensation expense of $62 and $62, respectively was recognized for the March 2017 RSGA. In the nine months ended September 30, 2017, $62,5002019 and $125,0002018 stock-based compensation expense of stock based compensation expense$186 and $188, respectively was recognized for the March 29, 2017 RSGA.

During the year ended December 31, 2013, the Company entered into a restricted stock grant agreement oran RSGA with its then Chief Executive Officer, James B. Nelson (the “December 2013 RSGA”), intended to provide and incentivize Mr. Nelson to improve the economic performance of the Company and to increase its value and stock price. All shares issuable under the RSGA arewere performance-based shares, and are valued as of the grant date at $0.47$3.29 per share. The RSGA providesprovided for the issuance of up to 769,230109,890 shares of the Company’s common stock to Mr. Nelson provided certain milestones are met in certain stages. As of September 30, 2014, two of the milestones were met, when the Company’s market capitalization exceeded $10 million and the consolidated gross revenue, calculated in accordance with GAAP, equaled or exceeded $10 million for the trailing twelve-month period. The Company issued 384,61554,945 shares of common stock to Mr. Nelson at fair value of $786,000$180 during the year ended December 31, 2014. If the Company’s consolidated net profit, calculated in accordance to GAAP, equals or exceeds $2 million for a trailing twelve-month period and the sooner ofIn conjunction with Mr. Nelson’s retirement change of control, or January 2019,in April 2018, the Company will issue an additional 384,615remaining 54,945 shares of the Company’s common stock vested and were issued to Mr. Nelson. We have not recognized any cost associated withNelson and $179 was expensed during the third milestone due to the inability to estimate the probabilitysecond calendar quarter of it being achieved. As the final performance goal is achieved, the shares shall become eligible for vesting and issuance.2018.

In recognition of the efforts of James B. Nelson, the Company’s Chairman, in leading the Company through the uplisting and financing transaction consummated by the Company in 2015, on August 31, 2016, the Company granted Mr. Nelson a restricted stock grant of 250,00035,715 shares of the Company’s common stock pursuant toan RSGA on the terms of the 2016 Plan.Plan (the “August 2016 RSGA”). All shares issuable under the August 2016 RSGA are valued as of the grant date at $2.90$20.30 per share. The restricted stock grant to Mr. Nelson willwas to vest upon the earlier of (i) January 1, 2021, (ii) a Change of Control as defined in the 2016 Plan (iii) upon Mr. Nelson’s retirement or (iv) upon Mr. Nelson’s death. “Change of Control” as defined in the 2016 Plan means (i) a sale of all or substantially all of the Company’s assets or (ii) a merger with another entity or an acquisition of the Company that results in the existing shareholders of the Company owning less than fifty percent (50%) of the outstanding shares of capital stock of the surviving entity following such transaction. Mr. Nelson’s retirement in April 2018 resulted in the August 2016 RSGA being vested in full and $502 was expensed during the second calendar quarter of 2018.

In the three months and nine months ended September 30, 2017, $41,8002019 and $125,5002018, stock-based compensation expense of stock based compensation expense$0 and $0, respectively, was recognized for the August 31, 2016 RSGA.

During the year ended December 31, 2014, the Company entered into RSGAs with the three Shareholders of Sunworks United (Sunworks United Shareholders), intended to provide incentive to the recipients to ensure economic performance of the Company. All shares issuable under the RSGAs were performance based shares and were valued as of the grant date at $5.12 per share. Each of the RSGAs provided for the issuance of up to 276,924 shares of the Company’s common stock in the aggregate to the Sunworks United Shareholders provided certain milestones were met in certain stages as follows: a) If the Company’s aggregate net income from operations, for any trailing four (4) quarters equaled or exceeded $2 million, the Company would issue each Sunworks United Shareholder 92,308 shares of common stock and 276,924 shares in the aggregate; b) If the Company’s aggregate net income from operations, for any trailing four (4) quarters exceeded $3 million, the Company would issue each Sunworks United Shareholder 92,308 shares and 276,924 shares of common stock in the aggregate; c) If the Company’s aggregate net income from operations, for any trailing four (4) quarters exceeded $4 million, the Company would issue each Sunworks United Shareholder 92,307 and 276,924 shares in the aggregate. Based on the probability that the first milestone would be achieved the Company recognized $100,000 in stock compensation expense during the year 2015. As of September 30, 2016, the Company achieved each of the three milestones. During the quarter ended September 30, 2016 the Company issued 276,924 shares in aggregate associated with the first milestone. The issuance of the remaining 553,845 shares was completed on March 16, 2017. The stock based compensation expense associated with the achievement of the second and third milestones totaled $2,837,000 and was recognized in the quarter ended September 30, 2016. No additional compensation expense was required with the March 16, 2017 issuance of the 553,845 common shares.

During the year ended December 31, 2014, the Company entered into RSGAs with certain employees of Sunworks United, intended to provide incentive to the recipients to ensure certain economic performance of the Company. All shares issuable under the RSGA were performance based shares and were valued as of the grant date at $5.12 per share. Each of the RSGAs provided for the issuance of up to 38,462 shares of the Company’s common stock to each employee provided certain milestones were met in certain stages as follows: a) If the Company’s aggregate net income from operations, for any trailing four (4) quarters equaled or exceeded $2 million, the Company would issue to each employee 12,821 shares of common stock and 64,105 shares in the aggregate; b) If the Company’s aggregate net income from operations, for any trailing four (4) quarters exceeded $3 million, the Company would issue each employee 12,821 shares of common stock and 64,105 shares in the aggregate; c) If the Company’s aggregate net income from operations, for any trailing four (4) quarters exceeded $4 million, the Company would issue each employee 12,820 and 51,280 shares in the aggregate. Based on the probability that the first milestone would be achieved the Company recognized $33,000 in stock compensation expense during the year 2015. As of September 30, 2016, the Company achieved each of the three milestones. During the quarter ended September 30, 2016 the Company issued 64,105 shares in aggregate associated with the first milestone. The issuance of the remaining 115,385 shares was completed on March 16, 2017. The stock based compensation expense associated with the achievement of the second and third milestones totaled $591,000 and was recognized in the quarter ended September 30, 2016. No additional compensation expense was required with the March 16, 2017 issuance of the 115,385 common shares.

On February 1, 2015, the Company entered into a RSGA with its former Chief Financial Officer, intended to provide incentive to the former CFO to ensure certain economic performance of the Company. All shares issuable under the RSGA were performance-based shares and were valued as of the grant date at $4.21 per share. The RSGA provided for the issuance of up to 115,385 shares of the Company’s common stock provided certain milestones were met in certain stages as follows: a) If the Company’s aggregate net income from operations, for any trailing four (4) quarters equaled or exceeded $2 million, the Company would issue 38,462 shares of common stock; b) If the Company’s aggregate net income from operations, for any trailing four (4) quarters exceeded $3 million, the Company would issue 38,462 shares of common stock; c) If the Company’s aggregate net income from operations, for any trailing four (4) quarters exceeded $4 million, the Company would issue 38,461. As of September 30, 2016, the Company achieved each of the three milestones. During the quarter ended September 30, 2016 the Company issued 38,462 shares associated with the first milestone. The issuance of the remaining 76,723 shares was completed on March 16, 2017. The stock based compensation expense associated with the achievement of the second and third milestones totaled $324,000 and was recognized in the quarter ended September 30, 2016. No additional compensation expense was required with the March 16, 2017 issuance of the 76,923 common shares.

The total combined option and restricted stock compensation expense recognized, in the statement of operations, during the threenine months ended September 30, 20172019 and 20162018 was $299,000$333 and $3,902,000,$1,183, respectively. The total combined option and restricted stock compensation expense recognized, in the statement of operations, during the first nine months of 2017 and 2016 was $833,000 and $5,764,000, respectively

Warrants

As of September 30, 2017,2019, the Company had 2,997,000428,143 common stock purchase warrants outstanding with an adjusted exercise price of $4.15$2.85 per share.share as of that date. The reduction in the exercise price is a result of the sale of Placement Shares pursuant to the ATM Agreement at prices less than the original $29.05 exercise price of the warrants. In accordance with the terms of the Warrant Agreement, the original $29.05 exercise price is reduced to a price equal to the aggregate consideration received divided by the number of additional shares of common stock issued. The warrants have an issuance date of March 9, 2015 and expire on March 9, 2020.

8.11. SUBSEQUENT EVENTS

None.Subsequent to September 30, 2019 and through October 30, 2019 the sale and issuance of Placement Shares pursuant to the ATM Agreement continued with 554,543 of additional common shares issued and outstanding resulting in net proceeds of $1,500. Further, 1,984 shares were issued under the March 2017 RSGA valued at $21.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form 10-Q contains certain forward-lookingThe following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements included in Part I, Item 1 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 on Form 10-Q except for historical information may be deemed to be forward-looking statements. Without limitingand 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, anyaudited consolidated financial 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. Readers should carefully review the factors identified in this report under the caption “Risk Factors” as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including our most recent Annual Report on Form 10-K for the year ended December 31, 2018. This section contains forward-looking statements that are based on our current expectations and subsequent quarterly reportsreflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled “Risk Factors” in Part II, Item 1A, and “Cautionary Note Regarding Forward-Looking Statements” within this Quarterly Report on Form 10-Q. 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.

Unless otherwise noted, (1) “Sunworks” refers to Sunworks, Inc., a Delaware corporation formerly known as Solar3D, Inc. (2) “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Sunworks and its Subsidiaries, whether conducted through Sunworks or a subsidiary of Sunworks, (3) “Subsidiaries” refers collectively to Sunworks United, Inc. (“Sunworks United”), MD Energy, Inc. (“MD Energy”) and Elite Solar Acquisition Sub, Inc.Plan B Enterprises (“Elite Solar”Plan B”).

Business Introduction / Overview

We provide photo voltaicSunworks provides photovoltaic (“PV”) based power systems for the agricultural, commercial, industrial, (“ACI”), public works, and residential markets in California, Hawaii, Massachusetts, Nevada, Oregon, New Jersey and Washington. We have direct sales and/or operations personnel in California, Massachusetts, Nevada, and Oregon. Through our operating subsidiaries, we design, arrange financing, integrate, install, and manage systems ranging in size from 2KW2kW (kilowatt) for residential loads to multi MW (megawatt) systems for larger agricultural, commercial or agriculturaland industrial (“ACI”) and public works projects. CommercialACI installations have included installations at office buildings, manufacturing plants, warehouses, churches, and warehouses. Agriculturalagricultural facilities includesuch 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.

On August 29, 2019, the board of directors of the Company approved the reverse stock split at a ratio of 1-for-7 which went in to effect at the open of trading on August 30, 2019, see Note 9. Share-related amounts have been retroactively adjusted in this report to reflect this reverse stock-split for all periods presented.

For the first nine months of 2017,2019, approximately sixty-seven percent (67%)69% of our 2019 revenue was generated from installations for the ACI customers. Approximately thirty-three percent (33%)and public works markets and approximately 31% of our revenue was from installations infor the residential market.

For the first nine months of 2018, approximately 73% of our revenue was from installations for the ACI and public works markets and approximately 27% of our revenue was from installations for 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.GAAP. 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 AmericaGAAP 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, 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.

Revenue Recognition

Revenues and related costs on commercial construction contracts are recognized usingas the “percentage of completion method” of accountingperformance obligations are satisfied over time in accordance with ASC 605-35, Accounting for Performance of Construction-Type and Certain Production TypeStandards Codification (“ASC”) 606,Revenue from Contracts (“ASC 605-35”)with Customers. Under this method, contract revenuesASC 606, revenue and related expenses areassociated profit, will be recognized overas the performance periodcustomer obtains control of the goods and services promised in the contract in direct proportion(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 the costs incurred asbe a percentagemeasure of total estimated costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs.progress. All unallocableun-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. The asset, “Costs

Revisions in excesscost and profit estimates, during the course of billings”, represents revenuesthe contract, are reflected in the accounting period in which the facts, which require the revision, become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

Contract assets represent revenue recognized in excess of amounts billedinvoiced to customers on contracts in progress. The liability, “BillingsContract liabilities represent amounts invoiced to customers in excess of costs”, represents billings in excess of revenuesrevenue recognized on contracts in progress.

Residential contractsLeases

We determine if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet. If we had Finance lease ROU assets, such assets would be presented within other assets, and finance lease liabilities would be presented appropriately.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized usingat commencement date based on the “completed contracts” methodpresent value of accounting.lease payments over the lease term. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, we have elected the short-term lease measurement and recognition exemption, which recognizes such lease payments on a straight-line basis over the lease term.

Indefinite Lived Intangibles and Goodwill Assets

The Company accountsWe account for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business“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 testsWe test for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, we performed a quantitative assessment of indefinite lived intangibles and goodwill at December 31, 2018. At December 31, 2018, we 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 CompanyWe periodically issuesissue stock options restricted stock and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accountsdirectors. We account for stock options, restricted stock and warrantoption grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards BoardFASB whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts

We account for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards BoardFASB 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.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 20172019 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 20162018

REVENUE AND COST OF GOODS SOLD

For the three months ended September 30, 2017,2019, revenue for the Company increased 7.1%decreased 4.0% to $18,797,000$17,547 compared to $17,557,000$18,281 for the three months ended September 30, 2016.2018. Cost of goods sold for the three months ended September 30, 2017,2019 was 21.7% higher at $15,704,000 compared to $12,902,000$14,547, or 2.5% below the $14,916 reported, for the three months ended September 30, 2016.2018.

GrossLower construction costs partially offset the lower revenue resulting in a gross profit for the Company was $3,093,000of $3,000 for the quarter ended September 30, 2017.2019. This compares to $4,655,000$3,365 of gross profit for the same quarter of the prior year.year, or a decrease in gross profit of $365. The gross margin was 16.5%17.1% in the third quarter of 20172019 compared to 26.5%18.4% in the same quarter of 2016. ACI jobs were 65%2018. Approximately 74% of revenuesrevenue in the third quarter of 20172019 was from installations for the ACI and public works markets compared to 57%73% of revenuesrevenue in the same period the prior year. ACI projects are larger and generally have a lower estimated gross margin than residential projects. In addition, during the quarter, the costs incurred to complete several ACI projects exceeded the original cost estimates. The costs exceeding original estimates totaled approximately $1.3 million and have all been expensed. These costs, exceeding the prior estimates, to complete these projects had no corresponding revenue to offset their impact on the cost of goods sold. Revenue is only recognized up to 100% of the original project estimate. Any costs in excess of estimates are charged to cost of goods sold as incurred.

SELLING AND MARKETING EXPENSES

For the three months ended September 30, 2017, the Company had2019, selling and marketing (S&M)(“S&M”) expenses of $1,751,000were $761 compared to $3,294,000$891 for the three months ended September 30, 2016. S&M expenses declined primarily due to decreases in media advertising expenses and personnel costs compared to the prior year.2018. As a percentage of revenue, S&M expenses were 9.3%4.3% of third quarter revenuesrevenue in 20172019 compared to 18.8%4.9% in the third quarter of 2016. The disciplined and effective use of media advertising has been an emphasis for 2017 resulting in third2018. Third quarter savings of approximately $602,000 compared to2019 S&M expenses were $130 less than the same quarterperiod in 2016.the prior year. Most of the decrease resulted from a reduction in personnel in the sales and sales support functions, lower commission and promotion expenses and lower advertising expenses. We continue to refine our marketing efforts, third-party revenue generators, and tracking systems with the goal of minimizing customer acquisition costs.

GENERAL AND ADMINISTRATIVE EXPENSES