UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 20212022.

Or

Or

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

For the transition period from _______________ to _______________

Commission File Number 001-36868

SUNWORKS, INC.

(Name of registrant in its charter)

Delaware01-0592299

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2270 Douglas Blvd.1555 Freedom Boulevard

Provo, Suite 216UT84604

Roseville, CA95661

(Address of principal executive offices) (Zip Code)

(916)(385) 409-6900497-6955

(Registrant’s telephone Number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTicker symbol(s)Name of each exchange on which registered
Common stock, par value $0.001 per shareSUNWThe Nasdaq Capital MarketNASDAQ

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 No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes No

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

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

The number of shares of registrant’s common stock outstanding as of August 13, 20219, 2022 was 27,047,74432,940,656

 

 

 
 

TABLE OF CONTENTS

 

 Page
  
PART I - FINANCIAL INFORMATION 
  
ITEM 1. FINANCIAL STATEMENTS4
  
Condensed Consolidated Balance Sheets as of June 30, 20212022 (Unaudited) and December 31, 202020214
  
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 20212022 and 202020215
  
Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 20212022 and 202020216
  
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 20212022 and 202020217
  
Notes to the Unaudited Condensed Consolidated Financial Statements8
  
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS20
  
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK25
ITEM 4. CONTROLS AND PROCEDURES25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS26
  
ITEM 4. CONTROLS AND PROCEDURES1A. RISK FACTORS26
  
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS27
ITEM 1A. RISK FACTORS27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS2826
  
ITEM 3. DEFAULTS UPON SENIOR SECURITIES28
ITEM 4. MINE SAFETY DISCLOSURES2826
  
ITEM 5. OTHER INFORMATION4. MINE SAFETY DISCLOSURES2826
  
ITEM 6. EXHIBITS5. OTHER INFORMATION2826
  
SIGNATURESITEM 6. EXHIBITS26
29
SIGNATURES27

 

2
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this Quarterly Report) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report except for statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

 

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that might cause these differences in actual results include but are not limited to, the impacts of the COVID-19 pandemic, including the impacts on us, our operations, or our future financialrisks and operational results; those factorsuncertainties discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20202021 (our Annual Report), and the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (SEC). In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

3
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

SUNWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 20212022 AND DECEMBER 31, 20202021

(in thousands, except share and per share data)

 

 June 30, 2021  December 31, 2020  June 30, 2022 December 31, 2021 
 (Unaudited)     (Unaudited)    
Assets                
Current Assets:                
Cash and cash equivalents $26,860  $38,991  $12,067  $19,719 
Restricted cash  348   348   323   323 
Accounts receivable, net  8,383   2,890   8,012   4,568 
Inventory  6,973   1,179   18,822   10,219 
Contract assets  9,824   2,397   19,637   14,498 
Other current assets  2,540   137   4,748   4,154 
Total Current Assets  54,928   45,942   63,609   53,481 
Property and equipment, net  3,725   198   2,778   3,195 
Finance lease right-of-use assets, net  1,142   -   1,488   1,407 
Operating lease right-of-use assets  2,479   694   2,212   2,502 
Deposits  120   47   139   132 
Intangible assets, net  10,770   -   6,383   7,910 
Goodwill  37,654   5,464   32,186   32,186 
Total Assets $110,818  $52,345  $108,795  $100,813 
                
Liabilities and Shareholders’ Equity                
Current Liabilities:                
Accounts payable and accrued liabilities $15,914  $7,356  $16,323  $11,127 
Contract liabilities  12,911   6,260   19,417   12,201 
Finance lease liability, current portion  415   -   440   424 
Operating lease liability, current portion  860   649   967   993 
Paycheck Protection Program loan payable, current portion  -   787 
Total Current Liabilities  30,100   15,052   37,147   24,745 
                
Long-Term Liabilities:                
Finance lease liability, net of current portion  409   -   618   542 
Operating lease liability, net of current portion  1,619   45   1,245   1,509 
Paycheck Protection Program loan payable, net of current portion  -   2,060 
Warranty liability  1,191   1,131   1,371   1,251 
Total Long-Term Liabilities  3,219   3,236   3,234   3,302 
Total Liabilities  33,319   18,288   40,381   28,047 
                
Commitments and contingencies          -   - 
                
Shareholders’ Equity:                
Preferred stock Series B, $0.001 par value, 5,000,000 authorized shares; 0 shares issued and outstanding  -   - 
Common stock, $0.001 par value; 50,000,000 authorized shares; 27,047,744 and 23,835,258 shares issued and outstanding, at June 30, 2021 and December 31, 2020, respectively  27   24 
Preferred stock, $0.001 par value, 5,000,000 authorized shares; 0 shares issued and outstanding  -   - 
Common stock, $0.001 par value; 50,000,000 authorized shares; 32,934,822 and 29,193,772 shares issued and outstanding, at June 30, 2022 and December 31, 2021, respectively  33   29 
Additional paid-in capital  172,787   122,668   199,433   187,997 
Accumulated deficit  (95,315)  (88,635)  (131,052)  (115,260)
Total Shareholders’ Equity  77,499   34,057   68,414   72,766 
                
Total Liabilities and Shareholders’ Equity $110,818  $52,345  $108,795  $100,813 

 

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

 

4
 

 

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 20212022 and 20202021

(in thousands, except share and per share data)

 

 June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020  June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 
 Three Months Ended  Six Months Ended  Three Months Ended  Six Months Ended 
 June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020  June 30, 2022  June 30, 2021  June 30, 2022  June 30, 2021 
                  
Revenue, net $32,091  $9,670  $38,260  $22,031  $36,397  $32,091  $67,593  $38,260 
                                
Cost of Goods Sold  16,953   7,263   23,031   17,798   19,532   16,953   36,697   23,031��
                                
Gross Profit  15,138   2,407   15,229   4,233   16,865   15,138   30,896   15,229 
                                
Operating Expenses:                                
Selling and marketing  10,165   1,268   11,396   2,795   14,318   10,165   26,548   11,396 
General and administrative  6,738   2,365   10,190   4,974   8,525   6,738   15,961   10,190 
Goodwill impairment  -   -   -   4,000 
Stock-based compensation  1,113   23   1,264   121   371   1,113   1,655   1,264 
Depreciation and amortization  1,905   83   1,970   164   1,312   1,905   2,595   1,970 
                                
Total Operating Expenses  19,921   3,739   24,820   12,054   24,526   19,921   46,759   24,820 
                                
Operating Loss  (4,783)  (1,332)  (9,591)  (7,821)  (7,661)  (4,783)  (15,863)  (9,591)
                                
Other Income (Expense)                                
Other income, net  2,886   10   2,890   10   51   2,886   53   2,890 
Interest expense  (21)  (137)  (30)  (396)  (59)  (21)  (66)  (30)
Gain on disposal of property and equipment  51   -   51   -   178   51   178   51 
                                
Total Other Income (Expense), net  2,916   (127)  2,911   (386)
Total Other Income, net  170   2,916   165   2,911 
                                
Loss before Income Taxes  (1,867)  (1,459)  (6,680)  (8,207)  (7,491)  (1,867)  (15,698)  (6,680)
                                
Income Tax Expense  -   -   -   -   94   -   94   - 
                                
Net Loss $(1,867) $(1,459) $(6,680) $(8,207) $(7,585) $(1,867) $(15,792) $(6,680)
                                
LOSS PER SHARE:                                
Basic $(0.07) $(0.09) $(0.26) $(0.59) $(0.23) $(0.07) $(0.51) $(0.26)
Diluted $(0.07) $(0.09) $(0.26) $(0.59) $(0.23) $(0.07) $(0.51) $(0.26)
                                
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING                                
Basic  27,047,744   16,628,992   26,145,676   13,896,447   32,907,289   27,047,744   31,262,031   26,145,676 
Diluted  27,047,744   16,628,992   26,145,676   13,896,447   32,907,289   27,047,744   31,262,031   26,145,676 

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

5

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE AND SIX MONTHS ENDED June 30, 2022 and 2021

(in thousands, except share data)

        Additional       
  Common Stock  Paid-in  Accumulated    
  Shares  Amount  Capital  Deficit  Total 
Balance at December 31, 2021  29,193,772  $29  $187,997  $(115,260) $72,766 
Stock-based compensation  -   -   1,284   -   1,284 
Issuance of common stock under terms of restricted stock grants  121,666   -   -   -   - 
Sales of common stock pursuant to S-3 registration statement, net  2,757,830   3   7,811   -   7,814 
Net loss for the three months ended March 31, 2022  -   -   -   (8,207)  (8,207)
Balance at March 31, 2022  32,073,268   32   197,092   (123,467)  73,657 
Stock-based compensation  -   -   371   -   371 
Issuance of common stock under terms of restricted stock grants  95,000   -   -   -   - 
Tax withholdings related to net share settlements of equity awards  (16,703)  -   (34)  -   (34)
Sales of common stock pursuant to S-3 registration statement, net  783,257   1   2,004   -   2,005 
Net loss for the three months ended June 30, 2022  -   -   -   (7,585)  (7,585)
Balance at June 30, 2022  32,934,822  $33  $199,433  $(131,052) $68,414 

        Additional       
  Common Stock  Paid-in  Accumulated    
  Shares  Amount  Capital  Deficit  Total 
Balance at December 31, 2020  23,835,258  $24  $122,668  $(88,635) $34,057 
Stock-based compensation for options  -   -   151   -   151 
Sales of common stock pursuant to S-3 registration statement  3,212,486   3   48,855   -   48,858 
Net loss for the three months ended March 31, 2021  -   -   -   (4,813)  (4,813)
Balance at March 31, 2021  27,047,744   27   171,674   (93,448)  78,253 
Stock-based compensation for options  -   -   1,113   -   1,113 
Net loss for the three months ended June 30, 2021  -   -   -   (1,867)  (1,867)
Balance at June 30, 2021  27,047,744  $27  $172,787  $(95,315) $77,499 

 

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

 

56
 

 

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS

FOR THE THREE AND SIX MONTHS ENDED June 30, 20212022 and 20202021

(in thousands, except share and per share data)thousands)

 

                     
        Additional       
  Common Stock  Paid-in  Accumulated    
  Shares  Amount  Capital  Deficit  Total 
Balance at December 31, 2020  23,835,258  $24  $122,668  $(88,635) $34,057 
Stock-based compensation  -   -   151   -   151 
Sales of common stock pursuant to S-3 registration statement, net  3,212,486   3   48,855   -   48,858 
Issuance of common stock under terms of restricted stock grants                    
Issuance of common stock under terms of restricted stock grants, shares                    
Net loss for the three months ended March 31, 2021  -   -   -   (4,813)  (4,813)
Balance at March 31, 2021  27,047,744   27   171,674   (93,448)  78,253 
Stock-based compensation  -   -   1,113   -   1,113 
Net loss for the three months ended June 30, 2021  -   -   -   (1,867)  (1,867)
Balance at June 30, 2021  27,047,744  $27  $172,787  $(95,315) $77,499 

        Additional       
  Common Stock  Paid-in  Accumulated    
  Shares  Amount  Capital  Deficit  Total 
Balance at December 31, 2019  6,805,697  $7  $81,132  $(72,696) $8,443 
Stock-based compensation for options  -   -   35   -   35 
Issuance of common stock under terms of restricted stock grants  5,952   -   63   -   63 
Sales of common stock pursuant to S-3 registration statement  9,817,343   10   7,726   -   7,736 
Net loss for the three months ended March 31, 2020  -   -   -   (6,748)  (6,748)
Balance at March 31, 2020  16,628,992   17   88,956   (79,444)  9,529 
Stock-based compensation for options  -   -   23   -   23 
Net loss for the three months ended June 30, 2020  -   -   -   (1,459)  (1,459)
Balance at June 30, 2020  16,628,992  $17  $88,979  $(80,903) $8,093 
  June 30, 2022  June 30, 2021 
  Six Months Ended 
  June 30, 2022  June 30, 2021 
CASH FLOWS FROM OPERATING ACTIVITIES:    ��   
Net loss $(15,792) $(6,680)
Adjustments to reconcile net loss to net cash used in operating activities        
Depreciation and amortization  2,595   1,970 
Amortization of right-of-use assets  536   484 
Gain on sale of equipment  (178)  (51)
Paycheck Protection Program loan forgiveness  -   (2,881)
Stock-based compensation  1,655   1,264 
Bad debt expense  225   188 
Changes in Operating Assets and Liabilities, net of acquisition        
Accounts receivable  (3,669)  (3,952)
Inventory  (8,603)  (1,961)
Deposits and other current assets  (601)  (782)
Contract assets  (5,139)  (91)
Accounts payable and accrued liabilities  5,196   1,635 
Contract liabilities  7,216   1,378 
Warranty liability  120   60 
Operating lease liability  (536)  (484)
NET CASH USED IN OPERATING ACTIVITIES  (16,975)  (9,903)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of Solcius LLC, net of cash acquired  -   (50,619)
Purchase of property and equipment  (439)  (429)
Proceeds from sale of equipment  197   61 
NET CASH USED IN INVESTING ACTIVITIES  (242)  (50,987)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Principal payments on finance lease liabilities  (220)  (99)
Proceeds from sale of common stock, net  9,819   48,858 
Payments for taxes related to net share settlement of equity awards  (34)  - 
NET CASH PROVIDED BY FINANCING ACTIVITIES  9,565   48,759 
         
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH  (7,652)  (12,131)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH BEGINNING OF PERIOD  20,042   39,339 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $12,390  $27,208 
         
Cash and cash equivalents $12,067  $26,860 
Restricted cash  323   348 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $12,390  $27,208 
         
CASH PAID FOR:        
Interest $18  $11 
Franchise and corporate excise taxes $42  $- 
         
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS        
Increase in operating right-of-use assets and liabilities due to lease modification  -   103 
Right-of-use assets obtained in exchange for new finance lease liability $338   87 
Right-of-use assets obtained in exchange for new operating lease liability $247  $481 

 

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

 

6

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED June 30, 2021 and 2020

(in thousands, except share and per share data)

         
  Six Months Ended 
  June 30, 2021  June 30, 2020 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(6,680) $(8,207)
Adjustments to reconcile net loss to net cash used in operating activities        
Depreciation and amortization  1,970   164 
Amortization of right-of-use assets  484   331 
Gain on sale of equipment  (51)  - 
Paycheck Protection Program loan forgiveness  (2,881)  - 
Stock-based compensation  1,264   121 
Goodwill impairment  -   4,000 
Amortization of debt issuance costs  -   180 
Bad debt expense  188   280 
Changes in Operating Assets and Liabilities, net of acquisition        
Accounts receivable  (3,952)  3,531 
Inventory  (1,961)  1,302 
Deposits and other current assets  (782)  (321)
Contract assets  (91)  591 
Accounts payable and accrued liabilities  1,635   (4,232)
Contract liabilities  1,378   (1,560)
Warranty liability  60   50 
Operating lease liability  (484)  (331)
NET CASH USED IN OPERATING ACTIVITIES  (9,903)  (4,101)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of Solcius LLC, net of cash acquired  (50,619)  - 
Purchase of property and equipment  (429)  (25)
Proceeds from sale of equipment  61   - 
NET CASH USED IN INVESTING ACTIVITIES  (50,987)  (25)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Loans payable repayments  -   (310)
Promissory note payable repayment  -   (1,500)
Principal payments on finance lease liabilities  (99)  - 
Proceeds from Paycheck Protection Program loan payable  -  2,847 
Proceeds from sale of common stock, net  48,858   7,736 
NET CASH PROVIDED BY FINANCING ACTIVITIES  48,759   8,773 
         
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH  (12,131)  4,647 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH BEGINNING OF PERIOD  39,339   3,539 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $27,208  $8,186 
         
Cash and cash equivalents $26,860  $7,838 
Restricted cash  348   348 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $27,208  $8,186 
         
CASH PAID FOR:        
Interest $11  $143 
Franchise and corporate excise taxes $-  $- 
         
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS        
Increase in operating right-of-use assets and liabilities due to lease modification  103     
Right-of-use assets obtained in exchange for new finance lease liability $87  - 
Right-of-use assets obtained in exchange for new operating lease liability $

481

  $- 

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

7
 

 

SUNWORKS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 20212022

(dollars in thousands, except share and per share data)

 

References herein to “we,” “us,” “Sunworks,” and “the Company” are to Sunworks, Inc. and its wholly owned subsidiaries, Sunworks United Inc. (“dba Sunworks United”), MDCommercial Solar Energy, Inc. (“MD Energy”CSE”), Plan B Enterprises, Inc. (“Plan B”) and Solcius LLCLLC. (“Solcius”).

 

1. BASIS OF PRESENTATION

 

Sunworks, Inc. (NASDAQ:SUNW) through its wholly owned subsidiaries is a provider of high-performance solarWe provide photovoltaic (“PV”) and battery-based power systems. Sunworks sells, engineers, procures materials, constructs and maintains photo-voltaic solar powerstorage systems for customers in a wide range of industries includingthe residential and commercial markets. Commercial projects include commercial, agricultural, commercial and industrial state and federal, and public works. Systems rangeworks projects. We operate in several residential and commercial markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, Rhode Island, New York, Pennsylvania, New Jersey and South Carolina. Through our operating subsidiaries, we design, arrange financing, integrate, install, and manage systems ranging in size from 2 kilowatt2kW (kilowatt) for residential projects to multi-megawatt in size.multi-MW (megawatt) systems for larger commercial and public works projects. Commercial installations have included installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and higher education institutions.

On April 8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United Inc. (the “Buyer”), acquired all of the issued and outstanding membership interests (the “Acquisition”“Solcius Acquisition”) of Solcius, LLC, a California limited liability company (“Solcius”), from Solcius Holdings, LLC (“Seller”). Located in Provo, Utah, Solcius is a full-service, residential solar systems provider. The transaction creates a national solar power provider with a presence in 12 states, including California, Oregon, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, New Jersey, Hawaii and South Carolina. The transactionCompany believes the Solcius Acquisition enhances economies of scale, leading to better access to suppliers, vendors and financial partners, as well as marketing and customer acquisition opportunities.

The Solcius Acquisition was consummated on April 8, 2021, pursuant to a Membership Interest Purchase Agreement, dated as of April 8, 2021 (the “Purchase Agreement”), by and between Buyer and Seller. The purchase price for Solcius consisted of $51,750 in cash, subject to post-closing adjustments related to working capital, cash, indebtedness and transaction expenses. The acquired assets and operating results of Solcius are included in these unaudited condensed consolidated financial statements (“financial statements”) and footnotes since the date of acquisition through June 30, 20212022 (see Note 3).

 

The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 20212022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.2022. The financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.

 

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. These accounting policies conform to GAAP and have been consistently applied in the preparation of the condensed consolidated financial statements.

 

There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021.

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries,subsidiaries: Sunworks United MDInc., Commercial Solar Energy, Plan BInc. and Solcius.Solcius LLC. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

Reclassifications

 

Certain reclassificationsprior period amounts have been made to prior year’s financial statementsreclassified to conform to classifications used in the current year. Sales commissions, finders’ fees and financing fees paidpresentation. The reclassifications impact historical segment reporting disclosures as historical corporate payroll costs were moved from the commercial operations segment to third parties have been reclassified from cost of goods sold to selling and marketing in the condensed consolidated statements of operations with no change in the previously reported net losses. Customer deposits have been reclassified and included in contract liabilities.corporate segment for enhanced reporting disclosures.

 

Segment Reporting

We currently operate in three segments based upon our organizational structure and the way in which our operations are managed and evaluated. Our largest segment is Residential Solar which are projects smaller in size and shorter in duration. Our second operating segment is Commercial Solar Energy which includes projects that are commonly larger in size and longer in duration serving commercial, industrial, agricultural and public works customers. Our third segment is the Corporate, which is responsible for general company oversight and management. Disaggregating the corporate costs from the residential and commercial operations simplifies the performance evaluation of the Residential Solar and Commercial Solar Energy segments.

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenuerevenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to assess the realizability ofreview the Company’s goodwill, intangibles, impairments and estimations of long-lived assets, revenue recognition on construction contracts recognized over time, fair value of assets acquired and liabilities assumed in a business combination, allowances for uncollectible accounts, operatingfinance lease right-of-use assets and financeliabilities, 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.

 

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Revenue Recognition

 

Revenue and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, engineering, procurement and construction (“EPC”) projects for residential and smaller commercial systems that require us to deliver functioning solar power systems are generally completed within two to twelve months from commencement of construction. Construction on larger commercial projects may be completed within eighteen to thirty-six months, depending on the size and location. We recognize revenue from commercial EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer.

 

The cost of materials or equipment will generally be excluded from our recognition of profit, unless specifically produced or manufactured for a project, because such costs are not considered to be a measure of progress. All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen,For residential contracts, the Company willrecognizes revenue upon completion of the job as determined by final inspection. We recognize revenue for systems operations and maintenance over the loss interm of the period it is determined.service period.

 

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. We use an input method based on costs incurred as we believe that this method most accurately reflects our progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed-price construction contracts is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

Contract assets represent revenue recognized in excess of amounts invoiced to customers on contracts in progress together with commissions paid to third-party sales partners prior to revenue being recognized on residential projects. Contract liabilities represent amounts invoiced to and deposits paid by customers in excess of revenue recognized on contracts in progress.

Accounts Receivable

Accounts receivable are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion of the contracts. Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of $262 and $392 were included in the balance of trade accounts receivable as of June 30, 2021 and December 31, 2020, respectively.

The Company performs ongoing credit evaluation of its customers. Management monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, age of receivables and other information, and records bad debts using the allowance method. Accounts receivable are presented net of an allowance for doubtful accounts at June 30, 2021 of $295 and at December 31, 2020 of $253. During the three months ended June 30, 2021, $134 of uncollectible accounts receivable was written off against the allowance for doubtful accounts. Additionally, during the three months ended June 30, 2021, $183 was recorded as bad debt expense compared to $158in the prior year period. During the six months ended June 30, 2021 and 2020, $188 and $280, respectively,was recorded as bad debt expense.

9
 

 

For commercial projects, we commence recognizing performance revenue when work starts on the job and continue recognizing revenue over time as work is performed based on the ratio of costs incurred, excluding modules and components, compared to the total estimated non-materials costs at completion of the performance obligations.

Inventory

Judgment is required to evaluate assumptions including the amount of net contract revenue and the total estimated costs to determine the Company’s progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If estimated total costs on any contract are greater than the net contract revenue, the Company recognizes the entire estimated loss in the period the loss becomes known.

Changes in estimates for commercial projects occur for a variety of reasons, including, but not limited to (i) construction plan accelerations or delays, (ii) product cost forecast changes, (iii) change orders, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect in the Company’s condensed consolidated statements of operations. The table below outlines the impact on revenue of net changes in estimated transaction prices and input costs for systems related sales contracts (both increases and decreases) for the three and six months ended June 30, 2022 and 2021 as well as the number of projects that comprise such changes. For purposes of the following table, only projects with changes in estimates that have an impact on revenue and or cost of at least $100, calculated on a quarterly basis during the periods, are presented. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.

SCHEDULE OF CHANGES IN ESTIMATE AGGREGATE REVENUE

(In thousands, except number of projects) June 30, 2022  June 30, 2021  June 30, 2022  June 30, 2021 
  Three Months Ended  Six Months Ended 
(In thousands, except number of projects) June 30, 2022  June 30, 2021  June 30, 2022  June 30, 2021 
Increase in revenue from net changes in transaction prices $-  $106  $475  $115 
Increase (decrease) in revenue from net changes in input cost estimates  -   35   (487)  38 
Net increase in revenue from net changes in estimates $-  $141  $(12) $153 
                 
Number of projects  -   3   3   5 
                 
Net change in estimate as a percentage of aggregate revenue for associated projects  0.0%  14.2%  (0.2)%  4.1%

Contract Assets and Liabilities

 

InventoryContract assets consist of (i) the earned, but unbilled, portion of a project for which payment is valued at lower of cost or net realizable value determineddeferred by the first-in, first-out method. Inventory primarily consistscustomer until certain contractual milestones are met; (ii) direct costs, including commissions, installation labor related costs and permitting fees paid prior to recording revenue, and (iii) unbilled receivables which represent revenue that has been recognized in advance of panels, inverters,billing the customer, which is common for larger construction contracts. Contract liabilities consist of deferred revenue, customer deposits and mounting rackscustomer advances, which represent consideration received from a customer prior to transferring control of goods or services to the customer under the terms of a contract. Total contract assets and other materials. The Company reviewscontract liabilities balances as of the cost of inventories against their estimated net realizable value and records write-downs if any inventories have costs in excess of their net realizable values.

Property and Equipment

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

  SCHEDULE OF PROPERTYCONTRACT ASSETS AND EQUIPMENT ESTIMATED USEFUL LIVESLIABILITIES

Machinery & equipment3-7 Years
Office equipment & fixtures5-7 Years
Computers & software3-5 Years
Vehicles & trailers3-7 Years
Leaseholder improvements3-5 Years
(In thousands) June 30, 2022  December 31, 2021 
  As of 
(In thousands) June 30, 2022  December 31, 2021 
Contract Assets $19,637  $14,498 
Contract Liabilities  19,417   12,201 

 

Intangible Assets

The Company’s intangible assets atDuring the three and six months ended June 30, 2021 consist2022, the Company recognized revenue of $4,187 and $6,863, respectively, that was included in contract liabilities as of December 31, 2021. Pre-Solcius acquisition, the following:

SCHEDULE OF INTANGIBLE ASSETS

  

Amortization

periods

 Cost  Accumulated amortization  Net carrying value 
Trademarks 10 Years $5,200 $(130) $5,070 
Backlog of projects 9 Months  2,000   (667)  1,333 
Covenant not-to-compete 3 Years  2,400   (200)  2,200 
Software (included in property and equipment) 3 Years  3,400   (283)  3,117 
Dealer relationships 18 Months  2,600   (433)  2,167 
    $15,600  $(1,713) $13,887 

Intangible assets are stated at their original estimated value at the date of acquisition. The amortization of intangible assets commences upon acquisition. The intangible assets are being amortized using the straight-line method over the intangible asset’s estimated useful life:

Amortization expenses for intangible assetsCommercial Solar Energy segment for the three and six months ended June 30, 2021 recognized revenue of $2,382 and $3,852, respectively, that was included in contract liabilities as follows:

SCHEDULE OF AMORTIZATION EXPENSES

  For the  For the 
  Three Months Ended  Six Months Ended 
  June 30, 2021  June 30, 2021 
Trademarks $130  $130 
Backlog of projects  667   667 
Covenant not-to-compete  200   200 
Software  283   283 
Dealer relationships  433   433 

 

 $1,713  $1,713 

Estimated future amortization expense for the Company’s intangible assets as June 30, 2021 is as follows:

SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE

  2021 
Years ending December 31,   
Remainder of 2021 $3,427 
2022 $3,753 
2023 $2,453 
2024 $1,004 
2025 $520 
Thereafter $2,730 

of December 31, 2020.

 

Depreciation and amortization expense for the three months ended June 30, 2021 and 2020 was $1,905 and $83, respectively. Depreciation and amortization expense for the six months ended June 30, 2021 and 2020 was $1,970 and $164, 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 in the condensed consolidated balance sheet. With the acquisition of Solcius in April 2021, the Company has finance lease ROU assets and finance lease liabilities, which are presented appropriately in the condensed consolidated balance sheet.

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 and finance 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 the commencement date in determining the present value of lease payments. The operating and finance 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.

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The following table represents the average percentage of completion as of June 30, 2022 for EPC projects that the Company is constructing. The Company expects to recognize $Stock-Based Compensation36,091 of revenue upon transfer of control of the projects.

SCHEDULE OF REVENUE RECOGNIZE UPON TRANSFER CONTROL OF PROJECTS

ProjectRevenue CategoryExpected Years Revenue Recognition Will Be CompletedAverage Percentage of Revenue Recognized
Various ProjectsEPC services2022 - 202340.1%

 

The Company periodically issues stock options and restricted stock units (“RSU”) to employees and non-employees. The Company accounts for stock option and RSU grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and RSU grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

Basic and Diluted Net (Loss) per Share Calculations

 

(Loss) per Share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share are computed by dividing income (loss) available to holders of common shareholdersstock by the weighted-average number of shares of common shares available.stock outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional shares of common sharesstock that would have been outstanding if the potential shares of common sharesstock had been issued and if the additional shares of common sharesstock were dilutive. The shares for employee options, restricted stock, warrants and RSUsconvertible notes were not used in the calculation of the net loss per share.

 

A net loss causes all outstanding common stock options and unvested RSUsrestricted stock units (“RSUs”) to be anti-dilutive. As a result, the basic and diluted losses per common share are the same for the three and six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 276,720 stock options and 2020, respectively.1,109,581 unvested RSUs.

 

As of June 30, 2021, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 329,914stock options and 287,500unvested RSUs.

As of June 30, 2020, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 128,411 stock options.

 

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

 

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Business Combinations and Goodwill

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

The Company retains a valuation consulting firm to test for goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of an asset exceeds its fair value and may not be recoverable. Early in 2020, as a result of the events and circumstances resulting from the COVID-19 pandemic, the Company’s outlook for revenue, profitability and cash flow had deteriorated. Therefore, the Company performed a quantitative assessment of goodwill at March 31, 2020. It was determined that the carrying value of goodwill exceeded its fair value at March 31, 2020. As a result, the Company recorded an impairment of $4,000. In accordance with the Company’s policies, the Company performed a quantitative assessment of goodwill at December 31, 2020 and no impairment was found.

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 June 30, 2021, the amounts reported for cash, accrued interest and other expenses, and notes payable approximate the fair value because of their short maturities.

We account for financial instruments measured as fair value on a recurring basis under ASC Topic 820. ASC Topic 820 defines fair value and established a framework for measuring fair value in accordance with GAAP and also 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 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

New Accounting Pronouncements

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Management reviewed currently issued pronouncements during the six months ended June 30, 2021,2022, and believes that any other recently issued, but not yet effective, accounting standards, if currently adopted, would not have a material effect on the accompanying condensed consolidated financial statements.

 

3. BUSINESS ACQUISITION

 

On April 8, 2021, pursuant to the Purchase Agreement, the Company, through its operating subsidiary Sunworks United Inc., acquired all of the issued and outstanding membership interests of Solcius from the Seller. Located in Provo, Utah, Solcius is a full-service residential solar systems provider.

 

The purchase price for Solcius consisted of $51,750 in cash subject to post-closing adjustments related to working capital, cash, indebtedness and transaction expenses. The Solcius Acquisition was accounted for under ASC 805 and the financial results of Solcius have been included in the Company’s condensed consolidated financial statements since the date of the Solcius Acquisition.

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Purchase Price Allocation

 

Under the purchase method of accounting, the transaction was valued for accounting purposes at $52,111 which was the fair value of Solcius at the time of acquisition. The assets and liabilities of Solcius were recorded at their respective fair values as of the date of acquisition. The Company usedutilized the services of a valuation consultant who identifiedspecialist to assist in identifying $15,600 of separately identifiable intangible assets. Any difference between the cost of Solcius and the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The acquisition date estimated fair value of the consideration transferred consisted of the following

following:

 

SCHEDULE OF BUSINESS ACQUISITION LIABILITIES AND ASSETS ACQUIRED

 (in thousands)  (in thousands) 
Base purchase price $51,750  $51,750 
Working capital shortfall  (1,131)  (1,131)
Cash surplus  1,492   1,492 
Total purchase price paid $52,111  $52,111 
        
Cash $1,492  $1,492 
Accounts receivable 1,729   1,729 
Inventory  3,833   3,833 
Contract assets  7,336   7,336 
Prepaids and other current assets  1,603   1,603 
Property and equipment  139   143 
Deposits  91   91 
Operating lease right-of-use asset  1,885   1,885 
Finance lease right-of-use assets  1,200   1,200 
Other intangible assets  15,600   15,600 
Identifiable assets acquired  34,908   34,912 

Accounts payable and accrued liabilities

  

(6,957

)  (6,957)

Contract liabilities

  

(5,273

)  (5,273)

Operating and finance lease liabilities

  

(2,757

)  (2,757)
Liabilities assumed  (14,987)  (14,987)
Net identifiable assets acquired  19,921   19,925 
Goodwill  32,190   32,186 

Net assets acquired

 $52,111  $52,111 

 

During the three and six months ended June 30, 2022, we recorded 0

transaction costs related to the Solcius Acquisition. During the three and six months ended June 30, 2021, we recorded total transaction costs related to the Acquisition of $40 and $750 respectively. related to the Solcius Acquisition, respectively. These expenses were accounted for separately from the net assets acquired and arewere included in general and administrative expense.expense for the three months and six months ended June 30, 2021.

 

We will continue to conduct assessmentsconducted an assessment of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. We expectvalues and concluded that it may take into late 2021 until all post-closing assessments and adjustments are finalized.no additional adjustment to the purchase price allocation or accounting was required from the original purchase accounting.

 

Pro Forma Information (Unaudited)

 

The results of operations for the Solcius Acquisition since the April 8, 2021 closing date have been included in our June 30, 2021 condensed consolidated financial statements and include approximately $22,812 of total revenue.statements. The following unaudited pro forma financial information represents a summary of the condensed consolidated results of operations for the three months and six months ended June 30, 20212022 and 2020,2021, assuming the acquisitionSolcius Acquisition had been completed as of January 1, 2020. The pro forma financial information includes certain non-recurring pro forma adjustments that were directly attributable to the business combination. The proforma adjustments include the elimination of Solcius Acquisition transaction expenses totaling $750 incurred in the six months of 2021, and adjustments to recognize amortization of intangible assets, retention stock-based compensation programs and retention bonus accruals in 2020.2022 and 2021. The retention bonus expense is recognized over the first year following the Solcius Acquisition. The pro forma financial information is not necessarily indicative of the results of operations that would have been achieved if the acquisitionSolcius Acquisition had been effective as of these dates, or of future results.

 

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SCHEDULE OF BUSINESS ACQUISITION PROFORMA STATEMENTS OF OPERATIONS

  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
  Three Months Ended  Six Months Ended 
  June 30, 2021  June 30, 2020  June 30, 2021  June 30, 2020 
             
Revenue, net $33,532  $30,775  $64,344  $69,578 
                 
Net Loss $(282) $(2,424) $(4,414) $(11,225)

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  June 30, 2022  June 30, 2021  June 30, 2022  June 30, 2021 
  Three Months Ended  Six Months Ended 
  June 30, 2022  June 30, 2021  June 30, 2022  June 30, 2021 
             
Revenue, net $36,397  $33,532  $67,593  $64,344 
                 
Net Loss $(7,151) $(282) $(13,971) $(4,414)

 

4. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

The following table represents a disaggregation of revenue by customer type from contracts with customers for the three and six months ended June 30, 20212022 and 2020:2021:

 SCHEDULE OF DISAGGREGATION OF REVENUE

 2022  2021  2022  2021 
 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 2021  2020  2021  2020  2022  2021  2022  2021 
Commercial $6,221  $5,152  $9,216  $9,762  $2,756  $6,221  $5,545  $9,216 
Public Works  940   2,717   2,584   6,695   478   940   1,886   2,584 
Residential  24,930   1,801   26,460   5,574   33,163   24,930   60,162   26,460 
Total $32,091  $9,670  $38,260  $22,031  $36,397  $32,091  $67,593  $38,260 

 

Contract assets represent revenue recognized in excess of amounts invoiced on contracts in progress. Contract liabilities represent billings in excess of revenue recognized on contracts in progress. At June 30, 2021 and December 31, 2020, the contract asset balances were $5. 9,824 OPERATING SEGMENTSand $2,397, and the contract liability balances were $12,911and $6,260, respectively. During the three and six months ended June 30, 2021, the Company recognized revenue of approximately $2,335 and $3,846 from the $6,260 contract liabilities balance as of December 31, 2020, respectively.

 

5. OPERATING SEGMENTSBeginning in 2022, the Company assessed its operating segment disclosure based on ASC 280, Segment Reporting guidance. As a result, the following segments were established: Residential Solar, Commercial Solar Energy, and Corporate.

 

The acquisitionResidential Solar

Through our Solcius operating subsidiary, we design, arrange financing, integrate, install, and manage systems, primarily for residential homeowners. We sell residential solar systems through multiple channels, through our network of sales channel partners, as well as, a growing direct sales channel strategy. We operate in several residential markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, and South Carolina. We have direct sales and/or operations personnel in California, Nevada, Utah, Arizona, New Mexico, Texas, Colorado, South Carolina, Wisconsin and Minnesota.

Commercial Solar

Through our Commercial Solar Energy subsidiary, we design, arrange financing, integrate, install, and manage systems ranging in size from 50kW (kilowatt) to multi-MW (megawatt) systems primarily for larger commercial and public works projects. Commercial installations have included installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and higher education institutions. Historically, the Commercial Solar Energy subsidiary participated in the California Residential solar market.  Following the Solcius was completedAcquisition, all new residential sales are managed under the Solcius brand.  Due to materiality, the Company will continue to report the remaining backlog of Residential projects in April 2021. Solciusthe Commercial Solar Energy segment, which is a separate segment for management reporting purposes. expected to be fulfilled within the next year. Commercial Solar Energy primarily operates in California.

13

Segment net revenue, segment operating expenses and segment contribution (loss) information consisted of the following for the three months and six months ended June 30, 2021.2022.

 SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT

             Residential Solar Commercial Solar Corporate Total 
 

For the Three Months Ended

June 30, 2021

  Three Months Ended June 30, 2022 
 Solcius  Sunworks  Total  Residential Solar Commercial Solar Corporate Total 
Net revenue $22,812  $9,279  $32,091  $32,516  $3,881  $-  $36,397 
Cost of sales  9,745   7,208   16,953   16,279   3,253   -   19,532 
Gross profit  13,067   2,071   15,138   16,237   628       16,865 
                            
Operating expenses                            
Selling & marketing  8,861   1,304   10,165 
General & administrative  3,531   3,207   6,738 
Segment contribution (loss)  675   (2,440)  (1,765)
Selling and marketing  13,225   870   223   14,318 
General and administrative  5,000   1,676   1,849   8,525 
Segment loss  (1,988)  (1,918)  (2,072)  (5,978)
                            
Stock-based compensation  967   146   1,113   16   35   320   371 
Depreciation and amortization  1,870   35   1,905   1,265   47   -   1,312 
Operating income (loss) $(2,162) $(2,621) $(4,783)
Operating loss $(3,269) $(2,000) $(2,392) $(7,661)

 

  Residential Solar  Commercial Solar  Corporate  Total 
  Six Months Ended June 30, 2022 
  Residential Solar  Commercial Solar  Corporate  Total 
Net revenue $58,911  $8,682  $-  $67,593 
Cost of sales  29,473   7,224   -   36,697 
Gross profit  29,438   1,458       30,896 
                 
Operating expenses                
Selling and marketing  24,357   1,721   470   26,548 
General and administrative  9,397   3,142   3,422   15,961 
Segment loss  (4,316)  (3,405)  (3,892)  (11,613)
                 
Stock-based compensation  721   70   864   1,655 
Depreciation and amortization  2,506   89   -   2,595 
Operating loss $(7,543) $(3,564) $(4,756) $(15,863)

  1  2  3 
  

For the Six Months Ended

June 30, 2021

 
  Solcius  Sunworks  Total 
Net revenue $22,812  $15,448  $38,260 
Cost of sales  9,745   13,286   23,031 
Gross profit  13,067   2,162   15,229 
             
Operating expenses            
Selling & marketing  8,861   2,535   11,396 
General & administrative  3,531   6,659   10,190 
Segment contribution (loss)  675   (7,032)  (6,357)
             
Stock-based compensation  967   297   1,264 
Depreciation and amortization  1,870   100   1,970 
Operating income (loss) $(2,162) $(7,429) $(9,591)

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6. RIGHT-OF-USE OPERATING LEASES

 

The Company has ROUright-of-use (“ROU”) operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining lease terms of 1year to 6 5years, some of which include options to extend.

 

The Company’s operating lease expense for the three and six months ended June 30, 2022 amounted to $384 and $811, respectively. The Company’s operating lease expense for the three and six months ended June 30, 2021 amounted to $444and $758, respectively. Operating lease payments, which reduced operating cash flows for the three and six months ended June 30, 20212022 amounted to $444384 and $758,811, respectively. The difference between the ROU asset amortization of $484 536and the associated lease expense of $758 811consists of early cancellation of a facility lease obligation, new facility leases, short-term leases excluded from the ROU asset calculation, basic operating lease expenses included in the lease expense for property and sales taxes, triple net and common area charges for facilities and other equipment and vehicle lease related charges.

 

15

Supplemental balance sheet information related to leases is as follows:

SCHEDULE OF OPERATING LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION 

 June 30, 2021  June 30, 2022 
 (in thousands)   (in thousands) 
Operating lease right-of-use assets $2,479  $2,212 
        
Operating lease liabilities—short term  860   967 
Operating lease liabilities—long term  1,619   1,245 
Total operating lease liabilities $2,479  $2,212 

 

As of June 30, 2021,2022, the weighted average remaining lease term was 2.46 3.2years and the weighted average discount rate for the Company’s leases was 3.9%3.2%.

 

Minimum payments for the operating leases are as follows:

 SCHEDULE OF MATURITIES FOR OPERATING LEASES LIABILITIES

 Operating Leases  Operating Leases 
 (in thousands)  (in thousands) 
Remainder of 2021 $565 
2022  716 
Remainder of 2022 $542 
2023  478   806 
2024  312   353 
2025  294   306 
2026  280 
Thereafter  269   - 
Total lease payments $2,634  $2,287 
Less: imputed interest  155   75 
Total $2,479  $2,212 

 

1615
 

 

7. RIGHT-OF-USE FINANCE LEASES

 

The Company has finance leases for vehicles. The Company’s finance leases have remaining lease terms of 1 year to 4 years.

 

Supplemental balance sheet information related to finance leases is as follows:

SCHEDULE OF FINANCE LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION  

 June 30, 2021  June 30, 2022 
 (in thousands)  (in thousands) 
Finance lease right-of-use asset cost $1,280  $2,248 
Finance lease right-of-use accumulated amortization  (138)  (760)
Finance lease right of use asset, net $1,142  $1,488 
        
Finance lease obligation—short term $415  $440 
Finance lease obligation—long term  409   618 
Total finance lease obligation $824  $1,058 

 

As of June 30, 2021,2022, the weighted average remaining lease term was 2.05 2.7years and the weighted average discount rate for the Company’s leases was 4.9%4.5%.

 

Minimum finance lease payments for the remaining lease terms are as follows:

 SCHEDULE OF MATURITIES FOR FINANCE LEASES LIABILITIES

 June 30, 2021  June 30, 2022 
  (in thousands)  (in thousands) 
Remainder of 2021 $268 
2022  360 
Remainder of 2022 $275 
2023  179   364 
2024  43   232 
2025  16   202 
2026  56 
Thereafter  -   - 
Total lease payments $866  $1,129 
Less: imputed interest  42   71 
Total $824  $1,058 

 

8.INTANGIBLE ASSETS, NET

The Company’s intangible assets at June 30, 2022 consist of the following:

SCHEDULE OF INTANGIBLE ASSETS

  Amortization
periods
 Cost  Accumulated amortization  Net carrying value 
Trademarks 10 Years $5,200  $(650) $4,550 
Backlog of projects 9 Months  2,000   (2,000)  - 
Covenant not-to-compete 3 Years  2,400   (1,000)  1,400 
Software (included in property and equipment) 3 Years  3,400   (1,416)  1,984 
Dealer relationships 18 Months  2,600   (2,167)  433 
    $15,600  $(7,233) $8,367 

Intangible assets are stated at their original estimated value at the date of acquisition. The amortization of intangible assets commences upon acquisition. The intangible assets are being amortized using the straight-line method over the intangible asset’s estimated useful life:

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Amortization expenses for intangible assets for the three months ended June 30, 2022 was as follows:

SCHEDULE OF AMORTIZATION EXPENSES OF INTANGIBLE ASSETS

         
  For the  For the 
  Three Months Ended  Six Months ended 
  June 30, 2022  June 30, 2022 
Trademarks $130  $260 
Covenant not-to-compete  200   400 
Software  283   567 
Dealer relationships  434   866 
 Amortization expenses for intangible assets $1,047  $2,093 

Estimated future amortization expense for the Company’s intangible assets as of June 30, 2022 is as follows:

SCHEDULE OF FUTURE AMORTIZATION EXPENSES OF INTANGIBLE ASSETS

     
Years ending December 31,   
Remainder of 2022 $1,660 
2023 $2,453 
2024 $1,004 
2025 $520 
2026 $520 
Thereafter $2,210 

Depreciation and amortization expense on property and equipment and intangible assets for the three and six months ended June 30, 2022 was $1,312 and $2,595, respectively. Depreciation and amortization expense on property and equipment and intangible assets for the three and six months ended June 30, 2021 was $1,905 and $1,970, respectively.

9. PAYCHECK PROTECTION PROGRAM LOAN PAYABLE

 

On April 28, 2020, the Company’s operating subsidiary, Sunworks United, Inc., received a loan under the Paycheck Protection Program (“PPP”), which was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), of $2,847. As modified by the subsequent PPP Flexibility Act of 2020, proceeds from the loan were used to cover documented expenses related to payroll, rent and utilities, during the 24-week period after the cash was received by the Company. The 24-week period ended on October 12, 2020. The loan was accounted for as a financial liability in accordance with FASB ASC 470 until June 29, 2021, when the $2,847loan was fully forgiven, together with $34of accrued interest. As a result, the Company recorded a gain on extinguishment of the debt which is included in other income on the condensed consolidated statements of operations for the three and six months ended June 30, 2021.

 

9.10. CAPITAL STOCK

Common StockRoth and Northland 2022 Sales Agreement At The Market Offering

 

On June 8, 2022, Sunworks, Inc. (the “Company”) entered into a Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC and Northland Securities, Inc. (each an “Agent” and collectively, the “Agents”), pursuant to which the Company may offer and sell from time to time up to an aggregate of $26,800 of shares of the Company’s common stock, par value $0.001 per share (the “June 2022 Placement Shares”), through the Agents. On June 8, 2022, the Company filed a prospectus supplement with the SEC that covers the sale of June 2022 Placement Shares to be sold under the Sales Agreement in an aggregate amount of $26,800 (the “Prospectus Supplement”).

The June 2022 Placement Shares have been registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Registration Statement on Form S-3 (File No. 333-252475) (the “2021 Registration Statement”), which was originally filed with the Securities and Exchange Commission (“SEC”) on January 27, 2021 and declared effective by the SEC on February 3, 2021, the base prospectus contained within the 2021 Registration Statement, and the Prospectus Supplement. The June 2022 Placement Shares may be sold by the Company in “at the market offerings,” as defined in Rule 415 promulgated under the Securities Act, through the Agents.

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Registration Statement

On June 1, 2022, the Company filed a Registration Statement on Form S-3 (File No. 333-252475)333-265336) (the “Registration“2022 Registration Statement”) with the Securities and Exchange Commission (the “SEC”).SEC. The 2022 Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate initial offering price not to exceed $10075,000 million.. The 2022 Registration Statement was declared effective by the SEC on February 3, 2021.August 5, 2022.

Roth Sales 2022 Agreement At The Market Offering

 

On February 10, 2021, the Company entered into a Sales Agreement (the “Roth Sales Agreement”) with Roth Capital Partners, LLC (the “Agent RCP”), pursuant to which the Company could offer and sell from time to time, through the Agent RCP, shares of the Company’s common stock, registered under the Securities Act, pursuant to the Registration Statement filed on Form S-3.Statement.

 

Sales

On October 21, 2021, the Company filed a prospectus supplement with the SEC, pursuant to which the Company could offer and sell from time to time, through the Agent RCP, up to $25,000 of shares of the Company’s common stock, registered under the Securities Act, pursuant to the Roth Sales Agreement are deemed to be2021 Registration Statement in “at the market offerings”offerings,” as defined in Rule 415 promulgated under the Securities Act. The Agent RCP has agreed to act as sales agent and use commercially reasonable efforts to sell on the Company’s behalf all of the shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the Agent RCP and the Company.

 

During the first quarter of 2022, 3,212,4862,757,830 shares of common stock (the “Placement Shares”) were sold under the Roth Sales Agreement between February 11, 2021 and February 23, 2021, pursuant to a prospectus supplement that was filed with the SEC on February 10, 2021.Agreement. Total gross proceeds forfrom the Placement Sharessales were $49,9377,974 orat an average sale price of $15.542.89 per share. Net proceeds after brokerage costs, professional, registration and other fees were $48,8587,814 or $15.212.83 per share.

 

17

During the second quarter of 2022, 783,257 shares of common stock were sold under the Roth Sales Agreement. Total gross proceeds for the sales were $2,080 on an average sale price of $2.66 per share. Net proceeds after brokerage costs, professional, registration and other fees were $2,005 or $2.56 per share.

 

10.

In connection with the filing of the Prospectus Supplement for June 2022 Placement Shares, the Roth Sales Agreement and the related prospectus supplement was terminated.

11. STOCK-BASED COMPENSATION

 

Options

 

As of June 30, 2021,2022, the Company has incentive stock options and non-qualified stock options outstanding to purchase 329,914276,720 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 years years from the date of grant at exercise prices ranging from $2.102.52 to $21.7012.15 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. Option forfeitures are accounted for as they occur.

 

On April 12, 2021, subject to the 2016 Plan, the Company granted eight members of Solcius management incentive stock options for a total of 260,000 shares of common stock. The entire 260,000 options vest on April 8, 2022, the one-year anniversary date of the Solcius acquisition. The exercise price of each option share is $12.15, the closing price of Sunworks stock on April 12, 2021. The Company determined the fair market value of these options at $10.30 per share by using the Black Scholes option valuation model. The annualized volatility is 126.0 percent with an annual risk-free interest rate of 1.69 percent. The options mature and expire in five yearsfrom date of grant.

SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS ACTIVITY

  June 30, 2021 
  Number  Weighted average 
  of Options  exercise price 
Outstanding, beginning December 31, 2020  88,441  $11.02 
Granted  260,000  $12.15 
Exercised  -   - 
Forfeited  (6,385) $6.14 
Expired  (12,142) $18.76 
Outstanding at the end of June 30, 2021  329,914  $11.72 
Exercisable at the end of June 30, 2021  63,780  $10.83 

During the three months ended June 30, 2021 and 2020, the Company charged a total of $738 and $23, respectively, to operations to recognize stock-based compensation expense for stock options.

During the six months ended June 30, 2021 and 2020, the Company charged a total of $750 and $58, respectively, to operations to recognize stock-based compensation expense for stock options.

RSU to CEO

On January 11, 2021, subject to the Sunworks, Inc. 2016 Equity Incentive Plan, (the “2016 Plan”), the Company entered into a RSU grant agreement with its Chief Executive Officer, Gaylon Morris (the “January 2021 RSUGA”). All shares issuable under the January 2021 RSUGA are valued as of the grant date at $7.95 per share. The January 2021 RSUGA provides for the issuance of up to 210,000 shares of the Company’s common stock. The RSUs will vest as follows: 70,000 of the RSUs will vest on the one-year anniversary of the effective date, and the balance, or 140,000 RSUs will vest in 24 equal monthly installments commencing on the one-year anniversary of the effective date.

During the three and six months ended June 30, 2021, stock-based compensation expense of $139 and $278, respectively, was recognized for the January 2021 RSUGA.

18
 

 

RSUs A summary of the Company’s stock option activity and related information follows:

to Solcius EmployeesSCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS ACTIVITY

  June 30, 2022 
     Weighted 
  Number  Average 
  of  Exercise 
  Options  Price 
Outstanding, at December 31, 2021  290,684  $11.65 
Granted  -   - 
Exercised  -   - 
Forfeited  (8,251)  8.38 
Expired  (5,713)  10.50 
Outstanding and expected to vest as of June 30, 2022  276,720  $11.77 
Exercisable at June 30, 2022  276,039  $11.80 
Weighted average fair value of options granted during period     $- 

 

On April 12, 2021, subjectThe following summarizes the options to the 2016 Plan, the Company entered into RSU grant agreements with seven members of Solcius management (the “April 2021 RSUGAs”). All shares issuable under the April 2021 RSUGAs are valued as of the grant date at $12.15 per share. The April 2021 RSUGAs provide for the total combined issuance of up to 77,500 purchase shares of the Company’s common stock. The entire stock which were outstanding at June 30, 2022:

77,500 SCHEDULE OF SHARE-BASED COMPENSATION, SHARES AUTHORIZED UNDER STOCK OPTION PLANS, BY EXERCISE PRICE RANGERSUs vest on April 8, 2022, the one-year anniversary of the Solcius acquisition.

         Weighted 
         Average 
         Remaining 
Exercisable  Stock Options  Stock Options  Contractual 
Prices  Outstanding  Exercisable  Life (years) 
$8.68   7,142   7,142   0.87 
$7.63   2,142   2,142   0.92 
$3.07   3,071   2,986   2.13 
$2.52   4,365   3,769   2.26 
$12.15   260,000   260,000   3.79 
     276,720   276,039     

 

During the three months endedAggregate intrinsic value of options outstanding and exercisable at June 30, 2022, and December 31, 2021 stock-based compensation expensewas $0 and $2, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $236 1.58 and $3.07was recognized for as of June 30, 2022 and December 31, 2021, respectively, and the April 2021 RSUGAs.exercise price multiplied by the number of options outstanding.

 

The total combined option and RSUCompany recorded stock-based compensation expense recognized infor stock options of $2 and $673 for the condensed consolidated statementsthree and six months ended June 30, 2022, respectively. The Company recorded stock-based compensation expense for stock options of operations during$738 and $750 for the three and six months ended June 30, 2021, and 2020 was $respectively.

1,113  

Restricted Stock Unitsand $23, respectively.

 

The total combined option and RSU compensation expense recognized infollowing table summarizes the condensed consolidated statements of operationsCompany’s restricted stock unit activity during the six months ended June 30, 2021 and 2020 was $1,264 and $121, respectively.2022:

 

11. RELATED PARTY TRANSACTIONSSCHEDULE OF STOCK-BASED COMPENSATION, RESTRICTED STOCK UNIT ACTIVITY

  June 30, 2022 
     Weighted Average 
  Number Of Shares  

Grant Date

Value per Share

 
Unvested, beginning December 31, 2021  1,185,889  $5.11 
Granted  167,208  $2.44 
Vested  (206,666) $9.69 
Forfeited  (36,850) $3.35 
Unvested at the end of June 30, 2022  1,109,581  $3.91 

The Company rents a facility in Durham, California from Plan D Enterprises, Inc., an entity controlled byrecorded RSU compensation expense for RSUs of $369 and $982 for the Company’s Presidentthree and six months ended June 30, 2022, respectively. The Company recorded RSU compensation expense of Commercial Operations,$375 and $514 for $9 per month.the three and six months ended June 30, 2021, respectively.

12.11. COMMITMENTS AND CONTINGENCIES

 

Litigation

 

From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a negative impact on the Company’s financial position except as noted below:position.

 

On October 12, 2020, a putative class complaint was filed by a purported stockholder of Sunworks regarding the contemplated but terminated merger among iSun, Inc. (formerly The Peck Company Holdings, Inc.), Peck Mercury, Inc. and Sunworks (the “Merger”). The complaint names, as defendants, each of the Sunworks’ Board of Directors (the “Directors”) and asserts that the Directors breached their fiduciary duties. The plaintiff alleges that the consideration to be received by stockholders of Sunworks was inadequate and that the Registration Statement on Form S-4 contained materially incomplete and misleading information regarding the proposed Merger. On November 24, 2020, the parties filed a joint stipulation to dismiss the action without prejudice with a reservation for plaintiff to seek attorneys’ fees and costs; the Court granted that stipulation and ordered the dismissal on November 25, 2020. On May 17, 2021, the Court granted a stipulation by the parties for plaintiff’s counsel to receive an award of $12. 500 SUBSEQUENT EVENTSas a mootness fee which was promptly paid by the Company. The had been recorded as an accrued liability as of December 31, 2020. As part of the stipulation, the Company did not admit any liability or wrongdoing and the case was closed.

 

The 2022 Registration Statement for $There were seven other actions related to75,000 was declared effective by the same proposed transaction, all of whichSEC on August 5, 2022. No shares have been voluntarily dismissed bysold under the respective plaintiffs.2022 Registration Statement.

19
 

 

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

(dollars in thousands, except share and per share data)

The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this Quarterly Report) and the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 20202021 (our Annual Report). This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled “Risk Factors” in Item 1A of our Annual Report and Part II, Item 1A of our Quarterly Report for the quarter ended March 31, 2022, and “Cautionary Note Regarding Forward-Looking Statements” included in this Quarterly Report.

 

Unless otherwise noted, (1) “Sunworks” refers to Sunworks, Inc., a Delaware corporation formerly known as Solar3D, Inc. (2) “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Sunworks, Inc., and its Subsidiaries, whether conducted through Sunworks or a subsidiary of Sunworks, and (3) “Subsidiaries” refers collectively towholly owned operating subsidiaries, Sunworks United Inc. (Sunworks United), MDCommercial Solar Energy, Inc. (MD Energy), Plan B Enterprises (Plan B) and Solcius LLC (Solcius).LLC. All material intercompany transactions have been eliminated upon consolidation of these entities.

All amounts presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, unless otherwise noted, are expressed in thousands of U.S. dollars, except share and per share amounts and unless otherwise noted.

The financial and operating results for the three and six months ended June 30, 2022, include the operating results of Solcius acquired on April 8, 2021, with only a partial contribution for the three and six months ended June 30, 2021.

 

Overview

 

We provide photovoltaic (PV) basedOn April 8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United (the “Buyer”), acquired all of the issued and outstanding membership interests (the “Solcius Acquisition”) of Solcius, from Solcius Holdings, LLC (“Seller”). Located in Provo, Utah, Solcius is a full-service, residential solar systems provider. The transaction creates a national solar power systems for the commercial, public works, and residential marketsprovider with a presence now in 15 states, including California, Utah, Nevada, Massachusetts, Oregon, New Jersey, Utah, Arizona, Colorado, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, Rhode Island, New York, Pennsylvania, New Jersey and South Carolina,Carolina. The Company believes the transaction enhances economies of scale, leading to better access to suppliers, vendors and financial partners, as well as marketing and customer acquisition opportunities.

The Solcius Acquisition was consummated on April 8, 2021, pursuant to a Membership Interest Purchase Agreement, dated as of April 8, 2021 (the “Purchase Agreement”), by and between Buyer and Seller. The purchase price for Solcius consisted of $51.75 million in cash.

Residential Solar

Through our Residential Solar operating subsidiary, we design, arrange financing, integrate, install, and manage systems, primarily for residential homeowners. We sell residential solar systems through multiple channels, including our network of sales channel partners, and our growing direct sales channel strategy. We operate in several residential and commercial markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin Minnesota and Hawaii.South Carolina. We have direct sales and/or operations personnel in California, Nevada, Massachusetts, Utah, Arizona, New Mexico, Texas, Colorado, South Carolina, Wisconsin and Minnesota.

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Commercial Solar

Through our Commercial Solar Energy operating subsidiaries,subsidiary, we design, arrange financing, integrate, install, and manage systems ranging in size from 2kW (kilowatt) for residential projects to multi MWmulti-MW (megawatt) systems for larger commercial and public works projects. Commercial installations have included installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and higher education institutions. We provide a full range of installation services to our solar energy customers including design, system engineering, procurement, permitting, construction, grid connection, warranty, system monitoring and maintenance.

We currently operateCommercial Solar primarily operates primarily in two segments based upon our organizational structure and the way in which our operations are managed and evaluated. Our Solcius segment is responsible for the vast majority of our residential market revenue and our Sunworks segment which services primarily commercial and public works markets.

As a result of the Solcius acquisition in April 2021, the portion of our consolidated revenue from residential installations has increased significantly.California.

 

For the first six monthssecond quarter of 2021,2022, approximately 69%91% of our 2021 revenue was from installations for the residential market. For the same period,market and approximately 31%9% of our revenue was from installations for the commercial and public works markets.

 

For the first six monthssecond quarter of 2020,2021 approximately 25%78% of our revenue was from installations for the residential market and approximately 75%22% of our 2020 revenue was from installations for the commercial and public works markets. Solcius revenue was only included from its acquisition date of April 8, 2021 through the end of the second quarter of 2021.

 

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Orders and Backlog

For the quarter ended June 30, 2022, the combined backlog of the Company increased from $63,000 to $96,000, driven by growth in both the Residential Solar and Commercial Solar segments.

Residential Solar segment new originations increased 37% quarter over quarter, driven by increased volume in the Company’s existing markets. While originations increased across all sales channels, originations from the direct salesforce increased 74% quarter over quarter. At the end of the period, our direct salesforce represented 23% of new originations, up from 2% in the comparable prior year quarter.

Commercial Solar Segment orders were $24,000 during the quarter, a result of the Company’s recent leadership changes and strengthening demand for commercial and public works solar projects. Orders during the quarter were more than double the amount of orders received for the full year in 2021.

 

IMPACT OF COVID-19 ON OUR BUSINESS

 

The continued global novel coronavirus and its variants (COVID-19) pandemic, has resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions and business shutdowns. The uncertain macroeconomic environment created by the COVID-19 pandemic has had and willmay continue to have a significant, adverse impact on our business. To assist readers in reviewing management’s discussion and analysis of financial condition and results of operations, we provide the following discussion regarding the effects COVID-19 has had on the Company, what management expects the future impact to be, how we are responding to evolving circumstances and how we are planning for further COVID-19 uncertainties.

 

State and local directives, guidelines, and other restrictions, as well as consumer behavior, continue to impact our operations in the regions in which we operate, particularly California. During the three months2022 and six months ended June 30, 2021 we continued to serve customers. COVID-19 and the governmental directives materially disrupted the operations of the local and state governments by closing or restricting operations at city, county and state offices for design reviews, permitting projects, and inspections of projects. Utility companies have been unable to provide timely shutdowns, inspections and interconnection approvals. This disruption negatively impacts our ability to complete projects, generate revenue on projects in backlog and causes many customers to delay decisions on new projects.

 

Our revenue and gross profit infor the three andfirst six months ended June 30, 2021of 2022 were negatively impacted by governmental responses to the COVID-19 pandemic, which delayed pre-construction approvals and installation activity for our larger public works, agriculture and commercial projects by delaying approvals and restricting our employees’ access to our work sites.approvals. Earlier governmental orders and social distancing guidelines slowed our sales process, as our customers avoided interacting with our sales and installation personnel and delayed buying decisions.

 

We received a loan under the Paycheck Protection Program of $2,847 which was used to pay for payroll costs, interest on debt, rent, utilities, and group health care benefits, allowing the Company to focus on revenue generating activities in an effort to mitigate some of the impact COVID-19 has on our business. The entire principal of the loan and all accrued interest was forgiven in June of 2021.

 

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Although there is uncertainty around the continued impact and severity the COVID-19 pandemic has had, and will continue to have, on our operations, these developments and measures have negatively affected our business.business, including a negative impact on the supply chain upon which we rely on to operate. We will continue to manageattempt to mitigate the impact through appropriate operational measures. Of concern is how the COVID-19 pandemic continues to spread and could continue to adversely impact our ability to source materials used in our operations or affect our ability to complete ongoing installations in a timely manner. Several of our personnel have been subject to Company-imposed quarantine restrictions based upon possible contact with individuals who have tested positive. We are encouraging our personnel wear masks, are using social distancing and believe we are taking appropriate sanitization measures. We cannot predict whether any one of our key executives or other personnel could become incapacitated by COVID-19 and its variants.

As the COVID-19 pandemic and its effects evolve, we are monitoring our business to ensure that our expenses are in line with expected cash generation. In March 2020, we formed an internal task force to evaluate the ongoing impact of COVID-19 on our business. This task force reviews and analyzes ongoing developments related to COVID-19 as they impact our business and operations. The extent to which our results are affected by the COVID-19 pandemic will largely depend on future developments which cannot be accurately predicted and are uncertain, but the COVID-19 pandemic has had and will continue to have an adverse effect on our business, operations, financial condition, results of operations, and cash flows.

 

Critical Accounting PoliciesEstimates

 

Our discussion and analysis ofWe prepare our financial condition and results of operations are based upon ourunaudited condensed consolidated financial statements which have been prepared in accordanceconformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements, which requires usmanagement to make estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenue on construction contracts recognized over time, fair value of assets acquiredrevenues and liabilities assumedexpenses recorded in a business combination, 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, operating and finance lease right-of-use assets and liabilities, deferred tax assets, costs to complete projects, and fair value computation using the Black Scholes option pricing model.financial statements. 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.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to assess the realizability of our goodwill, impairments and estimations of long-lived assets, revenue recognition on construction contracts recognized over time, fair value of assets acquired and liabilities assumed in a business combination, allowances for uncollectible accounts, operating and finance 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. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carryingcarry values of assets and liabilities that are not readily apparent from other sources.

These estimates may change as new events occur and additional information is obtained. Actual results may differ from these estimates under different assumptions orand conditions.

Revenue Recognition

 

Revenue and related costs on construction contracts are recognized as the performance obligations for work are satisfied over timeThere were no significant changes in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, engineering, procurement and construction (EPC) projects for residential and smaller commercial systems that require us to deliver functioning solar power systems are generally completed within two to twelve months from commencement of construction. Construction on larger commercial projects may be completed within eighteen to thirty-six months, depending on the size and location. We recognize revenue from EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer.

The cost of materials or equipment will generally be excluded from our recognition of profit, unless specifically produced or manufactured for a project, because such costs are not considered to be a measure of progress. All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, we will recognize the loss in the period it is determined.

Revisions in cost and profitcritical accounting estimates during the coursethree and six months ended June 30, 2022 compared to those previously disclosed in “Critical Accounting Policies” and “Use of Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the contract, are reflected in the accounting period in which the facts, which require the revision, become known. We use an input method based on costs incurred as we believe that this method most accurately reflects our progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed-price construction contracts is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

Contract assets represent revenue recognized in excess of amounts invoiced to customers on contracts in progress together with commissions paid to third-party sales partners prior to revenue being recognized on residential projects. Contract liabilities represent amounts invoiced to customers in excess of revenue recognized on contracts in progress.

fiscal year ended December 31, 2021.

Leases

We determine if an arrangement is a lease at inception. Operating lease right-of-use assets and short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease liabilities presented as short-term or long-term finance lease liabilities.

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

Indefinite Lived Intangibles and Goodwill Assets

We account for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations, where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

We test for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 20212022 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 20202021

 

REVENUE AND COST OF GOODS SOLD

 

For the three months ended June 30, 2021,2022, revenue increased 231%to $36,397 compared to $32,091 for the same quarter in the prior year. Approximately 91% of revenue was from installations for the residential markets, or $33,163, compared to $9,67078% of revenue, or $24,930, for the same quarter in the prior year. The increase in residential revenue is a result of organic growth and the inclusion of the Residential Solar segment (Solcius) revenue for the entire quarter compared to 2021. Within the Residential Solar segment, Revenue from the direct salesforce accounted for $4,400, or 14%, compared to approximately 5% in the prior year. Commercial and public works revenue was approximately 9% of total revenue or $3,234, for the three months ended June 30, 2020. The revenue increase is the result of the April 8, 2021 acquisition of Solcius and its $22,812 of revenue since the acquisition date through June 30, 2021. Solcius contributed 71.1%2022 compared to our consolidated revenue for the period. Overall, approximately 78%22%, or $7,161 of revenue in the second quarter of 2021 was from installations for the residential markets. Commercial and public works markets contributed 22% of revenue in the period. In contrast, for the same period in 2020,the prior to the Solcius acquisition, residential revenue was only 19% of total revenue having also been impactedyear. The reduction is primarily driven by COVID restrictions during that time while commercial and public works revenue was 81% of total revenuelower new orders in the prior year period.preceding quarters.

 

Cost of goods sold for the three months ended June 30, 2021,2022, was $16,953, or 52.8% of revenue$19,532, compared to $7,263 or 75.1% percent of revenue$16,953 reported for the three months ended June 30, 2020.2021. The increase in cost of goods sold is primarily the result of increase in revenue compared to the prior period and inflationary pressures on material and labor costs.

 

Gross profit was $16,865 for the three months ended June 30, 2022, compared to $15,138 for the quarter ended June 30, 2021, compared to $2,407 of gross profit for the same quarter of the prior year.year period. The gross margin wasdeclined to 46.3% in the second quarter of 2022, compared to 47.2% in the second quarter of 2021 compared to 24.9% in the same quarter of 2020.2021. The margin improvementpercentage decrease is the result of the Solcius acquisitioninflationary pressures on materials and the higher gross margins on residential projects combined with recent, better margin commercial projects being completed. Improving the accuracy of commercial cost estimates and bids has been an emphasis over the past several quarters.labor.

  

SELLING AND MARKETING EXPENSES

 

For the three months ended June 30, 2021,2022, our selling and marketing (“S&M”) expenses were $10,165$14,318, compared to $1,268$10,165 for the same three months ended June 30, 2020.in 2021. As a percentage of revenue, selling and marketing expenses were 39.3% of revenue in the second quarter of 2022, compared to 31.7% of revenue in the same period in 2021. The significant increase in S&M expense period over period is primarily the result of the higher revenue from the acquisition of Solcius. Solcius relies on dealer relationshipsincreased expenses were largely related to source customers. Theadditional marketing spend for dealer commissions are includedand investment in S&M. Additionally, we are running television ads, radio ads and increasing our focus and spending on all of our marketing and branding efforts.the residential direct salesforce.

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GENERAL AND ADMINISTRATIVE EXPENSES

 

Total general and administrative (“G&A”)&A expenses were $6,738of $8,525 for the three months ended June 30, 2021,2022, increased, compared to $2,365$6,738 for the three months ended June 30, 2020.same period in the prior year. The G&A expenses increased with the addition of Solcius. During the same quarter offrom the prior year Sunworks had reducedpartially as a result of Solcius G&A costs being included for the full quarter of 2022 compared to a partial quarter in 2021. There were also cost increases in salaries, and reduced overall spendingwages, benefits together with increases in response to the COVID-19 restrictions. The increase in G&Abusiness insurance expenses versus the prior year quarter included additional legal and accounting expenses, proxy costs, director bonuses, and executive recruiting fees. Expenses for bad debts, franchise taxes, and facility costs were lower compared to the prior year period.quarter.

 

STOCK-BASED COMPENSATION EXPENSESEXPENSE

 

During the three months ended June 30, 20212022, we incurred $1,113$371 in total non-cash stock-based compensation expense, compared to $23$1,113 for the same periodprior year period. The year over year decrease in stock-based compensation is the prior year. In January 2021, we entered into a restricted stock unit grant agreement with Gaylon Morris for 210,000 shares (the “January 2021 RSGU”) in connection with his commencement of employment. All shares issuable under the January 2021 RSGU are valued asresult of the grant date of $7.95 per share. The grant is being expensed on a straight-line basis over 36 months. For the three months ended June 30, 2021 we recognized $139 of expense for the January 2021 RSGU.

In April 2021, we entered into restricted stock unit grant agreements with seven members of Solcius management (the “April 2021 RSUGAs”). All shares issuable under the April 2021 RSUGAs are valued as of the grant date at $12.15 per share. The April 2021 RSUGAs provide for the total combined issuance of up to 77,500 shares of our common stock. The entire 77,500 restricted stock units vest on April 8, 2022, the one-year anniversaryvesting of the Solcius acquisition. During the three months ended June 30, 2021, we recognized $236 of expense for the April 2021 RSUGAs.

In April 2021, the Company also granted eight members of Solcius management incentiveacquisition related RSUs and stock options in April 2022. Partially offsetting the reduction in stock-based compensation expense, is the non-cash expenses for a total of 260,000 shares of common stock. The entire 260,000 options vest on April 8, 2022, the one-year anniversary dateexpanding RSU grants as part of the Solcius acquisition. During the three months ended June 30, 2021, we recognized $732compensation structure to a broader population of expense for the 260,000 April 2021 options.employees.

The April options and the April 2021 RSUGAs are being expensed over the vesting period of one year.

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DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense for the three months ended June 30, 20212022, was $1,905$1,312, compared to $83$1,905 for the same period in the prior year.year period. Depreciation and amortization expenses increaseddecreased as a result of $15,600 ofthe identified intangible assets identified inasset for the April 2021 Solcius acquisition. Additionally,acquired order backlog related to the Solcius property and equipment acquired added toAcquisition having been fully amortized within the depreciation expense forfirst nine months of the period.

transaction. The intangible assets are being amortized on a straight-line basis over a periodthe estimated useful lives of the specific assets, which have original useful lives ranging from nine months to ten years. The quarterly amortization of intangibles is estimated to be $1,713 through the end of 2021.

 

OTHER INCOME (EXPENSE)

 

Other income was $2,916$170 for the three months ended June 30, 2021,2022, compared to $127 in other expense$2,916 for the same three months in 2020.2021. The entire PPP loan of $2,847 plus accrued interest of $34 was forgiven and recognized as other income during the three months ended June 30,second quarter of 2021. A gain of $178 was recognized on the sale of surplus equipment. Interest expense for the second quarter ended June 30, 2021of 2022 was $59 compared to $21 primarilyfor the same quarter in 2021. The 2022 interest expense is related to the interest paid on financing leases. Interest expenseROU finance leased assets and a reserve for the quarter ended June 30, 2020 was $137 and was theamounts due as a result of interestan ongoing sales tax audit.

INCOME TAX EXPENSE

Income tax expense is a provision for Texas Margin Tax on our acquired Texas based operations as a result of the remaining balance of a $2.25 million promissory note repaidSolcius acquisition in December of 2020.April 2021.

 

NET LOSS

 

The net loss for the three months ended June 30, 20212022 was $1,867$7,585, compared to a net loss of $1,459$1,867 for the three months ended June 30, 2020.2021.

 

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 20212022 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 20202021

 

REVENUE AND COST OF GOODS SOLD

 

For the six months ended June 30, 2021,2022, revenue increased to $38,260$67,593 compared to $22,031$38,260 for the six months ended June 30, 2020.2021. Approximately 69%89% of revenue in the first six months of 20212022 was from installations for the residential markets at $26,460$60,162, compared to 25%69% of revenue or $5,574$26,460, for the same period in the prior year. This is theResidential Solar segment revenue increased as a result of the full period inclusion of the Solcius acquisition and includes its residential revenue since theAcquisition, which was acquired in April 2021 acquisition.and the expansion of our direct salesforce. Commercial and public worksSolar Energy segment revenue were 31%was 11% of total revenue, or $11,800$7,431, for the first six months of 2021,2022, compared to 75%31%, or $16,457$11,800, of revenue in the same period of the prior year. The reduction was primarily driven by lower new orders in the preceding quarters.

 

Cost of goods sold for the six months ended June 30, 2021,2022, was $23,031$36,697, or 60.2%54.3% of revenue, compared to $17,798$23,031, or 75.1%60.2% of revenue, reported for the six months ended June 30, 2020 which increase is consistent with the increase in installation activity for the period.2021.

 

Gross profit was $15,229$30,896 for the six months ended June 30, 2021.2022. This compares to $4,233$15,229 of gross profit for the same period of the prior year. The grossGross margin improved to 39.8%45.7% in the first six months of 20212022 compared to 19.2%39.8% in the same six-month period of 2020.2021. The gross margin improvement is predominantly driven by a mix of higher margin residential revenue, partially offset by inflationary pressures on materials and labor.

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Revenue and gross profit in the six months ended June 30, 20212022, were positively impacted by the Solcius acquisition and improving market and environmental health conditions.acquisition. In contrast, the prior year operatingSolcius results were impacted byonly included from the governmental responses toApril 8, 2021 acquisition date through the pandemic. These responses which prevented or restricted installation activity for allend of the markets Sunworks serves by not allowing our employees normal access to work sites during the similar period in 2020.second quarter.

 

SELLING AND MARKETING EXPENSES

 

For the six months ended June 30, 2021, the Company’s S&M2022, our selling and marketing expenses were $11,396$26,548, compared to $2,795$11,396 for the six months ended June 30, 2020.2021. As a percentage of revenue, S&Mselling and marketing expenses were 29.8%39.3% of the first six months revenue in 20212022, compared to 12.7%29.8% of revenue in the same period of 2020. The S&M2021. Selling and marketing expenses were $8,601 more thanincreased as a result of higher residential revenue, as the same period in the prior year. Most of the increase resulted from the Solcius acquisition. The Solcius sales and marketingresidential business model focuses on lead generation and effective interaction with third-party sales organizations. We anticipate an increase in personnel costs within sales and sales support functions as we work to add additional markets and an in-house sales capability for residential markets where we are not currently represented. The continuing goal is to optimize customer acquisition costs, improve customer communication and increase customer referrals.

 

GENERAL AND ADMINISTRATIVE EXPENSES (G&A)

 

Total G&A expenses of $15,961 for the six months ended June 30, 2022, increased, compared to $10,190 for the six months ended June 30, 2021 increased compared to $4,974 for the six months ended June 30, 2020.2021. The G&A expenses increased from the prior year six-month period as a result of the Solcius acquisition in April of 2021. During the same period in 2020, we also reduced headcount and discretionary spending in response to the COVID pandemic. G&A expenses will fluctuate as we benefit from the costs savings of more fully integrating Solcius operations while business insurance and employee benefit costs are projected to increase over the next year.

GOODWILL IMPAIRMENT

Goodwill impairment recorded for the six months ended June 30, 2021 and 2020 was $0 and $4,000, respectively. In March 2020, as a result of the events and circumstances resulting from the COVID-19 pandemic, our outlook for revenue, profitability and cash flow deteriorated. Therefore, we performed a quantitative assessment of goodwill at March 31, 2020. It was determined that the carrying value of goodwill exceeded its fair value at March 31, 2020 and, as a result, we recorded an impairment of $4,000 during the first six months of 2020.increases in corporate overhead expenses.

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STOCK-BASED COMPENSATION EXPENSESEXPENSE

 

During the six months ended June 30, 20212022, we incurred $1,264$1,655 in total non-cash stock-based compensation expense, compared to $121$1,264 for the same period in the prior year. $278 of the periodThe year over periodyear increase in stock-based compensation expense is the result of restricted stock units granted to the new CEOCompany expanding its RSU grants as part of his January 2021 employment agreement. $968the compensation structure to a broader population of stock-based compensation expense is for the restricted stock units and stock options granted to members of Solcius management as part of a retention incentive program. The retention incentive options and restricted stock units fully vest on the one-year anniversary of the Solcius acquisition or April 8, 2022.employees.

 

DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense for the six months ended June 30, 20212022, was $1,970$2,595, compared to $164$1,970 for the same period in the prior year. Depreciation and amortization expenses increased as a result of the Solcius acquisition and $15,600 of identified intangible assets of Solcius.Solcius being amortized within the first nine months since acquisition. The total $15,600 balance of intangible assets is being amortized over the estimated useful lives of the specific assets. The estimated useful lives range from nine months to ten years. The amortization expense from the April 2021 Solcius acquisition throughfor the six months ended June 202130, 2022 was $1,713. This quarterly amortization expense will remain constant each quarter through the end of 2021.$2,093.

 

OTHER INCOME (EXPENSE)

 

Other income was $2,911$165 for the six months ended June 30, 2021,2022, compared to an expense of $386$2,911 for the same six months in 2020.2021. Other income in 2022 was the result of equipment sales most of which was fully depreciated. Other income in the prior six month period income is primarily the result of the June 2021 forgiveness of the Paycheck Protection Program loan of $2,847 and $34 of accrued loan interest. Interest expense is primarily for interest on finance leases and sales taxes liability. Interest expense for the first six months of 2021,2022, was $30$66, compared to $396$30 during the first six months of 2020. The 2020 interest2021.

INCOME TAX EXPENSE

Income tax expense was primarily related tois a provision for Texas Margin Tax on our acquired Texas based operations as a result of the interest paid on a $2.25 million loan balance outstanding pursuant to a senior promissory note plus the amortization of a $435 exit fee and the origination loan fees that were both shown as interest expenseSolcius acquisition in the prior year period.April 2021.

 

NET LOSS

 

The net loss for the six months ended June 30, 20212022 was $6,680.$15,792. The net loss for the six months ended June 30, 20202021 was $8,207 including the $4,000 goodwill impairment expense.$6,680.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity and Capital Resources

 

We had $26,860$12,067 in unrestricted cash at June 30, 2021,2022, as compared to $38,991$19,719 at December 31, 2020.2021. We believe that the aggregate of our existing cash and cash equivalents in additionis sufficient to funds generated in operations will be adequatemeet our operating cash requirements and strategic objectives for us to maintain sufficient liquidity and cash balancesgrowth for at least the next twelveyear. To satisfy our capital requirements, including acquisitions and ongoing operations, 12 months and longer into the future, we will likely seek to raise additional financing through debt and equity financings.

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On January 27, 2021, the Company filed a Registration Statement on Form S-3 (File No. 333-252475) (the “Registration Statement”), with the SEC. The Registration Statement allows the Company to offer and sell, from time to time in one or more.more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate initial offering price not to exceed $100,000. The Registration Statement was declared effective by the SEC on February 3, 2021. From January 1, 2022 through the date of this filing we sold 3,541,087 shares with gross proceeds of approximately $10 million. Approximately $26.9 million of the $100 million total is available for future offerings pursuant to the Registration Statement.

 

AtOn June 1, 2022, the Company filed a Registration Statement on Form S-3 (File No. 333-265336) (the “2022 Registration Statement”), with the SEC. The 2022 Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate initial offering price not to exceed $75,000. The 2022 Registration Statement was declared effective by the SEC on August 5, 2022. No shares have been sold under the 2022 Registration Statement.

As of June 30, 2021,2022, our working capital surplus was a surplus of $24,828$26,496, compared to a working capital surplus of $30,890$28,736 at December 31, 2020.2021.

 

During the six months ended June 30, 2021,2022, we used $9,903$16,975 of cash in operating activities, compared to $4,101$9,903 used in operating activities for same period in 2020.the prior year period. The cash used in operating activities was primarily the result of the current year net loss which includedcombined with investments in working capital to secure inventory to support growth and minimize the legal, accounting and consulting costs incurred for the Solcius acquisition and the settlementimpacts of the stockholder lawsuit and mootness fee paid.supply chain disruption.

 

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Net cash used in investing activities totaled $50,987$242 for the six months ended June 30, 2021 including $50,619 net cash used to complete the Solcius2022, for acquisition and $429 of cash used to purchase trucks, vans and construction equipment to replace leased vehicles and rental equipment. The cash used in investing activities infor the same period in 2021 totaled $50,987 as a result of 2020 totaled $25 for minor equipment purchases.the purchase of Solcius LLC, which required net cash of $50,619, and the purchase of vehicles, property and equipment.

 

Net cash provided by financing activities during the six months ended June 30, 20212022, was $48,759. This is$9,565 primarily due to net proceeds from sales of our common stock in February 2021.during the first six months of the current year.

 

Net cash provided by financing activities during the first six months ended June 30, 2020of 2021 was $8,773.$48,759. Net cash received throughwas provided primarily by financing activities includes the net proceeds of $48,858 from the sales of our common stock totaled $7,736 during the six months ended June 30, 2020. The cash provided by financing activities during the six months of 2020 was primarily used to pay $1,500 of principal for a senior promissory note. $310 of cash was used to pay off an acquisition convertible promissory note, vehicle and equipment debt.stock.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenue,revenues, results of operations, liquidity, or capital expenditures.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKRISK..

 

Not Applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods specified in the SEC rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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Limitations on the Effectiveness of Controls

 

Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, the design of any system of controls is based on assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies and procedures may deteriorate. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

  

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal second quarter ended June 30, 20212022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS

 

None.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

None.

 

ITEM 5. OTHER INFORMATION.

 

On August 12, 2021, the Board of Directors of the Company received written notice from Daniel Gross of his resignation from the Board of Directors, effective on the date of notice.  Mr. Gross indicated that his decision to resign from the Board of Directors was not due to any disagreement with the Company on any matter relating to the Company’s operations, policies, practices or otherwise.None.

 

ITEM 6. EXHIBITS.

 

Exhibit No. Description
31.1* Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2* Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1** Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS** Inline XBRL Instance Document.
101.SCH** Inline XBRL Taxonomy Extension Schema Document.
101.CAL** Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF** Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB** Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE** Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*Filed herewith.
  
**Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Roseville,Provo, State of California,Utah, on August 13, 2021.9, 2022.

 

 Sunworks, Inc.
   
Date: August 13, 20219, 2022By:/s/ Gaylon Morris
  Gaylon Morris, Chief Executive Officer
  (Principal Executive Officer)
   
Date: August 13, 20219, 2022By:/s/ Paul C. McDonnelJason Bonfigt
  Paul C. McDonnel, InterimJason Bonfigt, Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

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