UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended SeptemberJune 30, 20222023.

 

OrOR

 

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

 

For the transition period from _______________ to _______________

 

Commission File Number 001-36868

A picture containing text, font, logo, graphics

Description automatically generated

 

SUNWORKS, INC.

(NameExact name of registrant as specified in its charter)

 

Delaware 01-0592299

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1555 Freedom Boulevard

ProvoProvo, UT 84604

(Address of principal executive offices) (Zip Code)

 

(385)497-6955

(Registrant’s telephone Number, including area code)

 

N/A 

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

 

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

 

Title of each class TickerTrading symbol(s) Name of each exchange on which registered
Common stock, par value $0.001 per share SUNW The Nasdaq Capital Market

 

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 filerSmaller 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 November 8, 2022August 11, 2023 was 35,187,89844,288,422.

 

 

 

 

TABLE OF CONTENTS

 

 Page
  
PART I - FINANCIAL INFORMATION 
  
ITEM 1. FINANCIAL STATEMENTS4
  
Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20222023 (Unaudited) and December 31, 202120224
  
Unaudited Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20222023 and 202120225
 
Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three and ninesix months ended SeptemberJune 30, 20222023 and 202120226
 
Unaudited Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20222023 and 202120227
  
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. CONTROLS1A. RISK FACTORS26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND PROCEDURESUSE OF PROCEEDS27
  
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS3. DEFAULTS UPON SENIOR SECURITIES27
  
ITEM 1A. RISK FACTORS4. MINE SAFETY DISCLOSURES27
  
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS5. OTHER INFORMATION27
  
ITEM 3. DEFAULTS UPON SENIOR SECURITIES6. EXHIBITS27
  
ITEM 4. MINE SAFETY DISCLOSURESSIGNATURES27
ITEM 5. OTHER INFORMATION27
ITEM 6. EXHIBITS28
SIGNATURES29

 

2

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that might cause these differences in actual results include the risksimpacts on us, our operations, or our future financial and uncertaintiesoperational results; discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20212022, as amended by our Form 10-K/A filed on May 1, 2023 (our “Annual Report”), and the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (SEC)(the “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 SEPTEMBERJUNE 30, 20222023 AND DECEMBER 31, 20212022

(in thousands, except share and per share data)

 

 September 30,
2022
  December 31,
2021
  June 30, 2023  December 31, 2022 
  (Unaudited)      (Unaudited)    
Assets                
Current Assets:                
Cash and cash equivalents $14,273  $19,719  $4,631  $7,807 
Restricted cash  248   323   249   248 
Accounts receivable, net  7,633   4,568   14,712   13,873 
Inventory  26,927   10,219   18,937   26,401 
Contract assets  24,722   14,498   16,201   20,699 
Other current assets  3,278   4,154   3,279   5,824 
Total Current Assets  77,081   53,481   58,009   74,852 
Property and equipment, net  2,494   3,195   1,488   2,154 
Finance lease right-of-use assets, net  1,888   1,407   4,300   2,487 
Operating lease right-of-use assets  1,937   2,502 
Operating lease right-of-use assets, net  2,374   2,779 
Deposits  162   132   199   192 
Intangible assets, net  5,620   7,910   4,630   5,290 
Goodwill  32,186   32,186   32,186   32,186 
Total Assets $121,368  $100,813  $103,186  $119,940 
                
Liabilities and Shareholders’ Equity                
Current Liabilities:                
Accounts payable and accrued liabilities $19,160  $11,127  $22,209  $24,567 
Contract liabilities  26,695   12,201   21,231   24,960 
Finance lease liability, current portion  491   424 
Operating lease liability, current portion  905   993 
Finance lease liabilities, current portion  1,047   631 
Operating lease liabilities, current portion  1,008   1,098 
Total Current Liabilities  47,251   24,745   45,495   51,256 
                
Long-Term Liabilities:                
Finance lease liability, net of current portion  997   542 
Operating lease liability, net of current portion  1,032   1,509 
Finance lease liabilities, net of current portion  2,911   1,470 
Operating lease liabilities, net of current portion  1,366   1,681 
Warranty liability  1,431   1,251   1,716   1,596 
Total Long-Term Liabilities  3,460   3,302   5,993   4,747 
Total Liabilities  50,711   28,047   51,488   56,003 
                
Commitments and contingencies  -    -    -   - 
                
Shareholders’ Equity:                
Preferred stock, $0.001 par value, 5,000,000 authorized shares; no shares issued and outstanding        
Common stock, $0.001 par value; 50,000,000 authorized shares; 35,161,648 and 29,193,772 shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively  35   29 
Preferred stock Series B, $0.001 par value, 5,000,000 authorized shares; no shares issued and outstanding  -   - 
Common stock, $0.001 par value; 50,000,000 authorized shares; 40,980,882 and 35,374,978 shares issued and outstanding, at June 30, 2023 and December 31, 2022, respectively  41   35 
Additional paid-in capital  207,067   187,997   214,194   207,373 
Accumulated deficit  (136,445)  (115,260)  (162,537)  (143,471)
Total Shareholders’ Equity  70,657   72,766   51,698   63,937 
                
Total Liabilities and Shareholders’ Equity $121,368  $100,813  $103,186  $119,940 

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

 

4

 

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBERThree and six months ended June 30, 20222023 and 20212022

(in thousands, except share and per share data)

 

 September 30,
2022
  September 30,
2021
  September 30,
2022
  September 30,
2021
  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
 Three Months Ended  Nine Months Ended  Three Months Ended  Six Months Ended 
 September 30,
2022
  September 30,
2021
  September 30,
2022
  September 30,
2021
  June 30, 2023  June 30, 2022  June 30, 2023  June 30, 2022 
                  
Revenue, net $40,713  $31,220  $108,306  $69,480  $34,638  $36,397  $72,537  $67,593 
                                
Cost of Goods Sold  21,204   18,150   59,030   42,348   23,196   19,803   49,173   37,827 
                                
Gross Profit  19,509   13,070   49,276   27,132   11,442   16,594   23,364   29,766 
                                
Operating Expenses:                                
Selling and marketing  14,773   10,072   41,320   21,468   11,967   14,318   24,046   26,548 
General and administrative  8,718   7,185   24,025   17,081   9,773   8,495   18,616   15,305 
Stock-based compensation  364   1,206   2,019   2,470   436   371   880   1,655 
Depreciation and amortization  1,056   1,062   3,177   2,160   623   1,071   1,245   2,121 
                                
Total Operating Expenses  24,911   19,525   70,541   43,179   22,799   24,255   44,787   45,629 
                                
Operating Loss  (5,402)  (6,455)  (21,265)  (16,047)  (11,357)  (7,661)  (21,423)  (15,863)
                                
Other Income (Expense)                                
Other income (expense), net  (6)  5   46   2,896   (1,016)  51   4,049   53 
Interest expense  (50)  (10)  (115)  (40)  (173)  (59)  (242)  (66)
Gain on disposal of property and equipment  65   -   243   51 
Gain (Loss) on disposal of property and equipment  (18)  178   (1,338)  178 
                                
Total Other Income (Expense), net  9   (5)  174   2,907   (1,207)  170   2,469   165 
                                
Loss before Income Taxes  (5,393)  (6,460)  (21,091)  (13,140)  (12,564)  (7,491)  (18,954)  (15,698)
                                
Income Tax Expense  -   -   94   -   112   94   112   94 
                                
Net Loss $(5,393) $(6,460) $(21,185) $(13,140) $(12,676) $(7,585) $(19,066) $(15,792)
                                
LOSS PER SHARE:                                
Basic $(0.16) $(0.24) $(0.66) $(0.50) $(0.34) $(0.23) $(0.52) $(0.51)
Diluted $(0.16) $(0.24) $(0.66) $(0.50) $(0.34) $(0.23) $(0.52) $(0.51)
                                
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING                                
Basic  33,626,405   27,047,960   32,027,304   26,449,743   37,524,312   32,907,289   36,477,806   31,262,031 
Diluted  33,626,405   27,047,960   32,027,304   26,449,743   37,524,312   32,907,289   36,477,806   31,262,031 

 

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 NineThree and six months ended SeptemberJune 30, 20222023 and 20212022

(in thousands, except share data)

 

      Additional            Additional      
 Common Stock Paid-in Accumulated     Common Stock  Paid-in  Accumulated    
 Shares Amount Capital Deficit Total  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 
Balance at December 31, 2022  35,374,978  $35  $207,373  $(143,471) $63,937 
Stock-based compensation  -   -   371   -   371   -   -   444   -   444 
Issuance of common stock under terms of restricted stock grants  95,000   -   -   -   -   104,267   -   -   -   - 
Tax withholdings related to net share settlements of equity awards  (16,703)  -   (34)  -   (34)  (13,271)  -   (39)  -   (39)
Sales of common stock pursuant to S-3 registration statement, net  783,257   1   2,004   -   2,005   100,000   1   141   -   142 
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 
Net loss for the three months ended March 31, 2023  -   -   -   (6,390)  (6,390)
Balance at March 31, 2023  35,565,974   36   207,919   (149,861)  58,094 
Stock-based compensation  -   -   364   -   364   -   -   436   -   436 
Issuance of common stock under terms of restricted stock grants  17,500   -   -   -   -   73,763   -   -   -   - 
Tax withholdings related to net share settlements of equity awards  (3,748)  -   (13)  -   (13)  (3,598)  -   (4)  -   (4)
Registered direct sale of common stock pursuant to S-3 registration statement, net  4,050,000   4   4,286   -   4,290 
Sales of common stock pursuant to S-3 registration statement, net  2,213,074   2   7,283   -   7,285   1,294,743   1   1,557   -   1,558 
Net loss for the three months ended September 30, 2022  -   -   -   (5,393)  (5,393)
Balance at September 30, 2022  35,161,648  $35  $207,067  $(136,445) $70,657 
Net loss for the three months ended June 30, 2023  -   -   -   (12,676)  (12,676)
Balance at June 30, 2023  40,980,882  $41  $214,194  $(162,537) $51,698 

 

        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 
Stock-based compensation for options  -   -   1,206   -   1,206 
Issuance of common stock for cashless exercise of options  1,530   -   -   -   - 
Net loss for the three months ended September 30, 2021  -   -   -   (6,460)  (6,460)
Balance at September 30, 2021  27,049,274  $27  $173,993  $(101,775) $72,245 
        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 
Balance  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 
Balance  32,934,822  $33  $199,433  $(131,052) $68,414 

 

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 Nine months ended SeptemberENDED June 30, 20222023 and 20212022

(in thousands)in thousands)

 

 September 30,
2022
  September 30,
2021
  June 30, 2023  June 30, 2022 
 Nine Months Ended  Six Months Ended 
 September 30,
2022
  September 30,
2021
  June 30, 2023  June 30, 2022 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss $(21,185) $(13,140) $(19,066) $(15,792)
Adjustments to reconcile net loss to net cash used in operating activities                
Depreciation and amortization  3,827   3,900   1,967   2,595 
Amortization of right-of-use assets  811   762   674   536 
Gain on sale of equipment  (243)  (51)
Paycheck Protection Program loan forgiveness  -   (2,881)
Loss (Gain) on sale of inventory and equipment  1,338   (178)
Stock-based compensation  2,019   2,470   880   1,655 
Bad debt expense  378   255   394   225 
Changes in Operating Assets and Liabilities, net of acquisition        
Changes in Operating Assets and Liabilities:        
Accounts receivable  (3,443)  (1,197)  (1,233)  (3,669)
Inventory  (16,784)  (5,700)  3,494   (8,603)
Deposits and other current assets  846  (2,073)  2,538   (601)
Contract assets  (10,224)  (2,685)  4,498   (5,139)
Accounts payable and accrued liabilities  8,033   (4,669)  (2,358)  5,196 
Contract liabilities  14,494   350   (3,729)  7,216 
Warranty liability  180   90   120   120 
Operating lease liability  (811)  (762)
Operating lease liabilities  (674)  (536)
NET CASH USED IN OPERATING ACTIVITIES  (22,102)  (25,331)  (11,157)  (16,975)
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of Solcius LLC, net of cash acquired  -   (50,619)
Purchase of property and equipment  (432)  (535)  (150)  (439)
Proceeds from sale of equipment  311   61 
NET CASH USED IN INVESTING ACTIVITIES  (121)  (51,093)
Proceeds from sale of inventory and equipment  2,631   197 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES  2,481   (242)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Principal payments on finance lease liabilities  (355)  (206)  (446)  (220)
Proceeds from sale of common stock, net  17,104   48,858   5,990   9,819 
Payments for taxes related to net share settlement of equity awards  (47)  -   (43)  (34)
NET CASH PROVIDED BY FINANCING ACTIVITIES  16,702   48,652   5,501   9,565 
                
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH  (5,521)  (27,772)  (3,175)  (7,652)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH BEGINNING OF PERIOD  20,042   39,339 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH BEGINNING OF YEAR  8,055   20,042 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $14,521  $11,567  $4,880  $12,390 
                
Cash and cash equivalents $14,273  $11,219  $4,631  $12,067 
Restricted cash  248   348   249   323 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $14,521  $11,567  $4,880  $12,390 
                
CASH PAID FOR:                
Interest $51  $40  $125  $18 
Franchise and corporate excise taxes $42  $-  $174  $42 
                
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS                
Increase in operating right-of-use assets and liabilities due to lease modification 

$

-  

$

132 
Right-of-use assets obtained in exchange for new finance lease liability $903  

$

252 
Right-of-use assets obtained in exchange for new operating lease liability $247  $697 
Decrease in operating right-of-use assets as a result of lease modification $44  $- 
Right-of-use assets obtained in exchange for new operating lease liabilities $314  $247 
Right-of-use assets obtained in exchange for new finance liabilities $2,310  $338 

 

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

 

7

 

SUNWORKS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBERJUNE 30, 20222023

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

 

References herein to “we,” “us,” “Sunworks,” and “the Company” are to Sunworks, Inc. and its wholly owned subsidiaries, Sunworks United Inc. (“Sunworks United”), Commercial Solar Energy, Inc. (“CSE”), and Solcius LLCLLC. (“Solcius”).

 

1. BASIS OF PRESENTATION

 

We provide photovoltaic (“PV”) and battery-based power and storage systems for the residential and commercial markets. Commercial projects include commercial, agricultural, industrial and public works projects. We operate in several residential and commercial markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, Rhode Island, New York, Pennsylvania, New Jersey and South Carolina. Through our operating subsidiaries, we design, arrange financing, integrate, install, and manage systems ranging in size from 2kW (kilowatt) for residential projects to multi-MW (megawatt) systems for larger commercial and public works projects. Commercial installations have included installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and higher education institutions.

 

On April 8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United (the “Buyer”), acquired all of the issued and outstanding membership interests (the “Solcius Acquisition”) of Solcius, from Solcius Holdings, LLC (“Seller”). Located in Provo, Utah, Solcius is a full-service, residential solar systems provider. The Company believes the Solcius Acquisition enhances economies of scale, leading to better access to suppliers, vendors and financial partners, as well as marketing and customer acquisition opportunities.

The Solcius Acquisition was consummated on April 8, 2021, pursuant to a Membership Interest Purchase Agreement, dated as of April 8, 2021 (the “Purchase Agreement”), by and between Buyer and Seller. The purchase price for Solcius consisted of $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 condensed consolidated financial statements and footnotes since the date of acquisition through September 30, 2022 (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 ninesix months ended SeptemberJune 30, 20222023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.2023. The financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022, as amended by our Form 10-K/A filed on May 1, 2023.

The financial statements have been prepared assuming that the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

 

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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, 2021.2022.

 

Principles of Consolidation

 

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

 

Liquidity

The Company has historically incurred significant operating losses. At June 30, 2023, the Company had an accumulated deficit of approximately $162,537. The Company’s net losses were $12,676 and $19,066 for the three and six months ended June 30, 2023, respectively.

We partner with various financing providers that offer our customers financial products that allow them to monetize the benefit of solar power generation. At the time of sale of a solar installation, we have historically received advanced funding from lenders to support our working capital needs. Credit market tightening related to recent bank sector volatility and general economic uncertainty have begun to materially change how lenders manage their risk profiles. In view of changing market dynamics, some of our lenders are either reducing or eliminating advance funding, which delays the timing of payment to us and negatively affects our available liquidity. Additionally, lenders are modifying their payment milestones and timelines, which may further reduce our available liquidity.

Management assesses whether the Company has sufficient liquidity to fund its costs for the next twelve months from each financial statement issuance date to determine if there is a substantial doubt about the Company’s ability to continue as a going concern. In the preparation of this liquidity assessment, management applied judgment to estimate the projected cash flows of the Company, including the following: (i) projected cash outflows, (ii) projected cash inflows, (iii) categorization of expenditures as discretionary versus non-discretionary, (iv) the ability to expedite collection of receivables under the Company’s factoring agreement with Produce Pay, Inc. and (vi) the ability to raise capital through the sale of equity in at-the-market offerings (see Note 8) or otherwise. The cash flow projections are based on known or planned cash requirements for operating costs and expected customer revenues from customers.

The Company’s continued existence is dependent upon management’s ability to increase liquidity, raise capital and develop profitable operations. Management is devoting significant efforts to increasing liquidity, raising capital and developing its business. The Company may meet its working capital requirements through a variety of means, including debt financings, equity financings, the sale or other disposition of assets, and/or reductions in operating costs. The Company anticipates that it will need to sell additional shares of stock, in at-the-market offerings or otherwise, in order to satisfy its liquidity needs for the next twelve months. Our ability to raise additional capital by issuing additional shares will require an increase in our authorized shares that requires shareholder approval. If the Company cannot raise needed funds, it raises substantial doubt about the Company’s ability to satisfy its liabilities and commitments in the normal course of business over the next year.

Effective May 4, 2023, Commercial Solar Energy, Inc. and Sunworks United, Inc., wholly-owned subsidiaries of Sunworks, Inc. (collectively, the “Company”) entered into a Factoring Agreement (the “Factoring Agreement”) with Produce Pay Inc. (the “Buyer”). Patrick McCullough, a director of the Company, is the Chief Executive Officer of the Buyer. Under the terms of the Factoring Agreement, the Company may use the Buyer’s on-line software platform to offer for sale, and the Buyer may purchase at 80% of face value, certain accounts receivable of the Company. The Company will receive a rebate back to the Company in a maximum amount of 18.4% of the verified receivable amount if the receivable is collected within 30 days and a lesser rebate amount based on the receivable collection period. The Factoring Agreement provides for a minimum volume commitment of $10,000 accounts receivable during the first year of the agreement. As of June 30, 2023, $2,405 of accounts receivable had been factored cumulatively pursuant to the Factoring Agreement.

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On May 22, 2023, the Company entered into trade purchase agreement with respect to its Employee Retention Tax Credit (ERTC) receivable with 1861 Acquisition LLC. Under the terms of the agreement, the Company received $5,723 of proceeds under the trade purchase agreement. The sale of the ERTC receivable resulted in a loss of $1,028 in the second quarter of 2023.

On January 27, 2021, the Company filed a Registration Statement on Form S-3 (File No. 333-252475) (the “2021 Registration Statement”), with the SEC. The 2021 Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate initial offering price not to exceed $100,000. The 2021 Registration Statement was declared effective by the SEC on February 3, 2021. From January 1, 2023 through the date of this filing we sold 1,394,743 shares with gross proceeds of approximately $1,751 under the 2021 Registration Statement. Approximately $17,600 of the $100,000 total is available for future offerings pursuant to the 2021 Registration Statement.

On June 1, 2022, the Company filed a Registration Statement on Form S-3 (File No. 333-265336) (the “2022 Registration Statement”), with the SEC. The 2022 Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate initial offering price not to exceed $75,000. The 2022 Registration Statement was declared effective by the SEC on August 5, 2022. On June 12, 2023, pursuant to a securities purchase agreement, the Company sold and issued 4,050,000 shares of common stock at a purchase price of $1.14 per share for total gross proceeds of $4,617. On August 11, 2023, pursuant to a securities purchase agreement, the Company sold and issued 3,300,000 shares of common stock at a purchase price of $1.00 per share for total gross proceeds of $3,300. Approximately $67,100 of the $75,000 total is available for future offerings pursuant to the 2022 Registration Statement.

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current presentation. The reclassifications impact historical cost of goods sold, depreciation, amortization and general and administrative expenses. During the quarterthree months ended SeptemberJune 30, 2021,2022, $201241 of depreciation and $667 of backlog amortization previously reported in depreciation and amortization expense and $47830 of costs previously reported in general and administrative expense are now reclassified to cost of goods sold. During the ninesix months ended SeptemberJune 30, 2021,2022, $407474 of depreciation and $1,333 of backlog amortization previously reported in depreciation and amortization expense and $771656 of costs previously reported in general and administrative expense are now reclassified to cost of goods sold. Additionally, other reclassifications impact historical segment reporting disclosures as historical corporate payroll costs were moved from the commercial operations segment to the corporate segment for enhanced reporting disclosures.

Change in Accounting Estimate

In July 2022, we completed an assessment of the contract fulfillment costs that give rise to an asset for residential contracts. We determined that additional specifically identifiable costs related directly to residential contracts can be capitalized, in accordance with Accounting Standards Codification (“ASC”) Section 340-40. The additional capitalized costs of approximately $2,794 as of September 30, 2022, include the allocation of costs that relate directly to the residential contracts. For the three and nine months ended September 30, 2021, the related capitalizable contract fulfillment costs were not material.

 

Segment Reporting

 

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

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill and intangibles, for possible impairments and estimations of long-lived assets, revenue recognition on construction contracts recognized over time, fair value of assets acquired and liabilities assumed in a business combination, allowances for uncollectible accounts, finance lease right-of-use assets and liabilities, operating lease right-of-use assets and liabilities, warranty reserves, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

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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 ASCAccounting 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.

 

For residential contracts, the Company recognizes revenue upon completion of the job as determined by final inspection. We recognize revenue for systems operations and maintenance over the term of the service period.

 

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

 

Judgment is required to evaluate assumptions including the amount of net contract revenue and the total estimated costs to determine the Company’s progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If the 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 ninesix months ended SeptemberJune 30, 20222023 and 20212022 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/and or cost of at least $100,$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 

                                
 Three Months Ended Nine Months Ended  Three Months Ended Six Months Ended 
(In thousands, except number of projects) September 30,
2022
 September 30,
2021
 September 30,
2022
 September 30,
2021
  June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 
Increase in revenue from net changes in transaction prices $                     -  $                 -  $484  $190  $223  $-  $163  $475 
Increase (decrease) in revenue from net changes in input cost estimates  -   1,307   (500)  985   386   -   571   (487)
Net increase (decrease) in revenue from net changes in estimates $-  $1,307  $(16) $1,175  $609  $-  $734  $(12)
                                
Number of projects  -   4   3   6   5   -   7   3 
                                
Net change in estimate as a percentage of aggregate revenue for associated projects  0.0%  17.3%  (0.2)%  11.3%  8.2%  0.0%  7.5%  (0.2)%

 

Contract Assets and Liabilities

 

Contract assets consist of (i) the earned, but unbilled, portion of a project for which payment is deferred by the customer until certain contractual milestones are met; (ii) direct costs, including all installation materials, commissions, installation labor benefit related costs and permitting fees paid prior to recording revenue, and (iii) unbilled receivables which represent revenue that has been recognized in advance of billing the customer, which is common for larger construction contracts. Contract liabilities consist of deferred revenue, customer deposits and customer advances, which represent consideration received from a customer prior to transferring control of goods or services to the customer under the terms of a contract. Total contract assets and contract liabilities balances as of the respective dates are as follows:

SCHEDULE OF CONTRACT ASSETS AND LIABILITIES 

        
(In thousands) June 30, 2023 December 31, 2022 
 As of  As of 
(In thousands) September 30,
2022
 December 31,
2021
  June 30, 2023 December 31, 2022 
Contract Assets $24,722  $14,498  $16,201  $20,699 
Contract Liabilities $26,695  $12,201   21,231   24,960 

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During the three and ninesix months ended SeptemberJune 30, 2022,2023, the Company recognized revenue of $4864,187 and $8,29517,308, respectively, that was included in contract liabilities as of December 31, 2021. Prior to the Solcius Acquisition, the Commercial Solar Energy segment for2022. During the three and ninesix months ended SeptemberJune 30, 20212022, the Company recognized revenue of $1,9424,187 and $4,3766,863, respectively, that was included in contract liabilities as of December 31, 2020, respectively.2021.

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The following table represents the average percentage of completion as of SeptemberJune 30, 20222023 for EPC projects that the Company is constructing. The Company expects to recognize $39,69536,161 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 Completed
Average Percentage
of Revenue
Recognized
Various ProjectsEPC services2023 - 202450.22022 - 202338.5%

 

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 stockshareholders by the weighted-average number of common shares of common stock outstanding.available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional shares of common stockshares that would have been outstanding if the potential shares of common stockshares had been issued and if the additional shares of common stockshares were dilutive. The shares for employee options, unvested restricted stock warrantsunits (“RSUs”) and convertible notesunvested performance-based restricted stock units (“PSUs”) were not used in the calculation of the net loss per share.

 

A net loss causes all outstanding common stock options, unvested RSUs and unvested restricted stock units (“RSUs”)PSUs to be anti-dilutive. As a result, the basic and diluted losses per common share are the same for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.

 

As of SeptemberJune 30, 2023, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 162,436 stock options, 746,829 unvested RSUs and 1,634,546 unvested PSUs.

As of June 30, 2022, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 236,720276,720 stock options, and 1,080,914666,692 unvested RSUs.

RSUs and

As of September 30, 2021, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 307,698 stock options and 317,500442,889 unvested RSUs.PSUs.

 

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

 

New Accounting Pronouncements

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates on certain types of financial instruments, including trade receivables. In addition, new disclosures are required. The ASU, as subsequently amended, is effective for the Company for fiscal years beginning after December 15, 2022, as the Company was a smaller reporting company as of November 15, 2019, the determination date. We adopted ASU 2016-13 on January 1, 2023. Based on the composition of the Company’s accounts receivable, and other financial assets, including current market conditions and historical credit loss activity, the adoption of this standard did not have a material impact on the Company’s consolidated financial statements or disclosures. Specifically, the Company’s estimate of expected credit losses as of June 30, 2023, using its expected credit loss evaluation process described above, resulted in no adjustments to the provision for credit losses and no cumulative-effect adjustment to accumulated deficit on the adoption date of the standard.

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Management reviewed currently issued pronouncements during the ninesix months ended SeptemberJune 30, 2022,2023, and believes that any recently issued, but not yet effective, accounting standards, if currently adopted, would not have a material effect on the accompanying condensed consolidated financial statements.

 

3. BUSINESS ACQUISITION

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

The purchase price for Solcius consisted of $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 utilized the services of a valuation specialist 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:

SCHEDULE OF BUSINESS ACQUISITION LIABILITIES AND ASSETS ACQUIRED

  (in thousands) 
Base purchase price $51,750 
Working capital shortfall  (1,131)
Cash surplus  1,492 
Total purchase price paid $52,111 
     
Cash $1,492 
Accounts receivable  1,729 
Inventory  3,833 
Contract assets  7,336 
Prepaids and other current assets  1,603 
Property and equipment  143 
Deposits  91 
Operating lease right-of-use asset  1,885 
Finance lease right-of-use assets  1,200 
Other intangible assets  15,600 
Identifiable assets acquired  34,912 
Accounts payable and accrued liabilities  (6,957)
Contract liabilities  (5,273)
Operating and finance lease liabilities  (2,757)
Liabilities assumed  (14,987)
Net identifiable assets acquired  19,925 
Goodwill  32,186 
Net assets acquired $52,111 

During the three and nine months ended September 30, 2022, we recorded no transaction costs related to the Solcius Acquisition. During the three and nine months ended September 30, 2021, we recorded transaction costs of $25 and $774 related to the Solcius Acquisition, respectively. These expenses were accounted for separately from the net assets acquired and were included in general and administrative expense for the three months and nine months ended September 30, 2021.

We conducted an assessment of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values and concluded that no additional adjustment to the purchase price allocation or accounting was required from the original purchase accounting.

Pro Forma Information (Unaudited)

The results of operations for the Solcius Acquisition since the April 8, 2021 closing date have been included in our consolidated financial statements. The following unaudited pro forma financial information represents a summary of the condensed consolidated results of operations for three and nine months ended September 30, 2022 and 2021, assuming the Solcius Acquisition had been completed as of January 1, 2020. The pro forma financial information includes certain non-recurring pro forma adjustments that were directly attributable to the business combination. The pro forma adjustments include the elimination of Solcius Acquisition transaction expenses totaling $774 incurred in the nine months ended September 30, 2021, and adjustments to recognize amortization of intangible assets, retention stock-based compensation programs and retention bonus accruals in the 2022 and 2021 periods. 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 Solcius Acquisition had been effective as of these dates, or of future results.

SCHEDULE OF BUSINESS ACQUISITION PROFORMA STATEMENTS OF OPERATIONS

                 
  Three Months Ended  Nine Months Ended 
  September 30,
2022
  September 30,
2021
  September 30,
2022
  September 30,
2021
 
(In thousands)            
Revenue, net $40,713  $31,220  $108,306  $95,564 
                 
Net Loss $(4,960) $(4,380) $(18,930) $(8,806)

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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 ninesix months ended SeptemberJune 30, 20222023 and 2021:2022:

SCHEDULE OF DISAGGREGATION OF REVENUE 

 2022  2021  2022  2021  2023  2022  2023  2022 
 Three months ended
September 30,
  Nine months ended
September 30,
  Three Months Ended June 30,  Six Months Ended June 30, 
(In thousands) 2022  2021  2022  2021 
Residential $37,253  $24,584  $97,416  $51,044 
 2023  2022  2023  2022 
Commercial  3,049   4,795   8,593   14,011  $4,218  $2,756  $6,950  $5,545 
Public Works  411   1,841   2,297   4,425   3,133   478   8,227   1,886 
Residential  27,287   33,163   57,360   60,162 
Total $40,713  $31,220  $108,306  $69,480  $34,638  $36,397  $72,537  $67,593 
Revenues $34,638  $36,397  $72,537  $67,593 

 

5.4. OPERATING SEGMENTS

 

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

 

Residential Solar

 

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

 

Commercial Solar Energy

 

Through our CSECommercial 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 CSECommercial Solar Energy subsidiary participated in the California Residentialresidential solar market. Following the acquisition of Solcius, Acquisition, all new residential sales are managed under the Solcius brand. Due to materiality, the Company will continue to report the remaining backlog of residential projects from CSE in the Commercial Solar Energy segment, which is expected to be fulfilled within the next year. CSECommercial Solar Energy primarily operates in California.

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Segment net revenue, segment operating expenses and segment contribution (loss) information consisted of the following for the three months and ninesix months ended SeptemberJune 30, 2023 and 2022. Certain prior period amounts have been reclassified to conform to the current period presentation.

SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT

                 Residential
Solar
  Commercial
Solar
  Corporate  Total 
 Three months ended September 30, 2022  Three Months Ended June 30, 2023 
 Residential Solar  Commercial Solar  Corporate  Total  Residential Solar  Commercial Solar  Corporate  Total 
Net revenue $36,659  $4,054  $-  $40,713  $27,200  $7,438  $-  $34,638 
Cost of goods sold  17,132   4,050   22   21,204   17,729   5,467   -   23,196 
Gross profit (loss)  19,527   4   (22)  19,509 
Gross profit  9,471   1,971       11,442 
                                
Operating expenses                                
Selling and marketing  13,711   809   253   14,773   11,272   584   111   11,967 
General and administrative  5,069   1,797   1,852   8,718   5,687   1,852   2,234   9,773 
Segment contribution (loss)  747   (2,602)  (2,127)  (3,982)
Segment loss  (7,488)  (465)  (2,345)  (10,298)
                                
Stock-based compensation  19   31   314   364   15   33   388   436 
Depreciation and amortization  1,056   -   -   1,056   623   -   -   623 
Operating loss $(328) $(2,633) $(2,441) $(5,402) $(8,126) $(498) $(2,733) $(11,357)

 

                 
  Nine months ended September 30, 2022 
  Residential Solar  Commercial Solar  Corporate  Total 
Net revenue $95,569  $12,737  $-  $108,306 
Cost of goods sold  47,646   11,354   30   59,030 
Gross profit  47,923   1,383   (30)   49,276 
                 
Operating expenses                
Selling and marketing  38,068   2,530   722   41,320 
General and administrative  13,810   4,941   5,274   24,025 
Segment loss  (3,955)  (6,088)  (6,026)  (16,069)
Segment contribution (loss)  (3,955)  (6,088)  (6,026)  (16,069)
                 
Stock-based compensation  740   101   1,178   2,019 
Depreciation and amortization  3,177   -   -   3,177 
Operating loss $(7,872) $(6,189) $(7,204) $(21,265)
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  Residential
Solar
  Commercial
Solar
  Corporate  Total 
  Three Months Ended June 30, 2022 
  Residential Solar  Commercial Solar  Corporate  Total 
Net revenue $32,516  $3,881  $-  $36,397 
Cost of goods sold  16,503   3,300   -   19,803 
Gross profit  16,013   581       16,594 
                 
Operating expenses                
Selling and marketing  13,225   870   223   14,318 
General and administrative  4,970   1,676   1,849   8,495 
Segment loss  (2,182)  (1,965)  (2,072)  (6,219)
                 
Stock-based compensation  16   35   320   371 
Depreciation and amortization  1,071   -   -   1,071 
Operating loss $(3,269) $(2,000) $(2,392) $(7,661)

 

  Residential
Solar
  Commercial
Solar
  Corporate  Total 
  Six Months Ended June 30, 2023 
  Residential Solar  Commercial Solar  Corporate  Total 
Net revenue $57,207  $15,330  $-  $72,537 
Cost of goods sold  36,168   13,005   -   49,173 
Gross profit  21,039   2,325       23,364 
                 
Operating expenses                
Selling and marketing  22,506   1,265   275   24,046 
General and administrative  11,071   3,475   4,070   18,616 
Segment loss  (12,538)  (2,415)  (4,345)  (19,298)
                 
Stock-based compensation  34   66   780   880 
Depreciation and amortization  1,245   -   -   1,245 
Operating loss $(13,817) $(2,481) $(5,125) $(21,423)

  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 goods sold  30,515   7,312   -   37,827 
Gross profit  28,396   1,370       29,766 
                 
Operating expenses                
Selling and marketing  24,357   1,721   470   26,548 
General and administrative  8,741   3,142   3,422   15,305 
Segment loss  (4,702)  (3,493)  (3,892)  (12,087)
                 
Stock-based compensation  721   70   864   1,655 
Depreciation and amortization  2,120   1   -   2,121 
Operating loss $(7,543) $(3,564) $(4,756) $(15,863)

14

Assets by operating segment are as follows:

 

  September 30,
2022
 
  (in thousands) 
Operating Segment:   
Residential Solar $93,956 
Commercial Solar  15,818 
Corporate  11,594 
Total Consolidated Assets $121,368 

14
  June 30, 2023 
Operating Segment:    
Residential Solar $82,518 
Commercial Solar  15,787 
Corporate  4,881 
Total Consolidated Assets $103,186 

 

6.5. RIGHT-OF-USE OPERATING LEASES

 

The Company has right-of-use (“ROU”) operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining lease terms of 1 year to 54 years, some of which include options to extend.

 

The Company’s operating lease expense for the three and ninesix months ended SeptemberJune 30, 20222023 amounted to $373444 and $1,1841,041, respectively. The Company’s operating lease expense for the three and ninesix months ended SeptemberJune 30, 20212022 amounted to $394384 and $1,086811, respectively. Operating lease payments, which reduced operating cash flows for the three and ninesix months ended SeptemberJune 30, 20222023 amounted to $373444 and $1,1841,041, respectively. The difference between the year to date ROU asset amortization of $811674 and the associated lease expense of $1,1841,041 consists of 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.

 

Supplemental balance sheet information related to leases is as follows:

SCHEDULE OF OPERATING LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION 

 September 30,
2022
  June 30, 2023 
  (in thousands)  (in thousands) 
Operating lease right-of-use assets $1,937  $2,374 
        
Operating lease liabilities—short term  905 
Operating lease liabilities—long term  1,032 
Operating lease liabilities, current portion  1,008 
Operating lease liabilities, net of current portion  1,366 
Total operating lease liabilities $1,937  $2,374 

 

As of SeptemberJune 30, 2022,2023, the weighted average remaining lease term was 3.03.2 years and the weighted average discount rate for the Company’s leases was 3.04.4%%.

 

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 2022 $264 
2023  806 
Remainder of 2023 $633 
2024  353   784 
2025  297   596 
2026  278   527 
Thereafter  - 
2027  43 
Total lease payments $1,998  $2,583 
Less: imputed interest  61   209 
Total $1,937  $2,374 

 

15

7.

6. 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 

 September 30,
2022
  June 30, 2023 
  (in thousands)  (in thousands) 
Finance lease right-of-use asset cost $2,761  $5,871 
Finance lease right-of-use accumulated amortization  (873)  (1,571)
Finance lease right of use asset, net $1,888  $4,300 
        
Finance lease obligation—short term $491 
Finance lease obligation—long term  997 
Finance lease obligation, current portion $1,047 
Finance lease obligation, net of current portion  2,911 
Total finance lease obligation $1,488  $3,958 

 

As of SeptemberJune 30, 2022,2023, the weighted average remaining lease term was 3.22.8 years and the weighted average discount rate for the Company’s leases was 5.28.4%%.

15

 

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

SCHEDULE OF MATURITIES FOR FINANCE LEASES LIABILITIES

 September 30,
2022
  June 30, 2023 
  (in thousands)  (in thousands) 
Remainder of 2022 $159 
2023  517 
Remainder of 2023 $691 
2024  385   1,283 
2025  355   1,250 
2026  197   1,044 
Thereafter  - 
2027  313 
Total lease payments $1,613  $4,581 
Less: imputed interest  125   623 
Total $1,488  $3,958 

 

8.7. INTANGIBLE ASSETS, NET

 

The Company’s intangible assets at SeptemberJune 30, 20222023 consist of the following:

SCHEDULE OF INTANGIBLE ASSETS

 Amortization
periods
 Cost Accumulated amortization Net
carrying
value
  Amortization
periods
 Cost Accumulated amortization Net carrying value 
Trademarks 10 Years $5,200  $(780) $4,420  10 Years $5,200  $(1,170) $4,030 
Backlog of projects 9 Months  2,000   (2,000)  -  9 Months  2,000   (2,000)  - 
Covenant not-to-compete 3 Years  2,400   (1,200)  1,200  3 Years  2,400   (1,800)  600 
Software (included in property and equipment) 3 Years  3,400   (1,700)  1,700  3 Years  3,400   (2,550)  850 
Dealer relationships 18 Months  2,600   (2,600)  -  18 Months  2,600   (2,600)  - 
   $15,600  $(8,280) $7,320    $15,600  $(10,120) $5,480 

 

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 expenseexpenses for intangible assets for the three and ninesix months ended SeptemberJune 30, 20222023 was as follows:

SCHEDULE OF AMORTIZATION EXPENSES OF INTANGIBLE ASSETS

 For the For the  For the For the 
 Three Months
Ended
 Nine Months
ended
  Three Months Ended Six Months ended 
 September 30,
2022
 September 30,
2022
  June 30, 2023 June 30, 2023 
Trademarks $130  $390  $130  $260 
Covenant not-to-compete  200   600   200   400 
Software  283   850   283   567 
Dealer relationships  434   1,300 
Amortization expenses for intangible assets $1,047  $3,140  $613  $1,227 

16

 

Estimated future amortization expense for the Company’s intangible assets as of SeptemberJune 30, 20222023 is as follows:

SCHEDULE OF FUTURE AMORTIZATION EXPENSES OF INTANGIBLE ASSETS

Years ending December 31,      
Remainder of 2022 $613 
2023 $2,453 
Remainder of 2023 $1,227 
2024 $1,004  $1,003 
2025 $520  $520 
2026 $520  $520 
2027 $520 
Thereafter $2,210  $1,690 

 

Depreciation and amortization expense on property and equipment and intangible assets for the three and ninesix months ended SeptemberJune 30, 20222023 was $1,2321,016 and $3,8271,967, respectively. Depreciation and amortization expense on property and equipment and intangible assets for the three and ninesix months ended SeptemberJune 30, 20212022 was $1,9301,312 and $3,9002,595, respectively.

 

16

9. PAYCHECK PROTECTION PROGRAM LOAN PAYABLE

On April 28, 2020, the Company’s operating subsidiary, Sunworks United received a loan of $2,847 under the Paycheck Protection Program (“PPP”), which was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). 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 $2,847 loan was fully forgiven, together with $34 of 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 nine months ended September 30, 2021.

10.8. CAPITAL STOCK

Roth/Northland Sales Agreement At The Market Offering

On June 8, 2022, the Company entered into a Sales Agreement (the “Roth/Northland Sales Agreement”) with Roth Capital Partners, LLC and Northland Securities, Inc. (each an “Agent” and collectively, the “Agents”), pursuant to which the Company may offer and sell from time to time up to an aggregate of $26,800 of shares of the Company’s common stock (the “June 2022 Placement Shares”), through the Agents. On June 8, 2022, the Company filed a prospectus supplement with the Securities and Exchange Commission (“SEC”) that covers the sale of June 2022 Placement Shares to be sold under the Sales Agreement (the “2022 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 SEC on January 27, 2021 and declared effective by the SEC on February 3, 2021, the base prospectus contained within the 2021 Registration Statement, and the 2022 Prospectus Supplement. The June 2022 Placement Shares may be sold by the Company in “at the market offerings,” as defined in Rule 415 promulgated under the Securities Act, through the Agents.

During the third quarter of 2022, 2,213,074 of the June 2022 Placement Shares were sold under the Roth/Northland Sales Agreement. Total gross proceeds for the sales were $7,467 and such shares were sold at an average sale price of $3.37 per share. Net proceeds from such sales, after brokerage costs, professional, registration and other fees were $7,285 or $3.29 per share.

Roth Sales Agreement At The Market Offering

On February 10, 2021, the Company entered into a Sales Agreement (the “Roth Sales Agreement”) with Roth Capital Partners, LLC (the “Agent RCP”), pursuant to which the Company could offer and sell from time to time, through the Agent RCP, shares of the Company’s common stock, (“the 2021(the “2021 Placement Shares”), registered under the Securities Act of 1933 (the “Securities Act”), pursuant to the 2021 Registration Statement.

 

On October 21, 2021, the Company filed a prospectus supplement with the SEC, (the “2021 Prospectus Supplement”) pursuant to which the Company could offer and sell from time to time, through the Agent RCP, up to $25,000 of the 2021 Placement Shares pursuant to the 2021 Registration Statement in “at the market“at-the-market” offerings, as defined in Rule 415 promulgated under the Securities Act.

 

DuringOn June 8, 2022, the first quarterCompany entered into a Sales Agreement (the “Roth/Northland Sales Agreement”) with Roth Capital Partners, LLC and Northland Securities, Inc. (each an “Agent” and collectively, the “Agents”), pursuant to which the Company may offer and sell from time to time up to an aggregate of 2022, $2,757,83026,800 of shares of the Company’s common stock (the “June 2022 Placement Shares” and together with the 2021 Placement Shares, werethe “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 RothRoth/Northland Sales Agreement. Total gross proceeds from the sales were $7,974 at an average sale price of $2.89 per share. Net proceeds after brokerage costs, professional, registration and other fees were $7,814 or $2.83 per share.Agreement (the “2022 Prospectus Supplement”).

 

The June 2022 Placement Shares are registered under the Securities Act, pursuant to the 2021 Registration Statement. 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.

17

2022 At-The-Market Offerings

 

During the second quarterfirst six months of 2022, 783,2573,541,087 shares of common stockthe Placement Shares were sold under the Roth Sales Agreement. Total gross proceeds for the sales were $2,08010,054 and such shares were sold at an average sale price of $2.662.84 per share. Net proceeds from such sales, after brokerage costs, professional, registration and other fees were $2,0059,819 or $2.562.77 per share.

 

In connection with the filing of the 2022 Prospectus Supplement for June 2022 Placement Shares, the Roth Sales Agreement and the 2021 Prospectus Supplement were terminated.2023 At-The-Market Offerings

 

During the first six months of 2023, 1,394,743 of the Placement Shares were sold under the Roth/Northland Sales Agreement. Total gross proceeds for the sales were $1,751 and such shares were sold at an average sale price of $1.26 per share. Net proceeds from such sales, after brokerage costs, professional, registration and other fees were $1.22 per share.

2022 Registration StatementRegistered Direct Offering

 

On June 1, 2022,8, 2023, pursuant to a securities purchase agreement, 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 offersold and sell, from time to time in one or more offerings, any combinationissued 4,050,000 shares of common stock preferred stock, warrants,at a purchase price of $1.14 per share for total gross proceeds of $4,617. After deducting placement agent commissions and other offering expenses, the net proceeds were $4,290 or units having an aggregate initial offering price not to exceed $75,0001.06. The 2022 Registration Statement was declared effective by the SEC on August 5, 2022. per share.

17

 

11.9. STOCK-BASED COMPENSATION

 

Options

 

As of SeptemberJune 30, 2022,2023, the Company has incentive stock options and non-qualified stock options outstanding to purchase 236,720162,436 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 from the date of grant at exercise prices ranging from $2.52 to $12.15 per share, based on the market value of the Company’s common stock on the date of each grant. The Company determined the fair market value of these options by using the Black Scholes option valuation model. Option forfeitures are accounted for as they occur.

 

A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2022, is as follows:

SCHEDULESUMMARY OF STOCK OPTIONS ACTIVITY

    Weighted  June 30, 2023 
 Number Average     Weighted 
 of Exercise  Number Average 
 Options  Price  of Exercise 
Outstanding, at December 31, 2021  290,684  $11.65 
 Options  Price 
Outstanding, at December 31, 2022  211,720  $11.66 
Granted  -   -   -   - 
Exercised  -   -   -   - 
Forfeited  (48,251)  11.50   (40,000)  12.15 
Expired  (5,713)  10.50   (9,284)  8.44 
Outstanding and expected to vest as of September 30, 2022  236,720  $11.71 
Exercisable at September 30, 2022  236,720  $11.71 
Outstanding and expected to vest as of June 30, 2023  162,436  $11.72 
Exercisable at June 30, 2023  162,436  $11.72 
Weighted average fair value of options granted during period     $-   -  $- 

 

The following summarizes the options to purchase shares of the Company’s common stock which were outstanding at SeptemberJune 30, 2022:2023:

SUMMARY OF SHARES AUTHORIZED UNDER STOCK OPTIONS PLANS, BY EXERCISE PRICE RANGE 

SCHEDULE OF OPTIONS TO PURCHASE SHARES OF COMMON STOCK OUTSTANDING

      Weighted        Weighted 
      Average        Average 
      Remaining        Remaining 
Exercise Stock Options Stock Options Contractual 
ExercisableExercisable Stock Options Stock Options Contractual 
PricesPrices Outstanding Exercisable Life (years) Prices  Outstanding  Exercisable  Life (years) 
$8.68   7,142   7,142   0.62 3.07   3,071   3,071   1.13 
$7.63 2,142 2,142 0.66 2.52   4,365   4,365   1.26 
$3.07 3,071 3,071 1.88 12.15   155,000   155,000   2.79 
$2.52 4,365 4,365 2.01 
$12.15  220,000  220,000  3.53 
   236,720  236,720       162,436   162,436     

 

Aggregate intrinsic value of options outstanding and exercisable at SeptemberJune 30, 2022,2023, and December 31, 20212022 was $10 and $20, 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 $2.791.13 and $3.071.58 as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively, and the exercise price multiplied by the number of options outstanding.

 

The Company recorded stock-based compensation expense for stock options of $10 and $6740 for the three and ninesix months ended SeptemberJune 30, 2022,2023, respectively. The Company recorded stock-based compensation expense for stock options of $6052 and $1,355673 for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively.

 

18

 

Restricted Stock Units

 

The following table summarizes the Company’s restricted stock unit activity during the ninesix months ended SeptemberJune 30, 2022:2023:

SCHEDULESUMMARY OF RESTRICTED STOCK UNIT ACTIVITY

    Weighted
Average
  June 30, 2023 
 Number Of Shares  

Grant Date

Value per
Share

     Weighted Average 
Unvested, beginning December 31, 2021  1,185,889  $5.11 
 Number Of Shares  

Grant Date

Value per Share

 
Unvested, beginning December 31, 2022  561,136  $3.80 
Granted  167,208  $2.44   403,536  $2.37 
Vested  (224,166) $9.55   (178,029) $3.84 
Forfeited  (48,017) $3.35   (39,814) $2.82 
Unvested at September 30, 2022  1,080,914  $3.85 
Unvested at the end of June 30, 2023  746,829  $3.07 

 

The Company recorded RSU compensation expense for RSUs of $363436 and $1,345880 for the three and ninesix months ended SeptemberJune 30, 2022,2023, respectively. The Company recorded RSU compensation expense for RSUs of $601369 and $1,115982 for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively.

 

Performance-Based Restricted Stock Units

12.

Separate from the RSUs above are Performance Based Restricted Stock Units that vest on achieving certain revenue, cash flow and profitability goals measured annually, or in some cases, for the year ending December 31, 2024. The maximum number of shares issuable upon achieving all goals is 1,634,546 shares.

10. COMMITMENTS AND CONTINGENCIES

 

Litigation

 

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

 

13.11. SUBSEQUENT EVENTS

Subsequent events have been evaluated from the condensed consolidated balance sheet date of September 30, 2022 through the date of this Quarterly Report. Based on management’s evaluation, there are no events that required recognition or disclosure in the Company’s accompanying condensed consolidated financial statements or the related notes thereto.

 

Registered Direct Offering

On August 11, 2023, pursuant to a securities purchase agreement, the Company sold and issued 3,300,000 shares of common stock at a purchase price of $1.00 per share for total gross proceeds of $3,300. After deducting placement agent commissions and other offering expenses, the net proceeds were $3,002 or $0.91 per share.

19

 

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

 

The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 20212022, as amended by our Form 10-K/A filed on May 1, 2023 (our “Annual Report”). This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled “Risk Factors” in Item 1A of our Annual Report and Part II, Item 1A, of our Quarterly Report for the quarter ended March 31, 2022, and “Cautionary Note Regarding Forward-Looking Statements” included in this Quarterly Report.

 

Unless otherwise noted, (1) “Sunworks” refers to Sunworks, Inc., (2) “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Sunworks, Inc., and its wholly ownedwholly-owned operating subsidiaries, Sunworks United Inc., (“Sunworks United”), Commercial Solar Energy, Inc. (“CSE”), 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 nine months ended September 30, 2022, include the operating results of Solcius acquired on April 8, 2021, with only a partial contribution for the three and nine months ended September 30, 2021.

Overview

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

The Solcius Acquisition was consummated on April 8, 2021, pursuant to a Membership Interest Purchase Agreement, dated as of April 8, 2021 (the “Purchase Agreement”), by and between Sunworks United and Seller. The purchase price for Solcius consisted of $51,750 in cash.

Residential Solar

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

 

Commercial Solar Energy

 

Through our CSECommercial Solar Energy operating subsidiary,subsidiaries, we design, arrange financing, integrate, install, and manage systems ranging in size from 2kW (kilowatt) for residential projects to multi-MW (megawatt) systems for larger commercial and public works projects. Commercial installations have included installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and higher education institutions. Historically, our CSE subsidiary participated in the California residential solar market. Following the Solcius Acquisition, all new residential sales are managed under the Solcius brand. Due to materiality, the Company will continue to report the remaining backlog of residential projects in the Commercial Solar Energy segment, which is expected to be fulfilled within the next year. CSE primarily operates primarily in California.

 

For the third quarter of 2022, approximately 92% of our revenue was from installations for the residential market and approximately 8% of our revenue was from installations for the commercial and public works markets.

For both the third quarter of 2021three and six months ended June 30, 2023, approximately 79% of our revenue was from installations for the residential market, and approximately 21% of our revenue was from installations for the commercial and public works markets. Solcius revenue was only included since its acquisition date of April 8, 2021.

20

Strategic Update

Increase the velocity of installation. We believe a reduction in the time required to install a residential solar installation improves both pricing power with third-party channel relationships and customer retention. During the second and third quarters of 2022, we decentralized all design, permitting and scheduling activities to local and regional Company hubs, while continuing to leverage the benefits of scale across shared services. We will continue to utilize lean principles and practices to optimize workflow and improve installation timelines.

Expand cost-efficient direct sales channel. We have embarked on a multi-year initiative to develop a robust, direct sales team designed to complement our third-party channel partners. This direct sales team is incentivized to develop business across the residential markets where we operate, with an emphasis on rooftop solar installations. During the third quarter of 2022, the direct sales team was responsible 24% of total installation revenue, versus approximately 4% in the prior-year period.

Drive efficient sourcing and procurement. We intend to shift an increased proportion of our sourcing away from foreign, third-party distribution channels toward U.S. based original equipment manufacturers, an approach that will allow for improved surety of supply. By year-end 2024, we intend to source a significant share of our panel and component inventory from U.S. based producers, whereas no materials are currently sourced domestically. During the third quarter of 2022, we grew total inventory by $8,100 on a sequential quarter basis to $26,900, thereby ensuring product availability during a period of elevated customer demand.

Drive sustained margin expansion. We believe key drivers of margin expansion include programmatic price increases; market share gains in both our core California commercial market and new geographic regions; reductions in lead times; optimization of our sales channel partner network; an increased mix of revenue derived from our direct sales force; increased productivity resulting from recent headcount investments; and the adoption of lean principles to reduce cost and drive continuous improvement. We expect to achieve improved margin realization in the fourth quarter 2022, when compared to the first nine months of 2022, as recent performance improvement initiatives are further implemented.

Orders and Backlog

 

For the quarterthree months and six months ended SeptemberJune 30, 2022, approximately 91% and 89% of our combined backlogrevenue, respectively, was $110,000, representing an increase of 116% compared to the third quarter of 2021.

Residential Solar segment originations increased 48% in the three months ended September 30, 2022, compared to the prior year period, driven by growth in both dealer and direct channels. Within this segment, originations generated from the direct sales channel were approximately 24%, in the three months ended September 30, 2022, compared to approximately 3% in the prior period, due to execution against our stated goal to diversify our sources of originations. As a result of these improvements, the Residential Solar backlog increased to $70,000, during the third quarter of 2022 which is double the prior year quarter and up approximately 18% on a sequential quarter basis. We expect to execute against our Residential Solar segment backlog over the next 1-5 months, as project complexity, jurisdictional requirements, materials and labor availability each influence timelines for completion.

Commercial Solar segment orders were approximately $8,000 during the three months ended September 30, 2022, compared to approximately $6,000 during the comparable period in 2021. The Commercial Solar segment backlog increased to approximately $40,000, during the third quarter of 2022, which represents an increase of over double the prior year period. We expect to execute against this backlog over the next 3-18 months, subject to receiving timely authorizations to proceed with construction from the various stakeholders.

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IMPACT OF COVID-19 ON OUR BUSINESS

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

State and local directives, guidelines, and other restrictions, as well as consumer behavior, continue to impact our operations in the regions in which we operate, particularly California. During 2022 and 2021 we continued to serve customers. COVID-19 and the governmental directives materially disrupted the operations of the local and state governments by closing or restricting operations at city, county and state offices for design reviews, permitting projects, and inspections of projects. Utility companies have been unable to provide timely shutdowns, inspections and interconnection approvals. This disruption negatively impacts our ability to complete projects, generate revenue on projects in backlog and causes many customers to delay decisions on new projects.

Our revenue and gross profitinstallations for the first nine monthsresidential market and approximately 9% and 11% of 2022 were negatively impacted by governmental responses toour revenue, respectively was from installations for the COVID-19 pandemic, which delayed pre-construction approvalscommercial and installation activity for our larger public works agriculture and commercial projects by delaying approvals. Earlier governmental orders and social distancing guidelines slowed our sales process, as our customers avoided interacting with our sales and installation personnel and delayed buying decisions.

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

Although there is uncertainty around the continued impact and severity the COVID-19 pandemic has had, and will continue to have, on our operations, these developments and measures have negatively affected our business, including a negative impact on the supply chain upon which we rely on to operate. We will continue to attempt to mitigate the impact through appropriate operational measures.

As the COVID-19 pandemic and its effects evolve, we are monitoring our business to ensure that our expenses are in line with expected cash generation. The extent to which our results are affected by the COVID-19 pandemic will largely depend on future developments which cannot be accurately predicted and are uncertain, but the COVID-19 pandemic has had and will continue to have an adverse effect on our business, operations, financial condition, results of operations, and cash flows.markets.

 

Critical Accounting Estimates

 

We prepare our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses recorded in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carry values of assets and liabilities that are not readily apparent from other sources.

 

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

 

There were no significant changes in our critical accounting estimates during the third quarter. In July 2022, we completed an assessment of the contract fulfillment costs that give risesix months ended June 30, 2023 compared to an asset for residential contracts. We determined that additional specifically identifiable costs related directly to residential contracts can be capitalized, in accordance with Accounting Standards Codification (“ASC”) Section 340-40. The additional capitalized costs of approximately $2,794 as of September 30, 2022, include the allocation of costs that relate directly to the residential contracts. This change in estimate is an update of the estimatesthose previously disclosed in “Critical Accounting Policies” and “Use of Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report. For the three and nine months ended September 30, 2021, these related amounts were immaterial.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBERJUNE 30, 20222023 COMPARED TO THE THREE MONTHS ENDED SEPTEMBERJUNE 30, 20212022

REVENUE AND COST OF GOODS SOLD

 

CONSOLIDATED RESULTS

Revenue and Cost of Goods Sold

For the three months ended SeptemberJune 30, 2022,2023, revenue increaseddeclined to $40,713$34,638, compared to $31,220$36,397 for the same quarter in the prior year. Approximately 92%78.5% of revenue was from residential segment installations, for the residential markets, or $37,253,$27,200, compared to 79%89.3% of revenue, or $24,854,$32,516, for the same quarter in the prior year. The increase in residentialResidential segment revenue isdeclined as a result of organic growth and the inclusion of the Residential Solar segment (Solcius) revenue. Within the Residential Solar segment, revenue from the direct salesforce accounted for approximately 24% of revenue for the three months ended September 30, 2022,fewer projects reaching final inspection compared to approximately 4%the same quarter in the prior year.year, partially offset by higher average selling prices. Commercial and public works revenue was approximately 8%21.5% of total revenue, or $3,460,$7,438, for the three months ended SeptemberJune 30, 2022,2023, compared to 21%10.7%, or $6,636$3,881, of revenue in the same period in the prior year. The reductionincrease in commercial revenue is primarily driven by lower new orders ina result of an increased backlog and executing on our strategy to grow the preceding quarters.commercial segment.

 

Cost of goods sold for the three months ended SeptemberJune 30, 2022,2023, was $21,204,$23,196, compared to $18,150$19,803 reported for the three months ended SeptemberJune 30, 2021.2022. The increase in cost of goods sold is primarily the result of increase in revenue compared to the prior year period and inflationary pressures on materiallabor, materials and labor costs.

construction supplies, as well as, under absorption of direct and overhead costs due to extended California interconnection approval timelines and lower volume in several markets.

 

Gross profit was $19,509$11,442 for the three months ended SeptemberJune 30, 2022,2023, compared to $13,070$16,594 for the prior year period. The gross margin increaseddeclined to 47.9%33.0% in the thirdsecond quarter of 2022,2023, compared to 41.9%45.6% in the thirdsecond quarter of 2021.2022. The reduction in margin percentage increase is the result of ainstallation delays due to delayed regulatory approvals and higher mix of Residential Solar projects as well as inflationary pressures on materials and labor. The change in estimate for the capitalization of additional specifically identifiable costs related directly to in-process residential installation contracts increased gross profit by approximately $2,794 during the third quarter of 2022.

construction costs.

 

Selling and Marketing ExpensesSELLING AND MARKETING EXPENSES

 

For the three months ended SeptemberJune 30, 2022, our2023, the Company’s selling and marketing expenses were $14,773,$11,967 compared to $10,072$14,318 for the same three months in 2021.2022. As a percentage of revenue, selling and marketing expenses were 36.3%34.5% of revenue in the thirdsecond quarter of 2022,2023 compared to 32.3%39.3% of revenue in the same period in 2021.2022. The increaseddecreased expenses in the current year period were largely related to additionalthe benefit of our sales and marketing effort over the past year to expand our lead generation efforts and improve brand awareness. Additionally, these investments are targeted at positively impacting our ability to grow our in-house sales capability for residential markets. In the prior year period, we incurred a higher marketing spend for dealer commissions, advertising and investment in thebranding. The residential direct salesforce.sales and marketing model had previously focused on lead generation and effective interaction with a network of authorized dealers and third-party sales organizations.

 

General and Administration ExpensesGENERAL AND ADMINISTRATIVE EXPENSES

 

Total G&Ageneral and administrative expenses of $8,718increased to $9,773 for the three months ended SeptemberJune 30, 2022 increased2023, compared to $7,185$8,495 for the same period in the prior year. The G&Ageneral and administrative expenses increased infrom the currentprior year period due to investmentsas a result of increases in salaries and benefits, insurance, professional services, software and equipment related benefitsexpenses, partially offset by savings attributable to support the revenue growtha reduction of the business.

headcount in 2023.

 

Stock-Based Compensation ExpenseSTOCK-BASED COMPENSATION EXPENSES

 

During the three months ended SeptemberJune 30, 2022,2023, we incurred $364$436 in total non-cash stock-based compensation expense, compared to $1,206$371 for the prior year period. The year over year decreaseperiod-over-period increase in stock-based compensation is the result of the vesting of the Solcius Acquisition related RSUs and stock options in April 2022. Partially offsetting the reduction in stock-based compensation expense is the non-cash expenses for expanding RSU grants as part of utilizing the non-cash compensation structure to a broader population offor incentivizing employees.

 

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Depreciation and Amortization Expense

DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense for the three months ended SeptemberJune 30, 20222023 was $1,232, including $176 recorded within cost of goods sold, compared to $1,930, including $868 recorded within cost of goods sold for the prior year period. Depreciation and amortization expenses decreased as a result of the identified intangible asset for the acquired order backlog related to the Solcius Acquisition having been fully amortized within the first nine months of the transaction. The intangible assets are being amortized over the estimated useful lives of the specific assets,$1,016, which have original useful lives ranging from nine months to ten years.

Other Income (Expense)

Other income was $9 for the three months ended September 30, 2022, compared to an expense of $(5) for the same three month period in 2021. A gain of $65 was recognized on the sale of surplus equipment during 2022. Interest expense for the third quarter of 2022 was $50 compared to $10 for the same quarter in 2021. The 2022 interest expense is primarily related to the ROU finance leased assets.

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Net Loss

The net loss for the three months ended September 30, 2022 was $5,393, compared to a net loss of $6,460 for the three months ended September 30, 2021.

RESIDENTIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS

  Three Months Ended 
  September 30, 
  2022  2021 
Net Total Originations (Watts in thousands)  15,249   11,101 
Installation (Watts in thousands)  8,703   5,805 
Average Project Size Installed (Watts)  6,689   6,072 
Revenue $36,659  $23,379 
Gross Margin  53.2%  52.9%
Operating (Loss) $(328) $(3,259)
Operating (Loss) %  (0.9)%  (13.9

)%

COMMERCIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS

  Three Months Ended 
  September 30, 
  2022  2021 
Net Total Orders $8,193  $5,841 
Revenue $4,054  $7,841 
Gross Margin  0.0%  16.1%
Operating (Loss) $(1,898) $(1,037)
Operating (Loss) %  (46.8)%  (13.2)%

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2021

CONSOLIDATED RESULTS

Revenue and Cost of Goods Sold

For the nine months ended September 30, 2022, revenue was $108,306 compared to $69,480 for the nine months ended September 30, 2021. Approximately 90% of revenue in the first nine months of 2022 was from installations for the residential markets at $97,416, compared to 73% of revenue or $51,044 for the same period in the prior year. Residential Solar segment revenue increased as a result of the full period inclusion of the Solcius Acquisition, which was completed in April 2021 and the expansion of our direct sales force and growth across the traditional dealer channel. Commercial Solar Energy segment revenue was 10% of total revenue, or $10,890, for the first nine months of 2022, compared to 27%, or $18,436, of revenue in the same period of the prior year. The reduction was primarily driven by lower new orders in the preceding quarters.

Cost of goods sold for the nine months ended September 30, 2022 was $59,030, or 54.5% of revenue, compared to $42,348, or 60.9% of revenue, reported for the nine months ended September 30, 2021.

Gross profit was $49,276 for the nine months ended September 30, 2022. This compares to $27,132 of gross profit for the same period of the prior year. Gross margin improved to 45.5% in the first nine months of 2022 compared to 39.1% in the same nine-month period of 2021. The gross margin improvement in the current year period is predominantly driven by a mix of higher margin residential revenue, partially offset by inflationary pressures on materials and labor. The change in estimate for the capitalization of an additional specifically identifiable costs related directly to in-process residential installation contracts increased gross profit by approximately $2,794 for the nine months ended September 30, 2022.

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Revenue and gross profit in the nine months ended September 30, 2022 were positively impacted by the Solcius Acquisition. In contrast, the prior year Solcius results were only included from the April 8, 2021 acquisition date through the end of the third quarter of 2021.

Selling and Marketing Expenses

For the nine months ended September 30, 2022, our selling and marketing expenses were $41,320, compared to $21,468 for the nine months ended September 30, 2021. As a percentage of revenue, selling and marketing expenses were 38.2% of the first nine months revenue in 2022, compared to 30.9% of revenue in the same period of 2021. Selling and marketing expenses increased in the current year period as a result of higher residential revenue, as the residential business model focuses on lead generation and effective interaction with third-party sales organizations.

General and Administrative Expenses

Total G&A expenses for the nine months ended September 30, 2022 was $24,025, compared to $17,081 for the nine months ended September 30, 2021. The G&A expenses increased from the prior year period as a result of the Solcius Acquisition, which was completed in April 2021, and increases in salaries and benefits in support of the revenue growth.

Stock-Based Compensation Expense

During the nine months ended September 30, 2022, we incurred $2,019 in total non-cash stock-based compensation expense, compared to $2,470 for the same period in the prior year. The year over year decrease in stock-based compensation is the result of the vesting of the Solcius Acquisition related RSUs and stock options granted in April 2022. Partially offsetting the reduction in stock-based compensation expense is the non-cash expense for expanding RSU grants as part of the compensation structure to a broader population of employees.

Depreciation and Amortization Expenses

Depreciation and amortization expense for the nine months ended September 30, 2022 was $3,827, including $650includes $393 recorded in cost of goods sold compared to $3,900, including $1,740$1,312, which includes $241 recorded in cost of goods sold for the same period in the prior year.year period. Depreciation and amortization expenses decreased in the current year period as a result of a portion of the $15,600 of identified intangible assets of Solcius being fully amortized within the first nine months since2022 following the closing of the Solcius Acquisitionacquisition in April 2021. The total $15,600 balance of intangible assets is being amortized over the estimated useful lives range from nine months to ten years. Offsetting the reduction in amortization of intangibles was an increase in depreciation expense for additional installation service vehicles added during the first half of 2023. The amortization expense from the Solcius acquisition for the second quarter of 2023 was $613, compared to $1,047 for the same period in 2022.

OTHER INCOME (EXPENSE)

Other expenses were $(1,207) for the three months ended June 30, 2023, compared to other income of $170 for the same period in the prior year. Other expense is primarily the result of the specific assets.$1,028 loss resulting from the sale our net $5,055 Employee Retention Tax Credit during the quarter. The interest expense of $173 is primarily related to the finance lease assets, credit card finance charges, sales tax liability and the financing of business insurance premiums.

INCOME TAX EXPENSE

Income tax expense is a provision for Texas Margin Tax for our Texas based operations.

NET LOSS

The net loss for the three months ended June 30, 2023, was $12,676, compared to a net loss of $7,585 for the three months ended June 30, 2022.

ORDERS AND BACKLOG

For the quarter ended June 30, 2023, our combined backlog of residential and commercial projects was $84,000, approximately a 2.7% decrease compared to the prior year end. Residential Solar segment originations decreased by approximately 50% in the current quarter, compared to the prior year quarter, primarily driven by higher interest rates and following a surge in California originations in the first quarter of 2023 as customers secured more favorable economics in advance of the NEM 3.0 deadline. Within this segment, originations generated from the direct sales channel were approximately 45%, compared to approximately 23% in the prior period, due to execution against our stated goal to diversify our sources of originations. As a result, the Residential Solar backlog declined to $48,000, or 19%, on a year-over-year basis. We expect to execute against our Residential Solar segment backlog over the next 1-5 months, as project complexity, jurisdictional requirements, materials and labor availability each influence timelines for completion.

Commercial Solar segment orders were approximately $8,094 for the quarter ending June 30, 2023, compared to approximately $23,743 during the same period in the prior year, which was primarily driven by the timing of several large orders. The Commercial Solar segment backlog is $36,200, which represents a 0.2% increase on a year-over-year basis. We expect to execute against this backlog over the next 3 to18 months, subject to receiving timely authorizations to proceed with construction from the various stakeholders.

RESIDENTIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS

  Three Months Ended 
  June 30, 
  2023  2022 
Net Total Originations (Watts in thousands)  8,064   16,292 
Installation (Watts in thousands)  6,309   7,920 
Average Project Size Installed (Watts)  6,782   6,268 
Revenue $27,200  $32,516 
Gross Margin  34.8%  49.3%
Operating (Loss) $(8,126) $(3,269)
Operating (Loss) %  (29.9)%  (10.1)%

COMMERCIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS

  Three Months Ended 
  June 30, 
  2023  2022 
Net Total Orders $8,094  $23,743 
Revenue $7,438  $3,881 
Gross Margin  26.5%  15.0%
Operating (Loss) $(498) $(2,000)
Operating (Loss) %  (6.7)%  (51.5)%

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2023 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2022

REVENUE AND COST OF GOODS SOLD

For the six months ended June 30, 2023, revenue increased to $72,537 compared to $67,593 for the six months ended June 30, 2022. Residential segment revenue was approximately 78.9% of revenue in the first six months of 2023 or $57,207. Residential segment revenue was approximately 87.2% of revenue or $58,911, for the same period in the prior year. Residential segment revenue decreased as a result of the reduction in third-party sales organization sourced revenue and extended inspection times. As a percentage of total revenue, residential segment revenue decreased as commercial revenue increased in both dollars and percentage of total revenue. Commercial segment revenue was 21.1% of total revenue, or $15,330, for the first six months of 2023, compared to 12.8%, or $8,682 of revenue in the same period of the prior year. Commercial revenue benefits from greater order volume in prior periods.

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Cost of goods sold for the six months ended June 30, 2023, was $49,173, or 67.8% of revenue, compared to $37,827, or 56.0% of revenue, reported for the six months ended June 30, 2022. The increase in cost of goods sold is primarily the result of higher revenue combined with inflationary pressures on materials and construction labor, as well as labor inefficiencies associated with weather and regulatory approval delays in the current year. Included within cost of goods sold is a $979 inventory write-down for solar module inventory to lower of cost or market, as a result of excess inventory in our Commercial Solar Energy segment.

Gross profit was $23,364 for the six months ended June 30, 2023. This compares to $29,766 of gross profit for the same period of the prior year. Gross margin declined to 32.2% in the first six months of 2023 compared to 44.0% in the same six-month period of 2022. The reduction in margin is the result of installation delays due to regulatory approvals and weather delays, as well as, higher construction costs.

SELLING AND MARKETING EXPENSES

For the six months ended June 30, 2023, our selling and marketing expenses were $24,046, compared to $26,548 for the six months ended June 30, 2022. As a percentage of revenue, selling and marketing expenses were 33.1% for the six months ended June 30, 2023, compared to 39.3% of revenue in the same period of 2022. Selling and marketing expenses decreased as a result of lower residential revenue, as the residential business model focuses more on direct lead generation.

GENERAL AND ADMINISTRATIVE EXPENSES

Total general and administrative expenses of $18,616 for the six months ended June 30, 2023, increased, compared to $15,305 for the six months ended June 30, 2022. The general and administrative expenses increased from the prior year six-month period as a result of increases in corporate overhead expenses including legal, accounting and consulting fees.

STOCK-BASED COMPENSATION EXPENSE

During the six months ended June 30, 2023, we incurred $880 in total non-cash stock-based compensation expense, compared to $1,655 for the same period in the prior year. The period-over-period decrease in stock-based compensation is the result of the vesting of the Solcius acquisition related RSUs and stock options granted in April 2021. Partially offsetting the reduction in stock-based compensation expense is the non-cash expense for expanding RSU grants during 2022 as part of the compensation structure to a broader population of employees.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for the six months ended June 30, 2023 was $1,967, which includes $722 recorded in cost of goods sold compared to $2,595, which includes $474 recorded in cost of goods sold in the prior year period. Depreciation and amortization expenses decreased in the current year period as a result of a portion of the $15,600 of identified intangible assets of Solcius being fully amortized within 2022 following the closing of the Solcius acquisition in April 2021. The estimated useful lives range from nine months to ten years.

Other Income (Expense)OTHER INCOME (EXPENSE)

 

Other income was $174$2,469 for the ninesix months ended SeptemberJune 30, 2022,2023, compared to $2,907$165 for the same period in 2021. the prior year. Other income is primarily related to the $5,055 employee retention tax credit receivable, net of consultants’ fees. During the second quarter the employee retention tax credit was sold at a discount of $1,028 which appears as other expense. Interest expense of $242 is primarily related to the finance lease assets, sales tax liability, credit card finance charges and the financing of business insurance premiums. Included in loss on sale of assets is the sale of $3,969 of solar module inventory for $2,596, recognizing a loss on the sale of assets of $1,373.

Other income in the 2022 period was the result of the gain on equipment sales of $178 most of which werewas fully depreciated. Other income in the prior year period was primarily the resultInterest expense of the June 2021 forgiveness of the PPP loan of $2,847 and $34 of accrued loan interest. Interest expense$66 is primarily for interest on finance leases. Interest expense for the nine months ended September 30, 2022, was $115, compared to $40 during the nine months ended September 30, 2021.

leases and sales taxes liability.

 

Income Tax ExpenseINCOME TAX EXPENSE

 

Income tax expense was $94is a provision for the nine months ended September 30, 2022, compared to no income tax expense in the prior year period. The income tax expense in the current period is attributable to the Texas margin tax related toMargin Tax on our Texas based operations, which we acquired as a result of the Solcius Acquisition in April 2021.operations.

 

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Net LossNET LOSS

 

The net loss for the ninesix months ended SeptemberJune 30, 20222023 was $21,185.$19,066. The net loss for the ninesix months ended SeptemberJune 30, 20212022 was $13,140.$15,792.

 

RESIDENTIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS

  Six Months Ended 
  June 30, 
  2023  2022 
Net Total Originations (Watts in thousands)  18,992   28,587 
Installation (Watts in thousands)  13,198   14,330 
Average Project Size Installed (Watts)  6,682   6,203 
Revenue $57,207  $58,911 
Gross Margin  36.8%  48.2%
Operating (Loss) $(13,817) $(7,543)
Operating (Loss) %  (24.2)%  (12.8)%

 

  Nine Months Ended 
  September 30, 
  2022  2021 
Net Total Originations (Watts in thousands)  43,927   29,702 
Installation (Watts in thousands)  23,003   17,766 
Average Project Size Installed (Watts)  6,552   6,051 
Revenue $95,570  $46,191 
Gross Margin  50.1%  54.1%
Operating (Loss) $(7,868) $(4,424)
Operating (Loss) %  (8.2)%  (9.6)%

COMMERCIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS

 

  Nine Months Ended 
  September 30, 
  2022  2021 
Net Total Orders $34,737  $3,720 
Revenue $12,737  $23,289 
Gross Margin  10.6%  13.8%
Operating (Loss) $(5,462) $(4,579)
Operating (Loss) %  (42.9)%  (19.7)%

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  Six Months Ended 
  June 30, 
  2023  2022 
Net Total Orders $19,627  $26,545 
Revenue $15,330  $8,682 
Gross Margin  15.2%  15.8%
Operating (Loss) $(2,481) $(3,564)
Operating (Loss) %  (16.2)%  (41.1)%

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity and Capital Resources

 

We had $14,273$4,631 in unrestricted cash at SeptemberJune 30, 2022,2023, as compared to $19,719$7,807 at December 31, 2021.2022. We believe that our existing cash and cash equivalents is not sufficient to meet our operating cash requirements and strategic objectives for growth for at least the next year. To satisfy our capital requirements, including acquisitions and ongoing operations, for 12 months and longer into the future, we will likely seekexpect to raise additional financingcapital through debt and equity financings.financings or the sale or other disposition of assets.

 

On January 27, 2021, the Companywe filed a Registration Statement on Form S-3 (File No. 333-252475) (the “2021 Registration Statement”), with the SEC. The 2021 Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination of common stock, preferred stock, warrants, or units having an aggregate initial offering price not to exceed $100,000. The 2021 Registration Statement was declared effective by the SEC on February 3, 2021. From January 1, 20222023 through the date of this filing we sold 5,754,1611,394,743 shares with gross proceeds of approximately $17,500$1,751 under the 2021 Registration Statement. Approximately $19,400$17,600 of the $100,000 total is available for future offerings pursuant to the 2021 Registration Statement.

 

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

On June 12, 2023, pursuant to a securities purchase agreement, the Company sold and issued 4,050,000 shares have beenof common stock registered under the 2022 Registration Statement. The registered direct offering was at a purchase price of $1.14 per share for total gross proceeds of $4,617. After deducting placement agent commissions and other offering expenses, the net proceeds were $4,290, or $1.06 per share.

On August 11, 2023, pursuant to a securities purchase agreement, the Company sold and issued 3,300,000 shares of common stock registered under the 2022 Registration Statement. The registered direct offering was at a purchase price of $1.00 per share for total gross proceeds of $3,300. After deducting placement agent commissions and other offering expenses, the net proceeds were $3,002, or $0.91 per share. Approximately $67,100 of the $75,000 total is available for future offerings pursuant to the 2022 Registration Statement.

 

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In addition, effective May 4, 2023, we entered into a Factoring Agreement (the “Factoring Agreement”) with Produce Pay Inc. (the “Buyer”) pursuant to which we may offer for sale, and the Buyer may purchase at 80% of face value, certain accounts receivable of the Company. Through June 30, 2023, $2,405 of receivables have been factored. Proceeds received total $1,924 through June 30, 2023 and $54 of interest expense recognized.

On May 22, 2023, the Company entered into a trade purchase agreement with respect to its Employee Retention Tax Credit receivable (ERC) with 1861 Acquisition LLC. Under the terms of the agreement, on May 23, 2023, the Company received $5,723 of proceeds under the trade purchase agreement.

As of SeptemberJune 30, 2022,2023, our working capital surplus was $29,830,$12,514 compared to a working capital surplus of $28,736$23,596 at December 31, 2021.2022.

 

During the ninesix months ended SeptemberJune 30, 2022,2023, we used $22,102$11,157 of cash in operating activities compared to $25,331$16,975 used in operating activities for the nine months ended September 30, 2021.prior year period. The cash used in operating activities during the current year period was primarily the result of the currenta higher operating loss during year net loss combined with investments in working capital to secure solar panelpartially offset by a reduction of inventory, which is primarily driven by sales of excess inventory and inverter inventory to support growthimproved module lead times and minimize the impacts of supply chain disruption.availability.

 

Net cash used inprovided by investing activities totaled $121$2,481 for the ninesix months ended SeptemberJune 30, 2022 and was2023, primarily used forfrom the sale of inventory partially offset by the acquisition of vehicles and equipment. The cash used in investing activities for the same period in 20212022 totaled $51,093 as a result of the purchase of Solcius, which required net cash of $50,619, and the purchase of vehicles, property and equipment.

Net cash provided by financing activities during the nine months ended September 30, 2022, was $16,702 primarily due to net proceeds from sales of our common stock during the first nine months of the current year.$242 for routine equipment purchases.

 

Net cash provided by financing activities during the ninesix months ended SeptemberJune 30, 20212023 was $48,652. Net cash was provided$5,501 primarily by financing activities includes thedue to net proceeds from the at-the-market offerings under our 2021 Registration Statement and our registered direct offering under our 2022 Registration Statement. Principal payments for finance lease liabilities totaled $446 together with $43 in tax payments related to net share settlement of $48,858 from sales of our common stock.equity awards.

 

Net cash provided by financing activities during the first six months of 2022 was $9,565 primarily due to net proceeds from the at-the-market offerings under our 2021 Registration Statement.

Off-Balance Sheet Arrangements

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not Applicable.

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

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

 

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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 thirdfiscal second quarter of 2022,ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS

 

The disclosure below supplements our risk factors from those disclosed in Part I, Item 1A in our Annual Report and Part II, Item 1A of our Quarterly Report for the quarter ended March 31, 2023. These risks and uncertainties, along with those previously disclosed, could materially adversely affect our business or financial results.

Interest Rate VolatilityOur ability to raise capital through the sale of our common stock in amounts sufficient to fund operations requires shareholder approval of an amendment to our certificate of incorporation to increase our authorized shares of common stock.

 

VolatilityTo satisfy our capital requirements, we expect to raise additional capital through equity financings.  Our certificate of incorporation currently authorizes the issuance of 50,000,000 shares of common stock. As of August 11, 2023, there were 44,280,882 shares of common stock issued and increases in interest rates could adversely impactoutstanding. Our ability to raise additional capital sufficient to fund operations by issuing shares of common stock will require us to increase the number of our business.   While interest rates have been at long-term historic lows in recent years, they have recently increased, and may continue increasing inauthorized shares of common stock above 50,000,000.  To increase the near future. Whilenumber of our authorized shares of common stock, we do not provide company branded financing solutionswill need to ask our shareholders to approve an amendment to our customers,certificate of incorporation, which requires an affirmative vote of a majority of the shares of our common stock attending our annual shareholders meeting and voting on the proposal to amend our certificate of incorporation.  There is no assurance that we partner withwill be able to obtain the requisite shareholder approval to increase the number of our authorized shares of common stock.  Failure to increase the number of our authorized shares of common stock would have a diverse groupmaterial adverse impact on our ability to raise capital sufficient to fund operations.

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If we are unable to obtain funding on a timely basis, or if revenues from collaboration arrangements or financing sources are less than we have projected, we may be required to further revise our business plan and strategy, which may result in us significantly curtailing, delaying or discontinuing portions or all of funding partners.  Rising interest rates increases the cost of capital for our funding partners, which are typically passed ontooperations, or may result in our customers.being unable to expand our operations or otherwise capitalize on our business opportunities. As a result, our business, financial condition and results of the increase in the cost of our products and services, there mightoperations could be less adoption of solar systems and our cash flow might be negatively impacted.materially affected.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.None.

 

ITEM 5. OTHER INFORMATION.

 

None.The meeting date for the 2023 annual meeting of stockholders (the “2023 Annual Meeting”) has been advanced more than 30 days from the anniversary of the Company’s 2022 annual meeting of stockholders. The 2023 Annual Meeting is tentatively scheduled for September 22, 2023. The time and meeting website information will be set forth in the Company’s proxy statement for the 2023 Annual Meeting, which will be filed with the SEC in advance of the meeting. Pursuant to Rule 14a-8, in order for a stockholder proposal or the nomination of a candidate for director to be included in the Company’s definitive proxy statement for the 2023 Annual Meeting, it must be submitted to our Corporate Secretary at 1555 Freedom Boulevard, 200 W, Provo, UT 84604 no later than August 18, 2023, which the Company believes is a reasonable time before it begins to print and send its proxy materials. The proposals and nominations must comply with all of the applicable requirements set forth in the rules and regulations of the SEC, under the Exchange Act, and the Company’s Bylaws.

 

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ITEM 6. EXHIBITS.

 

Exhibit No. Description

3.1

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the annual report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2021).

3.2Bylaws of Sunworks, Inc. (as updated through June 2, 2021) (incorporated by reference to Exhibit 3.2 to the annual report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2022).
10.1Factoring Agreement, dated May 4, 2023, by and among Commercial Solar Energy, Inc. Sunworks United, Inc. and Produce Pay Inc. (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 22, 2023).
31.1* Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2* Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1** Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS** Inline XBRL Instance Document.
101.SCH** Inline XBRL Taxonomy Extension Schema Document.
101.CAL** Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF** Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB** Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE** Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104 Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

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

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Provo, State of Utah, on November 8, 2022.August 14, 2023.

 

 Sunworks, Inc.
   
Date: November 8, 2022August 14, 2023By:/s/ Gaylon Morris
  Gaylon Morris, Chief Executive Officer
  (Principal Executive Officer)
   
Date: November 8, 2022August 14, 2023By:/s/ Jason Bonfigt
  Jason Bonfigt, Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

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