| Summary of Significant Accounting Policies | 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES This summary of significant
accounting policies of Sunworks, Inc. is presented to assist in understanding the Company’s financial statements. The financial
statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.
These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently
applied in the preparation of the financial statements. Principles of Consolidation The accompanying consolidated
financial statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries, Sunworks United, Inc.
(d/b/a Sunworks), MD Energy, Inc., and Elite Solar Acquisition Sub, Inc. All material intercompany transactions have been eliminated
upon consolidation of these entities. Use of Estimates The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill,
impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for
uncollectible accounts, warranty reserves, inventory valuation, debt beneficial conversion features, valuations of non-cash capital
stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. Revenue Recognition Revenues and related costs
on construction contracts are recognized as the performance obligations are satisfied over time in accordance with Accounting Standards
Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, will
be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations).
The cost of uninstalled materials or equipment will generally be excluded from our recognition of profit, unless specifically produced
or manufactured for a project, because such costs are not considered to be a measure of progress. All un-allocable indirect costs
and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract
is foreseen, the Company will recognize the loss as it is determined. Revisions in cost and profit
estimates during the course of the contract are reflected in the accounting period in which the facts, which require the revision,
become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions,
and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions
are determined. Accounts Receivables Accounts receivables are
recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon
completion of the contracts. Accounts payable to material suppliers and subcontractors are recorded for amounts currently due based
upon work completed or materials received, as are retention due subcontractors, which are payable upon completion of the contract.
General and administrative expenses are charged to operations as incurred and are not allocated to contract costs. Retention receivable
is the amount withheld by a customer until a contract is completed. Retention receivables of $988 and $958 were included in the
balance of accounts receivable as of June 30, 2018, and December 31, 2017, respectively. The Company performs ongoing
credit evaluation of its customers. Management monitors outstanding receivables based on factors surrounding the credit risk of
specific customers, historical trends, age of receivables and other information, and records bad debts using the allowance method.
Accounts receivable are presented net of an allowance for doubtful accounts of $390 at June 30, 2018, and $320 at December 31,
2017. Bad debt expense for the three months ended June 30, 2018 and 2017 was $79 and $102, respectively. Bed debt expense for the
six months ended June 30, 2018 and 2017 was $90 and $117, respectively. Customer Deposits Customer deposits are recorded
for funds remitted by our customers in advance of progress billings being completed. Cash and Cash Equivalents The Company considers all
highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted Cash The Company considers restricted
cash to be cash balances that have legal and/or contractual restrictions imposed by a third party and are restricted as to withdrawal
or use except for the specified purpose. Concentration Risk Cash includes amounts deposited
in financial institutions in excess of insurable Federal Deposit Insurance Corporation (FDIC) limits. At times throughout the year,
the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of June 31, 2018, the cash balance
in excess of the FDIC limits was $4,649. The Company has not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk in these accounts. Inventory Inventory is valued at the
lower of cost or market and is determined by the first-in, first-out method. Inventory primarily consists of panels, inverters,
and mounting racks and other materials. The Company also carries a reserve for inventory obsolescence that may arise from technological
advancement or changes in government regulation. Inventory is presented net of an allowance of $50 at June 30, 2018, and $50 at
December 31, 2017. Property and Equipment Property and equipment are
stated at cost. Depreciation for property and equipment commences when it’s put into service and are depreciated using the
straight-line method over its estimated useful lives:
Machinery & equipment 3-7 Years
Furniture & fixtures 5-7 Years
Computer equipment 3-5 Years
Vehicles 5-7 Years
Leaseholder improvements 3-5 Years Depreciation expense for
the three months ended June 30, 2018 and 2017 was $97 and $103, respectively. Depreciation expense for the six months ended June
30, 2018 and 2017 was $193 and $206, respectively. Advertising and Marketing The Company expenses advertising
and marketing costs as incurred. Advertising and marketing costs include printed material, billboards, sponsorships, direct mail,
radio, telemarketing, tradeshow costs, magazine, and catalog advertisement. Included within selling and marketing expenses are
advertising and marketing costs for the three months ended June 30, 2018 and 2017 of $60 and $270, respectively. Advertising and
marketing costs for the six months ended June 30, 2018 and 2017 were $144 and $701, respectively. Warranty Liability The Company establishes warranty
liability reserves to provide for estimated future expenses as a result of installation and product defects, product recalls and
litigation incidental to the Company’s business. Liability estimates are determined based on management’s judgment,
considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’
participation in sharing the cost of corrective action, and consultations with third party experts such as engineers. Solar panel
manufacturers currently provide substantial warranties between ten to twenty-five years with full reimbursement to replace and
install replacement panels while inverter manufacturers currently provide warranties covering ten to fifteen-year replacement and
installation. The warranty liability for estimated future warranty costs is $306 at June 30, 2018 and $246 at December 31, 2017. Stock-Based Compensation The Company periodically
issues stock options to employees and directors. The Company accounts for stock option grants issued and vesting to employees based
on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on
the date of grant and recognized over the vesting period. The Company accounts for
stock grants issued to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board
whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee
stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances
where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based
compensation charge is recorded in the period of the measurement date. Basic and Diluted Net
Income (Loss) per Share Calculations Income (Loss) per Share dictates
the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income
available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
The shares for employee options, restricted stock, warrants and convertible notes were not used in the calculation of the net loss
per share. A net loss causes all outstanding
common stock options, warrants, convertible preferred stock, and convertible notes to be anti-dilutive. As a result, the basic
and diluted losses per common share are the same for the three and six months ended June 30, 2018 and the six months ended June
30, 2017. As of June 30, 2018, the
potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 1,647,385
stock options, 305,555 restricted stock grants, 2,997,000 warrants, and shares underlying convertible notes. As of June 30, 2017, the
potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 1,125,924
stock options, 1,134,615 restricted stock grants, 2,997,000 warrants, and shares underlying convertible notes and preferred stock. Dilutive per share amounts
are computed using the weighted-average number of common shares outstanding and potentially dilutive securities, using the treasury
stock method, if their effect would be dilutive. Long-Lived Assets The Company reviews its property
and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted
operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be
disposed of are reported at the lower of carrying amount or fair value less costs to sell. Indefinite Lived Intangibles
and Goodwill Assets The Company accounts for
business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,”
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based
on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted,
up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities
assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible
assets acquired less liabilities assumed is recognized as goodwill. The Company tests for indefinite
lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that
the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company
performed a qualitative assessment of indefinite lived intangibles and goodwill at December 31, 2017. Fair Value of Financial
Instruments Disclosures about fair value
of financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where
it is practicable to estimate that value. As of June 30, 2018, the amounts reported for cash, accrued interest and other expenses,
and notes payable approximate the fair value because of their short maturities. We account for financial
instruments measured as fair value on a recurring basis under ASC Topic 820. ASC Topic 820 defines fair value, established a framework
for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures
about fair value measurements. Fair value is defined as
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Business Combinations We allocate the fair value
of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated
fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect
to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected
cash flows from acquired customer lists, acquired technology, and trade names from a market participant perspective, useful lives
and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which
are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period,
which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Income Taxes The Company uses the liability
method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law.
The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that,
based on available evidence, is not expected to be realized. Reclassifications Certain reclassifications
have been made to prior year’s financial statement to conform to classifications used in the current year. Segment Reporting Operating segments are defined
as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating
decision maker, or decision-making group, in deciding the method to allocate resources and assess performance. The Company currently
has one reportable segment for financial reporting purposes, which represents the Company’s core business. New Accounting Pronouncements In February 2016, the FASB
issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use
asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as
either operating or financing, with such classification affecting the pattern of expense recognition in the income statement. ASU
2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption
is permitted. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements and associated
disclosures. In November 2016, the FASB
issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash. ASU 2016-18 requires that the statement of cash flows
explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash
or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017. We elected to adopt ASU 2016-18 retrospectively
as of January 1, 2017 and have applied to all periods presented herein. The adoption of ASU 2016-18 did not have a material impact
to our consolidated financial statements. The effect of the adoption of ASU 2016-18 on our consolidates statements of cash flows
was to include restricted cash balances in the beginning and end of period balances of cash, cash equivalents, and restricted cash.
The change in restricted cash was previously disclosed in operating activities in the consolidated statements of cash flows. In January 2017, the FASB
issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by
eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S.
GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities
(including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of
assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill
impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge
should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes effective for the Company
on January 1, 2020. The amendments in this ASU should be applied on a prospective basis. Early adoption is permitted for interim
or annual goodwill impairment tests performed. We are currently evaluating the impact ASU No. 2017-04 will have on our consolidated
financial statements and associated disclosures. In May 2014, the FASB issued
ASU 2014-09, Revenue from Contracts with Customers (ASC 606), to clarify the principles of recognizing revenue and create common
revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASC 606, revenue is recognized
when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected
to be received in exchange for such goods or services. In addition, ASC 606 requires disclosure of the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers. The ASC is effective for fiscal years beginning
after December 15, 2017. The Company has adopted ASC 606 beginning on January 1, 2018 using the modified retrospective approach
for contracts not substantially complete at that date by recognizing a cumulative adjustment to the opening balance of accumulated
deficit. See Note 3 for additional disclosures in accordance with the new revenue recognition standard. Management reviewed currently
issued pronouncements during the three months ended June 30, 2018, and believes that any other recently issued, but not yet effective,
accounting standards, if currently adopted, would not have a material effect on the accompanying consolidated financial statements. |
