| Summary of Significant Accounting Policies | 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 accounting principles generally accepted in the United States of America (“GAAP”) and have been consistently
applied in the preparation of the financial statements. There have been no significant changes
in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31,
2018, except for the policies described below in relation to the adoption of Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842), Accounting Pronouncements Recently Adopted Principles of Consolidation The accompanying consolidated financial
statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries, Sunworks United, Inc. (d/b/a Sunworks
United), MD Energy, Inc., and Elite Solar Acquisition Sub, Inc. All material intercompany transactions have been eliminated upon
consolidation of these entities. Use of Estimates The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of 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 construction
contracts, allowances for uncollectible accounts, operating lease right-of-use-assets and liabilities, warranty reserves, inventory
valuation, debt beneficial conversion features, valuations of non-cash capital stock issuances and the valuation allowance on deferred
tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable
in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions. Revenue Recognition Revenues and related costs on construction
contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards
Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, 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 $847 and $1,234 were included in the
balance of trade accounts receivable as of March 31, 2019, and December 31, 2018, respectively. The Company performs ongoing credit
evaluation of its customers. Management monitors outstanding receivables based on factors surrounding the credit risk of specific
customers, historical trends, age of receivables and other information, and records bad debts using the allowance method. Accounts
receivable are presented net of an allowance for doubtful accounts of $325 at March 31, 2019, and $325 at December 31, 2018. During
the three months ended March 31, 2019 and 2018, $23 and $11 was recorded as bad debt expense, respectively. Customer Deposits Customer deposits are recorded for
funds remitted by our customers in advance of progress billings being completed. Cash and Cash 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 March 31, 2019, the cash balance
in excess of the FDIC limits was $1,434. 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 March 31, 2019, and $50 at December 31,
2018. Property and Equipment Property and equipment are stated
at cost. Depreciation for property and equipment commences when property and equipment are put into service and are depreciated
using the straight-line method over the property and equipment’s estimated useful lives:
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 March 31, 2019 and 2018 was $92 and $95, respectively. Leases The Company determines if an arrangement
is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities
are included on the face of the condensed consolidated balance sheet. If the Company had finance lease ROU assets, such assets
would be presented within other assets, and finance lease liabilities would be presented as appropriates. ROU assets represent the right to
use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments
arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value
of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses
an incremental borrowing rate based on the information available at commencement date in determining the present value of lease
payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to
extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease
payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease
components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the Company
has elected the short-term lease measurement and recognition exemption, and it recognizes such lease payments on a straight-line
basis over the lease term. Advertising and Marketing The Company expenses advertising
and marketing costs as incurred. Advertising and marketing costs include primarily printed material, sponsorships, tradeshow costs,
magazine, and catalog advertisement. Included within selling and marketing expenses are advertising and marketing costs for
the three months ended March 31, 2019 and 2018 of $43 and $84, 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 $351 and $321 at March 31, 2019 and December 31, 2018,
respectively. Stock-Based Compensation The Company periodically issues
stock options and warrants to employees and non-employees. The Company accounts for stock option and warrant 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 option and
warrant grants issued and vesting 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 (Loss)
per Share Calculations (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 months ended March 31, 2019 and 2018. As of March 31, 2019, the potentially
dilutive securities that have been excluded from the computations of weighted average shares outstanding include 952,500 stock
options, 180,554 restricted stock grants, 2,997,000 warrants, and shares underlying convertible notes. As of March 31, 2018, the potentially
dilutive securities have been excluded from the computations of weighted average shares outstanding include 1,633,155 stock options,
1,134,615 restricted stock grants, 2,997,000 warrants, 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 quantitative assessment of indefinite lived intangibles and goodwill at December 31, 2018. At December 31, 2018, the
Company determined that the carrying amount of goodwill exceeded its fair value and, as a result, recorded an impairment of $1,900. Fair Value of Financial Instruments Disclosures about fair value of
financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where
it is practicable to estimate that value. As of March 31, 2019, 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 GAAP 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 January 2017, the Financial Accounting
Standards Board (“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. Adopted Accounting Pronouncements In February 2016, the FASB issued
ASU 2016-02, Leases (Topic 842) Leases (Topic 842) - Targeted Improvements We adopted ASU 2016-02 in the first
quarter of 2019 using the optional transition method and elected certain practical expedients permitted under the transition guidance,
which, among other things, allowed us to not reassess prior conclusions related to contracts containing leases or lease classification.
The adoption primarily affected our condensed consolidated balance sheet through the recognition of $2.1 million of right-of-use
assets and $2.1 million of lease liabilities as of January 1, 2019. The adoption did not have a significant impact on our results
of operations or cash flows. See Note 4. “Leases” to our condensed consolidated financial statements for further discussion
of the effects of the adoption of ASU 2016-02 and the associated disclosures. In May 2014, the FASB issued ASU
2014-09, Revenue from Contracts with Customers (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 was effective for fiscal years beginning
after December 15, 2017. The Company has adopted ASC 606 beginning on January 1, 2018 using the modified retrospective approach
for contracts not substantially complete at that date by recognizing a cumulative adjustment to the opening balance of accumulated
deficit. See Note 3 for additional disclosures in accordance with the new revenue recognition standard. Management reviewed currently issued
pronouncements during the three months ended March 31, 2019, 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. |
