| 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 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,
2019. Principles of Consolidation The accompanying consolidated financial
statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries, Sunworks United, MD Energy, and
Plan B. All material intercompany transactions have been eliminated upon consolidation of these entities. Use of Estimates The preparation of financial statements
in conformity with 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 recognized over time, allowances for uncollectible accounts, operating lease right-of-use-assets and liabilities, warranty
reserves, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions. Revenue Recognition Revenues and related costs on construction
contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards
Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, engineering,
procurement and construction (“EPC”) projects for residential and smaller ACI 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
Public Works and ACI projects may be completed within eighteen to thirty-six months, depending on the size and location. We recognize
revenue from EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer. The cost of materials or equipment
will generally be excluded from our recognition of profit, unless specifically produced or manufactured for a project, because
such costs are not considered to be a measure of progress. All un-allocable indirect costs and corporate general and administrative
costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize
the loss in the period it is determined. Revisions in cost and profit estimates,
during the course of the contract, are reflected in the accounting period in which the facts, which require the revision, become
known. We use an input method based on costs incurred as we believe that this method most
accurately reflects our progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed-price
construction contracts is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs
at completion of the performance obligations. Contract assets represent revenues
recognized in excess of amounts invoiced to customers on contracts in progress. Contract liabilities represent amounts invoiced
to customers in excess of revenues recognized on contracts in progress. Accounts Receivable Accounts receivable are recorded
on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion
of the contracts. Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables
of $879 and $1,027 were included in the balance of trade accounts receivable as of June 30, 2020, and December 31, 2019, respectively. The Company performs ongoing credit
evaluation of its customers. Management monitors outstanding receivables based on factors surrounding the credit risk of specific
customers, historical trends, age of receivables and other information, and records bad debts using the allowance method. Accounts
receivable are presented net of an allowance for doubtful accounts at December 31, 2019 of $350 and at June 30, 2020 of $63. During
the three months ended June 30, 2020, $287 of uncollectible accounts receivable was written off against the allowance for doubtful
accounts. Additionally, during the three months ended June 30, 2020, $158 was recorded as bad debt expense compared to $15 in the
prior year period. During the six months ended June 30, 2020 and 2019, $280 and $39 was recorded as bad debt expense, respectively. Inventory Inventory is valued at lower of
cost or net realizable value determined by the first-in, first-out method. Inventory primarily consists of panels, inverters, and
mounting racks and other materials. The Company reviews the cost of inventories against their estimated net realizable value and
record write-downs if any inventories have costs in excess of their net realizable values. 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 June 30, 2020 and 2019 was $83 and $91, respectively. Depreciation expense for the six months ended June 30, 2020
and 2019 was $164 and $182, respectively. Leases The Company determines if an arrangement
is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities
are included on the face of the condensed consolidated balance sheet. If the Company had finance lease ROU assets, such assets
would be presented within other assets, and finance lease liabilities would be presented appropriately within liabilities. ROU assets represent the right to
use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments
arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value
of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses
an incremental borrowing rate based on the information available at commencement date in determining the present value of lease
payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to
extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease
payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease
components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the Company
has elected the short-term lease measurement and recognition exemption, and the Company recognizes such lease payments on a straight-line
basis over the lease term. 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 (loss) per share and diluted earnings per share. Basic earnings (loss) per share are computed by dividing income
(loss) 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 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, 2020 and 2019, respectively. As of June 30, 2020, the potentially
dilutive securities that have been excluded from the computations of weighted average shares outstanding include 128,411 stock
options. As of June 30, 2019, the potentially
dilutive securities have been excluded from the computations of weighted average shares outstanding include 125,857 stock options,
19,841 restricted stock grants, and 428,143 warrants. 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. 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 retains a valuation
consulting firm to test for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever
events or circumstances indicate that the carrying amount of an asset exceeds its fair value and may not be recoverable. In accordance
with the Company’s policies, the Company performed a quantitative assessment of indefinite lived intangibles and goodwill
at December 31, 2019, no impairment was found. As a result of the events and circumstances resulting from the COVID-19 pandemic,
the Company’s outlook for revenue, profitability and cash flow has deteriorated. Therefore, the Company performed another
quantitative assessment of indefinite lived intangibles and goodwill at March 31, 2020. It was determined that the carrying value
of goodwill exceeded its fair value at March 31, 2020 and, as a result, recorded an impairment of $4,000. No quantitative assessment
was deemed necessary to perform at June 30, 2020. 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, 2020, the amounts reported for cash, accrued interest and other expenses,
and notes payable approximate the fair value because of their short maturities. We account for financial instruments
measured as fair value on a recurring basis under ASC Topic 820. ASC Topic 820 defines fair value and established a framework for
measuring fair value in accordance with GAAP. ASC Topic 820 also expands disclosures about fair value measurements. Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Reclassifications Certain reclassifications have been
made to prior year’s financial statements to conform to classifications used in the current year. New Accounting Pronouncements Adopted Accounting Pronouncements In January 2017, the FASB issued
ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating
Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires
the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized
assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities
assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed
by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount
by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the
total amount of goodwill allocated to that reporting unit. The ASU became effective for the Company on January 1, 2020 and was
followed in the preparation of a quantitative assessment of indefinite lived intangibles and goodwill at March 31, 2020. It was
determined that the carrying value of goodwill exceeded its fair value at March 31, 2020 and, as a result, we recorded an impairment
of $4,000. No quantitative assessment was performed at June 30, 2020. Management reviewed currently issued
pronouncements during the six months ended June 30, 2020, 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. |
