| 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. Principles
of Consolidation The
accompanying consolidated financial statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries, Sunworks
United, MD Energy, Plan B and Solcius. All material intercompany transactions have been eliminated upon consolidation of these entities. Reclassifications Certain
reclassifications have been made to prior year’s financial statements to conform to classifications used in the current year.
Sales commissions, finders’ fees and financing fees paid to third parties have been reclassified from cost of goods sold to
selling and marketing in the condensed consolidated statements of operations with no change in the previously reported net
losses. Customer deposits have been reclassified and included in contract liabilities. Use
of Estimates The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
include estimates used to assess the realizability of the Company’s goodwill, impairments and estimations of long-lived
assets, revenue recognition on construction contracts recognized over time, fair value of assets acquired and liabilities assumed
in a business combination, allowances for uncollectible accounts, operating and finance lease right-of-use assets and liabilities,
warranty reserves, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets.
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 Revenue
and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance
with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated
profit, engineering, procurement and construction (“EPC”) projects for residential and smaller commercial systems that require
us to deliver functioning solar power systems are generally completed within two to twelve months from commencement of construction.
Construction on larger commercial projects may be completed within eighteen to thirty-six months, depending on the size and location.
We recognize revenue from 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. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions,
and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are
determined. Contract assets represent revenue recognized
in excess of amounts invoiced to customers on contracts in progress together with commissions paid to third-party sales partners prior
to revenue being recognized on residential projects. Contract liabilities represent amounts invoiced to and deposits paid by
customers in excess of revenue recognized on contracts in progress. Accounts
Receivable Accounts
receivable are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible
upon completion of the contracts. Retention receivable is the amount withheld by a customer until a contract is completed. Retention
receivables of $ 262 392 The
Company performs ongoing credit evaluation of its customers. Management monitors outstanding receivables based on factors surrounding
the credit risk of specific customers, historical trends, age of receivables and other information, and records bad debts using the allowance
method. Accounts receivable are presented net of an allowance for doubtful accounts at June 30, 2021 of $ 295
and at December 31, 2020 of $ 253 .
During the three months ended June 30, 2021, $ 134
of uncollectible accounts receivable was written
off against the allowance for doubtful accounts. Additionally, during the three months ended June 30, 2021, $ 183
was recorded as bad debt expense compared
to $ 158 in
the prior year period. During the six months ended June 30, 2021 and 2020, $ 188
and $ 280,
respectively, was recorded as bad debt expense. 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 records 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: SCHEDULE OF PROPERTY AND EQUIPMENT ESTIMATED USEFUL LIVES
Machinery & equipment 3 7
Office equipment & fixtures 5 7
Computers & software 3 5
Vehicles & trailers 3 7
Leaseholder improvements 3 5 Intangible
Assets The Company’s intangible assets
at June 30, 2021 consist of the following: SCHEDULE OF INTANGIBLE ASSETS
Amortization periods Cost Accumulated
amortization Net
carrying value
Trademarks 10 $ 5,200 $ (130 ) $ 5,070
Backlog
of projects 9 2,000 (667 ) 1,333
Covenant
not-to-compete 3 2,400 (200 ) 2,200
Software (included in property and equipment) 3 3,400 (283 ) 3,117
Dealer
relationships 18 2,600 (433 ) 2,167
$ 15,600 $ (1,713 ) $ 13,887 Intangible
assets are stated at their original estimated value at the date of acquisition. The amortization of intangible assets
commences upon acquisition. The intangible assets are being amortized using the straight-line method over the intangible asset’s
estimated useful life: Amortization expenses for intangible
assets for the three and six months ended June 30, 2021 was as follows: SCHEDULE OF AMORTIZATION EXPENSES
For
the For
the
Three
Months Ended Six
Months Ended
June
30, 2021 June
30, 2021
Trademarks $ 130 $ 130
Backlog
of projects 667 667
Covenant
not-to-compete 200 200
Software 283 283
Dealer
relationships 433 433
$ 1,713 $ 1,713 Estimated future amortization expense
for the Company’s intangible assets as June 30, 2021 is as follows: SCHEDULE OF ESTIMATED FUTURE
AMORTIZATION EXPENSE
2021
Years ending December 31,
Remainder of 2021 $ 3,427
2022 $ 3,753
2023 $ 2,453
2024 $ 1,004
2025 $ 520
Thereafter $ 2,730 Depreciation
and amortization expense for the three months ended June 30, 2021 and 2020 was $ 1,905
and $ 83 ,
respectively. Depreciation and amortization expense for the six months ended June 30, 2021 and 2020 was $ 1,970
and $ 164 ,
respectively. Leases The
Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term
and long-term lease liabilities are included in the condensed consolidated balance sheet. With the acquisition of Solcius in April
2021, the Company has finance lease ROU assets and finance lease liabilities, which are presented appropriately in
the condensed consolidated balance sheet. ROU
assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation
to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement
date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit
rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining
the present value of lease payments. The operating and finance lease ROU asset also excludes lease incentives. The Company’s
lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease
and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the
Company has elected the short-term lease measurement and recognition exemption, and the Company recognizes such lease payments on a straight-line
basis over the lease term. Stock-Based
Compensation The
Company periodically issues stock options and restricted stock units (“RSU”) to employees and non-employees. The Company
accounts for stock option and RSU grants issued and vesting to employees based on the authoritative guidance provided by the Financial
Accounting Standards Board (“FASB”) whereas the value of the award is measured on the date of grant and recognized
over the vesting period. The Company accounts for stock option and RSU grants issued and vesting to non-employees in accordance with
the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the
measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the
vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee,
option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date. Basic
and Diluted Net (Loss) per Share Calculations (Loss)
per Share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share
are computed by dividing income (loss) available to 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 and RSUs were not used in the calculation of the net loss per share. A
net loss causes all outstanding common stock options and unvested RSUs to be anti-dilutive. As a result, the basic and diluted
losses per common share are the same for the three and six months ended June 30, 2021 and 2020, respectively. As
of June 30, 2021, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding
include 329,914
stock options and 287,500
unvested
RSUs. As
of June 30, 2020, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding
include 128,411 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. Business
Combinations and Goodwill The
Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,”
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on
their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one
year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and
revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired
less liabilities assumed is recognized as goodwill. The
Company retains a valuation consulting firm to test for goodwill impairment in the fourth quarter of each year and whenever events or
circumstances indicate that the carrying amount of an asset exceeds its fair value and may not be recoverable. Early in 2020, as a result
of the events and circumstances resulting from the COVID-19 pandemic, the Company’s outlook for revenue, profitability and cash
flow had deteriorated. Therefore, the Company performed a quantitative assessment of goodwill at March 31, 2020. It was determined
that the carrying value of goodwill exceeded its fair value at March 31, 2020. As a result, the Company recorded an impairment
of $ 4,000 .
In accordance with the Company’s policies, the Company performed a quantitative assessment of goodwill at December 31, 2020
and no impairment was found. Fair
Value of Financial Instruments Disclosures
about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance
sheet, where it is practicable to estimate that value. As of June 30, 2021, the amounts reported for cash, accrued interest and other
expenses, and notes payable approximate the fair value because of their short maturities. We
account for financial instruments measured as fair value on a recurring basis under ASC Topic 820. ASC Topic 820 defines fair value and
established a framework for measuring fair value in accordance with GAAP and also expands disclosures about fair value measurements. Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs
used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
● Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
● Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted
prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active;
and
● Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions,
such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. New
Accounting Pronouncements Management
reviewed currently issued pronouncements during the six months ended June 30, 2021, and believes that any other recently issued, but
not yet effective, accounting standards, if currently adopted, would not have a material effect on the accompanying condensed
consolidated financial statements. |
