| 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. 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
EPC revenue, 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 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 EPC services 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 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 nine months ended September 30, 2021 and 2020 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 or cost of at least $100, calculated
on a quarterly basis during the periods, were 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
(In thousands, except number of projects) September September September September
Three Months Ended Nine Months Ended
(In thousands, except number of projects) September September September September
Increase in revenue from net changes in transaction prices $ - $ - $ 190 $ 200
Increase (decrease) in revenue from net changes in input cost estimates 1,307 83 985 369
Net increase in revenue from net changes in estimates $ 1,307 $ 83 $ 1,175 $ 569
Number of projects 4 3 6 7
Net change in estimate as a percentage of aggregate revenue for associated projects 17.3 % 1.1 % 11.3 % 5.2 % 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 commissions, labor 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
As of
(In thousands) September 30, 2021 December 31, 2020
Contract Assets $ 12,418 $ 2,397
Contract Liabilities 11,883 6,260 During
the three and nine months ended September 30, 2021, the Company recognized revenue of $ 1,942
and $ 4,376 ,
respectively, that was included in contract liabilities as of June 30, 2021 and December 31, 2020, respectively. During the three and
nine months ended September 30, 2020, the Company recognized revenue of $ 922
and $ 3,249,
respectively, that was included in contract
liabilities as of June 30, 2020 and December 31, 2019, respectively. The
following table represents the average percentage of completion as of September 30, 2021 for EPC projects that the Company
is constructing. The Company expects to recognize $ 17,900
of revenue upon transfer of control of the projects. SCHEDULE OF REVENUE RECOGNIZE
UPON TRANSFER CONTROL OF PROJECTS
Project Revenue Category Expected Years Revenue Recognition Will Be Completed Average Percentage of Revenue Recognized
Various Projects EPC services 2021
- 2022 55.5 % 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 $ 295 392 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 September 30, 2021 of $ 491
and at December 31, 2020 of $ 253 .
During the three months ended September 30, 2021, $ 132
of uncollectible accounts receivable was
written off against the allowance for doubtful accounts. Additionally, during the three months ended September 30, 2021, $ 74
was recorded as bad debt expense compared
to $ 0 in
the prior year period. During the nine months ended September 30, 2021 and 2020, $ 255
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, optimizers 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
Leasehold improvements 3 5 Intangible
Assets The
Company’s intangible assets at September 30, 2021 consist of the following: SCHEDULE OF INTANGIBLE ASSETS
Amortization Cost Accumulated amortization Net carrying value
Trademarks 10 $ 5,200 $ (260 ) $ 4,940
Backlog of projects 9 2,000 (1,334 ) 666
Covenant not-to-compete 3 2,400 (400 ) 2,000
Software (included in property and equipment) 3 3,400 (566 ) 2,834
Dealer relationships 18 2,600 (866 ) 1,734
$ 15,600 $ (3,426 ) $ 12,174 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 nine months ended September 30, 2021 was as follows: SCHEDULE OF AMORTIZATION EXPENSES
For the For the
Three Months Ended Nine months ended
September 30, 2021 September 30, 2021
Trademarks $ 130 $ 260
Backlog of projects 667 1,334
Covenant not-to-compete 200 400
Software 283 566
Dealer relationships 433 866
$ 1,713 $ 3,426 Estimated
future amortization expense for the Company’s intangible assets as of September 30, 2021 is as follows: SCHEDULE
OF ESTIMATED FUTURE AMORTIZATION EXPENSE
2021
Years ending December 31,
Remainder of 2021 $ 1,713
2022 $ 3,753
2023 $ 2,453
2024 $ 1,004
2025 $ 520
Thereafter $ 2,731 Depreciation
and amortization expense for the three months ended September 30, 2021 and 2020 was $ 1,930 82 3,900 246 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 nine months ended September 30, 2021 and 2020, respectively. 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 317,500 unvested RSUs. As
of September 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. There were no events or circumstances that indicated impairment of goodwill at September 30, 2021. 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 September 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 nine months ended September 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. |
