| 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 condensed consolidated 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, 2022. Principles
of Consolidation The
accompanying condensed consolidated financial statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries,
Sunworks United Inc., Commercial Solar Energy, Inc. and Solcius LLC. All material intercompany transactions have been eliminated upon
consolidation of these entities. Liquidity The Company has historically incurred significant operating losses. At June 30, 2023, the Company had
an accumulated deficit of approximately $ 162,537 12,676 19,066 We
partner with various financing providers that offer our customers financial products that allow them to monetize the benefit of solar
power generation. At the time of sale of a solar installation, we have historically received advanced funding from lenders to support
our working capital needs. Credit market tightening related to recent bank sector volatility and general economic uncertainty have begun
to materially change how lenders manage their risk profiles. In view of changing market dynamics, some of our lenders are either reducing
or eliminating advance funding, which delays the timing of payment to us and negatively affects our available liquidity. Additionally,
lenders are modifying their payment milestones and timelines, which may further reduce our available liquidity. Management
assesses whether the Company has sufficient liquidity to fund its costs for the next twelve months from each financial statement
issuance date to determine if there is a substantial doubt about the Company’s ability to continue as a going concern. In the
preparation of this liquidity assessment, management applied judgment to estimate the projected cash flows of the Company, including
the following: (i) projected cash outflows, (ii) projected cash inflows, (iii) categorization of expenditures as discretionary
versus non-discretionary, (iv) the ability to expedite collection of receivables under the Company’s factoring agreement with
Produce Pay, Inc. and (vi) the ability to raise capital through the sale of equity in at-the-market offerings (see Note 8) or
otherwise. The cash flow projections are based on known or planned cash requirements for operating costs and expected customer
revenues from customers. The
Company’s continued existence is dependent upon management’s ability to increase liquidity, raise capital and develop
profitable operations. Management is devoting significant efforts to increasing liquidity, raising capital and developing its
business. The Company may meet its working capital requirements through a variety of means, including debt financings, equity
financings, the sale or other disposition of assets, and/or reductions in operating costs. The Company anticipates that it will need
to sell additional shares of stock, in at-the-market offerings or otherwise, in order to satisfy its liquidity needs for the next
twelve months. Our ability to raise additional capital by issuing additional shares will require an increase in our authorized
shares that requires shareholder approval. If the Company cannot raise needed funds, it raises substantial doubt about the
Company’s ability to satisfy its liabilities and commitments in the normal course of business over the next year. Effective
May 4, 2023, Commercial Solar Energy, Inc. and Sunworks United, Inc., wholly-owned subsidiaries of Sunworks, Inc. (collectively, the
“Company”) entered into a Factoring Agreement (the “Factoring Agreement”) with Produce Pay Inc. (the
“Buyer”). Patrick McCullough, a director of the Company, is the Chief Executive Officer of the Buyer. Under the terms of
the Factoring Agreement, the Company may use the Buyer’s on-line software platform to offer for sale, and the Buyer may
purchase at 80% 18.4% 10,000 accounts
receivable 2,405 On
May 22, 2023, the Company entered into trade purchase agreement with respect to its Employee Retention Tax Credit (ERTC) receivable
with 1861 Acquisition LLC. Under the terms of the agreement, the Company received $ 5,723 1,028 On
January 27, 2021, the Company filed a Registration Statement on Form S-3 (File No. 333-252475) (the “2021 Registration Statement”),
with the SEC. The 2021 Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination
of common stock, preferred stock, warrants, or units having an aggregate initial offering price not to exceed $ 100,000 1,394,743 1,751 17,600 100,000 On
June 1, 2022, the Company filed a Registration Statement on Form S-3 (File No. 333-265336) (the “2022 Registration Statement”),
with the SEC. The 2022 Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination
of common stock, preferred stock, warrants, or units having an aggregate initial offering price not to exceed $ 75,000 4,050,000 1.14 4,617 3,300,000 1.00 3,300 67,100 75,000 Reclassifications Certain
prior period amounts have been reclassified to conform to the current presentation. The reclassifications impact historical cost of goods
sold, depreciation, amortization and general and administrative expenses. During the three months ended June 30, 2022, $ 241 30 474 656 Segment
Reporting We
currently operate in three segments based upon our organizational structure and the way in which our operations are managed and evaluated.
Our largest segment is Residential Solar which are projects smaller in size and shorter in duration. Our second operating segment is
Commercial Solar Energy which includes projects that are commonly larger in size and longer in duration serving commercial, industrial,
agricultural and public works customers. Our third segment is Corporate, which is responsible for general company oversight and management.
Disaggregating the corporate costs from the residential and commercial operations simplifies the performance evaluation of the Residential
Solar and Commercial Solar Energy segments. Use
of Estimates The
preparation of consolidated 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 consolidated 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 and intangibles, for possible impairments and estimations
of long-lived assets, revenue recognition on construction contracts recognized over time, allowances for uncollectible accounts, finance
lease right-of-use assets and liabilities, 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 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 commercial 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
commercial projects, 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 the
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 commercial projects 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 condensed 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 six months ended June 30, 2023 and 2022 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 SCHEDULE
OF CHANGES IN ESTIMATE AGGREGATE REVENUE
Three Months Ended Six Months Ended
(In thousands, except number of projects) June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022
Increase in revenue from net changes in transaction prices $ 223 $ - $ 163 $ 475
Increase (decrease) in revenue from net changes in input cost estimates 386 - 571 (487 )
Net increase (decrease) in revenue from net changes in estimates $ 609 $ - $ 734 $ (12 )
Number of projects 5 - 7 3
Net change in estimate as a percentage of aggregate revenue for associated projects 8.2 % 0.0 % 7.5 % (0.2 )% 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, installation 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
(In thousands) June 30, 2023 December 31, 2022
As of
(In thousands) June 30, 2023 December 31, 2022
Contract Assets $ 16,201 $ 20,699
Contract Liabilities 21,231 24,960 During
the three and six months ended June 30, 2023, the Company recognized revenue of $ 4,187 and $ 17,308 4,187 and
$ 6,863 ,
respectively, that was included in contract liabilities as of December 31, 2021. The
following table represents the average percentage of completion as of June 30, 2023 for EPC projects that the Company is constructing.
The Company expects to recognize $ 36,161 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 2023 - 2024 50.2 % 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, unvested restricted stock units (“RSUs”) and unvested performance-based
restricted stock units (“PSUs”) were not used in the calculation of the net loss per share. A
net loss causes all outstanding common stock options, unvested RSUs and unvested PSUs 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, 2023 and 2022, respectively. As
of June 30, 2023, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding
include 162,436 746,829 1,634,546 As
of June 30, 2022, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding
include 276,720 666,692 442,889 Dilutive
per share amounts are computed using the weighted-average number of shares of common stock outstanding and potentially dilutive securities,
using the treasury stock method, if their effect would be dilutive. New
Accounting Pronouncements In
June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial
Instruments.” This ASU replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects
expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates
on certain types of financial instruments, including trade receivables. In addition, new disclosures are required. The ASU, as subsequently
amended, is effective for the Company for fiscal years beginning after December 15, 2022, as the Company was a smaller reporting company
as of November 15, 2019, the determination date. We adopted ASU 2016-13 on January 1, 2023. Based on the composition of the Company’s
accounts receivable, and other financial assets, including current market conditions and historical credit loss activity, the adoption
of this standard did not have a material impact on the Company’s consolidated financial statements or disclosures. Specifically,
the Company’s estimate of expected credit losses as of June 30, 2023, using its expected credit loss evaluation process described
above, resulted in no adjustments to the provision for credit losses and no cumulative-effect adjustment to accumulated deficit on the
adoption date of the standard. Management
reviewed currently issued pronouncements during the six months ended June 30, 2023, and believes that any recently issued, but not yet
effective, accounting standards, if currently adopted, would not have a material effect on the accompanying condensed consolidated financial
statements. |
