| 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 operating entities. Other inactive wholly-owned
legal entities exist without any operations at this time. Liquidity The
Company has historically incurred significant operating losses. At September 30, 2023, the Company had an accumulated deficit of approximately
$ 198,941 26,000 36,404 55,470 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, recent bank sector volatility and
general economic uncertainty continue to have a material impact on how lenders manage their risk profiles. In view of changing market
dynamics, our lenders have eliminated 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 further reduces 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.
The Company anticipates that it will need to improve its liquidity position through equity or debt financings, sale or other
dispositions of assets and/or reductions in operating costs, in order to satisfy its liquidity needs for the next twelve months.
Following the liquidity assessment, Management has determined that substantial doubt exists about the Company’s ability to
continue as a going concern within one year after the date that these condensed consolidated financial statements are
issued. Management is devoting significant efforts to increasing liquidity, raising capital and developing its
business. 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, the Chairman 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 4,628 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 5,993,205 4,835 14,600 100,000 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 On
August 28, 2023, the Company entered into an At-The-Market-Issuance Sales Agreement (the “2023 Sales Agreement”) with B.
Riley Securities, Inc. and Northland Securities, Inc. (each an “Agent” and collectively, the “Agents”), pursuant
to which the Company may offer and sell from time to time up to an aggregate of $ 17,600
of shares of the Company’s common stock
(the “2023 Placement Shares”), through the Agents. On August 28, 2023, the Company filed a prospectus supplement with the
SEC that covers the sale of the 2023 Placement Shares to be sold under the Sales Agreement, which shares have been registered under the
2021 Registration Statement. Goodwill As
a result of the Solcius acquisition in April of 2021, the Company added $ 32,186
of goodwill, which was included in the Residential
segment. See Note 4, “Operating Segments” of these unaudited condensed consolidated financial statements for further discussion
of the Company’s segments. The goodwill represented the excess of the purchase price over the fair value of assets acquired, including
identifiable intangibles and liabilities as part of the Company’s acquisition of Solcius. During the third quarter of 2023, the
Company identified triggering events associated with Sunworks market capitalization relative to the net asset value of the Company and
the negative impact of rising interest rates on residential originations. As a result, the Company retained a valuation consulting firm
to assist in testing for goodwill impairment in the third quarter of 2023 to evaluate the recoverability of the Solcius asset group.
In accordance with GAAP, the carrying value of the Solcius asset group was compared to both forecasted discounted cash flows associated
with this asset group and a market valuation approach. Based on the analyses performed, it was determined that the carrying amount of
the reporting unit exceeded the fair value and the Company recorded a $ 26,000
goodwill impairment charge in the third quarter
of 2023. Operating
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 nine months ended September 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 Nine months Ended
(In thousands, except number of projects) September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022
Increase (decrease) in revenue from net changes in transaction prices $ (417 ) $ - $ (555 ) $ 484
Increase (decrease) in revenue from net changes in input cost estimates 229 - 591 (500 )
Net increase (decrease) in revenue from net changes in estimates $ (188 ) $ - $ 36 $ (16 )
Number of projects 4 - 9 3
Net change in estimate as a percentage of aggregate revenue for associated projects (3.3 )% 0.0 % 0.3 % (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) September 30, 2023 December 31, 2022
As of
(In thousands) September 30, 2023 December 31, 2022
Contract Assets $ 16,714 $ 20,699
Contract Liabilities 19,280 24,960 During
the three and nine months ended September 30, 2023, the Company recognized revenue of $ 1,352 18,660 486 8,295 The
following table represents the average percentage of completion as of September 30, 2023 for EPC projects that the Company is constructing.
The Company expects to recognize $ 30,585 SCHEDULE
OF REVENUE RECOGNIZE UPON CONTROL OF PROJECTS
Project Revenue Category Expected Years Revenue Recognition Will Be Completed Average Percentage of Revenue Recognized
Various Projects EPC services 2023 - 2024 56.7 % 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 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, 2023 and 2022, respectively. As of September 30, 2023, the potentially
dilutive securities that have been excluded from the computations of weighted average shares outstanding include 158,071 985,557 As of September 30, 2022, the potentially
dilutive securities that have been excluded from the computations of weighted average shares outstanding include 236,720 638,024 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 September 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 nine months ended September 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. |
