| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This
summary of significant accounting policies of Sunworks, Inc. is presented to assist in understanding the Company’s consolidated
financial statements. These accounting policies conform to generally accepted accounting principles used in the United States (“GAAP”)
and have been consistently applied in the preparation of the consolidated financial statements. Principles
of Consolidation The
accompanying 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
accompanying consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities and commitments
in the normal course of business. The Company has historically incurred significant operating losses. During
2022 we raised $ 17,104 19,400 75,000 We
believe that the aggregate of our existing cash and cash equivalents is sufficient to meet our operating cash requirements and
strategic objectives for growth for at least the next year. To satisfy our capital requirements, including acquisitions and ongoing
future operations, we may seek to raise additional financing, including access to our Sales Agreement (as defined in Note 12) or
through debt offerings. 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, fair value of assets acquired and liabilities assumed in a business combination, 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. Change
in Accounting Estimate In
July 2022, we completed an assessment of the contract fulfillment costs that give rise to an asset for residential contracts. We determined
that additional specifically identifiable costs related directly to residential contracts can be capitalized, in accordance with Accounting
Standards Codification (“ASC”) Section 340-40. The additional capitalized costs of approximately $ 3,458 Reclassifications Certain
prior year 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. For the year ended December 31, 2021, $ 655 2,000 1,210 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. 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. Revenue from systems operations and maintenance were not significant
or material in either 2022 or 2021. 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 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 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 years ended December 31, 2022 and 2021 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
Year Ended
(In thousands, except number of projects) December 31, 2022 December 31, 2021
Increase in revenue from net changes in transaction prices $ 492 $ 286
Increase (decrease) in revenue from net changes in input cost estimates (381 ) 815
Net increase (decrease) in revenue from net changes in estimates $ 111 $ 1,101
Number of projects 4 9
Net change in estimate as a percentage of aggregate revenue for associated projects 1.3 % 8.3 % 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) December 31, 2022 December 31, 2021
Contract Assets $ 20,699 $ 14,498
Contract Liabilities 24,960 12,201 During
the year ended December 31, 2022, the Company recognized revenue of $ 9,045 4,511 The
following table represents the average percentage of completion as of December 31, 2022 for EPC projects that the Company is constructing.
The Company expects to recognize $ 32,363 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 48.2 % Accounts
Receivable Accounts
receivables 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 $ 455 309 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 of $ 935 454 473 454 Cash
and Cash Equivalents The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted
Cash The
Company considers restricted cash to be cash balances that have legal or contractual restrictions imposed by a third party and are restricted
as to withdrawal or use except for the specified purpose. Concentration
Risk Cash
includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (“FDIC”)
limits. At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of
December 31, 2022 and 2021, the cash balance in excess of the FDIC limits was $ 7,735 19,631 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, batteries, optimizers, 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. Inventory is presented
net of an allowance of $ 227 312 Property
and Equipment Property
and equipment are stated at cost. Depreciation for property and equipment commences when it is put into service and are depreciated using
the straight-line method over property and equipment’s estimated useful lives: SCHEDULE OF PROPERTY AND EQUIPMENT ESTIMATED USEFUL LIVES
Machinery
& equipment 3 7
Office
equipment & furniture 5 7
Computers
& software 3 5
Vehicles
& trailers 3 7
Leasehold
improvements 3 5 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 consolidated balance sheet. The Company also has finance lease ROU assets and finance
lease liabilities, which are presented in the 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. Warranty
Liability The
Company establishes warranty liability reserves to provide for estimated future expenses as a result of installation, product and performance
defects, product recalls and litigation incidental to the Company’s business. Liability estimates are determined based on management’s
judgment, considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’
participation in sharing the cost of corrective action, and consultations with third party experts such as engineers. Solar panel manufacturers
currently provide substantial warranties of between ten to twenty-five years with full reimbursement to replace and install replacement
panels 1,596 1,251 Advertising
and Marketing The
Company expenses advertising and marketing costs as incurred. Advertising and marketing costs may include printed material, billboards,
sponsorships, direct mail, radio, telemarketing, tradeshow costs, magazine, and catalog advertisement. Advertising and marketing costs
for the years ended December 31, 2022 and 2021 were $ 1,527 864 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 unvested RSUs 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 year ended December 31, 2022 and 2021. As
of December 31, 2022, the potentially dilutive securities were excluded from the computations of weighted average shares outstanding
including 211,720 999,858 As
of December 31, 2021, the potentially dilutive securities were excluded from the computations of weighted average shares outstanding
including 290,684 1,185,889 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. Long-Lived
Assets The
Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. 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 assist in testing 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. At December
31, 2021 we performed a quantitative assessment of goodwill. It was determined that the remaining carrying of goodwill resulting from
the acquisitions made in 2014 and 2015 exceeded their fair value and we recorded an impairment of $ 5,464 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 December 31, 2022, the amounts reported for cash, accrued interest and other
expenses, approximate the fair value because of their short maturities. The
Company accounts for financial instruments measured as fair value on a recurring basis under ASC Topic 820. ASC Topic 820 defines fair
value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States
and 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. Income
Taxes The
Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to consolidated financial statements carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions
of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount
of tax benefits that, based on available evidence, is not expected to be realized. New
Accounting Pronouncements Management
reviewed currently issued pronouncements during the year ended December 31, 2022, 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. |
