NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
(dollars
in thousands, except share and per share data)
References
herein to “we,” “us,” “Sunworks,” and “the Company” are to Sunworks, Inc. and its wholly owned
subsidiaries, Sunworks United Inc. (“Sunworks United”), Commercial Solar Energy, Inc. (“CSE”), and Solcius LLC.
(“Solcius”)
1.
BASIS OF PRESENTATION
We
provide photovoltaic (“PV”) and battery-based power and storage systems for the residential and commercial markets. Commercial
projects include commercial, agricultural, industrial and public works projects. We operate in several residential and commercial markets
including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, Rhode Island, New York,
Pennsylvania, New Jersey and South Carolina. Through our operating subsidiaries, we design, arrange financing, integrate, install, and
manage systems ranging in size from 2kW (kilowatt) for residential projects to multi-MW (megawatt) systems for larger commercial and
public works projects. Commercial installations have included installations at office buildings, manufacturing plants, warehouses, service
stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school
districts, local municipalities, federal facilities and higher education institutions.
On
April 8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United (the “Buyer”), acquired all of the issued
and outstanding membership interests (the “Solcius Acquisition”) of Solcius, from Solcius Holdings, LLC (“Seller”).
Located in Provo, Utah, Solcius is a full-service, residential solar systems provider. The Company believes the Solcius Acquisition enhances
economies of scale, leading to better access to suppliers, vendors and financial partners, as well as marketing and customer acquisition
opportunities.
The
Solcius Acquisition was consummated on April 8, 2021, pursuant to a Membership Interest Purchase Agreement, dated as of April 8, 2021
(the “Purchase Agreement”), by and between Buyer and Seller. The purchase price for Solcius consisted of $51,750 in cash,
subject to post-closing adjustments related to working capital, cash, indebtedness and transaction expenses. The acquired assets and
operating results of Solcius are included in these consolidated financial statements and footnotes since the date of acquisition through
June 30, 2022 (see Note 3).
The
accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and
notes required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary
for a fair presentation have been included. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2022. The financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year December 31,
2021.
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, 2021.
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.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current presentation. The reclassifications impact historical segment reporting
disclosures as historical corporate payroll costs were moved from the commercial operations segment to the corporate segment for enhanced
reporting disclosures.
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 the 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 condensed 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 condensed
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, intangibles, 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.
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 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, 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, are 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) | |
June
30, 2022 | | |
June
30, 2021 | | |
June
30, 2022 | | |
June
30, 2021 | |
| |
Three
Months Ended | | |
Six
Months Ended | |
(In
thousands, except number of projects) | |
June
30, 2022 | | |
June
30, 2021 | | |
June
30, 2022 | | |
June
30, 2021 | |
Increase
in revenue from net changes in transaction prices | |
$ | - | | |
$ | 106 | | |
$ | 475 | | |
$ | 115 | |
Increase
(decrease) in revenue from net changes in input cost estimates | |
| - | | |
| 35 | | |
| (487 | ) | |
| 38 | |
Net
increase in revenue from net changes in estimates | |
$ | - | | |
$ | 141 | | |
$ | (12 | ) | |
$ | 153 | |
| |
| | | |
| | | |
| | | |
| | |
Number of projects | |
| - | | |
| 3 | | |
| 3 | | |
| 5 | |
| |
| | | |
| | | |
| | | |
| | |
Net change
in estimate as a percentage of aggregate revenue for associated projects | |
| 0.0 | % | |
| 14.2 | % | |
| (0.2 | )% | |
| 4.1 | % |
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, 2022 | | |
December
31, 2021 | |
| |
As
of | |
(In
thousands) | |
June
30, 2022 | | |
December
31, 2021 | |
Contract
Assets | |
$ | 19,637 | | |
$ | 14,498 | |
Contract
Liabilities | |
| 19,417 | | |
| 12,201 | |
During
the three and six months ended June 30, 2022, the Company recognized revenue of $4,187
and $6,863,
respectively, that was included in contract liabilities as of December 31, 2021. Pre-Solcius acquisition, the Commercial
Solar Energy segment for the three and six months ended June 30, 2021 recognized revenue of $2,382
and $3,852, respectively,
that was included in contract liabilities as of December 31, 2020.
The
following table represents the average percentage of completion as of June 30, 2022 for EPC projects that the Company is constructing.
The Company expects to recognize $36,091 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 | |
2022 - 2023 | |
| 40.1 | % |
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 holders of common stock by the weighted-average number of shares of common stock
outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include
the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued
and if the additional shares of common stock were dilutive. The shares for employee options, restricted stock, warrants and convertible
notes were not used in the calculation of the net loss per share.
A
net loss causes all outstanding common stock options and unvested restricted stock units (“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, 2022 and 2021, respectively.
As
of June 30, 2022, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding
include 276,720 stock options and 1,109,581 unvested RSUs.
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.
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
Management
reviewed currently issued pronouncements during the six months ended June 30, 2022, 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.
3.
BUSINESS ACQUISITION
On
April 8, 2021, pursuant to the Purchase Agreement, the Company, through its operating subsidiary Sunworks United Inc., acquired all of
the issued and outstanding membership interests of Solcius from the Seller. Located in Provo, Utah, Solcius is a full-service residential
solar systems provider.
The
purchase price for Solcius consisted of $51,750 in cash subject to post-closing adjustments related to working capital, cash, indebtedness
and transaction expenses. The Solcius Acquisition was accounted for under ASC 805 and the financial results of Solcius have been included
in the Company’s condensed consolidated financial statements since the date of the Solcius Acquisition.
Purchase
Price Allocation
Under
the purchase method of accounting, the transaction was valued for accounting purposes at $52,111 which was the fair value of Solcius
at the time of acquisition. The assets and liabilities of Solcius were recorded at their respective fair values as of the date of acquisition.
The Company utilized the services of a valuation specialist to assist in identifying $15,600 of separately identifiable intangible assets.
Any difference between the cost of Solcius and the fair value of the assets acquired and liabilities assumed is recorded as goodwill.
The acquisition date estimated fair value of the consideration transferred consisted of the following:
SCHEDULE OF BUSINESS ACQUISITION LIABILITIES AND ASSETS ACQUIRED
| |
(in
thousands) | |
Base purchase price | |
$ | 51,750 | |
Working capital
shortfall | |
| (1,131 | ) |
Cash
surplus | |
| 1,492 | |
Total
purchase price paid | |
$ | 52,111 | |
| |
| | |
Cash | |
$ | 1,492 | |
Accounts
receivable | |
| 1,729 | |
Inventory | |
| 3,833 | |
Contract
assets | |
| 7,336 | |
Prepaids
and other current assets | |
| 1,603 | |
Property
and equipment | |
| 143 | |
Deposits | |
| 91 | |
Operating
lease right-of-use asset | |
| 1,885 | |
Finance lease
right-of-use assets | |
| 1,200 | |
Other
intangible assets | |
| 15,600 | |
Identifiable
assets acquired | |
| 34,912 | |
Accounts
payable and accrued liabilities | |
| (6,957 | ) |
Contract
liabilities | |
| (5,273 | ) |
Operating
and finance lease liabilities | |
| (2,757 | ) |
Liabilities
assumed | |
| (14,987 | ) |
Net identifiable
assets acquired | |
| 19,925 | |
Goodwill | |
| 32,186 | |
Net
assets acquired | |
$ | 52,111 | |
During
the three and six months ended June 30, 2022, we recorded no transaction costs related to the Solcius Acquisition. During the three and
six months ended June 30, 2021, we recorded transaction costs of $40 and $750 related to the Solcius Acquisition, respectively. These
expenses were accounted for separately from the net assets acquired and were included in general and administrative expense for the three
months and six months ended June 30, 2021.
We
conducted an assessment of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at
their estimated acquisition date fair values and concluded that no additional adjustment to the purchase price allocation or accounting
was required from the original purchase accounting.
Pro
Forma Information (Unaudited)
The
results of operations for the Solcius Acquisition since the April 8, 2021 closing date have been included in our consolidated financial
statements. The following unaudited pro forma financial information represents a summary of the condensed consolidated results of operations
for three and six months ended June 30, 2022 and 2021, assuming the Solcius Acquisition had been completed as of January 1, 2020. The
pro forma financial information includes certain non-recurring pro forma adjustments that were directly attributable to the business
combination. The proforma adjustments include the elimination of Solcius Acquisition transaction expenses totaling $750 incurred in the
six months of 2021, and adjustments to recognize amortization of intangible assets, retention stock-based compensation programs and
retention bonus accruals in 2022 and 2021. The retention bonus expense is recognized over the first year following the Solcius Acquisition.
The pro forma financial information is not necessarily indicative of the results of operations that would have been achieved if the Solcius
Acquisition had been effective as of these dates, or of future results.
SCHEDULE OF BUSINESS ACQUISITION PROFORMA STATEMENTS OF OPERATIONS
| |
June
30, 2022 | | |
June
30, 2021 | | |
June
30, 2022 | | |
June
30, 2021 | |
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, 2022 | | |
June
30, 2021 | | |
June
30, 2022 | | |
June
30, 2021 | |
| |
| | |
| | |
| | |
| |
Revenue,
net | |
$ | 36,397 | | |
$ | 33,532 | | |
$ | 67,593 | | |
$ | 64,344 | |
| |
| | | |
| | | |
| | | |
| | |
Net
Loss | |
$ | (7,151 | ) | |
$ | (282 | ) | |
$ | (13,971 | ) | |
$ | (4,414 | ) |
4.
REVENUE FROM CONTRACTS WITH CUSTOMERS
The
following table represents a disaggregation of revenue by customer type from contracts with customers for the three and six months ended
June 30, 2022 and 2021:
SCHEDULE OF DISAGGREGATION OF REVENUE
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three
Months Ended June 30, | | |
Six
Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Commercial | |
$ | 2,756 | | |
$ | 6,221 | | |
$ | 5,545 | | |
$ | 9,216 | |
Public Works | |
| 478 | | |
| 940 | | |
| 1,886 | | |
| 2,584 | |
Residential | |
| 33,163 | | |
| 24,930 | | |
| 60,162 | | |
| 26,460 | |
Total | |
$ | 36,397 | | |
$ | 32,091 | | |
$ | 67,593 | | |
$ | 38,260 | |
5.
OPERATING SEGMENTS
Beginning
in 2022, the Company assessed its operating segment disclosure based on ASC 280, Segment Reporting guidance. As a result, the
following segments were established: Residential Solar, Commercial Solar Energy, and Corporate.
Residential
Solar
Through
our Solcius operating subsidiary, we design, arrange financing, integrate, install, and manage systems, primarily for residential homeowners.
We sell residential solar systems through multiple channels, through our network of sales channel partners, as well as, a growing direct
sales channel strategy. We operate in several residential markets including California, Utah, Nevada, Arizona, New Mexico, Texas, Colorado,
Minnesota, Wisconsin, and South Carolina. We have direct sales and/or operations personnel in California, Nevada, Utah, Arizona, New
Mexico, Texas, Colorado, South Carolina, Wisconsin and Minnesota.
Commercial
Solar
Through
our Commercial Solar Energy subsidiary, we design, arrange financing, integrate, install, and manage systems ranging in size from 50kW
(kilowatt) to multi-MW (megawatt) systems primarily for larger commercial and public works projects. Commercial installations have included
installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as
farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and
higher education institutions. Historically, the Commercial Solar Energy subsidiary participated in the California Residential solar
market. Following the Solcius Acquisition, all new residential sales are managed under the Solcius brand. Due to materiality,
the Company will continue to report the remaining backlog of Residential projects in the Commercial Solar Energy segment, which is expected
to be fulfilled within the next year. Commercial Solar Energy primarily operates in California.
Segment
net revenue, segment operating expenses and segment contribution (loss) information consisted of the following for the three months and
six months ended June 30, 2022.
SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT
| |
Residential
Solar | | |
Commercial
Solar | | |
Corporate | | |
Total | |
| |
Three
Months Ended June
30, 2022 | |
| |
Residential
Solar | | |
Commercial
Solar | | |
Corporate | | |
Total | |
Net
revenue | |
$ | 32,516 | | |
$ | 3,881 | | |
$ | - | | |
$ | 36,397 | |
Cost of sales | |
| 16,279 | | |
| 3,253 | | |
| - | | |
| 19,532 | |
Gross
profit | |
| 16,237 | | |
| 628 | | |
| | | |
| 16,865 | |
| |
| | | |
| | | |
| | | |
| | |
Operating
expenses | |
| | | |
| | | |
| | | |
| | |
Selling
and marketing | |
| 13,225 | | |
| 870 | | |
| 223 | | |
| 14,318 | |
General
and administrative | |
| 5,000 | | |
| 1,676 | | |
| 1,849 | | |
| 8,525 | |
Segment loss | |
| (1,988 | ) | |
| (1,918 | ) | |
| (2,072 | ) | |
| (5,978 | ) |
| |
| | | |
| | | |
| | | |
| | |
Stock-based
compensation | |
| 16 | | |
| 35 | | |
| 320 | | |
| 371 | |
Depreciation
and amortization | |
| 1,265 | | |
| 47 | | |
| - | | |
| 1,312 | |
Operating
loss | |
$ | (3,269 | ) | |
$ | (2,000 | ) | |
$ | (2,392 | ) | |
$ | (7,661 | ) |
| |
Residential
Solar | | |
Commercial
Solar | | |
Corporate | | |
Total | |
| |
Six
Months Ended June
30, 2022 | |
| |
Residential
Solar | | |
Commercial
Solar | | |
Corporate | | |
Total | |
Net
revenue | |
$ | 58,911 | | |
$ | 8,682 | | |
$ | - | | |
$ | 67,593 | |
Cost of sales | |
| 29,473 | | |
| 7,224 | | |
| - | | |
| 36,697 | |
Gross
profit | |
| 29,438 | | |
| 1,458 | | |
| | | |
| 30,896 | |
| |
| | | |
| | | |
| | | |
| | |
Operating
expenses | |
| | | |
| | | |
| | | |
| | |
Selling
and marketing | |
| 24,357 | | |
| 1,721 | | |
| 470 | | |
| 26,548 | |
General
and administrative | |
| 9,397 | | |
| 3,142 | | |
| 3,422 | | |
| 15,961 | |
Segment loss | |
| (4,316 | ) | |
| (3,405 | ) | |
| (3,892 | ) | |
| (11,613 | ) |
| |
| | | |
| | | |
| | | |
| | |
Stock-based
compensation | |
| 721 | | |
| 70 | | |
| 864 | | |
| 1,655 | |
Depreciation
and amortization | |
| 2,506 | | |
| 89 | | |
| - | | |
| 2,595 | |
Operating
loss | |
$ | (7,543 | ) | |
$ | (3,564 | ) | |
$ | (4,756 | ) | |
$ | (15,863 | ) |
6.
RIGHT-OF-USE OPERATING LEASES
The
Company has right-of-use (“ROU”) operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining lease
terms of 1 year to 5 years, some of which include options to extend.
The
Company’s operating lease expense for the three and six months ended June 30, 2022 amounted to $384 and $811, respectively. The
Company’s operating lease expense for the three and six months ended June 30, 2021 amounted to $444 and $758, respectively. Operating
lease payments, which reduced operating cash flows for the three and six months ended June 30, 2022 amounted to $384 and $811, respectively.
The difference between the ROU asset amortization of $536 and the associated lease expense of $811 consists of short-term leases excluded
from the ROU asset calculation, basic operating lease expenses included in the lease expense for property and sales taxes, triple net
and common area charges for facilities and other equipment and vehicle lease related charges.
Supplemental
balance sheet information related to leases is as follows:
SCHEDULE OF OPERATING LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION
| |
June
30, 2022 | |
| |
| (in
thousands) | |
Operating
lease right-of-use assets | |
$ | 2,212 | |
| |
| | |
Operating
lease liabilities—short term | |
| 967 | |
Operating
lease liabilities—long term | |
| 1,245 | |
Total
operating lease liabilities | |
$ | 2,212 | |
As
of June 30, 2022, the weighted average remaining lease term was 3.2 years and the weighted average discount rate for the Company’s
leases was 3.2%.
Minimum
payments for the operating leases are as follows:
SCHEDULE OF MATURITIES FOR OPERATING LEASES LIABILITIES
| |
Operating
Leases | |
| |
(in
thousands) | |
Remainder of 2022 | |
$ | 542 | |
2023 | |
| 806 | |
2024 | |
| 353 | |
2025 | |
| 306 | |
2026 | |
| 280 | |
Thereafter | |
| - | |
Total lease
payments | |
$ | 2,287 | |
Less:
imputed interest | |
| 75 | |
Total | |
$ | 2,212 | |
7.
RIGHT-OF-USE FINANCE LEASES
The
Company has finance leases for vehicles. The Company’s finance leases have remaining lease terms of 1 year to 4 years.
Supplemental
balance sheet information related to finance leases is as follows:
SCHEDULE OF FINANCE LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION
| |
June
30, 2022 | |
| |
(in
thousands) | |
Finance
lease right-of-use asset cost | |
$ | 2,248 | |
Finance lease
right-of-use accumulated amortization | |
| (760 | ) |
Finance lease
right of use asset, net | |
$ | 1,488 | |
| |
| | |
Finance lease
obligation—short term | |
$ | 440 | |
Finance lease
obligation—long term | |
| 618 | |
Total finance
lease obligation | |
$ | 1,058 | |
As
of June 30, 2022, the weighted average remaining lease term was 2.7 years and the weighted average discount rate for the Company’s
leases was 4.5%.
Minimum
finance lease payments for the remaining lease terms are as follows:
SCHEDULE OF MATURITIES FOR FINANCE LEASES LIABILITIES
| |
June
30, 2022 | |
| |
(in
thousands) | |
Remainder of 2022 | |
$ | 275 | |
2023 | |
| 364 | |
2024 | |
| 232 | |
2025 | |
| 202 | |
2026 | |
| 56 | |
Thereafter | |
| - | |
Total lease
payments | |
$ | 1,129 | |
Less: imputed
interest | |
| 71 | |
Total | |
$ | 1,058 | |
8.
INTANGIBLE ASSETS, NET
The
Company’s intangible assets at June 30, 2022 consist of the following:
SCHEDULE OF INTANGIBLE ASSETS
| |
Amortization
periods | |
Cost | | |
Accumulated
amortization | | |
Net
carrying value | |
Trademarks | |
10
Years | |
$ | 5,200 | | |
$ | (650 | ) | |
$ | 4,550 | |
Backlog of projects | |
9 Months | |
| 2,000 | | |
| (2,000 | ) | |
| - | |
Covenant
not-to-compete | |
3 Years | |
| 2,400 | | |
| (1,000 | ) | |
| 1,400 | |
Software
(included in property and equipment) | |
3 Years | |
| 3,400 | | |
| (1,416 | ) | |
| 1,984 | |
Dealer relationships | |
18 Months | |
| 2,600 | | |
| (2,167 | ) | |
| 433 | |
| |
| |
$ | 15,600 | | |
$ | (7,233 | ) | |
$ | 8,367 | |
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 months ended June 30, 2022 was as follows:
SCHEDULE OF AMORTIZATION EXPENSES OF INTANGIBLE ASSETS
| |
| | | |
| | |
| |
For
the | | |
For
the | |
| |
Three
Months Ended | | |
Six
Months ended | |
| |
June
30, 2022 | | |
June
30, 2022 | |
Trademarks | |
$ | 130 | | |
$ | 260 | |
Covenant
not-to-compete | |
| 200 | | |
| 400 | |
Software | |
| 283 | | |
| 567 | |
Dealer
relationships | |
| 434 | | |
| 866 | |
Amortization
expenses for intangible assets | |
$ | 1,047 | | |
$ | 2,093 | |
Estimated
future amortization expense for the Company’s intangible assets as of June 30, 2022 is as follows:
SCHEDULE OF FUTURE AMORTIZATION EXPENSES OF INTANGIBLE ASSETS
| |
| | |
Years
ending December 31, | |
| |
Remainder of
2022 | |
$ | 1,660 | |
2023 | |
$ | 2,453 | |
2024 | |
$ | 1,004 | |
2025 | |
$ | 520 | |
2026 | |
$ | 520 | |
Thereafter | |
$ | 2,210 | |
Depreciation
and amortization expense on property and equipment and intangible assets for the three and six months ended June 30, 2022 was $1,312
and $2,595, respectively. Depreciation and amortization expense on property and equipment and intangible assets for the three and six
months ended June 30, 2021 was $1,905 and $1,970, respectively.
9.
PAYCHECK PROTECTION PROGRAM LOAN PAYABLE
On
April 28, 2020, the Company’s operating subsidiary, Sunworks United, Inc., received a loan under the Paycheck Protection Program
(“PPP”), which was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), of $2,847.
As modified by the subsequent PPP Flexibility Act of 2020, proceeds from the loan were used to cover documented expenses related to payroll,
rent and utilities, during the 24-week period after the cash was received by the Company. The 24-week period ended on October 12, 2020.
The loan was accounted for as a financial liability in accordance with FASB ASC 470 until June 29, 2021, when the $2,847 loan was fully
forgiven, together with $34 of accrued interest. As a result, the Company recorded a gain on extinguishment of the debt which is included
in other income on the condensed consolidated statements of operations for the three and six months ended June 30, 2021.
10.
CAPITAL STOCK
Roth
and Northland 2022 Sales Agreement At The Market Offering
On
June 8, 2022, Sunworks, Inc. (the “Company”) entered into a Sales Agreement (the “Sales Agreement”) with
Roth Capital Partners, LLC 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 $26,800
of shares of the Company’s common stock, par value $0.001
per share (the “June 2022 Placement Shares”), through the Agents. On June 8, 2022, the Company filed a prospectus
supplement with the SEC that covers the sale of June 2022 Placement Shares to be sold under the Sales Agreement in an aggregate
amount of $26,800 (the
“Prospectus Supplement”).
The
June 2022 Placement Shares have been registered under the Securities Act of 1933, as amended (the “Securities Act”),
pursuant to the Registration Statement on Form S-3 (File No. 333-252475) (the “2021 Registration Statement”), which was
originally filed with the Securities and Exchange Commission (“SEC”) on January 27, 2021 and declared effective by the
SEC on February 3, 2021, the base prospectus contained within the 2021 Registration Statement, and the Prospectus
Supplement. The June 2022 Placement Shares may be sold by the Company in “at the market offerings,” as defined in
Rule 415 promulgated under the Securities Act, through the Agents.
Registration
Statement
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. The 2022 Registration Statement was declared effective by the SEC on August 5, 2022.
Roth
Sales 2022 Agreement At The Market Offering
On
February 10, 2021, the Company entered into a Sales Agreement (the “Roth Sales Agreement”) with Roth Capital Partners, LLC
(the “Agent RCP”), pursuant to which the Company could offer and sell from time to time, through the Agent RCP, shares of
the Company’s common stock, registered under the Securities Act, pursuant to the Registration Statement.
On October 21, 2021, the Company filed a prospectus
supplement with the SEC, pursuant to which the Company could offer and sell from time to time, through the Agent RCP, up to $25,000 of
shares of the Company’s common stock, registered under the Securities Act, pursuant to the 2021 Registration Statement in “at
the market offerings,” as defined in Rule 415 promulgated under the Securities Act.
During
the first quarter of 2022, 2,757,830
shares of common stock were sold under the Roth Sales Agreement. Total gross proceeds from the sales were $7,974
at an average sale price of $2.89
per share. Net proceeds after brokerage costs, professional, registration and other fees were $7,814
or $2.83
per share.
During
the second quarter of 2022, 783,257 shares of common stock were sold under the Roth Sales Agreement. Total gross proceeds for the sales were $2,080 on an average sale price of $2.66 per share. Net proceeds after brokerage costs, professional, registration and other
fees were $2,005 or $2.56 per share.
In connection with the filing of the Prospectus Supplement
for June 2022 Placement Shares, the Roth Sales Agreement and the related prospectus supplement was terminated.
11.
STOCK-BASED COMPENSATION
Options
As
of June 30, 2022, the Company has incentive stock options and non-qualified stock options outstanding to purchase 276,720 shares of common
stock, per the terms set forth in the option agreements. The stock options vest at various times and are exercisable for a period of
five years from the date of grant at exercise prices ranging from $2.52 to $12.15 per share, the market value of the Company’s
common stock on the date of each grant. The Company determined the fair market value of these options by using the Black Scholes option
valuation model. Option forfeitures are accounted for as they occur.
A
summary of the Company’s stock option activity and related information follows:
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS ACTIVITY
| |
June
30, 2022 | |
| |
| | |
Weighted | |
| |
Number | | |
Average | |
| |
of | | |
Exercise | |
| |
Options | | |
Price | |
Outstanding, at
December 31, 2021 | |
| 290,684 | | |
$ | 11.65 | |
Granted | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | |
Forfeited | |
| (8,251 | ) | |
| 8.38 | |
Expired | |
| (5,713 | ) | |
| 10.50 | |
Outstanding
and expected to vest as of June 30, 2022 | |
| 276,720 | | |
$ | 11.77 | |
Exercisable
at June 30, 2022 | |
| 276,039 | | |
$ | 11.80 | |
Weighted average fair value
of options granted during period | |
| | | |
$ | - | |
The
following summarizes the options to purchase shares of the Company’s common stock which were outstanding at June 30, 2022:
SCHEDULE OF SHARE-BASED COMPENSATION, SHARES AUTHORIZED UNDER STOCK OPTION PLANS, BY EXERCISE PRICE RANGE
| | |
| | |
| | |
Weighted | |
| | |
| | |
| | |
Average | |
| | |
| | |
| | |
Remaining | |
Exercisable | | |
Stock
Options | | |
Stock
Options | | |
Contractual | |
Prices | | |
Outstanding | | |
Exercisable | | |
Life
(years) | |
$ | 8.68 | | |
| 7,142 | | |
| 7,142 | | |
| 0.87 | |
$ | 7.63 | | |
| 2,142 | | |
| 2,142 | | |
| 0.92 | |
$ | 3.07 | | |
| 3,071 | | |
| 2,986 | | |
| 2.13 | |
$ | 2.52 | | |
| 4,365 | | |
| 3,769 | | |
| 2.26 | |
$ | 12.15 | | |
| 260,000 | | |
| 260,000 | | |
| 3.79 | |
| | | |
| 276,720 | | |
| 276,039 | | |
| | |
Aggregate
intrinsic value of options outstanding and exercisable at June 30, 2022, and December 31, 2021 was $0 and $2, respectively. Aggregate
intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period,
which was $1.58 and $3.07 as of June 30, 2022 and December 31, 2021, respectively, and the exercise price multiplied by the number of
options outstanding.
The
Company recorded stock-based compensation expense for stock options of $2 and $673 for the three and six months ended June 30, 2022,
respectively. The Company recorded stock-based compensation expense for stock options of $738 and $750 for the three and six months ended
June 30, 2021, respectively.
Restricted
Stock Units
The
following table summarizes the Company’s restricted stock unit activity during the six months ended June 30, 2022:
SCHEDULE OF STOCK-BASED COMPENSATION, RESTRICTED STOCK UNIT ACTIVITY
| |
June
30, 2022 | |
| |
| | |
Weighted
Average | |
| |
Number
Of Shares | | |
Grant
Date Value
per Share | |
Unvested, beginning
December 31, 2021 | |
| 1,185,889 | | |
$ | 5.11 | |
Granted | |
| 167,208 | | |
$ | 2.44 | |
Vested | |
| (206,666 | ) | |
$ | 9.69 | |
Forfeited | |
| (36,850 | ) | |
$ | 3.35 | |
Unvested
at the end of June 30, 2022 | |
| 1,109,581 | | |
$ | 3.91 | |
The Company recorded RSU compensation expense for
RSUs of $369 and $982 for the three and six months ended June 30, 2022, respectively. The Company recorded RSU compensation expense of
$375 and $514 for the three and six months ended June 30, 2021, respectively.
11.
COMMITMENTS AND CONTINGENCIES
Litigation
From
time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant
legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a negative impact on
the Company’s financial position.
12.
SUBSEQUENT EVENTS
The
2022 Registration Statement for $75,000 was declared effective by the SEC on August 5, 2022. No shares have been sold under the
2022 Registration Statement.