UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number 001-36868

SUNWORKS, INC.

(Exact name of registrant as specified in its charter)

Delaware

01-0592299

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1555 Freedom Boulevard

Provo, UT 84604

(Address of principal executive offices) (Zip Code)

(385) 497-6955

(Registrant’s telephone Number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol(s)		Name of each exchange on which registered
Common stock, par value $0.001 per share		SUNW		Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The number of shares of registrant’s common stock outstanding as of November 13, 2023 was 56,784,147.

TABLE OF CONTENTS

	Page

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS	4

Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	4

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022	5

Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2023 and 2022	6

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022	7

Notes to the Unaudited Condensed Consolidated Financial Statements	8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25

ITEM 4. CONTROLS AND PROCEDURES	25

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	26

ITEM 1A. RISK FACTORS	26

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	26

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	26

ITEM 4. MINE SAFETY DISCLOSURES	26

ITEM 5. OTHER INFORMATION	26

ITEM 6. EXHIBITS	26

SIGNATURES	27

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this Quarterly Report) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report except for statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that might cause these differences in actual results include the impacts on us, our operations, or our future financial and operational results; discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, as amended by our Form 10-K/A filed on May 1, 2023 (our “Annual Report”), and the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”). In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

SUNWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2023 AND DECEMBER 31, 2022

(in thousands, except share and per share data)

	September 30, 2023			December 31, 2022
	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	2,197		$	7,807
Restricted cash		250			248
Accounts receivable, net		10,203			13,873
Inventory		16,379			26,401
Contract assets		16,714			20,699
Other current assets		3,557			5,824
Total Current Assets		49,300			74,852
Property and equipment, net		1,156			2,154
Finance lease right-of-use assets, net		4,156			2,487
Operating lease right-of-use assets, net		2,203			2,779
Deposits		202			192
Intangible assets, net		4,300			5,290
Goodwill		6,186			32,186
Total Assets	$	67,503		$	119,940

Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable and accrued liabilities	$	18,587		$	24,567
Contract liabilities		19,280			24,960
Finance lease liabilities, current portion		1,115			631
Operating lease liabilities, current portion		915			1,098
Total Current Liabilities		39,897			51,256

Long-Term Liabilities:
Finance lease liabilities, net of current portion		2,933			1,470
Operating lease liabilities, net of current portion		1,288			1,681
Warranty liability		1,776			1,596
Total Long-Term Liabilities		5,997			4,747
Total Liabilities		45,894			56,003

Commitments and contingencies		-			-

Shareholders’ Equity:
Preferred stock Series B, $0.001 par value, 5,000,000 authorized shares; no shares issued and outstanding		-			-
Common stock, $0.001 par value; 100,000,000 authorized shares; 48,934,447 and 35,374,978 shares issued and outstanding, at September 30, 2023 and December 31, 2022, respectively		49			35
Additional paid-in capital		220,501			207,373
Accumulated deficit		(198,941	)		(143,471	)
Total Shareholders’ Equity		21,609			63,937

Total Liabilities and Shareholders’ Equity	$	67,503		$	119,940

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended September 30, 2023 and 2022

(in thousands, except share and per share data)

	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
	Three Months Ended						Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022

Revenue, net	$	28,696		$	40,713		$	101,234		$	108,306

Cost of Goods Sold		20,522			21,204			69,696			59,030

Gross Profit		8,174			19,509			31,538			49,276

Operating Expenses:
Selling and marketing		7,801			14,773			31,847			41,320
General and administrative		9,441			8,718			28,057			24,025
Goodwill impairment		26,000			-			26,000			-
Stock-based compensation		477			364			1,357			2,019
Depreciation and amortization		623			1,056			1,868			3,177

Total Operating Expenses		44,342			24,911			89,129			70,541

Operating Loss		(36,168	)		(5,402	)		(57,591	)		(21,265	)

Other Income (Expense)
Other income (expense), net		54			(6	)		4,103			46
Interest expense		(394	)		(50	)		(636	)		(115	)
Gain (loss) on disposal of property and equipment		104			65			(1,234	)		243

Total Other Income (Expense), net		(236	)		9			2,233			174

Loss before Income Taxes		(36,404	)		(5,393	)		(55,358	)		(21,091	)

Income Tax Expense		-			-			112			94

Net Loss	$	(36,404	)	$	(5,393	)	$	(55,470	)	$	(21,185	)

LOSS PER SHARE:
Basic and Diluted	$	(0.84	)	$	(0.16	)	$	(1.43	)	$	(0.66	)

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic and Diluted		43,569,953			33,626,405			38,867,833			32,027,304

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three and nine months ended September 30, 2023 and 2022

(in thousands, except share data)

	Shares			Amount		Capital			Deficit			Total
						Additional
	Common Stock					Paid-in			Accumulated
	Shares			Amount		Capital			Deficit			Total
Balance at December 31, 2022		35,374,978		$	35	$	207,373		$	(143,471	)	$	63,937
Stock-based compensation		-			-		444			-			444
Issuance of common stock under terms of restricted stock grants		104,267			-		-			-			-
Tax withholdings related to net share settlements of equity awards		(13,271	)		-		(39	)		-			(39	)
Sales of common stock pursuant to S-3 registration statement, net		100,000			1		141			-			142
Net loss for the three months ended March 31, 2023		-			-		-			(6,390	)		(6,390	)
Balance at March 31, 2023		35,565,974			36		207,919			(149,861	)		58,094
Stock-based compensation		-			-		436			-			436
Issuance of common stock under terms of restricted stock grants		73,763			-		-			-			-
Tax withholdings related to net share settlements of equity awards		(3,598	)		-		(4	)		-			(4	)
Registered direct sale of common stock pursuant to S-3 registration statement, net		4,050,000			4		4,286			-			4,290
Sales of common stock pursuant to S-3 registration statement, net		1,294,743			1		1,557			-			1,558
Net loss for the three months ended June 30, 2023		-			-		-			(12,676	)		(12,676	)
Balance at June 30, 2023		40,980,882			41		214,194			(162,537	)		51,698
Stock-based compensation		-			-		477			-			477
Issuance of common stock under terms of restricted stock grants		58,128			-		-			-			-
Tax withholdings related to net share settlements of equity awards		(3,025	)		-		(3	)		-			(3	)
Registered direct sale of common stock pursuant to S-3 registration statement, net		3,300,000			3		2,893			-			2,896
Sales of common stock pursuant to S-3 registration statement, net		4,598,462			5		2,940			-			2,945
Net loss for the three months ended September 30, 2023		-			-		-			(36,404	)		(36,404	)
Balance at September 30, 2023		48,934,447		$	49	$	220,501		$	(198,941	)	$	21,609

						Additional
	Common Stock					Paid-in			Accumulated
	Shares			Amount		Capital			Deficit			Total
Balance at December 31, 2021		29,193,772		$	29	$	187,997		$	(115,260	)	$	72,766
Stock-based compensation		-			-		1,284			-			1,284
Issuance of common stock under terms of restricted stock grants		121,666			-		-			-			-
Sales of common stock pursuant to S-3 registration statement, net		2,757,830			3		7,811			-			7,814
Net loss for the three months ended March 31, 2022		-			-		-			(8,207	)		(8,207	)
Balance at March 31, 2022		32,073,268			32		197,092			(123,467	)		73,657

Stock-based compensation		-			-		371			-			371
Issuance of common stock under terms of restricted stock grants		95,000			-		-			-			-
Tax withholdings related to net share settlements of equity awards		(16,703	)		-		(34	)		-			(34	)
Sales of common stock pursuant to S-3 registration statement, net		783,257			1		2,004			-			2,005
Net loss for the three months ended June 30, 2022		-			-		-			(7,585	)		(7,585	)
Balance at June 30, 2022		32,934,822			33		199,433			(131,052	)		68,414
Balance		32,934,822			33		199,433			(131,052	)		68,414

Stock-based compensation		-			-		364			-			364
Issuance of common stock under terms of restricted stock grants		17,500			-		-			-			-
Tax withholdings related to net share settlements of equity awards		(3,748	)		-		(13	)		-			(13	)
Sales of common stock pursuant to S-3 registration statement, net		2,213,074			2		7,283			-			7,285
Net loss for the three months ended September 30, 2022		-			-		-			(5,393	)		(5,393	)
Balance at September 30, 2022		35,161,648		$	35	$	207,067		$	(136,445	)	$	70,657
Balance		35,161,648		$	35	$	207,067		$	(136,445	)	$	70,657

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2023 and 2022

(in thousands)

	September 30, 2023			September 30, 2022
	Nine Months Ended
	September 30, 2023			September 30, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(55,470	)	$	(21,185	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		2,968			3,827
Amortization of right-of-use assets		999			811
Loss (gain) on sale of inventory and equipment		1,234			(243	)
Stock-based compensation		1,357			2,019
Goodwill impairment		26,000			-
Bad debt expense		584			378
Changes in Operating Assets and Liabilities:
Accounts receivable		3,086			(3,443	)
Inventory		5,522			(16,784	)
Deposits and other current assets		2,257			846
Contract assets		3,985			(10,224	)
Accounts payable and accrued liabilities		(5,980	)		8,033
Contract liabilities		(5,680	)		14,494
Warranty liability		180			180
Operating lease liabilities		(999	)		(811	)
NET CASH USED IN OPERATING ACTIVITIES		(19,957	)		(22,102	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(203	)		(432	)
Proceeds from sale of inventory and equipment		3,509			311
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		3,306			(121	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on finance lease liabilities		(742	)		(355	)
Proceeds from sale of common stock, net		11,831			17,104
Payments for taxes related to net share settlement of equity awards		(46	)		(47	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		11,043			16,702

NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH		(5,608	)		(5,521	)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH BEGINNING OF YEAR		8,055			20,042
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD	$	2,447		$	14,521

Cash and cash equivalents	$	2,197		$	14,273
Restricted cash		250			248
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD	$	2,447		$	14,521

CASH PAID FOR:
Interest	$	308		$	51
Franchise and corporate excise taxes	$	201		$	42

SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Decrease in operating right-of-use assets as a result of lease modification	$	44		$	-
Right-of-use assets obtained in exchange for new operating lease liabilities	$	468		$	247
Right-of-use assets obtained in exchange for new finance liabilities	$	2,689		$	903

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SUNWORKS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2023

(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, storage systems and electric charging solutions 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.

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 nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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 ended December 31, 2022, as amended by our Form 10-K/A filed on May 1, 2023.

The financial statements have been prepared assuming that the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

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. The Company’s net losses, including a non-cash $26,000 goodwill impairment, discussed below, were $36,404 and $55,470, for the three and nine months ended September 30, 2023, respectively.

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% of face value, certain accounts receivable of the Company. The Company will receive a rebate back to the Company in a maximum amount of 18.4% of the verified receivable amount if the receivable is collected within 30 days and a lesser rebate amount based on the receivable collection period. The Factoring Agreement provides for a minimum volume commitment of $10,000 accounts receivable during the first year of the agreement. As of September 30, 2023, $4,628 of accounts receivable had been factored cumulatively pursuant to the Factoring Agreement.

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 of proceeds under the trade purchase agreement. The sale of the ERTC receivable resulted in a loss of $1,028 in the second quarter of 2023.

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. The 2021 Registration Statement was declared effective by the SEC on February 3, 2021. From January 1, 2023 through September 30, 2023 we sold 5,993,205 shares with gross proceeds of approximately $4,835 under the 2021 Registration Statement. Approximately $14,600 of the $100,000 total is available for future offerings pursuant to the 2021 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. On June 12, 2023, pursuant to a securities purchase agreement, the Company sold and issued 4,050,000 shares of common stock at a purchase price of $1.14 per share for total gross proceeds of $4,617. On August 11, 2023, pursuant to a securities purchase agreement, the Company sold and issued 3,300,000 shares of common stock at a purchase price of $1.00 per share for total gross proceeds of $3,300. Approximately $67,100 of the $75,000 total is available for future offerings pursuant to the 2022 Registration Statement.

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, 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.


	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:

(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 and $18,660, respectively, that was included in contract liabilities as of December 31, 2022. During the three and nine months ended September 30, 2022, the Company recognized revenue of $486 and $8,295, respectively, that was included in contract liabilities as of December 31, 2021.

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 of revenue upon transfer of control of the 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 stock options and 985,557 unvested RSUs and an undetermined number of PSUs.

As of September 30, 2022, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 236,720 stock options and 638,024 unvested RSUs and an undetermined number of PSUs.

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.

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following table represents a disaggregation of revenue by customer type from contracts with customers for the three and nine months ended September 30, 2023 and 2022:

SCHEDULE OF DISAGGREGATION OF REVENUE

	2023		2022		2023		2022
	Three Months Ended September 30,				Nine months Ended September 30,
	2023		2022		2023		2022
Residential	$	20,455	$	37,253	$	77,816	$	97,416
Commercial		4,130		3,049		11,079		8,593
Public Works		4,111		411		12,339		2,297
Total	$	28,696	$	40,713	$	101,234	$	108,306
Revenues	$	28,696	$	40,713	$	101,234	$	108,306

4. OPERATING SEGMENTS

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 and 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.

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. Additionally, we provide storage and electric vehicle charging solutions to our customers. 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 acquisition of Solcius, 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 and nine months ended September 30, 2023 and 2022. Certain prior period amounts have been reclassified to conform to the current period presentation.

	Residential Solar			Commercial Solar			Corporate			Total
	Three Months Ended September 30, 2023
	Residential Solar			Commercial Solar			Corporate			Total
Net revenue	$	20,348		$	8,348		$	-		$	28,696
Cost of goods sold		13,506			7,016			-			20,522
Gross profit		6,842			1,332						8,174

Operating expenses
Selling and marketing		7,148			531			122			7,801
General and administrative		5,182			1,678			2,581			9,441
Segment loss		(5,488	)		(877	)		(2,703	)		(9,068	)

Goodwill impairment		26,000			-			-			26,000
Stock-based compensation		33			68			376			477
Depreciation and amortization		623			-			-			623
Operating loss	$	(32,144	)	$	(945	)	$	(3,079	)	$	(36,168	)

	Residential Solar			Commercial Solar			Corporate			Total
	Three Months Ended September 30, 2022
	Residential Solar			Commercial Solar			Corporate			Total
Net revenue	$	36,659		$	4,054		$	-		$	40,713
Cost of goods sold		17,132			4,050			22			21,204
Gross profit		19,527			4			(22	)		19,509

Operating expenses
Selling and marketing		13,711			809			253			14,773
General and administrative		5,069			1,797			1,852			8,718
Segment income (loss)		747			(2,602	)		(2,127	)		(3,982	)

Stock-based compensation		19			31			314			364
Depreciation and amortization		1,056			-			-			1,056
Operating loss	$	(328	)	$	(2,633	)	$	(2,441	)	$	(5,402	)

	Residential Solar			Commercial Solar			Corporate			Total
	Nine months Ended September 30, 2023
	Residential Solar			Commercial Solar			Corporate			Total
Net revenue	$	77,556		$	23,678		$	-		$	101,234
Cost of goods sold		49,675			20,021			-			69,696
Gross profit		27,881			3,657						31,538

Operating expenses
Selling and marketing		29,654			1,796			397			31,847
General and administrative		16,253			5,153			6,651			28,057
Segment loss		(18,026	)		(3,292	)		(7,048	)		(28,366	)

Goodwill impairment		26,000			-			-			26,000
Stock-based compensation		67			134			1,156			1,357
Depreciation and amortization		1,868			-			-			1,868
Operating loss	$	(45,961	)	$	(3,426	)	$	(8,204	)	$	(57,591	)

	Residential Solar			Commercial Solar			Corporate			Total
	Nine months Ended September 30, 2022
	Residential Solar			Commercial Solar			Corporate			Total
Net revenue	$	95,569		$	12,737		$	-		$	108,306
Cost of goods sold		47,646			11,354			30			59,030
Gross profit		47,923			1,383			(30	)		49,276

Operating expenses
Selling and marketing		38,068			2,530			722			41,320
General and administrative		13,810			4,941			5,274			24,025
Segment loss		(3,955	)		(6,088	)		(6,026	)		(16,069	)

Stock-based compensation		740			101			1,178			2,019
Depreciation and amortization		3,177			-			-			3,177
Operating loss	$	(7,872	)	$	(6,189	)	$	(7,204	)	$	(21,265	)

Assets by operating segment are as follows:

	September 30, 2023
Operating Segment:
Residential Solar	$	51,918
Commercial Solar		13,138
Corporate		2,447
Total Consolidated Assets	$	67,503

5. 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 4 years, some of which include options to extend.

The Company’s operating lease expense for the three and nine months ended September 30, 2023 amounted to $589 and $1,630, respectively. The Company’s operating lease expense for the three and nine months ended September 30, 2022 amounted to $373 and $1,184, respectively. Operating lease payments, which reduced operating cash flows for the three and nine months ended September 30, 2023 amounted to $589 and $1,630, respectively. The difference between the year to date ROU asset amortization of $999 and the associated lease expense of $1,630 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:

	September 30, 2023
	(in thousands)
Operating lease right-of-use assets	$	2,203

Operating lease liabilities, current portion		915
Operating lease liabilities, net of current portion		1,288
Total operating lease liabilities	$	2,203

As of September 30, 2023, the weighted average remaining lease term was 2.9 years and the weighted average discount rate for the Company’s leases was 4.5%.

Minimum payments for the operating leases are as follows:

	Operating Leases
	(in thousands)
Remainder of 2023	$	307
2024		832
2025		644
2026		571
2027		43
Total lease payments	$	2,397
Less: imputed interest		194
Total	$	2,203

6. 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:

	September 30, 2023
	(in thousands)
Finance lease right-of-use asset cost	$	5,208
Finance lease right-of-use accumulated amortization		(1,052	)
Finance lease right of use asset, net	$	4,156

Finance lease obligation, current portion	$	1,115
Finance lease obligation, net of current portion		2,933
Total finance lease obligation	$	4,048

As of September 30, 2023, the weighted average remaining lease term was 3.2 years and the weighted average discount rate for the Company’s leases was 8.5%.

Minimum finance lease payments for the remaining lease terms are as follows:

	September 30, 2023
	(in thousands)
Remainder of 2023	$	368
2024		1,395
2025		1,363
2026		1,156
2027		404
Total lease payments	$	4,686
Less: imputed interest		638
Total	$	4,048

7. INTANGIBLE ASSETS, NET

The Company’s intangible assets at September 30, 2023 consist of the following:

SCHEDULE OF INTANGIBLE ASSETS

	Amortization periods	Cost		Accumulated amortization			Net carrying value
Trademarks	10 Years	$	5,200	$	(1,300	)	$	3,900
Backlog of projects	9 Months		2,000		(2,000	)		-
Covenant not-to-compete	3 Years		2,400		(2,000	)		400
Software (included in property and equipment)	3 Years		3,400		(2,833	)		567
Dealer relationships	18 Months		2,600		(2,600	)		-
		$	15,600	$	(10,733	)	$	4,867

Intangible assets are stated at their original estimated value at the date of acquisition. The amortization of intangible assets commences upon acquisition. The intangible assets are being amortized using the straight-line method over the intangible asset’s estimated useful life:

Amortization expenses for intangible assets for the three and nine months ended September 30, 2023 was as follows:

	For the		For the
	Three Months Ended		Nine months ended
	September 30, 2023		September 30, 2023
Trademarks	$	130	$	390
Covenant not-to-compete		200		600
Software		283		850
	$	613	$	1,840

Estimated future amortization expense for the Company’s intangible assets as of September 30, 2023 is as follows:

Years ending December 31,
Remainder of 2023	$	614
2024	$	1,003
2025	$	520
2026	$	520
2027	$	520
Thereafter	$	1,690

Depreciation and amortization expense on property and equipment and intangible assets for the three and nine months ended September 30, 2023 was $1,001 and $2,968, respectively. Depreciation and amortization expense on property and equipment and intangible assets for the three and nine months ended September 30, 2022 was $1,232 and $3,827, respectively.

8. CAPITAL STOCK

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, (the “2021 Placement Shares”), registered under the Securities Act of 1933 (the “Securities Act”), pursuant to the 2021 Registration Statement.

On October 21, 2021, the Company filed a prospectus supplement with the SEC, (the “2021 Prospectus Supplement”) pursuant to which the Company could offer and sell from time to time, through the Agent RCP, up to $25,000 of the 2021 Placement Shares pursuant to the 2021 Registration Statement in “At-The-Market” offerings, as defined in Rule 415 promulgated under the Securities Act.

On June 8, 2022, the Company entered into a Sales Agreement (the “Roth/Northland Sales Agreement”) with Roth Capital Partners, LLC and Northland Securities, Inc. (each an “RN Agent” and collectively, the “RN Agents”), pursuant to which the Company could offer and sell from time to time up to an aggregate of $26,800 of shares of the Company’s common stock (the “June 2022 Placement Shares”), through the RN 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 Roth/Northland Sales Agreement (the “2022 Prospectus Supplement”).

On August 28, 2023, the Company delivered written notice to Roth Capital Partners, LLC terminating the Roth/Northland Sales Agreement. Upon termination of the Roth/Northland Sales Agreement, the Company will not make any additional offers or sales of placement shares pursuant to the Roth/Northland Sales Agreement or the 2022 Prospectus Supplement.

On August 28, 2023, the Company entered into the 2023 Sales Agreement, pursuant to which the Company may offer and sell from time to time 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.

2022 At-The-Market Offerings

During the first nine months of 2022, 5,754,161 of the Placement Shares were sold under the Roth Sales Agreement. Total gross proceeds for the sales were $17,521 and such shares were sold at an average sale price of $3.04 per share. Net proceeds from such sales, after brokerage costs, professional, registration and other fees were $17,104 or $2.97 per share.

2023 At-The-Market Offerings

During the first nine months of 2023, 5,993,205 of the 2022 Placement Shares were sold under the Roth/Northland Sales Agreement and 7,611,931 of the 2023 Placement Shares were sold under the 2023 Sales Agreement. Total gross proceeds for the sales were $4,835 and such shares were sold at an average sale price of $0.81 per share. Net proceeds from such sales, after brokerage costs, professional, registration and other fees were $ 4,645 or $0.77 per share.

Registered Direct Offerings

On June 8, 2023, pursuant to a securities purchase agreement, the Company sold and issued 4,050,000 shares of common stock at a purchase price of $1.14 per share for total gross proceeds of $4,617. After deducting placement agent commissions and other offering expenses, the net proceeds were $4,290 or $1.06 per share.

On August 11, 2023, pursuant to a securities purchase agreement, the Company sold and issued 3,300,000 shares of common stock at a purchase price of $1.00 per share for total gross proceeds of $3,300. After deducting placement agent commissions and other offering expenses, the net proceeds were $2,896 or $0.88 per share.

9. STOCK-BASED COMPENSATION

Options

As of September 30, 2023, the Company has incentive stock options and non-qualified stock options outstanding to purchase 158,071 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 $3.07 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:

SUMMARY OF STOCK OPTIONS ACTIVITY

	September 30, 2023
				Weighted
	Number			Average
	of			Exercise
	Options			Price
Outstanding, at December 31, 2022		211,720		$	11.66
Granted		-			-
Exercised		-			-
Forfeited		(44,365	)		11.20
Expired		(9,284	)		8.44
Outstanding and expected to vest as of September 30, 2023		158,071		$

SEC Form 10-Q filed by Sunworks Inc.