Sunworks

 
 
 
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
 
FORM
10-K
 
(Mark
One)
 
☒
Annual
Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
 
 
 
For
the fiscal year ended December 31, 2022
 
 
OR
 
 
☐
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For
the Transition Period from __________ to __________
 
Commission
File No. 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 office)
 
(Zip
Code)
 
Registrant’s
telephone number, including area code (385) 497-6955
 
Securities
registered pursuant to Section 12(b) of the Act:
 
Common
Stock, Par Value $0.001
 
SUNW
 
The
Nasdaq Stock Market LLC
(Title
of class)
 
(Trading
Symbol(s))
 
(Name
of exchange on which registered)
 
Securities
registered pursuant to Section 12(g) of the Act: NONE
 
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
 
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
 
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 filed the interactive data exhibits required to be filed during the past 12 months (or shorter
applicable period). Yes ☒ No ☐
 
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 company has filed an attestation report regarding management’s assessment of the effectiveness of its
internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accountants that audited
the company’s financial
statements. Yes ☐ No ☒
 

If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included
in the filing reflect the correction of an error to previously issued financial statements. Yes ☐ No ☒
 
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). Yes
☐ No ☒
 
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
 
The
aggregate market value of the common stock held by non-affiliates as of June 30, 2022 was $51.7 million.
 
The
outstanding number of shares of common stock as of March 10, 2023 was 35,417,104.
 
DOCUMENTS
INCORPORATED BY REFERENCE
 
Portions
of the registrant’s definitive Proxy Statement for the 2023 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, are
incorporated by reference in
Part III, Items 10-14 of this Form 10-K. Except for the portions of the Proxy Statement specifically incorporated
by reference in this Form 10-K, the Proxy
Statement shall not be deemed to be filed as part hereof
 
 
 
 

 
 
TABLE
OF CONTENTS
 
 
 
Page
 
PART I
 
Item
1.
Business
4
Item
1A.
Risk Factors
11
Item
1B.
Unresolved Staff Comments
26
Item
2.
Properties
26
Item
3.
Legal Proceedings
26
Item
4.
Mine Safety Disclosures
26
 
 
 
 
PART II
 
Item
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
27
Item
6.
Selected Financial Data
27
Item
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item
7A.
Quantitative and Qualitative Disclosures About Market Risk
35
Item
8.
Financial Statements and Supplementary Data
36
Item
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
37
Item
9A.
Controls and Procedures
37
Item
9B.
Other Information
37
 
 
 
 
PART III
 
Item
10.
Directors, Executive Officers and Corporate Governance
38
Item
11.
Executive Compensation
38
Item
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
38
Item
13.
Certain Relationships and Related Transactions, Director Independence
38
Item
14.
Principal Accounting Fees and Services
38
 
 
 
 
PART IV
 
Item
15.
Exhibits, Financial Statement Schedules
39
 
2

 
 
Cautionary
Note Regarding Forward-looking Statements
 
Statements
in this Annual Report on Form 10-K that are not historical facts constitute forward-looking statements. Examples of forward-looking
statements
include statements relating to industry prospects, our future economic performance including anticipated revenues and expenditures, results
of
operations or financial position, and other financial items, our business plans and objectives, and may include certain assumptions
that underlie forward-
looking statements. Risks and uncertainties that may affect our future results, levels of activity, performance
or achievements expressed or implied by these
forward-looking statements include, among other things, those listed under “Risk
Factors” and elsewhere in this Annual Report on Form 10-K.
 
The
following is a summary of the principal risk factors facing our business. This summary should be read in conjunction with the “Risk
Factors”
section and should not be relied upon as an exhaustive summary of the material risks facing our business. These risks
include but are not limited to:
 
●
our
history of operating losses;
●
our
ability to raise additional capital to meet our financial commitments and objectives;
●
our
ability to compete in the solar power industry;
●
our
ability to sell solar power systems;
●
our
ability to arrange financing for our customers;
●
government
incentive programs related to solar energy;
●
our
ability to increase the size of our company and manage growth;
●
our
ability to acquire and integrate other businesses;
●
disruptions
to our business from protective tariffs on imported components, supply shortages and/or fluctuations in pricing;
●
disruptions
to our supply chain due to the impact of COVID-19 (Coronavirus);
●
our
ability or inability to attract and/or retain competent employees;
●
relationships
with employees, consultants, customers, and suppliers; and
●
the
concentration of our business in one industry in limited geographic areas.
 
In
 some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,”
 “expects,” “intends,” “plans,”
“anticipates,” “believes,” “estimates,”
“predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology.
 
These
statements are subject to business and economic risk and reflect management’s current expectations and involve subjects that are
inherently
uncertain and difficult to predict. Actual events or results may differ materially. Moreover, neither we nor any other person
assumes responsibility for the
accuracy or completeness of these statements. We are under no duty to update any of the forward-looking
statements after the date of this Annual Report on
Form 10-K to conform these statements to actual results.
 
3

 
 
PART
I
 
Item
1. Business.
 
Business
Introduction/Summary
 
References
herein to “we,” “us,” “Sunworks,” and “the Company” are to Sunworks, Inc. and its wholly-owned
subsidiaries Sunworks United Inc.
(“Sunworks United”), and its wholly-owned subsidiaries Solcius, LLC (“Solcius”)
and Commercial Solar Energy Inc. (“CSE”).
 
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
 were originally incorporated in Delaware on January 30, 2002 as MachineTalker, Inc. In July 2010, we changed our company name to
Solar3D,
Inc. On January 31, 2014, we acquired 100% of the stock of Solar United Network, Inc., a California corporation. On March 2, 2015, we
acquired
MD Energy. On December 1, 2015, we acquired Plan B through a merger of Plan B Enterprises, Inc. into our wholly owned subsidiary,
 Elite Solar
Acquisition Sub., Inc. On March 1, 2016 we changed our name to Sunworks, Inc. with simultaneous Nasdaq stock symbol change
from SLTD to SUNW.
 
On
April 8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United (the “Buyer”), acquired all of the issued
and outstanding
membership interests (the “Acquisition”) of Solcius, from Solcius Holdings, LLC (“Seller”). Located
in Provo, Utah, Solcius is a full-service, residential
solar systems provider. The transaction creates a national solar power provider
with a presence now in 15 states, including California, Utah, Nevada,
Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts,
Rhode Island, New York, Pennsylvania, New Jersey and South Carolina.
We believe the transaction enhances economies of scale,
leading to better access to suppliers, vendors and financial partners, as well as marketing and
customer acquisition opportunities.
 
The
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 $51.75 million in cash, subject to post-closing
adjustments related to working capital, cash, indebtedness and transaction expenses.
 
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 have direct sales and/or operations personnel and operate in several residential markets
including California, Utah, Nevada, Arizona,
New Mexico, Texas, Colorado, Minnesota, Wisconsin, and South Carolina. Minnesota.
 
Commercial
Solar Energy
 
Through
our Commercial Solar Energy “CSE” 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 CSE 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 reported the
remaining revenue of legacy residential projects in the Commercial Solar Energy segment.
CSE primarily operates in California.
 
4

 
 
Company
Strategy
 
We
intend to capitalize on the growth outlook for commercial and residential solar markets in North America. Our strategic objectives
include
the following, of which are subject to risks and uncertainties that are, and potentially will be, exacerbated by any negative economic
downturn:
 
 
○
Capitalize
on industry growth. Over the last decade, solar power has become the lowest cost new energy generation source as the
 industry
matured and as technology has evolved. With solar, both residential and commercial customers can realize short pay back
periods and can reduce
their exposure to traditional energy sources. Environmental, Social and Governance (“ESG”)
considerations are factored into customer buying
patterns, as consumers want less reliance on grid participation are becoming more
focused on renewable forms of energy generation. Additionally,
the current regulatory environment is generally positive, as the
 Biden administration continues to pursue incentives directed to clean energy
generation, most notably, passing the Inflation
Reduction Act in 2022. As a result, the solar industry is expected to grow at a rapid rate and
become a significant source of new
power generation, displacing some carbon-based alternatives.
 
 
 
 
○
Increase
the velocity of installation. We believe a reduction in the time required to install a residential solar installation improves
both pricing
power with third-party channel relationships and customer retention. Beginning in 2022, we decentralized all design,
permitting and scheduling
activities to local and regional Company hubs, while continuing to leverage the benefits of scale across
shared services. We will continue to utilize
lean principles and practices to optimize workflow and improve installation timelines.
 
 
 
 
○
Expand
cost-efficient direct sales channel. We have embarked on a multi-year initiative to develop a robust, direct sales team designed
 to
complement our third-party channel partners. This direct sales team is incentivized to develop business across the residential
markets where we
operate, with an emphasis on rooftop solar installations. In 2022, the direct sales team was responsible approximately
20% of total residential
installation revenue, versus approximately 5% in the prior year.
 
 
 
 
○
Drive
efficient sourcing and procurement. We intend to shift an increased proportion of our sourcing away from foreign, third-party
distribution
channels toward U.S. based original equipment manufacturers, an approach that will allow for improved surety of supply.
By year-end 2024, we
intend to source a significant share of our panel and component inventory from U.S. based producers, whereas
no materials are currently sourced
domestically. During 2022, we grew total inventory by $16.2 million thereby ensuring product availability
during a period of elevated customer
demand.
 
 
 
 
○
Drive
sustained margin expansion. We believe key drivers of margin expansion include programmatic price increases; market share
gains in both
our core California commercial market and new geographic regions; reductions in lead times; optimization of our sales
channel partner network;
an increased mix of revenue derived from our direct sales force; increased productivity resulting from recent
headcount investments; and the
adoption of lean principles to reduce cost and drive continuous improvement. Over time, we expect
to achieve improved margin realization, as
recent performance improvement initiatives are further implemented.
 
5

 
 
Company
Operations
 
Employees
 
As
of December 31, 2022, we employed approximately 625 employees of which 622 were full-time employees with 2 of those employees on
temporary
layoff, medical, family or disability leave. We also utilize outside subcontractors to assist with installing commercial solar systems
for our
commercial customers. Our direct installation labor is a combination of employees and contract labor.
 
Sales
and Marketing
 
As
 of December 31, 2022, we had approximately 142 employees primarily focused on sales, sales support and marketing, compared to
approximately
35 employees as of December 31, 2021.
 
We
are adding to our in-house direct residential sales force and marketing capabilities while we continue to partner with authorized dealers
and
select third-party sales originators. Reducing our residential customer acquisition costs and managing the customer experience throughout
the process of
sales and installation is part of our goal to minimize the fixed costs and financial risk of customer acquisition while
 improving the entire customer
experience.
 
We
 believe we have an advantage in the commercial solar market given our extensive contact list, resulting from our experience in the
construction market, which provides access to customers. Through our network of vendors, participation in a variety of industry
trade associations and
independent sales consultants, we now have a growing list of repeat clients, as well as an active and loyal
referral network.
 
Financing
 
To
 promote sales, we assist customers in obtaining financing through our network of lenders that offer leases, loans or Power Purchase
Agreements
(“PPAs”). A PPA is a contract between two parties, one which generates electricity and the other purchases the electricity.
The Company
believes that offering a variety of financing options to its sales channels and end-customers promotes differentiation and
 enables solar adoption. The
Company expanded its financing partner relationships in 2022 and will continue to do so in the future, as
financing products evolve.
 
Suppliers
 
We
purchase solar panels, inverters, batteries and materials from multiple manufacturers both directly and through distributors. We intend
to
further coordinate purchases and optimize supply relationships to realize advantages of greater scale. If one or more of our suppliers
fail to meet our
anticipated demand, ceases or reduces production due to its financial condition, acquisition by a competitor or otherwise,
it may be difficult to quickly
identify alternate suppliers or to qualify alternative products on commercially reasonable terms, and
our ability to satisfy this demand may be adversely
affected. We do not, however, rely on any single supplier and, we believe, we can
obtain needed solar panels and materials from a variety of different
suppliers. Accordingly, we believe that the loss of any single supplier
would not materially affect our business.
 
We
 also utilize strategic partnerships with subcontractors for carport construction, and electrical installations, for racking and solar
 panel
installations, as well as subcontractors for roofing, grading, landscaping, and construction for our larger commercial projects.
 
6

 
 
Installation
 
We
are a licensed contractor in the markets we serve, and we are responsible for every customer installation. We manage the entire process
from
permitting through inspection to interconnection to the power grid, thereby making the system installation process simpler and as
seamless as possible for
our customers. Controlling every aspect of the installation process allows us to minimize costs, ensure quality
 and deliver high levels of customer
satisfaction.
 
Even
with controlling every aspect of the installation process, the ability to perform on a contract is subject to limitations. Jurisdictional
approval
processes are outside of our immediate control including, but not limited to, approval processes required by cities, counties,
 states or the federal
government or one of their agencies. Other aspects outside of our direct control include approvals from various
utility companies and weather conditions.
 
After-Sales
Support
 
We
offer continuing operational and maintenance services for our installed residential and commercial PV systems by providing extended factory
equipment technical support and acting as a service liaison using our proprietary knowledge, technology, and solar electric energy and
battery system
qualified engineering and technical staff. We do this through a Limited Workmanship Warranty and Operations and Maintenance
Program, which among
other things provides a service and technical support line to our customers. We generally respond to our job site
related issues within 24 hours. We strive to
offer assistance for residential installations as long as required to maintain customer
satisfaction. For commercial customers we offer separate operation,
maintenance and monitoring contracts. These operation, maintenance
and monitoring contracts generally have terms ranging from 5 to 25 years.
 
Facilities
 
We
maintain sales and installation offices in Roseville, Sacramento, Morgan Hill, Durham, Tulare, Santa Ana and Riverside, California. We
also
maintain sales and installation offices in Provo and St. George, Utah; Phoenix, Arizona; Las Vegas, Nevada; Centennial, Colorado;
El Paso, Mesquite and
McAllen, Texas; Albuquerque, New Mexico; Bloomingdale, Minnesota; Columbia, South Carolina; and Mequon, Wisconsin.
We lease all of our offices
and facilities.
 
Customers
 
Approximately
88% of our 2022 revenue came from residential installations while residential revenue was 77% of total revenue in 2021. The
increase
in residential revenue as a percentage of total revenue is the result of the Solcius Acquisition in April 2021 and its inclusion for the
full year of
2022. Approximately 12% of our total revenue in 2022 came from commercial installations, down from 23% in 2021.
 
Our
residential operations address the needs of property owners by installing systems typically smaller than 20kW. We facilitate purchase
or lease
financing and offer multiple product options to fit the specific needs of each customer.
 
We
 install systems for the commercial market and for public works projects. We define small commercial and public works projects as the
installation of systems under 100kW, whereas large projects involve the installation of systems greater than 100kW. Solar projects have
received limited
financing from traditional lending sources, but we are encouraged by municipal PACE programs in California which have
drawn funding sources such as
Ygrene Energy Fund into the financing of energy projects. Public works projects are frequently financed
through various PPA arrangements, often in
conjunction with SPURR (School Project for Utility Rate Reduction) programs, a Joint Powers
Authority in California. Cycle times vary from twenty
weeks to more than a year, depending on customer specifications, supply chain,
permitting and engineering lead times. Agricultural system sizes vary
significantly within this sector and can range from 10kW to multiple
megawatts. Agricultural loans to farmers and tax-oriented leases are the primary
funding sources within the industry. Similar to commercial
installations, cycle times for agricultural projects may commonly range from a few months to
more than three years depending upon the
authority having jurisdiction, the existing utility infrastructure and the various approvals required.
 
7

 
 
Competitors
 
In
the solar installation market, we compete with companies that offer products similar to ours. Some of these companies have greater financial
resources, operational experience, and technical capabilities than we do. When bidding for solar installation projects, however, our
current experience
suggests that there is no clear dominant or preferred competitor in the markets in which we compete. We do not believe
that any competitor has more than
10% of the market across all the areas in which we operate. We compete with other solar installers
on pricing, service, warranty, and the ability to arrange
financing. On a global scale, we also compete, on a cost basis, with traditional
utilities that supply electricity to our potential customers and with companies
that are not regulated like traditional utilities but
that have access to the traditional utility electricity transmission and distribution infrastructure pursuant to
state and local pro-competitive
and consumer choice policies. Our advantage over traditional utilities is that we offer customers the opportunity to create
their own
electricity and reduce dependency from the traditional electrical grid.
 
Seasonality
 
Our
revenue is impacted by seasonal weather patterns. In addition, some customers prefer to complete projects by the end of a calendar year
to
realize the benefits of available subsidy programs prior to year-end.
 
Technology
and Intellectual Property
 
Generally,
the solar installation business is not dependent on intellectual property. Within our residential business, we utilize proprietary software,
which enables our sales channel partners to efficiently manage the sales process and allows our operations team to manage thousands of
installations
annually.
 
Government
Regulation and Incentives
 
Government
Regulation
 
We
 are not regulated as a public utility within the United States under applicable national, state or other local regulatory regimes where
 we
conduct business.
 
To
operate our systems, we obtain interconnection permission from the applicable local primary electric utility. Depending on the size of
the solar
energy system and local law requirements, interconnection permission is provided by the local utility to us or our customer.
 In almost all cases,
interconnection permissions are issued on the basis of a standard process that has been pre-approved by the local
 public utility commission or other
regulatory body with jurisdiction over net energy metering procedures. As such, no additional regulatory
 approvals are required once interconnection
permission is given.
 
Our
operations are subject to stringent and complex federal, state and local laws, including regulations governing the occupational health
and
safety of our employees and wage regulations. For example, we are subject to the requirements of the federal and California Occupational
Safety and
Health Act, as amended (“OSHA”), the U.S. Department of Transportation (“DOT”), and comparable state
laws that protect and regulate employee health
and safety.
 
Federal,
state and local government bodies provide incentives to owners, end users, distributors, system integrators and manufacturers of solar
energy systems to promote solar energy in the form of rebates, tax credits and other financial incentives such as system performance
payments, payments
for renewable energy credits associated with renewable energy generation and exclusion of solar energy systems
from property tax assessments. These
incentives enable us to lower the price we charge customers to own or lease our solar energy systems,
helping to catalyze customer acceptance of solar
energy as an alternative to utility-provided power.
 
8

 
 
Inflation
Reduction Act
 
On
August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. This legislative package includes major policy
initiatives
across multiple industries from healthcare to clean energy. It is particularly focused on carbon reduction and replacing reliance on fossil fuels in the
U.S.,
providing
long-term tax credits and incentives for a myriad of renewable energy and electrification technologies.
 
For
the US solar industry, the passage of this legislation gives the industry
the most long-term certainty for federal tax credits it has ever had.
Assuming no significant changes to the IRA, the industry should
have ten years of certainty between the extensions of the current investment tax credit
(ITC) and production tax credit (PTC), in addition
to a new technology-neutral tax credit that begins after 2024. This stands in stark contrast to the one-,
two-, or five-year extensions
of the last decade that have typically been passed in the final days of the year.
 
Equally
as important, key provisions of the Solar Energy Manufacturing for America Act (SEMA) were included in the IRA, which means, for the
first time, the
US solar industry will have access to production tax credits and an investment tax credit for domestic manufacturing across the solar
value
chain. Multiple companies have already announced commitments to build new domestic facilities, which will diversify and bolster
the US solar supply
chain over the long term.
 
The
IRA extends the provisions of the Solar Investment Tax Credit (ITC) which allows residential homeowners who install designated solar
energy
systems between January 1, 2022, through the end of 2032, to receive a tax credit of 30% of the cost from their federal
income taxes. If owners owe less
than that amount in federal taxes for the year they install their solar system, they can carry over
any unused credit for as long as the ITC is in effect, January
1, 2032. After 2032, the residential ITC will start to phase out to
26% in 2033, 22% in 2034, and will end in 2035 unless Congress renews the provisions.
The base commercial project ITC rate is 30%.
To claim the ITC, solar developers and their sub-contractors must use union labor or prevailing wages during
construction and the
first five years of operations
 
The IRA
also enhances the ITC for certain projects placed into service after December 31, 2022. In the case of the PTC, the credit can
increase if
the solar projects meet certain requirements. The IRA also created the Advanced Manufacturing Production Credit (Section
45X), which provides for an
additional 10% increase in the ITC if a project uses
domestically produced materials and the total materials for the project are at least 40% U.S.-made.
 
Notwithstanding
the foregoing, Congress may take action to change or eliminate portions of the IRA, which could adversely affect our business by
reducing
or eliminating the incentives or credits set forth in the IRA, as signed into law last year.
 
NEM
3.0 Update
 
Net
Energy Metering (NEM) is utilized
in California to allow consumers to participate in transmitting solar power generated from their systems
and selling the power back to
 the grid. This benefit has allowed consumers to improve the economics of their investment in solar by lowering the
consumers overall energy
bill and shortening the payback period. In December 2022, the California Public Utility Commission issued a final decision on
NEM 3.0,
which would degrade economics of residential and commercial solar projects by lowering the export rate by 75%, a key benefit of solar.
While
the reduction in export rate is significant, the cost of solar relative to current electricity bills and the expected inflationary
pressures on future utility rates is
likely to continue to make solar economical. Additionally, homeowners may augment their solar systems
 with batteries, to ensure that excess power
generated during the day is exported to the grid during peak pricing times.
 
9

 
 
Anti-Circumvention
Investigation Update
 
On
March 28, 2022, the Department
 of Commerce (DOC) announced it would initiate an anti-circumvention investigation of Chinese anti-
dumping and countervailing duties (AD/CVD)
for solar cells and modules imported from Cambodia, Malaysia, Thailand, and Vietnam. This investigation
(referred to throughout as the
 anti-circumvention investigation) was initiated by a petition submitted in February 2022 by California-based module
manufacturer Auxin
Solar. The petition alleges that solar cell and module manufacturers are circumventing existing AD/CVD tariffs that apply to Chinese
imports
by manufacturing solar cells and modules in the four named countries using raw inputs from China. In June 2022, the
 Biden Administration
implemented a 24-month moratorium on any anti-circumvention duties that Commerce decides later this summer to impose
on solar cells and panels
imported from Vietnam, Malaysia, Thailand and Cambodia. Module manufacturers from the impacted countries have
since reopened plants and are likely
to regain full production by the end of 2023. In December 2022, the U.S. Department of Commerce
published its preliminary determination that certain
manufacturers of solar energy products in Malaysia, Vietnam, Thailand, and Cambodia
 that rely on Chinese-origin inputs are circumventing U.S.
antidumping and countervailing duties relating to crystalline silicon photovoltaic
cells and modules of Chinese origin. Assuming the results of Commerce’s
preliminary findings are upheld in the final determination,
 once the Biden Administration’s two-year tariff waiver for covered goods coming from
Southeast Asia expires in June 2024, manufacturers
 of solar energy products in Malaysia, Vietnam, Thailand, and Cambodia will be required to pay
AD/CVD duties on most imports of solar energy
products from these countries. None of our existing supply chain was impacted by this decision, as our
key suppliers were not found to
be circumventing existing tariffs.
 
Approximately
50% of U.S. states offer a personal or corporate investment or production tax credit for solar energy that is additive to the ITC.
Further,
 these states, and many local jurisdictions, have established property tax incentives for renewable energy systems that include exemptions,
exclusions, abatements, and credits. Many state governments, traditional utilities, municipal utilities and co-operative utilities offer
a rebate or other cash
incentive for the installation and operation of a solar energy system or energy efficiency measures. Capital costs
or “up-front” rebates provide funds to solar
customers based on the cost, size or expected production of a customer’s
solar energy system. Performance-based incentives provide cash payments to a
system owner based on the energy generated by their solar
 energy system during a pre-determined period, and they are paid over that time period.
Depending on the cost of the system and other
site-specific variables, tax incentives can typically cover 30-40% of the cost of a commercial or residential
solar system.
 
Many
states also have adopted procurement requirements for renewable energy production that requires regulated utilities to procure a specified
percentage of total electricity delivered to customers in the state from eligible renewable energy sources, such as solar energy systems,
by a specified date.
 
Corporate
Information
 
Our
principal executive offices are located at 1555 Freedom Blvd, Provo, Utah 84604 and our telephone number is (385) 497-6955. Our web site
address is www.sunworksusa.com. Information contained in or accessible through our website does not constitute part of this Annual Report
on Form 10-
K.
 
Available
Information
 
We
file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, referred
to
herein as the SEC. Our SEC filings, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and any
amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act are available to the public
free of charge over the Internet at
our website at http://www.sunworksusa.com or at the SEC’s web site at http://www.sec.gov. Our
SEC filings will be available on our website as soon as
reasonably practical after we have electronically filed or furnished them to
the SEC. Information contained on our website is not incorporated by reference
into this 10-K. You can view our Code of Conduct and Ethics
and the charters for each of our committees of our Board of Directors free of charge on the
investor relations section of our website
under corporate governance.
 
10

 
 
Item
1A. Risk Factors.
 
Our
 business and operations are subject to a number of significant risks and uncertainties as described below. However, the risks and
uncertainties
described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem
immaterial, may become important factors that could harm our business, financial condition, or results of operations. If any of the following
risks actually
occur, our business, financial condition or results of operations could suffer materially.
 
Risks
Related to Our Financial Position and Capital Requirements
 
We
have incurred significant losses since inception.
 
We
had an accumulated deficit of $143,471,000 and $115,260,000 as of December 31, 2022 and December 31, 2021, respectively. We incurred
annual operating losses since our inception. We anticipate becoming profitable as we increase our installation revenue and reduce our
costs as a percentage
of revenue. However, there can be no assurances that these actions will result in sustained profitability. We are
subject to all the risks incidental to the sales,
development, and costs of construction of new solar energy revenues, and we may encounter
unforeseen expenses, difficulties, complications, delays and
other unknown factors that may adversely affect our business.
 
We
 may require substantial additional funding which may not be available to us on acceptable terms, or at all. If we fail to raise the necessary
additional capital, we may be unable to achieve growth of our operations.
 
Our
operations have consumed substantial amounts of cash since inception. In order to carry out our business plan and implement our strategy,
we
anticipate that we will need to obtain additional financing from time to time and may choose to raise additional funds through strategic
collaborations,
public or private equity or debt financing, bank lines of credit, asset sales, government grants, or other arrangements.
We cannot be sure that any additional
funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional
equity or equity-related financing may be dilutive to our
shareholders, and debt or equity financing, if available, may subject us to
restrictive covenants and significant interest costs.
 
Our
inability to raise capital when needed could harm our ability to grow our operations substantially and could cause our stock price to
decline.
 
Risks
Related to Our Business and Industry
 
Our
results of operations have been and will continue to be adversely impacted by the COVID-19 Pandemic, and the duration and extent to which
it
will impact our results of operations remains uncertain.
 
A
significant outbreak of epidemic, pandemic, or contagious diseases in the human population, such as the COVID-19 pandemic, could result
in a
widespread health crisis that could adversely affect the broader economies, financial and capital markets, commodity and energy
 prices, and overall
demand environment for our products. A global health crisis could affect, and has affected, our workforce, customers
and vendors, as well as economies
and financial markets globally, potentially leading to an economic downturn, which could decrease spending,
 adversely affecting the demand for our
products.
 
In
response to the COVID-19 pandemic, many state, local, and foreign governments put in place, and others in the future may put in place,
travel
restrictions, quarantines, “stay at home” orders and guidelines, and similar government orders and restrictions, in
an attempt to control the spread of the
disease. Such restrictions or orders resulted in, and may continue to result in, business closures,
work stoppages, slowdowns and delays, among other
effects that could negatively impact our operations, as well as the operations of our
customers and business partners. Such results had and may have a
material adverse effect on our business, operations, financial condition,
 results of operations, and cash flows. Although many restrictions relating to
COVID-19 are no longer in place, the restrictions continue
to impact our operations today and governments may re-enact restrictions or lockdowns, which
may adversely affect our business.
 
11

 
 
Although
we have continued to operate consistent with federal guidelines and state and local orders, the extent to which the COVID-19 pandemic
impacts our business, operations, financial results and financial condition will depend on numerous evolving factors which are uncertain
and cannot be
predicted, including:
 
 
●
the
duration and scope of the pandemic and associated disruptions;
 
 
 
 
●
a
general slowdown in our industry;
 
 
 
 
●
governmental,
business and individuals’ actions taken in response to the pandemic;
 
 
 
 
●
the
effect on our customers and our customers’ demand for our products and installations;
 
 
 
 
●
the
effect on our suppliers and disruptions to the global supply chain;
 
 
 
 
●
our
ability to sell and provide our products and provide installations, including disruptions as a result of travel restrictions and
people working
from home;
 
 
 
 
●
the
ability of our customers to pay for our products;
 
 
 
 
●
delays
in our projects due to closures of jobsites or cancellation of jobs; and
 
 
 
 
●
any
closures of our and our suppliers’ and customers’ facilities.
We
continue to closely monitor the COVID-19 pandemic and related regulations.
Due, in part, to the COVID-19 pandemic, our organization
continues to operate both in person and virtually across the United States as
deemed necessary by management, which entails the need for us to continue to
support remote workforces at greater scale than we have before
COVID-19.
 
We
will continue promoting the health and safety of our employees and contractors. In an effort to protect our employees and contractors,
we
continue to comply with all health and safety regulations, including adopting social distancing policies at all our locations, working
 from home, and
complying with domestic travel restrictions as necessary. We will continue to implement appropriate safety measures, including
requiring employees to be
fully vaccinated to access our workplace facilities pursuant to federal, state, and local guidelines, as well
as taking into consideration COVID-19 case
trends and related measures in our locations. We may take further actions as government authorities
require or recommend or as we determine to be in the
best interests of our employees, customers, partners, and suppliers.
 
A
material reduction in the retail price of traditional utility generated electricity or electricity from other sources could harm our
business, financial
condition, results of operations and prospects.
 
We
believe that a significant number of our customers decide to buy solar energy because they want to pay less for electricity than what
is offered
by traditional utilities. However, distributed residential solar energy has yet to achieve broad market adoption as evidenced
by the fact that distributed solar
has penetrated less than 5% of its total addressable market in the U.S. residential sector.
 
The
customer’s decision to choose solar energy may also be affected by the cost of other renewable energy sources. Decreases in the
retail prices
of electricity from the traditional utilities or from other renewable energy sources would harm our ability to offer competitive
pricing and could harm our
business. The price of electricity from traditional utilities could decrease as a result of:
 
●
construction
of a significant number of new power generation plants, including plants utilizing natural gas, nuclear, coal, renewable energy or
other
generation technologies;
●
relief
of transmission constraints that enable local centers to generate energy less expensively;
●
reductions
in the price of natural gas;
●
utility
rate adjustment and customer class cost reallocation;
●
energy
conservation technologies and public initiatives to reduce electricity consumption;
●
development
of new or lower-cost energy storage technologies that have the ability to reduce a customer’s average cost of electricity by
shifting load
to off-peak times; or
●
development
of new energy generation technologies that provide less expensive energy.
 
12

 
 
A
reduction in utility electricity prices would make the purchase or the lease of our solar energy systems less economically attractive.
If the retail
price of energy available from traditional utilities were to decrease due to any of these reasons, or other reasons, we
 would be at a competitive
disadvantage, we may be unable to attract new customers and our growth would be limited.
 
Existing
electric utility industry regulations, and changes to regulations, may present technical, regulatory and economic barriers to the purchase
and
use of solar energy systems that may significantly reduce demand for our solar energy systems.
 
Federal,
 state and local government regulations and policies concerning the electric utility industry, and internal policies and regulations
promulgated
by electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies
often relate to
electricity pricing and the interconnection of customer-owned electricity generation. In the United States, governments
and utilities continuously modify
these regulations and policies. These regulations and policies could deter customers from purchasing
renewable energy, including solar energy systems.
This could result in a significant reduction in the potential demand for our solar
energy systems. For example, utilities commonly charge fees to larger,
industrial customers for disconnecting from the electric grid
or for having the capacity to use power from the electric grid for back-up purposes. These fees
could increase our customers’ cost
to use our systems and make them less desirable, thereby harming our business, prospects, financial condition and
results of operations.
In addition, depending on the region, electricity generated by solar energy systems competes most effectively with expensive peak-
hour
electricity from the electric grid, rather than the less expensive average price of electricity. Modifications to the utilities’
peak hour pricing policies or
rate design, such as to a flat rate, would require us to lower the price of our solar energy systems to
compete with the price of electricity from the electric
grid.
 
In
addition, any changes to government or internal utility regulations and policies that favor electric utilities could reduce our competitiveness
and
cause a significant reduction in demand for our products and services. For example, certain jurisdictions have proposed assessing
 fees on customers
purchasing energy from solar energy systems or imposing a new charge that would disproportionately impact solar energy
system customers who utilize net
energy metering, either of which would increase the cost of energy to those customers and could reduce
demand for our solar energy systems. It is possible
charges could be imposed on not just future customers but our existing customers,
 causing a potentially significant consumer relations problem and
harming our reputation and business. Due to the amount of our business
in California, any such changes in these markets would be particularly harmful to
our business, results of operations, and future growth.
For example, In December 2022, the California Public Utility Commission issued a final decision
on
NEM 3.0, which would degrade economics of residential and commercial solar projects by lowering the export rate by 75%, a key benefit
of solar.
 
Our
growth strategy depends on the widespread adoption of solar power technology.
 
The
market for solar power products is emerging and rapidly evolving, and its future success is uncertain. If solar power technology proves
unsuitable for widespread commercial deployment or if demand for solar power products fails to develop sufficiently, we would be unable
to generate
enough revenues to achieve and sustain profitability and positive cash flow. The factors influencing the widespread adoption
of solar power technology
include but are not limited to:
 
●
cost-effectiveness
of solar power technologies as compared with conventional and non-solar alternative energy technologies;
●
performance
and reliability of solar power products as compared with conventional and non-solar alternative energy products;
●
fluctuations
in economic and market conditions which impact the viability of conventional and non-solar alternative energy sources, such as
increases
or decreases in the prices of oil and other fossil fuels;
●
availability
and economics of battery storage and co-generation technology;
●
continued
deregulation of the electric power industry and broader energy industry; and
●
availability
of governmental subsidies and incentives.
 
13

 
 
Our
business currently benefits from the availability of rebates, tax credits and other financial incentives. The expiration, elimination
or reduction of
these rebates, credits and incentives would adversely impact our business.
 
U.S.
federal, state and local government bodies provide incentives to end users, distributors, system integrators and manufacturers of solar
energy
systems to promote solar electricity in the form of rebates, tax credits and other financial incentives such as system performance
payments and payments
for renewable energy credits associated with renewable energy generation. These governmental rebates, tax credits
and other financial incentives enhance
the return on investment for our customers and incentivize them to purchase solar systems. These
 incentives enable us to lower the price we charge
customers for energy and for our solar energy systems. However, these incentives may
expire on a particular date, end when the allocated funding is
exhausted, or be reduced or terminated as solar energy adoption rates
increase. These reductions or terminations often occur without warning.
 
Reductions
 in, or eliminations or expirations of, governmental incentives could adversely impact our results of operations and our ability to
compete
in our industry, causing us to increase the prices of our solar energy systems, and reducing the size of our addressable market. In addition,
this
would adversely impact our ability to attract investment partners and to form new financing funds and our ability to offer attractive
financing to prospective
customers.
 
Net
energy metering and related policies to offer competitive pricing to our customers in our current markets, and changes to net energy
metering
policies may significantly reduce demand for electricity from our solar energy systems.
 
Many
 of the states where we currently serve customers has adopted a net energy metering policy. Net energy metering typically allows our
customers
to interconnect their on-site solar energy systems to the utility grid and offset their utility electricity purchases by receiving a
bill credit at the
utility’s retail rate for energy generated by their solar energy system that is exported to the grid in excess
of the electric load used by the customer. At the
end of the billing period, the customer simply pays for the net energy used or receives
a credit at the retail rate if more energy is produced than consumed.
Utilities operating in states without a net energy metering policy
may receive solar electricity that is exported to the grid when there is no simultaneous
energy demand by the customer without providing
retail compensation to the customer for this generation.
 
Our
ability to sell solar energy systems and the electricity they generate may be adversely impacted by the failure of states to expand existing
limits on the amount of net energy metering in states that have implemented net metering. The failure of states to adopt a net energy
metering policy where
it currently is not in place, the imposition of new charges that only or disproportionately impact customers that
utilize net energy metering may also
negatively impact our operations. In addition, reductions in the amount or value of credit that
 customers receive through net energy metering could
negatively impact the demand for our services. Our ability to sell solar energy systems
and the electricity they generate also may be adversely impacted by
the unavailability of expedited or simplified interconnection for
 grid-tied solar energy systems or any limitation on the number of customer
interconnections or amount of solar energy that utilities
are required to allow in their service territory or some part of the grid. If such charges are imposed,
the cost savings associated with
 switching to solar energy may be significantly reduced and our ability to attract future customers and compete with
traditional utility
providers could be impacted.
 
Limits
on net energy metering, interconnection of solar energy systems and other operational policies in key markets could limit the number
of
solar energy systems installed in those markets. For example, the California Public Utilities Commission (“CPUC”) issued
a final decision on NEM 3.0,
which would degrade economics of residential and commercial solar projects by lowering the export rate by
75%, a key benefit of solar. In 2022, we
generated 41% of our revenue in California.
 
14

 
 
Our
business depends in part on the regulatory treatment of third-party owned solar energy systems.
 
Our
 leases and any power purchase agreements are third-party ownership arrangements. Sales of electricity by third parties face regulatory
challenges in some states and jurisdictions. Other challenges pertain to whether third-party owned systems qualify for the same levels
of rebates or other
non-tax incentives available for customer-owned solar energy systems, whether third-party owned systems are eligible
at all for these incentives, and
whether third-party owned systems are eligible for net energy metering and the associated significant
cost savings. Reductions in, or eliminations of, this
treatment of these third-party arrangements could reduce demand for our systems.
 
Our
ability to provide solar energy systems to customers on an economically viable basis depends on our ability to help customers arrange
financing for
such systems.
 
Our
solar energy systems have been eligible for Federal ITCs or U.S. Treasury grants, as well as depreciation benefits. We have relied on,
and will
continue to rely on, financing structures that monetize a substantial portion of those benefits and provide financing for our
solar energy systems. If, for any
reason, our customers were unable to continue to monetize those benefits through these arrangements,
we may be unable to provide and maintain solar
energy systems for new customers on an economically viable basis.
 
The
availability of this tax-advantaged financing depends upon many factors, including, but not limited to:
 
●
the
state of financial and credit markets;
●
changes
in the legal or tax risks associated with these financings; and
●
non-renewal
of these incentives or decreases in the associated benefits.
 
U.S.
Treasury grants are no longer available for new solar energy systems. Changes in existing law and interpretations by the Internal Revenue
Service and the courts could reduce the willingness of funding sources to provide funds to customers of these solar energy systems. We
cannot assure you
that this type of financing will be available to our customers. If, for any reason, we are unable to find financing
for solar energy systems, we may no longer
be able to provide solar energy systems to new customers on an economically viable basis.
This would have a negative impact on our business, financial
condition, and results of operations.
 
Our
inability to arrange financing for our customers could hurt our future business.
 
We
also compete, on a cost basis, with traditional utilities that supply electricity to our potential customers and with companies that
are not
regulated like traditional utilities but that have access to the traditional utility electricity transmission and distribution
infrastructure pursuant to state and
local pro-competitive and consumer choice policies. Our advantage over traditional utilities is
that we offer customers the opportunity to create their own
electricity and detach from the traditional electrical grid. To offer customers
this opportunity, we often have to arrange financing for our customers as solar
projects have received limited financing from traditional
lending sources. Our objective is to arrange the most flexible terms that meet the needs of the
customer. Although we do not provide
financing ourselves, we have relationships to arrange financing with numerous private and public sources, including
PACE (Property Assessed
Clean Energy) Programs, which are programs that involve both municipal governments and private financing companies that
allows property
owners to receive upfront funding for renewable energy projects, and agricultural financing offered by a network of lending institutions.
Our inability to arrange financing through these or other sources could adversely affect our business and results of operations.
 
If
we cannot compete successfully against other solar and energy companies, we may not be successful in developing our operations and our
business
may suffer.
 
The
solar and energy industries are characterized by intense competition and technological advances, both in the United States and internationally.
We compete with solar companies with business models that are similar to ours. In addition, we compete with solar companies in the downstream
value
chain of solar energy. For example, we face competition from purely finance driven organizations that acquire customers and then
subcontract out the
installation of solar energy systems, from installation businesses that seek financing from external parties, from
large construction companies and utilities,
and increasingly from sophisticated electrical and roofing companies. Some of these competitors
specialize in the residential solar energy market, and some
may provide energy at lower costs than we do. Further, some of our competitors
are integrating vertically in order to ensure supply and to control costs.
Many of our competitors also have significant brand name recognition
and have extensive knowledge of our target markets.
 
If
we are unable to compete in the market, it will have a negative impact on our business, financial condition, and results of operations.
 
15

 
 
Our
business is concentrated in certain markets, putting us at risk of region-specific disruptions.
 
With
the acquisition of Solcius in April 2021, we have reduced our concentration in California by having a presence in several more states.
We
expect our near-term future growth to occur outside of California and to further expand our customer base and operational infrastructure.
However, our
business and results of operations are now particularly susceptible to adverse regional economic, regulatory, political,
weather and other conditions in the
greater southwest, Texas and north central regions of the United States.
 
Our
customer acquisition function is concentrated with certain third-party solar sales channel partners and our growth depends on maintaining
and
expanding these relationships.
 
A
key component of our growth strategy is to develop or expand our relationships with third parties. For example, we are investing resources
in
establishing strategic relationships with dealers and sales channel partners, to generate new customers. Developing new relationships
may not occur as
quickly as planned or may not generate new customers as planned. A significant portion of our business depends on attracting
and retaining new and
existing solar dealers and sales channel partners. For example, we diversified our market and product concentration
following the acquisition of Solcius in
April 2021. Solcius utilizes a combination of authorized dealers and a direct sales strategy
to generate new customers. Since the acquisition, Solcius has
had three authorized dealers that combined accounted for more than 54% of
Solcius’ revenue for 2022, down from 56% of revenue in 2021. Negotiating
relationships with our solar partners, investing in due
 diligence efforts with potential solar partners, training such third parties and contractors, and
monitoring them for compliance with
our standards require significant time and resources and may present greater risks and challenges than expanding a
direct sales or installation
team. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to grow our
business
and address our market opportunities could be impaired. Even if we are able to establish and maintain these relationships, we may not
be able to
execute on our goal of leveraging these relationships to meaningfully expand our business, brand recognition and customer
base. This would limit our
growth and our opportunities to generate significant additional revenue or cash flows.
 
If
we are unable to retain and recruit qualified technicians and advisors, or if our board of directors, key executives, key employees or
consultants
discontinue their employment or consulting relationship with us or fail to properly integrate into our business and operations
 it may delay our
development efforts or otherwise adversely affect our business.
 
We
may not be able to attract or retain qualified management or technical personnel in the future due to the intense competition for qualified
personnel among solar, energy, construction and other businesses. Our industry has experienced a high rate of turnover of management
personnel in recent
years. If we are not able to attract, retain, motivate and integrate necessary personnel to accomplish our business
objectives, we may experience constraints
that will significantly impede the successful development of any product candidates, our ability
to raise additional capital, and our ability to implement our
overall business strategy.
 
We
are highly dependent on members of our management and technical staff. Our success also depends on our ability to continue to attract,
retain
and motivate highly skilled junior, mid-level, and senior managers as well as junior, mid-level, and senior technical personnel.
The loss of any of our
executive officers, key employees, or consultants and our inability to find suitable replacements could potentially
harm our business, financial condition,
and prospects. We may be unable to attract and retain personnel on acceptable terms given the
competition among solar and energy companies. Certain of
our current officers, directors, or consultants hereafter appointed may from
time to time serve as officers, directors, advisors, or consultants of other solar
and energy companies. We do not maintain “key
man” insurance policies on any of our officers or employees. Other than certain members of our senior
management team, all our
employees are employed “at will” and, therefore, each employee may leave our employment and join a competitor at any time.
 
We
plan to continue to issue restricted stock unit grants, performance grants, stock options or other forms of equity awards in the
future as a
method of attracting and retaining employees, motivating performance, and aligning the interests of employees with those
of our shareholders. If we are
unable to implement and maintain equity compensation arrangements that provide sufficient incentives,
we may be unable to retain our existing employees
and attract additional qualified candidates. If we are unable to retain our
existing employees and attract additional qualified candidates, our business and
results of operations could be adversely affected.
Currently the vast majority of the exercise prices of all outstanding stock options are greater than the
current stock
price.
 
16

 
 
We
may not realize the anticipated benefits of past or future investments, strategic transactions, or acquisitions, and integration of these
acquisitions
may disrupt our business and management.
 
We
have in the past and may in the future, acquire companies, or enter into joint ventures or other strategic transactions. For example,
on April 8,
2021, we acquired all the membership interests of Solcius, for cash consideration of $51.8 million, a full service, residential
solar system provider which
provides proposal generation, engineering, permitting, installation services and financial solutions to customers
across the country, with the largest markets
being Texas, California, New Mexico and Colorado.
 
We
may not realize the anticipated benefits of past or future investments, strategic transactions, or acquisitions, and these transactions
involve
numerous risks that are not within our control. These risks include the following, among others:
 
 
●
difficulty
in assimilating the operations, systems, and personnel of the acquired company;
 
 
 
 
●
difficulty
in effectively integrating the acquired technologies or products with our current products and technologies;
 
 
 
 
●
difficulty
in maintaining controls, procedures and policies during the transition and integration;
 
 
 
 
●
disruption
of our ongoing business and distraction of our management and employees from other opportunities and challenges due to integration
issues;
 
 
 
 
●
difficulty
integrating the acquired company’s accounting, management information and other administrative systems;
 
 
 
 
●
inability
to retain key technical and managerial personnel of the acquired business;
 
 
 
 
●
inability
to retain key customers, vendors and other business partners of the acquired business;
 
 
 
 
●
inability
to achieve the financial and strategic goals for the acquired and combined businesses;
 
 
 
 
●
incurring
acquisition-related costs or amortization costs for acquired intangible assets that could impact our results of operations;
 
 
 
 
●
significant
post-acquisition investments which may lower the actual benefits realized through the acquisition;
 
 
 
 
●
potential
failure of the due diligence processes to identify significant issues with product quality, legal, and financial liabilities, among
other
things; and
 
 
 
 
●
potential
inability to assert that internal controls over financial reporting are effective.
 
Our
failure to address these risks, or other problems encountered in connection with our past or future investments, strategic transactions,
or
acquisitions, could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated
liabilities, and
harm our business generally. Future acquisitions could also result in dilutive issuances of our equity securities, the
incurrence of debt, contingent liabilities,
amortization expenses, incremental expenses or the write-off of goodwill, any of which could
harm our financial condition or results of operations, and the
trading price of our common stock could decline.
 
Mergers
and acquisitions are inherently risky, may not produce the anticipated benefits and could adversely affect our business, financial condition
or results of operations.
 
17

 
 
A
portion of our total assets consists of goodwill and intangibles, which are subject to a periodic impairment analysis, and a significant
impairment
determination in any future period could have an adverse effect on our statement of operations even without a significant
loss of revenue or increase in
cash expenses attributable to such period.
 
We
 have remaining goodwill of approximately $32.2 million associated with the acquisition of Solcius LLC together with intangible assets
totaling $5.3 million. We will be required to continue to evaluate this goodwill and intangibles for impairment based on the fair value
of the operating
business units to which this goodwill and intangible assets relate, at least once a year. These estimated fair values
could change if we are unable to achieve
operating results at the levels that have been forecasted, the market valuation of that business
 unit decreases based on transactions involving similar
companies, or there is a permanent, negative change in the market demand for the
services offered by the business unit. These changes could result in
further impairment of the existing goodwill and intangible balances
and that could require a material non-cash charge to our results of operations.
 
In
the year ended December 31, 2021, we had a goodwill impairment charge of $5.5 million.
 
We
may be subject to claims arising from the operations of our various businesses for periods prior to the dates we acquired them.
 
We
may be subject to claims or liabilities arising from the ownership or operation of acquired businesses for the periods prior to our acquisition
of
them, including environmental, employee-related, and other liabilities and claims not covered by insurance. These claims or liabilities
could be significant.
Our ability to seek indemnification from the former owners of our acquired businesses for these claims or liabilities
may be limited by various factors,
including the specific time, monetary or other limitations contained in the respective acquisition
agreements and the financial ability of the former owners
to satisfy our indemnification claims. In addition, insurance companies may
be unwilling to cover claims that have arisen from acquired businesses or
locations, or claims may exceed the coverage limits that our
 acquired businesses had in effect prior to the date of acquisition. If we are unable to
successfully obtain insurance coverage of third-party
claims or enforce our indemnification rights against the former owners, or if the former owners are
unable to satisfy their obligations
for any reason, including because of their current financial position, we could be held liable for the costs or obligations
associated
with such claims or liabilities, which could adversely affect our financial condition and results of operations.
 
With
respect to providing electricity on a price-competitive basis, solar systems face competition from traditional regulated electric utilities,
from less-
regulated third party energy service providers and from new renewable energy companies.
 
The
 solar energy and renewable energy industries are both highly competitive and continually evolving as participants strive to distinguish
themselves within their markets and compete with large traditional utilities. We believe that one of our primary competitors (excluding
other engineering,
procure and construction businesses) are the traditional utilities that supply electricity to our potential customers.
 Traditional utilities generally have
substantially greater financial, technical, operational, and other resources than we do. As a result,
these competitors may be able to devote more resources
to the research, development, promotion, and sale of their products or respond
 more quickly to evolving industry standards and changes in market
conditions than we can. Traditional utilities could also offer other
value-added products or services that could help them to compete with us even if the cost
of electricity they offer is higher than ours.
In addition, a majority of utilities’ sources of electricity is non-solar, which may allow utilities to sell electricity
more cheaply
than electricity generated by our solar energy systems.
 
We
also compete with companies that are not regulated like traditional utilities but that have access to the traditional utility electricity
transmission
and distribution infrastructure pursuant to state and local pro-competitive and consumer choice policies. These energy service
companies are able to offer
customers electricity supply-only solutions that are competitive with our solar energy system options on
 both price and usage of renewable energy
technology while avoiding the long-term agreements and physical installations that our current
business model requires. This may limit our ability to attract
new customers; particularly those who wish to avoid long-term contracts
or have an aesthetic or other objection to putting solar panels on their roofs.
 
As
the solar industry grows and evolves, we will also face new competitors who are not currently in the market. Low technological barriers
to
entry characterize our industry and well-capitalized companies could choose to enter the market and compete with us. Our failure to
adapt to changing
market conditions and to compete successfully with existing or new competitors will limit our growth and will have
a negative impact on our business and
prospects.
 
18

 
 
Developments
 in alternative technologies or improvements in distributed solar energy generation may materially adversely affect demand for our
offerings.
 
Significant
developments in alternative technologies, such as advances in other forms of distributed solar power generation, storage solutions such
as batteries, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other forms of
centralized power
production may materially and adversely affect our business and prospects in ways we do not currently anticipate. Any
failure by us to adopt new or
enhanced technologies or processes, or to react to changes in existing technologies, could materially delay
deployment of our solar energy systems, which
could result in product obsolescence, the loss of competitiveness of our systems, decreased
revenue and a loss of market share to competitors.
 
Climate
change may have long-term impacts on our business, our industry, and the global economy.
 
Climate
change poses a systemic threat to the global economy and will continue to do so until our society transitions to renewable energy and
decarbonizes. While our core business model seeks to accelerate this transition to renewable energy, there are inherent climate-related
risks to our business
operations. Warming temperatures throughout the United States, and in California, our biggest market, in particular,
has contributed to extreme weather,
intense drought, and increased wildfire risks. These events have the potential to disrupt our business,
our third-party suppliers, and our customers, and may
cause us to incur additional operational costs. For instance, natural disasters
and extreme weather events associated with climate change can impact our
operations by delaying the installation of our systems, leading
to increased expenses and decreased revenue and cash flows in the period. They can also
cause a decrease in the output from our systems
due to smoke or haze. Additionally, if weather patterns significantly shift due to climate change, it may be
harder to predict the average
annual amount of sunlight striking each location where our solar energy systems are installed. This could make our solar
service offerings
less economical overall or make individual systems less economical.
 
We
depend on a limited number of suppliers, for certain critical raw materials, components and finished products, including our modules.
Any supply
interruption or delay could adversely affect our business, prevent us from delivering products to our customers within required
timeframes, and could
in turn result in sales and installation delays, cancellations, penalty payments, or loss of market share.
 
Our
supply chain is subject to natural disasters and other events beyond our control, such as raw material, component, and labor shortages,
global
and regional shipping and logistics constraints, global conflicts or wars, work stoppages, epidemics or pandemics, earthquakes,
floods, fires, volcanic
eruptions, power outages, or other natural disasters, and the physical effects of climate change, including changes
in weather patterns (including floods,
fires, tsunamis, drought, and rainfall levels), water availability, storm patterns and intensities,
and temperature levels. Human rights concerns, including
forced labor and human trafficking, in foreign countries and associated governmental
responses have the potential to disrupt our supply chain and our
operations could be adversely impacted. For example, the U.S. Department
 of Homeland Security issued a withhold release order on June 24, 2021
applicable to silica-based products made by a major producer of
polysilicon used by manufacturers of solar panels in China’s Xinjiang Uygur autonomous
region, over allegations of widespread,
state-backed forced labor in the region. Although we do not believe that raw materials used in the products we sell
are sourced from
this or other regions with forced labor concerns, any delays or other supply chain disruption resulting from these concerns, associated
governmental responses, or a desire to source products, components or materials from other manufacturers or regions could result in shipping,
sales and
installation delays, cancellations, penalty payments, or loss of revenue and market share, any of which could have a material
adverse effect on our business,
results of operations, cash flows, and financial condition.
 
19

 
 
Due
to the limited number of suppliers in our industry, the acquisition of any of these suppliers by a competitor or any shortage, delay,
quality issues,
price change, imposition of tariffs or duties or other limitation in our ability to obtain components or technologies
we use could result in sales and
installation delays, cancellations, and loss of market share.
 
While
we purchase our products from several different suppliers, if one or more of the suppliers that we rely upon to meet anticipated demand
ceases or reduces production due to its financial condition, acquisition by a competitor, or otherwise, is unable to increase production
as industry demand
increases or is otherwise unable to allocate sufficient production to us, it may be difficult to quickly identify
alternate suppliers or to qualify alternative
products on commercially reasonable terms, and our ability to satisfy this demand may be
adversely affected. At times, suppliers may have issues with the
quality of their products, which may not be realized until the product
has been installed at a customer site. This may result in additional costs incurred.
There are a limited number of suppliers of solar
energy system components and technologies. While we believe there are other sources of supply for these
products available, transitioning
to a new supplier may result in additional costs and delays in acquiring our solar products and deploying our systems.
These issues could
harm our business or financial performance.
 
In
addition, the acquisition of a component supplier or technology provider by one of our competitors could limit our access to such components
or technologies and require significant redesigns of our solar energy systems or installation procedures and have a negative impact on
our business.
 
There
 have also been periods of industry-wide shortages of key components, including solar panels, in times of industry disruption. The
manufacturing
 infrastructure for some of these components has a long lead-time, requires significant capital investment and relies on the continued
availability of key commodity materials, potentially resulting in an inability to meet demand for these components. The solar industry
 is frequently
experiencing significant disruption and, as a result, shortages of key components, including solar panels, may be more
likely to occur, which in turn may
result in price increases for such components. Even if industry-wide shortages do not occur, suppliers
may decide to allocate key components with high
demand or insufficient production capacity to more profitable customers, customers with
long-term supply agreements or customers other than us and our
supply of such components may be reduced as a result.
 
Typically,
we purchase the components for our solar energy systems on an as-needed basis and do not operate under long-term supply agreements.
The
vast majority of our purchases are denominated in U.S. dollars. Since our revenue is also generated in U.S. dollars, we are mostly insulated
from
currency fluctuations. However, since our suppliers often incur a significant amount of their costs by purchasing raw materials
and generating operating
expenses in foreign currencies, if the value of the U.S. dollar depreciates significantly or for a prolonged
period of time against these other currencies this
may cause our suppliers to raise the prices they charge us, which could harm our financial
results. Since we purchase most of the solar photovoltaic panels
we use from China, we are particularly exposed to exchange rate risk
from increases in the value of the Chinese Renminbi.
 
Although
our business has historically benefited from the declining cost of solar panels, our financial results may be harmed due to increases
in the
cost of solar panels and tariffs on imported solar panels imposed by the U.S. government.
 
The
declining cost of solar panels and the raw materials necessary to manufacture them has been a key driver in the pricing of our solar
energy
systems and customer adoption of this form of renewable energy. With the stabilization or increase of solar panel and raw materials
prices, our growth
could slow, and our financial results could suffer. Further, the cost of solar panels and raw materials could increase
in the future due to tariff penalties or
other factors.
 
If tariffs are imposed or other disruptions to the supply chain occur, our ability
to purchase these products on competitive terms or to access
specialized technologies from those countries could be limited. Any of those
events could harm our financial results by requiring us to account for the cost
of trade penalties or to purchase solar panels or other
system components from alternative, higher-priced sources.
 
20

 
 
We
act as the licensed general contractor for our customers and are subject to risks associated with construction, cost overruns, delays,
regulatory
compliance and other contingencies, any of which could have a negative impact on our business and results of operations.
 
We
are a licensed contractor. We are normally the general contractor, electrician, construction manager, and installer for our solar energy
systems.
We may be liable to customers for any damage we cause to their home, belongings, or property during the installation of our
systems. For example, we
penetrate our customers’ roofs during the installation process and may incur liability for the failure
to adequately weatherproof such penetrations following
the completion of installation of solar energy systems. In addition, because the
solar energy systems we deploy are high-voltage energy systems, we may
incur liability for the failure to comply with electrical standards
and manufacturer recommendations. Because our profit on a particular installation is based
in part on assumptions as to the cost of such
project, cost overruns, delays, or other execution issues may cause us to not achieve our expected results or
cover our costs for that
project.
 
In
addition, the installation of solar energy systems is subject to oversight and regulation in accordance with national, state, and local
laws and
ordinances relating to building, fire and electrical codes, safety, environmental protection, utility interconnection and metering,
and related matters. We also
rely on certain of our employees to maintain professional licenses in many of the jurisdictions in which
we operate, and our failure to employ properly
licensed personnel could adversely affect our licensing status in those jurisdictions.
It is difficult and costly to track the requirements of every authority
having jurisdiction over our operations and our solar energy
systems. Any new government regulations or utility policies pertaining to our systems, or
changes to existing government regulations
 or utility policies pertaining to our systems, may result in significant additional expenses to us and our
customers and, as a result,
could cause a significant reduction in demand for our systems.
 
Compliance
with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result
in potentially significant monetary penalties, operational delays, and adverse publicity.
 
The
installation of solar energy systems requires our employees to work at heights with complicated and potentially dangerous electrical
systems.
The evaluation and modification of buildings as part of the installation process requires our employees to work in locations
that may contain potentially
dangerous levels of asbestos, lead, mold or other materials known or believed to be hazardous to human health.
We also maintain a fleet of trucks and other
vehicles to support our installers and operations. There is substantial risk of serious
injury or death if proper safety procedures are not followed. Our
operations are subject to regulation under the U.S. Occupational Safety
and Health Act, or OSHA, the U.S. Department of Transportation, or DOT, and
equivalent state laws. Changes to OSHA or DOT requirements,
or stricter interpretation or enforcement of existing laws or regulations, could result in
increased costs. If we fail to comply with
applicable OSHA regulations, even if no work-related serious injury or death occurs, we may be subject to civil
or criminal enforcement
and be required to pay substantial penalties, incur significant capital expenditures or suspend or limit operations. High injury rates
could expose us to increased liability. In the past, we have had workplace accidents and received citations from OSHA regulators for
 alleged safety
violations, resulting in fines. Any such accidents, citations, violations, injuries or failure to comply with industry
best practices may subject us to adverse
publicity, damage our reputation and competitive position and adversely affect our business.
 
Problems
 with product quality or performance may cause us to incur warranty expenses, damage our market reputation, and prevent us from
maintaining
or increasing our market share.
 
If
our products fail to perform as expected while under warranty, or if we are unable to support the warranties or production guarantees,
sales of
our products may be adversely affected, or our costs may increase, and our business, results of operations, and financial condition
could be materially and
adversely affected.
 
We
may also be subject to warranty or product liability claims against us that are not covered by insurance or are in excess of our available
insurance limits or warranty reserves. In addition, quality issues can have various other ramifications, including delays in the recognition
of revenue, loss of
revenue, loss of future sales opportunities, increased costs associated with repairing or replacing products, and
a negative impact on our goodwill and
reputation. The possibility of future product failures could cause us to incur substantial expenses
to repair or replace defective products. Furthermore,
widespread product failures may damage our market reputation and reduce our market
share causing sales to decline.
 
21

 
 
A
failure to comply with laws and regulations relating to our interactions with current or prospective residential customers could result
in negative
publicity, claims, investigations, and litigation, and adversely affect our financial performance.
 
In
2022, approximately 88% of our revenue came from on contracts and transactions with residential customers. We must comply with numerous
federal, state, and local laws and regulations that govern matters relating to our interactions with residential consumers, including
those pertaining to
privacy and data security, consumer financial and credit transactions, home improvement contracts, warranties, and
door-to-door solicitation. These laws
and regulations are dynamic and subject to potentially differing interpretations, and various federal,
state and local legislative and regulatory bodies may
expand current laws or regulations, or enact new laws and regulations, regarding
these matters. Changes in these laws or regulations or their interpretation
could dramatically affect how we operate, acquire customers,
 and manage and use information we collect from and about current and prospective
customers and the costs associated therewith. We strive
to comply with all applicable laws and regulations relating to our interactions with residential
customers. It is possible, however,
that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another
and may conflict
with other rules or our practices. Our non-compliance with any such law or regulations could also expose us to claims, proceedings,
litigation and investigations by private parties and regulatory authorities, as well as substantial fines and negative publicity, each
of which may materially
and adversely affect our business. We have incurred, and will continue to incur, significant expenses to comply
 with such laws and regulations, and
increased regulation of matters relating to our interactions with residential consumers could require
us to modify our operations and incur significant
additional expenses, which could have an adverse effect on our business, financial
condition and results of operations.
 
If
we experience a significant disruption in our information technology systems, fail to implement new systems and software successfully,
or if we
experience cyber security incidents or have a deficiency in cybersecurity, our business could be adversely affected.
 
We
depend on information systems throughout our company to process orders, manage inventory, process and bill shipments and collect cash
from
our customers, respond to customer inquiries, contribute to our overall internal control processes, maintain records of our property,
plant and equipment,
and record and pay amounts due vendors and other creditors. These systems may experience damage or disruption from
a number of causes, including
power outages, computer and telecommunication failures, computer viruses, malware, ransomware or other
destructive software, internal design, manual or
usage errors, cyberattacks, terrorism, workplace violence or wrongdoing, catastrophic
events, natural disasters and severe weather conditions. We may also
be impacted by breaches of our third-party processors.
 
If
we were to experience a prolonged disruption in our information systems that involve interactions with customers and suppliers, it could
result
in the loss of sales and customers or increased costs, which could adversely affect our overall business operation. Although no
such incidents have had a
direct, material impact on us, we are unable to predict the direct or indirect impact of any future incidents
to our business.
 
In
 addition, numerous and evolving cybersecurity threats, including advanced and persistent cyberattacks, phishing and social engineering
schemes, particularly on internet applications, could compromise the confidentiality, availability, and integrity of data in our systems.
 The security
measures and procedures we and our customers have in place to protect sensitive data and other information may not be successful
or sufficient to counter
all data breaches, cyberattacks, or system failures. Although we devote resources to our cybersecurity programs
and have implemented security measures to
protect our systems and data, and to prevent, detect and respond to data security incidents,
there can be no assurance that our efforts will prevent these
threats.
 
Because
the techniques used to obtain unauthorized access, or to disable or degrade systems change frequently, have become increasingly more
complex and sophisticated, and may be difficult to detect for periods of time, we may not anticipate these acts or respond adequately
or timely. As these
threats continue to evolve and increase, we may be required to devote significant additional resources in order to
modify and enhance our security controls
and to identify and remediate any security vulnerabilities.
 
One potentially permanent result
of the COVID-19 pandemic is remote work. As portions of our workforce remain remote workers, this has the
potential to increase the likelihood
of a cyber-attack.
 
22

 
 
Seasonality
caused by customer demand and weather may cause fluctuations in our financial results.
 
We
often find that some customers tend to book projects by the end of a calendar year to realize the benefits of available subsidy programs
prior to
year-end. This results in third and fourth quarter revenues being more robust usually at the expense of the first quarter. However,
demand for our products
may be affected by changes in the buying patterns of our customers.
 
In
addition, the first quarter in California, Nevada and the Northeast often has rain and snow, which also reduces our ability to install
in the first
quarter relative to the remainder of the year. In the future, this seasonality may cause fluctuations in our financial results.
Poor performance because of
unseasonable weather conditions whether due to climate change or otherwise, economic conditions or other
factors, could have a negative impact on our
business, financial condition and operating results for the entire fiscal year. Abnormally
wet weather in the spring or summer months could negatively
impact our financial results.
 
Shifts
in customer demand or weather are difficult to predict and may not be immediately apparent, and the impact of these changes is difficult
to
quantify from period to period. There can be no assurance that we will be successful in implementing effective strategies to counter
 these shifts. In
addition, other seasonality trends may develop and the existing seasonality that we experience may change.
 
If
we fail to maintain an effective system of internal control over financial reporting and other business practices, and of board-level
oversight, we may
not be able to report our financial results accurately or prevent and detect fraud and other improprieties. Consequently,
investors could lose confidence
in our financial reporting, and this may decrease the trading price of our stock.
 
We
must maintain effective internal controls to provide reliable financial reports and to prevent and detect fraud and other improprieties.
We are
responsible for reviewing and assessing our internal controls and implementing additional controls when improvement is needed.
Failure to implement any
required changes to our internal controls or other changes we identify as necessary to maintain an effective
system of internal controls could harm our
operating results and cause investors to lose confidence in our reported financial information.
Any such loss of confidence would have a negative effect on
the market price of our stock.
 
Sarbanes-Oxley
Act requirements regarding internal control over financial reporting, and other internal controls over business practices, are costly
to implement and maintain, and such costs are relatively more burdensome for smaller companies such as us than for larger companies.
We have limited
internal personnel to implement procedures and must scale our procedures to be compatible with our resources. We also
rely on outside professionals
including accountants and attorneys to support our control procedures. We are working to improve all of
our controls but, if our controls are not effective,
we may not be able to report our financial results accurately or prevent and detect
fraud and other improprieties which could lead to a decrease in the
market price of our stock.
 
Risks
Relating to our Common Stock
 
The
market price of our common stock may fluctuate significantly, and investors in our common stock may lose all or a part of their investment.
 
The
 market prices for securities of solar and energy companies have historically been highly volatile, and the market has from time-to-time
experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The price
at which our
common stock has traded in the recent year has fluctuated greatly. In addition, the market price of our common stock may
 continue to fluctuate
significantly in response to numerous factors, some of which are beyond our control, such as:
 
●
adverse
regulatory decisions;
●
changes
in laws or regulations applicable to our products or services;
●
legal
disputes or other developments relating to proprietary rights, including patents, litigation matters and the results of any proceedings
or lawsuits,
including patent or shareholder litigation;
●
our
dependence on dealers and other third parties;
●
announcements
of the introduction of new products by our competitors;
 
23

 
 
●
market
conditions in the solar and energy sectors;
●
announcements
concerning product development results or intellectual property rights of others;
●
future
issuances of common stock or other securities;
●
the
addition or departure of key personnel;
●
failure
to meet or exceed any financial guidance or expectations that we may provide to the public;
●
actual
or anticipated variations in quarterly operating results;
●
our
failure to meet or exceed the estimates and projections of the investment community;
●
overall
performance of the equity markets and other factors that may be unrelated to our operating performance or the operating performance
of our
competitors, including changes in market valuations of similar companies;
●
announcements
of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
●
issuances
of debt or equity securities;
●
sales
of our common stock by us or our shareholders in the future;
●
trading
volume of our common stock;
●
ineffectiveness
of our internal controls;
●
publication
of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities
analysts;
●
general
political and economic conditions;
●
effects
of natural or man-made catastrophic events, including, without limitation, global conflicts or widespread public health epidemics
like the
pandemic related to COVID-19; and
●
other
events or factors, many of which are beyond our control.
 
Further,
the equity markets in general have recently experienced extreme price and volume fluctuations. Continued market fluctuations could
result
in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility
of our common
stock might worsen if the trading volume of our common stock is low. The realization of any of the above risks or any of
a broad range of other risks,
including those described in these “Risk Factors,” could have a dramatic and negative impact
on the market price of our common stock.
 
A
substantial number of shares of common stock may be sold in the market, which may depress the market price for our common stock.
 
A
substantial majority of the outstanding shares of our common stock and exercisable options are freely tradable without restriction or
further
registration under the Securities Act of 1933, as amended.
 
Pursuant
to various “at the market” agreements (“ATM Agreements”) with sales agents (each, an “Agent”), Sunworks
has periodically sold shares
of common stock (the “Placement Shares”) through an Agent. Sales of the Placement Shares pursuant
to ATM Agreements, were deemed to be “at the
market offerings” as defined in Rule 415 promulgated under the Securities Act.
The Agent acted as sales agent and used commercially reasonable efforts to
sell on Sunworks’ behalf all of the Placement Shares
requested to be sold by Sunworks, consistent with its normal trading and sales practices, on mutually
agreed terms between the Agent
and Sunworks. During 2019 Sunworks sold 2,920,968 shares under an ATM Agreement, with net proceeds for the shares
of $6,694,000. In 2020
we sold 17,009,685 shares, with net proceeds of $41,406,000. In 2021 we sold 5,356,984 shares with net proceeds of $61,600,000.
In 2022
we sold 5,754,161 shares with net proceeds of $17,104,000.
 
Sales
of a substantial number of shares of our common stock in the public market, future sales of substantial amounts of shares of our common
stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline.
Increased sales of
our common stock in the market for any reason could exert significant downward pressure on our stock price.
 
If
we fail to comply with the continued minimum closing bid requirements of the Nasdaq Capital Market LLC (“Nasdaq”) or other
requirements for
continued listing, our common stock may be delisted and the price of our common stock and our ability to access the
 capital markets could be
negatively impacted.
 
If
we fail to comply with continued minimum closing bid requirements or other requirements for continued listing, our common stock may be
delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted. A delisting of
our common stock
from The Nasdaq could materially reduce the liquidity of our common stock and result in a corresponding material reduction
in the price of our common
stock. In addition, delisting could harm our ability to raise capital through alternative financing sources
on terms acceptable to us, or at all, and may result
in the potential loss of confidence by investors, employees and fewer business development
opportunities.
 
24

 
 
Trading
in our stock has been volatile in volume and price. Therefore, investors may not be able to sell as much stock as they want at prevailing
prices.
Moreover, low volumes can increase stock price volatility.
 
Because
of the volatility of our common stock, it may be difficult for investors to sell or buy substantial quantities of shares in the public
market at
any given time at prevailing prices. When trading volume is low, significant price movement can be caused trading a relatively
small number of shares.
 
If
securities analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading
volume
could decline.
 
The
trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us
or our
business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about
our business, our stock price
would likely decline. If one or more of these analysts cease coverage of our company or fail to publish
reports on us regularly, demand for our stock could
decrease, which might cause our stock price and trading volume to decline.
 
We
do not expect any cash dividends to be paid on our common stock in the foreseeable future.
 
We
have never declared or paid a cash dividend on our common stock, and we do not anticipate paying cash dividends in the foreseeable future.
We expect to use future earnings, if any, as well as any capital that may be raised in the future, to fund business growth or retire
debt. Consequently, a
stockholder’s only opportunity to achieve a return on investment would be for the price of our common stock
to appreciate. We cannot assure stockholders
of a positive return on their investment when they sell their shares, nor can we assure
that stockholders will not lose the entire amount of their investment.
 
General
Risks
 
Rising
interest rates would adversely impact our business.
 
Volatility
and rising interest rates could adversely impact our business. While interest
rates have been at long-term historic lows in recent years,
they have recently increased, and may continue increasing in the near future
or remain high for an extended period of time. While we do not provide
company branded financing solutions to our customers, we partner
with a diverse group of funding partners. Rising interest rates increases the cost of
capital for our funding partners, which are typically
passed onto our customers. As a result of the increase in the cost of our products and services, there
might be less adoption of solar
systems and our cash flow might be negatively impacted. Rising interest rates could further affect the housing market,
which in turn,
could adversely affect our residential business, which amounted to 88% of our revenue in 2022.
 
We
may not successfully implement our business model.
 
Our
business model is predicated on our ability to provide solar systems at a profit, and through organic growth, geographic expansion, and
strategic acquisitions. We intend to continue to operate as we have previously with sourcing and marketing methods that we have used
successfully in the
past. However, we cannot assure that our methods will continue to attract new customers in the very competitive solar
systems marketplace.
 
In
the event our customers resist paying the prices projected in our business plan to purchase solar installations, our business, financial
condition,
and results of operations will be materially and adversely affected.
 
We
may not be able to effectively manage our growth.
 
Our
future growth, if any, may cause a significant strain on our management and our operational, financial, and other resources. Our ability
to
manage our growth effectively will require us to implement and improve our operational, financial, and management systems and to expand,
train, manage,
and motivate our employees. These demands may require the hiring of additional management personnel and the development
of additional expertise by
management. Any increase in resources used without a corresponding increase in our operational, financial,
and management systems performance could
have a negative impact on our business, financial condition, and results of operations.
 
25

 
 
Item
1B. Unresolved Staff Comments.
 
None.
 
Item
2. Properties.
 
We
lease offices and mixed-use facilities. We do not own any real estate. All facilities are leased. Leases in some cases are month to month
with
the longest lease expiring in February of 2027.
 
The
table below summarizes those leases for which the original lease term was greater than one year.
 
Location
 
Square
Footage
   
Monthly Base
Lease Rate
   
Building 
Type
 
Lease Expiration
Date
Riverside, CA
 
 
11,102   
$
9,385   
Mixed Use
 
Jan-2023
Roseville, CA
 
 
3,363   
 
6,894   
Office
 
Feb-2023
Phoenix, AZ
 
 
1,800   
 
1,764   
Mixed Use
 
Jun-2023
Tulare, CA
 
 
5,000   
 
4,783   
Mixed Use
 
Jul-2023
Albuquerque, NM
 
 
5,377   
 
5,000   
Mixed Use
 
Aug-2023
Columbia, SC
 
 
2,225   
 
1,495   
Mixed Use
 
Aug-2023
McAllen, TX
 
 
3,600   
 
2,250   
Mixed Use
 
Sep-2023
Centennial, CO
 
 
6,443   
 
5,906   
Mixed Use
 
Sep-2023
Bloomington, MN
 
 
4,200   
 
2,940   
Mixed Use
 
Sep-2023
Durham, CA
 
 
15,600   
 
11,000   
Mixed Use
 
Oct-2023
Santa Ana, CA
 
 
1,072   
 
1,876   
Office
 
Dec-2023
Las Vegas, NV
 
 
5,900   
 
4,337   
Mixed Use
 
Dec-2023
Sacramento, CA
 
 
11,968   
 
8,497   
Mixed Use
 
Feb-2024
St. George, UT
 
 
4,000   
 
4,800   
Mixed Use
 
Feb-2024
St. George, UT
 
 
1,640   
 
2,050   
Mixed Use
 
Mar-2024
Mesquite, TX
 
 
3,815   
 
2,531   
Mixed Use
 
Jun-2024
Morgan Hill, CA
 
 
1,233   
 
2,343   
Mixed Use
 
Aug-2024
Mequon, WI
 
 
7,553   
 
4,091   
Mixed Use
 
Oct-2024
El Paso, TX
 
 
6,000   
 
3,875   
Mixed Use
 
Sep-2025
Provo, UT
 
 
35,803   
 
24,500   
Mixed Use
 
Nov-2026
Riverside, CA
 
 
14,280   
 
18,207   
Mixed Use
 
Feb-2027
 
All
of these properties are adequate for our current needs. We expect that we can extend our leases on these properties, or replace them
with
similar space, at approximately the same cost.
 
Item
3. Legal Proceedings.
 
We
are not currently a party to any legal proceedings that individually or in the aggregate, are deemed to be
material to our financial condition or
results of operations.
 
Item
4. Mine Safety Disclosures.
 
Not
applicable.
 
26

 
 
PART
II
 
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
On
March 4, 2015 our common stock began to be traded on The Nasdaq under the symbol “SLTD” that was changed on March 1, 2016
to
“SUNW” simultaneously with our name change to Sunworks, Inc. Our common stock previously traded on the OTCQB under the
symbol “SLTD.” The
market for our common stock was often sporadic, volatile, and limited.
 
Holders
of Common Stock.
 
On
December 31, 2022, we had 125 registered holders of record of our common stock. The number of registered holders does not bear any
relationship
to the number of beneficial owners of the common stock as most of the Company’s common stock is held in street name at securities
brokerage
firms.
 
Dividends
and Dividend Policy.
 
We
have never declared or paid any dividends on our common stock. We do not anticipate paying dividends on our common stock at the present
time or in the foreseeable future. We currently intend to retain earnings, if any, for use in our business.
 
Unregistered
Sales of Equity Securities.
 
None.
 
Repurchase
of Equity Securities.
 
None.
 
Item
6. Selected Financial Data
 
As
a smaller reporting company, we are not required to provide the information under this item, pursuant to Regulation S-K Item 301(c).
 
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
You
should read the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial
statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains
forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated
in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under “Risk
Factors” and elsewhere in this Annual Report on Form 10-K.
 
Amounts
in thousands, except share and per share data
 
Overview
 
We
 provide photovoltaic (“PV”) based power systems for the residential and commercial markets. Commercial projects include commercial,
agricultural, industrial and public works projects.
 
On
April 8, 2021, Sunworks, Inc., through its operating subsidiary Sunworks United (the “Buyer”), acquired all of the issued
and outstanding
membership interests (the “Acquisition”) of Solcius, from Solcius Holdings, LLC (“Seller”). Located
in Provo, Utah, Solcius is a full-service, residential
solar systems provider. The Acquisition creates a national solar power provider
with a presence in various states, including California, Utah, Nevada,
Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts,
New Jersey and South Carolina. We believe the Acquisition enhances
economies of scale, leading to better access to suppliers, vendors
and financial partners, as well as marketing and customer acquisition opportunities.
 
The
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.
 
27

 
 
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 Energy (CSE)
 
Through
 our CSE 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. Commercial solar represented
12% of our 2022 revenue, compared to 23% of our revenue in 2021. Commercial Solar primarily
operates in California.
 
28

 
 
Critical
Accounting Policies and Estimates
 
Our
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which
have
been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
 The preparation of these
consolidated financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses,
and related disclosures of contingent assets and liabilities. On an ongoing basis, we
 evaluate our estimates, including those related to impairment of
property, plant and equipment, goodwill, intangibles, deferred tax assets,
costs to complete projects, and fair value computation using the Black Scholes
option pricing model. We base our estimates on historical
experience and on various other assumptions, such as the trading value of our common stock and
estimated future undiscounted cash flows,
 that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying
value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under
different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
 
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 our goodwill
and intangibles, for possible impairments and estimations of long-lived assets, revenue recognition on construction
contracts recognized
over time, fair value of assets acquired and liabilities assumed in a business combination, allowances for uncollectible accounts,
finance
lease right-of-use assets and liabilities, operating lease right-of-use assets and liabilities, warranty reserves, inventory valuation,
valuations of non-
cash capital stock issuances and the valuation allowance on deferred tax assets. We base our 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
 
Revenues
and related costs on commercial 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 and
public works projects may be completed within
eighteen to thirty-six months, depending on the size and location. We recognize revenue on residential
projects following final
inspection and approvals by all jurisdictions. We recognize revenue on commercial projects over time as our performance creates or
enhances an energy generation asset controlled by the customer.
 
29

 
 
The
cost of materials or equipment will generally be excluded from our recognition of profit, unless specifically produced or manufactured
for a
project, because such costs are not considered to be a measure of progress. All un-allocable indirect costs and corporate general
and administrative costs are
charged to the periods as incurred. However, in the event a loss on a contract is foreseen, we will recognize
the loss in the period it is determined.
 
Revisions
in cost and profit estimates during the course of the contract are reflected in the accounting period in which the facts which require
the
revision become known. We use an input method based on costs incurred as we believe that this method most accurately reflects our
progress toward
satisfaction of the performance obligation. Under this method, revenue arising from fixed-price construction contracts
is recognized as work is performed
based on the ratio of costs incurred to date to the total estimated costs at completion of the performance
obligations. Changes in job performance, job
conditions, and estimated profitability, including those arising from contract penalty provisions,
and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined.
 
Contract
Assets and Liabilities
 
Contract
assets consist of (i) the earned, but unbilled, portion of a project for which payment is deferred by the customer until certain contractual
milestones are met; (ii) direct costs, including commissions, labor related costs and permitting fees paid prior to recording revenue,
and (iii) unbilled
receivables which represent revenue that has been recognized in advance of billing the customer, which is common for
 larger construction contracts.
Contract liabilities consist of deferred revenue and 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.
 
Leases
 
We
 determine if an arrangement is a lease at inception. Operating lease right-of-use assets and short-term and long-term lease liabilities
 are
included on the face of the consolidated balance sheet. Finance lease ROU assets are presented within other assets, and finance lease
liabilities presented as
short-term or long-term finance lease liabilities.
 
ROU
assets represent the right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments
arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over
the lease term. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate
 based on the information available at
commencement date in determining the present value of lease payments. The operating lease ROU asset
also excludes lease incentives. Our lease terms
may include options to extend or terminate the lease when it is reasonably certain that
we will exercise that option. Lease expense for lease payments is
recognized on a straight-line basis over the lease term. We have lease
agreements with lease and non-lease components, which are accounted for as a single
lease component. For lease agreements with terms
less than 12 months, we have elected the short-term lease measurement and recognition exemption,
which recognizes such lease payments
on a straight-line basis over the lease term.
 
Business
Combinations and Goodwill
 
The
 Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business
Combinations,
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on
their
estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one
year from acquisition date,
after obtaining more information regarding, among other things, asset valuations, liabilities assumed and
revisions to preliminary estimates. The purchase
price in excess of the fair value of the tangible and identified intangible assets acquired
less liabilities assumed is recognized as goodwill.
 
The
Company retains a valuation consulting firm to assist in testing for goodwill
impairment in the fourth quarter of each year or whenever events
or circumstances indicate that the carrying amount of an asset exceeds
its fair value and may not be recoverable. In accordance with the Company’s
policies, the Company performed a quantitative assessment
of goodwill at December 31, 2022 and no impairment was found. The quantitative assessment
performed at December 31, 2021, resulted in
an impairment of $5,464 of goodwill primarily related to its CSE business.
 
30

 
 
Stock-Based
Compensation
 
The
Company periodically issues restricted stock units (“RSUs”), stock options and performance stock units (“PSUs”) to employees
and directors.
The Company accounts for RSUs, stock option grants and PSUs issued and vesting to employees based on the authoritative
guidance provided by the
Financial Accounting Standards Board (“FASB”) whereas the value of the award is measured on the
date of grant and recognized over the vesting or
performance period.
 
The
Company accounts for stock grants issued to non-employees in accordance with the authoritative guidance of the FASB whereas the value
of
the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is
reached, b) a
reasonable probability of reaching the performance obligation has been determined, or c) at the date at which the necessary
performance to earn the equity
instruments is complete. Non-employee stock-based compensation charges generally are amortized over the
vesting period on a straight-line basis. In
certain circumstances where there are no future performance requirements by the non-employee,
option grants are immediately vested and the total stock-
based compensation charge is recorded in the period of the measurement date.
 
Accounts
Receivable
 
Accounts
receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible
upon completion of the contracts. Retention receivable is the amount withheld by a customer until a contract is completed. Retention
receivables of $455
and $309 were included in the balance of trade accounts receivable as of December 31, 2022 and 2021, respectively.
 
The
Company performs ongoing credit evaluation of its customers. Management monitors outstanding receivables based on factors surrounding
the credit risk of specific customers, historical trends, age of receivables and other information, and records bad debts using the allowance
 method.
Accounts receivable are presented net of an allowance for doubtful accounts of $935 at December 31, 2022 and $454 at December
31, 2021. During the
year ended December 31, 2022, $473 was recorded as bad debt expense compared to $454 in 2021.
 
Inventory
 
Inventory
is valued at lower of cost or net realizable value determined by the first-in, first-out method. Inventory primarily consists of panels,
inverters, batteries and mounting racks and other materials. The Company reviews the cost of inventories against their estimated net
realizable value and
records write-downs if any inventories have costs in excess of their net realizable values. Inventory is presented
net of an allowance of $227 at December
31, 2022 and $312 at December 31, 2021.
 
Warranty
Liability
 
The
Company establishes warranty liability reserves to provide for estimated future expenses as a result of installation, product and performance
defects, product recalls and litigation incidental to the Company’s business. Liability estimates are determined based on management’s
 judgment,
considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’
participation in sharing the
cost of corrective action, and consultations with third party experts such as engineers. Solar panel manufacturers
currently provide substantial warranties of
between ten to twenty-five years with full reimbursement to replace and install replacement
panels. Inverter manufacturers currently provide warranties
covering ten to fifteen years including replacement and installation. The
warranty liability for estimated future warranty costs at December 31, 2022 and
2021 is $1,596 and $1,251, respectively.
 
Income
Taxes
 
The
 Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to consolidated financial statements carrying amounts of existing assets and liabilities and their respective
 tax bases and
operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions
of applicable tax law. The
measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount
of tax benefits that, based on available evidence,
is not expected to be realized.
 
31

 
 
Impact
of COVID-19
 
Our business and operations may continue to be impacted by the continued
COVID-19 pandemic, which has resulted in significant governmental
measures being implemented to control the spread of the virus, including
 quarantines, travel restrictions and business shutdowns. The uncertain
macroeconomic environment created by the COVID-19 pandemic has
had and may continue to have a significant, adverse impact on our business. To assist
readers in reviewing management’s discussion
and analysis of financial condition and results of operations, we provide the following discussion regarding
the effects COVID-19 has
had on the Company, what management expects the future impact to be, how we are responding to evolving circumstances and
how we are planning
for further COVID-19 uncertainties.
 
State
and local directives, guidelines, and other restrictions, as well as consumer
behavior, continue to impact our operations in the regions in
which we operate, particularly California. Although less impactful today,
COVID-19 and the governmental directives materially disrupted the operations of
the local and state governments by closing or restricting
operations at city, county and state offices for design reviews, permitting projects, and inspections
of projects. This disruption negatively
impacted our ability to complete projects, generate revenue on projects in backlog and causes many customers to
delay decisions on new
projects.
 
Although
there is uncertainty around the continued impact and severity the COVID-19 pandemic has had, and will continue to have, on our
operations,
 these developments and measures have negatively affected our business. We will continue to manage the impact through appropriate
operational
measures.
 
As
the COVID-19 pandemic and its effects evolve, we are monitoring our business to ensure that our expenses are in line with expected cash
generation. The extent to which our results are affected by the COVID-19 pandemic will largely depend on future developments which cannot
 be
accurately predicted and are uncertain.
 
32

 
 
Results
of Operations for the Years Ended December 31, 2022 and 2021
 
CONSOLIDATED
RESULTS
 
Revenue
and Cost of Goods Sold
 
For
the year ended December 31, 2022, revenue was $161,935 compared to $101,154 for the year ended December 31, 2021. Approximately 88% of
revenue in 2022 was from installations for the residential markets at $142,093, compared to 77% of revenue or $77,861 for the prior year.
Residential
market revenue increased as a result of the full year inclusion of the Solcius Acquisition, which was completed in
April 2021 and the expansion of our
direct sales force and growth across the traditional dealer channel. Commercial market revenue was 12% of total revenue, or $19,842, for 2022, compared
to 23%, or $23,293, of revenue in the prior year. The reduction was
primarily driven by lower new orders in the preceding quarters.
 
Cost
of goods sold for the year ended December 31, 2022 was $90,621, or 56.0% of revenue, compared to $60,372, or 59.7% of revenue, reported
for the
year ended December 31, 2021.
 
Gross
profit was $71,314 for the year ended December 31, 2022. This compares to $40,782 of gross profit for the prior year. Gross margin improved
to
44.0% in 2022 compared to 40.3% in 2021. The gross margin improvement in the current year period is predominantly driven by a mix
of higher margin
residential revenue, partially offset by inflationary pressures on materials and labor. The change in estimate for the
capitalization of specifically identifiable
costs related directly to in-process residential installation contracts increased
gross profit by approximately $3,458 (2.1%) for the year ended December 31,
2022.
 
Revenue
and gross profit in the year ended December 31, 2022 were positively impacted by the Solcius Acquisition. In contrast, the prior year
Solcius
results were only included from the April 8, 2021 acquisition date through the end of 2021.
 
Selling
and Marketing Expenses
 
For
the year ended December 31, 2022, our selling and marketing expenses were $59,206, compared to $32,760 for the year ended December 31,
2021. As
a percentage of revenue, selling and marketing expenses were 36.6% of revenue in 2022, compared to 32.4% of revenue in 2021.
Selling and marketing
expenses increased in the current year as a result of higher residential revenue, as the residential business model
focuses on lead generation and effective
interaction with third-party sales organizations.
 
General
and Administrative Expenses
 
Total
G&A expenses for the year ended December 31, 2022 was $34,122, compared to $24,826 for the year ended December 31, 2021. The G&A
expenses
increased from the prior year period as a result of the Solcius Acquisition, which was completed in April 2021, and increases
in salaries and benefits in
support of the revenue growth.
 
Stock-Based
Compensation Expense
 
During
the year ended December 31, 2022, we incurred $2,396 in total non-cash
stock-based compensation expense, compared to $3,734 for the same
period in the prior year. The year-over-year decrease in stock-based
compensation is the result of the vesting of the Solcius Acquisition related RSUs and
stock options granted in April 2022. Partially offsetting
the reduction in stock-based compensation expense is the non-cash expense for expanding RSU
grants during 2022 as part of the compensation
structure to a broader population of employees.
 
Depreciation
and Amortization Expenses
 
Depreciation
and amortization expense for the year ended December 31, 2022 was $4,823, which includes $1,024 recorded in cost of goods sold compared
to $5,877, which includes $2,655 recorded in cost of goods sold in the prior year. Depreciation and amortization expenses decreased in
the current year
period as a result of a portion of the $15,600 of identified intangible assets of Solcius being fully amortized within
2021 following the closing of the
Solcius Acquisition in April 2021. The estimated useful lives range from nine months to ten years.
 
33

 
 
Other
Income (Expense)
 
Other
income was $92 for the year ended December 31, 2022, compared to $2,599 for 2021. Other income in 2022 period was the result of equipment
sales, most of which were fully depreciated. Other income in the prior year period was primarily the result of the June 2021 forgiveness
of the Paycheck
Protection Program loan of $2,847 and $34 of accrued loan interest. Interest expense is primarily for interest on finance
leases. Interest expense for the year
ended December 31, 2022, was $172, compared to $381 during the year ended December 31, 2021.
 
Income
Tax Expense
 
Income
tax expense was $94 for the year ended December 31, 2022, compared to no
income tax expense in the prior year period. The income tax expense
in the current period is attributable to the Texas margin tax related
to our Texas-based operations, which we acquired as a result of the Solcius Acquisition
in April 2021.
 
Net
Loss
 
The
net loss for the year ended December 31, 2022 was $28,211. The net loss for the year ended December 31, 2021 was $26,625.
 
Orders and Backlog
 
For the year ended December 31, 2022, our combined backlog of residential
and commercial projects was $87,000, representing an increase of
51% compared to the prior year end. Residential Solar segment originations
increased 28% in the year ended 2022, compared to the prior year, driven by
growth in both dealer and direct channels. Within this segment,
originations generated from the direct sales channel were approximately 23%, compared to
approximately 4% in the prior period, due to
execution against our stated goal to diversify our sources of originations. As a result of these improvements,
the Residential Solar backlog
increased to $54,600, or 38% on a year-over-year basis. We expect to execute against our Residential Solar segment backlog
over the next
1-5 months, as project complexity, jurisdictional requirements, materials and labor availability each influence timelines for completion.
 
Commercial Solar segment orders were approximately $36,000 for the year
ended 2022, compared to approximately $11,000 during the prior year.
The Commercial Solar segment backlog increased to approximately $32,400,
during 2022, which represents a 78% increase on a year-over-year basis. We
expect to execute against this backlog over the next 3 to18
months, subject to receiving timely authorizations to proceed with construction from the various
stakeholders.
 
RESIDENTIAL
SOLAR SEGMENT KEY PERFORMANCE INDICATORS
 
 
 
Years Ended
 
 
 
December
31,
 
 
 
2022
 
 
2021
 
Net Total Originations (Watts in
thousands)
 
 
54,280 
 
 
31,709 
Installation (Watts in thousands)
 
 
33,126 
 
 
17,642 
Average Project Size Installed (Watts)
 
 
6,621 
 
 
5,985 
Revenue
 
$
139,967 
 
$
72,278 
Gross Margin
 
 
49.2%  
 
50.2%
Operating (Loss)
 
$
(10,314)
 
$
(9,403)
Operating (Loss) %
 
 
(7.4)% 
 
(13.1)%
 
COMMERCIAL
SOLAR SEGMENT KEY PERFORMANCE INDICATORS
 
 
 
Years Ended
 
 
 
December 31,
 
 
 
2022
 
 
2021
 
Net Total Orders
 
$
36,130 
 
$
10,986 
Revenue
 
$
21,968 
 
$
28,876 
Gross Margin
 
 
11.2%  
 
15.7%
Operating (Loss)
 
$
(8,287)
 
$
(4,577)
Operating (Loss) %
 
 
(37.7)% 
 
(15.9)%
 
Liquidity
and Capital Resources
 
We
had $7,807 in unrestricted cash at December 31, 2022, as compared to $19,719 at December 31, 2021. We believe that the aggregate of our
existing cash and cash equivalents is sufficient to meet our operating cash requirements and strategic objectives for growth for at least
the next year. To
satisfy our capital requirements, including acquisitions and ongoing future operations, we may seek to raise
additional financing through debt and equity
financings.
 
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, 2022 through the date of this filing we sold 5,754,161
 shares with gross proceeds of
approximately $17,500 under the 2021 Registration Statement. Approximately $19,400 of the $100,000 total
is available for future offerings pursuant to the
2021 Registration Statement.
 
34

 
 
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. No shares have been sold under the 2022 Registration Statement.
 
As
of December 31, 2022, our working capital surplus was $23,596 compared to a working capital surplus of $28,736 at December 31, 2021.
 
During
the year ended December 31, 2022, we used $28,190 of cash in operating activities compared to $29,210 used in operating activities for
the prior year ended December 31, 2021. The cash used in operating activities was primarily the result of the current year net loss combined
 with
investments in working capital to secure inventory and minimize the impacts of supply chain disruption.
 
The
cash used in investing activities totaled $313 in 2022 for purchases of equipment. Net cash used in investing activities totaled $51,325 for the
year ended December 31, 2021, including $50,619 net cash used to complete the Solcius acquisition and the remaining for purchases of
property, plant and
equipment.
 
Net
cash provided by financing activities during the year ended December 31, 2022 was $16,516. This increase was primarily due to net
proceeds
from sales of our common stock in 2022. Net cash provided by financing activities during the year ended December 31, 2021
was $61,238. This increase
was primarily due to net proceeds from sales of our common stock in 2021.
 
Off-Balance
Sheet Arrangements
 
We
 do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition,
revenues, results of operations, liquidity, or capital expenditures.
 
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
 
Not
applicable.
 
35

 
 
Item
8. Financial Statements and Supplementary Data.
 
SUNWORKS,
INC.
 
CONSOLIDATED
FINANCIAL STATEMENTS
 
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
 
CONTENTS
 
Report of Independent Registered Public Accounting Firm (PCAOB ID: 170)
F-1
 
 
Consolidated Balance Sheets as of December 31, 2022 and 2021
F-3
 
 
Consolidated Statements of Operations for the years ended December 31, 2022 and 2021
F-4
 
 
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2022 and 2021
F-5
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
F-6
 
 
Notes to Consolidated Financial Statements
F-7
 
36

 
 
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To
the Board of Directors and Shareholders of
Sunworks,
Inc.
 
Opinion
on the Consolidated Financial Statements
 
We
 have audited the accompanying consolidated balance sheets of Sunworks, Inc. (the “Company”) as of December 31, 2022 and 2021,
 the related
consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period
ended December 31, 2022, and the
related notes (collectively referred to as the “consolidated financial statements”). In
our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as
of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of
the two years in the period ended December
31, 2022, in conformity with accounting principles generally accepted in the United States of America.
 
Basis
for Opinion
 
These
 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
 on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
 
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis
for our opinion.
 
Critical
Audit Matter
 
The
 critical audit matter communicated below is a matter arising from the current
 period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and
that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of the critical audit matter does not
alter in any way our opinion on
the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a
separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
 
Revenue
Recognition – Estimated Costs to Complete Long-Term Contracts
 
Critical
Audit Matter Description
 
As
described in Notes 2 and 4 to the consolidated financial statements, the Company recognizes revenue over time on certain long-term contracts
that are
completed within eighteen to thirty-six months, as the Company’s performance creates or enhances an energy generation
asset controlled by the customer.
The Company uses an input method based on costs incurred (generally excluding costs of materials or
equipment) as management believes that this method
most accurately reflects progress toward satisfaction of the performance obligation.
 Under this method, revenue arising from fixed-price construction
contracts is recognized as work is performed based on the ratio of costs
incurred to date to the total estimated costs at completion of the performance
obligations. Changes in job performance, job conditions,
and estimated profitability, including those arising from contract penalty provisions, and final
contract settlements may result in revisions
to costs and income and are recognized in the period in which the revisions are determined.
 
F-1

 
 
We
identified estimated costs to complete long-term contracts as a critical audit matter. The determination of the total estimated cost
and progress toward
completion requires management to make significant estimates and assumptions. Changes in these estimates can have
a significant impact on the revenue
recognized each period. Auditing these estimates involved especially challenging auditor judgment
 in evaluating the reasonableness of management’s
assumptions and estimates over the duration of these contracts due to the lack
of objectively verifiable evidence used in the estimation process. As a result,
there is a high degree of auditor judgment involved in
performing procedures on the Company’s estimates.
 
How
the Critical Audit Matter Was Addressed in the Audit
 
The
primary procedures we performed to address this critical audit matter included, among others, performing job site visits for a sample
of open projects
at the end of the year. In addition, we assessed the reasonableness of project revenues and cost forecasts by selecting
a sample of open projects by: (i)
obtaining and inspecting the related contract agreements, amendments and change orders to test the
existence of customer arrangements and understand the
scope and pricing of the related projects; (ii) performing inquiries of management
and project personnel regarding facts and circumstances related to the
estimates to complete for these projects; (iii) testing key components
of the estimated costs to complete, including materials (as applicable), labor, and
subcontractors costs and agreeing actual costs incurred
to supporting documentation; and (iv) recalculating revenues recognized based on the project’s
percentage of completion and management’s
estimate of transaction price. In addition, we performed certain retrospective review procedures to assess
management’s historical
ability to accurately estimate the transaction price and costs to complete contracts.
 
/s/
KMJ Corbin & Company LLP
 
We
have served as the Company’s auditor since 2020.
 
Irvine,
California
March
10, 2023
 
F-2

 
 
SUNWORKS,
INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2022 AND 2021
(in
thousands, except share and per share data)
 
 
 
December 31, 2022
   
December 31, 2021
 
Assets
 
 
    
 
  
Current Assets:
 
 
    
 
  
Cash and cash equivalents
 
$
7,807   
$
19,719 
Restricted cash
 
 
248   
 
323 
Accounts receivable, net
 
 
13,873   
 
4,568 
Inventory
 
 
26,401   
 
10,219 
Contract assets
 
 
20,699   
 
14,498 
Other current assets
 
 
5,824   
 
4,154 
Total Current Assets
 
 
74,852   
 
53,481 
Property and equipment, net
 
 
2,154   
 
3,195 
Finance lease right-of-use assets, net
 
 
2,487   
 
1,407 
Operating lease right-of-use assets
 
 
2,779   
 
2,502 
Deposits
 
 
192   
 
132 
Intangible assets, net
 
 
5,290   
 
7,910 
Goodwill
 
 
32,186   
 
32,186 
Total Assets
 
$
119,940   
$
100,813 
 
 
 
    
 
  
Liabilities and Shareholders’ Equity
 
 
    
 
  
Current Liabilities:
 
 
    
 
  
Accounts payable and accrued liabilities
 
$
24,567   
$
11,127 
Contract liabilities
 
 
24,960   
 
12,201 
Finance lease liability, current portion
 
 
631   
 
424 
Operating lease liability, current portion
 
 
1,098   
 
993 
Total Current Liabilities
 
 
51,256   
 
24,745 
 
 
 
    
 
  
Long-Term Liabilities:
 
 
    
 
  
Finance lease liability, net of current portion
 
 
1,470   
 
542 
Operating lease liability, net of current portion
 
 
1,681   
 
1,509 
Warranty liability
 
 
1,596   
 
1,251 
Total Long-Term Liabilities
 
 
4,747   
 
3,302 
Total Liabilities
 
 
56,003   
 
28,047 
 
 
 
    
 
  
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; 50,000,000 authorized shares; 35,374,978 and
29,193,772 shares issued and outstanding, at December 31, 2022 and 2021, respectively
 
 
35   
 
29 
Additional paid-in capital
 
 
207,373   
 
187,997 
Accumulated deficit
 
 
(143,471)  
 
(115,260)
Total Shareholders’ Equity
 
 
63,937   
 
72,766 
 
 
 
    
 
  
Total Liabilities and Shareholders’ Equity
 
$
119,940   
$
100,813 
 
The
accompanying notes are an integral part of these consolidated financial statements.
 
F-3

 
 
SUNWORKS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(in
thousands, except share and per share data)
 
 
 
2022
   
2021
 
Revenue, net
 
$
161,935   
$
101,154 
 
 
 
    
 
  
Cost of Goods Sold
 
 
90,621   
 
60,372 
 
 
 
    
 
  
Gross Profit
 
 
71,314   
 
40,782 
 
 
 
    
 
  
Operating Expenses
 
 
    
 
  
Selling and marketing
 
 
59,206   
 
32,760 
General and administrative
 
 
34,122   
 
24,826 
Goodwill impairment
 
 
-   
 
5,464 
Stock-based compensation
 
 
2,396   
 
3,734 
Depreciation and amortization
 
 
3,799   
 
3,222 
 
 
 
    
 
  
Total Operating Expense
 
 
99,523   
 
70,006 
 
 
 
    
 
  
Operating Loss
 
 
(28,209)  
 
(29,224)
 
 
 
    
 
  
Other Income (Expense)
 
 
    
 
  
Other income, net
 
 
16   
 
2,894 
Interest expense
 
 
(172)  
 
(381)
Gain on disposal of property and equipment
 
 
248   
 
86 
 
 
 
    
 
  
Total Other Income, net
 
 
92   
 
2,599 
 
 
 
    
 
  
Loss Before Income Taxes
 
 
(28,117)  
 
(26,625)
 
 
 
    
 
  
Income Tax Expense
 
 
94   
 
- 
 
 
 
    
 
  
Net Loss
 
 
(28,211)  
$
(26,625)
 
 
 
    
 
  
Net Loss per common share, basic and diluted
 
$
(0.86)  
$
(0.99)
 
 
 
    
 
  
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
 
 
    
 
  
Basic and diluted
 
 
32,830,421   
 
26,947,023 
 
The
accompanying notes are an integral part of these consolidated financial statements.
 
F-4

 
 
SUNWORKS,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(in
thousands, except share data)
 
 
 
Common stock
   
Additional
Paid-in
   
Accumulated    
 
 
 
 
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
Balance at December 31, 2020
 
 
23,835,258   
$
24   
$
122,668   
$
(88,635)  
$
34,057 
Issuance of common stock for cashless
exercise of options
 
 
1,530   
 
-   
 
-   
 
-   
 
- 
Sales of common stock pursuant to S-3
registration statement, net
 
 
5,356,984   
 
5   
 
61,595   
 
-   
 
61,600 
Stock-based compensation
 
 
-   
 
-   
 
3,734   
 
-   
 
3,734 
Net loss
 
 
-   
 
-   
 
-   
 
(26,625)  
 
(26,625)
Balance at December 31, 2021
 
 
29,193,772   
29   
187,997   
(115,260)  
72,766 
Issuance of common stock under terms of
restricted stock grants
 
 
477,069   
 
-   
 
-   
 
-   
 
- 
Tax withholdings related to net share
settlements of equity awards
 
 
(50,024)  
 
-   
 
(118)  
 
-   
 
(118)
Sales of common stock pursuant to S-3
registration statement, net
 
 
5,754,161   
 
6   
 
17,098   
 
-   
 
17,104 
Stock-based compensation
 
 
-   
 
-   
 
2,396   
 
-   
 
2,396 
Net loss
 
 
-   
 
-   
 
-   
 
(28,211)  
 
(28,211)
Balance at December 31, 2022
 
 
35,374,978   
$
35   
$
207,373   
$
(143,471)  
$
63,937 
 
The
accompanying notes are an integral part of these consolidated financial statements.
 
F-5

 
 
SUNWORKS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(in
thousands)
 
 
 
2022
   
2021
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
    
 
  
Net loss
 
$
(28,211)  
$
(26,625)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
    
 
  
Depreciation and amortization
 
 
4,823   
 
5,877 
Amortization of right-of-use asset
 
 
1,107   
 
1,066 
Gain on sale of equipment
 
 
(248)  
 
(86)
Paycheck Protection Program loan forgiveness
 
 
-   
 
(2,881)
Stock-based compensation
 
 
2,396   
 
3,734 
Goodwill impairment
 
 
-   
 
5,464 
Bad debt expense
 
 
473   
 
454 
Changes in Operating Assets and Liabilities, net of acquisition:
 
 
    
 
  
Accounts receivable
 
 
(9,778)  
 
(403)
Inventory
 
 
(16,258)  
 
(5,207)
Deposits and other current assets
 
 
(1,730)  
 
(2,408)
Contract assets
 
 
(6,201)  
 
(4,765)
Accounts payable and accrued liabilities
 
 
13,440  
 
(3,152)
Contract liabilities
 
 
12,759   
 
668 
Warranty liability
 
 
345   
 
120 
Operating lease liability
 
 
(1,107)  
 
(1,066)
NET CASH USED IN OPERATING ACTIVITIES
 
 
(28,190)  
 
(29,210)
 
 
 
    
 
  
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
    
 
  
Purchase of Solcius LLC, net of cash acquired
 
 
-   
 
(50,619)
Purchase of property and equipment
 
 
(629)  
 
(805)
Proceeds from sale of property and equipment
 
 
316   
 
99 
NET CASH USED IN INVESTING ACTIVITIES
 
 
(313)  
 
(51,325)
 
 
 
    
 
  
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
    
 
  
Principal payments on finance lease liabilities
 
 
(470)  
 
(362)
Proceeds from sales of common stock, net
 
 
17,104   
 
61,600 
Payments for taxes related to net share settlement of equity awards
 
 
(118)  
 
- 
NET CASH PROVIDED BY FINANCING ACTIVITIES
 
 
16,516   
 
61,238 
 
 
 
    
 
  
NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
 
(11,987)  
 
(19,297)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
 
 
20,042   
 
39,339 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF YEAR
 
$
8,055   
$
20,042 
 
 
 
    
 
  
Cash and cash equivalents
 
$
7,807   
$
19,719 
Restricted cash
 
 
248   
 
323 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF YEAR
 
$
8,055   
$
20,042 
 
 
 
    
 
  
CASH PAID FOR:
 
 
    
 
  
Interest
 
$
89   
$
57 
Franchise and corporate excise taxes
 
$
174   
$
42 
 
 
 
    
 
  
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
 
 
    
 
  
Increase in operating right-of-use assets and liabilities due to lease modification
 
$
-   
$
132 
Right-of-use assets obtained in exchange for new operating lease liability
 
$
1,384   
$
1,056 
Right-of-use assets obtained in exchange for new finance lease liability
 
$
1,668   
$
492 
 
The
accompanying notes are an integral part of these consolidated financial statements.
 
F-6

 
 
SUNWORKS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2022 and 2021
(dollars
in thousands, except share and per share data)
 
1.
ORGANIZATION AND LINE OF BUSINESS
 
Organization
and Line of Business
 
Sunworks,
Inc. (“We” or the “Company”) provides 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
December 31, 2022 (see Note 3).
 
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
This
summary of significant accounting policies of Sunworks, Inc. is presented to assist in understanding the Company’s consolidated
financial statements.
These accounting policies conform to generally accepted accounting principles used in the United States (“GAAP”)
and have been consistently applied in
the preparation of the consolidated financial statements.
 
Principles
of Consolidation
 
The
 accompanying consolidated financial statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries,
 Sunworks
United Inc., Commercial Solar Energy, Inc. and Solcius LLC. All material intercompany transactions have been eliminated
upon consolidation of these
entities.
 
F-7

 
 
Liquidity
 
The
accompanying consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities and commitments
in the normal
course of business. The Company has historically incurred significant operating losses.
 
During
 2022 we raised $17,104 through the sale of shares from our 2021 Registration Statement. $19,400 remains available under that same 2021
Registration Statement. Additionally, our 2022 Registration Statement allows for an additional $75,000 to be raised.
 
We
believe that the aggregate of our existing cash and cash equivalents is sufficient to meet our operating cash requirements and
strategic objectives for
growth for at least the next year. To satisfy our capital requirements, including acquisitions and ongoing
future operations, we may seek to raise additional
financing, including access to our Sales Agreement (as defined in Note 12) or
through debt offerings.
 
Use
of Estimates
 
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the consolidated financial statements, and the reported
amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Significant estimates include estimates
used to review the Company’s
goodwill and intangibles, for possible impairments and estimations of long-lived assets, revenue recognition on construction
contracts
recognized over time, fair value of assets acquired and liabilities assumed in a business combination, allowances for uncollectible accounts,
finance lease right-of-use assets and liabilities, operating lease right-of-use assets and liabilities, warranty reserves, inventory valuation,
valuations of non-
cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on
historical experience and on various
other assumptions that are believed to be reasonable in the circumstances, the results of which form
the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions
or conditions.
 
Change
in Accounting Estimate
 
In
July 2022, we completed an assessment of the contract fulfillment costs that give rise to an asset for residential contracts. We determined
that additional
specifically identifiable costs related directly to residential contracts can be capitalized, in accordance with Accounting
Standards Codification (“ASC”)
Section 340-40. The additional capitalized costs of approximately $3,458 as of December 31,
2022, include the allocation of costs that relate directly to the
residential contracts. For the year ended December 31, 2021, the related
capitalizable contract fulfillment costs were not material.
 
Reclassifications
 
Certain
 prior year amounts have been reclassified to conform to the current presentation. The reclassifications impact historical cost of goods
 sold,
depreciation, amortization and general and administrative expenses. For the year ended December 31, 2021, $655 of depreciation
and $2,000 of backlog
amortization previously reported in depreciation and amortization expense and $1,210 of costs previously reported
in general and administrative expense
are now reclassified to cost of goods sold. Additionally, other 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 Corporate, which is responsible for general company oversight and management.
 Disaggregating the corporate costs from the
residential and commercial operations simplifies the performance evaluation of the Residential
Solar and Commercial Solar Energy segments.
 
Revenue
Recognition
 
Revenue
and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance
with
Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated
profit, engineering,
procurement and construction (“EPC”) projects for residential and smaller commercial systems that require
us to deliver functioning solar power systems
are generally completed within two to twelve months from commencement of construction.
Construction on larger commercial projects may be completed
within eighteen to thirty-six months, depending on the size and location.
 We recognize revenue from commercial EPC services over time as our
performance creates or enhances an energy generation asset controlled
by the customer.
 
F-8

 
 
For
residential contracts, the Company recognizes revenue upon completion of the job as determined by final inspection. We recognize revenue
for systems
operations and maintenance over the term of the service period. Revenue from systems operations and maintenance were not significant
or material in
either 2022 or 2021.
 
For
commercial projects, we commence recognizing performance revenue when work starts on the job and continue recognizing revenue over time
as work
is performed based on the ratio of costs incurred, excluding modules and components, compared to the total estimated non-materials
costs at completion of
the performance obligations.
 
Judgment
is required to evaluate assumptions including the amount of net contract revenue and the total estimated costs to determine the Company’s
progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If estimated total costs on any
contract are greater
than the net contract revenue, the Company recognizes the entire estimated loss in the period the loss becomes known.
 
Changes
in estimates for commercial projects occur for a variety of reasons, including, but not limited to (i) construction plan accelerations
or delays, (ii)
product cost forecast changes, (iii) change orders, or (iv) changes in other information used to estimate costs. Changes
in estimates may have a material
effect in the Company’s consolidated statements of operations. The table below outlines the impact
on revenue of net changes in estimated transaction
prices and input costs for systems related sales contracts (both increases and decreases)
for the years ended December 31, 2022 and 2021 as well as the
number of projects that comprise such changes. For purposes of the following
table, only projects with changes in estimates that have an impact on revenue
and or cost of at least $100, calculated on a quarterly
basis during the periods, were presented. Also included in the table is the net change in estimate as a
percentage of the aggregate revenue
for such projects.
 
 
 
Year Ended
 
(In thousands, except number of projects)
 
December 31, 2022
   
December 31, 2021
 
Increase in revenue from net changes in transaction prices
 
$
492   
$
286 
Increase (decrease) in revenue from net changes in input cost estimates
 
 
(381)  
 
815
Net increase (decrease) in revenue from net changes in estimates
 
$
111   
$
1,101 
 
 
 
    
 
  
Number of projects
 
 
4   
 
9 
 
 
 
    
 
  
Net change in estimate as a percentage of aggregate revenue for associated projects
 
 
1.3% 
 
8.3%
  
Contract
Assets and Liabilities
 
Contract
assets consist of (i) the earned, but unbilled, portion of a project for which payment is deferred by the customer until certain contractual
milestones
are met; (ii) direct costs, including commissions, labor related costs and permitting fees paid prior to recording revenue,
and (iii) unbilled receivables which
represent revenue that has been recognized in advance of billing the customer, which is common for
larger construction contracts. Contract liabilities
consist of deferred revenue, customer deposits and customer advances, which represent
consideration received from a customer prior to transferring control
of goods or services to the customer under the terms of a contract.
Total contract assets and contract liabilities balances as of the respective dates are as
follows:
 
 
 
As of
 
(In thousands)
 
December 31, 2022
   
December 31, 2021  
Contract Assets
 
$
20,699   
$
14,498 
Contract Liabilities
 
 
24,960   
 
12,201 
 
F-9

 
 
During
the year ended December 31, 2022, the Company recognized revenue of $9,045 that was included in contract liabilities as of December 31,
2021.
During the year ended December 31, 2021, the Company recognized revenue of $4,511 that was included in contract liabilities as
of December 31, 2020.
 
The
following table represents the average percentage of completion as of December 31, 2022 for EPC projects that the Company is constructing.
The
Company expects to recognize $32,363 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   
 
48.2%
 
Accounts
Receivable
 
Accounts
receivables are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible
upon
completion of the contracts. Retention receivable is the amount withheld by a customer until a contract is completed. Retention
receivables of $455 and
$309 were included in the balance of trade accounts receivable as of December 31, 2022, and 2021, respectively.
 
The
Company performs ongoing credit evaluation of its customers. Management monitors outstanding receivables based on factors surrounding
the credit
risk of specific customers, historical trends, age of receivables and other information, and records bad debts using the allowance
 method. Accounts
receivable are presented net of an allowance for doubtful accounts of $935 at December 31, 2022, and $454 at December
31, 2021. During 2022, $473 was
recorded as bad debt expense compared to $454 in 2021.
 
Cash
and Cash Equivalents
 
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
 
Restricted
Cash
 
The
Company considers restricted cash to be cash balances that have legal or contractual restrictions imposed by a third party and are restricted
as to
withdrawal or use except for the specified purpose.
 
Concentration
Risk
 
Cash
 includes amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Corporation (“FDIC”)
 limits. At times
throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of
December 31, 2022 and 2021, the
cash balance in excess of the FDIC limits was $7,735 and $19,631, respectively. The Company has not
 experienced any losses in such accounts and
believes it is not exposed to any significant credit risk in these accounts.
 
Inventory
 
Inventory
is valued at lower of cost or net realizable value determined by the first-in, first-out method. Inventory primarily consists of panels,
inverters,
batteries, optimizers, mounting racks and other materials. The Company reviews the cost of inventories against their estimated
net realizable value and
records write-downs if any inventories have costs in excess of their net realizable values. Inventory is presented
net of an allowance of $227 at December
31, 2022 and $312 at December 31, 2021.
 
F-10

 
 
Property
and Equipment
 
Property
and equipment are stated at cost. Depreciation for property and equipment commences when it is put into service and are depreciated using
the
straight-line method over property and equipment’s estimated useful lives:
Machinery
& equipment
3-7
Years
Office
equipment & furniture
5-7
Years
Computers
& software
3-5
Years
Vehicles
& trailers
3-7
Years
Leasehold
improvements
3-5
Years
 
Leases
 
The
Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term
and long-term lease
liabilities are included in the consolidated balance sheet. The Company also has finance lease ROU assets and finance
lease liabilities, which are presented
in the consolidated balance sheet.
 
ROU
assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation
to make lease payments
arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement
date based on the present value of lease
payments over the lease term. As most of the Company’s leases do not provide an implicit
rate, the Company uses an incremental borrowing rate based on
the information available at the commencement date in determining the present
value of lease payments. The operating and finance lease ROU asset also
excludes lease incentives. The Company’s lease terms may
include options to extend or terminate the lease when it is reasonably certain that the Company
will exercise that option. Lease expense
for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements
with lease and non-lease
components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the
Company has
elected the short-term lease measurement and recognition exemption, and the Company recognizes such lease payments on a straight-line
basis over the lease term.
 
Warranty
Liability
 
The
Company establishes warranty liability reserves to provide for estimated future expenses as a result of installation, product and performance
defects,
product recalls and litigation incidental to the Company’s business. Liability estimates are determined based on management’s
judgment, considering such
factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’
participation in sharing the cost of corrective
action, and consultations with third party experts such as engineers. Solar panel manufacturers
currently provide substantial warranties of between ten to
twenty-five years with full reimbursement to replace and install replacement
panels. Inverter manufacturers currently provide warranties covering ten to
fifteen years including replacement and installation. The
warranty liability for estimated future warranty costs at December 31, 2022 and 2021 is $1,596
and $1,251, respectively.
 
Advertising
and Marketing
 
The
 Company expenses advertising and marketing costs as incurred. Advertising and marketing costs may include printed material, billboards,
sponsorships, direct mail, radio, telemarketing, tradeshow costs, magazine, and catalog advertisement. Advertising and marketing costs
for the years ended
December 31, 2022 and 2021 were $1,527 and $864, respectively.
 
Stock-Based
Compensation
 
The
Company periodically issues stock options and restricted stock units (“RSU”) to employees and non-employees. The Company
accounts for stock
option and RSU grants issued and vesting to employees based on the authoritative guidance provided by the Financial
Accounting Standards Board
(“FASB”) whereas the value of the award is measured on the date of grant and recognized over the
vesting period. The Company accounts for stock option
and RSU grants issued and vesting to non-employees in accordance with the authoritative
 guidance of the FASB whereas the value of the stock
compensation is based upon the measurement date as determined at either a) the date
at which a performance commitment is reached, or b) at the date at
which the necessary performance to earn the equity instruments is
complete. Non-employee stock-based compensation charges generally are amortized
over the vesting period on a straight-line basis. In
certain circumstances where there are no future performance requirements by the non-employee, option
grants are immediately vested and
the total stock-based compensation charge is recorded in the period of the measurement date.
 
F-11

 
 
Basic
and Diluted Net (Loss) per Share Calculations
 
(Loss)
per Share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share
are computed by
dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted
earnings per share is
computed similar to basic earnings per share except that the denominator is increased to include the number of
additional common shares that would have
been outstanding if the potential common shares had been issued and if the additional common
shares were dilutive. The shares for employee options and
unvested RSUs were not used in the calculation
of the net loss per share.
 
A
net loss causes all outstanding common stock options to be anti-dilutive. As a result, the basic and diluted losses per common share
are the same for the
year ended December 31, 2022 and 2021.
 
As
 of December 31, 2022, the potentially dilutive securities were excluded from the computations of weighted average shares outstanding
 including
211,720 stock options and 999,858 unvested RSUs.
 
As
 of December 31, 2021, the potentially dilutive securities were excluded from the computations of weighted average shares outstanding
 including
290,684 stock options and 1,185,889 unvested RSUs.
 
Dilutive
per share amounts are computed using the weighted-average number of common shares outstanding and potentially dilutive securities, using
the
treasury stock method, if their effect would be dilutive.
 
Long-Lived
Assets
 
The
Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances
indicate
that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
 at least annually.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted operating cash flow
expected to be generated by the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which
the carrying amount of the asset exceeds the fair value of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value less costs to sell.
 
Business
Combinations and Goodwill
 
The
Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations,
where
the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on
their estimated fair values. The
purchase price is allocated using the information currently available, and may be adjusted, up to one
year from acquisition date, after obtaining more
information regarding, among other things, asset valuations, liabilities assumed and
revisions to preliminary estimates. The purchase price in excess of the
fair value of the tangible and identified intangible assets acquired
less liabilities assumed is recognized as goodwill.
 
The
Company retains a valuation consulting firm to assist in testing for goodwill impairment in the fourth quarter of each year and whenever
events or
circumstances indicate that the carrying amount of an asset exceeds its fair value and may not be recoverable. At December
31, 2021 we performed a
quantitative assessment of goodwill. It was determined that the remaining carrying of goodwill resulting from
the acquisitions made in 2014 and 2015
exceeded their fair value and we recorded an impairment of $5,464 for the remaining balances.
At December 31, 2022 we performed a quantitative
assessment of goodwill and determined that there was no impairment of goodwill.
 
F-12

 
 
Fair
Value of Financial Instruments
 
Disclosures
about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance
sheet,
where it is practicable to estimate that value. As of December 31, 2022, the amounts reported for cash, accrued interest and other
expenses, approximate the
fair value because of their short maturities.
 
The
Company accounts for financial instruments measured as fair value on a recurring basis under ASC Topic 820. ASC Topic 820 defines fair
value,
established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States
and expands disclosures
about fair value measurements.
 
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at
the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs
used in measuring fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). These tiers include:
 
 
●
Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
 
 
 
 
●
Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted
prices for
similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active;
and
 
 
 
 
●
Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions,
such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
 
Income
Taxes
 
The
Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences
attributable to consolidated financial statements carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax
credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions
of applicable tax law. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance based on the amount
of tax benefits that, based on available evidence, is not expected to be
realized.
 
New
Accounting Pronouncements
 
Management
reviewed currently issued pronouncements during the year ended December 31, 2022, and believes that any other recently issued, but not
yet
effective, accounting standards, if currently adopted, would not have a material effect on the accompanying consolidated financial
statements.
 
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 Acquisition was accounted for under ASC 805 and the financial results of Solcius have been included in
 the Company’s
consolidated financial statements since the date of the Acquisition.
 
F-13

 
 
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:
 
 
 
(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 year ended December 31, 2021, we recorded total transaction costs related to the Acquisition of $774. These expenses were accounted
for
separately from the net assets acquired and are included in general and administrative expense for 2021.
 
Pro
Forma Information (Unaudited)
 
The
results of operations for the Acquisition since the April 8, 2021 closing date have been included in our December 31, 2021 consolidated
financial
statements and include approximately $72,279 of total revenue. The following unaudited pro forma financial information represents
a summary of the
consolidated results of operations for the years ended December 31, 2022 and 2021, assuming the 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 Acquisition transaction expenses totaling
 $774 incurred in 2021, and adjustments to recognize
amortization of intangible assets, retention stock-based compensation programs and
retention bonus accruals. The pro forma financial information is not
necessarily indicative of the results of operations that would have
been achieved if the acquisition had been effective as of these dates, or of future results.
 
 
 
Year ended
 
 
 
December 31, 2022    
December 31, 2021  
 
 
    
  
Revenue, net
 
$
161,935   
$
127,304 
 
 
 
    
 
  
Net Loss
 
$
(25,956)  
$
(20,304)
 
F-14

 
 
4.
REVENUE FROM CONTRACTS WITH CUSTOMERS
 
The
following table represents a disaggregation of revenue by customer type from contracts with customers for the years ended December 31,
2022 and
2021:
 
 
 
Year Ended
December 31,
 
 
 
2022
   
2021
 
Residential
 
$
142,093   
$
77,861 
Commercial
 
 
11,464   
 
17,125 
Public Works
 
 
8,378   
 
6,168 
Total
 
$
161,935   
$
101,154 
 
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 CSE 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 CSE 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 from CSE in the Commercial Solar Energy segment, which is expected to
be fulfilled within the next year.
CSE primarily operates in California.
 
Segment
net revenue, segment operating expenses and segment contribution (loss) information consisted of the following for the years ended December
31,
2022 and 2021.
 
 
 
Year Ended December 31, 2022
 
 
 
Residential
Solar
   
Commercial
Solar
   
Corporate
   
Total
 
Net revenue
 
$
139,967   
$
21,968   
$
-   
$
161,935 
Cost of goods sold
 
 
71,113   
 
19,508   
 
-   
 
90,621 
Gross profit
 
 
68,854   
 
2,460   
 
-   
 
71,314 
 
 
 
    
 
    
 
    
 
  
Operating expenses
 
 
    
 
    
 
    
 
  
Selling and marketing
 
 
55,048   
 
3,206   
 
952   
 
59,206 
General and administrative
 
 
19,562   
 
7,409   
 
7,151   
 
34,122 
Segment loss
 
 
(5,756)  
 
(8,155)  
 
(8,103)  
 
(22,014)
 
 
 
    
 
    
 
    
 
  
Stock-based compensation
 
 
759   
 
132   
 
1,505   
 
2,396 
Depreciation and amortization
 
 
3,799   
 
-   
 
-   
 
3,799 
Operating loss
 
$
(10,314)  
$
(8,287)  
$
(9,608)  
$
(28,209)
 
F-15

 
 
 
 
Year
Ended December 31, 2021
 
 
 
Residential
Solar
   
Commercial
Solar
   
Corporate
   
Total
 
Net revenue
 
$
72,278   
$
28,876   
$
-   
$
101,154 
Cost of goods sold
 
 
36,028   
 
24,344   
 
-   
 
60,372 
Gross profit
 
 
36,250   
 
4,532   
 
-   
 
40,782 
 
 
 
    
 
    
 
    
 
  
Operating expenses
 
 
    
 
    
 
    
 
  
Selling and marketing
 
 
28,489   
 
4,000   
 
271   
 
32,760 
General and administrative
 
 
11,291   
 
5,031   
 
8,503   
 
24,825 
Segment loss
 
 
(3,530)  
 
(4,499)  
 
(8,774)  
 
(16,803)
 
 
 
    
 
    
 
    
 
  
Goodwill impairment
 
 
-   
 
5,464   
 
-   
 
5,464 
Stock-based compensation
 
 
2,725   
 
3   
 
1,006   
 
3,734 
Depreciation and amortization
 
 
3,148   
 
75   
 
-   
 
3,223 
Operating loss
 
$
(9,403)  
$
(10,041)  
$
(9,780)  
$
(29,224)
 
Assets by operating segment are as follows:
 
 
 
December
31, 2022
Operating
Segment:
 
   
Residential
Solar
 
$ 
90,113
Commercial
Solar
 
 
21,772
Corporate
 
 
8,055
 
$
119,940
 
6.
PROPERTY AND EQUIPMENT, NET
 
Property
and equipment is summarized as follows at December 31, 2022 and 2021:
 
 
 
2022
   
2021
 
Leasehold improvements
 
$
463   
$
442 
Vehicles & trailers
 
 
775   
 
723 
Machinery & equipment
 
 
847   
 
778 
Office equipment & furniture
 
 
579   
 
439 
Computers & software
 
 
3,810   
 
3,552 
 
 
6,474   
 
5,934 
Less accumulated depreciation
 
 
(4,320)  
 
(2,739)
 
$
2,154   
$
3,195 
 
7.
RIGHT-OF-USE OPERATING LEASES
 
The
Company has 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 years ended December 31, 2022 and 2021 amounted to $1,597 and $1,452, respectively. Operating
lease
payments, which reduced operating cash flows for the years ended December 31, 2022 and 2021 amounted to $1,597 and $1,452, respectively.
 The
difference between the ROU asset amortization of $1,107 and the associated lease expense of $1,597 consists of early cancellation
of a facility lease
obligation, new facility leases, 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:
 
 
 
Year Ended
December 31,
 
 
 
(in thousands)
 
 
 
2022
   
2021
 
Operating lease right-of-use assets
 
$
2,779   
$
2,502 
 
 
 
    
 
  
Operating lease liabilities—short term
 
 
1,098   
 
993 
Operating lease liabilities—long term
 
 
1,681   
 
1,509 
Total operating lease liabilities
 
$
2,779   
$
2,502 
 
F-16

 
 
As
of December 31, 2022, the weighted average remaining lease term was 3.4 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)
 
2023
 
$
1,143 
2024
 
 
686 
2025
 
 
582 
2026
 
 
527 
2027
 
 
43 
Total lease payments
 
$
2,981 
Less: imputed interest
 
 
202 
Total
 
$
2,779 
 
8.
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:
 
 
 
Year Ended
December 31,
 
 
 
(in thousands)
 
 
 
2022
   
2021
 
Finance lease right-of-use asset cost
 
$
3,543   
$
1,868 
Finance lease right-of-use accumulated amortization
 
 
(1,056)  
 
(461)
Finance lease right of use asset, net
 
 
2,487   
 
1,407 
 
 
 
    
 
  
Finance lease obligation—short term
 
 
631   
 
424 
Finance lease obligation—long term
 
 
1,470   
 
542 
Total finance lease obligation
 
$
2,101   
$
966 
 
As
of December 31, 2022, the weighted average remaining lease term was 2.5 years and the weighted average discount rate for the Company’s
leases was
6.7%.
 
Minimum
finance lease payments for the remaining lease terms are as follows:
 
 
 
December 31, 2022
 
 
 
 
(in thousands)
 
2023
 
$
749 
2024
 
 
618 
2025
 
 
583 
2026
 
 
384 
2027
 
 
10 
Total lease payments
 
$
2,344 
Less: imputed interest
 
 
243 
Total
 
$
2,101 
 
F-17

 
 
9.
INTANGIBLE ASSETS, NET
 
The
Company’s intangible assets at December 31, 2022 consist of the following:
 
 
Amortization 
periods
 
Cost
   
Accumulated
amortization
   
Net carrying
value
 
Trademarks
 
10 Years
 
$
5,200   
$
(910)  
$
4,290 
Backlog of projects
 
9 Months
 
 
2,000   
 
(2,000)  
 
- 
Covenant not-to-compete
 
3 Years
 
 
2,400   
 
(1,400)  
 
1,000 
Software (included in property and
equipment)
 
3 Years
 
 
3,400   
 
(1,983)  
 
1,417 
Dealer relationships
 
18 Months
 
 
2,600   
 
(2,600)  
 
- 
 
 
 
 
$
15,600   
$
(8,893)  
$
6,707 
 
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 years ended December 31, 2022 and 2021 is as follows:
 
 
Year
Ended
December 31,
 
 
 
(in thousands)
 
 
 
2022
   
2021
 
Trademarks
 
$
520   
$
390 
Backlog of projects
 
 
-   
 
2,000 
Covenant not-to-compete
 
 
800   
 
600 
Software
 
 
1,133   
 
850 
Dealer relationships
 
 
1,300   
 
1,300 
 
$
3,753   
$
5,140 
 
Estimated
future amortization expense for the Company’s intangible assets as of December 31, 2022 is as follows:
Years ending December 31,
 
 
 
2023
 
$
2,453 
2024
 
$
1,004 
2025
 
$
520 
2026
 
$
520 
2027
 
$
520 
Thereafter
 
$
1,690 
 
Depreciation
and amortization expense on property and equipment and intangible assets for the years ended December 31, 2022 and 2021 was $4,823 and
$5,877, respectively.
 
10.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts
payable and accrued liabilities at December 31, 2022 and 2021 are as follows:
 
 
 
2022
   
2021
 
Trade payables
 
$
15,721   
$
3,929 
Accrued payroll, bonuses and benefits
 
 
4,997   
 
3,132 
Accrued expenses and dealer commissions
 
 
3,849   
 
4,066 
Total
 
$
24,567   
$
11,127 
 
F-18

 
 
11.
PAYCHECK PROTECTION PROGRAM LOAN PAYABLE
 
On
April 28, 2020 the Company’s operating subsidiary, Sunworks United, 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, together with $34
of accrued interest, was fully forgiven. As a result, the Company recorded a gain on
extinguishment of the debt which is included in
other income on the consolidated statement of operations for the year ended December 31, 2021.
 
12.
CAPITAL STOCK
 
Preferred
Stock
 
Pursuant
to the terms of our Charter, our board of directors is authorized, subject to limitations prescribed by Delaware law, to issue up to
5,000,000 shares
of preferred stock, par value $0.001 per share, in one or more series, to establish from time to time the number of
shares to be included in each series, and
to fix the designation, powers, preferences and rights of the shares of each series and any
of its qualifications, limitations or restrictions, in each case
without further action by our stockholders.
 
On
January 9, 2015, we filed two Certificates of Designations, Preferences, and Rights, for Series A Preferred Stock and Series B Preferred
Stock with the
Secretary of State of the State of Delaware, or the Certificates of Designations, establishing the rights, preferences,
privileges, qualifications, restrictions
and limitations relating to 4,400 shares of our Series A Convertible Preferred Stock, par value
$0.001 per share, and 1,700,000 shares of our Series B
Preferred Stock, par value $0.001 per share. As of December 31, 2022 and 2021,
there are were no shares of our preferred stock outstanding.
 
At
The Market Offerings
 
On
January 27, 2021 the Company filed a Registration Statement on Form S-3 (File No. 333-252475) (the “2021 Registration Statement”)
which was
declared effective by the Securities and Exchange Commission (“SEC”) on February 3, 2021 and which 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.
 
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, pursuant to the 2021
Registration Statement.
 
F-19

 
 
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 “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 (the “June 2022
Placement Shares” and together with the 2021 Placement Shares, the “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 (the “2022 Prospectus Supplement”).
 
The
June 2022 Placement Shares are 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 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 2022 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.
 
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
Securities and Exchange Commission (“SEC”) SEC on August 5, 2022. No shares have
been sold in connection with the 2022 Registration Statement.
 
2022
At The Market Offerings
 
During
2022, 5,754,161 of the Placement Shares were sold under the Roth/Northland Sales Agreement and Roth Sales Agreements. 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.
 
2021
At The Market Offerings
 
In
2021, 5,356,984
shares of common stock were sold under Roth Sales Agreements for total gross proceeds of $63,067 or
$11.77
per share. Net proceeds
after brokerage costs, professional, registration and other fees were $61,600
or $11.49
per share.
 
F-20

 
 
13.
STOCK – BASED COMPENSATION
 
Options
 
As
of December 31, 2022, the Company has incentive stock options and non-qualified stock options outstanding to purchase 211,720 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.
 
On
April 12, 2021, subject to the 2016 Plan, the Company granted eight members of Solcius management incentive stock options for a total
of 260,000
shares of common stock. The entire 260,000 options vested on April 8, 2022, the one-year anniversary date of the Solcius acquisition.
The exercise price of
each option share is $12.15, the closing price of Sunworks stock on April 12, 2021. The Company determined the
fair market value of these options at
$10.30 per share by using the Black Scholes option valuation model. The annualized volatility was
126.0 percent with an annual risk-free interest rate of
1.69 percent. The options mature and expire in five years from date of grant.
 
During
2021, using cashless option exercises, 2,218 options were exercised resulting in 1,530 net shares being issued.
 
A
summary of the Company’s stock option activity and related information follows:
 
 
 
2022
   
2021
 
 
 
 
   
Weighted
   
 
   
Weighted
 
 
 
Number
   
Average
   
Number
   
Average
 
 
 
of
   
Exercise
   
of
   
Exercise
 
 
 
Options
   
Price
   
Options
   
Price
 
Outstanding, beginning January 1
 
 
290,684   
$
11.65   
 
88,441   
$
11.02 
Granted
 
 
-   
 
-   
 
260,000   
 
12.15 
Exercised
 
 
-   
 
-   
 
(2,218)  
 
2.10 
Forfeited
 
 
(73,251)  
 
11.73   
 
(29,113)  
 
7.38 
Expired
 
 
(5,713)  
 
10.50   
 
(26,426)  
 
19.93 
Outstanding, and expected to vest as of December 31
 
 
211,720   
$
11.66   
 
290,684   
$
11.65 
Exercisable at the end of December 31
 
 
211,720   
$
11.66   
 
28,042   
$
7.88 
Weighted average fair value of options granted during
period
 
 
    
$
-   
 
    
$
12.15 
 
The
following summarizes the options to purchase shares of the Company’s common stock which were outstanding at December 31, 2022:
 
 
   
 
   
 
   
Weighted
 
 
   
 
   
 
   
Average
 
 
   
 
   
 
   
Remaining
 
Exercisable
   
Stock Options
   
Stock Options
   
Contractual
 
Prices
   
Outstanding
   
Exercisable
   
Life (years)
 
$
8.68   
 
7,142   
 
7,142   
 
0.37 
$
7.63   
 
2,142   
 
2,142   
 
0.41 
$
3.07   
 
3,071   
 
3,071   
 
1.62 
$
2.52   
 
4,365   
 
4,365   
 
1.75 
$
12.15   
 
195,000   
 
195,000   
 
3.28 
 
    
 
211,720   
 
211,720   
 
  
 
Aggregate
intrinsic value of options outstanding and exercisable at December 31, 2022 and 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 December
31, 2022 and 2021, respectively, and the exercise price multiplied by the number of options outstanding.
 
The
Company recorded stock-based compensation for stock options of $674 and $2,027 for the years ended December 31, 2022 and 2021, respectively.
 
Restricted
Stock Units
 
The
following table summarizes the Company’s restricted stock unit activity during the year ended December 31, 2022 and 2021:
 
F-21

 
 
A
summary of the Company’s restricted stock unit activity and related information follows:
 
 
2022
   
2021
 
 
 
Number
   
Weighted Average
Grant Date
   
Number
   
Weighted Average
Grant Date
 
 
 
of
   
Value per
   
of
   
Value per
 
 
 
Shares
   
Share
   
Shares
   
Share
 
Unvested, beginning January1
 
 
1,185,889   
$
5.11   
 
-   
$
- 
Granted
 
 
337,972   
 
2.39   
 
1,195,889   
 
5.14 
Vested
 
 
(467,069)  
 
7.04   
 
(10,000)  
 
9.07 
Forfeited
 
 
(56,934)  
 
3.35   
 
-   
 
- 
Unvested at the end of December 31,
 
 
999,858  
 
3.54   
 
1,185,889   
 
5.11 
 
RSUs
granted during the year ended December 31, 2022 vest in a variety of ways. Some RSUs vest on the one-year anniversary of the date
of grant. Other
RSUs vest one-third on the one-year anniversary date of the grant and then monthly over the next 24 months. Other
RSUs vest one-third on each annual
anniversary date for the next three years. Another portion of the RSUs are performance based
and vest on achieving certain revenue and cash flow and
profitability goals measured annually or in some cases for the year 2024.
 
The
total combined stock option, RSU compensation expense recognized in the consolidated statements of operations during
the years ended December 31,
2022 and 2021 was $2,396 and $3,734, respectively.
 
14.
INCOME TAXES
 
The
 Company is recording an income tax expense for state franchise and minimum taxes only, due to operating losses incurred for the years
 ended
December 31, 2022 and 2021. State franchise and minimum taxes are included in general and administrative expense. The Company accounts
for income
taxes in accordance with ASC 740, which requires that the tax benefit of net operating losses, temporary differences and credit
carryforwards be recorded
as an asset to the extent that management assesses that realization is “more likely than not.”
Realization of the future tax benefits is dependent on the
Company’s ability to generate sufficient taxable income within the carryforward
period. No tax benefit has been reported in the 2022 consolidated financial
statements, since the potential tax benefit is offset by
a valuation allowance of the same amount.
 
The
Company’s income tax provision consists of the following for the years ended December 31, 2022 and 2021:
 
 
 
December 31, 2022
   
December 31, 2021
 
Current:
 
 
    
 
  
Federal
 
$
-   
$
- 
State
 
 
94   
 
75 
Total current expense
 
$
94   
$
75 
 
 
 
    
 
  
Deferred:
 
 
    
 
  
Federal
 
$
(5,350)  
$
(4,238)
State
 
 
(1,461)  
 
(1,353)
Change in valuation allowance
 
 
6,811   
 
5,591 
Total deferred
 
$
-   
$
- 
Income tax provision
 
$
94   
$
75 
 
F-22

 
 
Deferred
tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred
tax assets are as follows:
 
 
 
December 31, 2022
   
December 31, 2021
 
Deferred tax assets:
 
 
    
 
  
Warranty, inventory and bad debt reserves
 
$
650   
$
464 
Other accrued expenses
 
 
660   
 
228 
Other
 
 
30   
 
28 
Property and equipment
 
 
177   
 
39 
Intangible assets
 
 
439   
 
707 
Deferred stock-based compensation
 
 
421   
 
445 
Limitation under 163(j)
 
 
476   
 
440 
Research and development credits
 
 
173   
 
232 
Net operating loss
 
 
19,199   
 
12,830 
Total deferred tax assets
 
 
22,225   
 
15,413 
 
 
 
    
 
  
Valuation allowances
 
 
(22,225)  
 
(15,413)
 
 
 
    
 
  
Net deferred tax assets
 
$
-   
$
- 
 
A
reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income tax
provision is as follows:
 
 
2022
   
2021
 
U.S Federal statutory tax rate
 
 
21.00% 
 
21.00%
State tax benefit, net
 
 
-1.27% 
 
-1.08%
Research and development credits
 
 
-% 
 
-%
Stock-based compensation
 
 
-1.85% 
 
-1.59%
Impairment of goodwill
 
 
-% 
 
-4.31%
PPP Loan forgiveness
 
 
-% 
 
2.27%
Other
 
 
-0.01% 
 
-0.07%
Valuation allowance
 
 
-18.21% 
 
-16.50%
 
 
 
    
 
  
Effective income tax rate
 
 
-0.34% 
 
-0.28%
 
At
 December 31, 2022, the Company had federal and state net operating loss carryforwards of approximately $73,000 and
 $62,200,
 respectively. In
addition, the Company has federal research and development tax credit carryforwards of approximately $173.
The federal net operating losses incurred in
years beginning after January 1, 2018 in the amount of $61,100 can
be carried forward indefinitely. The
remaining $11,800 of federal net operating loss,
research tax credit carryforwards and California net operating loss carryforwards
will begin to expire in 2029 unless previously utilized. The
California
research and development credit carryforwards will carry forward indefinitely until utilized.
 
Utilization
of U.S. net operating losses and tax credit carryforwards may be limited by “ownership change” rules, as defined in Sections
382 and 383 of the
Code. Similar rules may apply under state tax laws. The Company has not conducted a study to-date to assess whether
a limitation would apply under
Sections 382 and 383 of the Code as and when it starts utilizing its net operating losses and tax credits.
The Company will continue to monitor activities in
the future. In the event the Company should experience an ownership change in the
 future, the amount of net operating losses and research and
development credit carryovers available in any taxable year could be limited
and may expire unutilized.
 
F-23

 
 
The
CARES Act was signed into law on March 27, 2020 as a response to the economic challenges facing U.S. businesses caused by the COVID-19
global
pandemic. The CARES Act allowed net operating loss incurred in 2018-2020 to be carried back five years or carried forward indefinitely,
and to be fully
utilized without being subjected to the 80% taxable income limitation. Net operating losses incurred after December 31,
2020 will be subjected to the 80%
taxable income limitation. In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion, or
all, of the deferred tax asset will be realized. The ultimate realization of
deferred tax assets is dependent upon the Company attaining future taxable income
during periods in which those temporary differences
become deductible.
 
Due
to the uncertainty surrounding the realization of the benefits of its deferred assets, including NOL carryforwards, the Company has provided
a 100%
valuation allowance on its deferred tax assets at December 31, 2022 and 2021, respectively.
 
The
Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, Income Taxes. When uncertain tax positions
exist, the
Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized.
The determination as to whether the
tax benefit will more likely than not be realized is based upon the technical merits of the tax position
as well as consideration of the available facts and
circumstances. As of December 31, 2022, the Company had no uncertain tax positions
for the years ended December 31, 2022 and 2021.
 
15.
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 significant-negative impact on
 the
Company’s financial position.
 
16.
MAJOR CUSTOMER/SUPPLIERS
 
The
Company utilizes a network of authorized dealers to source sales for its residential operations. For the year ended December 31, 2022,
the three largest
authorized dealers were responsible for approximately 54% of our consolidated revenue. For the year ended December
 31, 2021, the three largest
authorized dealers were responsible for approximately 56% of our consolidated revenue.
 
For
the years ended December 31, 2022 and 2021 the Company had no projects that represented more than 10% of revenue.
 
As
of December 31, 2022 the Company had a receivable balance from one customer for approximately $3,399 which was approximately 24% of the
consolidated accounts receivable balance. As of December 31, 2021 the Company had a receivable balance from one customer for approximately
$572
which was approximately 13% of the consolidated accounts receivable balance.
 
For
the year ended December 31, 2022 we had two vendors that combined accounted for 47% of our cost of goods sold. For the year ended December
31,
2021 we had two vendors that accounted for 45% of our cost of goods sold.
 
17.
SUBSEQUENT EVENTS
 
Subsequent
to December 31, 2022 through March 10, 2023, there were no events, not otherwise described in these consolidated financial statements,
requiring disclosure here.
 
F-24

 
 
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None.
 
Item
9A. Controls and Procedures.
 
Evaluation
of Disclosure Controls and Procedures
 
We
carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer
and
principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)).
Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the
end of the period covered in this report,
our disclosure controls and procedures were effective to ensure that information required to
be disclosed in reports we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the required time periods specified in the Commission’s rules
and forms and is accumulated and communicated to
our management, including our principal executive officer and principal financial officer or persons
performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
 
Limitations
on the Effectiveness of Controls
 
Our
 management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and
procedures or our internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can
 provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there
are resource constraints and the benefits of controls must be considered relative to their costs.
Due to the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected.
 
Management’s
Report on Internal Control Over Financial Reporting
 
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended. Our management assessed the effectiveness of our internal control over financial
reporting as of
December 31, 2022. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated Framework (2013).
 
Management
believes that the controls currently in place are adequate and operated effectively based upon the criteria established in “Internal
Control-Integrated Framework” issued by the COSO, management concluded that as of December 31, 2022, our internal controls over
financial reporting
are effective.
 
Changes
in Internal Control Over Financial Reporting
 
There
was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the year ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
 
No
Attestation Report by Independent Registered Accountant
 
The
effectiveness of our internal control over financial reporting as of December 31, 2022 has not been audited by our independent registered
public accounting firm by virtue of our exemption from such requirement as a smaller reporting company.
 
Item
9B. Other Information.
 
Not
applicable.
 
37

 
 
PART
III
 
Item
10. Directors, Executive Officers and Corporate Governance
 
The
information required by this Item will be included in our definitive Proxy Statement for the 2023 Annual Meeting of Stockholders and
is
incorporated herein by reference.
 
Item
11. Executive Compensation.
 
The
information required by this Item will be included in our definitive Proxy Statement for the 2023 Annual Meeting of Stockholders and
is
incorporated herein by reference.
 
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
The
information required by this Item will be included in our definitive Proxy Statement for the 2023 Annual Meeting of Stockholders and
is
incorporated herein by reference.
 
Item
13. Certain Relationships and Related Transactions and Director Independence.
 
The
information required by this Item will be included in our definitive Proxy Statement for the 2023 Annual Meeting of Stockholders and
is
incorporated herein by reference.
 
Item
14. Principal Accountant Fees and Services.
 
The
information required by this Item will be included in our definitive Proxy Statement for the 2023 Annual Meeting of Stockholders and
is
incorporated herein by reference.
 
38

 
 
PART
IV
 
Item
15. Exhibits, Financial Statement Schedules.
 
(1)
Consolidated Financial Statements.
 
The
consolidated financial statements required by item 15 are submitted in a separate section of this report, beginning on Page F-1, incorporated
herein and made a part hereof.
 
(2)
Financial Statement Schedules.
 
Schedules
have been omitted because of the absence of conditions under which they are required or because the required information is included
in the consolidated financial statements or notes thereto.
 
(3)
Exhibits.
 
The
following exhibits are filed with this report, or incorporated by reference as noted:
 
 
(a)
 
 
 
 
 
1.1
Sales Agreement, dated February 10, 2021, between Sunworks, Inc. and Roth Capital Partners, LLC (incorporated by reference to the
current report on Form 8-K with the Securities and Exchange Commission on February 11, 2021).
 
 
 
 
1.2
Sales Agreement, dated June 8, 2022, between Sunworks, Inc. and Roth Capital Partners, LLC and Northland Securities, Inc.
(incorporated by reference to the current report on Form 8-K with the Securities and Exchange Commission on June 9, 2022).
 
 
 
 
2.1
Membership
 Interest Purchase Agreement, dated as of April 8, 2021, between Solcius Holdings, LLC and Sunworks United Inc.
(incorporated by
reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2021).
 
 
 
 
3.1
Amended and Restated Certificate of Incorporation. (incorporated by reference to Exhibit 3.1 to the annual report on Form 10-K filed
with the Securities and Exchange Commission on March 26, 2021).
 
 
 
 
3.2
Bylaws of Sunworks, Inc. (as updated through June 2, 2021) (incorporated by reference to Exhibit 3.2 to the annual report on Form 10-K
filed with the Securities and Exchange Commission on March 11, 2022).
 
 
 
 
4.1
Description of Registrant’s Capital Stock (incorporated by reference from the annual report on Form 10-K for the year ended December
31, 2019 filed with the Securities and Exchange Commission on March 30, 2020).
 
39

 
 
 
10.1#
Sunworks, Inc. 2016 Equity Incentive Plan (incorporated by reference to Schedule 14A filed with the Securities and Exchange
Commission on May 18, 2016).
 
 
 
 
10.2
Form of Restricted Share Unit Agreement under the Sunworks, Inc. 2016 Equity Incentive Plan (incorporated by reference to Exhibit
10.2 to the annual report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2022).
 
 
 
 
10.3
Form of Stock Option Agreement under the Sunworks, Inc. 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the
annual report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2022).
 
 
 
 
10.4#
Form of Director and Officer Indemnification Agreement (incorporated by reference from the quarterly report on Form 10-Q filed with
the Securities and Exchange Commission on October 31, 2019).
 
 
 
 
10.5#
Employment Agreement effective as of January 11, 2021 between Sunworks, Inc. and Gaylon Morris (incorporated by reference to the
current report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2021).
 
 
 
 
10.6#
Amendment
to the January 11, 2021 Employment Agreement between Sunworks, Inc. and Gaylon Morris (incorporated by reference to
Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 11, 2022.
 
 
 
 
10.7#
Employment Agreement, dated October 5, 2021 between Sunworks, Inc. and Jason Bonfigt (incorporated by reference to the current
report on Form 8-K filed with the Securities and Exchange Commission on October 7, 2021).
 
 
 
 
10.8#
Second Amendment to the January 11, 2021 Employment Agreement between Sunworks, Inc. and Gaylon Morris (incorporated by
reference to the current report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2023).
 
 
 
 
10.9
Amendment to the October 5, 2021 Employment Agreement between Sunworks, Inc. and Jason Bonfigt (incorporated by reference to the
current report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2023).
 
 
 
 
14.1
Sunworks, Inc. Code of Conduct, adopted May 2018 (incorporated by reference to the current report filed on June 5, 2018).
 
 
 
 
23.1
Consent of Independent Registered Public Accounting Firm
 
 
 
 
31.1*
Certification of Principal Executive Officer
 
 
 
 
31.2*
Certification of Principal Financial Officer
 
 
 
 
32.1**
Section 1350 Certificate of President and Chief Financial Officer
 
 
101.INS
Inline XBRL Instance Document
 
101.SCH
Inline XBRL Taxonomy Extension Schema Document
 
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
 
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
 
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
 
*
Filed
herewith.
#
Denotes
management compensatory plan or arrangement.
**
The
certifications attached as Exhibit 32.1 accompany this Annual Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of
the Exchange Act and are not to be
incorporated by reference into any of the registrant’s filings under the Securities Act
or the Exchange Act, irrespective of any general incorporation
language contained in any such filing.
 
 
 
(b)
Exhibits.
 
 
 
See
(a)(3) above.
 
 
 
(c)
Financial Statement Schedules.
 
 
 
See
(a)(2) above.
 
40

 
 
SIGNATURES
 
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its
behalf by the undersigned, thereunto duly authorized.
 
SUNWORKS,
INC.
 
 
 
 
By: /s/
Gaylon Morris
 
 
Chief
Executive Officer
 
 
Principal
Executive Officer
 
 
 
 
By: /s/
Jason Bonfigt
 
 
Chief
Financial Officer
 
 
Principal
Financial and Accounting Officer
 
 
Date:
March 10, 2023
 
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant
and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/
Judith Hall
 
Chairperson
 
March
10, 2023
Judith
Hall
 
 
 
 
 
 
 
 
 
/s/
Gaylon Morris
 
Chief
Executive Officer & Director
 
March
10, 2023
Gaylon
Morris
 
(Principal
Executive Officer)
 
 
 
 
 
 
 
/s/
Jason Bonfigt
 
Chief
Financial Officer
 
March
10, 2023
Jason
Bonfigt
 
(Principal
Financial and Accounting Officer)
 
 
 
 
 
 
 
/s/
Patrick McCullough
 
Director
 
March
10, 2023
Patrick
McCullough
 
 
 
 
 
 
 
 
 
/s/
Stanley Speer
 
Director
 
March
10, 2023
Stanley
Speer
 
 
 
 
 
 
 
 
 
/s/
Rhone Resch
 
Director
 
March
10, 2023
Rhone
Resch
 
 
 
 
 
41

 
Exhibit
23.1
 
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We
 hereby consent to the incorporation by reference in the Registration Statement Nos. 333-215938 and 333-257870 on Form S-8 and Registration
Statement Nos. 333-252475 and 333-265336 on Form S-3 of our report dated March 10, 2023, relating to the consolidated financial statements
 of
Sunworks, Inc. appearing in this Annual Report on Form 10-K of Sunworks, Inc. for the year ended December 31, 2022.
 
/s/
KMJ Corbin & Company LLP
 
Irvine,
California
March
10, 2023
 
 
 
 

 
EXHIBIT
31.1
 
CERTIFICATION
 
I,
Gaylon Morris, certify that:
 
1.
I have reviewed this Annual Report on Form 10-K of Sunworks, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this
report;
 
3.
Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present
in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
 
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rule 13a-15 (f) and 15 (d)-15(f))
for the registrant and we have:
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities,
particularly during the period in which this annual report is being prepared;
 
b)
 designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
 our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated
financial statements for
external purposes in accordance with generally accepted accounting principles;
 
c)
 evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
 about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
 
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect the
registrant’s internal control over the financial reporting; and
 
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that are
reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal controls
over financial reporting.
 
/s/
Gaylon Morris
 
Chairman
 
(Principal
Executive Officer)
 
 
Date:
March 10, 2023
 
 

 
 
EXHIBIT
31.2
 
CERTIFICATION
 
I,
Jason Bonfigt, certify that:
 
1.
I have reviewed this Annual Report on Form 10-K of Sunworks, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this
report;
 
3.
Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present
in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
 
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rule 13a-15 (f) and 15 (d)-15(f))
for the registrant and we have:
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities,
particularly during the period in which this annual report is being prepared;
 
b)
 designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
 our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated
financial statements for
external purposes in accordance with generally accepted accounting principles;
 
c)
 evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
 about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
 
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect the
registrant’s internal control over the financial reporting; and
 
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that are
reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal controls
over financial reporting.
 
/s/
Jason Bonfigt
 
Chief
Financial Officer
 
(Principal
Financial and Accounting Officer)
 
 
Date:
March 10, 2023
 
 
 

 
EXHIBIT
32.1
 
Certification
Pursuant
To Section 906 of the Sarbanes-Oxley Act Of 2002
(Subsections
(A) And (B) Of Section 1350, Chapter 63 of Title 18, United States Code)
 
Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code),
each of the
undersigned officers of Sunworks, Inc., (the “Company”), does hereby certify, to such officer’s knowledge,
that:
 
The
Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Form 10-K”) of the Company fully complies with
the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly
presents, in all material respects, the
financial condition and results of operations of the Company.
 
/s/
Gaylon Morris
 
Chief
Executive Officer
 
(Principal
Executive Officer)
 
 
Dated:
March 10, 2023
 
/s/
Jason Bonfigt
 
Chief Financial Officer
 
(Principal
Financial and Accounting Officer)
 
 
Dated:
March 10, 2023
 
The
foregoing Certifications are being furnished solely to accompany the Form 10-K pursuant to 18 U.S.C. Section 1350, and are not being
filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into
any filing of the Company,
whether made before or after the date hereof, regardless of any general incorporation language in such filing.
A signed original of this written statement
required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company
and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.