Sunworks, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021.

Or

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

For the transition period from _______________ to _______________

Commission File Number 001-36868

SUNWORKS, INC.

(Name of registrant in its charter)

1555 Freedom Boulevard

Provo, UT 84604

(Address of principal executive offices) (Zip Code)

(385) 497-6955

(Registrant’s telephone Number, including area code)

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

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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

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

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

Yes ☐ No ☒

The number of shares of registrant’s common stock outstanding as of November 10, 2021 was 29,083,599

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that might cause these differences include, but are not limited to, the impacts of the COVID-19 pandemic, including the impacts on us, our operations, or our future financial and operational results; those factors discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 (our Annual Report), and the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (SEC). In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

SUNWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2021 AND DECEMBER 31, 2020

(in thousands, except share and per share data)

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

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 and 2020

(in thousands, except share and per share data)

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

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED September 30, 2021 and 2020

(in thousands, except share and per share data)

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

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED September 30, 2021 and 2020

(in thousands, except share and per share data)

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

SUNWORKS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(dollars in thousands, except share and per share data)

References herein to “we,” “us,” “Sunworks,” and the “Company” are to Sunworks, Inc. and its wholly owned subsidiaries Sunworks United, Inc. (“Sunworks United”), MD Energy, Inc. (“MD Energy”), Plan B Enterprises, Inc. (“Plan B”) and Solcius LLC (“Solcius”).

1. BASIS OF PRESENTATION

Sunworks, Inc. (NASDAQ:SUNW) through its wholly owned subsidiaries is a provider of high-performance solar power systems. Sunworks sells, engineers, procures materials, constructs and maintains photo-voltaic solar power systems for customers in a wide range of industries including residential, agricultural, commercial and industrial, state and federal, and public works. Systems range in size from 2 kilowatt to multi-megawatt in size.

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 in 14 states, including California, Oregon, Utah, Nevada, Arizona, New Mexico, Texas, Colorado, Minnesota, Wisconsin, Massachusetts, New Jersey, Hawaii and South Carolina. The Company believes 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 $51,750 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 unaudited condensed consolidated financial statements (“financial statements”) and footnotes since the date of acquisition through September 30, 2021 (see Note 3).

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. These accounting policies conform to GAAP and have been consistently applied in the preparation of the financial statements.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Sunworks, Inc., and its wholly owned operating subsidiaries, Sunworks United, MD Energy, Plan B and Solcius. All material intercompany transactions have been eliminated upon consolidation of these entities.

Reclassifications

Certain reclassifications have been made to prior year’s financial statements to conform to classifications used in the current year. Sales commissions, finders’ fees and financing fees paid to third parties have been reclassified from cost of goods sold to selling and marketing in the condensed consolidated statements of operations with no change in the previously reported net losses. Customer deposits have been reclassified and included in contract liabilities.

Use of Estimates

The preparation of 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 financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to assess the realizability of the Company’s goodwill, 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, operating and finance lease right-of-use assets and liabilities, warranty reserves, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Revenue and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, engineering, procurement and construction (“EPC”) projects for residential and smaller commercial systems that require us to deliver functioning solar power systems are generally completed within two to twelve months from commencement of construction. Construction on larger commercial projects may be completed within eighteen to thirty-six months, depending on the size and location. We recognize revenue from EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer.

For residential contracts, the Company recognizes revenue upon completion of the job as determined by final inspection. We recognize revenue for systems operations and maintenance over the term of the service period.

For EPC revenue, 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 EPC services 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 three and nine months ended September 30, 2021 and 2020 as well as the number of projects that comprise such changes. For purposes of the following table, only projects with changes in estimates that have an impact on revenue and or cost of at least $100, calculated on a quarterly basis during the periods, were presented. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.

SCHEDULE OF CHANGES IN ESTIMATE AGGREGATE REVENUE 

Contract Assets and Liabilities

Contract assets consist of (i) the earned, but unbilled, portion of a project for which payment is deferred by the customer until certain contractual milestones are met; (ii) direct costs, including commissions, labor related costs and permitting fees paid prior to recording revenue, and (iii) unbilled receivables which represent revenue that has been recognized in advance of billing the customer, which is common for larger construction contracts. Contract liabilities consist of deferred revenue, customer deposits and customer advances, which represent consideration received from a customer prior to transferring control of goods or services to the customer under the terms of a contract. Total contract assets and contract liabilities balances as of the respective dates are as follows:

SCHEDULE OF CONTRACT ASSETS AND LIABILITIES 

During the three and nine months ended September 30, 2021, the Company recognized revenue of $1,942 and $4,376, respectively, that was included in contract liabilities as of June 30, 2021 and December 31, 2020, respectively. During the three and nine months ended September 30, 2020, the Company recognized revenue of $922 and $3,249, respectively, that was included in contract liabilities as of June 30, 2020 and December 31, 2019, respectively.

The following table represents the average percentage of completion as of September 30, 2021 for EPC projects that the Company is constructing. The Company expects to recognize $17,900 of revenue upon transfer of control of the projects.

SCHEDULE OF REVENUE RECOGNIZE UPON TRANSFER CONTROL OF PROJECTS 

Accounts Receivable

Accounts receivable 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 $295 and $392 were included in the balance of trade accounts receivable as of September 30, 2021 and December 31, 2020, 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 at September 30, 2021 of $491 and at December 31, 2020 of $253. During the three months ended September 30, 2021, $132 of uncollectible accounts receivable was written off against the allowance for doubtful accounts. Additionally, during the three months ended September 30, 2021, $74 was recorded as bad debt expense compared to $0 in the prior year period. During the nine months ended September 30, 2021 and 2020, $255 and $280, respectively, was recorded as bad debt expense.

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, optimizers 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.

Property and Equipment

Property and equipment are stated at cost. Depreciation for property and equipment commences when property and equipment are put into service and are depreciated using the straight-line method over the property and equipment’s estimated useful lives:

SCHEDULE OF PROPERTY AND EQUIPMENT ESTIMATED USEFUL LIVES 

Intangible Assets

The Company’s intangible assets at September 30, 2021 consist of the following:

SCHEDULE OF INTANGIBLE ASSETS 

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

Amortization expenses for intangible assets for the three and nine months ended September 30, 2021 was as follows:

SCHEDULE OF AMORTIZATION EXPENSES 

Estimated future amortization expense for the Company’s intangible assets as of September 30, 2021 is as follows:

SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE 

Depreciation and amortization expense for the three months ended September 30, 2021 and 2020 was $1,930 and $82, respectively. Depreciation and amortization expense for the nine months ended September 30, 2021 and 2020 was $3,900 and $246, respectively.

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 condensed consolidated balance sheet. With the acquisition of Solcius in April 2021, the Company has finance lease ROU assets and finance lease liabilities, which are presented appropriately in the condensed 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.

Stock-Based Compensation

The Company periodically issues stock options and restricted stock units (“RSU”) to employees and non-employees. The Company accounts for stock option and RSU grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and RSU grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

Basic and Diluted Net (Loss) per Share Calculations

(Loss) per Share dictates the calculation of basic earnings (loss) per share and diluted earnings per share. Basic earnings (loss) per share are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The shares for employee options and RSUs were not used in the calculation of the net loss per share.

A net loss causes all outstanding common stock options and unvested RSUs to be anti-dilutive. As a result, the basic and diluted losses per common share are the same for the three and nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 307,698 stock options, and 317,500 unvested RSUs.

As of September 30, 2020, the potentially dilutive securities that have been excluded from the computations of weighted average shares outstanding include 128,411 stock options.

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.

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 test 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. Early in 2020, as a result of the events and circumstances resulting from the COVID-19 pandemic, the Company’s outlook for revenue, profitability and cash flow had deteriorated. Therefore, the Company performed a quantitative assessment of goodwill at March 31, 2020. It was determined that the carrying value of goodwill exceeded its fair value at March 31, 2020. As a result, the Company recorded an impairment of $4,000. In accordance with the Company’s policies, the Company performed a quantitative assessment of goodwill at December 31, 2020 and no impairment was found. There were no events or circumstances that indicated impairment of goodwill at September 30, 2021.

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 September 30, 2021, the amounts reported for cash, accrued interest and other expenses, and notes payable approximate the fair value because of their short maturities.

We account for financial instruments measured as fair value on a recurring basis under ASC Topic 820. ASC Topic 820 defines fair value and established a framework for measuring fair value in accordance with GAAP and also 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:

New Accounting Pronouncements

Management reviewed currently issued pronouncements during the nine months ended September 30, 2021, 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 condensed consolidated financial statements.

3. BUSINESS ACQUISITION

On April 8, 2021, pursuant to the Purchase Agreement, the Company, through its operating subsidiary Sunworks United Inc. acquired all of the issued and outstanding membership interests of Solcius from the Seller. Located in Provo, Utah, Solcius is a full-service residential solar systems provider.

The purchase price for Solcius consisted of $51,750 in cash subject to post-closing adjustments related to working capital, cash, indebtedness and transaction expenses. The Acquisition was accounted for under ASC 805 and the financial results of Solcius have been included in the Company’s financial statements since the date of the Acquisition.

Purchase Price Allocation

Under the purchase method of accounting, the transaction was valued for accounting purposes at $52,111 which was the fair value of Solcius at the time of acquisition. The assets and liabilities of Solcius were recorded at their respective fair values as of the date of acquisition. The Company used a valuation consultant who identified $15,600 of separately identifiable intangible assets. Any difference between the cost of Solcius and the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The acquisition date estimated fair value of the consideration transferred consisted of the following:

SCHEDULE OF BUSINESS ACQUISITION LIABILITIES AND ASSETS ACQUIRED 

During the three and nine months ended September 30, 2021, we recorded total transaction costs related to the Acquisition of $25 and $774, respectively. These expenses were accounted for separately from the net assets acquired, and are included in general and administrative expense.

We will continue to conduct assessments of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. We expect that it may take into late 2021 until all post-closing assessments and adjustments are finalized.

Pro Forma Information

The results of operations for the Acquisition since the April 8, 2021 closing date have been included in our September 30, 2021 condensed consolidated financial statements and include approximately $46,191 of total revenue. The following unaudited pro forma financial information represents a summary of the consolidated results of operations for the three months and nine months ended September 30, 2021 and 2020, 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 in 2020. The retention bonus expense is recognized over the first year following the Acquisition. 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.

SCHEDULE OF BUSINESS ACQUISITION PROFORMA STATEMENTS OF OPERATIONS 

4. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following table represents a disaggregation of revenue by customer type from contracts with customers for the three and nine months ended September 30, 2021 and 2020:

SCHEDULE OF DISAGGREGATION OF REVENUE 

5. OPERATING SEGMENTS

The acquisition of Solcius was completed in April 2021. Solcius is a separate segment for management reporting purposes. Segment net revenue, segment operating expenses and segment contribution (loss) information consisted of the following for the three months and nine months ended September 30, 2021.

SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT 

6. 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 6 years, some of which include options to extend.

The Company’s operating lease expense for the three and nine months ended September 30, 2021 amounted to $394 and $1,086, respectively. Operating lease payments, which reduced operating cash flows for the three and nine months ended September 30, 2021 amounted to $394 and $1,086, respectively. The difference between the ROU asset amortization of $762 and the associated lease expense of $1,086 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:

SCHEDULE OF OPERATING LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION 

As of September 30, 2021, the weighted average remaining lease term was 2.5 years and the weighted average discount rate for the Company’s leases was 3.8%.

Minimum payments for the operating leases are as follows:

SCHEDULE OF MATURITIES FOR OPERATING LEASES LIABILITIES 

7. RIGHT-OF-USE FINANCE LEASES

The Company has finance leases for vehicles. The Company’s finance leases have remaining lease terms of 1 year to 4 years.

Supplemental balance sheet information related to finance leases is as follows:

SCHEDULE OF FINANCE LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION 

As of September 30, 2021, the weighted average remaining lease term was 2.2 years and the weighted average discount rate for the Company’s leases was 4.5%.

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

 SCHEDULE OF MATURITIES FOR FINANCE LEASES LIABILITIES

8. 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 condensed consolidated statements of operations for the nine months ended September 30, 2021.

9. CAPITAL STOCK

Common Stock

On January 27, 2021, the Company filed a Registration Statement on Form S-3 (File No. 333-252475) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”). The 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 million. The Registration Statement was declared effective by the SEC on February 3, 2021.

On February 10, 2021, the Company entered into a Sales Agreement (the “Roth Sales Agreement”) with Roth Capital Partners, LLC (the “Agent RCP”), pursuant to which the Company could offer and sell from time to time, through the Agent RCP, shares of the Company’s common stock, registered under the Securities Act, pursuant to the Registration Statement filed on Form S-3.

Sales of shares pursuant to the Roth Sales Agreement are deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act. The Agent RCP has agreed to act as sales agent and use commercially reasonable efforts to sell on the Company’s behalf all of the shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the Agent RCP and the Company.

3,212,486 shares of common stock (the “Placement Shares”) were sold under the Roth Sales Agreement between February 11, 2021 and February 23, 2021, pursuant to a prospectus supplement that was filed with the SEC on February 10, 2021. Total gross proceeds for the Placement Shares were $49,937 or $15.54 per share. Net proceeds after brokerage costs, professional, registration and other fees were $48,858 or $15.21 per share.

10. STOCK-BASED COMPENSATION

Options

As of September 30, 2021, the Company has non-qualified stock options outstanding to purchase 307,698 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 one to five years from the date of grant at exercise prices ranging from $2.10 to $21.70 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.

 SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS ACTIVITY

The following table summarizes the Company’s restricted stock unit activity during the nine months ended September 30,2021:

SCHEDULE OF STOCK-BASED COMPENSATION, RESTRICTED STOCK UNIT ACTIVITY

The total combined option and RSU compensation expense recognized in the condensed consolidated statements of operations during the three months ended September 30, 2021 and 2020 was $1,206 and $16, respectively.

The total combined option and RSU compensation expense recognized in the condensed consolidated statements of operations during the nine months ended September 30, 2021 and 2020 was $2,470 and $137, respectively.

11. RELATED PARTY TRANSACTIONS

The Company rents a facility in Durham, California from Plan D Enterprises, Inc., an entity controlled by the Company’s former President of Commercial Operations, for $9 per month.

12. COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a negative impact on the Company’s financial position except as noted below:

On October 12, 2020, a putative class complaint was filed by a purported stockholder of Sunworks regarding the contemplated but terminated merger among iSun, Inc. (formerly The Peck Company Holdings, Inc.), Peck Mercury, Inc. and Sunworks (the “Merger”). The complaint names, as defendants, each of the Sunworks’ Board of Directors (the “Directors”) and asserts that the Directors breached their fiduciary duties. The plaintiff alleges that the consideration to be received by stockholders of Sunworks was inadequate and that the Registration Statement on Form S-4 contained materially incomplete and misleading information regarding the proposed Merger. On November 24, 2020, the parties filed a joint stipulation to dismiss the action without prejudice with a reservation for plaintiff to seek attorneys’ fees and costs; the Court granted that stipulation and ordered the dismissal on November 25, 2020. On May 17, 2021, the Court granted a stipulation by the parties for plaintiff’s counsel to receive an award of $500 as a mootness fee which was promptly paid by the Company. This amount had been recorded as an accrued liability as of December 31, 2020. As part of the stipulation, the Company did not admit any liability or wrongdoing and the case was closed.

There were seven other actions related to the same proposed transaction, all of which have been voluntarily dismissed by the respective plaintiffs.

13. SUBSEQUENT EVENTS

On October 21, 2021, the Company filed a prospectus supplement with the SEC, pursuant to which the Company could offer and sell from time to time, through the Agent RCP, shares of the Company’s common stock, registered under the Securities Act, pursuant to the Registration Statement.

In accordance with the terms of the Roth Sales Agreement, we may offer and sell shares of our common stock under this prospectus having an aggregate offering price of up to $25 million (the “New Placement Shares”) from time to time through or to Agent RCP, as sales agent or principal.

Sales of shares pursuant to the Roth Sales Agreement are deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act. The Agent RCP has agreed to act as sales agent and use commercially reasonable efforts to sell on the Company’s behalf all of the shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the Agent RCP and the Company.

Subsequent to September 30, 2021 and through November 10, 2021 the sale and issuance of the New Placement Shares pursuant to the Roth Sales Agreement totaled 2,035,025 additional common shares issued and outstanding resulting in net proceeds of $12,222.

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

(dollars in thousands, except share and per share data)

The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this Quarterly Report) and the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 (our Annual Report). This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” included in this Quarterly Report.

Unless otherwise noted, (1) “Sunworks” refers to Sunworks, Inc., a Delaware corporation formerly known as Solar3D, Inc. (2) “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Sunworks and its Subsidiaries, whether conducted through Sunworks or a subsidiary of Sunworks, and (3) “Subsidiaries” refers collectively to Sunworks United, Inc. (Sunworks United), MD Energy, Inc. (MD Energy), Plan B Enterprises (Plan B) and Solcius LLC (Solcius).

Overview

We provide photovoltaic (PV) based power systems for the commercial, public works, and residential markets in California, Nevada, Massachusetts, Oregon, New Jersey, Utah, Arizona, Colorado, New Mexico, Texas, South Carolina, Wisconsin, Minnesota and Hawaii. We have direct sales and/or operations personnel in California, Nevada, Massachusetts, Utah, Arizona, New Mexico, Texas, Colorado, South Carolina, Wisconsin and Minnesota. 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. We provide a full range of installation services to our solar energy customers including design, system engineering, procurement, permitting, construction, grid connection, warranty, system monitoring and maintenance.

We currently operate in two segments based upon our organizational structure and the way in which our operations are managed and evaluated. Our Solcius segment is responsible for the vast majority of our residential market revenue and our Sunworks segment services primarily commercial and public works markets.

As a result of the Solcius acquisition in April 2021, the portion of our consolidated revenue from residential installations has increased significantly.

For the first nine months of 2021, approximately 73% of our 2021 revenue was from installations for the residential market. For the same period, approximately 27% of our revenue was from installations for the commercial and public works markets.

For the first nine months of 2020, approximately 26% of our revenue was from installations for the residential market and approximately 74% of our 2020 revenue was from installations for the commercial and public works markets.

IMPACT OF COVID-19 ON OUR BUSINESS

The continued global novel coronavirus and its variants (COVID-19) pandemic, 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 will 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. During the three months and nine months ended September 30, 2021, we continued to serve customers. 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. Utility companies have been unable to provide timely shutdowns, inspections and interconnection approvals. This disruption negatively impacts our ability to complete projects, generate revenue on projects in backlog and causes many customers to delay decisions on new projects.

Our revenue and gross profit in the three and nine months ended September 30, 2021 were negatively impacted by governmental responses to the COVID-19 pandemic, which delayed pre-construction approvals and installation activity for our larger public works, agriculture and commercial projects by delaying approvals and restricting our employees’ access to our work sites. Earlier governmental orders and social distancing guidelines slowed our sales process, as our customers avoided interacting with our sales and installation personnel and delayed buying decisions.

We received a loan under the Paycheck Protection Program of $2,847 which was used to pay for payroll costs, interest on debt, rent, utilities, and group health care benefits, allowing the Company to focus on revenue generating activities in an effort to mitigate some of the impact COVID-19 has on our business. The entire principal of the loan and all accrued interest was forgiven in June of 2021.

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. Of concern is how the COVID-19 pandemic continues to spread and could continue to adversely impact our ability to source materials used in our operations or affect our ability to complete ongoing installations in a timely manner. Several of our personnel have been subject to Company-imposed quarantine restrictions based upon possible contact with individuals who have tested positive. We are encouraging our personnel to wear masks and use social distancing and we believe we are taking appropriate sanitization measures. We cannot predict whether any one of our key executives or other personnel could become incapacitated by COVID-19 and its variants.

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. In March 2020, we formed an internal task force to evaluate the ongoing impact of COVID-19 on our business. This task force reviews and analyzes ongoing developments related to COVID-19 as they impact our business and operations. 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, but the COVID-19 pandemic has had and will continue to have an adverse effect on our business, operations, financial condition, results of operations, and cash flows.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue on construction contracts recognized over time, fair value of assets acquired and liabilities assumed in a business combination, 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, intangible assets, operating and finance lease right-of-use assets and liabilities, 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 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 financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to assess the realizability of our goodwill, 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, operating and finance 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

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 EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer.

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; and (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 condensed 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.

Indefinite Lived Intangibles and Goodwill Assets

We account 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.

We test for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2020

REVENUE AND COST OF GOODS SOLD

For the three months ended September 30, 2021, revenue increased to $31,220 compared to $7,304 for the three months ended September 30, 2020. The revenue increase is the result of the April 8, 2021 acquisition of Solcius. Solcius contributed $46,191 of revenue since acquisition and $23,379 during the three months ended September 30, 2021. Solcius contributed 75% to our consolidated revenue for the period. Overall, approximately 79% of revenue in the third quarter of 2021 was from installations for the residential market. Commercial and public works markets contributed 21% of revenue in the period. In contrast, for the same period in 2020, prior to the Solcius acquisition, residential revenue represented 27% of total revenue while commercial and public works revenue was 73% of total revenue.

Cost of goods sold for the three months ended September 30, 2021, was $16,804, or 53.8% of revenue compared to $5,670 or 77.6% percent of revenue for the three months ended September 30, 2020. The increase in cost of goods sold is primarily the result of the April 8, 2021 acquisition of Solcius.

Gross profit was $14,416 for the quarter ended September 30, 2021, compared to $1,634 of gross profit for the same quarter of the prior year. The gross margin was 46.2% in the third quarter of 2021 compared to 22.4% in the same quarter of 2020. The margin improvement is the result of the Solcius acquisition and the related gross margin on residential projects combined with improved margin on commercial projects completed during the period.

SELLING AND MARKETING EXPENSES

For the three months ended September 30, 2021, our selling and marketing expenses were $10,072 compared to $1,069 for the three months ended September 30, 2020. The significant increase in expense period over period is primarily the result of the higher revenue and dealer commission expenses related to the Solcius acquisition. Additionally, during the quarter we incurred additional marketing costs to expand lead generation efforts and broaden our brand awareness.

GENERAL AND ADMINISTRATIVE EXPENSES

Total general and administrative (G&A) expenses were $7,663 for the three months ended September 30, 2021, compared to $3,161 for the three months ended September 30, 2020. G&A expenses primarily increased with the addition of Solcius. During the same quarter of the prior year, Sunworks had reduced salaries and reduced overall spending in response to the COVID-19 restrictions. The increase in G&A expenses versus the prior year quarter included compensation related expenses, general insurance expenses, and executive recruiting fees.

STOCK-BASED COMPENSATION EXPENSES

During the three months ended September 30, 2021 we incurred $1,206 in total non-cash stock-based compensation expense compared to $16 for the same period in the prior year. The period over period increase in stock-based compensation is the result of the company expanding RSU and stock option grants as part of the compensation structure to a wider population of employees.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for the three months ended September 30, 2021 was $1,930 compared to $82 for the same period in the prior year. Depreciation and amortization expenses increased as a result of $15,600 of intangible assets identified in the April 2021 Solcius acquisition. Additionally, the Solcius property and equipment acquired increased depreciation expense for the period.

OTHER (EXPENSE), NET

Other expense was a net $5 for the three months ended September 30, 2021, compared to a net expense of $158 for the same three months in 2020. Interest expense for the quarter ended September 30, 2021 was $10, primarily related to the interest paid on financing leases. Interest expense for the quarter ended September 30, 2020 was $159 and was the result of interest for the remaining balance of a $2.25 million promissory note repaid in December of 2020.

NET LOSS

The net loss for the three months ended September 30, 2021 was $6,460 compared to a net loss of $2,852 for the three months ended September 30, 2020.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2020

REVENUE AND COST OF GOODS SOLD

For the nine months ended September 30, 2021, revenue increased to $69,480 compared to $29,335 for the nine months ended September 30, 2020. Approximately 73% of revenue in the first nine months of 2021 was from installations for the residential markets at $51,044 compared to 26% of revenue or $7,562 for the same period in the prior year. The increase is a result of the Solcius acquisition in April 2021. Commercial and public works revenue was 27% of total revenue or $18,436 for the first nine months of 2021, compared to 74% or $21,773 of revenue in the same period of the prior year. Public works revenue was $3,903 higher during the first nine months of 2020. The higher 2020 revenue was the result of a larger project under construction and nearing completion during the same period in the prior year.

Cost of goods sold for the nine months ended September 30, 2021, was $39,836 or 57.3% of revenue compared to $23,468 or 80.0% of revenue reported for the nine months ended September 30, 2020. The increase in cost of goods sold is primarily the result of the April 8, 2021 acquisition of Solcius.

Gross profit was $29,644 for the nine months ended September 30, 2021. This compares to $5,867 of gross profit for the same period of the prior year. The gross margin improved to 42.7% in the first nine months of 2021 compared to 20.0% in the same nine-month period of 2020. The margin improvement is the result of the Solcius acquisition and the related gross margin on residential projects combined with improved margin on commercial projects completed during the period.

Revenue and gross profit in the nine months ended September 30, 2021 were positively impacted by the Solcius acquisition and improving market conditions. In contrast, the prior year operating results were negatively impacted COVID 19 and the governmental responses to the pandemic.

SELLING AND MARKETING EXPENSES

For the nine months ended September 30, 2021, the Company’s selling and marketing expenses were $21,468 compared to $3,864 for the nine months ended September 30, 2020. As a percentage of revenue, selling and marketing expenses were 30.9% of the first nine months revenue in 2021 compared to 13.2% of the same period of 2020. The vast majority of the expense increase resulted from the Solcius acquisition and additional marketing spend for advertising and branding. The Solcius sales and marketing model focuses on lead generation and effective interaction with third-party sales organizations. During the period, we invested in sales and marketing to expand our lead generation efforts and improve brand awareness. Additionally, these investments are targeted at positively impacting our ability to enter additional markets and grow our in-house sales capability for residential markets.

GENERAL AND ADMINISTRATIVE EXPENSES

Total G&A expenses of $17,853 for the nine months ended September 30, 2021 increased compared to $8,135 for the nine months ended September 30, 2020. The G&A expenses increased from the prior year nine-month period primarily as a result of the Solcius acquisition in April of 2021. During the same period in 2020, we reduced headcount and discretionary spending in response to the COVID pandemic. G&A expenses will fluctuate as we pursue benefits from the costs savings of more fully integrating Solcius operations while compensation, insurance and employee benefit costs have increased year over year.

GOODWILL IMPAIRMENT

Goodwill impairment recorded for the nine months ended September 30, 2021 and 2020 was $0 and $4,000, respectively. In March 2020, as a result of the events and circumstances resulting from the COVID-19 pandemic, our outlook for revenue, profitability and cash flow deteriorated. Therefore, we performed a quantitative assessment of goodwill at March 31, 2020. It was determined that the carrying value of goodwill exceeded its fair value at March 31, 2020 and, as a result, we recorded an impairment of $4,000 during the first nine months of 2020.

STOCK-BASED COMPENSATION EXPENSES

During the nine months ended September 30, 2021 we incurred $2,470 in total non-cash stock-based compensation expense, compared to $137 for the same period in the prior year. The period over period increase in stock-based compensation is the result of the company expanding RSU and stock option grants as part of the compensation structure to a wider population of employees.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for the nine months ended September 30, 2021 was $3,900 compared to $246 for the same period in the prior year. Depreciation and amortization expenses increased as a result of the Solcius acquisition and $15,600 of identified intangible assets of Solcius. The total $15,600 balance of intangible assets is being amortized over the estimated useful lives of the specific assets. The estimated useful lives range from nine months to ten years. The amortization expense from the April 2021 Solcius acquisition through September 2021 was $3,426.

OTHER INCOME (EXPENSE), NET

Other income was $2,907 for the nine months ended September 30, 2021, compared to an expense of $544 for the same nine months in 2020. Other income is 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 for the first nine months of 2021, was $40 compared to $555 during the first nine months of 2020. The 2020 interest expense was primarily related to the interest paid on a $2.25 million loan balance outstanding pursuant to a senior promissory note plus the amortization of a $435 exit fee and the origination loan fees that were both shown as interest expense in the prior year period.

NET LOSS

The net loss for the nine months ended September 30, 2021 was $13,140. The net loss for the nine months ended September 30, 2020 was $11,059 including the $4,000 goodwill impairment expense.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

We had $11,219 in unrestricted cash at September 30, 2021, as compared to $38,991 at December 31, 2020. We believe that the aggregate of our existing cash and cash equivalents, in addition to cash raised through our at the market offering and cash generated in operations will be adequate for us to maintain sufficient liquidity and cash balances for the next twelve months or more.

At September 30, 2021, our working capital was a surplus of $21,211 compared to a working capital surplus of $30,890 at December 31, 2020.

During the nine months ended September 30, 2021, we used $25,331 of cash in operating activities compared to $7,268 used in operating activities for same period in 2020. The cash used in operating activities was used to reduce payables by taking advantage of purchase discounts for materials, build higher inventory levels to proactively address industry-wide supply chain challenges and to fund the current year net loss which included the legal, accounting and consulting costs incurred for the Solcius acquisition and the settlement of the stockholder lawsuit and mootness fee paid.

Net cash used in investing activities totaled $51,093 for the nine months ended September 30, 2021 including $50,619 net cash used to complete the Solcius acquisition and $535 of cash used to purchase trucks, vans and construction equipment to replace leased vehicles and rental equipment. The cash used in investing activities in the same period of 2020 totaled $26 for minor equipment purchases.

Net cash provided by financing activities during the nine months ended September 30, 2021 was $48,652. This increase was primarily due to net proceeds from sales of our common stock in February 2021.

Net cash provided by financing activities during the nine months ended September 30, 2020 was $8,746. Net cash received through sales of our common stock totaled $7,736 during the nine months ended September 30, 2020. The cash provided by financing activities during the nine months of 2020 was primarily used to pay $1,500 of principal for a senior promissory note. $337 of cash was used to pay off an acquisition convertible promissory note, vehicle and equipment debt.

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, revenue, results of operations, liquidity, or capital expenditures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. 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 SEC 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. In addition, the design of any system of controls is based on assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies and procedures may deteriorate. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. 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.

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 fiscal third quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors,” of our 2020 Annual Report on Form 10-K, which could materially affect our business, financial condition, or future results and which are incorporated by reference herein. Set forth below are updates to certain of the risk factors disclosed in our 2020 Annual Report on Form 10-K.

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 of 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 in 14 states 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:

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.

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 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 sales channel partners. For example, we diversified our market and product concentration following the acquisition of Solcius on April 8, 2021, a leading installer of residential solar systems, which operates in 14 states. Solcius utilizes a combination of sales channel partners and a direct sales strategy to generate new customers. Since acquisition, Solcius has had three sales channel partners that combined accounted for more than 80% of Solcius’ revenue for the first nine months of 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.

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, 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.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Provo, State of Utah, on November 12, 2021.