# EDGAR Filing Document

**Accession Number:** 0001172631
**File Stem:** 0001493152-23-007266
**Filing Date:** 2023-3
**Character Count:** 241859
**Document Hash:** 1e755003298803514c9e671cabbef89e
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001493152-23-007266.hdr.sgml**: 20230310

**ACCESSION NUMBER**: 0001493152-23-007266

**CONFORMED SUBMISSION TYPE**: 10-K

**PUBLIC DOCUMENT COUNT**: 87

**CONFORMED PERIOD OF REPORT**: 20221231

**FILED AS OF DATE**: 20230310

**DATE AS OF CHANGE**: 20230310

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** Sunworks, Inc.
- **CENTRAL INDEX KEY:** 0001172631
- **STANDARD INDUSTRIAL CLASSIFICATION:** MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690]
- **IRS NUMBER:** 010592299
- **STATE OF INCORPORATION:** DE
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** 10-K
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-36868
- **FILM NUMBER:** 23724538

**BUSINESS ADDRESS:**
- **STREET 1:** 1030 WINDING CREEK ROAD
- **STREET 2:** SUITE 100
- **CITY:** ROSEVILLE
- **STATE:** CA
- **ZIP:** 95678
- **BUSINESS PHONE:** (916) 409-6900

**MAIL ADDRESS:**
- **STREET 1:** 1030 WINDING CREEK ROAD
- **STREET 2:** SUITE 100
- **CITY:** ROSEVILLE
- **STATE:** CA
- **ZIP:** 95678

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** SOLAR3D, INC.
- **DATE OF NAME CHANGE:** 20101006

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** MACHINETALKER INC
- **DATE OF NAME CHANGE:** 20050801

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** MACHINE TALKER INC
- **DATE OF NAME CHANGE:** 20020506

?xml version="1.0" encoding="utf-8"?

**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 | 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

![](form10-k_001.jpg)

**<u>SUNWORKS, INC.</u>**

(Exact name of registrant as specified in its charter)

---

| | |
|:---|:---|
| **<u>delaware</u>** | **<u>01-0592299</u>** |
| (State or other jurisdiction<br> of incorporation or organization) | (I.R.S. Employer<br> Identification No.) |
| **<u>1555 Freedom Boulevard</u>**<br> **<u>Provo, UT</u>** | **<u>84604</u>** |
| (Address of principal executive office) | (Zip Code) |

---

Registrant's telephone number, including area code **(385)<u>497-6955</u>**

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 ☐ <br> Non-accelerated filer ☒ Smaller reporting company ☒ <br> 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](#kutty_001) |  |
| Item 1. | [Business](#kutty_002) | 4 |
| Item 1A. | [Risk Factors](#kutty_003) | 11 |
| Item 1B. | [Unresolved Staff Comments](#kutty_004) | 26 |
| Item 2. | [Properties](#kutty_005) | 26 |
| Item 3. | [Legal Proceedings](#kutty_006) | 26 |
| Item 4. | [Mine Safety Disclosures](#kutty_007) | 26 |
|  | [PART II](#kutty_008) |  |
| Item 5. | [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](#kutty_009) | 27 |
| Item 6. | [Selected Financial Data](#kutty_010) | 27 |
| Item 7. | [Management's Discussion and Analysis of Financial Condition and Results of Operations](#kutty_011) | 27 |
| Item 7A. | [Quantitative and Qualitative Disclosures About Market Risk](#kutty_012) | 35 |
| Item 8. | [Financial Statements and Supplementary Data](#kutty_013) | 36 |
| Item 9. | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](#kutty_020) | 37 |
| Item 9A. | [Controls and Procedures](#kutty_021) | 37 |
| Item 9B. | [Other Information](#kutty_022) | 37 |
|  | [PART III](#kutty_023) |  |
| Item 10. | [Directors, Executive Officers and Corporate Governance](#kutty_024) | 38 |
| Item 11. | [Executive Compensation](#kutty_025) | 38 |
| Item 12. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](#kutty_026) | 38 |
| Item 13. | [Certain Relationships and Related Transactions, Director Independence](#kutty_027) | 38 |
| Item 14. | [Principal Accounting Fees and Services](#kutty_028) | 38 |
|  | [PART IV](#kutty_029) |  |
| Item 15. | [Exhibits, Financial Statement Schedules](#kutty_030) | 39 |

---

**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.

**PART I**

**Item 1. <u>Business</u>.**

**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.

**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.

**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.

**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.

**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.

 

*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.

 

*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.

**Item 1A. <u>Risk Factors</u>.**

*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.

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.

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.

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***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.

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***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.

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***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.

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***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.

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***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.

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***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.

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***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.

 ****

***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.

 ****

***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.

 ****

***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;

● 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.

 ****

***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.

**Item 1B. <u>Unresolved Staff Comments</u>.**

None.

**Item 2. <u>Properties</u>.**

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<br> Footage** | **Monthly Base Lease Rate** | **Building <br> Type** | **Lease Expiration Date** |
| Riverside, CA | 11102 | $9385 | Mixed Use | Jan-2023 |
| Roseville, CA | 3363 | 6894 | Office | Feb-2023 |
| Phoenix, AZ | 1800 | 1764 | Mixed Use | Jun-2023 |
| Tulare, CA | 5000 | 4783 | Mixed Use | Jul-2023 |
| Albuquerque, NM | 5377 | 5000 | Mixed Use | Aug-2023 |
| Columbia, SC | 2225 | 1495 | Mixed Use | Aug-2023 |
| McAllen, TX | 3600 | 2250 | Mixed Use | Sep-2023 |
| Centennial, CO | 6443 | 5906 | Mixed Use | Sep-2023 |
| Bloomington, MN | 4200 | 2940 | Mixed Use | Sep-2023 |
| Durham, CA | 15600 | 11000 | Mixed Use | Oct-2023 |
| Santa Ana, CA | 1072 | 1876 | Office | Dec-2023 |
| Las Vegas, NV | 5900 | 4337 | Mixed Use | Dec-2023 |
| Sacramento, CA | 11968 | 8497 | Mixed Use | Feb-2024 |
| St. George, UT | 4000 | 4800 | Mixed Use | Feb-2024 |
| St. George, UT | 1640 | 2050 | Mixed Use | Mar-2024 |
| Mesquite, TX | 3815 | 2531 | Mixed Use | Jun-2024 |
| Morgan Hill, CA | 1233 | 2343 | Mixed Use | Aug-2024 |
| Mequon, WI | 7553 | 4091 | Mixed Use | Oct-2024 |
| El Paso, TX | 6000 | 3875 | Mixed Use | Sep-2025 |
| Provo, UT | 35803 | 24500 | Mixed Use | Nov-2026 |
| Riverside, CA | 14280 | 18207 | 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. <u>Legal Proceedings</u>.**

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. <u>Mine Safety Disclosures.</u>**

Not applicable.

**PART II**

**Item 5. <u>Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities</u>.**

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. <u>Selected Financial Data</u>**

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. <u>Management's Discussion and Analysis of Financial Condition and Results of Operations.</u>**

*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.

 

*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.

**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.

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.

**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.

**Impact of COVID-19**

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.

**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.

 

*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** | **Years Ended** |
|  | **December 31,** | **December 31,** |
|  | **2022** | **2021** |
| Net Total Originations (Watts in thousands) | 54280 | 31709 |
| Installation (Watts in thousands) | 33126 | 17642 |
| Average Project Size Installed (Watts) | 6621 | 5985 |
| Revenue | $139967 | $72278 |
| Gross Margin | 49.2% | 50.2% |
| Operating (Loss) | $(10314) | $(9403) |
| Operating (Loss) % | (7.4)% | (13.1)% |

---

**COMMERCIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS**

---

| | | |
|:---|:---|:---|
|  | **Years Ended** | **Years Ended** |
|  | **December 31,** | **December 31,** |
|  | **2022** | **2021** |
| Net Total Orders | $36130 | $10986 |
| Revenue | $21968 | $28876 |
| Gross Margin | 11.2% | 15.7% |
| Operating (Loss) | $(8287) | $(4577) |
| 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.

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.

**Item 8. <u>Financial Statements and Supplementary Data</u>.**

**SUNWORKS, INC.**

**CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021**

**CONTENTS**

---

| | |
|:---|:---|
| [Report of Independent Registered Public Accounting Firm](#kutty_014) (PCAOB ID: 170) | F-1 |
| [Consolidated Balance Sheets as of December 31, 2022 and 2021](#kutty_015) | F-3 |
| [Consolidated Statements of Operations for the years ended December 31, 2022 and 2021](#kutty_016) | F-4 |
| [Consolidated Statements of Shareholders' Equity for the years ended December 31, 2022 and 2021](#kutty_017) | F-5 |
| [Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021](#kutty_018) | F-6 |
| [Notes to Consolidated Financial Statements](#kutty_019) | F-7 |

---

**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.

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

**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: |  |  |
| &nbsp;&nbsp;&nbsp;Cash and cash equivalents | $7807 | $19719 |
| &nbsp;&nbsp;&nbsp;Restricted cash | 248 | 323 |
| &nbsp;&nbsp;&nbsp;Accounts receivable, net | 13873 | 4568 |
| &nbsp;&nbsp;&nbsp;Inventory | 26401 | 10219 |
| &nbsp;&nbsp;&nbsp;Contract assets | 20699 | 14498 |
| &nbsp;&nbsp;&nbsp;Other current assets | 5824 | 4154 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total Current Assets | 74852 | 53481 |
| &nbsp;&nbsp;&nbsp;Property and equipment, net | 2154 | 3195 |
| &nbsp;&nbsp;&nbsp;Finance lease right-of-use assets, net | 2487 | 1407 |
| &nbsp;&nbsp;&nbsp;Operating lease right-of-use assets | 2779 | 2502 |
| &nbsp;&nbsp;&nbsp;Deposits | 192 | 132 |
| &nbsp;&nbsp;&nbsp;Intangible assets, net | 5290 | 7910 |
| &nbsp;&nbsp;&nbsp;Goodwill | 32186 | 32186 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total Assets | $119940 | $100813 |
| Liabilities and Shareholders' Equity |  |  |
| Current Liabilities: |  |  |
| &nbsp;&nbsp;&nbsp;Accounts payable and accrued liabilities | $24567 | $11127 |
| &nbsp;&nbsp;&nbsp;Contract liabilities | 24960 | 12201 |
| &nbsp;&nbsp;&nbsp;Finance lease liability, current portion | 631 | 424 |
| &nbsp;&nbsp;&nbsp;Operating lease liability, current portion | 1098 | 993 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total Current Liabilities | 51256 | 24745 |
| Long-Term Liabilities: |  |  |
| &nbsp;&nbsp;&nbsp;Finance lease liability, net of current portion | 1470 | 542 |
| &nbsp;&nbsp;&nbsp;Operating lease liability, net of current portion | 1681 | 1509 |
| &nbsp;&nbsp;&nbsp;Warranty liability | 1596 | 1251 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total Long-Term Liabilities | 4747 | 3302 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total Liabilities | 56003 | 28047 |
| Commitments and contingencies |  |  |
| Shareholders' Equity: |  |  |
| &nbsp;&nbsp;&nbsp;Preferred stock Series B, $0.001 par value, 5,000,000 authorized shares; no shares issued and outstanding |  |  |
| &nbsp;&nbsp;&nbsp;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 |
| &nbsp;&nbsp;&nbsp;Additional paid-in capital | 207373 | 187997 |
| &nbsp;&nbsp;&nbsp;Accumulated deficit | (143471) | (115260) |
| &nbsp;&nbsp;&nbsp;Total Shareholders' Equity | 63937 | 72766 |
| &nbsp;&nbsp;&nbsp;Total Liabilities and Shareholders' Equity | $119940 | $100813 |

---

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

**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 | $161935 | $101154 |
| Cost of Goods Sold | 90621 | 60372 |
| Gross Profit | 71314 | 40782 |
| Operating Expenses |  |  |
| &nbsp;&nbsp;&nbsp;Selling and marketing | 59206 | 32760 |
| &nbsp;&nbsp;&nbsp;General and administrative | 34122 | 24826 |
| &nbsp;&nbsp;&nbsp;Goodwill impairment |  | 5464 |
| &nbsp;&nbsp;&nbsp;Stock-based compensation | 2396 | 3734 |
| &nbsp;&nbsp;&nbsp;Depreciation and amortization | 3799 | 3222 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total Operating Expense | 99523 | 70006 |
| Operating Loss | (28209) | (29224) |
| Other Income (Expense) |  |  |
| &nbsp;&nbsp;&nbsp;Other income, net | 16 | 2894 |
| &nbsp;&nbsp;&nbsp;Interest expense | (172) | (381) |
| &nbsp;&nbsp;&nbsp;Gain on disposal of property and equipment | 248 | 86 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total Other Income, net | 92 | 2599 |
| Loss Before Income Taxes | (28117) | (26625) |
| Income Tax Expense | 94 | - |
| Net Loss | (28211) | $(26625) |
| Net Loss per common share, basic and diluted | $(0.86) | $(0.99) |
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING |  |  |
| &nbsp;&nbsp;&nbsp;Basic and diluted | 32830421 | 26947023 |

---

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

**SUNWORKS, INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021**

**(in thousands, except share data)**

---

| | | | | | |
|:---|:---|:---|:---|:---|:---|
|  | **Common stock** | **Common stock** | | | |
|  | **Shares** | **Amount** | **Additional Paid-in**<br>**Capital** | **Accumulated**<br>**Deficit** |<br>**Total** |
| Balance at December 31, 2020 | 23835258 | $24 | $122668 | $(88635) | $34057 |
| Issuance of common stock for cashless exercise of options | 1530 |  |  |  |  |
| Sales of common stock pursuant to S-3 registration statement, net | 5356984 | 5 | 61595 |  | 61600 |
| Stock-based compensation |  |  | 3734 |  | 3734 |
| Net loss | - | - | - | (26625) | (26625) |
| Balance at December 31, 2021 | 29193772 | 29 | 187997 | (115260) | 72766 |
| Issuance of common stock under terms of restricted stock grants | 477069 |  |  |  |  |
| Tax withholdings related to net share settlements of equity awards | (50024) |  | (118) |  | (118) |
| Sales of common stock pursuant to S-3 registration statement, net | 5754161 | 6 | 17098 |  | 17104 |
| Stock-based compensation |  |  | 2396 |  | 2396 |
| Net loss | - | - | - | (28211) | (28211) |
| Balance at December 31, 2022 | 35374978 | $35 | $207373 | $(143471) | $63937 |

---

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

**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: |  |  |
| &nbsp;&nbsp;&nbsp;Net loss | $(28211) | $(26625) |
| &nbsp;&nbsp;&nbsp;Adjustments to reconcile net loss to net cash used in operating activities |  |  |
| &nbsp;&nbsp;&nbsp;Depreciation and amortization | 4823 | 5877 |
| &nbsp;&nbsp;&nbsp;Amortization of right-of-use asset | 1107 | 1066 |
| &nbsp;&nbsp;&nbsp;Gain on sale of equipment | (248) | (86) |
| &nbsp;&nbsp;&nbsp;Paycheck Protection Program loan forgiveness |  | (2881) |
| &nbsp;&nbsp;&nbsp;Stock-based compensation | 2396 | 3734 |
| &nbsp;&nbsp;&nbsp;Goodwill impairment |  | 5464 |
| &nbsp;&nbsp;&nbsp;Bad debt expense | 473 | 454 |
| &nbsp;&nbsp;&nbsp;Changes in Operating Assets and Liabilities, net of acquisition: |  |  |
| &nbsp;&nbsp;&nbsp;Accounts receivable | (9778) | (403) |
| &nbsp;&nbsp;&nbsp;Inventory | (16258) | (5207) |
| &nbsp;&nbsp;&nbsp;Deposits and other current assets | (1730) | (2408) |
| &nbsp;&nbsp;&nbsp;Contract assets | (6201) | (4765) |
| &nbsp;&nbsp;&nbsp;Accounts payable and accrued liabilities | 13440 | (3152) |
| &nbsp;&nbsp;&nbsp;Contract liabilities | 12759 | 668 |
| &nbsp;&nbsp;&nbsp;Warranty liability | 345 | 120 |
| &nbsp;&nbsp;&nbsp;Operating lease liability | (1107) | (1066) |
| NET CASH USED IN OPERATING ACTIVITIES | (28190) | (29210) |
| CASH FLOWS FROM INVESTING ACTIVITIES: |  |  |
| &nbsp;&nbsp;&nbsp;Purchase of Solcius LLC, net of cash acquired |  | (50619) |
| &nbsp;&nbsp;&nbsp;Purchase of property and equipment | (629) | (805) |
| &nbsp;&nbsp;&nbsp;Proceeds from sale of property and equipment | 316 | 99 |
| &nbsp;&nbsp;&nbsp;NET CASH USED IN INVESTING ACTIVITIES | (313) | (51325) |
| CASH FLOWS FROM FINANCING ACTIVITIES: |  |  |
| &nbsp;&nbsp;&nbsp;Principal payments on finance lease liabilities | (470) | (362) |
| &nbsp;&nbsp;&nbsp;Proceeds from sales of common stock, net | 17104 | 61600 |
| &nbsp;&nbsp;&nbsp;Payments for taxes related to net share settlement of equity awards | (118) | - |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 16516 | 61238 |
| &nbsp;&nbsp;&nbsp;NET CHANGE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | (11987) | (19297) |
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR | 20042 | 39339 |
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF YEAR | $8055 | $20042 |
| &nbsp;&nbsp;&nbsp;Cash and cash equivalents | $7807 | $19719 |
| &nbsp;&nbsp;&nbsp;Restricted cash | 248 | 323 |
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF YEAR | $8055 | $20042 |
| CASH PAID FOR: |  |  |
| &nbsp;&nbsp;&nbsp;Interest | $89 | $57 |
| &nbsp;&nbsp;&nbsp;Franchise and corporate excise taxes | $174 | $42 |
| SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS |  |  |
| &nbsp;&nbsp;&nbsp;Increase in operating right-of-use assets and liabilities due to lease modification | $- | $132 |
| &nbsp;&nbsp;&nbsp;Right-of-use assets obtained in exchange for new operating lease liability | $1384 | $1056 |
| &nbsp;&nbsp;&nbsp;Right-of-use assets obtained in exchange for new finance lease liability | $1668 | $492 |

---

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

**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.

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.

For residential contracts, the Company recognizes revenue upon completion of the job as determined by final inspection. We recognize revenue for systems operations and maintenance over the term of the service period. Revenue from systems operations and maintenance were not significant or material in either 2022 or 2021.

For commercial projects, we commence recognizing performance revenue when work starts on the job and continue recognizing revenue over time as work is performed based on the ratio of costs incurred, excluding modules and components, compared to the total estimated non-materials costs at completion of the performance obligations.

Judgment is required to evaluate assumptions including the amount of net contract revenue and the total estimated costs to determine the Company's progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If estimated total costs on any contract are greater than the net contract revenue, the Company recognizes the entire estimated loss in the period the loss becomes known.

Changes in estimates for commercial projects occur for a variety of reasons, including, but not limited to (i) construction plan accelerations or delays, (ii) product cost forecast changes, (iii) change orders, or (iv) changes in other information used to estimate costs. Changes in estimates may have a material effect in the Company's consolidated statements of operations. The table below outlines the impact on revenue of net changes in estimated transaction prices and input costs for systems related sales contracts (both increases and decreases) for the years ended December 31, 2022 and 2021 as well as the number of projects that comprise such changes. For purposes of the following table, only projects with changes in estimates that have an impact on revenue and or cost of at least $100, calculated on a quarterly basis during the periods, were presented. Also included in the table is the net change in estimate as a percentage of the aggregate revenue for such projects.

SCHEDULE OF CHANGES IN ESTIMATE AGGREGATE REVENUE

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| | | |
|:---|:---|:---|
|  | Year Ended | 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 | $1101 |
| Number of projects | 4 | 9 |
| Net change in estimate as a percentage of aggregate revenue for associated projects | 1.3% | 8.3% |

---

Contract Assets and Liabilities

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

SCHEDULE OF CONTRACT ASSETS AND LIABILITIES

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| | | |
|:---|:---|:---|
|  | As of | As of |
| (In thousands) | December 31, 2022 | December 31, 2021 |
| Contract Assets | $20699 | $14498 |
| Contract Liabilities | 24960 | 12201 |

---

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.

SCHEDULE OF REVENUE RECOGNIZE UPON TRANSFER CONTROL OF PROJECTS

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| | | | |
|:---|:---|:---|:---|
| Project | Revenue Category | Expected Years<br> Revenue Recognition<br> Will Be Completed | Average Percentage of Revenue Recognized |
| Various Projects | EPC services | 2023 - 2024 | 48.2% |

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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.

Property and Equipment

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

SCHEDULE OF PROPERTY AND EQUIPMENT ESTIMATED USEFUL LIVES

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| | |
|:---|:---|
| 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 |

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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.

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.

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.

Purchase Price Allocation

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

SCHEDULE OF BUSINESS ACQUISITION LIABILITIES AND ASSETS ACQUIRED

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| | |
|:---|:---|
|  | **(in thousands)** |
| Base purchase price | $51750 |
| Working capital shortfall | (1131) |
| Cash surplus | 1492 |
| Total purchase price paid | $52111 |
| Cash | $1492 |
| Accounts receivable | 1729 |
| Inventory | 3833 |
| Contract assets | 7336 |
| Prepaids and other current assets | 1603 |
| Property and equipment | 143 |
| Deposits | 91 |
| Operating lease right-of-use asset | 1885 |
| Finance lease right-of-use assets | 1200 |
| Other intangible assets | 15600 |
| Identifiable assets acquired | 34912 |
| Accounts payable and accrued liabilities | (6957) |
| Contract liabilities | (5273) |
| Operating and finance lease liabilities | (2757) |
| Liabilities assumed | (14987) |
| Net identifiable assets acquired | 19925 |
| Goodwill | 32186 |
| Net assets acquired | $52111 |

---

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.

SCHEDULE OF BUSINESS ACQUISITION PROFORMA STATEMENTS OF OPERATIONS

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| | | |
|:---|:---|:---|
|  | **Year ended** | **Year ended** |
|  | **December 31, 2022** | **December 31, 2021** |
| Revenue, net | $161935 | $127304 |
| Net Loss | $(25956) | $(20304) |

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**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:

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| | | |
|:---|:---|:---|
|  | **Year Ended**<br> **December 31,** | **Year Ended**<br> **December 31,** |
|  | **2022** | **2021** |
| Residential | $142093 | $77861 |
| Commercial | 11464 | 17125 |
| Public Works | 8378 | 6168 |
| Total | $161935 | $101154 |

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**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.

SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31, 2022** | **Year Ended December 31, 2022** | **Year Ended December 31, 2022** | **Year Ended December 31, 2022** |
|  | **Residential Solar** | **Commercial Solar** | **Corporate** | **Total** |
| Net revenue | $139967 | $21968 | $- | $161935 |
| Cost of goods sold | 71113 | 19508 | - | 90621 |
| &nbsp;&nbsp;&nbsp;Gross profit | 68854 | 2460 |  | 71314 |
| Operating expenses |  |  |  |  |
| &nbsp;&nbsp;&nbsp;Selling and marketing | 55048 | 3206 | 952 | 59206 |
| &nbsp;&nbsp;&nbsp;General and administrative | 19562 | 7409 | 7151 | 34122 |
| Segment loss | (5756) | (8155) | (8103) | (22014) |
| Stock-based compensation | 759 | 132 | 1505 | 2396 |
| Depreciation and amortization | 3799 | - | - | 3799 |
| &nbsp;&nbsp;&nbsp;Operating loss | $(10314) | $(8287) | $(9608) | $(28209) |

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| | | | | |
|:---|:---|:---|:---|:---|
|  | **Year Ended December 31, 2021** | **Year Ended December 31, 2021** | **Year Ended December 31, 2021** | **Year Ended December 31, 2021** |
|  | **Residential Solar** | **Commercial Solar** | **Corporate** | **Total** |
| Net revenue | $72278 | $28876 | $- | $101154 |
| Cost of goods sold | 36028 | 24344 | - | 60372 |
| &nbsp;&nbsp;&nbsp;Gross profit | 36250 | 4532 |  | 40782 |
| Operating expenses |  |  |  |  |
| &nbsp;&nbsp;&nbsp;Selling and marketing | 28489 | 4000 | 271 | 32760 |
| &nbsp;&nbsp;&nbsp;General and administrative | 11291 | 5031 | 8503 | 24825 |
| Segment loss | (3530) | (4499) | (8774) | (16803) |
| Goodwill impairment |  | 5464 |  | 5464 |
| Stock-based compensation | 2725 | 3 | 1006 | 3734 |
| Depreciation and amortization | 3148 | 75 | - | 3223 |
| &nbsp;&nbsp;&nbsp;Operating loss | $(9403) | $(10041) | $(9780) | $(29224) |

---

Assets by operating segment are as follows:

---

| | |
|:---|:---|
|  | **December 31, 2022** |
| Operating Segment: |  |
| Residential Solar | $90113 |
| Commercial Solar | 21772 |
| Corporate | 8055 |
|  | $119940 |

---

**6. PROPERTY AND EQUIPMENT, NET**

Property and equipment is summarized as follows at December 31, 2022 and 2021:

SCHEDULE OF PROPERTY AND EQUIPMENT

---

| | | |
|:---|:---|:---|
|  | **2022** | **2021** |
| Leasehold improvements | $463 | $442 |
| Vehicles & trailers | 775 | 723 |
| Machinery & equipment | 847 | 778 |
| Office equipment & furniture | 579 | 439 |
| Computers & software | 3810 | 3552 |
|  | 6474 | 5934 |
| Less accumulated depreciation | (4320) | (2739) |
|  | $2154 | $3195 |

---

**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:

SCHEDULE OF OPERATING LEASES SUPPLEMENTAL BALANCE SHEET INFORMATION

---

| | | |
|:---|:---|:---|
|  | **Year Ended**<br> **December 31,** | **Year Ended**<br> **December 31,** |
|  | **(in thousands)** | **(in thousands)** |
|  | **2022** | **2021** |
| Operating lease right-of-use assets | $2779 | $2502 |
| Operating lease liabilities—short term | 1098 | 993 |
| Operating lease liabilities—long term | 1681 | 1509 |
| Total operating lease liabilities | $2779 | $2502 |

---

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:

SCHEDULE OF MATURITIES FOR OPERATING LEASES LIABILITIES

---

| | |
|:---|:---|
|  | Operating Leases |
|  | (in thousands) |
| 2023 | $1143 |
| 2024 | 686 |
| 2025 | 582 |
| 2026 | 527 |
| 2027 | 43 |
| Total lease payments | $2981 |
| Less: imputed interest | 202 |
| Total | $2779 |

---

**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**<br> **December 31,** | **Year Ended**<br> **December 31,** |
|  | **(in thousands)** | **(in thousands)** |
|  | **2022** | **2021** |
| Finance lease right-of-use asset cost | $3543 | $1868 |
| Finance lease right-of-use accumulated amortization | (1056) | (461) |
| Finance lease right of use asset, net | 2487 | 1407 |
| Finance lease obligation—short term | 631 | 424 |
| Finance lease obligation—long term | 1470 | 542 |
| Total finance lease obligation | $2101 | $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:

SCHEDULE OF MATURITIES FOR FINANCE LEASES LIABILITIES

---

| | |
|:---|:---|
|  | **December 31, 2022** |
|  | **(in thousands)** |
| 2023 | $749 |
| 2024 | 618 |
| 2025 | 583 |
| 2026 | 384 |
| 2027 | 10 |
| Total lease payments | $2344 |
| Less: imputed interest | 243 |
| Total | $2101 |

---

**9. INTANGIBLE ASSETS, NET**

The Company's intangible assets at December 31, 2022 consist of the following:

SCHEDULE OF INTANGIBLE ASSETS

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | Amortization <br> periods | Cost | Accumulated amortization | Net carrying value |
| Trademarks | 10 Years | $5200 | $(910) | $4290 |
| Backlog of projects | 9 Months | 2000 | (2000) |  |
| Covenant not-to-compete | 3 Years | 2400 | (1400) | 1000 |
| Software (included in property and equipment) | 3 Years | 3400 | (1983) | 1417 |
| Dealer relationships | 18 Months | 2600 | (2600) | - |
|  |  | $15600 | $(8893) | $6707 |

---

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:

SCHEDULE OF AMORTIZATION EXPENSES OF INTANGIBLE ASSETS

---

| | | |
|:---|:---|:---|
|  | **Year Ended**<br> **December 31,** | **Year Ended**<br> **December 31,** |
|  | **(in thousands)** | **(in thousands)** |
|  | **2022** | **2021** |
| Trademarks | $520 | $390 |
| Backlog of projects |  | 2000 |
| Covenant not-to-compete | 800 | 600 |
| Software | 1133 | 850 |
| Dealer relationships | 1300 | 1300 |
|  | $3753 | $5140 |

---

Estimated future amortization expense for the Company's intangible assets as of December 31, 2022 is as follows:

SCHEDULE OF FUTURE AMORTIZATION EXPENSES OF INTANGIBLE ASSETS

---

| | |
|:---|:---|
| Years ending December 31, |  |
| 2023 | $2453 |
| 2024 | $1004 |
| 2025 | $520 |
| 2026 | $520 |
| 2027 | $520 |
| Thereafter | $1690 |

---

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:

SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

---

| | | |
|:---|:---|:---|
|  | **2022** | **2021** |
| Trade payables | $15721 | $3929 |
| Accrued payroll, bonuses and benefits | 4997 | 3132 |
| Accrued expenses and dealer commissions | 3849 | 4066 |
| Total | $24567 | $11127 |

---

**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.

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.

**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** | **2022** | **2021** | **2021** |
|  |<br>**Number**<br>**of**<br>**Options** | **Weighted**<br>**Average**<br>**Exercise**<br>**Price** |<br>**Number**<br>**of**<br>**Options** | **Weighted**<br>**Average**<br>**Exercise**<br>**Price** |
| Outstanding, beginning January 1 | 290684 | $11.65 | 88441 | $11.02 |
| Granted |  |  | 260000 | 12.15 |
| Exercised |  |  | (2218) | 2.10 |
| Forfeited | (73251) | 11.73 | (29113) | 7.38 |
| Expired | (5713) | 10.50 | (26426) | 19.93 |
| Outstanding, and expected to vest as of December 31 | 211720 | $11.66 | 290684 | $11.65 |
| Exercisable at the end of December 31 | 211720 | $11.66 | 28042 | $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:

SUMMARY OF SHARES AUTHORIZED UNDER STOCK OPTION PLANS, BY EXERCISE PRICE RANGE

---

| | | | |
|:---|:---|:---|:---|
|<br><br>**Exercisable**<br>**Prices** |<br><br>**Stock Options**<br>**Outstanding** |<br><br>**Stock Options**<br>**Exercisable** | **Weighted**<br>**Average**<br>**Remaining**<br>**Contractual**<br>**Life (years)** |
| $8.68 | 7142 | 7142 | 0.37 |
| $7.63 | 2142 | 2142 | 0.41 |
| $3.07 | 3071 | 3071 | 1.62 |
| $2.52 | 4365 | 4365 | 1.75 |
| $12.15 | 195000 | 195000 | 3.28 |
|  | 211720 | 211720 |  |

---

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:

A summary of the Company's restricted stock unit activity and related information follows:

SUMMARY OF RESTRICTED STOCK UNIT ACTIVITY

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | **2022** | **2022** | **2021** | **2021** |
|  | **Number**<br>**of**<br>**Shares** | **Weighted Average Grant Date**<br>**Value per**<br>**Share** | **Number**<br>**of**<br>**Shares** | **Weighted Average Grant Date**<br>**Value per**<br>**Share** |
| Unvested, beginning January 1 | 1185889 | $5.11 |  | $- |
| Granted | 337972 | 2.39 | 1195889 | 5.14 |
| Vested | (467069) | 7.04 | (10000) | 9.07 |
| Forfeited | (56934) | 3.35 | - | - |
| Unvested at the end of December 31, | 999858 | 3.54 | 1185889 | 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: |  |  |
| &nbsp;&nbsp;&nbsp;Federal | $- | $- |
| &nbsp;&nbsp;&nbsp;State | 94 | 75 |
| Total current expense | $94 | $75 |
| Deferred: |  |  |
| &nbsp;&nbsp;&nbsp;Federal | $(5350) | $(4238) |
| &nbsp;&nbsp;&nbsp;State | (1461) | (1353) |
| &nbsp;&nbsp;&nbsp;Change in valuation allowance | 6811 | 5591 |
| Total deferred | $- | $- |
| Income tax provision | $94 | $75 |

---

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: |  |  |
| &nbsp;&nbsp;&nbsp;Warranty, inventory and bad debt reserves | $650 | $464 |
| &nbsp;&nbsp;&nbsp;Other accrued expenses | 660 | 228 |
| &nbsp;&nbsp;&nbsp;Other | 30 | 28 |
| &nbsp;&nbsp;&nbsp;Property and equipment | 177 | 39 |
| &nbsp;&nbsp;&nbsp;Intangible assets | 439 | 707 |
| &nbsp;&nbsp;&nbsp;Deferred stock-based compensation | 421 | 445 |
| &nbsp;&nbsp;&nbsp;Limitation under 163(j) | 476 | 440 |
| &nbsp;&nbsp;&nbsp;Research and development credits | 173 | 232 |
| &nbsp;&nbsp;&nbsp;Net operating loss | 19199 | 12830 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total deferred tax assets | 22225 | 15413 |
| Valuation allowances | (22225) | (15413) |
| &nbsp;&nbsp;&nbsp;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:

SCHEDULE OF EFFECTIVE INCOME TAX RATE RECONCILIATION

---

| | | |
|:---|:---|:---|
|  | **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.

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.

**Item 9. <u>Changes in and Disagreements with Accountants on Accounting and Financial Disclosure</u>.**

None.

**Item 9A. <u>Controls and Procedures</u>.**

**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. <u>Other Information</u>.**

Not applicable.

**PART III**

**Item 10. <u>Directors, Executive Officers and Corporate Governance</u>**

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. <u>Executive Compensation</u>.**

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. <u>Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters</u>.**

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. <u>Certain Relationships and Related Transactions and Director Independence</u>.**

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. <u>Principal Accountant Fees and Services</u>.**

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.

**PART IV**

**Item 15. <u>Exhibits, Financial Statement Schedules</u>.**

(1) <u>Consolidated Financial Statements</u>.

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) <u>Financial Statement Schedules</u>.

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) <u>Exhibits</u>.

The following exhibits are filed with this report, or incorporated by reference as noted:

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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315221003273/form8-k.htm)

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).](https://www.sec.gov/ix?doc=/Archives/edgar/data/1172631/000149315222016212/form8-k.htm)

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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315221008292/ex2-1.htm)

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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315221006917/ex3-1.htm)

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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315222006620/ex3-2.htm)

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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315220005238/ex4-3.htm)

---

| | |
|:---|:---|
| 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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315216010063/def14a.htm) |
| 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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315222006620/ex10-2.htm) |
| 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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315222006620/ex10-3.htm) |
| 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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315219016245/ex10-1.htm) |
| 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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315221000948/ex10-1.htm) |
| 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.](https://www.sec.gov/Archives/edgar/data/1172631/000149315222006620/ex10-8.htm) |
| 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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315221024898/ex10-1.htm) |
| 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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315223002962/ex10-1.htm) |
| 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).](https://www.sec.gov/Archives/edgar/data/1172631/000149315223002962/ex10-2.htm) |
| 14.1 | [Sunworks, Inc. Code of Conduct, adopted May 2018 (incorporated by reference to the current report filed on June 5, 2018).](https://www.sec.gov/Archives/edgar/data/1172631/000149315218008202/ex14-1.htm) |
| 23.1 | [Consent of Independent Registered Public Accounting Firm](ex23-1.htm) |
| 31.1\* | [Certification of Principal Executive Officer](ex31-1.htm) |
| 31.2\* | [Certification of Principal Financial Officer](ex31-2.htm) |
| 32.1\*\* | [Section 1350 Certificate of President and Chief Financial Officer](ex32-1.htm) |

---

---

| |
|:---|
| 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) |

---

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| | |
|:---|:---|
| \* | 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. |

---

**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.** | **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 |  |  |

---

## Exhibit 23.1

**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

**EXHIBIT 31.1**

**CERTIFICATION**

I, Gaylon Morris, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Annual Report on Form 10-K of Sunworks, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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):

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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

**EXHIBIT 31.2**

**CERTIFICATION**

I, Jason Bonfigt, certify that:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. I have reviewed this Annual Report on Form 10-K of Sunworks, Inc.;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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):

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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

**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.