SUNWORKS, INC. 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
The Acquisition was consummated on
27 Residential Solar
Through our
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
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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
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.
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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
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
30 Stock-Based Compensation
The Company periodically issues restricted stock units ("RSUs"), stock options
and performance stock units ("PSUs") to employees and directors. The Company
accounts for RSUs, stock option grants and PSUs issued and vesting to employees
based on the authoritative guidance provided by the
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
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
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
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
Income Taxes
The Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized.
31 Impact of COVID-19
Our business and operations may continue to be impacted by the continued COVID-19 pandemic, which has resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions and business shutdowns. The uncertain macroeconomic environment created by the COVID-19 pandemic has had and may continue to have a significant, adverse impact on our business. To assist readers in reviewing management's discussion and analysis of financial condition and results of operations, we provide the following discussion regarding the effects COVID-19 has had on the Company, what management expects the future impact to be, how we are responding to evolving circumstances and how we are planning for further COVID-19 uncertainties.
State and local directives, guidelines, and other restrictions, as well as
consumer behavior, continue to impact our operations in the regions in which we
operate, particularly
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.
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Results of Operations for the Years Ended
CONSOLIDATED RESULTS
Revenue and Cost of Goods Sold
For the year ended
Cost of goods sold for the year ended
Gross profit was
Revenue and gross profit in the year ended
Selling and Marketing Expenses
For the year ended
General and Administrative Expenses
Total G&A expenses for the year ended
Stock-Based Compensation Expense
During the year ended
Depreciation and Amortization Expenses
Depreciation and amortization expense for the year ended
33 Other Income (Expense)
Other income was
Income Tax Expense
Income tax expense was
Net Loss
The net loss for the year ended
Orders and Backlog
For the year ended
Commercial Solar segment orders were approximately
RESIDENTIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
Years Ended
December 31,
2022 2021Net Total Originations (Watts in thousands) 54,280 31,709 Installation (Watts in thousands)
33,126 17,642
Average Project Size Installed (Watts) 6,621 5,985
Revenue $ 139,967 $ 72,278
Gross Margin 49.2 % 50.2 %
Operating (Loss) $ (10,314 ) $ (9,403 )
Operating (Loss) % (7.4 )% (13.1 )%
COMMERCIAL SOLAR SEGMENT KEY PERFORMANCE INDICATORS
Years Ended
December 31,
2022 2021
Net Total Orders $ 36,130 $ 10,986
Revenue $ 21,968 $ 28,876
Gross Margin 11.2 % 15.7 %
Operating (Loss) $ (8,287 ) $ (4,577 )
Operating (Loss) % (37.7 )% (15.9 )%
Liquidity and Capital Resources
We had
On
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On
As of
During the year ended
The cash used in investing activities totaled
Net cash provided by financing activities during the year ended
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.
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