UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020.

Or

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

For the transition period from _______________ to _______________

Commission File Number 001-36868

SUNWORKS, INC.

(Name of registrant in its charter)

1030 Winding Creek Road, Suite 100

Roseville, CA 95678

(Address of principal executive offices)

(916) 409-6900

(Issuer’s telephone Number)

(Former Address if Changed Since Last Report)

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 [X] No [  ]

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

Yes [X] No [  ]

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

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

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

Yes [  ] No [X]

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

The number of shares of registrant’s common stock outstanding as of October 30, 2020 was 16,628,992

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that might cause these differences include, but are not limited to, the impacts of the COVID-19 pandemic, including the impacts on us, our operations, or our future financial and operational results; those factors discussed in this Quarterly Report under the caption “Risk Factors” and in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 (our Annual Report). We caution you that the foregoing list may not include all of the forward-looking statements made in this Quarterly Report. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

SUNWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(in thousands, except share and per share data)

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

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(in thousands, except share and per share data)

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

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED September 30, 2020 and 2019

(in thousands, except share and per share data)

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

SUNWORKS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED September 30, 2020 and 2019

(in thousands, except share and per share data)

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

SUNWORKS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(in thousands, except share and per share data)

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

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

At the Company’s Annual Meeting of Stockholders on August 7, 2019, the stockholders of the Company approved a reverse stock split of its issued and outstanding common stock at a ratio not less than 1-for-3 and not greater than 1-for-10. On August 29, 2019, the Company’s Board of Directors approved the reverse stock split at a ratio of 1-for-7 which went into effect at the open of trading on August 30, 2019. At the effective time of the reverse stock split, every seven shares of issued and outstanding common stock was converted into one share of issued and outstanding common stock. The authorized shares of 200,000,000 and the par value of $0.001 remained the same. All shares and related financial information in this Quarterly Report on Form 10-Q (this “Quarterly Report”) are retroactively stated to reflect this 1-for-7 reverse stock split.

At the Company’s Annual Meeting of Stockholders on August 26, 2020, the stockholders of the Company approved a reduction of the Company’s authorized shares to 50,000,000. On September 18, 2020, a Certificate of Amendment of the Certificate of Incorporation was filed with the State of Delaware reducing the number of shares of our authorized common stock to 50,000,000. The par value of $0.001 remained the same.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019.

Liquidity

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern and contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

The Company has incurred significant operating losses over the past five years. In addition, beginning in the first quarter of 2020, the Company’s business has been impacted by the effects of the global pandemic of COVID-19 and the related protective public health measures. The Company’s business depends upon sales and installation of its photovoltaic systems. The prevalence of shelter in place and similar orders in California and other states where a majority of these systems are sold and installed has resulted in significant declines in the Company’s sales, installation revenues, and cash generating activities which is expected to continue for some period of time.

On August 10, 2020, Sunworks and Peck Company Holdings, Inc. (“Peck”) (Nasdaq: PECK), entered into a definitive agreement under which Peck will acquire Sunworks in an all-stock transaction pursuant to which each share of Sunworks stock will be exchanged for 0.185171 shares of Peck common stock (subject to certain adjustments). Assuming no adjustments, Sunworks’ stockholders will receive an aggregate of approximately 3,079,207 shares of Peck common stock, representing approximately 36.54% of Peck common stock outstanding after the merger. Before entering into the definitive agreement, no material relationship existed between Sunworks and Peck. The merger has received the approval of the Board of Directors of both Sunworks and Peck and is anticipated to close during the fourth quarter of 2020 subject to approval by stockholders of both companies and other customary conditions.

We believe that this merger provides us with the opportunity to significantly reduce general and administrative costs by eliminating the duplication of the costs incurred for both companies needing to comply with public reporting requirements and eliminating duplicative management. The combined companies will have greater geographical coverage, better access to project finance funds, and greater sources of debt and capital financing than Sunworks remaining alone.

The Company has prepared and filed a Joint Proxy Statement/Prospectus with the Securities and Exchange Commission dated October 14, 2020 that was first mailed to Sunworks stockholders on or about October 15, 2020. The stockholder vote is scheduled for November 12, 2020.

If we do not complete the merger with Peck, the Company may meet its debt and working capital requirements through a variety of means, including extension, refinancing, equity placements, the sale or other disposition of assets, or reductions in operating costs.

Limitations on the Company’s liquidity and ability to raise capital may adversely affect our ability to operate.  Sufficient liquidity is critical to meet the Company’s operating needs. Although the Company expects its sources of capital will be sufficient to meet its near-term liquidity needs, there can be no assurance that its liquidity requirements will continue to be satisfied. If the merger does not occur and the Company cannot raise needed funds, it raises substantial doubt about the Company’s ability to satisfy its liabilities and commitments in the normal course of business over the next year.

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of 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, impairments and estimations of long-lived assets, revenue recognition on construction contracts recognized over time, allowances for uncollectible accounts, operating lease right-of-use-assets and liabilities, warranty reserves, inventory valuation, valuations of non-cash capital stock issuances and the valuation allowance on deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Revenues 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 ACI 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 Public Works and ACI projects may be completed within eighteen to thirty-six months, depending on the size and location. We recognize revenue from EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer.

The cost of materials or equipment will generally be excluded from our recognition of profit, unless specifically produced or manufactured for a project, because such costs are not considered to be a measure of progress. All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company 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 represent revenues recognized in excess of amounts invoiced to customers on contracts in progress. Contract liabilities represent amounts invoiced to customers in excess of revenues recognized on contracts in progress.

Accounts Receivable

Accounts receivable are recorded on contracts for amounts currently due based upon progress billings, as well as retention, which are collectible upon completion of the contracts. Retention receivable is the amount withheld by a customer until a contract is completed. Retention receivables of $778 and $1,027 were included in the balance of trade accounts receivable as of September 30, 2020, and December 31, 2019, respectively.

The Company performs ongoing credit evaluation of its customers. Management monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, age of receivables and other information, and records bad debts using the allowance method. Accounts receivable are presented net of an allowance for doubtful accounts at December 31, 2019 of $350 and at September 30, 2020 of $63. During the three months ended September 30, 2020, $0 of uncollectible accounts receivable was written off against the allowance for doubtful accounts. Additionally, during the three months ended September 30, 2020, $0 was recorded as bad debt expense compared to $25 in the prior year period. During the nine months ended September 30, 2020 and 2019, $280 and $67 was recorded as bad debt expense, respectively.

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, and mounting racks and other materials. The Company reviews the cost of inventories against their estimated net realizable value and records write-downs if any inventories have costs in excess of their net realizable values.

Property and Equipment

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

Depreciation expense for the three months ended September 30, 2020 and 2019 was $82 and $87, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $246 and $269, respectively.

Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities are included on the face of the condensed consolidated balance sheet. If the Company had finance lease ROU assets, such assets would be presented within other assets, and finance lease liabilities would be presented appropriately within liabilities.

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 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 commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and the Company recognizes such lease payments on a straight-line basis over the lease term.

Stock-Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board 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 warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board 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, restricted stock, warrants and convertible notes 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 three and nine months ended September 30, 2020 and 2019, respectively.

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

As of September 30, 2019, the potentially dilutive securities have been excluded from the computations of weighted average shares outstanding include 155,978 stock options, 11,904 restricted stock grants, and 428,143 warrants.

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.

Indefinite Lived Intangibles and Goodwill Assets

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

The Company retains a valuation consulting firm to test for indefinite lived intangibles and 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. In accordance with the Company’s policies, the Company performed a quantitative assessment of indefinite lived intangibles and goodwill at December 31, 2019, no impairment was found. As a result of the events and circumstances resulting from the COVID-19 pandemic, the Company’s outlook for revenue, profitability and cash flow has deteriorated. Therefore, the Company performed another quantitative assessment of indefinite lived intangibles and goodwill at March 31, 2020. It was determined that the carrying value of goodwill exceeded its fair value at March 31, 2020 and, as a result, the Company recorded an impairment of $4,000. No quantitative assessment was deemed necessary at September 30, 2020.

Fair Value of Financial Instruments

Disclosures about fair value of financial instruments, requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of September 30, 2020, the amounts reported for cash, accrued interest and other expenses, and notes payable approximate the fair value because of their short maturities.

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

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

Reclassifications

Certain reclassifications have been made to prior year’s financial statements to conform to classifications used in the current year.

New Accounting Pronouncements

Adopted Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU became effective for the Company on January 1, 2020 and was followed in the preparation of a quantitative assessment of indefinite lived intangibles and goodwill at March 31, 2020. It was determined that the carrying value of goodwill exceeded its fair value at March 31, 2020 and, as a result, we recorded an impairment of $4,000. No quantitative assessment was performed at September 30, 2020.

Management reviewed currently issued pronouncements during the nine months ended September 30, 2020, 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. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenues and related costs on construction contracts are recognized as the performance obligations for work are satisfied over time in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, revenue and associated profit, EPC projects for residential and smaller ACI 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 Public Works and ACI projects may be completed within eighteen to thirty-six months, depending on the size and location. We recognize revenue from EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer. The cost of materials or equipment will generally be excluded from our recognition of profit, unless specifically produced or manufactured for a project, because such costs are not considered to be a measure of progress.

The following table represents a disaggregation of revenue by customer type from contracts with customers for the three and nine months ended September 30, 2020 and 2019:

Contract assets represent revenue recognized in excess of amounts invoiced on contracts in progress. Contract liabilities represent billings in excess of revenue recognized on contracts in progress. At September 30, 2020 and December 31, 2019, the contract asset balances were $3,961 and $4,864, and the contract liability balances were $3,406 and $4,616, respectively.

4. Leases

The Company has operating leases for offices, warehouses, vehicles, and office equipment. The Company’s leases have remaining lease terms of 1 year to 3 years, some of which include options to extend.

The Company’s lease expense for the three and nine months ended September 30, 2020 was entirely comprised of operating leases and amounted to $285 and $817, respectively. Operating lease payments, which reduced operating cash flows for the three and nine months ended September 30, 2020 amounted to $285 and $817 respectively. The difference between the ROU asset amortization of $570 and the associated lease expense of $817 consists of costs in addition to basic operating lease expense including interest, vehicle licensing and registrations, property taxes, common area charges for facilities and other charges.

Supplemental balance sheet information related to leases was as follows:

As of September 30, 2020, the weighted average remaining lease term was 1.07 years and the discount rate for the Company’s leases was 10.0%.

Maturities for leases were as follows:

5. LOANS PAYABLE

On January 5, 2016, the Company entered into a loan agreement for the acquisition of a pile driver in the principal amount of $182 bearing interest at 5.5%. The loan agreement called for monthly payments of $4 and matured on January 15, 2020. The loan was secured by the pile driver. At September 30, 2020, there was no remaining loan balance.

On September 8, 2016, the Company entered into a loan agreement for the acquisition of a pile driver in the principal amount of $174 bearing interest at 5.5%. The loan agreement called for monthly payments of $4 and matured on September 15, 2020. The loan was secured by the pile driver. At September 30, 2020, there was no remaining loan balance.

On November 14, 2016, the Company entered into a 0% interest loan agreement for the acquisition of an excavator in the principal amount of $59. The loan agreement calls for monthly payments of $1 and is scheduled to mature on November 13, 2020. The loan is secured by the excavator. The outstanding balance at September 30, 2020 was $3.

On December 23, 2016, the Company entered into a loan agreement for the acquisition of modular office systems and related furniture in the principal amount of $172 bearing interest at 4.99%. The loan agreement called for 16 quarterly payments of $12 and matured in September 2020. The loan is secured by the modular office systems and related furniture. At September 30, 2020, there was no remaining loan balance.

As of September 30, 2020 and December 31, 2019, loans payable (“Loans Payable”) are summarized as follows:

6. ACQUISITION CONVERTIBLE PROMISSORY NOTES

On February 28, 2015, the Company issued a 4% convertible promissory note in the aggregate principal amount of $2,650 as part of the consideration paid to acquire 100% of the total outstanding stock of MD Energy. The note was convertible into shares of common stock on or after each of the following dates: November 30, 2015, November 30, 2016 and November 30, 2017. The conversion price was $18.20 per share. A beneficial conversion feature of $3,262 was calculated but capped at the $2,650 value of the note. The beneficial conversion feature was calculated by multiplying the difference between the fair value of stock at the date of the note, $40.60, less the conversion price of $18.20, multiplied by the maximum number of shares subject to conversion, 145,604. In November 2015, the Company issued 48,535 shares of common stock upon conversion of the principal amount of $883. Commencing on March 31, 2015, and each quarter thereafter during the first two (2) years of the note, the Company made quarterly interest only payments to the shareholder for accrued interest on the Note during the quarter. Commencing with the quarter ending on June 30, 2017, the Company began to make quarterly payments of interest accrued on the convertible note during the prior quarter plus $151 with the final payment of all outstanding principal and accrued but unpaid interest on the convertible note due and payable on February 28, 2020, the maturity date. This convertible promissory note was paid in full at maturity. The debt discount was fully amortized and has a zero balance. The Company recorded interest expense of $3 and $17 during the nine months ended September 30, 2020 and 2019, respectively. The outstanding balances at September 30, 2020 and December 31, 2019 were $0 and $252, respectively.

The Company evaluated the foregoing financing transactions in accordance with ASC Topic 470, Debt with Conversion and Other Options, and determined that the conversion feature of the convertible promissory note was afforded the exemption for conventional convertible instruments due to its fixed conversion rate. The convertible promissory note had explicit limits on the number of shares issuable, so it met the conditions set forth in current accounting standards for equity classification. The convertible promissory note was issued with non-detachable conversion options that were beneficial to the investors at inception because the conversion option had an effective strike price that was less than the market price of the underlying stock at the commitment date. The accounting for the beneficial conversion feature required that the beneficial conversion feature be recognized by allocating the intrinsic value of the conversion option to additional paid-in-capital, resulting in a discount on the convertible note, which was amortized and recognized as interest expense.

7. CONVERTIBLE PROMISSORY NOTES

On February 11, 2014, the Company entered into a securities purchase agreement providing for the sale of a 10% convertible promissory note in the principal amount of $100. The note was convertible into shares of common stock of the Company at a variable conversion price equal to the lesser of $9.10 per share, or fifty percent (50%) of the lowest trading price after the effective date. As of September 30, 2014, the note was exchanged for a new convertible note with a fixed conversion price of $2.37. Per ASC 815, the derivative liability on the note was extinguished and the new note was re-valued per ASC 470, as a beneficial conversion feature. The note matured on various dates from the effective date of each advance with respect to each advance. At the sole discretion of the lender, the lender was able to modify the maturity date to be twelve (12) months from the effective date of each advance. The note matured on various dates in 2014, and was extended to September 30, 2016, and in March 2016 was subsequently extended to September 30, 2019 with zero interest. The Company recorded no interest expense during the year ended December 31, 2019. On April 10, 2019, all remaining principal and accrued interest due under the convertible promissory note was converted into 68,082 shares of common stock. The balances converted included $100 of principal and $61 of accrued interest with a remaining principal balance of $0.

8. PROMISSORY NOTES PAYABLE

On April 27, 2018, the Company entered into a Loan Agreement (the “Loan Agreement”) with CrowdOut Capital, Inc. (“CrowdOut”) pursuant to which the Company issued an aggregate of $3,750 in promissory notes (the “Notes”), of which $3,000 is a Senior Note and $750 are Subordinated Notes. The Subordinated Notes were funded by the Company’s Chief Executive Officer, Charles Cargile, and the Company’s President of Commercial Operations, Kirk Short.

The Notes bear interest at the rate of the one-month LIBOR plus 950 basis points and were originally scheduled to mature on June 30, 2020. The maturity date of the Notes was subsequently extended to January 31, 2021 as described below.

On June 3, 2019, the Company entered into an amendment to its Loan Agreement (the “First Amendment”), pursuant to which the maturity date of the $3,000 Senior Note and $750 Subordinated Notes was extended from June 30, 2020 to January 31, 2021. In connection with entering into the First Amendment, the Company agreed to issue to CrowdOut, as the holder of the Senior Note, 57,143 shares of common stock as an amendment fee (the “Amendment Fee”) pursuant to the Company’s shelf registration statement on Form S-3. Based upon the closing price of the Company’s common stock on June 17, 2019, the day of issuance, the 57,143 shares were valued at $344. The $344 Amendment Fee plus $7 for CrowdOut Amendment related legal fees have been added to the debt issuance costs and are being amortized over the remaining life of the loan (see discussion below).

The Notes may be prepaid in whole without the consent of the lender or in part with the consent of the lender. At the time the Notes are paid in full, the Company shall pay CrowdOut, as the holder of the Senior Note, an exit fee of $435. The Company is accruing the exit fee of $435 over the extended remaining life of the Loan Agreement and recognizing the exit fee as interest expense. For the three months ended September 30, 2020 and 2019, the exit fee recorded as interest expense was $33 and $33, respectively. For the nine months ended September 30, 2020 and 2019, the exit fee recorded as interest expense was $98 and $127, respectively.

On January 28, 2020, the Company entered into a second amendment to its Loan Agreement (the “Second Amendment” and, together with the First Amendment, the “Amendments”) pursuant to which the Loan Agreement was amended to permit the partial prepayment of One Million Five Hundred Thousand Dollars ($1,500) of the Senior Note loan amount without any prepayment fees. In addition, the Second Amendment provides that, unless an event of default occurs under the Loan Agreement, CrowdOut will no longer have the right to designate a member to the Company’s Board of Directors. Accordingly, in January 2020, $1,500 of the $3,000 Senior Note was paid.

In connection with the issuance of the Senior Note, the Company entered into a security agreement (the “Security Agreement”) pursuant to which the Company granted to CrowdOut a security interest in certain of the Company’s assets to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the Senior Note. The Company also entered into a subordination agreement with the holders of the Subordinated Notes and the Senior Note pursuant to which the Subordinated Notes are subordinated to the Senior Note.

The Loan Agreement contains certain customary events of default including, but not limited to, default in payment of any sum payable thereunder, breaches of representations or warranties thereunder, the occurrence of an event of default under the transaction documents, change in control of the Company, filing of bankruptcy and the entering or filing of certain monetary judgments against the Company. Upon the occurrence of an event of default the outstanding principal amount of the Notes, plus accrued but unpaid interest and other amounts owing in respect thereof, shall become, at the giving of notice by CrowdOut, immediately due and payable. Interest on overdue payments upon the occurrence of an event of default shall accrue interest at a rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. Additionally, the Loan Agreement includes a subjective event of default clause if CrowdOut reasonably determines that an event has occurred that would reasonably be expected to have a “material adverse effect.”

In conjunction with the Loan Agreement and Amendments, the Company recorded $468 of capitalized debt issuance costs. The debt issuance costs are being amortized over the life of the Loan Agreement and recognized as interest expense. The balance payable under the Notes is reported net of the unamortized portion of the debt issuance costs. The Company recorded amortization of the debt issuance cost of $37 and $61 as interest expense during the three months ended September 30, 2020 and 2019, respectively. The Company recorded amortization of the debt issuance cost of $217 and $105 as interest expense during the nine months ended September 30, 2020 and 2019, respectively. The $217 recorded as amortization of the debt issuance costs during the nine months ended September 30, 2020 includes $98 of expense required as a result of the $1,500 prepayment of the $3,000 Senior Note and required write-off of a proportionate share of the associated debt issuance cost.

On April 28, 2020, the Company entered into a Third Amendment to Loan Agreement (“Third Amendment”) with CrowdOut. Pursuant to the Third Amendment, CrowdOut provided its consent permitting the Company to obtain its Paycheck Protection Program (“PPP”) loan.

Promissory notes payable at September 30, 2020 and December 31, 2019 are as follows:

9. PAYCHECK PROTECTION PROGRAM Loan Payable

On April 28, 2020 the Company’s operating subsidiary, Sunworks United, received a PPP loan, 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 are being 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 is being accounted for as a financial liability in accordance with FASB ASC 470. Proceeds from the loan will remain recorded as a liability until either (1) the loan is, in part or wholly forgiven, and the Company has been “legally released” from the liability or (2) the Company pays off the loan. Once the loan is in part or wholly forgiven, and a legal release is received, the liability will be reduced by the amount forgiven and the Company will record a gain on extinguishment of the debt.

The eligible forgiveness amount allows for not more than 40% of the forgiveness to be for non-payroll items and is subject to reduction if employees are terminated or wages are reduced. The remaining unforgiven amount of the loan bears interest at 1% per annum. Eighteen equal principal and interest payments of $159 are deferred for up to ten months after the initial 24-week covered period, with payments scheduled to begin on August 12, 2021; however, interest is being accrued from the inception date of the loan. There are no collateral requirements or prepayment penalties associated with the loan.

The underlying expenses, included in the forgiveness application filed with the Small Business Administration (SBA), are sufficient to have the entire $2,847 PPP loan completely forgiven. Until final approval is received from the SBA and the Company has been “legally released” from the liability, there is no guarantee when forgiveness will be received or whether the loan will be completely or partially forgiven.

Paycheck Protection Program loan payable at September 30, 2020 and December 31, 2019 are as follows:

10. CAPITAL STOCK

Common Stock

At the Company’s Annual Meeting of Stockholders on August 7, 2019, the stockholders of the Company approved a reverse stock split of the Company’s issued and outstanding common stock at a ratio not less than 1-for-3 and not greater than 1-for-10. On August 29, 2019, the board of directors of the Company approved the reverse stock split at a ratio of 1-for-7 which went into effect at the open of trading on August 30, 2019. At the effective time of the reverse stock split, every seven shares of issued and outstanding common stock was converted into one share of issued and outstanding common stock. The authorized shares of 200,000,000 and the par value of $0.001 remained the same. All shares and related financial information in this Quarterly Report are retroactively stated to reflect this 1-for-7 reverse stock split.

On March 13, 2020, the Company received a letter from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company has failed to comply with the minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires that companies listed on the Nasdaq Capital Market maintain a minimum closing bid price of at least $1.00 per share.

On August 5, 2020 the Company received a letter from the NASDAQ Listing Qualifications Staff notifying the Company that the Company has regained compliance with NASDAQ’s minimum bid price requirements for continued listing on the Nasdaq Capital Market. The letter noted that as a result of the closing bid price of the Company’s common stock having been at $1.00 per share or greater for at least ten consecutive business days, from July 22, 2020 to August 4, 2020, the Company has regained compliance with Listing Rule 5550(a)(2) and the matter is now closed.

As approved by stockholders during the 2020 annual meeting, on September 18, 2020 a Certificate of Amendment of the Certificate of Incorporation was filed with the State of Delaware to reduce the total number of shares of all classes of capital stock of the Company to fifty-five million (55,000,000) shares, consisting of fifty million (50,000,000) shares of common stock, par value $0.001 per share and five million (5,000,000) shares of preferred stock, par value $0.001 per share.

On September 22, 2020, the Company received a letter from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company has failed to comply with the minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires that companies listed on the Nasdaq Capital Market maintain a minimum closing bid price of at least $1.00 per share.

On October 14, 2020 the Company received a letter from the NASDAQ Listing Qualifications Staff notifying the Company that the Company has regained compliance with NASDAQ’s minimum bid price requirements for continued listing on the Nasdaq Capital Market. The letter noted that as a result of the closing bid price of the Company’s common stock having been at $1.00 per share or greater for at least ten consecutive business days, from September 23, 2020 to October 13, 2020, the Company has regained compliance with Listing Rule 5550(a)(2) and the matter is now closed.

During the nine months ended September 30, 2020 and 2019, shares of common stock were issued during each respective period to the Company’s Chairman and former Chief Executive Officer, Charles Cargile pursuant to the terms of a restricted stock grant agreement (the “March 2017 RSGA”) effective March 29, 2017. See Note 11 for more information regarding the March 2017 RSGA and its expiration in March of 2020.

On April 10, 2019, the remaining principal of $100 and accrued interest of $61 due under the convertible promissory notes dated January 31, 2014 and February 11, 2014 were converted into 68,082 shares of common stock.

Pursuant to an At Market Issuance Sales Agreement (the “ATM Agreement”) with B. Riley FBR, Inc. (the “Agent”) the Company could offer and sell from time to time up to an aggregate of $15,000 of shares of the Company’s common stock, par value $0.001 per share (the “Placement Shares”), through the Agent.

The Placement Shares were registered under the Securities Act of 1933, as amended, pursuant to the Registration Statement (“Registration Statement”) on Form S-3 (File No. 333-231653), which was originally filed with the Securities and Exchange Commission (“SEC”) on May 21, 2019 and declared effective by the SEC on May 31, 2019. The base prospectus was contained within the Registration Statement, and a prospectus supplement was filed with the SEC on June 6, 2019.

Sales of the Placement Shares, pursuant to the ATM Agreement, were made in sales 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 the Company’s behalf all of the Placement Shares requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the Agent and the Company.

The Company had no obligation to sell any of the Placement Shares under the ATM Agreement and could at any time suspend offers under the ATM Agreement or terminate the ATM Agreement. The Company intends to use the net proceeds from this offering for general corporate purposes, including, without limitation, sales and marketing activities, product development, making acquisitions of assets, businesses, companies or securities, capital expenditures, repayment of indebtedness, and for working capital needs.

Placement Shares sold between June 6, 2019 and December 31, 2019 totaled 2,920,968 shares. Total gross proceeds for the shares were $7,023 or $2.404 per share. Net proceeds, less issuance costs were $6,694 or $2.291 per share as of December 31, 2019.

Placement Shares sold between January 1, 2020 and March 26, 2020 totaled 9,817,343 shares. Total gross proceeds for the shares were $7,976 or $0.812 per share. Net proceeds, less issuance costs were $7,736 or $0.788 per share as of March 31, 2020. With the sale of the Placement Shares sold in the three months ended March 31, 2020, the Company sold the maximum amount allowed under its prospectus supplement and no further Placement Shares under the ATM Agreement will be sold pursuant to such prospectus supplement.

The Company may file an additional prospectus supplement with the SEC. The Registration Statement was filed in reliance on Instruction I.B.6. of Form S-3, which imposed a limitation on the maximum amount of securities that the Company may sell pursuant to Instruction I.B.6 during the period of 12 calendar months immediately prior to, and including, the sale of our shares to no more than one-third of the aggregate market value of our common stock held by our non-affiliates.

At the time the Company sells securities pursuant to a Registration Statement, the amount of securities to be sold plus the amount of any securities the Company has sold during the prior twelve months in reliance on Instruction I.B.6. may not exceed one-third of the aggregate market value of the Company’s outstanding common stock held by non-affiliates as of a day during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6.

11. STOCK OPTIONS, RESTRICTED STOCK, AND WARRANTS

Options

As of September 30, 2020, the Company has non-qualified stock options outstanding to purchase 128,411 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 $2.10 to $21.70 per share, the market value of the Company’s common stock on the date of each grant. The Company determined the fair market value of these options by using the Black Scholes option valuation model.

During the three months ended September 30, 2020 and 2019, the Company charged a total of $16 and $37, respectively, to operations to recognize stock-based compensation expense for stock options. During the nine months ended September 30, 2020 and 2019, the Company charged a total of $74 and $147, respectively, to operations to recognize stock-based compensation expense for stock options.

Restricted Stock Grant to Chairman and Former CEO

With an effective date of March 29, 2017, subject to the Sunworks, Inc. 2016 Equity Incentive Plan, (the “2016 Plan”) the Company entered into the March 2017 RSGA with its then Chief Executive Officer, Charles Cargile. All shares issuable under the March 2017 RSGA are valued as of the grant date at $10.50 per share. The March 2017 RSGA provides for the issuance of up to 71,429 shares of the Company’s common stock. The restricted shares shall vest as follows: 23,810 of the restricted shares shall vest on the one (1) year anniversary of the effective date, and the balance, or 47,619 restricted shares, shall vest in twenty-four (24) equal monthly installments commencing on the one (1) year anniversary of the effective date. Vesting of the shares and recognition of stock-based compensation expense for the March 2017 RSGA ended as of March 29, 2020.

In the three months ended September 30, 2020 and 2019, stock-based compensation expense of $0 and $62, respectively was recognized for the March 2017 RSGA. For the nine months ended September 30, 2020 and 2019, stock-based compensation expense of $63 and $186, respectively was recognized for the March 2017 RSGA.

The total combined option and restricted stock compensation expense recognized in the condensed consolidated statements of operations, during the three months ended September 30, 2020 and 2019 was $16 and $99, respectively. The total combined option and restricted stock compensation expense recognized in the condensed consolidated statement of operations, during the nine months ended September 30, 2020 and 2019 was $137 and $333, respectively.

Warrants

As of September 30, 2020, the Company had no remaining stock purchase warrants outstanding. The 428,143 warrants previously issued on March 9, 2015 with an average exercise price of $0.65 expired unexercised on March 9, 2020.

12. RELATED PARTY TRANSACTIONS

The Subordinated Notes (Note 8) were funded by the Company’s Chairman and former Chief Executive Officer and the Company’s President of Commercial Operations.

The Company rents a facility in Durham, California from the Company’s President of Commercial Operations for $9 per month.

13. SUBSEQUENT EVENTS

On October 14, 2020 the Company received a letter from the NASDAQ Listing Qualifications Staff notifying the Company that the Company has regained compliance with NASDAQ’s minimum bid price requirements for continued listing on the Nasdaq Capital Market. The letter noted that as a result of the closing bid price of the Company’s common stock having been at $1.00 per share or greater for at least ten consecutive business days, from September 23, 2020 to October 13, 2020, the Company has regained compliance with Listing Rule 5550(a)(2) and the matter is now closed.

On October 14, 2020 the Company filed its Definitive Joint Proxy Statement/Prospectus (“the Proxy”) with the Securities and Exchange Commission. The Proxy included the notice of a Special Meeting of Stockholders to be held on November 12, 2020 to vote on the proposal to adopt the Agreement and Plan of Merger dated as of August 10, 2020. Pursuant to the Agreement and Plan of Merger, Peck would acquire Sunworks in an all-stock transaction pursuant to which each share of Sunworks stock will be exchanged for 0.185171 shares of Peck common stock (subject to certain adjustments). Assuming no adjustments, Sunworks’ stockholders will receive an aggregate of approximately 3,079,207 shares of Peck common stock, representing approximately 36.54% of Peck common stock outstanding after the merger. Before entering into the definitive agreement, no material relationship existed between Sunworks and Peck. The merger has received the approval of the Board of Directors of both Sunworks and Peck and is anticipated to close during the fourth quarter of 2020 subject to approval by stockholders of both companies and other customary conditions.

Following the announcement of the Agreement and Plan of Merger, and as of the filing date of this Form 10-Q, eight complaints have been filed by alleged stockholders of Sunworks challenging the merger.

The complaints  contend, among other things, that (i) the consideration to be paid to Sunworks stockholders pursuant to the merger is inadequate and (ii) the Registration Statement on Form S-4 filed with the SEC by Peck on October 1, 2020, and serving as the preliminary Joint Proxy Statement/Prospectus contained materially incomplete and misleading information regarding the merger,  and (iii) that in facilitating the merger for the alleged inadequate consideration and the dissemination of the preliminary Joint Proxy Statement/Prospectus, each member of the Sunworks Board of Directors breached his or her fiduciary duties. 

Each of the complaints seek (i) injunctive relief preventing consummation of the merger; (ii) damages suffered by the plaintiff; and (iii) an award of plaintiffs’ expenses, including reasonable attorneys’ and experts’ fees. Sunworks and the Sunworks Board of Directors believe the claims asserted in the complaints are without merit and intend to vigorously defend themselves.

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

The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this Quarterly Report) and the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 (our Annual Report). This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled “Risk Factors” in Part II, Item 1A, and “Cautionary Note Regarding Forward-Looking Statements” included in this Quarterly Report.

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

Overview

We provide photovoltaic (PV) based power systems for the agricultural, commercial, industrial (ACI), public works, and residential markets in California, Nevada, Massachusetts, Oregon, New Jersey and Hawaii. We have direct sales and/or operations personnel in California, Nevada, Massachusetts, and Oregon. 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 ACI and public works projects. ACI installations have included installations at office buildings, manufacturing plants, warehouses, service stations, churches, and agricultural facilities such as farms, wineries, and dairies. Public works installations have included school districts, local municipalities, federal facilities and higher education institutions. We provide a full range of installation services to our solar energy customers including design, system engineering, procurement, permitting, construction, grid connection, warranty, system monitoring and maintenance.

We currently operate in one segment based upon our organizational structure and the way in which our operations are managed and evaluated.

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

For the first nine months of 2019 approximately 69% of our revenue was from installations for the ACI and public works markets and approximately 31% of our revenue was from installations for the residential market.

At our Annual Meeting of Stockholders on August 7, 2019, our stockholders approved a reverse stock split of our issued and outstanding common stock at a ratio not less than 1-for-3 and not greater than 1-for-10. On August 29, 2019, our board of directors approved the reverse stock split at a ratio of 1-for-7 which went into effect at the open of trading on August 30, 2019. At the effective time of the reverse stock split, every seven shares of our issued and outstanding common stock were converted into one share of our issued and outstanding common stock. The authorized shares of 200,000,000 and the par value of $0.001 remained the same until September 18, 2020 when the number of authorized common shares was reduced to 50,000,000. All shares and related financial information in this Quarterly Report are retroactively stated to reflect this 1-for-7 reverse stock split.

IMPACT OF COVID-19 ON OUR BUSINESS

The continued global novel coronavirus (COVID-19) pandemic, including its spread in the United States, has resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions and business shutdowns. The uncertain macroeconomic environment created by the COVID-19 pandemic has had and will continue to have a significant, adverse impact on our business. To assist readers in reviewing management’s discussion and analysis of financial condition and results of operations, we provide the following discussion regarding the effects COVID-19 has had on the Company, what management expects the future impact to be, how we are responding to evolving circumstances and how we are planning for further COVID-19 uncertainties.

State and local directives, guidelines, and other restrictions, as well as consumer behavior, continue to impact our operations in the regions in which we operate, particularly California. During the three months ended September 30, 2020, we continued to serve customers based on our qualification as an “Essential Business” as defined by county agencies’ directives. As an “Essential Business,” our employees are allowed to leave their residences to continue working. We operate in the energy industry, which is identified as a critical infrastructure sector by the Federal Homeland Security Cybersecurity and Infrastructure Security Agency (CISA). Therefore, we are able to conduct business despite evolving orders from the California Department of Public Health. Although we are permitted to continue our operations as an Essential Business, COVID-19 and the governmental directives materially disrupted the operations of the government by closing or restricting operations at city, county and state offices for design reviews, permitting projects, and inspections of projects. Utility companies have been unable to provide timely shutdowns, inspections and interconnection approvals. This disruption negatively impacts our ability to complete projects, generate revenue on projects in backlog and causes many customers to delay decisions on new projects. As a result, we have continued with certain cost and headcount reductions. Although we continue working with our reduced workforce, these cost savings are offset by an expected decline in revenues from the continued disruption impacting our customers.

Our revenue and gross profit in the three months ended September 30, 2020 were negatively impacted by governmental responses to the COVID-19 pandemic, which prevented or prohibited installation activity for many of the larger public works, agriculture and commercial projects by restricting our employees’ access to our work sites. In addition, governmental orders and social distancing guidelines slowed our sales process, as our customers avoided interacting with our sales and installation personnel and delayed buying decisions. In turn, our receipt of approvals or permits to build from local governmental authorities slowed or stopped, reducing the number of residential installations and residential revenues during the quarter. In order to comply with social distancing among themselves, customers, local authorities and our installation crews must also alter traditional construction methods and practices, adding complexity to each project.

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

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

As the COVID-19 pandemic and its effects evolve, we are monitoring our business to ensure that our expenses are in line with expected cash generation. In March 2020, we formed an internal task force to evaluate the ongoing impact of COVID-19 on our business. This task force reviews and analyzes ongoing developments related to COVID-19 as they impact our business and operations. The extent to which our results are affected by the COVID-19 pandemic will largely depend on future developments which cannot be accurately predicted and are uncertain, but the COVID-19 pandemic has had and will continue to have an adverse effect on our business, operations, financial condition, results of operations, and cash flows.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, 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, intangible assets, deferred tax assets, costs to complete projects, and fair value computation using the Black Scholes option pricing model. We base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review our goodwill, impairments and estimations of long-lived assets, revenue recognition on construction contracts recognized over time, allowances for uncollectible accounts, 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 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 ACI 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 Public Works and ACI projects may be completed within eighteen to thirty-six months, depending on the size and location. We recognize revenue from EPC services over time as our performance creates or enhances an energy generation asset controlled by the customer.

The cost of materials or equipment will generally be excluded from our recognition of profit, unless specifically produced or manufactured for a project, because such costs are not considered to be a measure of progress. All un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, we will recognize the loss in the period it is determined.

Revisions in cost and profit estimates, during the course of the contract, are reflected in the accounting period in which the facts, which require the revision, become known. We use an input method based on costs incurred as we believe that this method most accurately reflects our progress toward satisfaction of the performance obligation. Under this method, revenue arising from fixed-price construction contracts is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

Contract assets represent revenues recognized in excess of amounts invoiced to customers on contracts in progress. Contract liabilities represent amounts invoiced to customers in excess of revenues recognized on contracts in progress.

Leases

We determine 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 on the face of the condensed consolidated balance sheet. If we had Finance lease ROU assets, such assets would be presented within other assets, and finance lease liabilities would be presented appropriately.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are accounted for as a single lease component. For lease agreements with terms less than 12 months, we have elected the short-term lease measurement and recognition exemption, which recognizes such lease payments on a straight-line basis over the lease term.

Indefinite Lived Intangibles and Goodwill Assets

We account for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations, where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

We test for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with our policies, we performed a quantitative assessment of indefinite lived intangibles and goodwill at December 31, 2019. At December 31, 2019, we retained an independent valuation consulting firm to test for indefinite lived intangibles and goodwill impairment. Based on the valuation assessment, we determined that the carrying value of the assets did not exceed the fair value and, therefore, there was no impairment of assets. As a result of the events and circumstances resulting from the COVID-19 pandemic, we expected our near-term revenue, profitability, and cash flow to be lower than we anticipated in our December 2019 review. Therefore, we performed another quantitative assessment of indefinite lived intangibles and goodwill at March 31, 2020. It was determined that the carrying value of goodwill exceeded its fair value at March 31, 2020 and, as a result, we recorded an impairment of $4,000. The primary driver of the $4,000 impairment at March 31, 2020 compared to no impairment at December 31, 2019, was lowered revenue projections for 2020 due to the impact of COVID-19, combined with the ATM sales in the first quarter of 2020, which resulted in a higher carrying value of the net assets of the Company. No quantitative assessment was performed at September 30, 2020.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2019

REVENUE AND COST OF GOODS SOLD

For the three months ended September 30, 2020, revenue decreased 58.4% to $7,304 compared to $17,547 for the three months ended September 30, 2019. Approximately 73% of revenue in the third quarter of 2020 was from installations for the ACI and public works markets compared to 74% of revenue in the same period the prior year. For the third quarter of 2020, ACI, public works and residential revenue fell by $5.2 million, $2.5 million and $2.5 million, respectively, when compared to the same quarter of 2019.

Cost of goods sold for the three months ended September 30, 2020, was $6,050, or 58.4% below the $14,547 reported for the three months ended September 30, 2019.

Gross profit was $1,254 for the quarter ended September 30, 2020, compared to $3,000 of gross profit for the same quarter of the prior year. The gross margin was 17.2% in the third quarter of 2020 compared to 17.1% in the same quarter of 2019.

Revenue and gross profit in the three months ended September 30, 2020 were negatively impacted by governmental and customer responses to the COVID-19 pandemic. Response to the pandemic created utility approval delays or holds and prevented or postponed installation activity for many of the larger agriculture and commercial, and public works projects. by restricting our employees’ access to our work sites. In addition, governmental orders, shelter-in-place and social distancing guidelines slowed our sales and installation process, as our customers avoided interacting with our sales and installation personnel and delayed buying decisions and reduced installation revenue. In turn, our receipt of utility approvals or permits to build from local governmental authorities slowed or stopped, reducing the number of residential installations and residential revenue during the quarter. In order to comply with social distancing among themselves, customers, and local authorities, our installation crews must also alter traditional construction methods and practices, adding complexity and inefficiency to each project.

SELLING AND MARKETING EXPENSES

For the three months ended September 30, 2020, the Company’s selling and marketing (S&M) expenses were $689 compared to $761 for the three months ended September 30, 2019. The decrease period over period resulted from a reduction in cost of personnel in the sales and sales support functions and lower commissions due to the lower revenue levels.

GENERAL AND ADMINISTRATIVE EXPENSES

Total general and administrative (G&A) expenses were $3,161 for the three months ended September 30, 2020, compared to $3,016 for the three months ended September 30, 2019. G&A expenses increased $145 from the third quarter of the prior year driven by the $724 of costs incurred in legal, accounting and consulting fees specifically related to the proposed merger with Peck. Excluding the merger-related costs, G&A expenses are lower versus the prior year quarter as a result of reduced headcount and reduced personnel related costs, and lower costs incurred for facilities, vehicles, travel, technology, communications and general office expenses.

Operating expenses, including stock-based compensation, for 2020 are expected to be lower than 2019 as we continue to streamline our operating and administrative costs.

STOCK-BASED COMPENSATION EXPENSES

During the three months ended September 30, 2020 we incurred $16 in total non-cash stock-based compensation expense compared to $99 for the same period in the prior year. Stock-based compensation expense decreased due to the expiration of a restricted stock grant agreement with our Chairman and former Chief Executive Officer that ended during the first quarter of 2020.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses for the three months ended September 30, 2020 were $82 compared to $87 for the same period in the prior year. Depreciation and amortization expenses decreased primarily as a result of certain assets becoming fully depreciated.

OTHER EXPENSE

Other expense was $158 for the three months ended September 30, 2020, compared to $221 for the same three months in 2019. Interest expense for the quarter ended September 30, 2020, was $159 primarily related to the interest paid on the $2.25 million Promissory Note from CrowdOut plus the amortization of the $435 exit fee and the origination fees both of which are shown as interest expense. Interest expense for the quarter ended September 30, 2019 was $213 and was the result of higher CrowdOut interest for a $3.75 million principal balance plus interest owed for the loans payable for equipment financing.

NET LOSS

The net loss for the three months ended September 30, 2020 was $2,852 compared to a net loss of $1,184 for the three months ended September 30, 2019.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2019

REVENUE AND COST OF GOODS SOLD

For the nine months ended September 30, 2020, revenue decreased 35.5% to $29,335 compared to $45,470 for the nine months ended September 30, 2019. Approximately 74% of revenue in the first nine months of 2020 was from installations for the ACI and public works markets compared to 69% of revenues in the same period the prior year. For the first three quarters of 2020, ACI, public works and residential revenue fell by $8.1 million, $1.7 million and $6.4 million, respectively, when compared to the same three quarters of 2019.

Cost of goods sold for the nine months ended September 30, 2020, was $25,468, or 35.5% less than the $39,486 reported for the nine months ended September 30, 2019, consistent with the decrease in installation activity for the period.

Gross profit was $3,867 for the nine months ended September 30, 2020. This compares to $5,984 of gross profit for the same period of the prior year. The gross margin remained steady at 13.2% despite lower revenue in the first nine months of 2020 compared to 13.2% in the same nine-month period of 2019.

Revenue and gross profit in the nine months ended September 30, 2020 were negatively impacted by governmental responses to the pandemic, which created utility company approval delays or holds and prevented or prohibited installation activity for many of the larger public works, agriculture and commercial projects by not allowing our employees access to work sites. In addition, governmental orders and social distancing guidelines slowed our sales and installation process, as our customers avoided interacting with our sales and installation personnel, delayed buying decisions and reduced installation revenue. In turn, our receipt of utility approvals or permits to build from local governmental authorities slowed or stopped, reducing the number of residential installations and residential revenue during the quarter. In order to comply with social distancing among themselves, customers, and local authorities, our installation crews must also alter traditional construction methods and practices, adding complexity to each project.

SELLING AND MARKETING EXPENSES

For the nine months ended September 30, 2020, the Company’s S&M expenses were $1,864 compared to $2,147 for the nine months ended September 30, 2019. As a percentage of revenue, S&M expenses were 6.4% of the first nine months revenue in 2020 compared to 4.7% of the same period of 2019. The S&M expenses were $283 less than the same period in the prior year. Most of the decrease resulted from a reduction in personnel within the sales and sales support functions.

GENERAL AND ADMINISTRATIVE EXPENSES

Total G&A expenses of $8,135 for the nine months ended September 30, 2020 include $763 of costs incurred for legal, accounting and consulting specifically related to the proposed merger between Sunworks and Peck. For the nine months ended September 30, 2019, G&A expenses were $8,392. The G&A expenses declined from the prior year nine-month period as a result of reduced headcount and discretionary spending. Headcount reductions between periods resulted in savings in salaries and employee benefits that were partially offset by increases in bad debt expense, vehicle insurance, legal, accounting and other professional services.

GOODWILL IMPAIRMENT

Goodwill impairment recorded for the nine months ended September 30, 2020 and 2019 was $4,000 and $0, respectively. We retained an independent valuation consultant to perform a quantitative assessment of indefinite lived intangibles and goodwill at December 31, 2019 and March 31, 2020. In accordance with our policies, we performed a quantitative assessment of indefinite lived intangibles and goodwill at December 31, 2019, and no impairment was found. As a result of the events and circumstances resulting from the COVID-19 pandemic, our outlook for revenue, profitability and cash flow deteriorated. Therefore, we performed another quantitative assessment of indefinite lived intangibles and goodwill at March 31, 2020. It was determined that the carrying value of goodwill exceeded its fair value at March 31, 2020 and, as a result, we recorded an impairment of $4,000 during the first nine months of 2020.

STOCK-BASED COMPENSATION EXPENSES

During the nine months ended September 30, 2020 we incurred $137 in total non-cash stock-based compensation expense compared to $333 for the same period in the prior year. The reduction in expense is the result of the cessation of any stock-based compensation expense for the March 2017 RSGA that ended as of March 29, 2020.

Stock-based compensation, excluding restricted stock grant agreements, related to employee and director options totaled $74 and $147 for the nine months ended September 30, 2020 and 2019, respectively.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses for the nine months ended September 30, 2020 were $246 compared to $269 for the same period in the prior year. Depreciation and amortization expenses decreased primarily as a result of certain assets becoming fully depreciated.

OTHER EXPENSE

Other expense was $544 for the nine months ended September 30, 2020, compared to $639 for the same nine months in 2019. Interest expense for the first nine months of 2020, was $555 primarily related to the interest paid on the remaining $2.25 million outstanding pursuant to the Promissory Note from CrowdOut plus the amortization of the $435 exit fee and the origination fees both of which are shown as interest expense.

NET LOSS

The net loss for the nine months ended September 30, 2020 was $11,059, including the $4,000 goodwill impairment expense, compared to a net loss of $5,796 for the nine months ended September 30, 2019.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

Liquidity

The Company has incurred significant operating losses over the past five years. In addition, beginning in the first quarter of 2020, the Company’s business has been impacted by the effects of the global pandemic of COVID-19 and the related protective public health measures. The Company’s business depends upon sales and installation of its photovoltaic systems. The prevalence of shelter in place and similar orders in California and other states where a majority of these systems are sold and installed has resulted in significant declines in the Company’s sales, installation revenues, and cash generating activities which is expected to continue for some period of time.

On August 10, 2020, Sunworks and Peck Company Holdings, Inc. (“Peck”) (Nasdaq: PECK), entered into a definitive agreement under which Peck will acquire Sunworks in an all-stock transaction pursuant to which each share of Sunworks stock will be exchanged for 0.185171 shares of Peck common stock (subject to certain adjustments). Assuming no adjustments, Sunworks’ stockholders will receive an aggregate of approximately 3,079,207 shares of Peck common stock, representing approximately 36.54% of Peck common stock outstanding after the merger. Before entering into the definitive agreement, no material relationship existed between Sunworks and Peck. The merger has received the approval of the Board of Directors of both Sunworks and Peck and is anticipated to close during the fourth quarter of 2020 subject to approval by stockholders of both companies and other customary conditions.

We believe that this merger provides us with the opportunity to significantly reduce general and administrative costs by eliminating the duplication of the costs incurred for both companies needing to comply with public reporting requirements and eliminating duplicative management. The combined companies will have greater geographical coverage, better access to project finance funds, and greater sources of debt and capital financing than Sunworks remaining alone.

The Company has prepared and filed a Joint Proxy Statement/Prospectus with the Securities and Exchange Commission dated October 14, 2020 that was first mailed to Sunworks stockholders on or about October 15, 2020. The stockholder vote is scheduled for November 12, 2020.

If we do not complete the merger with Peck, the Company may meet its debt and working capital requirements through a variety of means, including extension, refinancing, equity placements, the sale or other disposition of assets, or reductions in operating costs.

Limitations on the Company’s liquidity and ability to raise capital may adversely affect our ability to operate.  Sufficient liquidity is critical to meet the Company’s operating needs. Although the Company expects its sources of capital will be sufficient to meet its near-term liquidity needs, there can be no assurance that its liquidity requirements will continue to be satisfied. If the merger does not occur and we cannot raise needed funds, the Company could be forced to make substantial reductions in its operations, which could adversely impact its ability to implement its current business plan and ultimately its viability as a company. 

Current Financing Arrangements

On April 28, 2020, we received a loan under the Paycheck Protection Program of $2,847, as modified by the Paycheck Protection Program Flexibility Act. We are using proceeds from this loan to cover documented expenses related to payroll, rent and utilities, during the 24-week period after we received the loan. The loan allows for forgiveness of all or a portion of the loan based upon terms and conditions within the loan. The forgiveness amount does not permit for more than 40% of the funds to be used for non-payroll items, and is subject to reduction if employees are terminated or wages are reduced, with some exceptions. The remaining unforgiven amount of the loan bears interest at 1% per annum and matures on April 28, 2022. Initial principal payments are deferred for up to 10 months; however, interest still accrues during this time. There are no collateral requirements or prepayment penalties associated with the loan.

We had $4,643 in unrestricted cash at September 30, 2020, as compared to $3,154 at December 31, 2019. The effects of the COVID-19 pandemic caused utility approval delays are expected to continue to have an adverse effect on our liquidity and cash. As a result we believe that the aggregate of our existing cash and cash equivalents, in addition to funds generated in operations will not be adequate for us to maintain sufficient liquidity and cash for the next twelve months or more.

Currently, we cannot be certain of the type of additional future financing, terms and conditions or actual timing of any debt or equity financing, and there are no assurances that any debt or equity financing will be available. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing may involve agreements that include high interest costs and restrictive covenants. Additionally, the COVID-19 pandemic may adversely affect our ability to access future debt or equity financings.

At September 30, 2020, our working capital was a surplus of $1,727 compared to a working capital surplus of $1,460 at December 31, 2019.

The Loan Agreement for the Senior Note contains a subjective event of default clause based on CrowdOut determining, in the exercise of its reasonable discretion, that an event has occurred that would reasonably be expected to have a “material adverse effect.” If any event of default occurs and is continuing, or if CrowdOut reasonably determines that a “material adverse effect” in our business has occurred, CrowdOut may declare that an event of default has occurred and the outstanding indebtedness to be immediately due. See Note 8, “Promissory Notes Payable” for more information regarding the Senior Note. Principal and accrued interest outstanding under the Loan Agreement was $2,250 as of September 30, 2020. All principal and accrued interest, plus a $435 exit fee, are due under the Loan Agreement on January 31, 2021.

During the nine months ended September 30, 2020, we used $7,268 of cash in operating activities compared to $4,237 used in operating activities for same period in 2019. The cash used in operating activities was due to the result of the current year net loss. The cash impact of the net loss was offset by collection of cash from accounts receivables and reductions in inventory, contract assets and deposits. We also used cash to reduce accounts payable, contract liabilities and customer deposits.

Net cash from investing activities for the nine months ended September 30, 2020 and 2019 was insignificant.

Net cash provided by financing activities during the nine months ended September 30, 2020 was $8,746 compared to $2,670 for the same period in 2019. The cash was primarily used to offset the cash used in operating activities, pay $1,500 of principal on the Senior Note, and to payoff the acquisition convertible promissory note and existing vehicle and equipment debt, totaling $337. We received a loan under the Paycheck Protection Program of $2,847, as modified by the Paycheck Protection Program Flexibility Act. We also generated $7,736 of cash, net of fees, through the sale of our common stock pursuant to an At Market Issuance Sales Agreement we entered into with B. Riley FBR, Inc. (the ATM Agreement). We sold the maximum amount allowed under the prospectus supplement we filed with the U.S. Securities and Exchange Commission (SEC) related to the ATM Agreement. Our shelf registration statement on Form S-3 was filed in reliance on Instruction I.B.6. of Form S-3, which imposes a limitation on the maximum amount of securities that we may sell pursuant to the registration statement during any twelve-month period. At the time we sell securities pursuant to the registration statement, the amount of securities to be sold plus the amount of any securities we have sold during the prior twelve months in reliance on Instruction I.B.6. may not exceed one-third of the aggregate market value of our outstanding common stock held by non-affiliates as of a day during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6. At September 30, 2020, we did not have any additional availability under our existing S-3 under the 1/3 limitation calculations set forth in Instruction I.B.6 of Form S-3. Furthermore, Instruction I.B.6. of Form S-3 requires that the issuer have at least one class of common equity securities listed and registered on a national securities exchange. If we are not able to maintain compliance with applicable Nasdaq rules, we will no longer be able to rely upon that Instruction, which may negatively impact our ability to raise funds through an equity financing.

On March 13, 2020, we received a letter from The Nasdaq Stock Market LLC (Nasdaq) indicating that we have failed to comply with the minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires that companies listed on the Nasdaq Capital Market maintain a minimum closing bid price of at least $1.00 per share. On August 5, 2020 we received a letter from the NASDAQ Listing Qualifications Staff notifying us that we have regained compliance with NASDAQ’s minimum bid price requirements for continued listing on the Nasdaq Capital Market. The letter noted that as a result of the closing bid price of the Sunworks’ common stock having been at $1.00 per share or greater for at least ten consecutive business days, from July 22, 2020 to August 4, 2020, we have regained compliance with Listing Rule 5550(a)(2) and the matter is now closed.

On September 22, 2020, the Company received a letter from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company has failed to comply with the minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires that companies listed on the Nasdaq Capital Market maintain a minimum closing bid price of at least $1.00 per share. On October 14, 2020 the Company received a letter from the NASDAQ Listing Qualifications Staff notifying the Company that the Company has regained compliance with NASDAQ’s minimum bid price requirements for continued listing on the Nasdaq Capital Market. The letter noted that as a result of the closing bid price of the Company’s common stock having been at $1.00 per share or greater for at least ten consecutive business days, from September 23, 2020 to October 13, 2020, the Company has regained compliance with Listing Rule 5550(a)(2) and the matter is now closed.

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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods specified in the SEC rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Controls

Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. In addition, the design of any system of controls is based on assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies and procedures may deteriorate. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal third quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS

We have updated our existing risk factors to include information associated with the current events related to COVID-19 pandemic that impacted global markets due to outbreaks occurring worldwide beginning in early calendar year 2020. Those risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 are incorporated herein by reference.

Our results of operations have been and will in the future 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 current 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 have 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 have resulted in, and will 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 have had and will continue to have a material adverse effect on our business, operations, financial condition, results of operations, and cash flows.

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:

These effects of the COVID-19 pandemic have resulted and will result in lost or delayed revenue to us, and we have experienced, and continue to experience, disruptions to our business as we implement safety protocols, and modifications to travel. We are closely monitoring the impact of the COVID-19 Pandemic, continually assessing its potential effects on our business. We have taken actions to offset the impact of the COVID-19 pandemic, including reducing salaries for all exempt employees, implementing furloughs, and restricting nonessential travel, but we cannot predict what future actions we may have to take in response to the COVID-19 pandemic. The extent to which our results are affected by the COVID-19 pandemic will largely depend on future developments which cannot be accurately predicted and are uncertain, but the COVID-19 pandemic has had and will continue to have an adverse effect on our business, operations, financial condition, results of operations, and cash flows.

In addition, while we believe we have taken appropriate steps to maintain a safe workplace to protect our employees from contracting and spreading the coronavirus, including following the guidance set out from both the Occupational Safety and Health Administration and Centers for Disease Control and Prevention, we may not be able to completely prevent the spread of the virus among our employees. As of the time of this filing, several of our personnel have been subject to Company-imposed quarantine restrictions based upon possible contact with individuals who have tested positive. We may face litigation or other proceedings making claims related to unsafe working conditions, inadequate protection of our employees or other claims. Any of these claims, even if without merit, could result in costly litigation or divert management’s attention and resources. Furthermore, we may face a sustained disruption to our operations due to one or more of the factors described above.

Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic instability that has occurred or may occur in the future. Any of these events could amplify the other risks and uncertainties described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 and could materially adversely affect our business, operations, financial condition, results of operations, cash flows or stock price.

See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, specifically the subsections entitled “Impact of COVID-19” and “Liquidity and Capital Resources”, for further discussion.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Roseville, State of California, on November 2, 2020.