SecProbe.io

CORRESP
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filename1.htm

September
30, 2022

Via
EDGAR Submission

U.S.
Securities and Exchange Commission

Division
of Corporation Finance

100
F Street, N.E.

Washington,
D.C. 20549

    Attention:

    Mr.
    Karl Hiller

    Branch
    Chief

    Division
    of Corporation Finance Office of Energy & Transportation

    Mark
    Wojciechowski

    Staff
    Accountant

    Re:

    Sunworks,
    Inc.

    Form
    10-K for the Fiscal Year ended December 31, 2021

    Filed
    March 11, 2022

    File
    No. 001-36868

Dear
Messrs. Hiller and Wojciechowski:

This
letter is being respectfully submitted by Sunworks, Inc., a Delaware corporation (the “Company”), in response
to comments from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”)
on the Company’s above-referenced Annual Report on Form 10-K (the “Form 10-K”) for the fiscal year ended
December 31, 2021, contained in the Staff letter dated September 15, 2022 (the “Letter”). The Company’s
responses are preceded by a reproduction of the Staff’s comments as set forth in the Letter.

Form
10-K for the Fiscal Year ended December 31, 2021

Management’s
Discussion and Analysis of Financial Condition and Results of Operations Results of Operations for the Years Ended December 31, 2021
and 2020, page 34

    1.
    We
    understand from your disclosures on page 7 that you differentiate between residential and commercial installations in reporting your
    operations, and between small and large commercial and public works projects based on a 100kW threshold, as well as cycle times in
    describing the scope or duration of your solar installation projects.

    We
    note there was a substantial shift in the relative significance of your residential and commercial installations as a result of the
    April 8, 2021 acquisition of Solcius LLC, also that you appear to be tracking the total number of installations and total solar capacity
    on your website, and that you reference the metrics of residential solar segment originations, commercial solar energy segment orders,
    and backlog in your earnings releases.

Page
1 of 10

    We
    also note that your website presentation for the second quarter of 2022 includes a strategic update, including the time required
    to install residential solar systems, a shift towards direct sales channels, a shift in sourcing from third party distribution channels
    to manage supply chain constraints, price increases to offset inflationary pressures, and efforts to “execute against”
    multi-year high backlog in both segments.

    Please
    expand the disclosures in your annual report and subsequent interim reports as necessary to address any material financial effects
    associated with the efforts, concerns, and objectives identified in your strategic update, including the associated trends and uncertainties
    involving reasonably possible effects of the initiatives that you mention, and to clarify how these matters have evolved over the
    periods covered by each report.

    Please
    include meaningful measures of installation volumes for your residential and commercial installations for each period, such as the
    number of installations within a range or size class, or kilowatts or megawatts associated with completed installations, and address
    the relationship between costs and revenues associated with these categories of installations, including any reasonably possible
    changes that would have material effects, to comply with Item 303(b) and (b)(2) of Regulation S-K.

    Please
    discuss the composition of the backlog measures for each segment, in terms of the nature and duration of the underlying projects,
    reasons for installation delays, and the amount of time that you envision will be necessary to realize these amounts.

Company
Response:

The
Company periodically evaluates disclosures from comparable issuers within the solar industry and reviews metrics and other information
that management utilizes to evaluate business performance. As part of this process, the Company also evaluates this information to determine
if any such information is proprietary or could cause competitive harm to the Company if disclosed. Following this review, the Company
enhances its disclosure in its filings to provide updates on its strategic plans and operational trends that provide more information
to readers of its periodic filings.

For
example, in the year ended report December 31, 2021, the Company enhanced its disclosure in Part 1, to include updated strategic priorities
following the acquisition and integration of Solcius. Additionally, within Part 1, the Company enhanced its disclosures of Company Operations,
as well as updates to the regulatory environment, as well as updates to its Risk Factors in Part 1A. In its press release issued on August
9, 2022, reporting results for the period ended on June 30, 2022, and corresponding investor presentation, the Company enhanced its disclosure
by introducing segment metrics including total Residential Solar originations, an update on Direct Sales Channel originations and Commercial
Solar Energy orders. In its 10-Q for the period ended on June 30, 2022, the Company similarly enhanced disclosure by including an “Orders
and Backlog” section in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and
by including changes in Residential Solar segment originations, as well as, new orders within the Commercial Solar Energy segment. The
Company plans to include and/or enhance these disclosures in future filings. The Company’s believes these metrics, coupled with
the existing financial statements and related disclosures, provides readers of the financial statements leading indicators of business
performance and will help monitor the Company’s execution against its stated strategy.

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2 of 10

The
Company will further evaluate whether other metrics currently used on its website, such as total number of installations and total solar
capacity, constitute material performance indicators. Historically, these indicators have provided a reference point for the Company’s
credibility within the industry, but the Company has not considered these metrics to provide material performance indicators for period-over-period
comparisons and management has not used these metrics to evaluate operating performance.

However,
the Company believes that further disclosures including installations and project size for applicable reporting periods may be helpful
to readers. As a result, the Company plans to provide additional disclosure within Management’s Discussion and Analysis of Financial
Condition and Results of Operations by including a table in substantially the following form by segment:

Residential
Solar Segment

    Three Months Ended

    September 30,

    2022
    2021

    Net Total Originations (Watts)

    Net Total Originations ($)

    Installations (Watts)

    Average project size (Watts)

    Revenue

    Gross Margin %

    Operating Income

Commercial
Solar Segment

    Three Months Ended

    September 30,

    2022
    2021

    Net Total Orders (Watts)

    Net Total Orders ($)

    Revenue

    Gross Margin %

    Operating Income

The
Company respectfully confirms that disclosures within its periodic filings will evolve over time, as its business operations evolve and
as comparable issuers disclosures are enhanced. Beginning with the filing of its 10-Q as of and for the period ended September 30, 2022,
the Company plans to include additional disclosure around its strategic objectives, updates on the implementation of its strategic objectives,
financial effects associated with implementing its strategic objectives and associated trends and uncertainties that can be identified
at the time of such filings.

Page
3 of 10

For
example, the Company plans to provide a Strategic Update in its 10-Q as of and for the period ended September 30, 2022 substantially
similar to the following:

Increase
the velocity of installation. Sunworks believes a reduction in the time required to install a residential solar installation
improves both pricing power with third-party channel relationships and customer retention. Following a recent pilot test in which the
Company decentralized all design, permitting and scheduling activities to Company representatives, Sunworks was able to significantly
reduce installation times. The Company is currently mapping Company-wide workflow in order to leverage these benefits to scale.

Expand
cost-efficient direct sales channel. Sunworks has embarked on a multi-year initiative to develop a robust, direct sales team
designed to complement its third-party channel partners. This direct sales team is incentivized to develop business across the residential
markets where Sunworks operates, with an emphasis on rooftop solar installations. During the second quarter 2022, the direct sales team
was responsible for nearly 15% of total installation revenue, versus approximately 5% in the prior-year period.

Drive
efficient sourcing and procurement. The Company intends to shift an increased proportion of its sourcing from third-party
distribution channels toward U.S. based original equipment manufacturers, an approach that will allow for improved surety of supply at
a lower average cost. Sunworks believes that the Executive Order executed by President Biden in June 2022 suspending the collection of
anti-dumping and countervailing duties (AD/CVD) of certain solar cells and modules exported from Cambodia, Malaysia, Thailand, and Vietnam
for 24-months should have a favorable impact on material availability beginning in late 2022.

Drive
sustained margin expansion. The Company believes key drivers of margin expansion include programmatic price increases; market
share gains in both its core California commercial market and new geographic regions; reductions in lead times; optimization of its sales
channel partner network; an increased mix of revenue derived from its direct sales force; increased productivity resulting from recent
headcount investments; and the adoption of lean principles to reduce cost and drive continuous improvement. Sunworks expects to achieve
improved margin realization in the second half of 2022, when compared to the first half of 2022, as recent performance improvement initiatives
are further implemented.

The
Company will also enhance its disclosures relating to backlog, including backlog by segment, and anticipated timing to realize such amounts.
For example, beginning with its filing of its 10-Q as of and for the period ended September 30, 2022, the Company plans to expand its
disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations by providing a business overview
of orders and backlog for the quarter substantially similar to the following, which language will vary depending on the facts and circumstances
during the corresponding period:

Page
4 of 10

Orders
and Backlog

For
the quarter ended September 30, 2022, the combined backlog of the Company was $xx,xxx, representing an increase/decrease of xx% compared
to the third quarter of 2021. Residential Solar segment originations increased/decreased compared to the prior year quarter, due to ____________________.
Within this segment, originations generated from our direct sales was XX%, compared to XX% in the prior year quarter, due to ________________.
As a result of these changes, the Residential Solar backlog increased/decreased to $xx,xxx, which represents a XX% change on a year over
basis and up/down XX% sequentially. The Company expects to execute against its Residential Solar segment backlog over the next 1-4 months,
as project complexity, jurisdictional requirements, material and labor availability influences timelines for completion. Commercial Solar
Energy new orders were $xx,xxx during the quarter compared to $xx,xxx during the prior year quarter, due to ________________. As a result
of these changes, the Commercial Solar backlog increased/decreased to $xx,xxx, which represents a XX% change on a year over basis and
up/down XX% sequentially from the prior quarter.. The Company expects to execute against its Commercial Solar Energy segment backlog
over the next 3-18 months, based on the authority having jurisdiction, existing utility infrastructure, various approvals required, customer
specifications, supply chain and engineering lead times.

Financial
Statements

Consolidated Statements of Operations, page F-2

    2.
    We
    note that your cost of goods sold and gross profit measures do not appear to reflect depreciation and amortization expense, although
    details in Notes 6 and 9 on pages F-15, F-16 and F-17 seem to identify one or more components that would be attributable to cost
    of goods sold under generally accepted accounting principles (GAAP).

    SAB
    Topic 11:B provides an accommodation for presenting cost of goods sold apart from allocable depreciation and amortization expense,
    which generally requires a parenthetical notation of the excluded amounts, although it does not extend to measures of gross profit,
    which should reflect all costs of goods sold in accordance with GAAP.

    Tell
    us how you have evaluated the nature and use of your property and equipment, and the intangible assets, in determining whether the
    associated depreciation and amortization would be attributable to cost of goods sold. Also clarify how you are reporting the lease
    expenses and ROU amortization discussed in Notes 7 and 8 on pages F-15 and F-16, pertaining to your offices, warehouses, vehicles,
    and office equipment.

    Please
    submit any revisions to the presentation or incremental disclosures that you believe would adequately address or alleviate the concerns
    outlined above.

Company
Response:

The
Company respectfully confirms that one or more components of depreciation and amortization are attributable to cost of goods sold under
generally accepted accounting principles. All amounts listed in subsequent responses are in thousands, unless indicated otherwise.

During
the year ended December 31, 2021, the Company recorded a total of $1,588 of depreciation expense. Consolidated net revenue for the comparable
period of time was $101,154. The Company has determined that approximately $633 for the year ended December 31, 2021, or less than 1%
of revenue relates to cost of goods sold items, such as vehicles, equipment and leasehold improvements at its operating facilities. For
the year ended December 31, 2021, the consolidated gross margin impact of reclassifying cost of goods sold depreciation would reduce
reported gross margin from 44.1% to 43.5%. The Company plans to include the cost of goods sold related depreciation in cost of goods
sold beginning with its filing of the 10-Q as of and for the period ended September 30, 2022. As part of this reclassification, the Company
will reclassify expenses for the related past periods for comparability purposes.

Page
5 of 10

During
the year ended December 31, 2021, the Company recorded a total of $4,290 of amortization expense. Consolidated net revenue for the comparable
period of time was $101,154. The Company has determined that approximately $2,000 for the year ended December 31, 2021, of the amortization
relates to cost of goods sold items, specifically for backlog acquired in conjunction with the Solcius acquisition in April 2021. For
the year ended December 31, 2021, the consolidated gross margin impact of reclassifying cost of goods sold amortization would reduce
reported gross margin from 44.1% to 42.2%. As of December 31, 2021, amortization related to backlog acquired was fully amortized and
is non-recurring in 2022. The Company has determined that it is not material to amend the historical financial statements given that
amortization related to backlog acquired w