UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM
_____________________________________________________
(Mark One)
|
|
|
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
|
|
|
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______to _____
Commission File Number:
(Exact name of registrant as specified in its charter)
|
|
|
|
| |
(State or other jurisdiction of
incorporation or organization) |
| (Federal Employer
Identification No.) |
|
|
|
| ||
(Address of principal executive offices) |
| (Zip Code) |
(
Registrant’s telephone number, including area code
Securities Registered Pursuant to Section 12(b) of the Act
Title of Each Class | Trading Symbol | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES NO ☐
Indicate by a 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.
Large Accelerated Filer ☐ Accelerated Filer ☐
Smaller Reporting Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. YES ☐ NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
|
Outstanding at November 11, 2022 |
PINEAPPLE ENERGY INC.
INDEX
|
|
| Page No. |
Part I. | Financial Information |
| |
|
|
|
|
| Item 1. | Financial Statements (Unaudited) |
|
|
|
|
|
| 2 | ||
|
|
|
|
| Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) | 4 | |
|
|
|
|
| Condensed Consolidated Statements of Changes in Stockholders’ Equity | 5 | |
|
|
|
|
| 7 | ||
|
|
|
|
| 8 | ||
|
|
|
|
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | |
|
|
|
|
| 36 | ||
|
|
|
|
| 36 | ||
|
|
|
|
37 | |||
|
| ||
40 |
|
|
|
|
|
|
|
|
|
|
|
|
PINEAPPLE ENERGY INC. | |||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||
(Unaudited) | |||||
|
|
|
|
|
|
ASSETS | |||||
| September 30 |
| December 31 | ||
| 2022 |
| 2021 | ||
CURRENT ASSETS: |
|
|
|
|
|
Cash and cash equivalents | $ | |
| $ | |
Restricted cash and cash equivalents |
| |
|
| — |
Investments |
| |
|
| — |
Trade accounts receivable, less allowance for |
|
|
|
|
|
doubtful accounts of $ |
| |
|
| — |
Inventories, net |
| |
|
| — |
Prepaid income taxes |
| |
|
| — |
Other current assets |
| |
|
| — |
TOTAL CURRENT ASSETS |
| |
|
| |
PROPERTY, PLANT AND EQUIPMENT, net |
| |
|
| — |
OTHER ASSETS: |
|
|
|
|
|
Investments |
| |
|
| — |
Goodwill |
| |
|
| — |
Operating lease right of use asset |
| |
|
| — |
Intangible assets, net |
| |
|
| |
Other assets, net |
| |
|
| — |
TOTAL OTHER ASSETS |
| |
|
| |
TOTAL ASSETS | $ | |
| $ | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
CURRENT LIABILITIES: |
|
|
|
|
|
Accounts payable | $ | |
| $ | |
Accrued compensation and benefits |
| |
|
| |
Operating lease liability |
| |
|
| — |
Other accrued liabilities |
| |
|
| — |
Working capital note payable |
| — |
|
| |
Customer deposits |
| |
|
| — |
Deferred revenue |
| |
|
| — |
TOTAL CURRENT LIABILITIES |
| |
|
| |
LONG-TERM LIABILITIES: |
|
|
|
|
|
Loan payable and related interest |
| |
|
| |
Related party payables |
| — |
|
| |
Operating lease liability |
| |
|
| — |
Deferred revenue |
| |
|
| — |
Contingent value rights |
| |
|
| — |
TOTAL LONG-TERM LIABILITIES |
| |
|
| |
COMMITMENTS AND CONTINGENCIES (Note 8) |
|
|
| ||
STOCKHOLDERS' EQUITY |
|
|
|
|
|
Convertible preferred stock, par value $ |
| |
|
|
|
Common stock, par value $ |
|
|
|
|
|
|
| |
|
| |
Additional paid-in capital |
| |
|
| ( |
Accumulated deficit |
| ( |
|
| ( |
Accumulated other comprehensive loss |
| ( |
|
| — |
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) |
| |
|
| ( |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | |
| $ | |
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PINEAPPLE ENERGY INC. | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS | |||||||||||
(Unaudited) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30 |
| Nine Months Ended September 30 | ||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Sales | $ | |
| $ | |
| $ | |
| $ | |
Cost of sales |
| |
|
| — |
|
| |
|
| — |
Gross profit |
| |
|
| |
|
| |
|
| |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
| |
|
| |
|
| |
|
| |
Amortization expense |
| |
|
| |
|
| |
|
| |
Transaction costs |
| |
|
| |
|
| |
|
| |
Total operating expenses |
| |
|
| |
|
| |
|
| |
Operating loss |
| ( |
|
| ( |
|
| ( |
|
| ( |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Investment and other income |
| |
|
| — |
|
| |
|
| — |
Gain on sale of assets |
| |
|
| — |
|
| |
|
| — |
Fair value remeasurement of earnout consideration |
| |
|
| — |
|
| |
|
| — |
Fair value remeasurement of contingent value rights |
| — |
|
| — |
|
| ( |
|
| — |
Interest and other expense |
| ( |
|
| ( |
|
| ( |
|
| ( |
Other income (expense), net |
| ( |
|
| ( |
|
| |
|
| ( |
Net loss before income taxes |
| ( |
|
| ( |
|
| ( |
|
| ( |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| ( |
|
| ( |
|
| ( |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gain (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities |
| |
|
| — |
|
| ( |
|
| — |
Total other comprehensive gain (loss) |
| |
|
| — |
|
| ( |
|
| — |
Comprehensive loss | $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share: | $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
Diluted net loss per share: | $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Basic Shares Outstanding |
| |
|
| |
|
| |
|
| |
Weighted Average Dilutive Shares Outstanding |
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PINEAPPLE ENERGY INC. | |||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | |||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||
For the Nine Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| ||
| Series A |
|
|
|
|
|
| Additional |
|
|
| Other |
|
|
| ||||||
| Preferred Stock |
| Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
|
|
| |||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Total | ||||||
BALANCE AT DECEMBER 31, 2021 | — |
| $ | — |
| |
| $ | |
| $ | ( |
| $ | ( |
| $ | — |
| $ | ( |
Net loss | — |
|
| — |
| — |
|
| — |
|
| — |
|
| ( |
|
| — |
|
| ( |
Issuance of common stock for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
professional services | — |
|
| — |
| |
|
| |
|
| ( |
|
| — |
|
| — |
|
| — |
Issuance of common stock for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion of related party payables | — |
|
| — |
| |
|
| |
|
| |
|
| — |
|
| — |
|
| |
Issuance of common stock for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion of working capital note payable | — |
|
| — |
| |
|
| |
|
| |
|
|
|
|
|
|
|
| |
Effect of reverse capitalization | — |
|
| — |
| |
|
| |
|
| |
|
| — |
|
| — |
|
| |
Issuance of common stock for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEC Asset Acquisition | — |
|
| — |
| |
|
| |
|
| |
|
| — |
|
| — |
|
| |
Issuance of preferred stock and warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to PIPE investors, net of issuance costs | |
|
| |
| — |
|
| — |
|
| |
|
| — |
|
| — |
|
| |
Contingent consideration related to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
merger transaction | — |
|
| — |
| — |
|
| — |
|
| ( |
|
| — |
|
| — |
|
| ( |
Share based compensation | — |
|
| — |
| — |
|
| — |
|
| |
|
| — |
|
| — |
|
| |
Other comprehensive loss | — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| ( |
|
| ( |
BALANCE AT SEPTEMBER 30, 2022 | |
| $ | |
| |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| ||
| Series A |
|
|
|
|
|
| Additional |
|
|
| Other |
|
|
| ||||||
| Preferred Stock |
| Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
|
|
| |||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Total | ||||||
BALANCE AT JUNE 30, 2022 | |
| $ | |
| |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
Net loss | — |
|
| — |
| — |
|
| — |
|
| — |
|
| ( |
|
| — |
|
| ( |
Share based compensation | — |
|
| — |
| — |
|
| — |
|
| |
|
| — |
|
| — |
|
| |
Other comprehensive income | — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| |
|
| |
BALANCE AT SEPTEMBER 30, 2022 | |
| $ | |
| |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
| Other |
|
|
| ||
|
|
| Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
|
|
| |||||||||
|
|
|
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Total | ||||||
BALANCE AT DECEMBER 31, 2020 |
|
|
|
|
| |
| $ | |
| $ | ( |
| $ | ( |
| $ | — |
| $ | ( |
Net loss |
|
|
|
|
| — |
|
| — |
|
| — |
|
| ( |
|
| — |
|
| ( |
BALANCE AT SEPTEMBER 30, 2021 |
|
|
|
|
| |
| $ | |
| $ | ( |
| $ | ( |
| $ | — |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
| Other |
|
|
| ||
|
|
| Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
|
|
| |||||||||
|
|
|
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Total | ||||||
BALANCE AT JUNE 30, 2021 |
|
|
|
|
| |
| $ | |
| $ | ( |
| $ | ( |
| $ | — |
| $ | ( |
Net loss |
|
|
|
|
| — |
|
| — |
|
| — |
|
| ( |
|
| — |
|
| ( |
BALANCE AT SEPTEMBER 30, 2021 |
|
|
|
|
| |
| $ | |
| $ | ( |
| $ | ( |
| $ | — |
| $ | ( |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
|
|
|
|
|
|
PINEAPPLE ENERGY INC. | |||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||
(Unaudited) | |||||
|
|
|
|
|
|
| Nine Months Ended September 30 | ||||
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
Net loss | $ | ( |
| $ | ( |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
Depreciation and amortization |
| |
|
| |
Share based compensation |
| |
|
| — |
Fair value remeasurement of earnout consideration |
| ( |
|
| — |
Fair value remeasurement of contingent value rights |
| |
|
| — |
Gain on sale of assets |
| ( |
|
| — |
Interest and accretion expense |
| |
|
| |
Changes in assets and liabilities: |
|
|
|
|
|
Trade accounts receivable |
| ( |
|
| — |
Inventories |
| ( |
|
| — |
Prepaid income taxes |
| ( |
|
| — |
Other assets, net |
| |
|
| — |
Accounts payable |
| ( |
|
| |
Accrued compensation and benefits |
| ( |
|
| |
Customer deposits |
| |
|
| — |
Other accrued liabilities |
| |
|
| — |
Accrued interest |
| ( |
|
| — |
Net cash used in operating activities |
| ( |
|
| ( |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
Capital expenditures |
| ( |
|
| — |
Acquisition of business, net of cash acquired |
| ( |
|
| — |
Proceeds from the sale of property, plant and equipment held for sale |
| |
|
| |
Proceeds from the sale of investments |
| |
|
| — |
Proceeds from earnout consideration on sale of assets |
| |
|
| — |
Net cash (used in) provided by investing activities |
| ( |
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
Borrowings against working capital note payable |
| |
|
| |
Payments against loan payable principal |
| ( |
|
| — |
Payments related to equity issuance costs |
| ( |
|
| — |
Proceeds from the issuance of preferred stock upon closing of private placement |
| |
|
| — |
Payments for contingent value rights distributions |
| ( |
|
| — |
Net cash provided by financing activities |
| |
|
| |
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
| |
|
| |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD |
| |
|
| — |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | |
| $ | |
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
Income taxes paid | $ | |
| $ | — |
Interest paid |
| |
|
| |
NONCASH FINANCING AND INVESTING ACTIVITIES: |
|
|
|
|
|
Issuance of common stock for conversion of related party payables |
| |
|
| — |
Issuance of common stock for conversion of working capital note payable |
| |
|
| — |
Issuance of common stock for the acquisition of HEC and E-Gear |
| |
|
| — |
Effect of reverse capitalization |
| |
|
| — |
Contingent consideration related to merger transaction |
| ( |
|
| — |
Operating right of use assets obtained in exchange for lease obligations |
| |
|
| — |
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements. |
PINEAPPLE ENERGY INC.
(Unaudited)
Pineapple Energy Inc. (formerly Communications Systems, Inc. and Pineapple Holdings, Inc.) (“PEGY”, “we” or the “Company”), was originally organized as a Minnesota corporation in 1969. On March 28, 2022, the Company completed its previously announced merger transaction with Pineapple Energy LLC (“Pineapple Energy”) in accordance with the terms of that certain Agreement and Plan of Merger dated March 1, 2021, as amended by an Amendment No. 1 to Merger Agreement dated December 16, 2021 (collectively the “merger agreement”), by and among the Company, Helios Merger Co., a Delaware corporation and a wholly-owned subsidiary of the Company (the “Merger Sub”), Pineapple Energy LLC, a Delaware limited liability company, Lake Street Solar LLC as the Members’ Representative, and Randall D. Sampson as the Shareholders’ Representative, pursuant to which Merger Sub merged with and into Pineapple Energy, with Pineapple Energy surviving the merger as a wholly-owned subsidiary of the Company (the “merger”). Following the closing of the merger (the “Closing”) the Company changed its name from Communications Systems, Inc. to Pineapple Holdings, Inc. and commenced doing business using the Pineapple name, and subsequently, on April 13, 2022, changed its name to Pineapple Energy Inc.
In addition, on March 28, 2022 and immediately prior to the closing of the merger, Pineapple Energy completed its acquisition (“HEC Asset Acquisition”) of substantially all of the assets of
The Company is a growing domestic operator and consolidator of residential solar, battery storage, and grid service solutions. The Company’s focus is acquiring and growing leading local and regional solar, storage and energy service companies nationwide, which commenced with Pineapple Energy’s acquisitions of certain assets of Horizon Solar Power and Sungevity in December 2020. Through the Company’s HEC business, the Company also operates as a recognized solar integrator, dedicated to providing affordable energy solutions in Hawaii with its offerings of solar panels, communication filters, web monitoring systems, batteries, water heating systems, and other related products that help residential and commercial users reduce electric costs and earn tax credits related to installing renewable energy systems. The Company’s E-Gear business is a renewable energy innovator that offers proprietary patented and patent pending edge-of-grid energy management and storage solutions that offer intelligent and real-time adaptive control, flexibility, visibility, predictability and support to energy consumers, energy service companies, and utilities.
Through the Company’s legacy CSI subsidiaries, JDL Technologies, Inc. (“JDL”) and Ecessa Corporation (“Ecessa”), the Company provides technology solutions, including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment, and designs, develops and sells SD-WAN (software-designed wide-area network) solutions.
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned operating subsidiaries. Any reference in these notes to applicable guidance is meant to refer to the
authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed consolidated financial statements and notes thereto should be read in conjunction with Pineapple Energy’s audited financial statements and notes thereto for the year ended December 31, 2021 included on the Company’s Current Report on Form 8-K/A, as filed with the Securities and Exchange Commission (“SEC”) on May 19, 2022. The accompanying condensed balance sheet at
The Company accounted for the March 28, 2022 merger as a reverse recapitalization whereby it was determined that Pineapple Energy was the accounting acquirer and CSI was the accounting acquiree. This determination was primarily based on:
Former Pineapple Energy stockholders having the largest voting interest in the Company following the merger;
The implied enterprise value of Pineapple Energy in the merger was well in excess of the market capitalization of CSI prior to the merger;
At the Closing, the board of directors of the Company was fixed at
Pineapple Energy’s Chief Executive Officer serves as the Chief Executive Officer of the Company subsequent to the merger;
The post-combination company assumed the “Pineapple Energy” name; and
The Company disposed of the pre-existing CSI headquarters during the second quarter of 2022 and expects to dispose of its legacy subsidiaries, JDL and Ecessa, and will continue Pineapple Energy operations in Hawaii.
Accordingly, for accounting purposes, the merger was treated as the equivalent of Pineapple Energy issuing stock for the net assets of CSI, accompanied by a recapitalization.
While CSI was the legal acquirer in the merger, because Pineapple Energy was determined to be the accounting acquirer, the historical financial statements of Pineapple Energy became the historical financial statements of the combined company upon the consummation of the merger. As a result, the financial statements included in the accompanying condensed consolidated financial statements reflect (i) the historical operating results of Pineapple Energy prior to the merger; (ii) the consolidated results of legacy CSI, Pineapple Energy, HEC, and E-Gear following the closing of the merger; (iii) the assets and liabilities of Pineapple Energy at their historical cost; (iv) the assets and liabilities of CSI, HEC and E-Gear at fair value as of the merger date in accordance with ASC 805, Business Combinations, and (v) the Company’s equity structure for all periods presented.
In connection with the merger transaction, we have converted the equity structure for the periods prior to the merger to reflect the number of shares of the Company’s common stock issued to Pineapple Energy’s members in connection with the recapitalization transaction. As such, the shares, corresponding capital amounts and earnings per share, as applicable, related to Pineapple Energy member units prior to the merger have been retroactively converted by applying the exchange ratio established in the merger agreement.
On March 28, 2022, following the closing of the merger, the Company closed on a $
and for working capital to support Pineapple Energy’s growth strategy of acquiring leading local and regional solar installers around the United States.
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and accounts have been eliminated.
The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. The Company uses estimates based on the best information available in recording transactions and balances resulting from operations. Actual results could materially differ from those estimates. The Company’s estimates consist principally of reserves for doubtful accounts, asset impairment evaluations, accruals for compensation plans, lower of cost or market inventory adjustments, the fair value of the term loan payable and related assets at the date of acquisition, the fair value of the contingent value rights and contingent consideration, provisions for income taxes and deferred taxes, depreciable lives of fixed assets, and amortizable lives of intangible assets.
For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company may invest in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the federal deposit insurance company (“FDIC”) or other government agency. These money market funds seek to preserve the value of the investment at $
Investments consist of corporate notes and bonds and commercial paper that are traded on the open market and are classified as available-for-sale and minority investments in strategic technology companies. Available-for-sale investments are reported at fair value with unrealized gains and losses excluded from operations and reported as a separate component of stockholders’ equity, net of tax. The investments on the balance sheet as of September 30, 2022 can only be used to support the legacy CSI business, will be distributed to CVR holders and cannot be used to support the working capital needs of the Pineapple Energy business.
Accounts receivable are recorded at their net realizable value and are not collateralized. Accounts receivable include amounts earned less payments received and allowances for doubtful accounts. Management continually monitors and adjusts its allowances associated with the Company’s receivables to address any credit risks associated with the accounts receivable and periodically writes off receivables when collection is not considered probable. The Company does not charge interest on past due accounts. When uncertainty exists as to the collection of receivables, the Company records an allowance for doubtful accounts and a corresponding charge to bad debt expense.
Inventories, which consist primarily of materials and supplies used in the installation of solar systems, are stated at the lower of cost or net realizable value, with costs computed on a weighted average cost basis. The Company periodically reviews its inventories for excess and obsolete items and adjusts carrying costs to estimated net realizable values when they are determined to be less than cost.
Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method. Maintenance and repairs are charged to operations and additions or improvements are capitalized. Items of property sold, retired or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any gains or losses on disposal are reflected in the statements of operations.
Goodwill represents the amount by which the purchase prices (including liabilities assumed) of acquired businesses exceed the estimated fair value of the net tangible assets and separately identifiable intangible assets of these businesses. Definite lived intangible assets, consisting primarily of trade names, technology, and customer relationships are amortized on a straight-line basis over the estimated useful life of the asset. Goodwill is not amortized but is tested at least annually for impairment. The Company reassesses the value of our reporting units and related goodwill balances annually on October 1 and at other times if events have occurred or circumstances exist that indicate the carrying amount of goodwill may not be recoverable.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If indicators of impairment exist, management identifies the asset group that includes the potentially impaired long-lived asset, at the lowest level at which there are separate, identifiable cash flows. If the fair value, determined as the total of the expected undiscounted future net cash flows for the asset group is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset.
Accumulated other comprehensive loss, net of tax, is comprised of unrealized losses on debt securities.
Within the Company’s Solar segment, revenue is recognized when there is a transfer of control of promised goods or services to customers in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services. The Company sells solar power systems under construction and development agreements to residential and commercial customers. The completed system is sold as a single performance obligation. For residential contracts, revenue is recognized at the point-in-time when the systems are placed into service. Any advance payments received in the form of customer deposits are recorded as contract liabilities. Commercial contracts are generally completed within three to twelve months from commencement of construction. Construction on large projects may be completed within eighteen to twenty-four months, depending on the size and location of the project. Revenue from commercial contracts are recognized as work is performed based on the estimated ratio of costs incurred to date to the total estimated costs at the completion of the performance obligation.
The Company also arranges for solar power systems to be installed for residential customers by a third party, for which it earns a commission upon the end customer’s acceptance of the installation. As there are more than two parties involved in the sales transaction, the Company has determined it has an agent relationship in the contracts with these customers, due to the fact that the Company is not primarily responsible for fulfilling the promise to provide the installation of solar
arrays to the customer, the Company does not have inventory risk and has only limited discretion in pricing. Accordingly, the Company has determined that revenue under these arrangements should be recognized on a net basis.
Within the Company’s IT Solutions & Services segment, revenue is recognized over time for managed services and professional services (time and materials (“T&M”) and fixed price) performance obligations. This segment’s managed services performance obligation is a bundled solution, a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are recognized evenly over the term of the contract. T&M professional services arrangements are measured over time with an input method based on hours expended towards satisfying this performance obligation. Fixed price professional service arrangements under a relatively longer-term service will also be measured over time with an input method based on hours expended.
The Company has also identified the following performance obligations within its IT Solutions & Services segment that are recognized at a point in time, which include resale of third-party hardware and software, installation services, arranging for another party to transfer services to the customer, and certain professional services. The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the agreed upon shipping terms. Installation services are recognized at a point in time when the services are completed. The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time as the Company has transferred control upon the service first being made available to the customer by the third-party vendor, which are required to be presented on a net basis. Depending on the nature of the service, certain professional services transfer control at a point in time. The Company evaluates these circumstances on a case-by-case basis to determine if revenue should be recognized over time or at a point in time. See Note 4, Revenue Recognition, for further discussion regarding revenue recognition.
The State of Hawaii imposes a gross receipts tax on all business operations done in Hawaii. The Company records the tax revenue and expense on a gross basis.
The Company has an Employee Savings Plan (401(k)) and matches a percentage of employee contributions up to six percent of compensation.
The Company accounts for share-based compensation awards on a fair value basis. The estimated grant date fair value of each stock-based award is recognized in the statement of operations over the requisite service period (generally the vesting period). The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.
Basic net loss per common share is based on the weighted average number of common shares outstanding during each year. Diluted net loss per common share adjusts for the dilutive effect of potential common shares outstanding. The Company’s only potential additional common shares outstanding are common shares that would result from the conversion of the Series A convertible preferred shares, stock options, warrants and shares associated with the long-term incentive compensation plans, which resulted in
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. This ASU is intended to provide financial statement users with more decision-useful information about expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
Accounting Standards Adopted
In August 2020, FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock and amend the guidance for the derivative scope exception for contracts in an entity’s own equity. Convertible instruments that continue to be subject to separation models are a) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and b) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The reduction of accounting models is intended to simplify the accounting for convertible instruments, reduce complexity for preparers and practitioners, and improve the decision usefulness and relevance of the information provided to financial statement users. The amendments to the derivative scope exception guidance a) removes the following conditions from the settlement guidance: settlement in unregistered shares, collateral, and shareholder rights; b) clarifies that penalty payments do not preclude equity classification within the settlement guidance in the situation where there is a failure to timely file; c) requires instruments that are required to be classified as an asset or liability under ASC 815-40-15-8A to be measured subsequently at fair value, with changes reported in earnings and disclosed in the financial statements; d) clarifies that the scope of the disclosure requirements in ASC 815-40-50 applies only to freestanding instruments, not embedded features; and e) clarifies that the scope of the reassessment guidance in ASC 815-40-35 on subsequent measurement applies to both freestanding instruments and embedded features. The amendment to this guidance is intended to reduce form-over-substance-based accounting conclusions. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We adopted this update as of January 1, 2022 and have incorporated this guidance in our evaluation of the accounting for our warrants, which are classified as equity in our condensed consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" (“ASU 2021-08”). The standard requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, “Revenue from Contracts with Customers,” as if it had originated the contracts. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company adopted this ASU during the second quarter of 2022 and has incorporated this guidance in our evaluation of the accounting for the merger and the HEC Asset Acquisition.
CSI Merger
On March 28, 2022, the Company and Pineapple Energy consummated the transactions contemplated by the merger agreement. At the Closing, each member unit of Pineapple Energy that was issued and outstanding immediately prior to the effective time of the merger was cancelled and converted into the right to receive the Company’s common stock. The Company issued an aggregate of
proceeds from the divestiture of the Company’s pre-merger operating and non-operating assets and properties, and (ii) the opportunity for the legacy CSI shareholders, through ownership of the Company’s common stock following the merger, to participate in the potential growth of the combined company’s residential solar, battery storage, and grid services solutions business.
The Company accounted for the merger as a reverse recapitalization whereby it was determined that Pineapple Energy was the accounting acquirer and CSI was the accounting acquiree. Refer to Note 2, Summary of Significant Accounting Policies, for further details. The accompanying condensed consolidated financial statements and related notes reflect the historical results of Pineapple Energy prior to the merger and do not include the historical results of CSI prior to the consummation of the merger.
As a result of the reverse merger, the acquired assets and assumed liabilities of CSI were remeasured and recognized at fair value as of the acquisition date. The total purchase price represents the fair value of the Company common stock held by legacy CSI shareholders at the time of the merger (
The merger agreement also included the execution of CVR agreements with holders of record of CSI stock at the close of business on March 25, 2022. Each shareholder of record received one contractual non-transferable CVR per share of common stock held, which entitles the holders of the CVRs to receive a portion of the cash, cash equivalents, investments and net proceeds of any divestiture, assignment, or other disposition of all legacy assets of CSI and/or its legacy subsidiaries, JDL and Ecessa, that are related to CSI’s pre-merger business, assets, and properties, including the sale of JDL and Ecessa, that occur during the 24-month period following the closing of the merger. As of the merger date, the fair value of the CVR liability was estimated at $
The purchase price allocation for the merger is based on the estimated fair value of assets acquired and liabilities assumed and has been provisionally allocated as follows:
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
| $ | |
Investments |
|
| |
Accounts receivable |
|
| |
Inventory |
|
| |
Other assets |
|
| |
Property, plant, and equipment |
|
| |
Current assets held for sale |
|
| |
Intangible assets |
|
| |
Goodwill |
|
| |
Total assets |
|
| |
|
|
|
|
Accounts payable |
|
| |
Accrued expenses |
|
| |
Deferred revenue |
|
| |
Total liabilities |
|
| |
|
|
|
|
Net assets acquired |
| $ | |
The identifiable intangible assets from the merger are definite-lived assets. These assets include trade names, developed technology, and customer relationships and have a provisional weighted average amortization period of
The initial accounting for the acquired assets and liabilities is incomplete and is expected to be finalized during the twelve-month post-closing measurement period. The areas of the purchase price allocation that are not yet finalized for the merger include the valuation of intangible assets and income tax related matters. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
The merger included the acquisition of current assets held for sale related to CSI’s company headquarters building located in Minnetonka, Minnesota, pursuant to a purchase agreement entered into with Buhl Investors LLC on November 18, 2021. The agreement was further amended on February 15, 2022, April 11, 2022 and April 26, 2022, to allow for additional time to complete due diligence. The assets were recorded at the purchase price of $
The condensed consolidated financial statements include results of operations of CSI following the consummation of the merger for the three and nine months ended September 30, 2022, which included $
HEC Asset Acquisition
On March 28, 2022, immediately prior to the closing of the merger, Pineapple Energy completed its acquisition of substantially all of the assets of HEC and E-Gear and assumed certain liabilities of HEC and E-Gear pursuant to the Asset Purchase Agreement dated March 1, 2021, as amended by Amendment No. 1 to Asset Purchase Agreement dated December 16, 2021, by and among Pineapple Energy as Buyer, HEC and E-Gear as Sellers, and Steve P. Godmere, as representative for the Sellers. This acquisition was an expansion in the residential solar market and is a strategic start to the Company’s overall acquisition growth plan as it looks to expand further through the acquisition of regional residential solar companies and energy technology solution providers. At the closing of this acquisition, Pineapple Energy issued
The assets and liabilities of HEC and E-Gear were recorded within the Solar segment as of the merger date at their respective fair values. The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed and has been provisionally allocated as follows:
|
|
|
|
|
|
| |
Cash and cash equivalents |
| $ | |
Accounts receivable |
|
| |
Inventory |
|
| |
Other assets |
|
| |
Property, plant, and equipment |
|
| |
Intangible assets |
|
| |
Goodwill |
|
| |
Total assets |
|
| |
|
|
|
|
Total liabilities |
|
| ( |
|
|
|
|
Net assets acquired |
| $ | |
The identifiable intangible assets from the HEC Asset Acquisition are definite-lived assets. These assets include a trade name and developed technology and have a weighted average amortization period of seven years. Goodwill recorded as part of the purchase price allocation is tax deductible. The fair value of the acquired identifiable intangible assets is provisional depending on the final valuation of those assets. The developed technology preliminary fair values were determined using the relief-from-royalty method, an income approach, which included the following significant assumptions: projected revenue, obsolescence, royalty rate, income tax rate, and discount rate. The preliminary fair values of the trade names were determined using the multiple period excess-earnings method, an income approach, which included the following significant assumptions: projected revenues, estimated probability of continued used of tradenames, margins, depreciation, contributory asset charges, discount rates, and income tax rates.
The initial accounting for the acquired assets and liabilities is incomplete and is expected to be finalized during the twelve-month post-closing measurement period. The areas of the purchase price allocation that are not yet finalized for the HEC Asset Acquisition include the valuation of intangible assets and income tax related matters. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
The condensed consolidated financial statements include results of operations of HEC and E-Gear following the consummation of the HEC Asset Acquisition for the three and nine months ended September 30, 2022, which included $
Transaction costs related to the merger and HEC Asset Acquisition totaled $
Pro Forma Information
The following unaudited pro forma information represents the results of operations as if the Company had completed the merger and HEC Asset Acquisition as of January 1, 2021. The unaudited pro forma financial information below includes adjustments to amortization expense for intangible assets totaling $
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30 |
| Nine Months Ended September 30 | ||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
Net revenue | $ | |
| $ | |
| $ | |
| $ | |
Net loss |
| ( |
|
| ( |
|
| ( |
|
| ( |
Earnout Shares
As part of the merger, the Company agreed to issue up to
The milestone for the second tranche of the Merger Earnout Shares is triggered upon the volume weighted average price (“VWAP”) of the Company’s common stock equaling or exceeding $
Disaggregation of revenue
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that best reflects the consideration we expect to receive in exchange for those goods or services. In accordance with ASC 606-10-50-5, the following tables present how we disaggregated our revenues for the three and nine months ended September 30, 2022. There was $
|
|
|
|
|
|
| Solar Revenue by Type | ||||
| Three Months Ended September 30 |
| Nine Months Ended September 30 | ||
|
| 2022 |
|
| 2022 |
Residential contracts | $ | |
| $ | |
Commercial contracts |
| |
|
| |
Commission revenue |
| |
|
| |
| $ | |
| $ | |
The IT Solutions & Services segment classifies its revenue (including $
|
|
|
|
|
|
| IT Solutions & Services Revenue by Customer Group | ||||
| Three Months Ended September 30 |
| Nine Months Ended September 30 | ||
|
| 2022 |
|
| 2022 |
Financial & Legal | $ | |
| $ | |
Healthcare |
| |
|
| |
Education |
| |
|
| |
Other commercial clients |
| |
|
| |
| $ | |
| $ | |
|
|
|
|
|
|
| IT Solutions & Services Revenue by Type | ||||
| Three Months Ended September 30 |
| Nine Months Ended September 30 | ||
|
| 2022 |
|
| 2022 |
Project & product revenue | $ | |
| $ | |
Services & support revenue |
| |
|
| |
| $ | |
| $ | |
The following tables show the Company’s restricted cash equivalents and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as restricted cash and cash equivalents or short- and long-term investments as of September 30, 2022. There were
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 | ||||||||||||||||||||
| Amortized Cost |
| Gross Unrealized |
| Gross Unrealized |
| Fair Value |
| Cash Equivalents |
| Short-Term |
| Long-Term | |||||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds | $ | |
| $ | — |
| $ | — |
| $ | |
| $ | |
| $ | — |
| $ | — |
Subtotal |
| |
|
| — |
|
| — |
|
| |
|
| |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Notes/Bonds |
| |
|
| — |
|
| ( |
|
| |
|
| — |
|
| |
|
| — |
Subtotal |
| |
|
| — |
|
| ( |
|
| |
|
| — |
|
| |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | $ | |
| $ | — |
| $ | ( |
| $ | |
| $ | |
| $ | |
| $ | — |
The Company tests for other-than-temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The Company intends to hold the investments until it can recover the full principal amount and has the ability to do so based on other sources of liquidity. The Company expects such recoveries to occur prior to the contractual maturities.
The following table summarizes the estimated fair value of our investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortized Cost |
| Estimated Market | ||
Due within one year |
| $ | |
| $ | |
Due after one year through five years |
|
| — |
|
| — |
|
| $ | |
| $ | |
As part of the merger, the Company acquired an investment totaling $
Inventories are summarized below. There were
|
|
|
|
|
|
| September 30, |
| |
|
| 2022 |
| |
Finished goods |
| $ | |
|
Raw materials |
|
| |
|
|
| $ | |
|
The Company recorded a provisional goodwill balance totaling $
Including the provisional intangible assets totaling $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2022 | ||||||
|
| Gross Carrying Amount |
| Accumulated Amortization |
| Net | |||
Tradenames & trademarks |
| $ | |
| $ | ( |
| $ | |
Developed technology |
|
| |
|
| ( |
|
| |
Customer relationships |
|
| |
|
| ( |
|
| |
|
| $ | |
| $ | ( |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2021 | ||||||
|
| Gross Carrying Amount |
| Accumulated Amortization |
| Net | |||
Tradename & trademark |
| $ | |
| $ | ( |
| $ | |
|
| $ | |
| $ | ( |
| $ | |
Amortization expense on these identifiable intangible assets was $
|
|
|
|
|
|
|
|
Year Ending December 31: |
|
|
|
Q4 2022 |
| $ | |
2023 |
|
| |
2024 |
|
| |
2025 |
|
| |
2026 |
|
| |
Thereafter |
|
| |
Loan Payable
As of September 30, 2022 and December 31, 2021, Pineapple Energy had $
On December 16, 2021, the Term Loan Agreement was amended, whereby the maturity date was extended to
The amendment represented a modification to the loan agreement with the existing lender as both the original loan agreement and the amendment allow for immediate prepayment and the Company passed the cash flow test. At December 31, 2021, the combined loan and accrued interest balance was $
effective interest rate of approximately
Interest and accretion expense was $
Working Capital Note
On January 8, 2021, Pineapple Energy and Hercules, as agent for itself and the lenders, entered into a Working Capital Loan and Security Agreement (the “Working Capital Agreement”) for a working capital loan in the maximum principal amount of $
Interest expense was $
Related Party Payables
During December 2020, Pineapple Energy incurred acquisition-related costs and accrued a payable totaling $
On December 16, 2021, the then-members signed subscription agreements where the then-members agreed, in consideration for the full cancellation of the accrued payables, to convert the accrued payables into convertible promissory notes of Pineapple Energy, effective immediately prior to the consummation of the merger. The convertible promissory notes automatically converted into
Other Contingencies
During the first quarter of 2022, the
In the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against these actions and claims. Company management is not aware of any outstanding or pending legal actions or claims that could materially affect the Company’s financial position or results of operations.
2022 Equity Incentive Plan
On January 24, 2022 the CSI board of directors adopted, and on March 16, 2022 the Company’s shareholders approved, the Company’s 2022 Equity Incentive Plan (“2022 Plan”), which became effective on March 28, 2022. The 2022 Plan authorizes incentive awards to officers, key employees, non-employee directors, and consultants in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock awards, stock unit awards, and other stock-based awards. The 2022 Plan authorizes the issuance of up to
Changes in Restricted Stock Units Outstanding
The following table summarizes the changes in the number of RSUs under the 2022 Plan over the period December 31, 2021 to September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average | |
|
|
|
|
| Grant Date | |
|
|
| RSUs |
| Fair Value | |
Outstanding – December 31, 2021 |
|
|
|
| $ |
|
Granted |
|
| |
|
| |
Issued |
|
| — |
|
| — |
Forfeited |
|
| — |
|
| — |
Outstanding – September 30, 2022 |
|
| |
| $ | |
Compensation Expense
Convertible Preferred Stock and Warrants
On June 28, 2021, the Company entered into a securities purchase agreement (“SPA”) in which, subsequent to the closing of the merger, the Company would authorize the issuance and sale of
Concurrent with the amendment, the Company entered into warrant agreements with the PIPE Investors to purchase common stock (the “Warrant Agreement”), whereby the Company would issue
These Convertible Preferred Stock and PIPE Warrants were issued on March 28, 2022 upon the consummation of the merger. As of September 30, 2022, there were
The proceeds from the issuance of Convertible Preferred Stock were allocated between the Convertible Preferred Stock and PIPE Warrants using a relative fair value method. As of March 28, 2022, the fair value of the Convertible Preferred Stock was estimated at $
In the preparation of the Company’s condensed consolidated financial statements, management calculates income taxes based upon the estimated effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. Management analyzes these assets and liabilities regularly and assesses the likelihood that deferred tax assets will be recovered from future taxable income.
The Company’s effective income tax rate was
The Company classifies its business operations into
Solar: generates revenue through the sale and installation of residential and commercial solar systems, battery storage, and grid service solutions.
IT Solutions & Services: provides technology solutions that address prevalent IT challenges, including network resiliency, security products and services, network virtualization, and cloud migrations, IT managed services, wired and wireless network design and implementation, and converged infrastructure configuration, deployment and management.
Our chief operating decision maker evaluates segment financial performance based on segment revenues and segment operating income and allocates resources to achieve our operating profit goals through these
Information concerning the Company’s operations in its segments for the three- and nine-month periods ended September 30, 2022 and 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| IT Solutions & |
|
|
|
| Intercompany |
|
| ||||
| Solar |
| Services |
| Other |
| Eliminations |
| Total | |||||
Three Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales | $ | |
| $ | |
| $ | — |
| $ | ( |
| $ | |
Cost of sales |
| |
|
| |
|
| — |
|
| — |
|
| |
Gross profit |
| |
|
| |
|
| — |
|
| ( |
|
| |
Selling, general and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expenses |
| |
|
| |
|
| |
|
| ( |
|
| |
Amortization expense |
| |
|
| |
|
| — |
|
| — |
|
| |
Transaction costs |
| — |
|
| |
|
| |
|
| — |
|
| |
Operating loss |
| ( |
|
| ( |
|
| ( |
|
| — |
|
| ( |
Other income (expense) |
| ( |
|
| |
|
| |
|
| — |
|
| ( |
Loss before income tax | $ | ( |
| $ | ( |
| $ | ( |
| $ | — |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization | $ | |
| $ | |
| $ | — |
| $ | — |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures | $ | |
| $ | |
| $ | — |
| $ | — |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets | $ | |
| $ | |
| $ | — |
| $ | — |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| IT Solutions & |
|
|
|
| Intercompany |
|
| ||||
| Solar |
| Services |
| Other |
| Eliminations |
| Total | |||||
Three Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales | $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | |
Cost of sales |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Gross profit |
| |
|
| — |
|
| — |
|
| — |
|
| |
Selling, general and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expenses |
| |
|
| — |
|
| — |
|
| — |
|
| |
Amortization expense |
| |
|
| — |
|
| — |
|
| — |
|
| |
Transaction costs |
| |
|
| — |
|
| — |
|
| — |
|
| |
Operating loss |
| ( |
|
| — |
|
| — |
|
| — |
|
| ( |
Other expense |
| ( |
|
| — |
|
| — |
|
| — |
|
| ( |
Loss before income tax | $ | ( |
| $ | — |
| $ | — |
| $ | — |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization | $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets | $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| IT Solutions & |
|
|
|
| Intercompany |
|
| ||||
| Solar |
| Services |
| Other |
| Eliminations |
| Total | |||||
Nine Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales | $ | |
| $ | |
| $ | — |
| $ | ( |
| $ | |
Cost of sales |
| |
|
| |
|
| — |
|
| — |
|
| |
Gross profit |
| |
|
| |
|
| — |
|
| ( |
|
| |
Selling, general and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expenses |
| |
|
| |
|
| |
|
| ( |
|
| |
Amortization expense |
| |
|
| |
|
| — |
|
| — |
|
| |
Transaction costs |
| |
|
| |
|
| |
|
| — |
|
| |
Operating loss |
| ( |
|
| ( |
|
| ( |
|
| — |
|
| ( |
Other income (expense) |
| ( |
|
| |
|
| |
|
| — |
|
| |
Income (loss) before income tax | $ | ( |
| $ | ( |
| $ | |
| $ | — |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization | $ | |
| $ | |
| $ | — |
| $ | — |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures | $ | |
| $ | |
| $ | — |
| $ | — |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| IT Solutions & |
|
|
|
| Intercompany |
|
|
| |||
| Solar |
| Services |
| Other |
| Eliminations |
| Total | |||||
Nine Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales | $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | |
Cost of sales |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Gross profit |
| |
|
| — |
|
| — |
|
| — |
|
| |
Selling, general and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expenses |
| |
|
| — |
|
| — |
|
| — |
|
| |
Amortization expense |
| |
|
| — |
|
| — |
|
| — |
|
| |
Transaction costs |
| |
|
| — |
|
| — |
|
| — |
|
| |
Operating loss |
| ( |
|
| — |
|
| — |
|
| — |
|
| ( |
Other expense |
| ( |
|
| — |
|
| — |
|
| — |
|
| ( |
Loss before income tax | $ | ( |
| $ | — |
| $ | — |
| $ | — |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization | $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | |
The accounting guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.
Level 2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated by observable market data. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.
Level 3 – Significant inputs to pricing that have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial instruments.
Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 are summarized below. There were
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2022 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total Fair Value | ||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
Money market funds | $ | |
| $ | — |
| $ | — |
| $ | |
Subtotal |
| |
|
| — |
|
| — |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
Corporate notes/bonds |
| — |
|
| |
|
| — |
|
| |
Subtotal |
| — |
|
| |
|
| — |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Contingent value rights |
| — |
|
| — |
|
| ( |
|
| ( |
Earnout consideration |
| — |
|
| — |
|
| — |
|
| — |
Subtotal |
| — |
|
| — |
|
| ( |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | $ | |
| $ | |
| $ | ( |
| $ | ( |
The estimated fair value of the CVRs as of September 30, 2022 was $
The estimated fair value of the earnout consideration as of September 30, 2022 was $
The fair value remeasurements noted above were both recorded within other income (expense) in the condensed consolidated statements of operations.
We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period. There were
SUNation Acquisition
On November 9, 2022, the Company entered into a Transaction Agreement (the “Transaction Agreement”) with Solar Merger Sub, LLC, a New York limited liability company and wholly owned subsidiary of the Company (“Merger Sub”), Scott Maskin, James Brennan, Scott Sousa and Brian Karp (collectively, the “Sellers”), and Scott Maskin as representative of each seller, pursuant to which the Company directly or indirectly acquired all of the issued and outstanding equity of SUNation Solar Systems, Inc. and
The Company acquired the equity of the Acquired Companies from Sellers for an aggregate purchase price of approximately $
The Short-Term Note is secured as described below and matures on August 9, 2023. It carries an annual interest rate of
Pursuant to a Limited Pledge and Security Agreement among the Company and Sellers, dated November 9, 2022 (the “Pledge Agreement”), the Short-Term Note is secured by a pledge by the Company and Merger Sub of the equity of the Acquired Companies purchased under the Transaction Agreement. While the Short-Term Note remains outstanding, the Company also agrees to certain negative covenants with respect to the operation of the Acquired Companies, including limits on distributions, the incurrence of indebtedness, imposition of liens, and sales of assets outside the ordinary course of business. If Sellers exercise their remedies under the Pledge Agreement (due to an event of default by the Company under the Short-Term Note or the Pledge Agreement), Sellers would be able recover the pledged equity of the Acquired Companies and the Company’s remaining obligations under the Short-Term Note and the Long-Term Note would be cancelled in their entirety and would be of no further force and effect. The Company’s obligations to make any Earnout payment under the Transaction Agreement would also be terminated. The Pledge Agreement will automatically terminate upon the payment of all amounts due under the Short-Term Note.
As a result of the timing of the acquisition in proximity to the filing date, not all disclosures as required under ASC 805 are presented herein (including a preliminary purchase price allocation and certain pro-forma information) as the initial accounting for the business combination is incomplete at the time the financial statements were issued.
PIPE Investment Reset
Following market close on November 9, 2022, the Company also entered into a separate Consent, Waiver and Amendment with each of the Company’s existing PIPE Investors whereby these investors provided certain waivers to the anti-dilution protections that reset the conversion price of the Convertible Preferred Stock to $
The Company’s financial statements as of September 30, 2022 have been prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As noted in Note 14, the Company entered into a $
In order to continue as a going concern, the Company will need additional capital resources. Management plans to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. These financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited financial statements and notes thereto as of and for the years ended December 31, 2021 and 2020, which are contained in our amended Current Report on Form 8-K/A filed with the Securities and Exchange Commission (“SEC”) on May 19, 2022.
Forward-Looking Statements
This quarterly report and, from time to time, reports filed with the Securities and Exchange Commission (“SEC”), in press releases, and in other communications to shareholders or the investing public, may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “may,” “will,” “can,” “should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,” “believe,” “are confident that,” “look forward to,” “predict,” “estimate,” “potential,” “project,” “target,” “forecast,” “see,” “intend,” “design,” “strive,” “strategy,” “future,” “opportunity,” “assume,” “guide,” “position,” “continue” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on current beliefs, expectations and assumptions that are subject to significant risks, uncertainties and changes in circumstances that could cause actual results to differ materially from such forward-looking statements. These risks, uncertainties and changes in circumstances include, but are not limited to:
Solar Segment Risks and Uncertainties:
our growth strategy depends on the continued origination of solar service agreements;
if sufficient additional demand for residential solar power systems does not develop or takes longer to develop than we anticipate, our ability to originate solar service agreements may decrease;
a material reduction in the retail price of electricity charged by electric utilities or other retail electricity providers could harm our business, financial condition and results of operations;
we need to obtain substantial additional financing arrangements to continue as a going concern and provide working capital and growth capital;
our business prospects are dependent in part on a continuing decline in the cost of solar energy system components;
we face competition from centralized electric utilities, retail electric providers, independent power producers and renewable energy companies;
developments in technology or improvements in distributed solar energy generation and related technologies or components may materially adversely affect demand for our offerings;
we depend on a limited number of suppliers of solar energy system components;
increases in the cost of our solar power systems due to tariffs imposed by the U.S. government could have a material adverse effect on our business, financial condition and results of operations;
our operating results may fluctuate from quarter to quarter and year to year;
if we are unable to make acquisitions on economically acceptable terms, our future growth would be limited, and any acquisitions we may make could reduce, rather than increase, our cash flows;
the installation and operation of solar power systems depends heavily on suitable solar and meteorological conditions;
the loss of one or more members of our senior management or key employees may adversely affect our ability to implement our strategy;
our inability to protect our intellectual property could adversely affect our business;
we may be subject to interruptions, failures or breaches in our information technology systems;
we may be subject to regulation as an electric utility in the future;
electric utility policies and regulations, including those affecting electric rates, may present regulatory and economic barriers to the purchase and use of solar power systems;
we rely on net metering and related policies for competitive pricing to our customers;
our business depends in part on the availability of financial incentives;
limitations regarding the interconnection of solar power systems to the electrical grid may significantly reduce our ability to sell electricity from our solar power systems; and
compliance with occupational safety and health requirements and best practices can be costly.
IT Solutions & Services Segment Risks and Uncertainties:
our ability to profitably increase our business serving small and mid-size businesses (“SMB”) commercial businesses as well as any decreased spending by our existing SMB customers due to uncertainty or lower customer demand due to the COVID-19 pandemic;
our ability to successfully and profitably manage a large number of small accounts;
our ability to establish and maintain a productive and efficient workforce;
our ability to compete in a fast growing and large field of SD-WAN competitors, some of which have more features than our current product offering; and
our ability to successfully sell the legacy CSI businesses at a value close to their fair market value.
Other risks and uncertainties are discussed more fully under the caption “Risk Factors” in our filings with the SEC, including in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q. Accordingly, you should not place undue reliance on forward-looking statements. To the extent permitted by applicable law, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.
Overview
Pineapple Energy Inc. (formerly Communications Systems, Inc. (“CSI”) and Pineapple Holdings, Inc.) (“PEGY,” “we” or the “Company”) was originally organized as a Minnesota corporation in 1969. On March 28, 2022, the Company completed its previously announced merger transaction with Pineapple Energy LLC (“Pineapple Energy”) in accordance with the terms of a merger agreement, pursuant to which a subsidiary of the Company merged with and into Pineapple Energy, with Pineapple Energy surviving the merger as a wholly owned subsidiary of the Company (the “merger”). Following the closing of the merger (the “Closing”) the Company changed its name from Communications Systems, Inc. to Pineapple Holdings, Inc. and subsequently, on April 13, 2022, changed its name to Pineapple Energy Inc.
In addition, on March 28, 2022 and immediately prior to the closing of the merger, the Company completed its acquisition (“HEC Asset Acquisition”) of substantially all of the assets of two Hawaii-based solar energy companies, Hawaii Energy Connection, LLC (“HEC”) and E-Gear, LLC (“E-Gear”).
The Company is a growing domestic operator and consolidator of residential solar, battery storage, and grid service solutions. The Company’s focus is acquiring and growing leading local and regional solar, storage and energy service companies nationwide. Through the Company’s HEC business, the Company also operates as a recognized solar integrator, dedicated to providing affordable energy solutions in Hawaii with its offerings of solar panels, communication filters, web monitoring systems, batteries, water heating systems, and other related products that help residential and commercial users reduce electric costs and earn tax credits related to installing renewable energy systems. The Company’s E-Gear business is a renewable energy innovator that offers proprietary patented and patent pending edge-of-grid energy management and storage solutions that offer intelligent and real-time adaptive control, flexibility, visibility, predictability and support to energy consumers, energy service companies, and utilities.
Through the Company’s legacy CSI subsidiaries, JDL Technologies, Inc. (“JDL”) and Ecessa Corporation (“Ecessa”), the Company provides technology solutions, including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment, and designs, develops and sells SD-WAN (software-designed wide-area network) solutions.
While CSI was the legal acquirer in the merger, because Pineapple Energy was determined to be the accounting acquirer, the historical financial statements of Pineapple Energy became the historical financial statements of the combined company upon the consummation of the merger. As a result, the financial statements included in the accompanying condensed consolidated financial statements, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, reflect the historical operating results of Pineapple Energy prior to the merger, the consolidated results of CSI, Pineapple Energy, HEC, and E-Gear following the closing of the
merger, and the Company’s equity structure for all periods presented. Accordingly, references to “the Company” herein are to the applicable entity at the date or during the time period in the applicable discussion.
Following the merger, the Company operates in two distinct business segments as follows:
Solar Segment
Through the Company’s Pineapple Energy, HEC and E-Gear businesses, the Company operates as follows:
As a recognized solar integrator, dedicated to providing affordable energy solutions in Hawaii with its offerings of solar panels, communication filters, web monitoring systems, batteries, water heating systems, and other related products that help residential and commercial users reduce electric costs and earn tax credits related to installing renewable energy systems.
As a renewable energy innovator that offers proprietary patented and patent pending edge-of-grid energy management and storage solutions that offer intelligent and real-time adaptive control, flexibility, visibility, predictability and support to energy consumers, energy service companies, and utilities.
IT Solutions & Services Segment
Through the Company’s legacy subsidiaries, JDL and Ecessa, the Company provides technology solutions, including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment, and designs, develops and sells SD-WAN (software-designed wide-area network) solutions. As previously disclosed, the Company expects to dispose of JDL and Ecessa.
SUNation Acquisition
On November 9, 2022, we entered into a Transaction Agreement (the “Transaction Agreement”) with Solar Merger Sub, LLC, a New York limited liability company and wholly owned subsidiary of the Company (“Merger Sub”), Scott Maskin, James Brennan, Scott Sousa and Brian Karp (collectively, the “Sellers”), and Scott Maskin as representative of each seller, pursuant to which we directly or indirectly acquired all of the issued and outstanding equity of SUNation Solar Systems, Inc. and five of its affiliated entities: SUNation Commercial, Inc., SUNation Service, Inc., SUNation Electric, Inc., SUNation Energy, LLC, and SUNation Roofing, LLC (collectively, the “Acquired Companies”). This acquisition was a further expansion in the residential and commercial solar markets and fits into our overall acquisition growth plan as we look to expand further through the acquisition of regional residential solar companies and energy technology solution providers.
We acquired the equity of the Acquired Companies from Sellers for an aggregate purchase price of approximately $21.9 million, comprised of (a) $2.39 million in cash consideration paid at closing, (b) the issuance at closing of a $5.0 million Short-Term Limited Recourse Secured Promissory Note (the “Short-Term Note”), (c) the issuance at closing of a $5,486,000 Long-Term Promissory Note (the “Long-Term Note”), (d) the issuance at closing of an aggregate of 1,480,000 shares (the “Shares”) of Company common stock, and (e) potential earn-out payments of up to $2.5 million for each of fiscal years 2023 and 2024, based on the percentage of year-over-year EBITDA growth of the Acquired Companies, as set forth in the Transaction Agreement (the “Earnout”).
The Short-Term Note is secured as described below and matures on August 9, 2023. It carries an annual interest rate of 4% until the three-month anniversary of issuance, 8% thereafter until the six-month anniversary of issuance, then 12% thereafter until the Short-Term Note is paid in full. The Long-Term Note is unsecured and matures on November 9, 2025. It carries an annual interest rate of 4% until the first anniversary of issuance, then 8% thereafter until the Long-Term Note is paid in full. We will be required to make a principal payment of $2.5 million on the second anniversary of the Long-Term Note. Both the Short-Term Note and Long-Term Note may be prepaid at our option at any time without penalty.
Pursuant to a Limited Pledge and Security Agreement among the Company and Sellers, dated November 9, 2022 (the “Pledge Agreement”), the Short-Term Note is secured by a pledge by us and Merger Sub of the equity of the Acquired Companies. While the Short-Term Note remains outstanding, we also agree to certain negative covenants with respect to
the operation of the Acquired Companies, including limits on distributions, the incurrence of indebtedness, imposition of liens, and sales of assets outside the ordinary course of business. If Sellers exercise their remedies under the Pledge Agreement (due to an event of default by us under the Short-Term Note or the Pledge Agreement), Sellers would be able recover the pledged equity of the Acquired Companies and our remaining obligations under the Short-Term Note and the Long-Term Note would be cancelled in their entirety and would be of no further force and effect. Our obligations to make any Earnout payment under the Transaction Agreement would also be terminated. The Pledge Agreement will automatically terminate upon the payment of all amounts due under the Short-Term Note.
Results of Operations
Comparison of the Three Months Ended September 30, 2022 and 2021
The consolidated results herein reflect the historical operating results of Pineapple Energy prior to the merger and the consolidated results of CSI, Pineapple Energy, HEC and E-Gear following the closing of the merger on March 28, 2022.
Consolidated sales were $7,709,062 in the third quarter of 2022 and $25,417 in the third quarter of 2021. Sales in the third quarter of 2022 consisted of $5,888,162 from the Solar segment (primarily from residential solar sales by HEC), $1,860,111 from the IT Solutions & Services segment, and $(39,211) in intercompany eliminations. Sales in the third quarter of 2021 were related to commissions revenue on third-party installations.
Consolidated gross profit was $2,013,742 in the third quarter of 2022, with $1,404,173 generated from the Solar segment, $648,780 from the IT Solutions & Services segment, and $(39,211) in intercompany eliminations. Consolidated gross profit was $25,417 in the third quarter of 2021.
Consolidated operating expenses included selling, general and administrative expenses, amortization expense and transaction costs and increased 285.6% to $4,414,721 in the third quarter of 2022 as compared to $1,144,986 in the third quarter of 2021. Consolidated selling, general and administrative expenses increased to $3,122,976 in the third quarter of 2022 from $241,728 in the third quarter of 2021 due primarily to $1,811,471 in selling, general and administrative costs of the acquired businesses and $1,290,982 in corporate overhead costs in the third quarter of 2022. Amortization expense increased $669,038 to $1,026,362 in the third quarter of 2022 due to amortization of intangible assets acquired through the merger and HEC Asset Acquisition. Transaction costs decreased $280,551 to $265,383 in the third quarter of 2022, since the merger and HEC Asset Acquisition were consummated in the first quarter of 2022.
Consolidated other expense was $119,017 in the third quarter of 2022 as compared to $275,694 in the third quarter of 2021. The decrease is primarily related to a decrease in interest and accretion expense.
Consolidated operating loss in the third quarter of 2022 increased to $2,400,979 from an operating loss of $1,119,569 in the third quarter of 2021. Net loss in the third quarter of 2022 was $2,519,996, or $(0.34) per diluted share, compared to net loss of $1,395,263, or $(0.45) per diluted share, in the third quarter of 2021.
Comparison of the Nine Months Ended September 30, 2022 and 2021
Consolidated sales were $13,918,498 in the first nine months of 2022 and $25,417 in the first nine months of 2021. Sales in the first nine months of 2022 consisted of $10,338,483 from the Solar segment (primarily from residential solar sales by HEC), $3,679,990 from the IT Solutions & Services segment, and $(99,975) in intercompany eliminations.
Consolidated gross profit was $3,385,136 in the first nine months of 2022, with $2,372,324 generated from the Solar segment, $1,112,787 from the IT Solutions & Services segment, and $(99,975) in intercompany eliminations. Consolidated gross profit was $25,417 in the first nine months of 2021.
Consolidated operating expenses included selling, general and administrative expenses, amortization expense and transaction costs increased 180.5% to $10,511,125 in the first nine months of 2022 as compared to $3,747,392 in the first nine months of 2021. Consolidated selling, general and administrative expenses increased to $6,653,796 in the first nine months of 2022 from $697,985 in the first nine months of 2021 due primarily to $3,574,286 in selling, general and administrative costs of the acquired businesses and $2,627,532 in corporate overhead costs in the first nine months of
2022. Amortization expense increased $1,338,074 to $2,410,045 in the first nine months of 2022 due to intangible assets acquired through the merger and HEC Asset Acquisition. Transaction costs decreased $530,152 to $1,447,284 in the first nine months of 2022, due to the consummation of the merger and HEC Asset Acquisition in the first quarter of 2022.
Consolidated other income was $4,165,011 in the first nine months of 2022 as compared to $1,004,964 in consolidated other expense in the first nine months of 2021. The current year period included a $4,684,000 gain on the fair value remeasurement of the Company’s earnout consideration and a $1,229,133 gain on sale of assets, partially offset by a $1,214,560 loss on the fair value remeasurement of the CVRs, as discussed further in Note 13, Fair Value Measurements.
Consolidated operating loss in the first nine months of 2022 increased to $7,125,989 from an operating loss of $3,721,975 in the first nine months of 2021. Net loss in the first nine months of 2022 was $2,960,978, or $(0.49) per diluted share, compared to net loss of $4,726,939, or $(1.54) per diluted share, in the first nine months of 2021.
Liquidity and Capital Resources
As of September 30, 2022, the Company had $10,236,453 in cash, restricted cash and cash equivalents, and liquid investments. Of this amount, $959,541 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the FDIC or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating cash. The Company also had $2,654,383 in investments consisting of corporate notes and bonds that are traded on the open market and are classified as available-for-sale at September 30, 2022.
Of the amounts of cash, restricted cash, cash equivalents and investments on the balance sheet at September 30, 2022, $4,578,099 consist of funds that can only be used to support the legacy CSI business, will be distributed to CVR holders and cannot be used to support the working capital needs of the Pineapple Energy business.
The Company had working capital of $8,535,469 at September 30, 2022, consisting of current assets of $17,205,232 and current liabilities of $8,669,763, compared to working capital of $(2,872,233) at December 31, 2021 consisting of current assets of $18,966 and current liabilities of $2,891,199.
Cash flow used in operating activities was $6,341,172 in the first nine months of 2022 as compared to $563,359 in the same period of 2021. Significant working capital changes from December 31, 2021 to September 30, 2022 included an increase in customer deposits of $4,462,156, a decrease in accounts payable of $3,065,340 and an increase in accounts receivable of $1,236,634.
Net cash used in investing activities was $2,300,726 in the first nine months of 2022 compared to net cash provided by investing activities of $479,983 in the same period of 2021. Net cash used in the 2022 period was primarily related to $10,199,835 in net cash paid for the HEC Asset Acquisition and the merger, partially offset by $6,297,115 in proceeds from the sale of assets previously classified as held for sale and $1,500,000 in earnout consideration payments related to legacy CSI’s sale of its Electronics and Software segment in 2021.
Net cash provided by financing activities was $16,205,002 in the first nine months of 2022 compared to $150,000 in the same period of 2021. In the first quarter of 2022, the Company received $32,000,000 in proceeds from the issuance of preferred stock and warrants to PIPE Investors and paid $2,699,370 in related issuance costs. The Company also paid $4,500,000 in principal against the Hercules term loan in the first quarter of 2022, as discussed further in Note 8, Commitments and Contingencies. During the third quarter of 2022, the Company paid $8,745,628 in CVR distributions.
As discussed above and in Note 14, Subsequent Events, on November 9, 2022, the Company, in connection with the SUNation acquisition, paid $2.39 million in cash and entered into the Short-Term Note and the Long-Term Note. The Short-Term Note matures on August 9, 2023. Also as discussed above, of the amounts of cash, restricted cash, cash equivalents and investments on the balance sheet at September 30, 2022, $4,578,099 consist of funds that can only be used to support the legacy CSI business, are restricted under the CVR agreement and cannot be used to support the working capital needs of the Pineapple Energy business.
Based on the Company’s current financial position, the Company’s forecasted future cash flows for twelve months beyond the date of issuance of the financial statements in this report indicate that the Company will not have sufficient cash to repay the Short-Term Note obligation, a factor which raises substantial doubt about the Company’s ability to continue as a going concern.
As a result, the Company requires additional funding and seeks to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances. However, additional funding may not be available on terms acceptable to the Company, or at all. If the Company is unable to raise additional funds, it would have a negative impact on the Company’s business, results of operations and financial condition. To the extent that additional funds are raised through the sale of equity or securities convertible into or exercisable for equity securities, the issuance of securities will result in dilution to the Company’s shareholders. Further, certain transactions could trigger an adjustment to the exercise price of the Convertible Preferred Stock and PIPE Warrants, which would lead to a corresponding increase in the number of shares of common stock issuable upon exercise of the PIPE Warrants, further diluting the Company’s shareholders.
Contingent Value Rights and Impact on Cash
As discussed in Note 3, Business Combinations, the Company issued CVRs prior to the closing of the merger to CSI shareholders of record on the close of business on March 25, 2022. The CVR entitles the holder to a portion of the cash, cash equivalents, investments and net proceeds of any divestiture, assignment, or other disposition of all legacy assets of CSI and/or its legacy subsidiaries, JDL and Ecessa, that are related to CSI’s pre-merger business, assets, and properties that occur during the 24-month period following the closing of the merger. The CVR liability as of September 30, 2022 was estimated at $10,743,224 and represented the estimated fair value as of that date of the legacy CSI assets to be distributed to CVR holders as of that date. This amount is recorded as a long-term liability that includes the remaining restricted cash and cash equivalents, investments, along with the other tangible and intangible assets related to the legacy CSI business. The proceeds from CSI’s pre-merger business working capital and related long term-assets and liabilities are not available to fund the working capital needs of the post-merger company.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and such differences could be material to our financial position and results of operations. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.
While our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting estimates, which involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results.
Income Taxes: In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating the Company’s current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. These assets and liabilities are analyzed regularly and management assesses the likelihood it will realize these deferred assets from future taxable income. We determine the valuation allowance for deferred income tax benefits based upon the expectation of whether the benefits are more likely than not to
be realized. The Company records interest and penalties related to income taxes as income tax expense in the consolidated statements loss and comprehensive loss.
Accounting for Business Combinations: We record all acquired assets and liabilities, including goodwill, other identifiable intangible assets, contingent value rights and contingent consideration at fair value. The initial recording of goodwill, other identifiable intangible assets, contingent value rights and contingent consideration, requires certain estimates and assumptions concerning the determination of the fair values and useful lives. The judgments made in the context of the purchase price allocation can materially affect our future results of operations. The valuations calculated from estimates are based on information available at the acquisition date. Goodwill is not amortized, but is subject to annual tests for impairment or more frequent tests if events or circumstances indicate it may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The contingent consideration and contingent value rights liability are adjusted to fair value each reporting period with any adjustments recorded within the statement of operations. For additional details, see Note 3, Business Combinations and Note 7, Goodwill and Intangible Assets.
Revenue Recognition: The Company recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to receive in exchange for these goods or services.
Within the Company’s Solar segment, revenue is recognized when there is a transfer of control of promised goods or services to customers in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services. The Company sells solar power systems under construction and development agreements to residential and commercial customers. The completed system is sold as a single performance obligation. For residential contracts, revenue is recognized at the point-in-time when the systems are placed into service. Any advance payments received in the form of customer deposits are recorded as contract liabilities. Commercial contracts are generally completed within three to twelve months from commencement of construction. Construction on large projects may be completed within eighteen to twenty-four months, depending on the size and location of the project. Revenue from commercial contracts is recognized as work is performed based on the estimated ratio of costs incurred to date to the total estimated costs at the completion of the performance obligation.
The Company also arranges for solar power systems to be installed for residential customers by a third party, for which it earns a commission upon the end customer’s acceptance of the installation. As there are more than two parties involved in the sales transaction, the Company has determined it has an agent relationship in the contracts with these customers, due to the fact that the Company is not primarily responsible for fulfilling the promise to provide the installation of solar arrays to the Customer, the Company does not have inventory risk and has only limited discretion in pricing. Accordingly, the Company has determined that revenue under these arrangements should be recognized on a net basis.
Within the Company’s IT Solutions & Services segment, revenue is recognized over time for managed services and professional services (time and materials (“T&M”) and fixed price) performance obligations. This segment’s managed services performance obligation is a bundled solution, a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are recognized evenly over the term of the contract. T&M professional services arrangements are measured over time with an input method based on hours expended towards satisfying this performance obligation. Fixed price professional service arrangements under a relatively longer-term service will also be measured over time with an input method based on hours expended.
The Company has also identified the following performance obligations within its IT Solutions & Services segment that are recognized at a point in time which include resale of third-party hardware and software, installation, arranging for another party to transfer services to the customer, and certain professional services. The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the agreed upon shipping terms. Installation services are recognized at a point in time when the services are completed. The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time as the Company has transferred control upon the service first being made available to the customer by the third-party vendor, which are required to be presented on a net basis. Depending on the nature of the service, certain professional services transfer control at a point in time. The Company evaluates these circumstances on a
case-by-case basis to determine if revenue should be recognized over time or at a point in time. See Note 4, Revenue Recognition, for further discussion regarding revenue recognition.
Recently Issued Accounting Pronouncements
Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are also described in Note 2, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in this report.
Not applicable.
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”), which could materially affect our business, financial condition or future results. That “Risk Factors” discussion was divided into two parts: (1) “Risks Related to the Combined Company Following Consummation of the Merger” applicable if the merger was consummated (the “Combined Company Risks”), and (2) “Risks Related to CSI Following Termination of the Merger” applicable if the merger was not consummated. Since the merger was consummated, the Combined Company Risks apply.
There have been no material changes in the risk factors from the Combined Company Risks section disclosed in the Form 10-K, except the following two new risk factors are added:
The Company needs to raise additional capital to fund its operations and repay its obligations, which funding may not be available on favorable terms or at all and may lead to substantial dilution to the Company’s existing shareholders. Further, there is substantial doubt about the Company’s ability to continue as a going concern, which conditions may adversely affect the Company’s stock price and its ability to raise capital.
Based on the Company’s current financial position, including the approximately $4.6 million of cash, restricted cash, cash equivalents and investments that are restricted under the CVR agreement and cannot be used by the Company for its own working capital needs, the Company’s forecasted future cash flows for twelve months beyond the date of issuance of the financial statements in this report indicate that the Company will not have sufficient cash to repay the Short-Term Note obligation. As a result, the Company requires additional funding and seeks to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances. However, additional funding may not be available on terms acceptable to the Company, or at all. If the Company is unable to raise additional funds, it would have a negative impact on the Company’s business, results of operations and financial condition.
Raising additional capital may be costly or difficult to obtain and could significantly dilute the Company’s shareholders’ ownership interests or inhibit the Company’s ability to achieve its business objectives. If the Company raises additional funds through public or private equity offerings or convertible debt or other exchangeable securities, the terms of these securities may include liquidation or other preferences that adversely affect the rights of the Company’s common shareholders. To the extent that the Company raises additional capital through the sale of common stock or securities convertible or exchangeable into common stock, the Company’s existing shareholders with be diluted. In addition, any debt financing may subject the Company to fixed payment obligations and covenants limiting or restricting its ability to take specific actions, such as incurring additional debt or making capital expenditures. Further, certain transactions could trigger a reset of the exercise price of the Convertible Preferred Stock and PIPE Warrants, which would lead to a corresponding increase in the number of shares of common stock issuable upon exercise of the PIPE Warrants, further diluting the Company’s shareholders.
In addition, the fact that there is substantial doubt about the Company’s ability to continue as a going concern and that the Company is operating under these conditions may adversely affect the Company’s stock price and its ability to raise capital.
The Company may have difficulty integrating the businesses from the SUNation transaction with its existing operations or otherwise obtaining the strategic benefits of the acquisition.
The impact of the SUNation acquisition on the Company’s business, operating results and financial condition is uncertain. The Company may have difficulty assimilating the Acquired Companies’ businesses and their products, services,
technologies and personnel into the Company’s existing operations. These difficulties could disrupt the Company’s ongoing business, distract its management and workforce, increase the Company’s expenses and materially adversely affect the Company’s operating results and financial condition.
The acquisition involves other potential risks, including:
the failure to successfully integrate personnel, departments and systems, including IT and accounting systems, technologies, books and records, and procedures;
the need for additional investments post-acquisition that could be greater than anticipated;
the assumption of liabilities of the Acquired Companies that could be greater than anticipated;
incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill or other assets that could adversely affect the Company’s operating results;
unforeseen difficulties related to entering geographic regions or industries in which it does not have prior experience; and
the potential loss of key employees or existing customers or adverse effects on existing business relationships with suppliers and customers.
Additionally, the Company cannot ensure that the expected benefits of SUNation acquisition will be realized or will be realized within the time frames it expects. Unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not recoverable through indemnification or as an adjustment to the purchase price. The price the Company paid for the Acquired Companies may exceed the value it realizes, the Company cannot provide assurance that it will obtain the expected revenues, anticipated synergies and strategic benefits of the SUNation acquisition within the time it expects or at all.
In connection with the SUNation acquisition, the Company incurred additional indebtedness with the issuance of the Short-Term Note and the Long-Term Note. While the Short-Term Note remains outstanding, the Company is subject to certain negative covenants with respect to the operation of the Acquired Companies, including limits on distributions, the incurrence of indebtedness, imposition of liens, and sales of assets outside the ordinary course of business.
Further, although the Company looks to expand further through the acquisition of regional residential solar companies and energy technology solution providers, there can be no assurance that the Company will be able to find appropriate candidates for acquisitions, reach agreement to acquire them, have sufficient capital or funding to acquire them, or obtain any required shareholder or regulatory approvals needed, despite the effort and management attention invested.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits
The following exhibits are included herewith:
|
|
|
|
|
|
Form of Restricted Stock Unit Award Agreement under the 2022 Equity Incentive Plan | |
Form of Performance Stock Unit Award Agreement under the 2022 Equity Incentive Plan | |
Form of Incentive Stock Option Award Agreement under the 2022 Equity Incentive Plan | |
Form of Non-Qualified Stock Option Award Agreement under the 2022 Equity Incentive Plan | |
Certifications pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). | |
Press Release dated November 14, 2022 Announcing Third Quarter Results | |
101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
|
|
|
|
| Pineapple Energy Inc. | ||
|
|
|
|
|
| By | /s/ Kyle Udseth |
|
|
| Kyle Udseth |
Date: November 14, 2022 |
|
| Chief Executive Officer |
|
|
|
|
|
| By | /s/ Eric Ingvaldson |
|
|
| Eric Ingvaldson |
Date: November 14, 2022 |
|
| Chief Financial Officer |