Item 1A. Risk Factors
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 risk factors discussed under Part I, Item 1A “Risk Factors” of our 2020 Annual Report and in our other filings with the SEC. Some risk factors set forth in our 2020 Annual Report will also be applicable to Sunpro Solar after the closing of the proposed acquisition. The risks described herein and in our 2020 Annual Report, as well as such other filings with the SEC, are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.
Additional Risk Factor Relating to COVID-19
Mandatory COVID-19 vaccination of employees could impact our workforce and suppliers and have a material adverse effect on our business and results of operations.
Effective November 5, 2021, the U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”) issued an emergency temporary standard (“OSHA Regulation”) requiring all employers with at least 100 employees (“Covered Employers”) to implement a COVID-19 vaccination policy that requires their employees be fully vaccinated or tested weekly. Under the OSHA Regulation, each Covered Employer must require its employees to be vaccinated or to undergo weekly COVID-19 testing and wear a face covering at work. Covered Employers, such as the Company, will be required to provide paid time off to workers to get vaccinated and allow for paid leave to recover from any side effects. The OSHA Regulation also requires Covered Employers to i) determine the vaccination status of each employee, ii) obtain acceptable proof of vaccination status from vaccinated employees and maintain records of such vaccinations, and iii) require employees to provide prompt notice when they test positive for COVID-19 diagnosis or receive a COVID-19 diagnosis. Covered Employers are required to comply with most of the requirements of the OSHA Regulation by December 6, 2021, and must comply with the testing requirement by January 4, 2022. Failure to comply with the OSHA Regulation may result in fines. Litigation challenging aspects of the OSHA Regulation has already commenced, and we anticipate that further litigation and other actions challenging aspects of the OSHA Regulation may materialize, which could further complicate the implementation of the OSHA Regulation.
The OSHA Regulation or similar mandatory vaccination or testing requirements that may become applicable to our employees may result in employee attrition, including attrition of critically skilled labor, difficulty in obtaining services, parts, components and equipment from impacted suppliers, and increased costs which could have a material adverse effect on our business, financial condition, and results of operations.
Risks Relating to Our Proposed Acquisition of Sunpro Solar
The Sunpro Solar acquisition is subject to closing conditions which may not be satisfied, and we may have difficulties integrating the operations and business of Sunpro Solar with our own and in realizing anticipated synergies.
The Sunpro Solar Acquisition is subject to closing conditions which may not be satisfied. If we are able to successfully close the acquisition, it will be the largest acquisition we have undertaken for a number of years and is in an industry with which we do not have experience. The complexities of the integration and expansion of Sunpro Solar’s operations are not yet known. It has and will continue to take a significant amount of time and attention to integrate these operations with our existing operations teams, and management’s ongoing attention to the solar business during and beyond the integration phase could detract from our existing operations. Among the challenges we face in doing so are the need to integrate a large number of new employees and integrating and aligning numerous business and work processes, including information technology and cyber security systems, all within an industry to which we are new. If we encounter other difficulties with the integration process, it could harm our reputation and have a material adverse effect on our business, financial condition, or results of operations. There also is no assurance that we will be able to recognize anticipated synergies, and, accordingly, to realize the perceived benefits of the proposed acquisition.
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The solar industry is competitive and creates pressure on pricing and customer acquisition efforts.
Solar energy is a new market for us, with strong competitors that could make it difficult for us to attract customers at prices which we believe are appropriate, which could result in lower revenue and cash flow from operating activities. We do not have experience in this industry and may not be as capable as our competitors in adapting our business as market needs may demand, or in realizing opportunities within this business. There can be no assurance that we will be able to successfully compete against larger or more established competitors, and the failure to compete effectively may adversely impact our ability to meet our growth and revenue plans and may adversely impact our results of operations.
The Sunpro Solar business may not have disclosure controls and procedures, internal controls over financial reporting, or data privacy compliance programs that are as robust as those we currently have, or which may not be in conformity with ours.
We may need to further develop the SEC disclosure controls and procedures, internal controls over financial reporting, and other controls of the Sunpro Solar business. If there are deficiencies in controls, procedures, or programs, we may not be in a position to detect significant errors or comply with our obligations under applicable laws, regulations, rules, or listing standards. We will be able to avail ourselves of scope limitations with respect to certifications required under Section 404 of the Sarbanes-Oxley Act for the current year assuming the acquisition closes in the fourth quarter of 2021. However, in 2022, we will not be able to scope out the Sunpro Solar business for specific controls, and we cannot guarantee that we will have enough time to develop the necessary controls. If we do not timely develop these controls, our business and financial condition may be materially harmed.
Existing electric utility industry regulations, and changes to regulations, may present technical, regulatory, or economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our solar energy systems.
Federal, state, and local government regulations and policies concerning the electric utility industry, and internal policies and regulations promulgated by electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies often relate to electricity pricing and the interconnection of customer-owned electricity generation. In the United States, governments and utilities continuously modify these regulations and policies. These regulations and policies could deter potential customers from purchasing renewable energy, including solar energy systems. This could result in a significant reduction in the potential demand for Sunpro Solar energy systems. For example, utilities commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could increase customers’ costs and make the Sunpro Solar system less desirable, or require Sunpro Solar to effectively subsidize customers’ financing arrangements, thereby harming our business, prospects, financial condition, and results of operations. In addition, depending on the region, electricity generated by solar energy systems competes most effectively with expensive peak-hour electricity from the electric grid rather than the less expensive average price of electricity. Modifications to the utilities’ peak hour pricing policies or rate design, such as a flat rate, would require us to lower the price of solar energy systems to compete with the price of electricity from the electric grid.
In addition, any changes to government or internal utility regulations and policies that favor electric utilities could reduce Sunpro Solar’s competitiveness and cause a significant reduction in demand for our products and services. For example, certain jurisdictions have proposed assessing fees on customers purchasing energy from solar energy systems or imposing a new charge that would disproportionately impact solar energy system customers who utilize net metering, either of which would increase the cost of energy to those customers and could reduce demand for solar energy systems. Any similar government or utility policies adopted in the future could reduce demand for our products and services and adversely impact growth.
The Sunpro Solar business currently depends on the availability of rebates, tax credits, and other financial incentives. The expiration, elimination, or reduction of these rebates, credits, and incentives would adversely impact our business.
U.S. federal, state, and local government bodies provide incentives to end users, distributors, system integrators, and manufacturers of solar energy systems to promote solar electricity in the form of rebates, tax credits, and other financial incentives such as system performance payments and payments for renewable energy credits associated with renewable energy generation. Sunpro Solar relies on these governmental rebates, tax credits, and other financial incentives to lower its cost of capital, enabling it to lower the price it charges to customers. However, these incentives may expire on a particular date, end when the allocated funding is exhausted, or be reduced or terminated as solar energy adoption rates increase. These reductions or terminations often occur without warning.
Reductions in, or eliminations or expirations of, governmental incentives could adversely impact our results of operations and ability to compete by increasing the cost of capital, causing us to increase the prices, and reducing the size of our addressable market.
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Sunpro Solar depends on a limited number of suppliers of solar panels and other system components to adequately meet anticipated demand for solar energy systems. Any shortage, delay, or component price change from these suppliers could result in sales and installation delays, cancellations, and/or loss of market share .
Sunpro Solar purchases solar panels and other components from a limited number of suppliers, making it susceptible to quality issues, shortages, and price changes. If it fails to develop, maintain, and expand its relationships with these or other suppliers, it may be unable to adequately meet anticipated demand for solar energy systems, or may only be able to offer systems at higher costs or after delays. If one or more of the suppliers ceases or reduces production, Sunpro Solar may be unable to quickly identify alternate suppliers or to qualify alternative products on commercially reasonable terms. There have also been periods of industry-wide shortage of key components, including solar panels, in times of rapid industry growth. The manufacturing infrastructure for some of these components has a long lead time, requires significant capital investment, and relies on the continued availability of key commodity materials, potentially resulting in an inability to meet demand for these components. Any decline in the exchange rate of the U.S. dollar compared to the functional currency of component suppliers could increase component prices. In addition, the U.S. government has imposed tariffs on solar cells manufactured in China. Any of these shortages, delays, or price changes could limit growth, cause cancellations, or adversely affect profitability, and result in loss of market share and damage to our brand.
Compliance with federal, state, and local laws and regulations, such as occupational safety and health requirements and best practices, can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties, operational delays, or adverse publicity.
The installation of solar energy systems requires employees to work at heights with complicated and potentially dangerous systems. There is risk of serious injury or death if proper safety procedures are not followed. Sunpro Solar operations are subject to regulation under the U.S. Occupational Safety and Health Act, or OSHA, and equivalent state laws. Changes to OSHA requirements, or stricter interpretation or enforcement of existing laws or regulations, could result in increased costs. Failure to comply with applicable OSHA regulations or other federal, state, and local laws and regulations related to any aspect of the Sunpro Solar business, even if no work-related serious injury or death occurs, may result in civil or criminal enforcement and substantial penalties, significant capital expenditures, or suspension or limitation of operations. Any such accidents, citations, violations, injuries, or failure to comply with industry best practices may result in adverse publicity, which could damage our reputation and competitive position, and may adversely affect our business.
If we are unable to retain Sunpro Solar’s management and key talent, or a sufficient number of team members to maintain and grow the business, our business could be materially and adversely affected.
Our success will depend in part upon the continued services of certain key talent, including management and team members of Sunpro Solar, throughout our integration and expansion efforts. Our ability to retain existing and to recruit new team members could be negatively impacted by the competitive labor environment and require us to pay wages and incur other costs in excess of our planned expenditures. In addition, any impact related to the COVID-19 Pandemic, including any mandate we may impose upon team members to become vaccinated or otherwise wear protective equipment in the performance of their duties with us, could result in team member attrition and an inability to recruit new team members. The loss, incapacity, or unavailability for any reason of members of the Sunpro Solar management team or other key talent, along with higher than expected payroll and other costs associated with the hiring and retention of key talent and other team members, or the inability to hire or delay in any such hiring, could materially adversely affect our ability to manage our business and our future operational and financial results.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.