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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-01 · 338 added, 771 removed, 29 unchanged (97% of the section changed)

Management’s Discussion and Analysis of Financial

Condition and Results of Operations.

The following discussion and analysis provides information which

our management believes is relevant to an assessment and understanding of our financial condition and results of operations.

This discussion

and analysis should be read together with our results of operations and financial condition and the audited and unaudited consolidated

financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K.

In addition to historical financial

information, this discussion and analysis contains forward-looking statements based upon current expectations that involve risks, uncertainties

and assumptions.

See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” Actual results and timing

of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including

those set forth under “Risk Factors” or elsewhere in this Annual Report on Form 10-K.

Certain figures, such as interest rates and other percentages,

included in this section have been rounded for ease of presentation.

Percentage figures included in this section have not in all cases

been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding.

For this reason, percentage

amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated

financial statements or in the associated text.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information which the Company's Management believes is relevant to an assessment and understanding of our financial condition and results of operations.

This discussion and analysis should be read together with our results of operations and financial condition and the audited and unaudited consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K.

In addition to historical financial information, this discussion and analysis contains forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions.

See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or elsewhere in this Annual Report on Form 10-K.

Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation.

Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding.

For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text.

Certain other amounts that appear in this section may similarly not sum due to rounding.

As used in this discussion and analysis, references to “XL,”

“the company,” “we,” “us” or “our” refer only to XL Fleet Corp.

and its consolidated

subsidiaries.

We are a provider of fleet electrification solutions for commercial

vehicles in North America, offering our systems for vehicle electrification (our “Power Drive” business) and through our

energy efficiency and infrastructure solutions business, including charging stations to enable customers to effectively plug in their

electrified vehicles (our “XL Grid” business).

In over 10 years of operations, we believe

that we have built a large customer base deploying Class 2-5 vehicles across North America.

Our fleet electrification solutions for

commercial vehicles provide the market with cost-effective hybrid and plug-in hybrid solutions with on-board telematics that are

available for sale and deployment across a broad range of popular vehicle chassis from the world’s leading OEMs.

our XL Grid Business in December 2020 and with the acquisition of World Energy Efficiency Services, LLC (“World Energy”)

in May 2021, we are able to offer comprehensive solutions to commercial fleets to sustainably transform their operations.

Through the capabilities we acquired with World Energy, we are able

to provide turnkey energy efficiency, renewable technology, electric vehicle charging stations and other energy solutions throughout

New England, which adds capability and capacity to our XL Grid division.

We currently sell most of our Power Drives through a network

of commercial vehicle upfitters.

Our current electrified Power Drives systems are comprised

of an electric motor that is mounted onto the vehicle’s drive shaft, an inverter, motor controller, and a lithium ion battery pack

to store energy to be used for propulsion.

No other significant modifications to the vehicle are required, and no changes are made to

the internal combustion engine or transmission.

We deploy our electrified Power Drives systems (XLH™) onto the chassis of vans,

pickups, shuttle buses, delivery trucks, and many other commercial vehicles produced by leading OEMs such as Ford, RAM, GMC, Chevrolet

This technology can be installed as the vehicles are being manufactured by industry standard second stage manufacturers, known

as upfitters, in less than one day, with no negative impact on the vehicles’ operational performance or factory warranties and with

reduced maintenance cost.

Our electrified powertrain systems capture and store energy during braking and subsequently deploy that energy

into the driveline during acceleration, operating in parallel with the existing OEM drive train.

Our systems enable vehicles to burn less

fuel and emit less CO2.

To date, vehicles deploying our electrification solutions have driven over 181 million miles.

The Company is currently conducting a strategic review

which includes assessing its offerings, strategy, processes and growth opportunities.

While this strategic review is ongoing, the Company

will be narrowing its focus in 2022 to concentrate on those areas the Company considers to be the most profitable, both in the short-

and long-term.

As part of this, the Company took actions to align the team and resources with its short-term needs.

This included the

elimination in February 2022 of 51 positions across the organization.

With our acquisition of World Energy, we became a provider of energy

efficiency, renewable technology, electric vehicle charging station and other energy solutions to customers across the New England region.

By leveraging our comprehensive solutions in combination with utility incentive programs, project management and financing, we assist

companies throughout all aspects of the fleet vehicle electrification process.

We provide full-service electric vehicle charger installations,

including the assessment of a location’s electrical infrastructure, site layout of the charging area plan and equipment installation.

We believe that the availability of robust electric vehicle charging and infrastructure solutions is critical to meeting the long-term

fleet electrification goals of our customers which in turn will translate into growth opportunities for the Company.

On December 21, 2020, (“Closing Date”) privately held

XL Hybrids, Inc., a Delaware corporation, (“Legacy XL”) consummated the merger pursuant to that certain Agreement and Plan

of Reorganization, dated as of September 17, 2020 (the “Merger Agreement”), by and among Pivotal Investment Corporation II

(“Pivotal”), PIC II Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of Pivotal (“Merger Sub”),

and Legacy XL.

Pursuant to the terms of the Merger Agreement, a business combination between Legacy XL and Pivotal was effected through

the merger of Merger Sub with and into Legacy XL, with Legacy XL surviving as a wholly-owned subsidiary of Pivotal (the “Merger”

and, collectively with the other transactions described in the Merger Agreement, the “Business Combination”).

In connection

with the closing of the Business Combination, Pivotal Investment Corporation II changed its name to XL Fleet Corp.

Recent Developments

Acquisition of World Energy :

On May 17, 2021 (“Closing

Date”), we acquired 100% of the membership interests of World Energy for total consideration of $12.5 million, consisting of cash

of $8.0 million, a working capital adjustment of $0.5 million, the fair value of shares issued at closing of $1.5 million, the fair value

of the earnout of $1.0 million and the portion of deferred obligation to issue shares of common stock of $1.5 million.

With respect to

the share component of the purchase price, 231,002 shares were issued at the Closing Date, with an additional 231,002 shares issued on

November 15, 2021, the six-month anniversary of the Closing Date.

In addition to the above, we are obligated to issue an additional

462,004 shares in equal installments on the 24- and 30-month anniversaries of the Closing Date to the former owners.

Of these 462,004

shares, 298,701 are contingent upon their continued employment with us, and as such were considered compensation expense for accounting

purposes and are being amortized over the service period.

World Energy provides turnkey energy efficiency, renewable technology,

electric vehicle charging stations and other energy solutions throughout New England.

We completed the acquisition to further the strategy

of our XL Grid business to provide a suite of charging and power solutions to support fleet electrification.

Minority investment in eNow:

On July 15, 2021,

XL Fleet made an investment of $3.0 million into eNow, a developer of solar and battery power systems that will enable fully-electric

transport refrigeration units (“eTRUs”) for Class 8 commercial trailers.

In exchange for the investment, eNow issued to the

Company a convertible debenture (the “eNow Convertible Note”) dated July 15, 2021 (the “Issuance Date”) in the

original principal amount of $3.0 million, at the rate of 8% per annum and due on December 31, 2022.

The investment was classified as

an available-for-sale security.

The parties also entered into a supply agreement whereby eNow would exclusively purchase batteries for

its eTRU systems from XL Fleet.

After reviewing the status of eNow’s financial condition on December 31, 2021, the Company determined

that the investment in the eNow Convertible Note was fully impaired and recorded a charge to the Statement of Operations for $3.0 million.

Due to supply chain constraints limiting the availability of batteries, the parties are negotiating the termination of the aforementioned

supply agreement.

Leadership Transition :

On November 1, 2021,

the Company entered into an executive employment agreement with Eric Tech (the “Employment Agreement”), pursuant to which

Tech became the Company’s Chief Executive Officer effective December 1, 2021.

In addition, on January 31, 2021, the Company’s

Chief Financial Officer resigned.

An interim replacement was named until the Company can find a permanent replacement.

Public Health Emergency of International Concern :

11, 2020, the World Health Organization categorized the COVID-19 outbreak a “Public Health Emergency of International Concern”

as global pandemic and recommended containment and mitigation measures.

As part of these efforts, and in accordance with applicable government

directives, beginning in late March 2020, we implemented work from home policies where practical at our facilities.

Effective December

31, 2021 all 177 employees were working full-time from one of our five offices or from home.

Current COVID policies include universal

facial covering requirements if not vaccinated, rearranging facilities to follow social distancing protocols, employees self-screening

before going into the office, enhanced cleaning procedures, ability to go mask-free if proof of vaccination is provided to Human Resources,

and strict quarantine protocols for any suspected or confirmed employee cases.

However, the COVID-19 pandemic and the continued precautionary

actions taken related to COVID-19 have adversely impacted, and are expected to continue to adversely impact, our operations, our contractors

and the automotive original equipment manufacturers.

We have experienced, and expect to continue to experience, significantly

reduced operations and production line shutdowns at vehicle OEMs due to COVID-19, which reduced chassis deliveries to fleet customers.

XL and OEM manufacturers have and will continue to be impacted by supply chain shortages and we are experiencing limitations on travel

by our personnel and personnel of our customers.

The COVID-19 pandemic and the protocols and procedures

we have implemented in response to the pandemic have caused some delays in operational activities.

The full impact of the COVID-19 pandemic

on our business and results of operations subsequent to December 31, 2021 will depend on future developments, such as the ultimate duration

and scope of the outbreak and its impact on its operations and impact on our customers and industry partners.

As the coronavirus pandemic continues to evolve, we believe the extent

of the impact to our business, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity

and duration of the coronavirus pandemic and its impact on the U.S.

and global economies.

Those primary drivers are beyond our knowledge

and control, and as a result, at this time we are unable to predict the cumulative impact, both in terms of severity and duration, that

the coronavirus pandemic will have on our business, operating results, cash flows and financial condition, but it could be material if

the current circumstances continue to exist for a prolonged period.

Although we have made our best estimates based upon current information,

actual results could materially differ from the estimates and assumptions developed by management.

Accordingly, it is reasonably possible

that the estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term by these

conditions, and if so, we may be subject to future impairment losses related to long-lived assets as well as changes to recorded reserves

and valuations.

In addition, we believe that the impact of the global microchip shortage that the entire vehicle industry is currently

experiencing will adversely impact our operating results in fiscal year 2022 and possibly thereafter.

Paycheck Protection Program Loan :

On May 8, 2020, we received

loan proceeds in the amount of $1.1 million under the Paycheck Protection Program (“PPP”).

The PPP was established as part

of CARES Act and provided for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the

business, subject to certain limitations.

The loan bore interest at a rate of 1.0% per annum and required payment of principal in full

upon the maturity date of April 21, 2022.

Interest on the loan accrued from the date inception of the loan, interest payments were

deferred for Deferral Period, and commencing one month from the expiration of the first six months (the “Deferral Period”),

principal and interest were to be paid monthly in equal payments in such amounts which fully amortized the principal and interest amount

by the maturity date of the loan.

The loan and accrued interest were forgivable to the extent the borrower uses the loan proceeds for

eligible purposes over a 24 week period subsequent to receiving the loan, including payroll, benefits, rent and utilities, and so long

as the borrower maintains threshold levels of pre-funding employment and wage levels.

We utilized the proceeds of the loan to fund payroll,

benefits, rent and utilities.

The PPP loan and accrued interest were repaid in full in December 2020 following consummation of the Business

Public Company Costs

As a consequence of the Merger, we are an NYSE-listed company, which

required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and

customary practices.

We expect to incur additional annual expenses as a public company for, among other things, directors’ and

officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources,

including increased audit and legal fees.

Additionally, we expect our capital and operating expenditures will

increase significantly in connection with ongoing activities as we:

● increase our investment in marketing, advertising, sales and

distribution infrastructure for our existing and future products and services;

● develop additional new products and enhancements to existing

● obtain, maintain and improve our operational, financial and

management performance;

● hire additional personnel;

● obtain, maintain, expand and protect our intellectual property

● operate as a public company.

Comparability of Financial Information

Our historical operations and statements of assets and liabilities

may not be comparable to our operations and statements of assets and liabilities as a result of the Business Combination.

Key Factors Affecting Operating Results

We believe that our performance and future success depend on several

factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the

section entitled “Risk Factors—Risks Related to our Business and Industry.”

We are a provider in fleet electrification and

energy efficiency infrastructure solutions.

We have a strategy to leverage our existing products and sales channels to market.

affecting our operating results include our ability to execute on the results of the Company’s strategic review, which includes

narrowing the focus of the Company on the most profitable products and strategically reducing some aspects of the Company’s hybrid

There are challenges and risks to our plan to capture these opportunities, such as:

architecture design choices must provide adequate functionality and value for customers;

sourcing agreements must deliver targets for cost reduction while maintaining high quality and reliability;

sales and marketing

efforts must be effective in forging the relationships to deliver these products to market and generate demand from the end users and

channel partners;

OEMs and principal equipment

component suppliers must be able to provide ample supply throughout the year to meet our Power Drive sales goals.

We have experienced

interruptions in OEM vehicle supply amid a worldwide microchip shortage.

This resulted in very limited OEM deliveries of new chassis

to our commercial customers during 2021.

We are expecting some increase in deliveries in 2022, but there will likely be a significant

adverse impact on vehicle deliveries resulting from the microchip shortage.

This has had and continues to have an adverse impact on our

operating results in fiscal year 2021 and is expected to continue in 2022;

We have flexibility to also provide our Power Drive systems

as a retrofit for existing fleet vehicles and a good portion of our 2021 product shipments were for retrofits.

We re-entered the California

market with the California Air Resources Board (CARB) approval in June 2021 for our Ford Transit tm HEV systems and received

CARB approval in February 2022 for our battery electric Ford F-600 platform, We have seen positive signs in terms of increased budgets

from municipal customers, but we believe the OEM chip shortage is hindering the rebound in that area of the market, despite budget availability;

● energy-efficiency upgrades must translate into a positive

return on investment for our customers;

● our success will depend on our ability to support our customers

in their drive to electrify their fleets.

Key Components of Statements of Operations

Research and Development Expense

Research and development expenses consist primarily of costs incurred

for the discovery and development of our electrified powertrain offerings, which include:

personnel-related

expenses including salaries, benefits, travel and share-based compensation, for personnel performing research and development activities;

paid to third parties such as consultants and contractors for outsourced engineering services;

related to prototype materials, supplies and third-party services;

for equipment used in research and development activities.

We expect our research and development costs to decline in 2022 as

the Company narrows its focus based on its strategic review and reduces some aspects of our hybrid offerings.

Selling, General and Administrative Expense

general and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, sales, marketing and

other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as

expenses for facilities, depreciation, amortization, travel, sales and marketing costs.

Personnel-related expenses consist of salaries,

benefits and share-based compensation.

We expect our selling, general and administrative expenses to decrease in 2022 as we narrow our

focus and take actions to align our team and resources with our short- term needs.

Other Income (Expense), Net

Other income and expense consists of impairment of investments, interest

expense net of interest income, loss on extinguishment of debt, change in the fair value of warrant liabilities, change in the fair value

of convertible notes payable derivative liabilities, change in fair value of obligation to issue shares of common stock to sellers of

World Energy and loss on asset disposal.

Critical Accounting Policies and Significant Judgments and Estimates

management’s discussion and analysis of our financial position and results of operations is based on our financial statements,

which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.

The preparation

of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the

financial statements and accompanying notes.

On an ongoing basis, we evaluate estimates, which include estimates related to warrant valuation,

the valuation of the assets and liabilities related to the business combination of World Energy, reserves and net realizable value adjustments

for inventory and warranty obligations, impairment assessments for goodwill and long-lived assets and valuation allowance as it relates

to the realization of deferred tax assets.

The Company’s critical accounting policies include revenue recognition and the accounting

for business combinations.

We base our estimates on historical experience and other market- specific or other relevant assumptions that

we believe to be reasonable under the circumstances.

Actual results may differ materially from those estimates or assumptions.

The Company’s

critical accounting policies include revenue recognition and the accounting for business combinations.

As used in this discussion and analysis, references to the "Company,”, "Spruce Power", “we,” “us” or “our” refer only to Spruce Power Holding Corporation and its consolidated subsidiaries, including Spruce Holding Company 1 LLC, Spruce Holding Company 2 LLC, Spruce Holding Company 3 LLC, and Spruce Manager LLC (collectively and together with their subsidiaries, “Legacy Spruce Power”) after the acquisition of Legacy Spruce Power on September 9, 2022.

Depending on the context, references to "Spruce Power" may also include the historical business of Legacy Spruce Power prior to September 9, 2022.

The Company is a leading owner and operator of distributed solar energy assets across the United States, offering subscription-based services to approximately 51,000 customers as of December 31, 2022 and making renewable energy more accessible to everyone.

The Company generates revenues primarily through the sale of electricity generated by its residential solar energy systems to homeowners pursuant to long-term agreements that obligate the Company’s subscribers to make recurring monthly payments, and the servicing of those agreements for other institutional owners of residential solar energy systems.

The Company holds subsidiary fund companies that own and operate portfolios of residential solar energy systems.

The solar energy systems are subject to solar lease agreements ("SLAs") and power purchase agreements ("PPAs", together with the SLAs, "Customer Agreements") with residential customers who benefit from the production of electricity produced by the solar energy systems.

The solar energy systems may qualify for subsidies, renewable energy credits and other incentives as provided by various states and local agencies.

These benefits have generally been retained by the Company's subsidiaries that own the systems, with the exception of the investment tax credit under Section 48 of the Internal Revenue Code ("IRC"), which were generally passed through to various financing partners of the solar energy systems.

The Company also engages in the energy efficiency and solar loan servicing business.

The Company offers services which include asset management services and operating and maintenance services for residential solar photovoltaic projects, in addition to, loan servicing support that allows residential consumers to finance energy efficiency home improvements and residential solar energy systems.

The Company believes that the combination of Spruce Power’s existing subscriber-base and proven servicing platform along with its proven track record of growth through strategic acquisitions coupled with the additional capital and access to capital markets amplifies its ability to take advantage of rapid growth in rooftop solar, energy storage and electric vehicle adoption while creating a path to more predictable revenues, profits and cash flow for the Company’s shareholders.

Acquisition of Legacy Spruce Power and Discontinued Operations

Historically the Company had provided fleet electrification solutions for commercial vehicles in North America, offering its systems for vehicle electrification (the “Drivetrain” segment) and through its energy efficiency and infrastructure

solutions business, including offering and installing charging stations to enable customers to effectively and cost-effectively develop the charging infrastructure required for their electrified vehicles (the “XL Grid” segment).

In the first quarter of 2022, the Company initiated a strategic review of its overall business operations which included assessing its offerings, strategy, processes and growth opportunities.

As a result of the strategic review, in the first quarter of 2022 the Company made the following decisions relating to a restructuring of its Drivetrain business:

(i) the elimination of a substantial majority of the Company’s hybrid drivetrain products;

(ii) the elimination of its Plug-In Hybrid Electric Vehicles (“PHEV”) products;

(iii) the reduction in the size of the Company’s workforce by approximately 50 employees;

(iv) the closure of the Company’s production center and warehouse in Quincy, IL;

(v) the closure of the Company’s engineering activities in its Boston office;

and (vi) the termination of the Company’s partnership with eNow.

Following the strategic review, the Company announced its decision to pursue transformational mergers and acquisition (“M&A”) opportunities, enabled by a significant cash balance resulting from the Company’s go-public transaction completed in December 2020.

As a result of these efforts, on September 9, 2022, the Company acquired Legacy Spruce Power for $32.6 million which consisted of cash payments of $61.8 million less cash and restricted cash acquired of $29.2 million.

In connection w ith the acquisition of Legacy Spruce Power, the Company also assumed $542.5 million of long-term debt .

Spruce Power was the largest privately held owner and operator of residential solar energy systems in the U.S.

at the time of the transaction, with more than 52,000 customer subscribers.

Spruce Power sells the power generated by its systems to homeowners pursuant to long-term agreements that obligate subscribers to make recurring monthly payments.

With the completion of the acquisition of Legacy Spruce Power, the Company announced that it would analyze strategic alternatives related to its Drivetrain business.

In December 2022, the Company announced that it was exiting its Drivetrain business and would be selling a portion of the business for an immaterial amount to Shyft Group USA (“Shyft”) which closed in January 2023.

Shyft bought certain technical equipment and assumed the Company’s Wixom, Michigan facility and also offered employment to certain engineers and other sales personnel.

Shyft also assumed completion of the Company’s pilot development agreement with the Department of Defense related to vehicle hybridization (with the Company retaining rights to potential future royalties from the program).

The Company also announced that it had sold certain battery inventory and its legacy hybrid technology to RMA Group, an automotive and equipment supplier in Southeast Asia.

As of December 31, 2022, the Company had ceased Drivetrain operations and began to restructure most of its related Corporate functions.

The Company also began reviewing the operations of its XL Grid business to evaluate its strategic fit with Spruce Power.

In the fourth quarter of 2022, the Company entered into a non-binding letter of intent (“LOI”) for the sale of World Energy for an immaterial amount, with the divestiture closing in January 2023 and the Company ceased XL Grid operations after the closing of the divestiture.

Both the Drivetrain and XL Grid operations are presented as discontinued operations.

Restructuring Actions

As a result of the above described strategic review of its operations, in the first quarter of 2022 the Company recognized restructuring and related charges of $2.5 million.

These charges included $0.8 million of severance charges, all of which were paid in 2022, and $1.5 million of charges for inventory obsolescence.

In the second quarter of 2022 the Company recognized an additional charge for inventory obsolescence of $0.2 million.

In the third quarter of 2022, with the acquisition of Legacy Spruce Power, the Company initiated an evaluation of strategic alternatives for the Company’s Drivetrain business and began efforts to evaluate personnel and processes of various corporate functions between Spruce Power and legacy XL Fleet to optimize the future corporate structure.

In the fourth quarter of 2022, with the announcement that the Company was exiting the Drivetrain business and corporate restructuring actions, the Company recognized $19.1 million of restructuring and restructuring related charges.

These charges included $3.6 million of severance charges, $5.0 million impact of accelerated vesting of certain equity awards, and $10.6 million of charges related to inventory obsolescence.

The charges for severance and accelerated vesting of certain equity awards were included in selling, general and administrative expenses and the inventory obsolescence charges were included in cost of revenues – inventory and other directs costs in the Consolidated Statement of Operations.

Reportable Segments

Segment reporting is based on the “management approach,” following the method that Management organizes the Company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the Company’s chief operating decision maker (“CODM”) in allocating resources and in assessing performance.

The Company’s CODM is its Chief Executive Officer.

The Company’s CODM does not evaluate operating segments using asset or liability information.

With the acquisition of Legacy Spruce Power, the Company had three reportable segments, (i) Residential Solar, (ii) Drivetrain and (iii) XL Grid, and separately calculated the costs of its corporate operations.

As discussed above, the Company determined that in the fourth quarter of 2022 the Drivetrain and XL Grid operations were discontinued operations which resulted in the Company having one operating segment.

As of December 31, 2022, the Company’s Residential Solar segment owns and operates approximately 51,000 residential solar energy systems in 16 states.

In addition to providing management services to its own portfolio, the Company also provides management services to over 30,000 systems owned by other companies.

These services include (i) billing and collections, (ii) account management services, (iii) financial reporting, (iv) homeowner support and (v) maintenance monitoring and dispatch.

Results of Operations

Comparison of Years Ended December 31, 2022 and 2021

The consolidated statements of operations for the years ended December 31,

2021 and 2020 are presented below:

The results of operations related to the Company’s Drivetrain and XL Grid businesses, which were determined to be discontinued operations in the fourth quarter of 2022, are presented as net loss from discontinued operations in the Company’s Consolidated Statements of Operations.

As a result, the continuing operational results reflect the operations

related to the Company’s corporate functions and the results of operations for Spruce Power since its acquisition on September 9, 2022.

Information with respect to the Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 are presented below:

Years Ended December 31,

(In thousands, except per share and share amounts)

Cost of revenues

Gross profit (loss)

(Amounts in thousands, except share and per share data)

Revenues $ 23,194 $ — $ 23,194 N.M.

Operating expenses:

Research and Development

Selling, general and admin expenses

Cost of revenues 9,949 — 9,949 N.M.

Selling, general and administrative expenses 73,118 35,094 38,024 108

Loss from operations (59,873) (35,094) (24,779) 71

1 unchanged sentence

Interest expense, net 10,062 39 10,023 25700

Loss on extinguishment of debt

Loss on asset disposal

Impairment of investment

Gain on extinguishment of debt (4,527) — (4,527) N.M.

(Gain) loss on asset disposal (580) 26 (606) (2331)

Loss on impairment — 3,000 (3,000) (100)

Change in fair value of obligation to issue shares of common stock to sellers of World Energy (535) (565) 30 (5)

Change in fair value of warrant liabilities

Change in fair value of convertible notes payable derivative liabilities

Net income (loss)

decreased by $4.7 million, or 23.3%, to $15.6 million in the year ended December 31, 2021 from $20.3 million for the year ended December

The decrease was primarily due to a net decrease of $17.5 million in revenues from the sale of our Power Drive systems.

Interruptions

in OEM vehicle supply amid a worldwide microchip shortage caused OEMs to stop taking fleet orders for much of 2021 limiting sales of

our electrified Power Drive systems.

We have flexibility to also provide our Power Drive systems as a retrofit for existing fleet vehicles.

We have seen positive signs in terms of increased budgets from municipal customers, but we believe the OEM chip shortage hindered the

rebound in that area of the market, despite budget availability.

Hybrid Electric Vehicle (HEV) sales decreased $16.5 million and Plug-in

Hybrid Electric Vehicles (PHEV) decreased $0.9 million.

This decrease was partially offset by the addition of World Energy in May 2021

and its energy infrastructure solutions revenues of $12.8 million across 349 projects.

Cost of Revenues

of revenues decreased by $1.3 million, or 7.4%, to $16.3 million in the year ended December 31, 2021 from $17.6 million for the year

ended December 31, 2020.

The decrease was primarily attributable to the decrease in the sales of Power Drive systems described above

Direct cost of sales for the Power Drive units sold in 2021 decreased $14.0 million over the direct costs for the Power Drive units

sold in 2020.

Indirect costs increased $4.3 million primarily due to an increase in our inventory reserves of $2.7 million resulting

from our plans to reduce some aspects of our hybrid offerings in 2022 and an increase of approximately $1.0 in warranty costs

related to higher projected warranty claims.

The microchips shortage has impacted the ability to comply with customers’ orders

and the cost of production.

This decrease in Power Drive cost of sales was partially offset by the cost of revenues related to World

Energy, which was acquired in May of 2021, of $8.4 million for energy infrastructure projects completed.

Gross Profit (Loss)

profit (loss) decreased by $3.4 million, or 125.4%, to $0.7 million gross loss in the year ended December 31, 2021 from $2.7 million

gross profit for the year ended December 31, 2020.

The decrease in gross profit (loss) was driven by lower gross profits on the sale

of Power Drive systems of $7.8 million.

This was offset by gross profit of $4.4 million on the sales of infrastructure projects from

World Energy, which was acquired in May 2021.

Research and Development

and development expenses increased by $6.4 million, or 142.4%, to $10.8 million in the year ended December 31, 2021 from $4.4 million

for the year ended December 31, 2020.

The increase was primarily due to additional employee compensation costs of $3.4 million, professional

service expenses of $0.8 million, and facilities and production costs of $2.1 million.

The increase was primarily due to the hiring of

36 additional engineering staff to develop and broaden our Power Drives product lines as well as the opening of a new research and development

facility in Wixom, MI in the second quarter of 2021.

Change in fair value of warrant liability (5,148) (90,138) 84,990 (94)

Change in fair value of interest rate swaps (5,554) — (5,554) N.M.

Other income (912) (58) (854) 1472

Net (loss) income from continuing operations (52,679) 52,602 (105,281) (200)

Net loss from discontinued operations (40,112) (23,812) (16,300) 68

Net (loss) income (92,791) 28,790 (121,581) (422)

Net income attributable to redeemable noncontrolling interests and noncontrolling interests 1,140 — 1,140 N.M.

Net (loss) income attributable to stockholders $ (93,931) $ 28,790 $ (122,721) (426)

Revenues and Cost of Revenues

Revenues and cost of revenues represent the residential solar energy system revenues and related costs for the period of September 9, 2022 (date of the acquisition of Legacy Spruce Power) through December 31, 2022.

Selling, General and Administrative

general, and administrative expenses increased by $33.8 million, or 249.0%, to $47.4 million in the year ended December 31, 2021 from

$13.6 million for the year ended December 31, 2020.

The increase consisted principally of an increase in headcount of 57 employees attributable

to the responsibilities of becoming a public company and to build out our human resource, finance and sales infrastructure in the amount

of $10.2 million.

Legal, accounting and other professional fees increased approximately $8.6 million partially due to increased costs

due to the requirements of being a public company.

In addition, sales and marketing expenses increased $1.3 million including advertising,

participations in conferences and tradeshows to generate revenue growth, and an increase of $1.2 million in insurance costs.

year ended December 2021, selling, general, and administrative expenses include charges of $4.8 million related to the separation of

the prior Chief Executive Officer, of which $4.4 million was a non-cash charge for modifications to outstanding stock awards.

Additionally,

with the acquisition of World Energy, selling, general, and administrative expenses in the period increased by approximately $4.4 million

compared to the comparable period in the prior year, consisting principally of employee compensation, benefits and professional fees.

Selling, general, and administrative expenses increased by $38.0 million, or 108.3%, to $73.1 million in 2022 from $35.1 million in 2021.

The increase was primarily due to the acquisition of Legacy Spruce Power on September 9, 2022.

Selling, general and administrative expenses of the Company's residential solar energy operations for the period was $14.0 million.

In addition, expenses for 2022 include $13.6 million of transaction related expenses related to the acquisition of Legacy Spruce Power.

The remaining increase was due to (i) higher legal expenses in 2022 due to the SEC investigation and shareholder lawsuits;

(ii) severance charges of $4.4 million related to restructuring actions in 2022;

and (iii) higher stock compensation costs of $4.5 million due to the acceleration of vesting of certain awards of terminated senior executives and a stock award of $1.1 million granted to the Company's new President in the third quarter of 2022 which vested immediately.

These increases were partially offset by lower professional fees in 2022.

Other Income (Expense), Net

expense, net decreased by $6.3 million, or 99.4%, to $0.4 million in the year ended December 31, 2021 from $6.4 million for the year

ended December 31, 2020 primarily due to the Company repaying or converting substantially all debt prior to December 31, 2020.

in fair value of warrant liability of $90.1 million for the year ended December 31, 2021 was principally due to a decrease in the fair

value of our Common Stock while in the year ended December 31, 2020, the Company recognized a charge of $35.0 million from the increase

in the fair value of the warrant liability.

The Company recorded an impairment charge of $3.0 million in the fourth quarter of 2021 related

to its investment in eNow.

In the year ended December 31, 2020, we recorded a $1.0 loss on the extinguishment of debt.

The negative change

in fair value of obligation to issue shares of common stock to sellers of World Energy of $0.6 million for the year ended December 31,

2021 was due to a decrease in the stock price from the date of the acquisition.

Comparison of Years Ended December 31, 2020 and 2019

The consolidated statements of operations for the years ended December 31,

2020 and 2019 are presented below:

Other income, net in 2022 was $7.2 million compared to other income, net of $87.7 million in 2021.

Other income in 2021 included a benefit of $90.1 million for the change in the fair value of the warrant liability compared to a benefit of $5.1 million for the change in fair value of the warrant liability in 2022.

The decrease in the fair value of the warrant liability reflects the decrease in the value of the Company’s stock in 2022 from 2021.

In 2022, the Company recognized a $4.5 million gain on the extinguishment of debt related to the wind-down of the New Market Tax Credit obligation.

Interest expense, net was $10.0 million in 2022 compared to $0.04 million in 2021.

The increase relates to interest on the long-term debt assumed with the acquisition of Legacy Spruce Power of $13.5 million partially offset by gains on interest rate swaps of $7.7 million.

The Company enters into interest rate swaps to reduce the volatility related to the Company’s variable rate long-term debt.

The Company recorded an impairment charge of $3.0 million in the fourth quarter of 2021 related to its investment in eNow.

The Company also recorded gains on sales of solar energy systems of $1.8 million in 2022.

Net Loss from Discontinued Operations

Net loss from discontinued operations of $40.1 million in 2022 and $23.8 million in 2021 includes the discontinued operations of the Company’s Drivetrain and XL Grid businesses.

The net loss from discontinued operations in 2022 consists of a net loss from the Drivetrain business of $30.4 million and a net loss from the XL Grid business of $1.1 million and a goodwill impairment charge related to both businesses of $8.6 million.

The net loss from discontinued operations in 2021 consists of a net loss from the Drivetrain business of $23.8 million and a net gain from the XL Grid business of $0.02 million.

The increase in the net loss from the Drivetrain business in 2022 was driven by inventory impairment charges of $12.3 million in 2022 compared to inventory impairment charges of $2.7 million in 2021.

These charges were offset by lower warranty costs of $2.2 million, higher gross profits of $1.1 million and lower operating expenses due to cost-cutting measures initiated at the beginning of 2022.

The increase in the XL Grid net loss was due to lower gross margins of $0.7 million due to higher cost of sales, an intangible asset impairment charge of $0.7 million in 2022, and higher operating expenses in 2022 due to a full 12 months of World Energy, which was purchased in May 2021.

Supplemental disclosure of pro forma information:

The following unaudited pro forma financial information presents the combined results of the operations of the Company, World Energy, and Legacy Spruce Power as if the acquisitions of World Energy on May 17, 2021 and Legacy Spruce Power on September 9, 2022 had occurred as of January 1, 2021.

The unaudited pro forma revenues and pro forma net (loss) income reflect the continuing operational results of the Company’s corporate functions and the results of operations for Legacy Spruce Power.

The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations actually would have been had the respective acquisitions been completed on January 1, 2021.

In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined Company.

Years Ended December 31,

(In thousands, except per share and share amounts)

Cost of revenues

Operating expenses:

Research and Development

Selling, general and admin expenses

Loss from operations

Other (income) expense:

Interest expense, net

Loss on extinguishment of debt

Change in fair value of warrant liabilities

Change in fair value of convertible notes payable derivative liabilities

increased by $13.1 million, or 181.9%, to $20.3 million in the year ended December 31, 2020 from $13.1 million for the year ended December

The increase was primarily due to the resolution of battery supply issues, increased end customer demand and increased order

During the year ended December 31, 2020, we along with our suppliers and OEMs made improvements to our supply chain, including

sourcing an additional battery supplier, which helped to counteract the negative impact of the COVID-19 pandemic on our business in prior

Of the $20.3 million in revenue for the year ended December 31, 2020, approximately $17.2 million of revenue was recognized

during the second half of the year, which was primarily due to the resolution of battery supply issues and seasonality in the order and

delivery of fleet vehicles.

Resolving the battery supply issues allowed us to increase production and fulfill orders in our outstanding

Cost of Revenues

of revenues increased by $9.5 million, or 117.9%, to $17.6 million in the year ended December 31, 2020 from $9.5 million for the year

ended December 31, 2019.

The increase was due to higher unit volume as a result of increased customer orders and resolution of supply

chain disruptions resulting from the COVID-19 pandemic and increased proportionally with the increased revenue.

These supply chain disruptions

were widespread in terms of shutdowns at various direct suppliers and their suppliers as well as the OEM vehicle factories that build

the vehicles our customers had ordered in anticipation of the installation of our hybrid and plug in hybrid systems.

Gross Profit (Loss)

profit increased by $3.6 million, or 419.1%, to $2.7 million in the year ended December 31, 2020 from a loss of $0.9 million for the

year ended December 31, 2019.

This increase in gross profit was primarily due to higher unit volume as discussed above as well as improved

price realization per unit and cost reductions in sourcing batteries and other components.

Research and Development

and development expenses increased by $1.6 million, or 54.7%, to $4.4 million in the year ended December 31, 2020 from $1.6 million for

the year ended December 31, 2019.

The increase was primarily due to the hiring of additional engineering staff to support unit sales

growth and to further develop our product line.

Selling, General and Administrative

general, and administrative expenses increased by $3.8 million, or 38.2%, to $13.6 million in the year ended December 31, 2020 from $3.8

million for the year ended December 31, 2019.

The increase was primarily due to costs incurred for readiness to become a public company,

including accounting, legal, and other professional fees incurred in connection with meeting SEC and other financial reporting responsibilities

in the amount of $5.8 million, and an increase in headcount of about 46 employees to build out our human resource infrastructure in the

amount of $7.6 million.

The aforementioned increase in legal, accounting and other professional fees consist of increases in consulting

fees of $4.8 million and legal fees of $1.1 million.

Additionally, with the acquisition of World Energy, selling, general, and administrative

expenses in the nine-month period increased by approximately $2.4 million compared to the comparable period in the prior year, consisting

principally of employee compensation and benefits and professional fees.

Other Income (Expense), Net

expense, net increased by $4.2 million, or 196.1%, to $6.4 million in the year ended December 31, 2020 from $2.2 million for the year

ended December 31, 2019 primarily due to the increase in the amount of convertible debt incurred in February 2020, the increase in the

amount of the term loan with Silicon Valley Bank in late 2019, the draw-down in August 2020 on our revolving line of credit and the conversion

of the convertible debt in December of 2020 which resulted in the accelerated amortization of the debt discount.

We incurred a loss on

extinguishment of $1.0 million in connection with the amendment of certain convertible notes.

Specifically, during February of 2020,

we entered into amendments to the agreements with certain note holders to extend the maturities of $10.0 million in face value of convertible

notes to February 2021.

We computed the discounted cash flows from these convertible notes as of the date of the amendment, both before

and after the amendment.

We determined that there was a greater than 10% change in the present value of these cash flows, and as such,

the amendment qualified as an extinguishment.

Pursuant to the relevant accounting guidance, we recorded a loss on extinguishment of debt

of $1.0 million.

The change in fair value of warrant liabilities of $35.0 million for the year ended December 31, 2020 was on account

of an increase in the fair value of our common stock.

The change in fair value of convertible notes payable derivative liabilities of

$2.9 million for the year ended December 31, 2020 was principally on account of an increase in the fair value of our Common Stock.

(Amounts in thousands, except share and per share data) 2022 2021

Revenues $ 79,253 $ 79,163

Net (loss) income from continuing operations $ (28,870) $ 66,212

Net loss from discontinued operations (40,112) (24,236)

Net (loss) income $ (68,982) $ 41,976

Per share amounts:

Net (loss) income from continuing operations - basic $ (0.20) $ 0.48

Net (loss) income from continuing operations - diluted $ (0.20) $ 0.45

Net loss from discontinued operations - basic $ (0.28) $ (0.18)

Net loss from discontinued operations - diluted $ (0.28) $ (0.16)

Liquidity and Capital Resources

cash requirements depend on many factors, including the execution of our business strategy and plan.

We remain focused on carefully managing

costs, including capital expenditures, maintaining strong balance sheet, and ensuring adequate liquidity.

Our primary cash needs are

for operating expenses, working capital and capital expenditures to support the growth in our business.

Working capital is impacted by

the timing and extent of our business needs.

As of December 31, 2021, we had working capital of $358.0 million, including cash and cash

equivalents of $351.8 million.

We had a net income of $28.8 million (a net loss of $61.3 million after adjusting for a non-cash benefit

of $90.1 to recognize the decline in fair value of warrant liability) for the year ended December 31, 2021 and incurred a net loss of

$60.6 million for the year ended December 31, 2020, which included a non-cash charge of $35.0 million relating to an increase in the

fair value of the warrant liability.

the year ended December 31, 2021, 7,441,020 public warrants were exercised, which resulted in the issuance of 7,441,020 shares of the

Company’s Common Stock, generating cash proceeds of approximately $85.6 million.

No Public Warrants remain outstanding as of December

part of its strategic review, the Company has decided to narrow its operational focus in order to more effectively and judiciously execute

on our strategy moving forward as well as to preserve cash.

As part of this process, we will be strategically reducing some aspects of

the hybrid offerings and limiting our products to those platforms and applications that are most scalable and provide the most substantial

return on investment.

As part of this narrowing of focus, we took actions in February 2022 to align our team and resources with our near-term

As part of this, we eliminated 51 positions across the organization.

Severance charges related to the elimination of those position

totaled approximately $1.3 million.

We expect to continue to incur net losses in the short term, as we

continue to engage in a strategic review and reassess our operational focus.

Based on our current liquidity, we believe that no additional

capital will be needed to execute our current business plan over the next 12 months.

We continually, evaluate our cash needs to raise

additional funds or seek alternative sources to invest in growth opportunities, research and development projects, technology, sales,

and other purposes.

Silicon Valley Bank Loan and Security Agreement

Effective December 10, 2018, and as amended on August 12, 2020 and

December 1, 2020, we entered into a Loan and Security Agreement for a revolving line of credit and term loan with Silicon Valley Bank.

The revolving line of credit features a maximum borrowing base equal to the lesser of the defined borrowing base less any outstanding

principal or a minimum aggregate principal amount of $3 million, which may increase dependent upon certain revenue targets.

2019, we amended the Loan and Security Agreement to extend the maturity of the revolving line of credit to December 8, 2020.

2020, we amended the Loan and Security Agreement to extend the maturity of the revolving line of credit to January 18, 2021.

loan was structured to be paid in two tranche periods of up to $1 million in each period, or up to $2 million in total.

The revolving

line of credit bears interest at a floating per annum rate equal to the greater of (i) the prime rate plus 4.50% or (ii) a fixed rate

The term loan has an interest rate equal to the greater of (i) the prime rate plus 2.00% or (ii) a fixed rate of 7.00%.

term loan would mature in December 2021.

connection with the November 2019 amendment to the Loan and Security Agreement, we secured access to an additional growth capital term

loan, structured to be paid in two tranche periods of up to $1.5 million in the first period and up to $0.5 million in the second period,

or up to $2 million in total.

This growth capital term loan has an interest rate equal to the greater of (i) the prime rate plus 2.00%

or (ii) a fixed rate of 7.00%.

The growth capital loan matures in June 2022.

The term loan and growth capital loan and accrued interest thereon

were repaid in December 2020 following the consummation of the Business Combination.

Convertible Promissory Note Investment

July 15, 2021, XL Fleet made an investment of $3.0 million into eNow, a developer of solar and battery power systems that is

developing fully-electric transport refrigeration units (“eTRUs”) for Class 8 commercial trailers.

In exchange for the

investment, eNow issued to the Company a convertible debenture (the “eNow Convertible Note”) dated July 15, 2021 (the

“Issuance Date”) in the original principal amount of $3.0 million, at the rate of 8% per annum and due on December 31,

The investment was classified as an available-for-sale security.

Due to certain events and conditions occurring in the fourth

quarter, including supply chain issues that negatively impacted the timeline to deliver eTRUs, and reviewing the impact of these

delays on the financial condition of eNow, the Company determined that the investment in the eNow Convertible Note was fully

impaired and as such recorded a charge of $3.0 million, reflected within other (income) expense in the consolidated statements of

As discussed below, XL Fleet had an option to purchase eNow.

If XL Fleet did not exercise this option, under certain

circumstances the eNow Convertible Note would be converted on such date into Series B preferred stock.

Interest on the outstanding

principal sum of the eNow Convertible Note would commence accruing on the Issuance Date and computed on the basis of a 365- day

The eNow Convertible Note did not convert to Series B preferred stock at December 31, 2021 and the investment remained in the

form of a convertible note.

Pursuant to the terms of the eNow Convertible Note agreement, XL Fleet

had the right to acquire eNow at a pre-determined valuation and had a right of first refusal with respect to competing offers to acquire

In the fourth quarter of 2021, the Company notified eNow that it would not exercise its option to purchase eNow, which expired

unexercised on December 31, 2021.

In addition to the terms described above, on July 15, 2021 (“Effective Date”), XL Fleet

entered into a Development and Supply Agreement (the “Development and Supply Agreement”) with eNow, whereby XL Fleet was

made the exclusive provider of high voltage batteries and associated power systems for use in eNow eTRUs.

The Company considered the

existence of adverse conditions regarding the global supply chain crisis (chips, electronic hardware) that causes further impediments

to eNow being able to execute on its business plan.

XL Fleet evaluated the supply chain issues, specifically the lack of availability

of batteries from third party suppliers, which increased during the three months ended December 31, 2021 and the eNow’s financial

difficulties and, in January 2022, began discussions with eNow to terminate the Development System agreement.

The Company's cash requirements depend on many factors, including the execution of its business strategy and plan.

The Company remains focused on carefully managing costs, including capital expenditures, maintaining strong balance sheet, and ensuring adequate liquidity.

The Company's primary cash needs are debt service, acquisition of solar energy portfolios, operating expenses, working capital and capital expenditures to support the growth in its business.

Working capital is impacted by the timing and extent of the Company's business needs.

As of December 31, 2022, the Company had working capital of $215.3 million, including cash and cash equivalents and restricted cash of $240.1 million.

The Company had a net loss of $93.9 million for the year ended December 31, 2022 and net income of $28.8 million for the year ended 2021.

During 2021, 7,441,020 Public Warrants were exercised, which resulted in the issuance of 7,441,020 shares of the Company’s Common Stock, generating cash proceeds of $85.6 million.

With the acquisition of Legacy Spruce Power in September 2022, the Company assumed all of the outstanding debt of Legacy Spruce Power which had a principal balance of $542.5 million on the date of the acquisition.

As of December 31, 2022, the Company’s debt balance was $499.8 million, net of $33.4 million of unamortized fair value adjustment.

The debt consists of three senior debt facilities and a subordinate facility.

The loan agreements require quarterly principal payments and the earliest maturity date is May 2026.

For additional information on the Company’s debt, see Note 10.

Debt included in the accompanying audited Consolidated Financial Statements.

The Company expects to continue to incur net losses in the short term, as it finalizes the transition to a residential solar company and related restructuring actions.

Based on the Company's current liquidity, it believes that no additional capital will be needed to execute its current business plan over the next 12 months.

The Company continually evaluates its cash needs to raise additional funds or seek alternative sources to invest in growth opportunities and other purposes.

Cash Flows Summary

Presented below is a summary of our operating, investing and financing

Presented below is a summary of the Company's operating, investing and financing cash flows:

Years Ended December 31,

(Amounts in thousands) 2022 2021

Net cash provided by (used in)

Operating activities

Investing activities

Financing activities

Continuing operating activities $ (47,717) $ (28,185)

Discontinued operating activities (15,772) (20,309)

Continuing investing activities (30,296) (3,000)

Discontinued investing activities 1,290 (11,829)

Continuing financing activities (19,088) 85,860

Discontinued financing activities (99) (502)

Net change in cash and cash equivalents and restricted cash $ (111,682) $ 22,035

Cash Flows Used in Operating Activities

Our cash flows from operating activities are significantly affected

by our cash investments to support the growth of our business in areas such as research and development and selling, general and administrative

expense and working capital.

Our operating cash inflows include cash from fleet electrification and related servicing, customer deposits,

and delivery of turnkey energy efficiency and electric vehicle charging stations.

These cash inflows are offset by our payments to suppliers

for production materials and parts used in our manufacturing process, operating expenses, operating lease payments and interest payments

on our financings.

The net cash used in operating

activities for the year ended December 31, 2021 was $48.5 million.

Sources consisted of a decrease in accounts receivable of $7.6 million

primarily due to reduced sales in 2021, an increase in accrued expenses and other current liabilities of $4.6 million.

The sources of

operating cash were offset by operating expenditures of approximately $49.2 million (net income of $28.8 million less non-cash income

(expense) of approximately $78.0 million including a mark-to-market gain on the fair value of warrant liabilities of $90.1 million, stock-based

compensation of $(7.9) million, a non-cash impairment charge of $(3.0) million and depreciation and amortization expense of $(1.8) million),

an increase of inventory of $10.4 million, and a decrease in accounts payable of $1.7 million.

The net cash used in operating activities for the year

ended December 31, 2020 was $19.9 million which consisted of a net loss of $60.6 million, offset principally by a non-cash charge of $35.0

million relating to an increase in the fair value of warrant liabilities and a non-cash charge of $2.9 million related to a loss on the

extinguishment of debt, debt discount amortization of $4.6 million, $1.0 million to stock-based compensation, and additional noncash charges

in the aggregate of $1.4 million.

The net cash used in operating activities for the year ended December

31, 2019 was $11.6 million which consisted of a net loss of $14.9 million, offset principally by a decrease of $2.6 million in accounts

The period over period increase in cash used in operating activities was principally due to an increase in the net loss.

Cash used in operations increased in 2021

versus 2020 by $28.8 million principally due to higher operating expenditures in the 2021 period, as well as higher inventory

purchases offset by higher collections of accounts receivable in 2021.

Historically, the Company's cash flows from operating activities were significantly affected by its cash investments to support the growth of the business in areas such as research and development and selling, general and administrative expense and working capital.

Operating cash inflows included cash from fleet electrification and related servicing, customer deposits, and delivery of turnkey energy efficiency and electric vehicle charging stations.

Subsequent to the acquisition of Legacy Spruce Power on September 9, 2022, cash inflows included cash from power generated by its residential solar energy systems and the servicing of long-term agreements for other institutional owners of residential solar energy systems.

These cash inflows were offset by payments to suppliers for production materials and parts used in the Company's manufacturing process, operating expenses, operating lease payments and interest payments on our financing.

In the fourth quarter of 2022, the Company discontinued its Drivetrain and XL Grid businesses.

The net cash used in operating activities in 2022 was $47.7 million.

Cash used in operations increased in 2022 compared to 2021 by $19.5 million principally due to higher operating expenditures in the 2022 period primarily due to legal fees,

restructuring expenses and transaction expenses related to the acquisition of Legacy Spruce Power and the divestiture of the Drivetrain business.

In addition, there were lower collections of accounts receivables due to reduced revenues in 2022.

These amounts were partially offset by lower purchases of inventory in 2022.

The net cash used in operating activities in 2021 was $28.2 million.

Sources consisted of a decrease in accounts receivable of $7.6 million primarily due to reduced sales in 2021, an increase in accrued expenses and other current liabilities of $4.6 million.

The sources of operating cash were offset by operating expenditures of approximately $49.2 million (net income of $28.8 million less non-cash income (expense) of approximately $78.0 million including a mark-to-market gain on the fair value of warrant liabilities of $90.1 million, stock-based compensation of $(7.9) million, a non-cash impairment charge of $(3.0) million and depreciation and amortization expense of $(1.8) million), an increase of inventory of $10.4 million, and a decrease in accounts payable of $1.7 million.

Cash Flows Used in Investing Activities

net cash used in investing activities for the year ended December 31, 2021 was $14.8 million which consisted of payment to acquire the

membership interests of World Energy of $8.2 million, an investment in the eNow Convertible Note of $3.0 million and purchases of equipment

of $3.6 million including $0.8 million toward the purchase of electric buses.

The net cash used in investing activities for the year ended December

31, 2020 was $0.15 million which consisted of the purchase of operating equipment and a truck to support R&D operations.

The net cash used in investing activities for the year ended December

31, 2019 was $0.03 million which consisted of the purchase of R&D equipment.

Cash Flows Provided by Financing Activities

The net cash provided by financing activities

for the year ended December 31, 2021 was $85.4 million which primarily consisted of proceeds from the exercise of public warrants of

$85.6 million.

The net cash provided by financing activities for the year ended December

31, 2020 was $346.3 million which consisted of proceeds from the reverse merger recapitalization of the Company, net of issuance costs

of $207.2 million, proceeds from the issuance of the PIPE transaction, net of issuance costs, of $144.9 million and proceeds of $8.10

million from the issuance of subordinated convertible promissory notes.

The net cash provided by financing activities for the year ended December

31, 2019 was $9.21 million which consisted of proceeds from the issuance of subordinated convertible promissory notes of $10.0 million.

The year over year increase in cash provided was principally to fund our expanding operations.

The net cash used in investing activities in 2022 was $30.3 million which consisted of cash paid for Legacy Spruce Power, net of cash acquired of $32.6 million partially offset by proceeds from the sale of fixed assets and solar energy systems.

The net cash used in investing activities in 2021 was $3.0 million which consisted of payments of $8.2 million to acquire World Energy, an investment in the eNow Convertible Note of $3.0 million and purchases of equipment of $3.6 million.

Cash Flows Provided by (Used in) Financing Activities

The net cash used in financing activities in 2022 was $19.1 million which primarily consisted of $9.4 million of long-term debt principal payments, $8.3 million used to buyout non-controlling interests and $1.9 million of capital distributions to non-controlling interests partially offset by $0.6 million of stock option proceeds received in 2022.

The net cash provided by financing activities in 2021 was $85.9 million which primarily consisted of proceeds from the exercise of public warrants of $85.6 million.

Related Parties

are party to a noncancelable lease agreement for office, research and development, and vehicle development and installation facilities

with a holder of more than 5% of our Common Stock.

On February 28, 2021, the lease term was extended through February 28, 2022.

2022, the lease term was extended through August 31, 2022.

Pursuant to the terms of the lease agreement, we currently pay monthly rent

installments of $19,473 for this property.

Rent expense under the operating lease for the years ended December 31, 2021, 2020, and 2019

was $0.2 million, $0.2 million and $0.2 million, respectively.

The Company was party to a noncancelable lease agreement for office, research and development, and vehicle development and installation facilities with a holder of more than 5% of the Company's Common Stock.

The lease expired in the third quarter of 2022.

Rent expense under the operating lease for the years ended December 31, 2022 and 2021 was $0.1 million and $0.2 million, respectively.

Off-Balance Sheet Arrangements

During the periods presented, other than the New Markets Tax Credit

variable interest entity, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured

finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.

During the periods presented, other than the New Markets Tax Credit variable interest entity which was settled in January 2022, the Company did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance

with the generally accepted accounting principles of the U.S.

The preparation of these consolidated financial statements requires us

to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets

and liabilities as of the consolidated balance sheet date, as well as the reported expenses incurred during the reporting periods.

bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the

basis for making judgments about the carrying values of assets and liabilities.

Actual results could differ from those estimates, and

such differences could be material to our consolidated financial statements.

While our significant accounting policies are described in the notes

to our historical financial statements included elsewhere in this Annual Report (see Note 2 in the accompanying audited consolidated

financial statements), we believe that the following accounting policies require a greater degree of judgment and complexity:

recognition, business combinations and convertible notes derivative accounting.

Accordingly, these are the policies we believe are the

most critical to aid in fully understanding and evaluating our financial condition and results of operations.

combinations:

We account for the acquisition of a business in accordance with ASC 805, Business Combinations (ASC 805).

to acquire a business are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition.

We determine the fair value of purchase consideration, including contingent consideration, and acquired intangible assets based on detailed

valuations that use certain information and assumptions provided by management.

We allocate any excess purchase price over the fair value

of the net tangible and intangible assets acquired to goodwill.

The results of operations of acquired businesses are included in the

financial statements from the date of acquisition forward.

Acquisition-related costs are expensed to the Statement of Operations as incurred.

We use the income approach to determine the fair value of developed

technology acquired in a business combination.

This approach determines fair value by estimating the after-tax cash flows attributable

to the respective asset over its useful life and then discounting these after-tax cash flows back to a present value.

We base our revenue

assumptions on estimates of relevant market sizes, expected market growth rates, expected trends in technology and expected product introductions

by competitors.

Developed technology represents patented and unpatented technology and know-how.

The Company’s Consolidated Financial Statements are prepared in accordance with U.S.

Preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

The Company’s most critical accounting policies and estimates are those most important to the portrayal of its financial condition and results of operations and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.

The Company has identified the following as its most critical accounting policies and judgments.

Although Management believes that its estimates and assumptions are reasonable, they are based on information available when they are made and, therefore, may differ from estimates made under different assumptions or conditions.

The Company’s significant accounting policies are discussed in Note 2.

Summary of Significant Accounting Policies, included in accompanying audited Consolidated Financial Statements, and should be reviewed in connection with the following discussion of accounting policies that require difficult, subjective and complex judgments.

Acquisitions:

Business combinations are accounted for using the acquisition method of accounting.

The purchase price of a business combination is measured at the estimated fair value of the assets acquired, equity instruments issued and liabilities assumed at the acquisition date.

Any noncontrolling interests acquired are also initially measured at fair value.

Costs that are directly attributable to the acquisition are expensed as incurred to general and administrative expense.

Goodwill is recognized if the aggregate fair value of the total purchase consideration and the noncontrolling interests is in excess of the aggregate fair value of the assets acquired and liabilities assumed.

Asset acquisitions are measured based on the cost to the Company, including transaction costs.

Asset acquisition costs, or the consideration transferred, are assumed to be equal to the fair value of the net assets acquired.

If the consideration transferred is cash, measurement is based on the amount of cash paid to the seller, as well as transaction costs incurred.

Consideration given in the form of non-monetary assets, liabilities incurred or equity instruments issued is measured based on either the cost to the Company or the fair value of the assets or net assets acquired, whichever is more clearly evident.

The cost of an asset acquisition is allocated to the assets acquired based on their estimated fair values.

Goodwill is not recognized in an asset acquisition.

The fair values of the assets acquired and liabilities assumed are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions.

Significant estimates include, but are not limited to, discount rates and forecasted cash flows.

These estimates are inherently uncertain and unpredictable.

Revenue Recognition:

On January 1, 2019, we adopted Accounting

Standards Codification (“ASC”) 606, Revenue from Contracts with Customers.

Our revenue is primarily derived from the sales

of hybrid electric powertrain equipment.

Our products are marketed and sold to end-user fleet customers and channel partners in the United

States and Canada.

Sales of products and services are subject to economic conditions and may fluctuate based on changes in the industry,

trade policies and financial markets.

Revenue is recognized upon transfer of control to the customer, which

occurs when we have a present right to payment, legal title has passed to the customer, the customer has the significant risks and rewards

of ownership, and where acceptance is not a formality, the customer has accepted the product or service.

In general, transfer of control

is upon shipment of the equipment as the terms are free on board shipping point, or equivalent and we have no other promised goods or

services in our contracts with customers.

In limited instances, we provide installation services to end-user fleet customers related

to the purchased hybrid electric powertrain equipment.

When provided, the installation services are not distinct within the context of

the contract due to the fact that the end-use fleet customer is purchasing a completed modification to our vehicles and therefore, the

installation services involve significant integration to integrate the hybrid electric powertrain equipment with the customer’s

As a result, the hybrid electric powertrain equipment and installation services represent a single performance obligation within

these contracts with customers.

We have elected to treat shipping and handling activities related to contracts with channel partner customers

as costs to fulfill the promise to transfer the associated equipment and not as a separate performance obligation.

For the XL Grid solutions,

in general, transfer of control is upon the acceptance and certification of project completion by both the end customer and the utility

who is funding the energy incentives, representing a single performance obligation of the Company.

Due to the short-term nature of projects

(typically two to three weeks), the Company recognizes revenues from all XL Grid solutions activities at a point in time, when persuasive

evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and the Company has the right to payment

for the transferred asset.

The Company also assesses multiple contracts entered into by the same customer in close proximity to determine

if the contracts should be combined for revenue recognition purposes.

During the duration of a project for XL Grid solutions, all direct

material and labor costs and those indirect costs related to the project are capitalized, and customer deposits are treated as liabilities.

Once a project has been completed and the energy efficiency upgrades have been deemed to meet client specifications, capitalized costs

are charged to earnings.

transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods and services

to the customer.

Revenue is recorded based on the transaction price, which is solely made up of fixed consideration for its products

and services.

The Company does not adjust transaction price for the effects of a significant financing component when the period between

the transfer of the promised good or service to the customer and payment for that good or service by the customer is expected to be one

year or less.

The Company has not identified any significant financing components to date.

We provide limited-assurance-type warranties for our equipment and

work performed under our contracts.

The warranty period typically extends for 3 years following transfer of control of the equipment.

The warranties solely relate to correction of product defects during the warranty period, which is consistent with similar warranties

offered by competitors.

Therefore, we have determined that this warranty is outside the scope of ASC 606 and will continue to be accounted

for under ASC 460, Guarantees.

At the time of purchase of the equipment, customers may purchase from us an extended warranty for our

The extended warranty commences upon the end of the assurance-based warranty period and is considered a separate performance

obligation that represents a stand-ready obligation to perform warranty services after the assurance-type warranty expires.

The transaction

price allocated to the extended warranty is recognized ratably over the extended warranty period.

When our contracts with customers contain multiple performance obligations,

the contract transaction price is allocated on a relative standalone selling price (“SSP”) basis to each performance obligation.

We determine SSP based on observable selling prices for the sale of kits.

For extended warranties, we determine SSP based on expected

cost plus margin.

We establish the margin based on review of market conditions and margins obtained by market participants for similar

The Company’s revenue has been derived through three business units:

(i) the Residential Solar operations primarily generate revenue through the sale to homeowners of power generated by its residential solar energy systems pursuant to long-term agreements;

(ii) the Drivetrain operations generated revenue from the sales of hybrid electric powertrain systems;

and (iii) the XL Grid operations generated revenues through turnkey energy efficiency, renewable technology, and other energy solutions.

At December 31, 2022, the Drivetrain business and XL Grid business are reported in discontinued operations.

Residential Solar Revenues

Energy generation - Customers purchase electricity under PPAs or SLAs.

Revenue is recognized from contracts with customers as performance obligations are satisfied at a transaction price reflecting an amount of consideration based upon an estimated rate of return which is expressed as the solar rate per kilowatt hour or a flat rate per month as defined in the customer contracts.

• PPAs - Under ASC 606, Revenue from Contracts with Customers ("ASC 606") , PPA revenue is recognized when generated based upon the amount of electricity delivered as determined by remote monitoring equipment at solar rates specified under the PPAs.

• SLAs - The Company has SLAs, which do not meet the definition of a lease under ASC 842, Leases ("ASC 842"), and are accounted for as contracts with customers under ASC 606.

Revenue is recognized on a straight-line basis over the contract term as the obligation to provide continuous access to the solar energy system is satisfied.

The amount of revenue recognized may not equal customer cash payments because the performance obligation has been satisfied ahead of cash receipt or evenly as continuous access to the solar energy system has been provided.

The differences between revenue recognition and cash payments received are reflected in accounts receivable, other assets or deferred revenue, as appropriate.

Solar renewable energy credit s - The Company has contracts with third parties to sell Solar Renewable Energy Credits ("SRECs") generated by the solar energy systems for fixed prices.

Certain contracts that meet the definition of a derivative may be exempted as normal purchase or normal sales transactions ("NPNS").

NPNS are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.

The Company's SREC contracts meet these requirements and are designated as NPNS contracts.

Such SRECs are exempted from the derivative accounting and reporting requirements, and the Company recognizes revenues in accordance with ASC 606.

The Company recognizes revenue for SRECs based on pricing predetermined within the respective contracts at a point of time when the SRECs are transferred.

Government incentives - The Company participates in the Residential Solar Investment Program of Connecticut, which offers a performance-based incentive (“PBI”) for certain of its solar energy systems that are associated with the program (“eligible systems”).

PBIs are paid to the Company and recognized as revenue quarterly based on actual per-kilowatt-hour production delivered to the eligible systems.

For systems up to 20kW, the Company will be paid a predetermined rate based on the eligible system start date.

The program lasts for six years from the eligible systems’ start date.

PBI revenue is accounted for under ASC 606 and is earned monthly based upon the actual electricity produced by the system.

MSA revenue - The Company earns operating and maintenance revenue from third-party residential solar fund customers at pre-determined rates for various operating and maintenance and asset management services as specified in Maintenance Service Agreements ("MSAs") and Operating Service Agreements ("OSAs").

The MSAs and OSAs contain multiple performance obligations, including routine maintenance, nonroutine maintenance, renewable energy certificate management, inventory management, delinquent account collections and customer account management.

Pursuant to ASC 606, the Company has elected the "right to invoice" practical expedient and revenue for these performance obligations are recognized as services are rendered based upon the underlying contractual arrangements.

Loan servicing - The Company performs loan servicing functions for third parties in return for a servicing fee.

The compensation is based on a percentage of the loans outstanding.

The Company has elected the "right to invoice" practical expedient and loan servicing support revenues are recognized as services are rendered based upon the underlying contractual arrangements.

Drivetrain and XL Grid Revenues

For the Drivetrain products, in general, transfer of control is upon shipment of the equipment as the terms are FOB shipping point or equivalent and the Company has no other promised goods or services in its contracts with customers.

In limited instances, the Company provides installation services to end-user fleet customers related to the purchased hybrid electric powertrain equipment.

When provided, these installation services are not distinct within the context of the contract due to the fact that the end-use fleet customer is purchasing a completed modification to its vehicles and therefore, the installation services involve significant integration to integrate the hybrid electric powertrain equipment with the customer’s vehicle.

As a result, the hybrid electric powertrain equipment and installation services represent a single performance obligation within these contracts with customers.

The Company recognizes the revenue for the equipment sale and installation service for Drivetrain products at the same time, which is after the installation is complete.

The Company has elected to treat shipping and handling activities related to contracts with channel partner customers for Drivetrain products as costs to fulfill the promise to transfer the associated equipment and not as a separate performance obligation.

For the XL Grid operations, in general, transfer of control is upon the acceptance and certification of project completion by both the end customer and the utility who is funding the energy incentives, representing a single performance obligation of the Company.

Due to the short-term nature of projects (typically two to three weeks), the Company recognizes revenues from all XL Grid activities at a point in time, when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and the Company has the right to payment for the transferred asset.

Since the Company generally does not have a right to payment until acceptance and receipt of certification of project completion by both the end customer and the utility who is funding the energy incentives, the Company does not recognize revenue until acceptance and certification occurs.

The Company also assesses multiple contracts entered into by the same customer in close proximity to determine if the contracts should be combined for revenue recognition purposes.

During the duration of a project for XL Grid, all direct material and labor costs and those indirect costs related to the project are capitalized, and customer deposits are treated as liabilities.

Once a project has been completed and the energy efficiency upgrades have been deemed to meet client specifications, capitalized costs are charged to earnings.

For both Drivetrain and XL Grid operations, when the Company’s contracts with customers contain multiple performance obligations, which is infrequent, the contract transaction price is allocated on a relative standalone selling price ("SSP") basis to each performance obligation.

The Company determines SSP based on observable selling prices for the sale of its systems.

For extended warranties, the Company determines SSP based on expected cost plus margin.

The Company establishes the margin based on review of market conditions and margins obtained by market participants for similar services.

Any allocation of the transaction price required is determined at the contracts’ inception.

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods and services to the customer.

Revenue is recorded based on the transaction price, which is solely made up of fixed consideration for its products and services.

The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfer of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less.

The Company has not identified any significant financing components to date.

The Company’s sales can in certain instances include non-cash consideration in the form of the customer transferring to the Company, the customer’s rights to cash incentives from programs administered by municipalities related to hybrid vehicle programs that a customer is entitled to as a result of its purchase.

The incentives are fixed amounts that are readily determinable.

The Company values the non-cash consideration at its fair value, which generally is the amount of the incentive.

Warrant liabilities:

We account for the warrants which we assumed

in connection with our Business Combination in accordance with ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s

Own Equity” (“ASC 815”), under which the warrants do not meet the criteria for equity classification and must be recorded

as liabilities.

As the warrants meet the definition of a derivative as contemplated in ASC 815, the Warrants are measured at fair value

at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in

the Statement of Operations in the period of change.

and net realizable value adjustments for the Company’s warranty liability and inventory, respectively:

The Company uses consistent

methodologies to evaluate inventory for net realizable value and periodically reviews inventories for obsolescence and any inventories

identified as slow moving or obsolete are initially reserved for and then written-off.

The Company also assesses net realizable value

by reviewing current quantities on hand to projected usages over the next twelve months.

As of December 31, 2021 and 2020, the Company’s

inventory reserve for obsolescence was $2,863 and $58, respectively.

who purchase the Power Drive systems are provided limited-assurance-type warranties for equipment and work performed under the contracts.

As of December 31, 2022 and 2021, the Company has outstanding private warrants it assumed with the December 2020 merger of Pivotal and Legacy XL.

With the merger, the Company assumed private placement warrants to purchase 4,233,333 shares of common stock, with an exercise price of $11.50 per share.

The warrants do not meet the criteria for equity classification and must be recorded as liabilities.

As the warrants meet the definition of a derivative, they were measured at fair value at inception and at each reporting date with changes in fair value recognized in the Consolidated Statements of Operations.

The Private Warrants were valued using a Black-Scholes model, with significant inputs consisting of risk-free interest rate, remaining term, expected volatility, exercise price, and the Company’s stock price.

The Company’s inventories consist primarily of raw materials, work in process and finished goods related to its Drivetrain business.

Inventory is stated at the lower of cost or net realizable value.

Cost of raw material inventories include the purchase and related costs incurred in bringing the products to their present location and condition.

The Company uses consistent methodologies to evaluate inventory for net realizable value and periodically reviews inventories for obsolescence and any inventories identified as slow moving or obsolete are initially reserved for and then written-off.

The Company also assesses net realizable value by reviewing current quantities on hand to projected usages over the next twelve months.

In the fourth quarter of 2022, with the Company’s planned exit of the Drivetrain business, the Company actively liquidated inventory with the remaining balance of inventory at December 31, 2022 primarily consisting of inventory expected to be utilized to service future warranty claims.

Customers who purchased the Company's Drivetrain systems were provided limited-assurance-type warranties for equipment and work performed under the contracts.

The warranty period typically extends for 3 years following transfer of control of the equipment.

The warranties solely relate to correction

of product defects during the warranty period, which is consistent with similar warranties offered by competitors.

Therefore, the Company

has determined that these warranties are outside the scope of ASC 606 and will continue to be accounted for under ASC 460, Guarantees.

At the time of purchase of the equipment, customers may purchase from the Company an extended warranty for its equipment.

warranty commences upon the end of the assurance-based warranty period and is considered a separate performance obligation that represents

a stand-ready obligation to perform warranty services after the assurance- type warranty expires.

The transaction price allocated to

the extended warranty is recognized ratably over the extended warranty period.

Customers of XL Grid solutions are provided limited-assurance-type

warranties for a term of one year for installation work performed under its contracts.

Warranties for equipment sold to customers are

provided by the original equipment manufacturers.

both Power Drives and XL Grid solutions, the Company accrues the estimated cost of product warranties for unclaimed charges based on

historical experiences and expected results.

Should product failure rates and material usage costs differ from these estimated revisions

to the estimated warranty liability are required.

The Company periodically assesses the adequacy of its recorded product warranty liabilities

and adjusts the balances as required.

Warranty expense is recorded as a component of cost of product revenue in the statements of operations.

assessment of goodwill and long-lived assets:

The Company reviews long-lived assets, including property and equipment and, intangible

assets with definite lives, for impairment whenever events or changes in circumstances indicate that an asset group’s carrying

amount may not be recoverable.

The Company conducts its long-lived asset impairment analysis in accordance with ASC 360-10, Impairment

or Disposal of Long-Lived Assets, which requires the Company to group assets and liabilities at the lowest level for which identifiable

cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of

the undiscounted future cash flows.

If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable,

an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value.

During the years

ended December 31, 2021, 2020 and 2019, no impairment indicators were identified.

represents the excess of cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses.

is not amortized but instead is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying

amount of goodwill may be impaired.

The Company has recorded goodwill in connection with its historical business acquisitions.

Company performs its annual goodwill impairment assessment at October 1 each fiscal year, or more frequently if events or circumstances

arise which indicate that goodwill may be impaired.

An assessment can be performed by first completing a qualitative assessment on the

Company’s single reporting unit.

The Company can also bypass the qualitative assessment in any period and proceed directly to the

quantitative impairment test, and then resume the qualitative assessment in any subsequent period.

Qualitative indicators that may trigger

the need for annual or interim quantitative impairment testing include, among other things, deterioration in macroeconomic conditions,

declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion

of the reporting unit.

Additionally, a significant change in business climate, a loss of a significant customer, increased competition,

a sustained decrease in share price, or a decrease in estimated fair value below book value may trigger the need for interim impairment

testing of goodwill.

the Company believes that, as a result of its qualitative assessment, it is more likely than not that the fair value of the reporting

unit is less than its carrying amount, the quantitative impairment test is required.

The quantitative test involves comparing the fair

value of the reporting unit with its carrying amount, including goodwill.

If the carrying amount of the reporting unit exceeds its fair

value, an impairment loss is recorded as a reduction to goodwill with a corresponding charge to earnings in the period the goodwill is

determined to be impaired.

The income tax effect associated with an impairment of tax- deductible goodwill is also considered in the

measurement of the goodwill impairment.

The warranties solely relate to correction of product defects during the warranty period, which is consistent with similar warranties offered by competitors.

At the time of purchase of the equipment, customers could purchase from the Company an extended warranty for its equipment.

The extended warranty commences upon the end of the assurance-based warranty period and is considered a separate performance obligation that represents a stand-ready obligation to perform warranty services after the assurance-type warranty expires.

The transaction price allocated to the extended warranty is recognized ratably over the extended warranty period.

Customers of XL Grid were provided limited-assurance-type warranties for a term of one year for installation work performed under its contracts.

For both Drivetrain and XL Grid, the Company accrues the estimated cost of product warranties for unclaimed charges based on historical experiences and expected results.

Should product failure rates and material usage costs differ from these estimated revisions to the estimated warranty liability are required.

The Company periodically assesses the adequacy of its recorded product warranty liabilities and adjusts the balances as required.

Warranty expense is recorded as a component of discontinued operations.

With the Company’s exit from the Drivetrain business and the subsequent sale of World Energy, the Company will not incur any additional warranty obligations and expects the warranty obligation to substantially run-off over the next 24 months.

As of December 31, 2022 and 2021, the Company had warranty reserves of $1.1 million and $2.5 million, respectively.

Impairment of long-lived assets:

The Company reviews long-lived assets, including solar energy systems, property and equipment, and intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that an asset group’s carrying amount may not be recoverable.

The Company groups assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows.

If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value.

In the fourth quarter of 2022, the Company determined that there was an indicator of impairment for intangible assets in its discontinued operations of the Drivetrain and XL Grid businesses and that the asset was not recoverable.

Comparing the carrying value of the asset to the fair value it was determined that the entire balances were impaired and an impairment charge of $0.9 million was recognized.

Goodwill represents the excess of cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses.

Goodwill is not amortized but instead is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired.

The Company performs its annual goodwill impairment assessment at October 1 each fiscal year, or more frequently if events or circumstances arise which indicate that goodwill may be impaired.

An assessment can be performed by first

completing a qualitative assessment on the Company’s single reporting unit.

The Company can also bypass the qualitative assessment in any period and proceed directly to the quantitative impairment test, and then resume the qualitative assessment in any subsequent period.

Qualitative indicators that may trigger the need for annual or interim quantitative impairment testing include, among other things, deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of the reporting unit.

Additionally, a significant change in business climate, a loss of a significant customer, increased competition, a sustained decrease in share price, or a decrease in estimated fair value below book value may trigger the need for interim impairment testing of goodwill.

If the Company believes that, as a result of its qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the quantitative impairment test is required.

The quantitative test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill.

If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recorded as a reduction to goodwill with a corresponding charge to earnings in the period the goodwill is determined to be impaired.

The income tax effect associated with an impairment of tax- deductible goodwill is also considered in the measurement of the goodwill impairment.

Any goodwill impairment is limited to the total amount of goodwill.

Company determines the fair value of its reporting unit using the market approach.

Under the market approach method, the Company

compared its book value to the fair value of its public float, utilizing the fair value of its common stock on the measurement

The Company determines the fair value of its reporting unit using the market approach.

Under the market approach method, the Company compared its book value to the fair value of its public float, utilizing the fair value of its common stock on the measurement date.

In the first quarter of 2022, the Company believed there were indicators that the carrying amount of its goodwill may be impaired due to a decline in the Company’s stock price and market capitalization.

As a result, the Company performed an assessment of its goodwill for impairment.

The Company elected to forego the qualitative test and proceeded to perform a quantitative test.

The Company compared the book value of its single reporting unit to the fair value of its public float.

The market capitalization was below the fair value of the Company by an amount in excess of its reported value of goodwill.

As a result, the Company recorded a charge of $8.6 million to fully impair its existing goodwill.

Valuation of deferred tax assets:

accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred tax liabilities and assets are recognized for

the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets

and liabilities and net operating loss and tax credit carryforwards.

Deferred income taxes are provided for the temporary differences

arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes,

and operating loss carry-forwards and credits.

Deferred tax assets and liabilities are measured using enacted rates in effect for the

year in which the differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of changes in

tax rates is recognized in the statements of operations in the period in which the enactment rate changes.

Deferred tax assets and liabilities

are reduced through the establishment of a valuation allowance if, based on available evidence, it is more likely than not that the deferred

tax assets will not be realized.

Accordingly, these are the policies we believe are the most critical

to aid in fully understanding and evaluating our financial condition and results of operations.

The Company accounts for income taxes using the asset and liability method, under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss and tax credit carryforwards.

Deferred income taxes are provided for the temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss carry-forwards and credits.

Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which the differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statements of operations in the period in which the enactment rate changes.

The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income and other factors such as the taxing jurisdiction in which the asset is to be recovered.

A high degree of judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets.

The Company has provided valuation allowances as of December 31, 2022 and 2021 aggregating $69.4 million and $34.9 million, respectively, against such assets based on its assessment of past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.

Although the Company believes that its approach to estimates and judgments as described herein is reasonable, actual results could differ and the Company may be exposed to increases or decreases in income taxes that could be material.

Redeemable noncontrolling interests and noncontrolling interests:

Noncontrolling interests represent third-party interests in the net assets of certain consolidated subsidiaries.

t he Company consolidates any variable interest entity ("VIE") of which it is the primary beneficiary.

The Company formed or acquired VIEs which are partially funded by tax equity investors in order to facilitate the funding and monetization of certain attributes associated with solar energy systems.

The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity;

however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests.

A variable interest holder is required to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company does not consolidate a VIE in which it has a majority ownership interest when the Company is not considered the primary beneficiary.

The Company evaluates its relationships with the VIEs on an ongoing basis to determine if it is the primary beneficiary.

The Company's investments in Ampere Solar Owner IV, LLC, Volta Solar Owner II, LLC, ORE F4 HoldCo, LLC, ORE F5A HoldCo, LLC, ORE F6 HoldCo, LLC, Sunserve Residential Solar I, LLC, RPV Fund 11 LLC, RPV Fund 13 LLC, Level Solar Fund III LLC and Level Solar Fund IV LLC (collectively, the "Funds") were determined to be variable interests in VIEs.

The Company considered the provisions within the contractual arrangements that grant it power to manage and make decisions that affect the operation of the VIEs, including determining the solar energy systems contributed to the VIEs, and the operation and maintenance of the solar energy systems.

The Company considers the rights granted to the other investors under the contractual arrangements to be more protective in nature rather than substantive participating rights.

As such, the Company was determined to be the primary beneficiary and the assets, liabilities and activities of the Funds are consolidated by the Company.

The distribution rights and priorities for the Funds as set forth in their respective operating agreements differ from the underlying percentage ownership interests of the members.

As a result, the Company allocates income or loss to the noncontrolling interest holders of the Funds utilizing the hypothetical liquidation of book value ("HLBV") method, in which income or loss is allocated based on the change in each member's claim on the net assets at the end of each reporting period, adjusted for any distributions or contributions made during such periods.

The HLBV method is commonly applied to investments where cash distribution percentages vary at different points in time and are not directly linked to an equity member's ownership percentage.

The HLBV method is a balance sheet-focused approach.

Under this method, a calculation is prepared at each reporting date to determine the amount that each member would receive if the entity were to liquidate all of its assets and distribute the resulting proceeds to its creditors and members based on the contractually defined liquidation priorities.

The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is used to derive each member's share of the income or loss for the period.

Factors used in the HLBV calculation include GAAP income (loss), taxable income (loss), capital contributions, investment tax credits, distributions and the stipulated targeted investor return specified in the subsidiaries' operating agreements.

Changes in these factors could have a significant impact on the amounts that investors would receive upon a hypothetical liquidation.

The use of the HLBV method to allocate income (loss) to the noncontrolling interest holders may create volatility in the consolidated statements of operations as the application of HLBV can drive changes in net income or loss attributable to noncontrolling interests from period to period.

The Company classifies certain noncontrolling interests with redemption features that are not solely within the Company’s control outside of permanent equity in the consolidated balance sheets.

Redeemable noncontrolling interests are reported using the greater of the carrying value at each reporting date as determined by the HLBV method or the estimated redemption value at the end of each reporting period.

Estimating the redemption value of the redeemable noncontrolling interests requires the use of significant assumptions and estimates, such as projected future cash flows.

Interest Rate Swaps:

The Company utilizes interest rate swaps to manage interest rate risk on existing and planned future debt issuance s.

These swaps are not designated as cash flow hedges or fair value hedges.

The fair value of the interest rate swaps are calculated by discounting the future net cash flows to the present value based on the terms and conditions of the agreements and the forward interest rate curves.

As these inputs are based on observable data and valuations of similar instruments, the interest rate derivatives are primarily categorized in Level 2 in the fair value hierarchy.

The fair value of interest rate swaps are recorded on the Consolidated Balance Sheets.

Realized gains and losses on interest rate swaps are recognized in Interest Expense, Net on the Consolidated Statements of Operations.

Unrealized gains and losses on interest rate swaps are recognized in Other (Income) Expense on the Consolidated Statements of Operations and as a non-cash reconciling item in operating activities on the Consolidated Statements of Cash Flows.

New and Recently Adopted Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the

FASB or other standard setting bodies that are applicable to us as of the specified effective date.

Unless otherwise discussed, we believe

that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or

results of operations under adoption.

As of December 31, 2021, the Company satisfies the definition of a

“large accelerated filer” under the definition of the Securities Exchange Act of 1934, as amended, and it no longer qualifies

as an emerging growth company.

See the section titled “Summary of Significant Accounting Policies — Recent accounting pronouncements

issued and adopted” in Note 2 to our consolidated financial statements included elsewhere in this Annual Report for additional

Quantitative and Qualitative Disclosure About Market Risk

Not required.

Off-Balance Sheet Arrangements

We have no significant known off balance sheet arrangements.

Quantitative and Qualitative Disclosures About Market

Not required.

See Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K

Quantitative and Qualitative Disclosures About Market Risk

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis