What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-30 compared with 2022-03-01 · 1300 added, 1454 removed, 339 unchanged (89% of the section changed)

Financial Statements and Supplementary Data

Our financial statements are presented beginning

on page F-1 which appears following this caption.

The Company's Consolidated Financial Statements are presented beginning on page F-1 which appears following this caption.

Index to Consolidated Financial Statements

2 unchanged sentences

Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 202 2 and 202 1

Consolidated Statements of Cash Flows for the Years Ended December 31, 202 2 and 202 1

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

XL Fleet Corp.

and Subsidiaries

Opinion on the Financial

We have audited the accompanying

consolidated balance sheets of XL Fleet Corp.

and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related

consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period

ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the

financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020,

and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity

with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the

standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial

reporting as of December 31, 2021, based on the criteria established in Internal Control - Integrated Framework issued by the Committee

of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 1, 2022 , expressed an adverse

opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of material weaknesses.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Spruce Power Holding Corporation (formerly known as XL Fleet Corp.) (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility

of the Company's management.

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks

of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall

presentation of the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below

are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to

the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our

especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion

on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions

on the critical audit matters or on the accounts or disclosures to which they relate.

Initial measurement of fair value of assets related to a business

The Company completed the acquisition of all

of the issued and outstanding membership interests of World Energy Efficiency Services LLC in May 2021.

The Company has accounted for

this acquisition as a business combination under ASC Topic 805 “Business Combinations.” Accordingly, the purchase price of

$12.46 million was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified

intangible assets of $1.56 million and resulting goodwill of $8.11 million.

We identified the initial fair value measurement of intangible assets

as a critical audit matter because of the significant estimates and assumptions management makes to fair value these assets for purposes

of recording the acquisition.

This required a high degree of auditor judgment and an increased extent of effort when performing audit

procedures to evaluate the reasonableness of management’s forecasts and future cash flows including the need to involve our fair

value specialists.

Our audit procedures related to these forecasts included the following,

among others:

• We evaluated the reasonableness of management’s

forecasts of future cash flows by comparing the projections to historical results.

• Testing the source information underlying the forecasts.

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Initial measurement of fair value of assets related to a business combination

The Company completed the acquisition of all of the membership interests of Spruce Holding Company 1 LLC, Spruce Holding Company 2 LLC, Spruce Holding Company 3 LLC, and Spruce Manager LLC.

The Company has accounted for this acquisition as a business combination under ASC Topic 805 “Business Combinations.” Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values.

We identified the initial fair value measurement of intangible assets as a critical audit matter because of the significant estimates and assumptions management makes to fair value these assets for purposes of recording the acquisition.

This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s initial estimates of cash flows including the need to involve our fair value specialists.

Our audit procedures related to these forecasts included the following, among others:

• Testing the source information underlying the estimates

• With the assistance of our fair value specialists:

• Evaluating the reasonableness of the valuation methodology

• Developing a range of independent estimates

for the discount rates and comparing those to the discount rates selected by management.

• Developing a range of independent estimates for the discount rates and comparing those to the discount rates selected by management

/s/ Marcum LLP

1 unchanged sentence

March 30, 2023

XL Fleet Corp.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Consolidated Balance Sheets

6 unchanged sentences

Accounts receivable, net 8,336 —

Inventory, net

Interest rate swap assets, current 10,183 —

Prepaid expenses and other current assets 5,316 310

Current assets of discontinued operations 10,977 22,469

Total current assets 274,956 374,605

Property and equipment, net

Intangible assets, net

Solar energy systems, net 395,826 —

Other property and equipment, net 342 252

Interest rate swap assets, non-current 22,069 —

Deferred rent assets 1,626 —

Right-of-use asset 2,802 146

Liabilities and stockholders ’ equity

Goodwill 128,548 —

Other assets 383 —

Long-term assets of discontinued operations — 18,218

Total assets $ 826,552 $ 393,221

Liabilities, redeemable noncontrolling interests and stockholders’ equity

Current liabilities:

1 unchanged sentence

Accounts payable 2,904 697

Deferred revenue, current 39 —

Lease liability, current 834 51

Accrued expenses and other current liabilities 21,509 6,241

Current liabilities of discontinued operations 9,097 9,644

Total current liabilities 59,697 16,633

4 unchanged sentences

Contingent consideration — 541

Other long-term liabilities 10 —

New market tax credit obligation

Long-term liabilities of discontinued operations

Total liabilities 537,576 31,411

Commitments and contingencies (Note 20)

Redeemable noncontrolling interests 85 —

Stockholders’ equity

3 unchanged sentences

Additional paid-in capital 473,277 461,207

Noncontrolling interests 8,942 —

Accumulated deficit ( 193,342 ) ( 99,411 )

Total stockholders’ equity 288,891 361,810

Total liabilities and stockholders’ equity

(1) Held by variable interest entity

notes to consolidated financial statements.

XL Fleet Corp.

Total liabilities, redeemable noncontrolling interests and stockholders’ equity $ 826,552 $ 393,221

See notes to consolidated financial statements.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Consolidated Statements of Operations

For the Years Ended December 31, 2022 and 2021

Ended December 31,

(In thousands,

except per share and share amounts)

Cost of revenues

profit (loss)

Research and development

general, and administrative expenses

from operations

(income) expense:

Years Ended December 31,

(In thousands, except per share and share amounts) 2022 2021

Revenues $ 23,194 $ —

Operating expenses:

Cost of revenues - solar energy systems depreciation 6,583 —

Cost of revenues - operations and maintenance 3,170 —

Cost of revenues - loan servicing 196 —

Selling, general, and administrative expenses 73,118 35,094

Total operating expenses 83,067 35,094

Loss from operations ( 59,873 ) ( 35,094 )

Other (income) expense:

Interest expense, net 10,062 39

Loss on extinguishment

Loss on asset disposal

Gain on extinguishment of debt ( 4,527 ) —

(Gain) loss on asset disposal ( 580 ) 26

Loss on impairment — 3,000

in fair value of obligation to issue shares of common stock to sellers of World Energy

Change in fair value

of warrant liability

Change in fair value

of convertible notes payable derivative liability

(loss) income

(loss) income per share, basic

Net loss per share,

Weighted-average

shares outstanding, basic

Weighted-average

shares outstanding, diluted

to consolidated financial statements.

XL Fleet Corp.

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

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

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

Other income ( 912 ) ( 58 )

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

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

Net (loss) income ( 92,791 ) 28,790

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

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

Net (loss) income attributable to stockholders per share, basic $ ( 0.66 ) $ 0.21

Net (loss) income attributable to stockholders per share, diluted $ ( 0.66 ) $ 0.19

Weighted-average shares outstanding, basic 142,692,003 138,457,416

Weighted-average shares outstanding, diluted 142,692,003 148,510,351

See notes to consolidated financial statements.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Consolidated Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2022 and 2021

Stockholders’

(In thousands, except share amounts)

Redeemable Noncontrolling Interests Additional

Capital Noncontrolling Interests Accumulated

Deficit Stockholders’

(In thousands, except share amounts) Shares Amount

Balance at December 31, 2021

$ — 140,540,671 $ 14 $ 461,207 $ — $ ( 99,411 ) $ 361,810

Stock-based compensation expense

Stock acceleration and extension

Exercise of warrants

Exercise of public warrants

Settlement of warrant liability upon exercise of warrants

Settlement of warrant liability upon call of warrants

Proceeds from PIC shares recapitalization

Exercise of stock options — 2,670,114 — 630 — — 630

Issuance of restricted stock — 1,064,441 — — — — —

Issuance of shares in business combination with World Energy

Issuance of shares as contingent consideration relating to Quantum business acquisition — 100,000 — 186 — — 186

Stock-based compensation expense — — — 9,996 — — 9,996

Noncontrolling interests related to acquisition of Legacy Spruce Power 7,159 — — — 12,164 — 12,164

Buyout of noncontrolling interests ( 6,517 ) — — 1,258 ( 3,024 ) — ( 1,766 )

Capital distributions to noncontrolling interests ( 1,403 ) — — — ( 492 ) — ( 492 )

Net (loss) income 846 — — — 294 ( 93,931 ) ( 93,637 )

Balance at December 31, 2022

Stockholders’

(Deficit) Equity

$ 85 144,375,226 $ 14 $ 473,277 $ 8,942 $ ( 193,342 ) $ 288,891

Common Stock Additional

Capital Accumulated

Deficit Stockholders’

Shares Amount

Balance at December 31, 2020

131,365,254 $ 13 $ 317,084 $ ( 128,201 ) $ 188,896

Exercise of stock options 1,027,519 — 230 — 230

Exercise of warrants 233,555 — — — —

Stock-based compensation expense

Conversion of convertible debt

Issuance of restricted stock

PIC shares recapitalized, net of issuance costs and the fair value of warrant liabilities

Shares issued in offering, net of issuance costs

Balance at December 31, 2020

$ ( 128,201 )

Stockholders’

(Deficit) Equity

Balance at January 1, 2019

Exercise of public warrants 7,441,020 1 85,554 — 85,555

Issuance of restricted stock 11,319 — — — —

Exercise of stock options

Issuance of stock in asset acquisition

Issuance of warrants

Issuance of shares in business combination with World Energy 462,004 — 2,631 — 2,631

Stock-based compensation expense — — 3,508 — 3,508

Stockholder distribution

Stock acceleration and extension — 4,372 — 4,372

Settlement of warrant liability upon exercise of warrants — — 47,162 — 47,162

Settlement of warrant liability upon call of warrants — — 591 — 591

Proceeds from PIC shares recapitalization — — 75 — 75

Net income — — — 28,790 28,790

Balance at December 31, 2021

to consolidated financial statements.

XL Fleet Corp.

140,540,671 $ 14 $ 461,207 $ ( 99,411 ) $ 361,810

See notes to consolidated financial statements.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Consolidated Statements of Cash Flows

3 unchanged sentences

Operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Changes in fair value of warrant liabilities

Net (loss) income $ ( 92,791 ) $ 28,790

Net loss from discontinued operations 40,112 23,812

Adjustments to reconcile net (loss) income to net cash used in operating activities:

Stock-based compensation 9,996 7,880

Loss on impairment

Bad debt expense 1,839 —

Depreciation and amortization expense 6,422 —

Loss on impairment — 3,000

Contingent consideration — ( 61 )

Change in fair value of obligation to issue shares of

common stock to sellers of World Energy

Change in fair value of obligation to issue shares of common stock ( 535 ) ( 565 )

Fair value change of derivative liabilities ( 5,554 ) —

Loss on extinguishment of debt

Loss on disposal of assets

Changes in fair value of warrant liabilities ( 5,148 ) ( 90,138 )

Gain on extinguishment of debt ( 4,527 ) —

(Gain) loss on asset disposal ( 580 ) 26

Change in operating right-of-use assets 134 —

Interest on finance leases

Debt discount 1,482 72

1 unchanged sentence

Accounts receivable, net 553 —

Inventory, net

Prepaid expenses and other current assets ( 1,571 ) 954

Deferred rent assets ( 1,626 ) —

Accounts payable ( 1,696 ) ( 577 )

1 unchanged sentence

Deferred revenue 495 —

Net cash used in operating activities

Net cash used in continuing operating activities ( 47,717 ) ( 28,185 )

Net cash used in discontinued operating activities ( 15,772 ) ( 20,309 )

Investing activities:

Payment to acquire net assets of World Energy

Purchase of eNow Convertible Note

Purchases of property and equipment

Net cash used in investing activities

Proceeds from sale of property and equipment 2,289 —

Investment and acquisitions, net of cash acquired ( 32,585 ) —

Purchase of convertible note — ( 3,000 )

Net cash used in continuing investing activities ( 30,296 ) ( 3,000 )

Net cash provided by (used in) discontinued investing activities 1,290 ( 11,829 )

Financing activities:

Proceeds from the issuance of subordinated convertible promissory notes

Repayments to the issuance of subordinated convertible promissory notes

Proceeds from paycheck protection program

Repayments to paycheck protection program

Proceeds from debt

Repayments of debt ( 9,302 ) —

Repayment of contingent consideration

Repayments under financing leases ( 238 ) —

Proceeds from revolving line of credit

Repayments of revolving line of credit

Proceeds from recapitalization of PIC shares — 75

Proceeds from issuance of common stock

Proceeds of issuance costs in connection with term loans and revolving line of credit

Proceeds from exercise of stock options 630 230

Stockholder distribution

Proceeds from exercise of Public Warrants — 85,555

Net cash provided by financing activities

Net increase in cash and cash equivalents and restricted cash

Buyout of redeemable noncontrolling interests and noncontrolling interests ( 8,283 ) —

Capital distributions to redeemable noncontrolling interests and noncontrolling interests ( 1,895 ) —

Net cash provided by (used in) continuing financing activities ( 19,088 ) 85,860

Net cash used in discontinued financing activities ( 99 ) ( 502 )

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

Cash, cash equivalents, and restricted cash at beginning of period 351,826 329,791

3 unchanged sentences

Supplemental disclosures of noncash investing and financing information:

Issuance of warrants

Initial measurement of warrants assumed in connection with the Business Combination accounted for as liabilities

Contingent and deferred consideration issued in connection with business combination

Issuance of stock in asset acquisition

Issuance costs in accrued expenses

Recording of operating lease asset and liability $ 1,827 $ —

Recording of finance lease asset and liability $ 23 $ —

Settlement of lease liability $ 685 $ —

Settlement of contingent liability through issuance of shares $ 186 $ —

Settlement of warrant liability upon exercise of Public Warrants $ — $ 47,162

1 unchanged sentence

Issuance of shares to former owners of WEES $ — $ 1,192

Conversion of convertible debt

Retrospective recapitalization of stockholders’ equity

Reduce derivative liability for extinguishment of convertible notes payable

Increase derivative liability for issuance of convertible notes payable

Reduce derivative liability for the conversion and repayment of the convertible notes payable

Equipment financing $ — $ 271

to consolidated financial statements.

XL Fleet Corp.

See notes to consolidated financial statements.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Organization and Description of Business

Description of Business:

XL Fleet Corp.

and its subsidiaries

(“XL Fleet” or the “Company”) is a provider of fleet electrification solutions for commercial vehicles in North

America, offering solutions for vehicle electrification (“Power Drive”) and energy efficiency infrastructure solutions such

as vehicle charging stations through its XL Grid programs, as further described below.

XL Fleet has over 4,450 electrified powertrain

systems sold and driven over 181 million miles by over 245 fleets, as of December 31, 2021.

Merger and Reorganization:

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.

Acquisition of World Energy:

On May 17, 2021 (“Closing

Date”), the Company acquired 100 % of the membership interests of World Energy Efficiency Services, LLC (“World Energy”).

World Energy provides turnkey energy efficiency, renewable technology, electric vehicle charging stations and other energy solutions throughout

The Company completed the acquisition to further the strategy of its XL Grid business to provide corporations and municipalities

a means to reduce its carbon footprints and ready itself for the demands of electric fleet requirements (See Note 4).

COVID-19 Worldwide Pandemic:

On March 11, 2020, the World Health

Organization characterized the outbreak of the novel coronavirus (“COVID-19”) as a global pandemic and recommended containment

and mitigation measures.

Since then, extraordinary actions have been taken by international, federal, state, and local public health and

governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world.

These actions include

travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily

activities and for many businesses to curtail or cease normal operations.

Consistent with the actions taken by governmental authorities, the

Company has taken appropriately cautious steps to protect its workforce and support community efforts.

As part of these efforts, and in

accordance with applicable government directives, beginning in late March 2020, the Company implemented work from home policies where

practical at its facilities.

Effective December 31, 2021, all of the Company’s employees were working full-time from one of the

Company’s five offices or from home.

Current COVID-19 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, its operations, its contractors and the automotive original equipment manufacturers.

The Company has experienced, and expects to continue to experience,

reduced operations and production line shutdowns at vehicle OEMs due to COVID-19, limitations on travel by the Company’s personnel

and personnel of the Company’s customers, and future delays or shutdowns of vehicle OEMs or the Company’s suppliers.

The COVID-19 pandemic and the protocols and procedures the Company

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

The full impact of the COVID-19 pandemic

on its 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 its customers and industry partners.

XL Fleet Corp.

Spruce Power Holding Corporation (formerly known as XL Fleet Corp.) and its subsidiaries ("Spruce Power" or 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 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 the 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 its 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.

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.

This included the implementation of a process to institutionalize the M&A effort including the formation of an investment committee comprised of senior members of our team and members of the Board.

The objective was to continue the exploration of value-generative opportunities in the decarbonization and energy transition ecosystem, focused on three core requirements, (i) a business that is making an impact on decarbonization, (ii) a leader in an established, growing market segment, and (iii) a company that is generating positive EBITDA.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the years ended December 31,

2021, 2020 and 2019

(Amounts in thousands, except share

and per share data)

Summary of Significant Accounting

Basis of consolidated financial statement

presentation:

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally

accepted in the United States (“U.S.

The accompanying consolidated financial statements of the Company include the

accounts of its wholly owned subsidiaries and variable interest entities, for which the Company is the primary beneficiary.

Company holds certain rights that provide the power to direct the activities of variable interests that most significantly impact the

VIE economic performance, as well as to potentially receive benefits or the obligation to absorb potentially significant losses, the

Company has a controlling interest in such VIEs.

The Company reports its consolidated financial information as a single segment.

significant intercompany transactions have been eliminated in consolidation.

Emerging Growth Company:

Company was an “emerging growth company” under Jumpstart Our Business Act (the “JOBS Act”) until December 31,

2021, the date on which the company was deemed to be a large accelerated filer under the rules of the Securities Exchange Commission

Effective December 31, 2021, the Company was required to comply with new or revised accounting standards applicable

to public companies.

In addition, because the Company ceased to be an “emerging growth company” with its transition to large

accelerated filer status as of December 31, 2021, the Company is also now subject to Section 404(b) of Sarbanes-Oxley Act of 2002 (“SOX”),

which requires that its independent registered public accounting firm provide an attestation report on the effectiveness of the Company’s

internal control over financial reporting for the first time in this Annual Report on Form 10-K, among other additional requirements.

For the Years Ended December 31, 2022 and 2021

Organization and Description of Business, continued

As a result of these efforts, on September 9, 2022, the Company acquired 100 % of the membership interests of 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”) (See Note 4.

Business Combinations).

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 approximately 51,000 customer subscribers as of December 31, 2022.

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 in the Consolidated Financial Statements (see Note 23.

Discontinued Operations).

Summary of Significant Accounting Policies

Basis of consolidated financial statement presentation:

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.

The accompanying Consolidated Financial Statements of the Company include the accounts of its wholly owned subsidiaries and variable interest entities, for which the Company was the primary beneficiary.

All significant intercompany transactions have been eliminated in consolidation.

Correction of immaterial error:

During the fourth quarter of 2022, the Company determined that there was an error in the third quarter of 2022 for the accounting for the buyout of noncontrolling interests.

The impact of the error was an understatement of additional paid-in capital of $ 2.9 million and an overstatement of noncontrolling interest of $ 2.9 million as of September 30, 2022.

The Company assessed the materiality of the issue considering both qualitative and quantitative factors and determined the error was immaterial.

The error was corrected in the fourth quarter.

The adjustment had no impact on total assets, total liabilities or total stockholders’ equity, the Consolidated Statements of Operations, or the Consolidated Statements of Cash Flows.

Use of estimates:

preparation of financial statements in conformity with U.S.

GAAP requires management to make certain estimates and assumptions that

affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet

date, as well as reported amounts of expenses during the reporting period.

The Company’s most significant estimates and

judgments involve inventory reserves, deferred income taxes, warranty reserves, valuation of share-based compensation, the valuation

of warrant liability, the fair value of investment in convertible notes, and the valuation of business combinations, including the

fair values and useful lives of acquired assets and assumed liabilities and the fair value of purchase consideration.

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 the Company’s financial statements.

Segment Information:

The Company’s

chief operating decision maker (“CODM”) is its chief executive officer, who makes operating decisions, assesses performance

and allocates resources on a consolidated basis.

The CODM reviews financial information presented on a consolidated basis for the purposes

of allocating resources and evaluating financial performance.

Accordingly, management has determined that the Company operates as one

operating and reportable segment.

The preparation of financial statements in conformity with U.S.

GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of expenses during the reporting period.

The Company’s most significant estimates and judgments involve inventory reserves, deferred income taxes, warranty reserves, valuation of share-based compensation, the valuation of warrant liability, useful lives of certain assets and liabilities, the

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Summary of Significant Accounting Policies, continued

allowance for doubtful accounts, and the valuation of business combinations, including the fair values and useful lives of acquired assets and assumed liabilities and the fair value of purchase consideration.

Management 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 the Company’s financial statements.

Variable interest entities:

The 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.

(See Note 12.

Redeemable Noncontrolling Interests and Noncontrolling Interests)

Redeemable noncontrolling interests and noncontrolling interests:

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 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.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Summary of Significant Accounting Policies, continued

Concentration of Credit Risk:

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and trade receivables.

times, such cash may be in excess of the FDIC limit.

At December 31, 2021 and 2020, the Company had cash in excess of the $ 250 federally

insured limit.

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents.

At times, such cash may be in excess of the FDIC limit.

At December 31, 2022 and 2021, the Company had cash in excess of the $250,000 federally insured limit.

The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

With respect to trade receivables, the

Company routinely assesses the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure

As of December 31, 2021, two customers accounted for approximately 74 % and 11 % of accounts receivable, net.

As of December

31, 2020, one customer accounted for approximately 82 % of accounts receivable, net.

For the year ended December 31, 2021,

two customers accounted for approximately 78% of revenues.

For the years ended December 31, 2020, one customer accounted for approximately

68% of revenues and for December 31, 2019 two customers accounted for approximately 65% of revenues.

Cash, cash equivalents, and restricted

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash

Cash and cash equivalents include cash held in banks and money market accounts.

Cash equivalents are carried at cost, which

approximates fair value due to their short-term nature.

The Company’s cash and cash equivalents are placed with high-credit quality

financial institutions and issuers, and at times exceed federally insured limits.

To date, the Company has not experienced any credit

loss relating to its cash and cash equivalents.

Restricted cash:

Cash and cash equivalents:

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.

Cash and cash equivalents include cash held in banks, U.S.

Treasury bills and money market accounts.

Cash equivalents are carried at cost, which approximates fair value due to their short-term nature.

The Company’s cash and cash equivalents are placed with high-credit quality financial institutions and issuers, and at times exceed federally insured limits.

To date, the Company has not experienced any credit loss relating to its cash and cash equivalents.

Restricted cash:

held at December 31, 2021 and 2020, consists of $ 150 for a bank deposit required for a letter of credit which is reserved for the Company’s

California lease.

The following table provides a reconciliation

of cash, cash equivalents, and restricted cash in the consolidated balance sheets to the total amount shown in the consolidated statements

of cash flows:

Restricted cash held at December 31, 2022 of $ 19.8 million primarily consists of approximately $ 19.7 million of cash that is subject to restriction due to provisions in the Company's financing agreements and the operating agreements of the Funds that are accounted for as consolidated VIEs.

Restricted cash held at December 31, 2021 of $ 150,000 consists of a bank deposit required for a letter of credit which is reserved for the Company’s California lease.

The restricted cash may be subject to depository and collateral account agreements.

The carrying amount reported in the Consolidated Balance Sheets for restricted cash approximates fair value.

The following table provides a reconciliation of Cash and Cash Equivalents and Restricted Cash in the Consolidated Balance Sheets to the total amount shown in the Consolidated Statements of Cash Flows:

As of December 31,

(Amounts in thousands) 2022 2021

Cash and cash equivalents $ 220,321 $ 351,676

1 unchanged sentence

Total cash, cash equivalents, and restricted cash $ 240,144 $ 351,826

XL Fleet Corp.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020 and 2019

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

Summary of Significant Accounting Policies, continued

Accounts receivable, net:

Accounts receivable

are stated at the gross invoice amount, net of an allowance for doubtful accounts.

The allowance for doubtful accounts is maintained at

a level considered adequate to provide for potential account losses on the balance based on management’s evaluation of the anticipated

impact of current economic conditions, changes in the character and size of the balance, past and expected future loss experience, among

other pertinent factors.

As of December 31, 2021 and 2020, the Company’s allowance for doubtful accounts was $ 148 and $ 0 respectively.

Accounts receivable represent amounts due from customers and are stated at the gross invoice amount, net of an allowance for doubtful accounts.

The allowance for doubtful accounts is maintained at a level considered adequate to provide for potential account losses on the balance based on Management’s evaluation of the anticipated impact of current economic conditions, changes in the character and size of the balance, past and expected future loss experience, among other pertinent factors.

As of December 31, 2022, the Company’s allowance for doubtful accounts was $ 12.2 million.

Inventory, net:

Inventory is comprised of raw

materials, work in process and finished goods.

Inventory is comprised of raw materials, work in process and finished goods related to its discontinued Drivetrain and XL Grid businesses.

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.

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.

As of December 31, 2021 and 2020,

the Company’s inventory reserve for obsolescence was $ 2,863 and $ 58 , respectively.

The increase in the inventory reserve at December

31, 2021 reflects decreased utilization in 2022 due to the Company’s plan to strategically reduce its hybrid offerings in 2022.

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.

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.

As of December 31, 2022 and 2021, inventory included in Current Assets of Discontinued Operations consisted of $ 2.3 million and $ 18.1 million, respectively, net of a reserve for obsolescence of $ 0.04 million and $ 2.9 million, respectively.

Fair value measurements:

The Company follows the guidance in

ASC Topic 820, “Fair Value Measurement”, for its financial assets and liabilities that are re-measured and reported at fair

value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.

The fair value of the Company’s financial assets and liabilities

reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid

in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date.

In connection

with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained

from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price

assets and liabilities).

The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs

and unobservable inputs used in order to value the assets and liabilities:

Quoted prices (unadjusted) for identical assets or

liabilities in active markets that the Company can access at the measurement date.

Significant other observable inputs other than level

1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are

observable or can be corroborated by observable market data.

Significant unobservable inputs that reflect the Company’s

judgment about the assumptions that market participants would use in pricing an asset or liability.

An asset’s or liability’s fair value measurement level

within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

See Note 15 for additional information on assets and liabilities measured

at fair value.

The Company believes its valuation methods are appropriate and consistent

with other market participants, however the use of different methodologies or assumptions to determine the fair value of certain financial

instruments could result in a different fair value measurement at the reporting date.

XL Fleet Corp.

The fair value of the Company’s financial assets and liabilities reflects Management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Summary of Significant Accounting Policies, continued

Fair value measurements, continued:

The Company’s financial instruments consist of cash and cash

equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, contingent consideration liability, long-term

debt and warrant liability.

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses

approximates fair value because of the short-term nature of those instruments.

Prepaid expenses and other current assets:

Prepaid expenses

and other current assets include prepaid insurance, prepaid rent, and supplies, which are expected to be recognized or realized within

the next 12 months.

Property and equipment, net:

Property and equipment, net is

stated at cost less accumulated depreciation, or if acquired in a business combination, at fair value as of the date of acquisition.

is calculated using the straight-line method, based upon the following estimated useful lives:

Furniture and fixtures

Computer and related equipment

Leasehold improvements

Lesser of useful life of the asset or remaining life of the lease

Improvements are capitalized, while replacements, maintenance and repairs, which do not improve or extend the lives of the respective

assets, are expensed as incurred.

When property and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation

are removed from the accounts, and any gain or loss on the disposition is recorded in the statement of operations as a component of other

(expense) income, net.

Business combinations:

The Company accounts for the acquisition

of a business in accordance with ASC 805, Business Combinations (ASC 805).

Amounts paid to acquire a business are allocated to the assets

acquired and liabilities assumed based on their fair values at the date of acquisition.

The Company determines 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.

The Company allocates 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 in periods in which the costs are incurred.

The Company uses 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.

The Company bases

its 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.

Refer to Note 4 for discussion of the Company’s 2021 business

Intangible assets, net:

Intangible assets are initially recorded

at fair value and stated net of accumulated amortization and impairments.

The Company amortizes its intangible assets that have finite

lives using either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset

is expected to be utilized.

Amortization is recorded over the estimated useful lives, which for developed technology is 4 years .

evaluates the recoverability of its definite lived intangible assets whenever events or changes in circumstances or business conditions

indicate that the carrying value of these assets may not be recoverable based on expectations of future undiscounted cash flows for each

If the carrying value of an asset or asset group exceeds its undiscounted cash flows, the Company estimates the fair value

of the assets, generally utilizing a discounted cash flow analysis based on the present value of estimated future cash flows to be generated

by the assets using a risk-adjusted discount rate.

To estimate the fair value of the assets, the Company uses market participant assumptions

pursuant to ASC 820, Fair Value Measurements.

XL Fleet Corp.

transfer of the liabilities in an orderly transaction between market participants at the measurement date.

For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value.

Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances.

Depending on the inputs, the Company classifies each fair value measurement as follows:

Observable inputs that reflect unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the level in the fair value hierarchy must be determined based on the lowest level input that is significant to the fair value measurement.

An assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, contingent consideration liability, long-term debt, interest rate swaps and warrant liability.

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair value because of the short-term nature of those instruments.

Fair Value Measurements for additional information on assets and liabilities measured at fair value.

Solar energy systems, net:

Solar energy systems, net consists of residential solar energy systems which are subject to Customer Agreements.

Solar energy systems are recorded at fair value upon acquisition, less any impairment charges.

For all acquired systems, the Company calculates depreciation using the straight-line method over the remaining useful life as of the acquisition date based on a 30 -year useful life from the date the asset was placed in service.

When a solar energy system is sold or otherwise disposed of, a gain (or loss) is recognized for the amount of cash received in excess of the net book value of the solar energy system (or vice versa) at which time the related solar energy system is removed from the balance sheet.

Depreciation expense of solar energy systems for the year ended December 31, 2022 was $ 6.5 million.

Other property and equipment, net:

Other property and equipment, net is stated at cost less accumulated depreciation, or if acquired in a business combination, at fair value as of the date of acquisition.

Depreciation is calculated using the straight-line method, based upon the following estimated useful lives:

Equipment 5 years

Furniture and fixtures 3 years

Computer and related equipment 2 years

Software 2 years

Vehicles 5 years

Leasehold improvements Lesser of useful life of the asset or remaining life of the lease

Improvements are capitalized, while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed as incurred.

When property and equipment is retired or otherwise disposed of, the

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Summary of Significant Accounting Policies, continued

related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is recorded in the Consolidated Statements of Operations as a component of other (income) expense, net.

Depreciation expense of other property and equipment for the years ended December 31, 2022 and 2021 was approximately $ 783,000 and $ 653,000 , respectively.

Asset retirement obligations:

Customer agreements only require that solar energy systems be removed if:

(1) the customer has not renewed the customer agreement or exercised their purchase option and (2) the host customer requests the Company to remove the system.

Upon review of the Company's estimate of the probability of required system removal, the Company considered current industry trends and has determined that it is highly probable that the customers will choose to renew their agreements or exercise the buyout option as the systems have an estimated useful life greater than the terms of the customer agreements and would still present value to the customer through cost savings.

Therefore, the Company believes that the probability-weighted estimated removal costs are nominal.

Business combinations:

The Company accounts for the acquisition of a business using the acquisition method of accounting.

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

The Company determines the fair value of purchase consideration, including contingent consideration, and acquired intangible assets based on valuations that use certain information and assumptions provided by Management.

The Company allocates 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 in periods in which the costs are incurred.

Intangible assets, net:

Intangible assets are initially recorded at fair value and stated net of accumulated amortization and impairments.

The Company amortizes its intangible assets that have finite lives using either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized.

Amortization is recorded over the estimated useful lives.

The Company evaluates the recoverability of its definite lived intangible assets whenever events or changes in circumstances or business conditions indicate that the carrying value of these assets may not be recoverable based on expectations of future undiscounted cash flows for each asset group.

If the carrying value of an asset or asset group exceeds its undiscounted cash flows, the Company estimates the fair value of the assets, generally utilizing a discounted cash flow analysis based on the present value of estimated future cash flows to be generated by the assets or asset group using a risk-adjusted discount rate.

During 2022, intangible assets consisted of:

(i) developed technology acquired during 2019, (ii) sponsorship agreement contracted during 2021, and (iii) customer relationships acquired in the World Energy acquisition in 2021.

In the fourth quarter of 2022, the Company determined that there were indicators of impairment for intangible assets in its Drivetrain and XL Grid businesses and determined that the assets were not recoverable.

Comparing the carrying value of the assets to the fair value it was determined that the entire balance was impaired and impairment charges of $ 0.9 million were recognized.

Impairment of 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.

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.

Impairment of goodwill:

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

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 has recorded goodwill in connection with its historical business acquisitions.

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

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Summary of Significant Accounting Policies, continued

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.

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.

XL Fleet Corp.

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.

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 determined 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 goodwill in the first quarter of 2022.

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.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Summary of Significant Accounting Policies, continued

The Company’s revenue is derived from the sales

of hybrid and plug-in hybrid electric powertrain systems, our Power Drive business, and turnkey energy efficiency, renewable technology,

electric vehicle charging stations and other energy solutions (our “XL Grid” business).

The Power Drive products are marketed

and sold to end-user fleet customers and channel partners in the United States and Canada.

The Company’s XL Grid solutions are marketed

and sold to municipalities, corporations and other businesses and principally funded through energy incentives provided through public

and private utilities.

The XL Grid business consists of the operations acquired through the May 2021 World Energy acquisition.

products and services are subject to economic conditions and may fluctuate based on changes in the industry, trade policies, financial

markets, and funded energy incentives.

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

occurs when the Company has 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.

For the Power Drive products, in general, transfer of control is upon

shipment of the equipment as the terms are FOB shipping point or equivalent, as 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

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 Power Drive 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 Power Drive products 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.

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.

For both Power Drive and XL Grid solutions, 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.

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.

XL Fleet Corp.

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.

The following table presents the detail of the Company’s revenues as recorded in the Consolidated Statements of Operations for the year ended December 31, 2022:

(Amounts in thousands) 2022

PPA revenue $ 8,756

SLA revenue 11,270

Solar renewable energy credit revenue 1,576

Government incentives 245

MSA revenue 596

Loan servicing 174

Other revenue 577

Total $ 23,194

Drivetrain and XL Grid Revenues

As noted above, the Drivetrain and XL Grid business were included in discontinued operations at December 31, 2022.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Summary of Significant Accounting Policies, continued

Revenue, continued:

Payment terms on invoices range from 30 to 60 days.

The Company excludes

from revenue any sales tax and other government-assessed and imposed taxes on revenue generating activities that are invoiced to customers.

The Company has elected to apply the practical expedient to expense

costs to obtain contracts, which principally relate to sales commissions, at the time the liability is incurred when the expected amortization

period is one year or less.

Customers who purchase the Power Drives are 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.

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 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.

For 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.

The Drivetrain products were marketed and sold to end-user fleet customers and channel partners in the United States and Canada.

The Company’s XL Grid solutions were marketed and sold to municipalities, corporations and other businesses and principally funded through energy incentives provided through public and private utilities.

The XL Grid business primarily consists of the operations acquired through the May 2021 World Energy acquisition.

Sales of products and services are subject to economic conditions and may fluctuate based on changes in the industry, trade policies, financial markets, and funded energy incentives.

For these businesses, revenue was recognized upon transfer of control to the customer, which occurred when the Company had a present right to payment, legal title had passed to the customer, the customer had the significant risks and rewards of ownership, and where acceptance is not a formality, the customer had accepted the product or service.

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

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

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

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

The Company recognized the revenue for the equipment sale and installation service for Drivetrain products at the same time, which was 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 XL Grid, in general, transfer of control was upon the acceptance and certification of project completion by both the end customer and the utility who was 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 recognized revenues from all XL Grid activities at a point in time, when persuasive evidence of an arrangement existed, delivery had occurred, the price was fixed or determinable and the Company had 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 assessed 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 were capitalized, and customer deposits were treated as liabilities.

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

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

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

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

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

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

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

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

The Company did 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 was expected to be one year or less.

For all years presented, the Company did not have any significant financing components as no payment terms exceeded one year from the transfer of control.

The Company’s sales could 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

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Summary of Significant Accounting Policies, continued

determinable.

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

Payment terms on invoices ranged from 30 to 60 days.

The Company excluded from revenue any sales tax and other government-assessed and imposed taxes on revenue generating activities that were invoiced to customers.

Costs to obtain contracts, which principally related to sales commissions, were recognized at the time the liability was incurred and were not material in fiscal year 2022 or 2021.

Remaining performance obligations:

At December 31, 2022 and 2021, there was approximately $ 208,000 and $ 237,000 in deferred revenue related to unsatisfied extended warranty performance obligations, respectively.

During the year ended December 31, 2022, the Company recognized revenue of approximately $ 29,000 from the December 31, 2021 deferred revenue balance.

There was no deferred warranty revenue recognized for the year ended December 31, 2021, respectively.

Contract Balances:

The timing of revenue recognition, billings and cash collections results in billed trade accounts receivable, and deferred revenue (contract liabilities) on the Consolidated Balance Sheets.

Costs to obtain a contract:

Sales commissions paid to internal sales personnel, as well as associated payroll taxes and retirement plan contributions (together, sales commissions and associated costs) that are incremental to the acquisition of customer contracts, were expensed upon transfer of control of the equipment at the time the related revenues are recognized.

Total commission expense recognized during the years ended December 31, 2022 and 2021 was approximately $ 837,000 and $ 834,000 , respectively.

There were no capitalized commissions during the years ended December 31, 2022 and 2021.

Cost of Revenues:

Cost of revenues - solar energy systems depreciation represents the depreciation expense relating to the solar energy systems.

Cost of revenues - operations and maintenance represents the costs of operating the solar energy systems, primarily the costs of third parties used to service the systems.

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.

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.

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.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Summary of Significant Accounting Policies, continued

The following is a roll-forward of the Company’s accrued warranty liability:

(Amounts in thousands) 2022 2021

Balance at the beginning of the period $ 2,547 $ 1,735

Acquisition date accrual for World Energy acquisition — 25

Accrual for warranties issued 116 346

Accrual of additional warranty obligations — 965

Changes in estimates for preexisting warranties ( 955 ) —

Warranty fulfillment charges ( 583 ) ( 524 )

Balance at the end of the period $ 1,125 $ 2,547

The warranty liability is included in Current Liabilities of Discontinued Operations on the Consolidated Balance Sheets.

Income taxes:

The Company 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

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.

Uncertain tax positions taken or expected to be taken in a tax return

are accounted for using the more likely than not threshold for financial statement recognition and measurement.

The determination as to

whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration

of the available facts and circumstances.

For the years ended December 31, 2021, 2020 and 2019, there were no uncertain tax position taken

or expected to be taken in the Company’s tax returns.

In the normal course of business, the Company is subject to regular

audits by U.S.

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.

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.

Uncertain tax positions taken or expected to be taken in a tax return are accounted for using the more likely than not threshold for financial statement recognition and measurement.

The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.

For the years ended December 31, 2022 and 2021, there were no uncertain tax position taken or expected to be taken in the Company’s tax returns.

In the normal course of business, the Company is subject to regular audits by U.S.

federal and state and local tax authorities.

With few exceptions, the Company is no longer subject to federal, state or

local tax examinations by tax authorities in its major jurisdictions for tax years before 2018.

However, net operating loss carryforwards

remain subject to examination to the extent they are carried forward and impact a year that is open to examination by tax authorities.

The Company did not recognize any tax related interest or penalties

in the accompanying consolidated financial statements, but would record any such interest and penalties as a component of the provision

for income taxes.

XL Fleet Corp.

With few exceptions, the Company is no longer subject to federal, state or local tax examinations by tax authorities in its major jurisdictions for tax years before 2019.

However, net operating loss carryforwards remain subject to examination to the extent they are carried forward and impact a year that is open to examination by tax authorities.

The Company did not recognize any tax related interest or penalties in the accompanying Consolidated Financial Statements, but would record any such interest and penalties as a component of the provision for income taxes.

Share-based compensation:

The Company grants stock-based awards to certain employees, directors and non-employee consultants.

Awards issued under the Company’s stock-based compensation plans include stock options, restricted stock units and restricted stock awards.

For transactions in which the Company obtains employee services in exchange for an award of equity instruments, the cost of the services are measured based on the grant date fair value of the award.

The Company recognizes the cost over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

Costs related to plans with graded vesting are generally recognized using a straight-line method.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Summary of Significant Accounting Policies, continued

Share-based compensation:

The Company accounts for its share-based

compensation awards in accordance with ASC Topic 718, Compensation-Stock Compensation.

The Company issues stock-based awards to acquire

common stock to employees, directors and non-employee consultants.

Awards issued under the Company’s stock-based compensation plans

include stock options, restricted stock units and restricted stock awards.

Stock options, restricted stock units and restricted stock

awards typically contain service based vesting conditions.

Stock Options

The Company uses the Black-Scholes option pricing model to determine

the fair value of stock-based awards, and recognizes the compensation cost on a straight line basis over the requisite service period

of the awards for employee, which is typically the four-year vesting period of the award, and effective contract period specified in the

award agreement for non-employee.

The fair value of common stock is determined based on the closing price

of the Company’s common stock on the New York Stock Exchange at each award grant date.

The determination of the fair value of share-based payment awards utilizing

the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected life, risk-

free interest rate and expected dividends.

The Company does not have a history of trading in its common stock as it was not a public company

until December 21, 2020, and as such volatility was estimated using historical volatilities of comparable public entities.

life of the awards is estimated based on a simplified method, which uses the average of the vesting term and the original contractual

The Company uses the Black-Scholes option pricing model to determine the fair value of stock-based awards and recognizes the compensation cost on a straight line basis over the requisite service period of the awards for employee, which is typically the four-year vesting period of the award, and effective contract period specified in the award agreement for non-employee.

The fair value of common stock is determined based on the closing price of the Company’s common stock on the New York Stock Exchange at each award grant date.

The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected life, risk- free interest rate and expected dividends.

The Company does not have a significant history of trading of its common stock as it was not a public company until December 21, 2020, and as such expected volatility was estimated using historical volatilities of comparable public entities.

The expected life of the awards is estimated based on a simplified method, which uses the average of the vesting term and the original contractual term.

The risk-free interest rate assumption is based on observed interest rates appropriate for the expected life of the awards.

dividend yield assumption is based on history and expectation of paying no dividends.

The dividend yield assumption is based on history and expectation of paying no dividends.

Forfeitures are accounted for as they occur.

The fair value of stock options issued for the years ended December

31, 2021, 2020, and 2019 was measured with the following assumptions:

Expected volatility

78.1 – 88.2 %

79.6 – 90.5 %

Expected term (in years)

Risk-free interest rate

Expected dividend yield

Restricted Stock Units

Restricted stock units generally vest over the requisite service periods

(vesting on a straight–line basis).

The fair value of a restricted stock unit award is equal to the fair market value of a share

of the Company’s Common stock on the grant date.

Restricted stock units generally vest over the requisite service periods (vesting on a straight–line basis).

The fair value of a restricted stock unit award is equal to the closing price of the Company’s common stock on the New York Stock Exchange on the grant date.

The Company accounts for the forfeiture of equity awards as they occur.

Derivative instruments and hedging activities:

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

The fair value of all derivative instruments are recognized as assets or liabilities at the balance sheet date on the Consolidated Balance Sheets.

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.

Warrant Liabilities:

The Company evaluated the Public Warrants

(“Public Warrants”) and Private Warrants (“Private Warrants”) (collectively, “Warrants”, which are

discussed in Note 17) in accordance with ASC 815-40, “Derivatives and Hedging — Contracts in Entity’s Own Equity”,

and concluded that a provision in the Warrant Agreement related to such warrants (“Warrant Agreement”) related to certain

tender or exchange offers precludes the Warrants from being accounted for as components of equity.

As the Warrants met the definition

of a derivative as contemplated in ASC 815, the Warrants were initially recorded at fair value as derivative liabilities on the Consolidated

Balance Sheets and measured at fair value at each reporting date in accordance with ASC 820, “Fair Value Measurement”, with

changes in fair value recognized in the Consolidated Statement of Operations in the period of change.

XL Fleet Corp.

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.

Segment Reporting:

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.

In the fourth quarter of 2022, the Company determined that 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

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Summary of Significant Accounting Policies, continued

Research and development expense:

Research and development costs

did not meet the requirements to be recognized as an asset as the associated future benefits were at best uncertain and there was no alternative

future use at the time the costs were incurred.

Research and development costs include, but are not limited to, costs incurred in performing

research and development activities, including salaries, benefits, facilities, research- related overhead, sponsored research costs, contracted

services, license fees, and other external costs.

operates approximately 51,000 residential solar energy systems in 16 states.

In addition to providing management services to its own portfolio, as of December 31, 2022 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/or (v) maintenance monitoring and dispatch.

Engineering, research and development expense:

Engineering, research and development costs, which are primarily related to the Company's Drivetrain business, were expensed as incurred and include, but are not limited to, costs incurred in performing research and development activities, including salaries, benefits, facilities, research-related overhead, sponsored research costs, contracted services, license fees, and other external costs.

Net income (loss) per share:

Basic net income (loss) per share

is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, without

consideration for potentially dilutive securities.

Diluted net income (loss) per share is computed by dividing net income (loss) by the

weighted-average number of shares of common stock and potentially dilutive securities outstanding during the period determined using the

treasury-stock and if-converted methods.

For purposes of the diluted income (loss) per share calculation, stock options, restricted stock

units, restricted stock and warrants are considered to be potentially dilutive securities.

Potentially dilutive securities were excluded

from the calculation of diluted income (loss) per share when their effect would be anti-dilutive.

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities.

Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock and potentially dilutive securities outstanding during the period determined using the treasury-stock and if-converted methods.

For purposes of the diluted income (loss) per share calculation, stock options, restricted stock units, restricted stock and warrants are considered to be potentially dilutive securities.

Potentially dilutive securities are excluded from the calculation of diluted income (loss) per share when their effect would be anti-dilutive.

Related parties:

A party is considered to be related to the

Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control

with the Company.

Related parties also include principal owners of the Company, its management, members of the immediate families of principal

owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly

influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully

pursuing its own separate interests.

A party which can significantly influence the management or operating policies of the transacting

parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that

one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company.

Related parties also include principal owners of the Company, its Management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

Recent accounting pronouncements issued and adopted:

In February 2016, the Financial Accounting Standards Board (“FASB”)

issued a new Accounting Standards Update (“ASU”) , Accounting Standards Codification Topic 842, Leases (“ASC 842”),

related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”)

assets and lease liabilities on the balance sheet.

Most significant among the changes in the standard is the recognition of ROU assets

and lease liabilities by lessees for those leases classified as operating leases under previous U.S.

Under the new standard, disclosures

are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows

arising from leases.

The Company adopted ASC 842 effective January 1, 2021 and as a result, the Company recorded a ROU asset and lease

liability within its consolidated financial statements (See Note 12).

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic

Simplifying the Accounting for Income Taxes , (“ASU 2019 - 12”) which is intended to simplify various aspects related

to accounting for income taxes.

The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning

after December 15, 2020, with early adoption permitted.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses of Financial Instruments , ("ASU 2016-13”) which, together with subsequent amendments, amends the requirement on the measurement and recognition of expected credit losses for financial assets held to replace the incurred loss model for financial assets measured at amortized cost and require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

ASU 2016-13 is effective for the Company beginning January 1, 2023.

of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements.

XL Fleet Corp.

The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Merger with Pivotal Investment Corporation II

On December 21, 2020 (the “Closing Date”), Pivotal Investment Corporation II, a special purpose acquisition company incorporated on March 20, 2019 (“Pivotal”), consummated a business combination pursuant to that certain Agreement and Plan of Reorganization, dated as of September 17, 2020 (the “Merger Agreement”), by and among Pivotal, PIC II Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of Pivotal (“Merger Sub”), and XL Hybrids, Inc., a Delaware corporation (“Legacy XL”).

Pursuant to the terms of the Merger Agreement, a business combination between Pivotal and Legacy XL was affected through the merger of Merger Sub with and into Legacy XL, with Legacy XL surviving as the surviving company and as a wholly-owned subsidiary of Pivotal (the “Merger” and, collectively with the other transactions described in the Merger Agreement, the “Business Combination”).

On the Closing Date, and in connection with the closing of the Business Combination (the “Closing”), Pivotal Investment Corporation II changed its name to XL Fleet Corp ("XL Fleet").

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Summary of Significant Accounting Policies, continued

Recent accounting pronouncements issued and adopted – continued

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit

Losses (Topic 326):

Measurement of Credit Losses of Financial Instruments , (ASU 2016-13”)which, together with subsequent amendments,

amends the requirement on the measurement and recognition of expected credit losses for financial assets held to replace the incurred

loss model for financial assets measured at amortized cost and require entities to measure all expected credit losses for financial assets

held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

ASU 2016-13 is

effective for the Company beginning January 1, 2023.

The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s

consolidated financial statements.

Merger with Pivotal Investment Corporation II

On the Closing Date, pursuant to the Merger Agreement, Merger Sub merged

with and into Legacy XL, with Legacy XL surviving as a wholly owned subsidiary of XL Fleet Corp.

On the Closing Date, each outstanding

share of common stock of Legacy XL (including each share of Legacy XL’s common stock issued as a result of the conversion of Legacy

XL’s preferred stock and any conversion or exchange of Legacy XL’s convertible promissory notes) was converted into the right

to receive 0.75718950 shares (“Exchange Ratio”) of Pivotal’s common stock, par value $ 0.0001 per share.

In connection with the consummation of the Business Combination, each

outstanding share of Pivotal’s Class A common stock, par value $ 0.0001 per share (“Pivotal Class A Common Stock”), including

(a) any shares of Pivotal’s Class B common stock, par value $ 0.0001 per share (“Pivotal Class B Common Stock”) that

were converted into Pivotal Class A Common Stock in connection with the Merger and (b) any Pivotal units that were separated into the

component securities, including Pivotal Class A Common Stock in connection with the Merger, was converted into one share of Common Stock.

On the Closing Date, a number of purchasers (each, a “Subscriber”) purchased from the Company an aggregate of 15,000,000 shares

of Common Stock (the “PIPE Shares”), for a purchase price of $ 10.00 per share and an aggregate purchase price of $ 150,000,000 ,

pursuant to separate subscription agreements (each, a “Subscription Agreement” and the financing, the “PIPE”).

Merger with Pivotal Investment Corporation II, continued

On the Closing Date, each outstanding share of common stock of Legacy XL (including each share of Legacy XL’s common stock issued as a result of the conversion of Legacy XL’s preferred stock and any conversion or exchange of Legacy XL’s convertible promissory notes) was converted into the right to receive 0.75718950 shares (“Exchange Ratio”) of Pivotal’s common stock, par value $ 0.0001 per share.

In connection with the consummation of the Business Combination, each outstanding share of Pivotal’s Class A common stock, par value $ 0.0001 per share (“Pivotal Class A Common Stock”), including (a) any shares of Pivotal’s Class B common stock, par value $ 0.0001 per share (“Pivotal Class B Common Stock”) that were converted into Pivotal Class A Common Stock in connection with the Merger and (b) any Pivotal units that were separated into the component securities, including Pivotal Class A Common Stock in connection with the Merger, was converted into one share of Common Stock.

On the Closing Date, a number of purchasers (each, a “Subscriber”) purchased from the Company an aggregate of 15,000,000 shares of Common Stock (the “PIPE Shares”), for a purchase price of $ 10.00 per share and an aggregate purchase price of $ 150.0 million, pursuant to separate subscription agreements (each, a “Subscription Agreement” and the financing, the “PIPE”).

Pursuant to the Subscription Agreements, the Company gave certain registration rights to the Subscribers with respect to the PIPE Shares.

The sale of PIPE Shares was consummated concurrently with the Closing of 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, and public warrants to purchase 7,666,667 shares

of common stock, with an exercise price of $ 11.50 per share (See Note 15).

Immediately prior to the Closing Date XL Fleet Corp.

filed its Second

Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, pursuant to which, among other

things, XL Fleet Corp.

(i) changed its name from Pivotal to “XL Fleet Corp.”, (ii) increased the number of shares of Pivotal

Class A Common Stock it is authorized to issue to 350,000,000 shares, (iii) removed the provisions for the Pivotal Class B Common Stock

(all such shares of Pivotal Class B Common Stock converted into shares of Pivotal Class A Common Stock in connection with the Business

Combination) so that the Pivotal Class B Common Stock ceased to exist and the Company now has a single class of common stock (such resulting

stock, the “Common Stock”), and (iv) removed the various provisions applicable only to special purpose acquisition corporations.

Each of the options to purchase Legacy XL’s common stock, whether

or not exercisable and whether or not vested, and each of the warrants to purchase Legacy XL’s common stock, in each case that was

outstanding immediately prior to the effective time of the Business Combination, were assumed by XL Fleet Corp.

on the Closing Date and

converted into an option or warrant, as the case may be, to purchase a number of shares of Common Stock equal to the number of shares

subject to such option or warrant immediately prior to the effective time multiplied by the Exchange Ratio, at an exercise price equal

to the exercise price immediately prior to the effective time divided by the Exchange Ratio.

Holders of Legacy XL’s outstanding convertible promissory notes

were entitled to elect conversion or repayment of the principal amount of such notes, with accrued interest to be converted into shares

of Legacy XL common stock.

Immediately prior to the consummation of the Business Combination, the holders of such notes elected to have

Legacy XL pay in cash an aggregate principal amount of $ 11,250,000 of such notes within three business days of the Closing Date.

Closing Date XL Fleet Corp.

issued an aggregate of 1,715,918 shares of its Common Stock upon conversion of the remaining outstanding principal

amount and accrued interest.

XL Fleet Corp.

The Company assumed private placement warrants to purchase 4,233,333 shares of common stock, with an exercise price of $ 11.50 per share, and public warrants to purchase 7,666,667 shares of common stock, with an exercise price of $ 11.50 per share (See Note 15.

Immediately prior to the Closing Date, XL Fleet filed its Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, pursuant to which, among other things, XL Fleet (i) changed its name from Pivotal to “XL Fleet Corp.”, (ii) increased the number of shares of Pivotal Class A Common Stock it is authorized to issue to 350,000,000 shares, (iii) removed the provisions for the Pivotal Class B Common Stock (all such shares of Pivotal Class B Common Stock converted into shares of Pivotal Class A Common Stock in connection with the Business Combination) so that the Pivotal Class B Common Stock ceased to exist and the Company now has a single class of common stock (such resulting stock, the “Common Stock”), and (iv) removed the various provisions applicable only to special purpose acquisition corporations.

Each of the options to purchase Legacy XL’s common stock, whether or not exercisable and whether or not vested, and each of the warrants to purchase Legacy XL’s common stock, in each case that was outstanding immediately prior to the effective time of the Business Combination, were assumed by XL Fleet on the Closing Date and converted into an option or warrant, as the case may be, to purchase a number of shares of Common Stock equal to the number of shares subject to such option or warrant immediately prior to the effective time multiplied by the Exchange Ratio, at an exercise price equal to the exercise price immediately prior to the effective time divided by the Exchange Ratio.

Holders of Legacy XL’s outstanding convertible promissory notes were entitled to elect conversion or repayment of the principal amount of such notes, with accrued interest to be converted into shares of Legacy XL common stock.

Immediately prior to the consummation of the Business Combination, the holders of such notes elected to have Legacy XL pay in cash an aggregate principal amount of $ 11.3 million of such notes within three business days of the Closing Date.

On the Closing Date XL Fleet issued an aggregate of 1,715,918 shares of its Common Stock upon conversion of the remaining outstanding principal amount and accrued interest.

Immediately after the consummation of the Merger and prior to the consummation of PIPE, the former stockholders and option holders of Legacy XL owned, or held rights to acquire, approximately 75.2 % of the fully-diluted common stock of Company, and Pivotal’s stockholders and option holders immediately prior to the Merger owned approximately 24.8 % of the fully-diluted common stock of the Company.

Based on the terms of the Merger, the transaction was treated as a reverse merger of the Company by Legacy XL.

The Merger was accounted for as a recapitalization of Legacy XL.

Under this method of accounting, Pivotal was treated as the “acquired” company for financial reporting purposes.

This determination was primarily based on Legacy XL comprising the ongoing operations of the combined company, Legacy XL senior management comprising the senior management of the combined company, and that the former owners and management of Legacy XL have control of the board of directors of the combined company after the Merger.

In accordance with guidance

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Merger with Pivotal Investment Corporation II, continued

Immediately after the consummation of the Merger and prior to the consummation

of PIPE, the former stockholders and option holders of Legacy XL owned, or held rights to acquire, approximately 75.2 % of the fully-diluted

common stock of Company, and Pivotal’s stockholders and option holders immediately prior to the Merger owned approximately 24.8 %

of the fully-diluted common stock of the Company.

Based on the terms of the Merger, the transaction was treated as a reverse merger of

the Company by Legacy XL.

The merger was accounted for as a recapitalization of Legacy XL.

Under this method of accounting, Pivotal was

treated as the “acquired” company for financial reporting purposes.

This determination was primarily based on Legacy XL comprising

the ongoing operations of the combined company, Legacy XL senior management comprising the senior management of the combined company,

and that the former owners and management of Legacy XL have control of the board of directors of the combined company after the Merger.

In accordance with guidance applicable to these circumstances, the Merger was considered to be a capital transaction in substance.

for accounting purposes, the Merger was treated as the equivalent of the Company issuing shares for the net assets of Pivotal, accompanied

by a recapitalization.

applicable to these circumstances, the Merger was considered to be a capital transaction in substance.

Accordingly, for accounting purposes, the Merger was treated as the equivalent of the Company issuing shares for the net assets of Pivotal, accompanied by a recapitalization.

The net assets of Pivotal will be stated at historical cost, with no goodwill or other intangible assets recorded.

Operations prior to the closing of the Merger will be those of the Company.

The following table reconciles the elements of the Business Combination

to the consolidated statements of cash flows and the consolidated statement of changes in stockholders’ equity (deficit) for the

year ended December 31, 2020 (in thousands):

The following table reconciles the elements of the Business Combination to the Consolidated Statements of Cash Flows and the Consolidated Statement of Changes in Stockholders’ Equity for the year ended December 31, 2020 (in thousands):

Cash – Pivotal’s trust and cash (net of redemption) $ 231,975

Cash – PIPE 150,000

transaction costs and advisory fees paid ( 29,915 )

Net Business Combination and PIPE financing $ 352,060

XL Fleet Corp.

Business Combinations

On May 17, 2021, the Company acquired all of the issued and outstanding membership interests of World Energy Efficiency Services, LLC (“World Energy”), a privately-held, Massachusetts-based entity, and retained its principals and all of its employees.

World Energy is a direct-install energy efficiency services company serving commercial, industrial and institutional customers.

World Energy enables utilities to meet their energy savings mandates by developing and executing energy efficiency projects.

The total purchase price consideration, as adjusted, was $ 12.5 million for the acquisition of World Energy.

The as-adjusted purchase price consisted of the following components:

• Cash of $ 8.5 million consisting of the contractual purchase price of $ 8.0 million, plus working capital adjustments of an aggregate of $ 0.5 million.

• The closing date issuance of 231,002 shares of the Company’s common stock, valued at the closing price of $ 6.23 per share as of May 17, 2021, for a total share fair value upon issuance of $ 1.4 million;

• An obligation to issue 244,956 shares of the Company’s common stock to certain of the sellers and their advisors of World Energy, in three equal installments on the sixth, twenty-fourth and the thirtieth monthly anniversaries of the closing date.

The closing date fair value was recorded at an aggregate amount of $ 1.5 million;

• An obligation for an earnout cash payment of $ 1.0 million upon World Energy’s achievement for the calendar year 2021 of minimum annual revenues of $ 19.5 million.

World Energy met the revenue requirements and the Company paid the contingent consideration of $ 1.0 million in March 2022.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Business Combination

On May 17, 2021, the Company acquired all of the issued and outstanding

membership interests of World Energy, a privately-held, Massachusetts-based entity, and retained two of its principals and all of World

Energy’s employees.

World Energy is a direct-install energy efficiency services company (“ESCO”), serving commercial,

industrial and institutional customers.

World Energy enables utilities to meet their energy savings mandates by developing and executing

energy efficiency projects.

The acquisition of World Energy expanded the Company’s ability to deliver a comprehensive suite of energy

savings services that enhances XL Grid’s solutions portfolio to include commercial and industrial EV charging, solar, and energy

management services.

The total purchase price consideration, as adjusted, is $12,461 for

the acquisition of World Energy.

During the year ended December 31, 2021, the Company remitted to the sellers of World Energy additional

cash of $76 in connection with the finalization of working capital adjustments.

The as-adjusted purchase price consisted of the following

Cash of $8,496, as adjusted, consisting of the contractual purchase

price of $8,000, plus working capital adjustments of an aggregate of $496.

closing date issuance of 231,002 shares of the Company’s common stock, valued at the closing price of $6.23 per share as of May

17, 2021, for a total share fair value upon issuance of $1,439;

obligation to issue 244,956 shares of the Company’s common stock to certain of the sellers and their advisors of World Energy,

in three equal installments on the sixth, twenty-fourth and the thirtieth monthly anniversaries of the closing date.

The closing date

fair value was recorded at an aggregate amount of $1,526;

obligation to pay in cash an earnout of $1,000 upon World Energy’s achievement for the calendar year 2021 of minimum annual revenues

The payment of the earnout is due within 30 days following the completion of the audit of XL Fleet’s financial statements

for the fiscal year ending December 31, 2021.

World Energy met the revenue requirements and as such, the Company expects to pay the $1,000

earnout shortly after the filing of this annual report on Form 10-K.

The following details the final allocation of the purchase price consideration:

Business Combinations, continued

The following details the final allocation of the purchase price consideration (in thousands):

Working capital adjustments 496

4 unchanged sentences

Less the fair value of assets acquired less liabilities assumed ( 4,344 )

Included in assets acquired was cash of $ 308 .

XL Fleet Corp.

Goodwill $ 8,117

Included in assets acquired was cash of $ 0.3 million.

In connection with the acquisition of World Energy, the Company incurred an initial additional obligation to issue shares of its common stock to the three sellers, two of which also entered into employment agreements with the Company.

Pursuant to the terms of the agreement, the Company was initially obligated to issue an aggregate of 448,050 shares of its common stock, issuable in three equal installments on November 17, 2021, on May 17, 2023 and on November 17, 2023, provided that seller/employee is employed by the Company at the date of issuance.

If the seller/employee is not employed at such issuance date, the shares attributable to that seller/employee are forfeited.

The Company determined that this obligation should be accounted for as compensation as opposed to purchase price consideration.

Accordingly, the fair values of each of the three compensation share obligations are accreted as compensation expense over each relevant compensation period.

The accrued obligation is marked to market each period based on the price of the underlying shares.

For the years ended December 31, 2022 and 2021, the Company recognized a benefit of $ 0.1 million and a charge of $ 1.0 million, respectively, for compensation expense within Selling, General and Administrative Expenses.

On November 17, 2021, the Company issued 231,002 shares of its common stock pursuant to this share obligation to the three sellers.

The initial transaction with World Energy included an outstanding PPP loan of $ 0.5 million that was incorporated in the liabilities assumed.

During the third quarter of 2021, the PPP loan was forgiven in full which resulted in an additional payment to the sellers of World Energy.

Consequently, the fair value of assets acquired less liabilities assumed was adjusted by the entire amount of the PPP loan that was forgiven, with a corresponding reduction in goodwill.

The Company has accounted for this acquisition of a business using the acquisition method of accounting.

The acquisition method requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Business Combination, continued

World Energy, continued

In connection with the acquisition of World Energy, the Company incurred

an initial additional obligation to issue shares of its common stock to the three sellers, two of which also entered into employment agreements

with the Company.

Pursuant to the terms of the agreement, the Company was initially obligated to issue an aggregate of 448,050 shares

of its common stock, issuable in three equal installments on November 17, 2021, on May 17, 2023 and on November 17, 2023, provided that

seller/employee is employed by the Company at the date of issuance.

If the seller/employee is not employed at such issuance date, the

shares attributable to that seller/employee are forfeited.

The Company determined that under relevant accounting guidance that this obligation

to issue shares would be accounted for as compensation and not as purchase price consideration.

Accordingly, the fair values of each of

the three compensation share obligations are accreted as compensation over each relevant compensation period.

For the year ended December

31, 2021, the Company recorded selling, general and administration expense of $ 1,049 related to this obligation.

On November 17, 2021, the Company issued 231,002 shares of its common

stock pursuant to this share obligation to the three sellers.

The initial transaction with World Energy included an outstanding PPP

loan of $ 507 that was incorporated in the liabilities assumed.

During the third quarter of 2021, the PPP loan was forgiven in full which

resulted in an additional payment to the sellers of World Energy.

Consequently, the fair value of assets acquired less liabilities assumed

was adjusted by the entire amount of the PPP loan that was forgiven, with a corresponding reduction in goodwill.

The Company has accounted for this acquisition as a business combination

under ASC Topic 805 “Business Combinations.” The acquisition method requires, among other things, that assets acquired and

liabilities assumed in a business combination be recognized at their fair values as of the acquisition date.

The fair values of the assets

acquired and liabilities assumed by major class were recognized as follows:

Business Combinations, continued

at their fair values as of the acquisition date.

The fair values of the assets acquired and liabilities assumed by major class were recognized as follows:

(Amounts in thousands) Amount

Accounts receivable 3,585

4 unchanged sentences

Right-of-use asset 145

Goodwill 8,117

Other assets 12

Accounts payable ( 1,096 )

4 unchanged sentences

Total purchase consideration $ 12,461

The acquired intangible assets of $ 1,560 represents to the fair value

of customer relationships which is amortized over three years.

The estimated fair value of the intangible asset acquired was determined

based on the income approach to measure the fair value of the customer relationships.

This fair value measurement was based on significant

inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.

XL Fleet Corp.

The acquired intangible assets of $ 1.6 million represents the fair value of customer relationships which is amortized over three years .

The estimated fair value of the intangible asset acquired was determined based on the income approach to measure the fair value of the customer relationships.

This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.

Goodwill represents the excess of the purchase consideration over the estimated acquisition date fair value of the net tangible and intangible assets acquired.

Goodwill is primarily attributable to expected post-acquisition synergies from integrating World Energy’s assembled workforce, products and processes into the Company’s product offerings.

Goodwill recorded is not deductible for income tax purposes.

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.

Management evaluated which entity should be considered the acquirer in the transaction by giving consideration to the form of consideration transferred, the composition of the equity holders, the composition of voting rights of the Board of Directors, continuity of management structure, and size of the respective organizations.

Based on the evaluation of the applicable factors, Management noted that all factors, with the exception of relative size of organization, were indicators that the Company was the acquiring entity resulting in Management’s conclusion that the Company acquired Legacy Spruce Power.

The acquisition was accounted for as a business combination.

The Company allocated the Legacy Spruce Power purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, September 9, 2022.

The excess of the purchase price over those fair values was recorded to goodwill.

The Company's evaluations of the facts and circumstances available as of September 9, 2022, to assign fair values to assets acquired and liabilities assumed are ongoing.

As we complete further analysis of assets including solar systems, intangible assets, as well as noncontrolling interests and debt, additional information on the assets acquired and liabilities assumed

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Business Combination, continued

World Energy, continued

Goodwill represents the excess of the purchase consideration over the

estimated acquisition date fair value of the net tangible and intangible assets acquired.

Goodwill is primarily attributable to expected

post-acquisition synergies from integrating World Energy’s assembled workforce, products and processes into the Company’s

product offerings.

Goodwill recorded is not deductible for income tax purposes.

Business Combinations, continued

becomes available.

A change in information related to the net assets acquired may change the amount of the purchase price assigned to goodwill, and as a result, the preliminary fair values set forth below are subject to adjustment as additional information is obtained and valuations are completed.

Provisional adjustments are recognized during the reporting period in which the adjustments are determined.

The Company expects to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.

The following table summarizes the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in the acquisition of Legacy Spruce Power, as adjusted, during the year ended December 31, 2022:

(Amounts in thousands) Initial Purchase Price Allocation Measurement Period Adjustments Updated Purchase Price Allocation

Total purchase consideration:

Cash, net of cash acquired, and restricted cash $ 32,585 $ — $ 32,585

Allocation of consideration to assets acquired and liabilities assumed:

Accounts receivable, net 10,995 — $ 10,995

Prepaid expenses and other current assets 6,768 ( 2,405 ) $ 4,363

Solar energy systems 406,298 ( 2,081 ) $ 404,217

Other property and equipment 337 — $ 337

Interest rate swap assets 26,698 — $ 26,698

Right-of-use asset 3,279 ( 328 ) $ 2,951

Other assets 358 — $ 358

Goodwill 158,636 ( 30,088 ) $ 128,548

Accounts payable ( 2,620 ) ( 23 ) $ ( 2,643 )

Accrued expenses ( 13,061 ) ( 243 ) $ ( 13,304 )

Lease liability ( 3,382 ) 41 $ ( 3,341 )

Long-term debt ( 510,002 ) 2,772 $ ( 507,230 )

Other liabilities ( 335 ) 294 $ ( 41 )

Redeemable noncontrolling interests and noncontrolling interests ( 51,384 ) 32,061 $ ( 19,323 )

Goodwill represents the excess of the purchase consideration over the estimated acquisition date fair value of the net assets acquired.

Goodwill is primarily attributable to the Company's ability to leverage and use its existing capital and access to capital markets along with Spruce Power's established operations and mergers and acquisition capabilities to grow the Spruce Power business.

Supplemental disclosure of pro forma information:

The following unaudited pro forma financial information presents the

combined results of the operations of XL Fleet and World Energy as if the acquisition of World Energy had occurred as of January 1, 2019.

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, 2019.

In addition, the unaudited pro forma financial information

does not purport to project the future results of operations of the combined Company.

The following table presents the Company’s pro forma combined

results of operations for the years ended December 31, 2021, 2020, and 2019:

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 acquisition of World Energy on May 17, 2021 and Legacy Spruce Power on September 9, 2022 had occurred as of January 1, 2021.

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.

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

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Business Combinations, continued

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

The following table presents the Company’s pro forma combined results of operations for the years ended December 31, 2022 and 2021:

(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 per share – basic

Net loss per share - diluted

The above pro forma information includes pro forma adjustments to remove

the effect of the following non-recurring transactions:

1.) Non-recurring merger expenses of $ 498 were added back for the year ended December 31, 2021.

2.) Elimination of interest expense associated with debt

that was repaid in the acquisition of World Energy of $ 37 for the year ended December 31, 2021, $ 94 for the year ended December 31, 2020

and $ 99 for the year ended December 31, 2019.

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 )

The above pro forma information includes pro forma adjustments to remove the effect of the following items:

Eliminate the effect of transaction expenses related to the acquisition of World Energy of approximately $ 498,000 for the year ended December 31, 2021.

Eliminate interest expense associated with debt that was repaid in the acquisition of World Energy of approximately $ 37,000 for the year ended December 31, 2021.

Eliminate the effect of transaction expenses related to the acquisition of Legacy Spruce Power of $ 15.0 million for the year ended December 31, 2022.

Since the acquisition of World Energy occurred in May 2021, the results of the acquisition are fully incorporated into the Consolidated Financial Statements for the year ended December 31, 2022.

Settlement of Contingent Consideration Quantum

On October 4, 2019, pursuant to the terms of an asset purchase agreement,

the Company acquired certain assets of Quantum Fuel Systems, LLC (“Quantum”) The purchase consideration included deferred

payments or share issuances upon certain milestones being met.

In October 2019, pursuant to the terms of an asset purchase agreement, the Company acquired certain assets of Quantum Fuel Systems, LLC (“Quantum”) The purchase consideration included deferred payments or share issuances upon certain milestones being met.

The final payments to the sellers of Quantum were:

● A cash payment of $ 450 paid on December 31, 2020 upon meeting

a workforce retention milestone.

● Second milestone event was met on November 19, 2021 upon

the achievement of certain product development criteria as outlined in the asset purchase agreement.

In connection with having achieved

the second milestone, in February 2022 the Company paid cash consideration of $ 475 and issued 50,000 shares of the Company’s common

● Third milestone event was met on November 19, 2021 upon the

successful demonstration of a prototype as outlined in the asset purchase agreement.

In connection with having achieved the third milestone,

in February 2022 the Company paid cash consideration of $ 475 and issued 50,000 shares of the Company’s common stock.

XL Fleet Corp.

• A cash payment of $ 450,000 paid on December 31, 2020 upon meeting a workforce retention milestone.

• Second milestone event was met upon the achievement of certain product development criteria as outlined in the asset purchase agreement.

In connection with having achieved the second milestone, in February 2022 the Company paid cash consideration of $ 475,000 and issued 50,000 shares of the Company’s common stock.

• Third milestone event was met upon the successful demonstration of a prototype as outlined in the asset purchase agreement.

In connection with having achieved the third milestone, in February 2022 the Company paid cash consideration of $ 475,000 and issued 50,000 shares of the Company’s common stock.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

The following table represents the Company’s revenues for the

years ended December 31, 2021, 2020 and 2019, respectively, disaggregated, by sales channel.

Disaggregation of revenue:

Revenue from the sale of Power Drives:

Revenue direct to customers

Revenue through channel partners

Revenue from the sale of XL Grid solutions – which are sold direct to customers

Total revenue

Remaining performance obligations:

At December 31, 2021, 2020

and 2019, there was approximately $ 237 , $ 305 and $ 133 in deferred revenue related to unsatisfied extended warranty performance obligations,

respectively.

During the year ended December 31, 2021, the Company recognized revenue of $ 128 from the December 31, 2020 deferred revenue

There was no deferred warranty revenue recognized for the years ended December 2020 and 2019, respectively.

Contract Balances:

The timing of revenue recognition, billings

and cash collections results in billed trade accounts receivable, and deferred revenue (contract liabilities) on the consolidated balance

In addition, the Company defers certain costs incurred to obtain a contract (contract costs).

Costs to obtain a contract:

Sales commissions paid to internal

sales personnel, as well as associated payroll taxes and retirement plan contributions (together, sales commissions and associated costs)

that are incremental to the acquisition of customer contracts, are capitalized as contract acquisition cost on the balance sheet when

the period of benefit is determined to be greater than one year.

In instances where an extended warranty is sold, the period of benefit

would extend beyond 12 months and therefore, the practical expedient would not be met for those contracts and require capitalization of

the related costs to obtain those contracts.

The Company has elected to allocate the capitalized commissions to performance obligations

on a relative basis (i.e., in proportion to the transaction price allocated to each performance obligation) to determine the period of

amortization.

As a result, substantially all of the commission is allocated to the combined equipment and installation performance obligation

and is amortized upon transfer of control of this performance obligation, which typically occurs in the same period in which commission

liability is incurred.

Total commission expense recognized during the years ended December 31, 2021, 2020 and 2019 was $ 834 , $ 105 and

$ 226 , respectively.

There were no capitalized commissions during the periods ended December 31, 2021 and 2020.

The Company accrues estimated warranty costs at

the time of sale related to its assurance- type warranties.

In general, for the sales of Power Drives, manufactured products are warranted

for the shorter of three years or 75,000 miles against defects in material and workmanship when properly used for their intended purpose,

installed correctly and appropriately maintained.

For the XL Grid solutions, projects are warranted for one year .

The amount of the accrued

warranty liability is estimated based on historical claims rates and warranty fulfillments costs adjusted for any expected changes in

fulfillment costs.

Warranty charges in 2021 include a charge of $ 965 related to faults identified in certain Power Drive products based

on the Company’s review of data gathered on the performance of its existing systems on the road.

The following is a roll-forward of the Company’s accrued warranty

Balance at the beginning of the period

Acquisition date accrual for World Energy acquisition

Accrual for warranties issued

Accrual of additional warranty obligations

Warranty fulfillment charges

Balance at the end of the period

The warranty liability is included in accrued expenses and other current

liabilities on the consolidated balance sheets.

Notes to Consolidated Financial Statements

For the years ended December 31,

2021, 2020 and 2019

(Amounts in thousands, except share

and per share data)

Property and Equipment

Property and equipment consisted of

the following at December 31:

Property and equipment consisted of the following at December 31:

As of December 31,

(Amounts in thousands) 2022 2021

Solar energy systems $ 401,754 $ —

Less accumulated depreciation ( 5,928 ) —

Solar energy systems, net $ 395,826 $ —

Equipment $ 48 $ —

Furniture and fixtures 294 29

Computers 222 412

Leasehold improvements 65 —

XL Grid projects not yet in service

Less accumulated depreciation ( 293 ) ( 189 )

Property and equipment, net

Depreciation expense on property and equipment, was $ 653 , $ 406 and

$ 265 for the years ended December 31, 2021, 2020 and 2019, respectively.

Intangible assets consist of:

● Developed technology acquired during 2019 with a gross value of $ 863 that

is being amortized over a useful life of four years and that has accumulated amortization of $ 485 , as of December 31, 2021,

● Sponsorship agreement contracted during 2021 with a gross value of $ 500 that

is being amortized over a useful life of one year and has accumulated amortization of $ 250 as of December 31, 2021, and

● The initial direct cost related to customer energy efficiency agreement acquisition

costs of $ 1,560 that is being amortized over three years and has accumulated amortization of $ 325 .

Approximate annual aggregate amortization expense of the intangibles

for the years subsequent to December 31, 2021 is as follows:

Year ending December 31:

Total amortization

Amortization expense recognized on intangible assets was $ 791 , $ 216

and $ 72 for the years ended December 31, 2021, 2020 and 2019, respectively.

Other property and equipment, net $ 342 $ 252

Purchase of Convertible Note

On July 15, 2021, XL Fleet made an investment of $ 3,000 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 $ 3,000 , at the rate of 8 % per annum

and due on December 31, 2022.

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

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 as such recorded a charge of $ 3,000 , reflected within other (income) expense as impairment of investment in the consolidated

statements of operations.

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 year.

eNow Convertible Note did not convert at December 31, 2021.

XL Fleet Corp.

In July 2021, the Company 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 commercial trailers.

In exchange for the investment, eNow issued to the Company a convertible debenture (the “eNow Convertible Note”) in the original principal amount of $ 3.0 million, at the rate of 8 % per annum and due on December 31, 2022.

Pursuant to the terms of the eNow Convertible Note agreement, the Company 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 eNow.

In addition, the Company entered into a Development and Supply Agreement (the “Development and Supply Agreement”) with eNow, whereby the Company was made the exclusive provider of high voltage batteries and associated power systems for use in eNow eTRUs.

In the fourth quarter of 2021, after reviewing the status of eNow’s financial condition, the Company determined that the investment in the eNow Convertible Note was fully impaired and recorded an impairment charge of $ 3.0 million.

In addition, the Company notified eNow that it would not exercise its option to purchase eNow, which expired unexercised on December 31, 2021.

In the first quarter of 2022, due to the ongoing supply chain issues and concerns about the financial viability of eNow, the Company notified eNow of its intention to terminate the Development and Supply Agreement.

The arrangement was terminated in the second quarter of 2022.

As part of the termination of the arrangement, the Company agreed to the conversion of the eNow Convertible Note into common shares of eNow at a rate of $ 1.1658 per share.

These shares have no book value as the investment in the eNow Convertible Note was fully impaired in the fourth quarter of 2021.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

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.

During the three months ended December 31, 2021, the supply chain issues worsened, and in particular the lack of availability

of batteries from third party suppliers.

These worsened conditions, in the Company’s opinion, negatively impacted eNow’s prospects

and financial condition.

In January 2022, due to the ongoing supply chain issues, the Company notified eNow of its intention to terminate

the Development System Agreement (See Note 15).

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following

at December 31, 2021 and 2020:

Accrued warranty costs

Accrued expenses and other current liabilities consisted of the following at December 31, 2022 and 2021:

(Amounts in thousands) 2022 2021

Accrued compensation and related benefits $ 6,526 $ —

3 unchanged sentences

Professional fees 1,749 949

Accrued interest 6,586 —

Accrued settlements 451 494

Accrued expenses, other 5,996 1,570

Certain prior year amounts have been reclassified to conform to current

year presentation.

New Markets Tax Credit Financing

On March 4, 2015, the Company entered into a financing transaction

Bancorp Community Development Corporation (U.S.

Bank) under a qualified New Markets Tax Credit (“NMTC”) program

related to the operation of the Company’s facility in Quincy, Illinois.

The NMTC program was provided for in the Community Renewal

Tax Relief Act of 2000 (the Act) and is intended to encourage capital investment in qualified lower income communities.

The Act permits

taxpayers to claim credits against their Federal income taxes for up to 39 % of qualified investments in the equity of community development

entities (CDEs).

CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.

In connection with the financing, the Company made two loans totaling

$ 10,454 to federal ($ 6,455 at 1.51 %) and state ($ 3,999 at 1.53 %) NMTC investment funds (the Investment Funds).

Simultaneously, U.S.

made an equity investment of $ 4,995 to the Investment Funds and, by virtue of such contribution, is entitled to substantially all of the

tax benefits derived from the NMTC.

For compliance with the NMTC rules, principal payments on the loan would not begin until June 10,

2025 (the NMTC rules prohibit principal payments during the 7 -year term of the NMTC arrangement).

The maturity date on the loans would

have been December 31, 2044 .

The Investment Funds then contributed the loan proceeds to a CDE, which,

in turn, loaned combined funds of $ 15,000 , net of debt issuance costs of $ 546 , to XL Hybrid Quincy, LLC, a wholly-owned subsidiary of

the Company, at an interest rate of 1.15 % per year with a maturity date of March 4, 2045 .

These loans are secured by the leasehold improvements

and equipment at the facility in Quincy, Illinois.

Repayment of the loans would have commenced March 10, 2025.

The proceeds from the loans

from the CDE were used to partially fund the build-out of the facility in Quincy, Illinois.

The transaction includes a put/call feature whereby, at the end of

the seven-year NMTC compliance period, the Company may be obligated or entitled to repurchase U.S.

Bank’s equity interest in the

Investment Funds.

U.S Bank exercised the put option in January 2022 the end of the recapture period.

The value attributable to the put/call

is anticipated to be nominal.

The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code.

The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement.

Non-compliance

with applicable requirements could have resulted in US Bank’s projected tax benefits not being realized and, therefore, could have

required the Company to indemnify US Bank for any loss or recapture of NMTCs related to the financing.

The Company has determined that

no credit recapture was required in connection with this financing arrangement.

XL Fleet Corp.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020 and 2019

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

New Markets Tax Credit Financing, continued

The Company has determined that the financing arrangement with the

Investment Fund and CDEs contains a variable interest entity (“VIE”).

This conclusion was reached based on the following:

● The ongoing activities of the Investment Fund – collecting and remitting

interest and fees and NMTC compliance – were all considered in the initial design and are expected to significantly affect the economic

performance throughout the life of the Investment Fund;

● management considered the contractual arrangements that obligate the Company

to comply with NMTC rules and regulations, deliver tax benefits, and provide various other guarantees to the structure;

Bank’s lack of a material interest in the underlying economics

of the project as a result of the guarantees, indemnifications, and put/call options;

● the fact that the Company is obligated to absorb losses of the Investment

As such, the Company concluded that it is the primary beneficiary of

the VIE and consolidated the Investment Fund, as a VIE, in accordance with the accounting standards for consolidation.

Because the Company

consolidates an entity from which it has an approximately $ 10,500 loan receivable and consolidates an entity to which it owes an approximately

$ 15,000 loan payable, these two balances partially eliminate against each other in consolidation.

The $ 4,995 in net proceeds received

in exchange for the transfer of tax credits were deferred and will be recognized by the Company when the tax benefits have been fully

earned and delivered to US Bank without risk of recapture.

During the years ended December 31, 2021 and 2020, the Company amortized

debt issuance costs related to the NMTC of $ 72 and $ 78 , respectively.

The unamortized balance of debt issuance costs as of December 31,

2021 and 2020 was $ 20 and $ 91 , respectively.

On January 14, 2022, the NMTC financing arrangement was terminated

and settled, with the note receivable of $ 15,000 (owed by XL Hybrid Quincy) being transferred to XL Hybrids LL in payment of the $ 10,500

note receivable.

Both notes were retired resulting in a gain on forgiveness of debt of approximately $ 4,500 .

$ 21,509 $ 6,241

Certain prior year amounts have been reclassified to conform to current year presentation.

ROU Assets and Lease Liabilities

XL Fleet has entered into operating and finance leases as the lessee

of office space, R&D and manufacturing facilities, and vehicles.

On January 1, 2021 (“Effective Date”), the Company adopted

FASB ASC 842, which increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from

leases by recording them on the balance sheet as lease assets and lease liabilities.

The new guidance requires the recognition of the

right-of-use (“ROU”) assets and related operating and finance lease liabilities on the balance sheet.

The Company adopted

the new guidance using the modified retrospective approach on January 1, 2021.

As a result, the consolidated balance sheet as of December

31, 2020 was not restated and is not comparative.

The adoption of ASC 842 resulted in the recognition of operating ROU

assets of $ 3,481 and operating lease liabilities of $ 3,481 on the Company consolidated balance sheet as of January 1, 2021.

of ASC 842 resulted in the recognition of finance ROU assets of $ 897 and finance lease liabilities of $ 897 on the Company’s consolidated

balance sheet as of January 1, 2021.

The Company elected the package of practical expedients permitted within the standard, which allow an entity to forgo reassessing (i)

whether a contract contains a lease, (ii) classification of leases, and (iii) whether capitalized costs associated with a lease meet the

definition of initial direct costs.

Also, the Company elected the expedient allowing an entity to use hindsight to determine the lease

term and impairment of ROU assets and the expedient to allow the Company to not have to separate lease and non-lease components.

has also elected the short-term lease accounting policy under which the Company would not recognize a lease liability or ROU asset for

any lease that at the commencement date has a lease term of twelve months or less and does not include a purchase option that the Company

is more than reasonably certain to exercise.

For contracts entered into on or after the Effective Date, at the inception

of a contract the Company will assess whether the contract is, or contains, a lease.

The Company has entered into operating and finance leases as the lessee of office space, R&D and manufacturing facilities, and vehicles.

On January 1, 2021 (“Effective Date”), the Company adopted Accounting Standards Codification ("ASC") 842 Leases ("ASC 842"), which increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as lease assets and lease liabilities.

The new guidance requires the recognition of the right-of-use (“ROU”) assets and related operating and finance lease liabilities on the balance sheet.

The Company adopted the new guidance using the modified retrospective approach on January 1, 2021.

The adoption of ASC 842 resulted in the recognition of operating ROU assets of $ 3.5 million and operating lease liabilities of $ 3.5 million as of January 1, 2021.

The adoption of ASC 842 resulted in the recognition of finance ROU assets of $ 0.9 million and finance lease liabilities of $ 0.9 million as of January 1, 2021.

The Company elected the package of practical expedients permitted within the standard, which allow an entity to forgo reassessing (i) whether a contract contains a lease, (ii) classification of leases, and (iii) whether capitalized costs associated with a lease meet the definition of initial direct costs.

Also, the Company elected the expedient allowing an entity to use hindsight to determine the lease term and impairment of ROU assets and the expedient to allow the Company to not have to separate lease and non-lease components.

The Company has also elected the short-term lease accounting policy under which the Company would not recognize a lease liability or ROU asset for any lease that at the commencement date has a lease term of twelve months or less and does not include a purchase option that the Company is more than reasonably certain to exercise.

For contracts entered into on or after the Effective Date, at the inception of a contract the Company will assess whether the contract is, or contains, a lease.

The Company’s assessment is based on:

the contract involves the use of a distinct identified asset, (ii) whether the Company obtained the right to substantially all the economic

benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset.

entered into prior to January 1, 2021, which were accounted for under ASC 840, were not reassessed for classification.

XL Fleet Corp.

(i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtained the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset.

Leases entered into prior to January 1, 2021, which were accounted for under ASC 840, were not reassessed for classification.

For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments.

For finance leases, the lease liability is initially measured in the same manner and date as for operating leases, and is subsequently presented at amortized cost using the effective interest method.

The Company generally uses its incremental borrowing rate as the discount rate for leases, unless an interest rate is implicitly stated in the lease.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

ROU Assets and Lease Liabilities, continued

For operating leases, the lease liability is initially and

subsequently measured at the present value of the unpaid lease payments.

For finance leases, the lease liability is initially

measured in the same manner and date as for operating leases, and is subsequently presented at amortized cost using the effective

interest method.

The Company generally uses its incremental borrowing rate as the discount rate for leases, unless an interest rate

is implicitly stated in the lease.

The present value of the lease payments is calculated using the incremental borrowing rate for

operating and finance leases, which was determined using a portfolio approach based on the rate of interest that the Company would

have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.

The lease term for all of

the Company’s leases includes the noncancelable period of the lease plus any additional periods covered by either a Company

option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease controlled by the

present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.

The lease term for all of the Company’s leases includes the noncancelable period of the lease plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease controlled by the lessor.

All ROU assets are reviewed periodically for impairment.

Lease expense for operating leases consists of the lease payments plus

any initial direct costs and is recognized on a straight-line basis over the lease term.

Lease expense for finance leases consists of

the amortization of the asset on a straight-line basis over the shorter of the lease term or its useful life and interest expense determined

on an amortized cost basis, with the lease payments allocated between a reduction of the lease liability and interest expense.

The Company’s operating leases are comprised primarily of office

space and R&D and manufacturing facilities.

Lease expense for operating leases consists of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term.

Lease expense for finance leases consists of the amortization of the asset on a straight-line basis over the shorter of the lease term or its useful life and interest expense determined on an amortized cost basis, with the lease payments allocated between a reduction of the lease liability and interest expense.

The Company’s operating leases are comprised primarily of office space and R&D and manufacturing facilities.

Finance leases are comprised primarily of vehicle leases.

Balance sheet information related

to our leases is presented below (ASC 842 was adopted on January 1, 2021):

The Company's ROU assets and lease liabilities from continuing operations are comprised of the following (ASC 842 was adopted on January 1, 2021):

(Amounts in thousands) December 31,

2022 December 31,

Operating leases:

7 unchanged sentences

Other information related to leases is presented below:

For the Year Ended

For the Years Ended

(Amounts in thousands) 2022 2021

Other information:

3 unchanged sentences

Weighted-average discount rate – operating leases 2.9 % 9.7 %

As of December 31, 2021, the annual minimum lease payments of our operating

lease liabilities were as follows:

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

ROU Assets and Lease Liabilities, continued

As of December 31, 2022, the annual minimum lease payments of our operating lease liabilities were as follows (in thousands):

For The Years Ending December 31,

2 unchanged sentences

Present value of future minimum lease payments $ 3,146

XL Fleet Corp.

Scheduled payments on long-term debt as of December 31, 2022 are as follows (in thousands):

SVB Credit Agreement Second SVB Credit Agreement KeyBank Credit Agreement Second KeyBank Credit Agreement Total

For The Years Ending December 31,

2023 $ 15,467 $ 5,261 $ 4,586 $ — $ 25,314

2024 16,650 5,423 4,622 — 26,695

2025 17,455 5,585 4,238 — 27,278

2026 183,214 5,142 4,157 — 192,513

2027 — 48,903 46,578 — 95,481

Thereafter — — — 165,887 165,887

Total principal payments 232,786 70,314 64,181 165,887 533,168

Current portion of long-term debt ( 15,467 ) ( 5,261 ) ( 4,586 ) — ( 25,314 )

$ 217,319 $ 65,053 $ 59,595 $ 165,887 507,854

Unamortized fair value adjustment ( 33,413 )

Long-term debt, net of current portion $ 474,441

In connection with the acquisition of Legacy Spruce Power, the Company assumed certain long-term debt instruments as of September 9, 2022, the acquisition date of Legacy Spruce Power.

In connection with accounting for the business combination, the Company adjusted the carrying value of this long-term debt to its fair value as of the acquisition date.

This fair value adjustment resulted in a reduction of the carrying value of the debt by $ 35.2 million.

This adjustment to fair

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Paycheck Protection Program Loan

In March 2021, World Energy entered into a Promissory Note (the “PPP

Note”) with Boston Private Bank & Trust Company as the lender (the “Lender”), pursuant to which the Lender agreed

to make a loan to the Company under the Paycheck Protection Program (the “PPP Loan”) offered by the U.S.

Small Business Administration

(the “SBA”) in a principal amount of $ 507 pursuant to Title 1 of the Coronavirus Aid, Relief and Economic Security Act (the

“CARES Act”).

This loan was forgiven by the SBA during July 2021and the Company recorded the forgiveness as an opening balance

sheet adjustment in conjunction with the acquisition of World Energy.

(See Note 4).

At December 31, 2021 and 2020, the carrying value of debt was

As of December 31,

Vehicle financing agreements

Total debt obligations, net of deferred financing costs

current portion of debt

Debt – net of current portion

Bank term loan and revolver:

Effective December 10, 2018, and

as amended on November 19, 2019, August 12, 2020 and December 1, 2020, the Company entered into a Loan and Security Agreement for a revolving

line of credit (Revolver) and term loan (Term Loan) with Silicon Valley Bank.

The revolving line of credit bore interest at a floating

per annum rate equal to the greater of (i) the prime rate plus 4.50% or (ii) a fixed rate of 7.75%.

On December 23, 2020, the revolver

was repaid in full.

In connection with the amendment to the Loan and Security Agreement

executed in November 2019, the Company secured access to an additional term loan (Growth Capital Term Loan).

The Term Loan and the Growth

Capital Term Loan were repaid on December 23, 2020.

Convertible notes payable:

In January 2020, the Company’s

Board of Directors approved the issuance of subordinated convertible promissory notes up to an additional $ 13,000 and the amendment to

the existing subordinated convertible promissory notes such that they contain the same terms as the 2020 notes.

During the year ended

December 31, 2020, the Company issued subordinated convertible promissory notes in the amount of $8,100.

The notes mature at the earlier

of (i) February 6, 2021 or (ii) the date of a change of control as defined in the note agreements.

Upon a change of control, the Company

is required to repay all outstanding principal and interest and a 100% premium on the outstanding principal balance of each note.

the terms of the agreements, upon a qualifying financing event occurring after July 31, 2020, the convertible promissory notes and accrued

interest would be convertible at 70% of the price per share paid generally by cash investors in such qualifying financing.

During the year ended December 31, 2020, the Company incurred a loss

on extinguishment of $ 1,038 in connection with the amendment of $ 10,000 in face value of convertible notes.

Specifically, during February

of 2020, the Company entered into amendments of the convertible loan agreements with these note holders to extend the maturities to February

The Company computed the discounted cash flows from these convertible notes as of the date of the amendment, both before and after

the amendment.

The Company 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, the Company recorded a loss on extinguishment

of debt of $ 1,038 .

The Company assessed these embedded features and determined that they

were not considered clearly and closely related to the host notes, and met the definition of a derivative.

Therefore, these embedded features

were all required to be bifurcated from the notes and accounted for separately as a combined derivative liability.

The Company estimated

the fair value of the combined derivative liability which was recorded as a liability and as a discount net against the subordinated convertible

The Company was required to remeasure the combined derivative liability to its then fair value at each subsequent balance sheet

date, through an adjustment to current earnings (See Note 15 for further details on the Company’s fair value measurements).

The debt discount was amortized over the term of the associated debt

agreement utilizing the effective interest method.

The Company recorded $ 4,497 in amortization of these discounts as a component of interest

expense during the year ended December 31, 2020.

XL Fleet Corp.

Debt, continued

value will be amortized to interest expense over the life of the related debt instruments using the effective interest method.

Amortization expense for the fair value adjustment for the year ended December 31, 2022 was $ 1.8 million.

SVB Credit Agreement

In April 2019, Spruce Power 1, LLC ("Spruce Power 1", formerly known as Kilowatt Systems, LLC), Volta Owner I LLC, and Volta MH Owner II LLC entered into a Credit Agreement with Silicon Valley Bank ("SVB Credit Agreement") as Co-Borrowers with a total principal balance of $ 194.1 million.

In October 2019, Spruce Power amended and restated the credit facility (the “A&R SVB Credit Agreement”).

The additional term loan amount under the A&R SVB Credit Agreement was $ 34.2 million.

Under the A&R SVB Credit Agreement, the Co-Borrowers to the debt facility were Greenday Finance I, LLC, Volta MH Owner II, LLC, and Spruce Kismet, LLC (collectively, with Spruce Power 1, the "Co-Borrowers").

The A&R SVB Credit Agreement is collateralized with all of the assets and property of, and equity interest in, each Co-Borrower and certain related parties of the Company.

The A&R SVB Credit Agreement consists of a term loan commitment and a Debt Service Reserve letter of credit commitment.

The term loan bears interest at the 3-month LIBOR plus the applicable margin.

The applicable margin is 2.25 % per annum for the first three years, 2.375 % per annum from the third anniversary through the sixth anniversary and 2.5 % per annum starting on the sixth anniversary.

The interest rate on the A&R SVB Credit Agreement as of December 31, 2022 was 5.19 %.

In March 2020, Spruce Power 1, along with the other Co-Borrowers, entered into an Omnibus Amendment and Consent (the "Omnibus") related to the A&R SVB Credit Agreement to provide for additional term loan commitments totaling $ 53.8 million and additional letter of credit commitments of $ 2.9 million.

The A&R SVB Credit Agreement provides that the lenders agree to issue letters of credit at any time during the letter of credit availability period, further defined in the A&R SVB Credit Agreement, provided that the purpose of the letter of credit is to satisfy the Debt Service Reserve (“DSR LC”).

As of December 31, 2022, the DSR LC has a total capacity of $ 17.1 million and a total of $ 15.6 million in letters of credit outstanding with no amounts drawn.

Amounts outstanding under the DSR LC bear interest of 2.25 % per annum and unused amounts bear interest at 0.50 % per annum.

The A&R SVB Credit Agreement requires Spruce Power 1 to be in compliance with various covenants including debt service coverage ratios.

The refinancing also provides that the Co-Borrowers may not make distributions unless it has satisfied various provisions relating to debt service, events of default and financial ratios.

As of December 31, 2022, Spruce Power 1 was in compliance with the covenants contained in the A&R SVB Credit Agreement.

The term loan component of the A&R SVB Credit Agreement requires quarterly principal payments, paid a month in arrears, beginning December 31, 2019 with the remaining balance due in a single payment in April 2026.

Second SVB Credit Agreement

In May 2020, Spruce Power 2, LLC ("Spruce Power 2", formerly known as Spruce Juniper, LLC) entered into a Credit Agreement with Silicon Valley Bank (“Second SVB Credit Agreement”).

The Second SVB Credit Agreement consisted of a term loan of $ 60.0 million, which was used directly to fund the acquisition of RPV Holdco 1 and a letter of credit (the "Second DSR LC") for $ 3.1 million.

The Second SVB Credit Agreement is collateralized with all of the assets and property of, and equity interest in, Spruce Power 2 and its subsidiaries.

The term loan bears interest at the 3-month LIBOR plus the applicable margin.

The applicable margin is 2.30 % per annum for the first three years, 2.425 % per annum from the third anniversary through the sixth anniversary and 2.55 % per annum starting on the sixth anniversary.

The interest rate on the Second SVB Credit Agreement as of December 31, 2022 was 5.11 %.

As of December 31, 2022, the Second DSR LC has a total capacity of $ 4.3 million and a total of 3.3 million in letters of credit outstanding with no amounts drawn.

Amounts outstanding under the Second DSR LC bear interest of 2.30 % per annum and unused amounts bear interest at 0.50 % per annum.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Debt, continued

Convertible notes payable, continued:

On December 21, 2020, the convertible notes and accrued interest were

settled with the payment in cash of convertible notes in the amount of $ 11,250 and the issuance of 1,715,918 shares upon the conversion

of convertible notes into principal and accrued interest of $ 6,850 and $ 1,709 , respectively.

The Second SVB Credit Agreement requires Spruce Power 2 to be in compliance with various covenants including debt service coverage ratios.

As of December 31, 2022, Spruce Power 2 was in compliance with the covenants contained in the Second SVB Credit Agreement.

The Second SVB Credit Agreement requires quarterly principal payments and matures in May 2027.

KeyBank Credit Agreement

In November 2020, Spruce Power 3, LLC ("Spruce Power 3") entered into a Credit Agreement with KeyBank National Association (“KeyBank Credit Agreement”).

The KeyBank Credit Agreement consisted of a term loan of $ 74.8 million, which was used directly to fund the acquisitions of residential solar energy systems owned by WPS Power Development, LLC and NRG Residential Solar Solutions LLC, and a letter of credit (the "KeyBank DSR LC") for $ 4.1 million.

The KeyBank Credit Agreement is collateralized with all of the assets and property of, and equity interest in, Spruce Power 3 and its subsidiaries.

The term loan bears interest at the 3-month LIBOR plus the applicable margin.

The applicable margin is 3.00 % per annum for the first three years, 3.125 % per annum from the third anniversary through the fifth anniversary and 3.25 % per annum starting on the fifth anniversary.

The interest rate on the KeyBank Credit Agreement as of December 31, 2022 was 5.81 %.

As of December 31, 2022, the KeyBank DSR LC has a total capacity of $ 4.1 million and a total of $ 4.1 million in letters of credit outstanding with no amounts drawn.

Amounts outstanding under the KeyBank DSR LC bear interest of 3.00 % per annum.

The KeyBank Credit Agreement requires Spruce Power 3 to be in compliance with various covenants including debt service coverage ratios.

As of December 31, 2022, Spruce Power 3 was in compliance with the covenants contained in the KeyBank Credit Agreement.

The KeyBank Credit Agreement requires quarterly principal payments and matures in November 2027.

Second KeyBank Credit Agreement

In April 2020, KWS Solar Term Parent 1 LLC, KWS Solar Term Parent 2 LLC, and KWS Solar Term Parent 3 LLC, as Co-Borrowers entered into a Credit Agreement with KeyBank National Association (“Second KeyBank Credit Agreement”) as the Administrative Agent and various funds managed by Sequoia Investment Management Co LTD and Vantage Infrastructure Holdings Ltd.

as lenders, which consisted of a term loan of $ 124.0 million with the option to pay-in-kind interest expense up to $ 8.0 million (“PIK Loan Commitment”) until April 30, 2026, whereby the PIK Loan Commitment shall reduce by $ 1.5 million for each subsequent year until April 30, 2029.

In March 2021, Spruce Power amended and restated the credit facility (“A&R Second KeyBank Credit Agreement”) to include Spruce Power 3 HoldCo, LLC as an additional Co-Borrower and an additional term loan amount of $ 25.0 million.

The A&R Second KeyBank Credit Agreement is collateralized with all of the assets and property of, and equity interest in, each Co-Borrower and certain subsidiaries of Spruce Power.

The term loan bears interest at 8.25 % per annum and is collateralized with all of the assets and property of, and equity interest in, each Co-Borrower and certain subsidiaries of Spruce Power.

The A&R Second KeyBank Credit Agreement requires quarterly payments based on the Net Available Amount of all proceeds in cash and cash equivalents and matures in April 2030.

Vehicle financing agreements:

The Company has entered

into several vehicle financing agreements with various lenders with maturities ranging from 2020 to 2025.

Interest rates on these agreements

range from 2.95% to 10.00%.

The Company had entered into several vehicle financing agreements with various lenders with scheduled maturities ranging from 2020 to 2025.

Interest rates on these agreements range from 2.95 % to 10.00 %.

Each agreement is collateralized by the equipment purchased.

With the exit of the Drivetrain business, the Company terminated all vehicle leases and no balance remained outstanding as of December 31, 2022.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Debt, continued

New Markets Tax Credit Financing:

In March 2015, the Company entered into a financing transaction with U.S.

Bancorp Community Development Corporation ("U.S.

Bank") under a qualified New Markets Tax Credit (“NMTC”) program related to the operation of the Company’s facility in Quincy, Illinois.

The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the "Act") and was intended to encourage capital investment in qualified lower income communities.

The Act permits taxpayers to claim credits against their Federal income taxes for up to 39% of qualified investments in the equity of community development entities ("CDEs").

CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.

In connection with the financing, the Company made two loans totaling $ 10.5 million to federal ($ 6.5 million at 1.51 %) and state ($ 4.0 million at 1.53 %) NMTC investment funds (the "Investment Funds").

Simultaneously, U.S.

Bank made an equity investment of $ 5.0 million to the Investment Funds and, by virtue of such contribution, was entitled to substantially all of the tax benefits derived from the NMTC.

For compliance with the NMTC rules, principal payments on the loan would not begin until June 10, 2025 (the NMTC rules prohibit principal payments during the 7 -year term of the NMTC arrangement).

The maturity date on the loans would have been December 31, 2044.

The Investment Funds then contributed the loan proceeds to a CDE, which, in turn, loaned combined funds of $ 15.0 million, net of debt issuance costs of $ 0.5 million, to XL Hybrid Quincy, LLC, a wholly-owned subsidiary of the Company, at an interest rate of 1.15 % per year with a maturity date of March 4, 2045.

These loans are secured by the leasehold improvements and equipment at the facility in Quincy, Illinois.

Repayment of the loans would have commenced March 10, 2025.

The proceeds from the loans from the CDE were used to partially fund the build-out of the facility in Quincy, Illinois.

The transaction included a put/call feature whereby, at the end of the seven-year NMTC compliance period, the Company may have been obligated or entitled to repurchase U.S.

Bank’s equity interest in the Investment Funds.

U.S Bank exercised the put option in January 2022 the end of the recapture period.

The value attributable to the put/call was nominal.

The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code.

The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement.

Non-compliance with applicable requirements could have resulted in US Bank’s projected tax benefits not being realized and, therefore, could have required the Company to indemnify US Bank for any loss or recapture of NMTCs related to the financing.

The Company has determined that no credit recapture was required in connection with this financing arrangement.

The Company determined that the financing arrangement with the Investment Fund and CDEs contained a VIE and that it was the primary beneficiary of the VIE and consolidated the Investment Fund.

The VIE was terminated upon the exercise of the put option.

In January 2022, the NMTC financing arrangement was terminated and settled, with the note receivable of $ 15.0 million (owed by XL Hybrid Quincy LLC) being transferred to XL Hybrids LL LLC in payment of the $ 10.5 million note receivable.

Both notes were retired resulting in the recognition of a gain on forgiveness of debt, net of unamortized debt issuance costs, of $ 4.5 million.

During the years ended December 31, 2022 and 2021, the Company amortized debt issuance costs related to the NMTC of approximately $ 20,000 and $ 72,000 , respectively.

Interest Rate Swaps

With the acquisition of Legacy Spruce Power, the Company assumed interest rate swaps from agreements that Legacy Spruce Power entered into with four financial institutions.

The purpose of the swap agreements is to convert the floating interest rate on the A&R SVB Credit Agreement, Second SVB Credit Agreement, and the A&R KeyBank Credit

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Interest Rate Swaps, continued

Agreement to a fixed rate.

As of December 31, 2022, the notional amount of the interest rate swaps covers approximately 97 % of the balance of the Company’s floating rate term loans.

As of December 31, 2022, the following interest rate swaps are outstanding (in thousands):

# Notional Amount Fixed Rate Effective Date Early Termination Date Maturity Date Total Fair Value Asset (Liability)

1 $ 13,534 0.73 % 4/30/2020 4/30/2026 1/31/2031 $ 1,597

2 13,534 0.75 % 4/30/2020 4/30/2026 1/31/2031 1,552

3 13,534 0.78 % 4/30/2020 4/30/2026 1/31/2031 1,552

4 4,702 1.57 % 10/31/2019 4/30/2026 1/31/2031 415

5 8,229 1.62 % 10/31/2019 4/30/2026 1/31/2031 705

6 8,229 1.56 % 10/31/2019 4/30/2026 1/31/2031 730

7 8,229 1.59 % 10/31/2019 4/30/2026 1/31/2031 709

8 44,287 2.36 % 7/31/2019 4/30/2026 10/31/2031 2,440

9 44,287 2.33 % 7/31/2019 4/30/2026 10/31/2031 2,532

10 25,307 2.34 % 7/31/2019 4/30/2026 10/31/2031 1,436

11 44,287 2.39 % 7/31/2019 4/30/2026 10/31/2031 2,403

12 31,056 0.90 % 11/13/2020 11/13/2027 10/31/2032 4,366

13 31,056 0.90 % 11/13/2020 11/13/2027 10/31/2032 4,418

14 18,693 2.83 % 07/12/2022 5/14/2027 04/30/2032 676

15 48,382 0.40 % 07/12/2022 5/14/2027 10/31/2031 6,721

$ 357,346 $ 32,252

During the year ended December 31, 2022, the change in the fair value of the interest rate swaps was $ 7.7 million of which $ 5.6 million were unrealized gains reflected within Change in Fair Value of Interest Rate Swaps within Other Income (Expense) and $ 2.1 million were realized gains reflected within Interest Expense, Net in the Consolidated Statements of Operations.

Fair Value Measurements for the methodology used to determine fair value of interest rate swaps.

Redeemable Noncontrolling Interest and Noncontrolling Interests

The following table summarizes redeemable noncontrolling interest and noncontrolling interests as of December 31, 2022:

Tax Equity Entity Date Class A Member Admitted

Redeemable noncontrolling interest:

Level Solar Fund IV LLC December 2016

Noncontrolling interests:

ORE F4 Holdco, LLC August 2014

Volta Solar Owner II, LLC August 2017

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Redeemable Noncontrolling Interest and Noncontrolling Interests, continued

The tax equity entities were structured at inception so that the allocations of income and loss for tax purposes will flip at a date in the future.

The terms of the tax equity entities' operating agreements contain allocations of taxable income (loss), Section 48(a) ITCs and cash distributions that vary over time and adjust between the members on an agreed date (referred to as the flip date).

The operating agreements specify either a date certain flip date or an internal rate of return ("IRR") flip date.

The date certain flip date is based on the passage of a fixed period of time as defined in the operating agreements for each entity.

The IRR flip date is the date on which the tax equity investor has achieved a contractual rate of return.

From inception through the flip date, the Class A members' allocation of taxable income (loss) and Section 48(a) ITCs is generally 99 % and the Class B members' allocation of taxable income (loss) and Section 48(a) ITCs is generally 1 %.

After the related flip date (or, if the tax equity investor has a deficit capital account, typically after such deficit has been eliminated), the Class A members' allocation of taxable income (loss) will typically decrease to 5 % (or, in some cases, a higher percentage if required by the tax equity investor) and the Class B members' allocation of taxable income (loss) will increase by an inverse amount.

The redeemable noncontrolling interests and noncontrolling interests are comprised of Class A units, which represent the tax equity investors' interest in the tax equity entities.

Both the Class A members and Class B members may have call options to allow either member to redeem the other member's interest in the tax equity entities upon the occurrence of certain contingent events, such as bankruptcy, dissolution/liquidation and forced divestitures of the tax equity entities.

Additionally, the Class B members may have the option to purchase all Class A units, which is typically exercisable at any time during the periods specified under their respective governing documents, and, in regards to the tax equity entities classified as redeemable noncontrolling interests, also have the contingent obligation to purchase all Class A units if the Class A members exercise their right to withdraw, which is typically exercisable at any time during the nine-month period commencing upon the applicable flip date.

The carrying values of the redeemable noncontrolling interests were equal to or greater than the estimated redemption values as of December 31, 2022.

In November 2022, the Company purchased the membership interests of Ampere Solar Owner IV, LLC, RPV Fund 13, LLC, and Level Solar Fund III, LLC for cash payments of $ 4.6 million.

Fair Value Measurements

Mark-to-Market Measurement

The investment in the eNow Convertible Note was valued based upon a

revenue multiple enterprise valuation.

The contingent consideration related to the acquisition of Quantum Fuel Systems LLC (“Quantum”)

and the earnout - World Energy were valued based upon the present value of the expected contingent consideration.

The fair value of obligation

to issue shares of common stock to the sellers of World Energy was based on the closing price of XL’s Common Stock on the reporting

The Public Warrants were traded under the symbol XL.WS and the fair

values were based upon the closing price of the Public Warrants at each measurement date.

The Private Warrants were valued using a Black-Scholes

model, pursuant to the inputs provided in the table below:

Mark-to-Market Measurement at

The investment in the eNow Convertible Note was valued based upon a revenue multiple enterprise valuation.

The contingent consideration related to the acquisition of Quantum and the earnout for World Energy were valued based upon the present value of the expected contingent consideration.

The fair value of obligation to issue shares of common stock to the sellers of World Energy was based on the closing price of the Company’s Common Stock on the reporting date.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Fair Value Measurements, continued

The Public Warrants were traded under the symbol XL.WS and the fair values were based upon the closing price of the Public Warrants at each measurement date.

During the year ended December 31, 2021, 7,441,020 of 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 and 225,647 of Public Warrants were called at $ 0.01 per warrant.

No Public Warrants remain outstanding as of December 31, 2022.

The Private Warrants were valued using a Black-Scholes model, pursuant to the inputs provided in the table below:

Input Mark-to-Market Measurement at December 31, 2022

Mark-to-Market Measurement at December 31, 2021

Risk-free rate 1.111 % 1.11 %

3 unchanged sentences

Fair value of common stock $ 3.31 $ 3.31

The following table sets forth the Company’s assets and liabilities

which are measured at fair value on a recurring basis by level within the fair value hierarchy:

The Company's interest rate swaps are not traded on a market exchange and the fair value are determined using a valuation model based on a discounted cash flow analysis.

This analysis reflects the contractual terms of the interest rate swap agreements and uses observable market-based inputs, including estimated future interest rates.

The fair value of the Company's interest rate swap is the net difference in the discounted future fixed cash payments and the discounted expected variable cash receipts.

The variable cash receipts are based on the expectation of future interest rates and are observable inputs available to a market participant.

The interest rate swap valuation is classified in Level 2 of the fair value hierarchy.

The debt balances as presented in the Consolidated Balance Sheets approximate the fair value of the respective instruments as the debt is at a variable rate, the estimates of which are considered Level 2 fair value calculations within the fair value hierarchy.

The following table sets forth the Company’s assets and liabilities which are measured at fair value on a recurring basis by level within the fair value hierarchy:

Fair Value Measurements as of

December 31, 2022

Investment in eNow Convertible Note

(Amounts in thousands) Level I Level II Level III Total

Interest rate swaps $ — $ 32,252 $ — $ 32,252

Private Warrants $ — $ — $ 256 $ 256

Contingent consideration – Quantum

Earnout – World Energy

Fair value of obligation to issue shares of common stock to sellers of World Energy — — 151 151

XL Fleet Corp.

Total $ — $ — $ 407 $ 407

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Fair Value Measurements, continued

1 unchanged sentence

December 31, 2021

Public Warrants

(Amounts in thousands) Level I Level II Level III Total

Private Warrants $ — $ — $ 5,404 $ 5,404

Contingent consideration – Quantum — — 1,950 1,950

During 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 $ 85,555

and 225,647 Public Warrants were called at $ 0.01 per warrant.

No Public Warrants remain outstanding as of December 31, 2021.

Earnout – World Energy — — 1,000 1,000

Fair value of obligation to issue shares of common stock to sellers of World Energy — — 541 541

Total $ — $ — $ 8,895 $ 8,895

The following is a roll forward of the Company’s Level 3 instruments:

1 unchanged sentence

December 31, 2022 and 2021

(Amounts in thousands) Asset

Balance, January 1, 2021

Reduce derivative liability for extinguishment of convertible notes payable

Increase derivative liability for issuance of convertible notes payable

Private Placement Warrants assumed in connection with the Business Combination

Fair value adjustments- Derivatives

Fair value adjustments- Contingent consideration

Fair value adjustments- Private Placement Warrants

Reduce derivative liability for conversion and repayment of convertible notes

Reduce contingent consideration for cash payment of a portion of obligation

Balance, December 31, 2020

Obligation to issue shares of common stock to sellers of World Energy — 1,526

7 unchanged sentences

Balance, December 31, 2021

Fair value adjustment – Quantum contingent consideration — ( 145 )

Cash settlement of Quantum liability — ( 950 )

Share settlement of Quantum liability — ( 186 )

Cash settlement of World Energy liability — ( 1,000 )

Fair value adjustments – Warrant liability — ( 5,148 )

Fair value adjustments – World Energy — ( 390 )

Adjustment - Quantum Liability — ( 669 )

Balance, December 31, 2022

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Stockholders’ Equity

Common stock:

At December 31, 2021, the Company has authorized

a total of 350,000,000 shares of Common Stock.

The holders of Common Stock are entitled to vote on all matters and are entitled to the

number of votes equal to the number shares of Common Stock held.

Common stockholders are entitled to dividends when and if declared by

the Board of Directors.

The following shares of Common Stock are reserved for future issuance

as of December 31, 2021:

At December 31, 2022, the Company has 350,000,000 of authorized shares of Common Stock.

The holders of Common Stock are entitled to vote on all matters and are entitled to the number of votes equal to the number of shares of Common Stock held.

Common stockholders are entitled to dividends when and if declared by the Board of Directors.

The following shares of Common Stock are reserved for future issuance as of December 31, 2022:

Warrants issued and outstanding 4,239,450

2 unchanged sentences

Authorized for future grant of equity instruments under 2020 Equity Incentive Plan 1,695,979

XL Fleet Corp.

Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020 and 2019

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

Legacy XL Common Stock Warrants:

During the year ended December 31, 2020, the Company issued 4,995,584

shares of Common Stock pursuant to the exercise of warrants which resulted in cash proceeds to the Company of $ 884 .

During the year ended December 31, 2021, 243,000 Legacy XL Warrants

were exercised, which resulted in the issuance of 233,555 shares of the Company’s common stock, in a cashless exercise.

A summary of the warrant activity for the years ended December 31 was

Outstanding at January 1, 2020

Total 21,859,407

During 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 $ 85.6 million.

In addition, 225,647 Public Warrants were called at $ 0.01 per warrant.

No Public Warrants remain outstanding at December 31, 2022.

During the year ended December 31, 2021, 243,000 Legacy XL Warrants were exercised, which resulted in the issuance of 233,555 shares of the Company’s Common Stock, in a cashless exercise.

A summary of the warrant activity for the years ended December 31 was as follows:

Warrants Shares Weighted

Outstanding at December 31, 2020

12,149,117 $ 11.28

Outstanding at January 1, 2021

Called ( 225,647 ) 11.50

Exercised ( 7,684,020 ) 11.14

Outstanding at December 31, 2021

Exercisable at December 31, 2021

4,239,450 $ 11.48

Exercised — —

Outstanding at December 31, 2022

4,239,450 $ 11.48

Share-Based Compensation Expense

Share-based compensation expense for stock options, restricted stock

awards and restricted stock units for the years ended December 31, 2021, 2020 and 2019 was $ 7,881 , $ 978 and $ 208 , respectively.

December 31, 2021, there was $ 6,423 of unrecognized compensation cost related to stock options which is expected to be recognized over

the remaining vesting periods, with a weighted-average period of 2.7 years.

Share-based compensation expense for stock options, restricted stock awards and restricted stock units for the years ended December 31, 2022 and 2021 was $ 10.0 million and $ 7.9 million, respectively.

As of December 31, 2022, there was $ 7.0 million of unrecognized compensation cost related to stock options which is expected to be recognized over the remaining vesting periods, with a weighted-average period of 3.5 years.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Share-Based Compensation Expense, continued

Stock Options

During the years ended December 31, 2021 and 2020, the Company issued

1,232,844 and 2,738,912 options, respectively, to certain employees and board members that will vest over a period of one to four years .

A summary of stock option award activity for the year ended December

31, 2021 was as follows:

The Company grants stock options to certain employees that will generally vest over a period of one to four years .

A summary of stock option award activity for the years ended December 31 was as follows:

Options Shares Weighted

Price Weighted

Contractual Term

Outstanding at December 31, 2020

Cancelled or forfeited

10,975,224 $ 0.57 7.6

Granted 1,232,844 6.89

Exercised ( 1,032,819 ) 0.22

Cancelled or forfeited ( 1,437,957 ) 0.66

Outstanding at December 31, 2021

9,737,292 1.40 7.2

Granted 43,482 1.95

Exercised ( 2,664,814 ) 0.24

Cancelled or forfeited ( 1,024,689 ) 4.42

( 1,437,957 )

Outstanding at December 31, 2022

6,091,271 $ 1.39 2.7

Exercisable at December 31, 2022

The aggregate intrinsic value of stock options outstanding as of December

31, 2021 was $ 24,777 .

The aggregate intrinsic value of stock options exercisable as of December 31, 2021 was $ 20,967 .

Cash received from

options exercised for the years ended December 31, 2021, 2020 and 2019 was $ 229 , $ 114 and $ 10 , respectively.

XL Fleet Corp.

5,530,330 $ 1.05 2.2

The aggregate intrinsic value of stock options outstanding as of December 31, 2022 was $ 3.3 million.

The aggregate intrinsic value of stock options exercisable as of December 31, 2022 was $ 3.3 million.

Cash received from options exercised for the years ended December 31, 2022 and 2021 was approximately $ 630,000 and $ 230,000 , respectively.

The fair value of stock options issued for the years ended December 31, 2022 and 2021 was measured with the following assumptions:

Expected volatility 78.1 – 88.2 %

78.1 – 88.2 %

Expected term (in years) 6.25 6.25

Risk-free interest rate 0.1 – 1.3 %

Expected dividend yield 0.0 % 0.0 %

Restricted Stock Units

The Company grants restricted stock units to certain employees that will generally vest over a period of four years .

The fair value of restricted stock unit awards is estimated by the fair value of the Company’s Common Stock at the date of grant.

Restricted stock units activity during the years ended December 31 was as follows:

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Share-Based Compensation Expense, continued

Restricted Stock Awards

The fair value of restricted stock awards is estimated by the fair

value of the Company’s Common Stock at the date of grant.

Restricted stock activity during the year ended at December 31, 2021 was

Number of Shares

Weighted Average Grant Date Fair Value Per Share

Non-vested, at December 31, 2019

Shares Weighted

Non-vested, at December 31, 2020

Granted 651,326 6.38

Vested ( 13,524 ) 14.17

Cancelled or forfeited ( 33,369 ) 8.92

Non-vested, at December 31, 2021

Restricted Stock Units

At December 31, 2021, the Company has 604,433 restricted stock units

outstanding to certain employees and board members that will vest over a period of one to four years .

The fair value of restricted stock unit awards is estimated by the

fair value of the Company’s Common Stock at the date of grant.

Restricted stock activity during the year ended at December 31, 2021

was as follows:

Non-vested, at beginning of period

Granted 11,238,956 1.20

Vested ( 1,062,339 ) 1.80

Cancelled or forfeited ( 948,343 ) 2.70

Non-vested, at end of period

As of December 31, 2021, 2,205 restricted stock units have vested that

had not yet been settled into shares of Common Stock.

XL Fleet Corp.

Non-vested, at December 31, 2022

9,832,707 $ 1.30

Restricted Stock Awards

The Company awarded two members of the Board of Directors each 223,166 shares of the Company’s Common Stock in June 2019.

In September 2020, the award was amended such that the award would vest upon the expiration of the lock up period for XL Fleet employees established in connection with the Merger.

This amendment did not impact the fair value of the award.

Modifications

In addition, in connection with the divestiture of the Company's Drivetrain business to Shyft, the Company modified certain stock awards to the employees of the Company's Drivetrain business who were terminating from the Company in December 2022 and commenced employment at Shyft.

The modification consisted of the acceleration of the vesting of all awards including stock options and restricted stock units scheduled to vest in 2023 which would have otherwise been forfeited.

The vesting date of these awards was accelerated to December 31, 2022.

The acceleration of the vesting of these awards resulted in incremental expense of $ 0.3 million.

Christian Fong Ladder Restricted Stock Unit Award

On September 9, 2022, in connection with the acquisition of Legacy Spruce Power and his appointment as President of XL Fleet, the Company granted to Mr.

Christian Fong a restricted stock unit award (the "Ladder RSUs") of 1,666,666 shares of common stock.

The Ladder RSUs vest in 10 % increments on the dates the Plan administrator certifies the applicable milestone stock prices have been achieved or exceeded, provided that Mr.

Fong remains employed on the date of certification and such achievement occurs within ten years of the date of the grant.

The Company used a Monte Carlo simulation valuation model to determine the fair value of the award.

The following inputs were used in the simulation:

grant date stock price of $ 1.17 , annual volatility of 85.0 %, risk-free interest rate of 3.3 % and dividend yield of 0.0 %.

For each tranche, a fair value was calculated as well as a derived service period which represents the median number of years it is expected to take for the Ladder RSUs to meet their corresponding milestone stock price excluding the simulation paths that result in the Ladder RSUs not vesting within the 10 year term of the agreement.

Each tranche's fair value will be amortized ratably over the respective derived service period.

The fair value and derived service period of each tranche was as follows:

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Share-Based Compensation Expense, continued

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Income Taxes, continued

Stock Price Tranche Fair Value Derived Service Period (in years)

$ 3.23 $ 1.11 1.72

5.37 1.06 2.71

7.50 1.03 3.30

9.64 0.99 3.70

11.77 0.97 4.11

13.91 0.94 4.42

16.04 0.91 4.64

18.18 0.89 4.78

20.31 0.87 5.00

22.45 0.85 5.10

The Company recognized approximately $ 144,000 of expense related to the Ladder RSUs for the year ended December 31, 2022.

Net deferred income tax assets consist of the following components as of December 31, 2022 and 2021:

(Amounts in thousands) 2022 2021

Deferred tax assets (liabilities):

1 unchanged sentence

Tax credit carryforwards 1,643 1,840

Reserves 3,352 1,258

Share-based compensation 2,843 730

1 unchanged sentence

Depreciation and amortization ( 19,109 ) 229

Interest expense carryforward 8,697 —

Right of use assets/liabilities 179 —

Other 1,452 185

Total deferred tax assets, net 69,353 34,928

1 unchanged sentence

Net deferred tax assets (liabilities) $ — $ —

A reconciliation of the provision for income taxes with the amounts

computed by applying the statutory Federal income tax to income before provision for income taxes is as follows:

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Income Taxes, continued

A reconciliation of the provision for income taxes with the amounts computed by applying the statutory Federal income tax to income before provision for income taxes is as follows:

For the Years Ended

3 unchanged sentences

Option and RSU expense 0.2 % 4.5 %

Other ( 1.5 ) % 0.7 %

True-up to prior years return 0.8 % 3.2 %

Change in valuation allowance ( 37.1 ) % 41.8 %

Purchase accounting 10.1 % — %

Effective tax rate — % — %

The Company utilizes an asset and liability approach for financial accounting and reporting for income taxes.

The provision for income

taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of taxable

Deferred income taxes represent the tax effects of differences between the financial reporting and tax basis of the Company’s

assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected to reverse.

The Company evaluates the recoverability of deferred tax assets and

establishes a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous

estimates of tax liability.

The provision for income taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of taxable income.

Deferred income taxes represent the tax effects of differences between the financial reporting and tax basis of the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected to reverse.

The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability.

In Management’s opinion, adequate provisions for income taxes have been made.

If actual taxable income

by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

Tax benefits are recognized only for tax positions that are more likely

than not to be sustained upon examination by tax authorities.

The amount recognized is measured as the largest amount of benefit that

is greater than 50 percent likely to be realized upon settlement.

A liability for “unrecognized tax benefits” is recorded

for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

years ended December 31, 2021, 2020 and 2019, no liability for unrecognized tax benefits was required to be reported.

The Company has provided a full valuation allowance against its net

deferred tax assets since realization of any future benefit from deductible temporary differences and net operating loss cannot be sufficiently

Management of the Company has evaluated the positive and negative evidence bearing upon the reliability of its deferred tax assets,

which are comprised principally of net operating loss carryforwards and research and development credits.

Under the applicable accounting

standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company

will not recognize the benefits of federal and state deferred tax assets.

During the year ended December 31, 2021 and 2020, the Company

increased its valuation allowance by $ 12,026 and $ 5,659 , respectively.

XL Fleet Corp.

If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities.

The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement.

A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

For the years ended December 31, 2022 and 2021, no liability for unrecognized tax benefits was required to be reported.

The Company has provided a full valuation allowance against its net deferred tax assets since realization of any future benefit from deductible temporary differences and net operating loss cannot be sufficiently assured.

Management of the Company has evaluated the positive and negative evidence bearing upon the reliability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits.

Under the applicable accounting standards, Management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets.

During the year ended December 31, 2022 and 2021, the Company increased its valuation allowance by $ 34.4 million and $ 12.0 million, respectively.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Income Taxes, continued

As of December 31, 2021, the Company has federal and state net operating

loss carryforwards of approximately $122,000 and $69,000, respectively, approximately $31,300 of the federal net operating loss carryforward

will expire at various dates commencing on 2029 and through 2037 and $90,700 were generated between the years ended December 31, 2018

and 2021 and have an indefinite life.

At December 31, 2021, the Company has federal and state tax credits of approximately $ 1,452 and $ 388 , respectively.

These federal and state tax credits

are available to reduce future taxable income and expire at various dates commencing 2026 through 2039.

Utilization of the NOLs and tax

credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership

change limitations that have occurred previously or that could occur in the future.

These ownership changes may limit the amount of net

operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.

has not determined whether an ownership change under section 382 has occurred or whether such limitation exists.

Restructuring, continued

As of December 31, 2022, the Company has federal and state net operating loss carryforwards of $ 279.8 million and $ 206.7 million, respectively, approximately $ 42.1 million of the federal net operating loss carryforward will expire at various dates commencing on 2029 and through 2037 and approximately $ 237.6 million were generated between the years ended December 31, 2018 and 2021 and have an indefinite life.

At December 31, 2022, the Company has federal tax credits of approximately $ 1.6 million.

These federal tax credits are available to reduce future taxable income and expire at various dates commencing 2026 through 2039.

Utilization of the NOLs and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously or that could occur in the future.

These ownership changes may limit the amount of net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.

The Company has not determined whether an ownership change under section 382 has occurred or whether such limitation exists.

The Company files income tax returns in the U.S.

federal jurisdiction, and various states.

With few exceptions, the Company is no longer subject to U.S.

federal, state and local income tax examinations by tax authorities for years before 2017.

The Company follows a comprehensive model for the recognition, measurement, presentation and disclosure in consolidated financial statements of uncertain tax positions that have been taken or expected to be taken on a tax return.

No liability related to uncertain tax positions is recorded in the Consolidated Financial Statements as of December 31, 2022 and 2021.

Related Party Transactions

Operating lease:

In March 2012, the Company entered into a noncancelable

lease agreement for office, research and development, and vehicle development and installation facilities with an investor of the Company.

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

The lease includes a rent escalation clause, and rent expense

is being recorded on a straight-line basis.

On December 31, 2021, the lease term was extended through August 31, 2022.

Rent expense under the operating lease for the years ended December

31, 2021, 2020 and 2019 was $ 231 , $ 235 and $ 235 , respectively.

Future minimum lease payments for this lease are as follows:

Commitments and Contingencies

Sponsorship Commitment:

On February 24, 2021, the Company agreed

to a sponsorship agreement with several entities related to the UBS Arena, Belmont Park and the NY Islanders Hockey Club.

that Agreement, the Company was designated an “Official Electric Transportation Partner of UBS Arena” with various associated

marketing and branding rights, including the development of electric vehicle charging stations.

Through December 31, 2021, the Company

has incurred costs of approximately $ 700 related to a future opportunities to develop electric vehicle charging stations on the UBS Arena

The sponsorship agreement has a term of three years with a sponsor fee of approximately $ 500 per year, of which $ 250 was paid on

June 25, 2021 and the second payment of $ 250 was accrued on December 31, 2021 and paid on January 14, 2022.

One of the directors of XL

Fleet is a co-owner of the NY Islanders Hockey Club.

Equipment Purchase:

On March 1, 2021, the Company entered into

an agreement with Creative Bus Sales, Inc.

(“Creative) to purchase six low floor electric transit buses to be delivered in 2022

for a total purchase price of $ 4,191 .

In connection with this agreement, on March 2, 2021, the Company made a down-payment of $ 780 .

February 2022, the Company terminated its purchase agreement with Creative received a refund of the down payment of $ 780 .

Purchase Commitments:

The Company has entered into firm commitments

to purchase batteries and motors from major suppliers.

As of December 31, 2021, these purchase obligations consisted an obligation of

$2,132 to purchase motors by July 2022 and an open ended commitment of $2,700 to purchase batteries, an obligation of $936 to acquire

batteries for hybrid electric vehicle, and an obligation of $748 to buy chip-sensitive items including telematics modules and inverters.

XL Fleet Corp.

The Company had a noncancelable lease agreement for office, research and development, and vehicle development and installation facilities with an investor of the Company which expired in the third quarter of 2022.

Rent expense under the operating lease for the years ended December 31, 2022 and 2021 was approximately $ 139,000 and $ 231,000 , respectively.

Restructuring

In the first quarter of 2022, the Company conducted a strategic review of its operations.

The results of this review resulted in the following actions being taken:

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

(ii) the termination of engineering activities in the Company’s Boston office;

(iii) elimination of all of the Company’s plug-in hybrid products and a substantial majority of the Company’s hybrid drivetrain products;

(iv) a reduction of the Company’s workforce of approximately 50 employees;

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

The Company recognized a total charge of $ 2.4 million related to these activities.

In connection with the Company’s reduction in its workforce, the Company incurred severance charges included in Selling, General and Administrative expenses of approximately $ 840,000 of which $ 725,000 was paid in the first quarter of 2022, $ 67,000 was paid in the second quarter of 2022, and the remainder paid in the third quarter of 2022.

In connection with the Company’s decision to exit certain product lines, the Company incurred an inventory obsolescence charge, included in Net Loss from Discontinued Operations, of $ 1.5 million in the first quarter of 2022.

In the second quarter of 2022, the Company recognized an additional $ 0.2 million of non-cash charge related to inventory obsolescence.

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.

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 of non-cash charges for accelerated vesting of certain equity awards, and $ 10.6 million of non-cash charges related to inventory obsolescence.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Commitments and Contingencies, continued

Included in Selling, General and Administrative Expenses were $ 8.6 million of charges for severance and accelerated vesting of certain equity awards.

Included in Net Loss from Discontinued Operations were $ 10.6 million of charges for severance and accelerated vesting of certain equity awards and the inventory obsolescence charges.

Restructuring Liability

The following table summarizes the activity for the year ended December 31, 2022 in the restructuring liability:

(Amounts in thousands) Balance at December 31, 2021

Additions Payments Balance at December 31, 2022

Employee termination charges $ — $ 4,435 $ ( 1,007 ) $ 3,428

Commitments and Contingencies

Sponsorship Commitment:

In February 2021, the Company agreed to a sponsorship agreement with several entities related to the UBS Arena, Belmont Park and the NY Islanders Hockey Club.

Pursuant to that Agreement, the Company was designated an “Official Electric Transportation Partner of UBS Arena” with various associated marketing and branding rights, including the development of electric vehicle charging stations.

The sponsorship agreement has a term of three years with a sponsor fee of approximately $ 500,000 per year, of which approximately $ 250,000 was paid in June 2021 and the second payment of $ 250,000 was accrued on December 31, 2021 and paid in January 2022.

One of the directors of the Company is a co-owner of the NY Islanders Hockey Club.

In the second quarter of 2022, the Company exercised its option to terminate the final two years of the agreement and will incur no further sponsor fees.

The Company has incurred costs of approximately $ 700,000 related to a future opportunities to develop electric vehicle charging stations on the UBS Arena area.

Legal proceedings:

The Company is periodically involved in legal

proceedings, legal actions and claims arising in the normal course of business, including proceedings relating to product liability, intellectual

property, safety and health, employment and other matters.

Management believes that the outcome of such legal proceedings, legal actions

and claims will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.

Beginning on March 8, 2021, two putative securities class

action complaints were filed in the federal district court for the Southern District of New York against the Company and certain of its

current and former officers and directors.

Those cases were consolidated and a lead plaintiff appointed in June 2021, and an amended complaint

filed on July 20, 2021 alleging that certain public statements made by the defendants between October 2, 2020 and March 2, 2021 violated

Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

The Company believes that the allegations

asserted in the amended complaint are without merit, and the Company intends to vigorously defend the lawsuit.

There can be no assurance,

however, that the Company will be successful.

At this time, the Company is unable to estimate potential losses, if any, related to the

On September 20, 2021, and October 19, 2021, two class

action complaints were filed in the Delaware Court of Chancery against certain of the Company’s current officers and directors,

and the Company’s sponsor, Pivotal Investment Holdings II LLC.

The actions were consolidated as In re XL Fleet (Pivotal) Stockholder

Litigation , C.A.

The Company is periodically involved in legal proceedings, legal actions and claims arising in the normal course of business, including proceedings relating to product liability, intellectual property, safety and health, employment and other matters.

Management believes that the outcome of such legal proceedings, legal actions and claims will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.

Putative securities class action complaints

On March 8, 2021, two putative securities class action complaints were filed in the federal district court for the Southern District of New York against the Company and certain of its current and former officers and directors.

Those cases were consolidated and a lead plaintiff appointed in June 2021, and an amended complaint filed on July 20, 2021 alleging that certain public statements made by the defendants between October 2, 2020 and March 2, 2021 violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

The Company believes that the allegations asserted in the amended complaint are without merit and is vigorously defending the lawsuit.

There can be no assurance, however, that the Company will be successful.

At this time, the Company is unable to estimate potential losses, if any, related to the lawsuit.

On September 20, 2021 and October 19, 2021, two class action complaints were filed in the Delaware Court of Chancery against certain of the Company’s current officers and directors, and the Company’s SPAC sponsor, Pivotal Investment Holdings II LLC.

The actions were consolidated as In re XL Fleet (Pivotal) Stockholder Litigation , C.A.

2121-0808, and an amended complaint was filed on January 31, 2022.

The amended complaint alleges various breaches

of fiduciary duty, and aiding and abetting breaches of fiduciary duty, for purported actions relating to the negotiation and approval

of the December 21, 2020 merger and organization of legacy XL to become XL Fleet Corp., and purportedly materially misleading statements

made in connection with the merger.

The Company believes that the allegations in complaint are without merit, and the Company intends

to vigorously defend the lawsuit.

On January 6, 2022, the Company received a subpoena from

the Securities and Exchange Commission (the “SEC”) requesting the production of certain documents related to, among other

things, the Company’s business combination with XL Hybrids, Inc.

and the related PIPE financing, the Company’s sales pipeline

and revenue projections, purchase orders, suppliers, CARB approvals, fuel economy from our Power Drive products, customer complaints,

and disclosures and other matters in connection with the foregoing.

The SEC has informed the Company that its current investigation is

a fact-finding inquiry.

The SEC has also informed the Company that the investigation does not mean that it has concluded that anyone has

violated the law, and does not mean that it has a negative opinion of any person, entity or security.

We intend to provide the requested

information and cooperate fully with the SEC investigation.

Leadership Transition

On November 1, 2021, the Company entered into an executive employment

agreement with Eric Tech (the “Employment Agreement”), pursuant to which Mr.

Tech became the Company’s CEO effective

December 1, 2021.

On November 20, 2021, the Company entered into a separation agreement

with Dimitri Kazarinoff, the Chief Executive Officer.

Kazarinoff’s employment ended effective December 1, 2021.

In connection

with the separation agreement, the Company agreed to accelerate the vesting of all outstanding stock options by one year, extend the exercise

period of the stock options to two years, and pay twelve months of severance.

Due to the modification of his options, the Company recorded

the incremental value of $ 4,372 as an expense during the year ended December 31, 2021.

On January 31, 2022, the Company’s Chief Financial Officer resigned.

An interim replacement was named while the Company completes the search for a permanent replacement.

XL Fleet Corp.

The amended complaint alleges various breaches of fiduciary duty, and aiding and abetting breaches of fiduciary duty, for purported actions relating to the negotiation and approval of the December 21, 2020 merger and organization of legacy XL Hybrids Inc.

("XL Legacy") to become XL Fleet Corp., and

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Commitments and Contingencies, continued

purportedly materially misleading statements made in connection with the merger.

The Company believes that the allegations asserted in both the class action complaints are without merit and is vigorously defending the lawsuit.

At this time, the Company is unable to estimate potential losses, if any, related to the lawsuit.

Securities and Exchange Commission Subpoena

On January 6, 2022, the Company received a subpoena from the SEC requesting the production of certain documents related to, among other things, the Company’s business combination with XL Hybrids, Inc.

and the related PIPE financing, the Company’s sales pipeline and revenue projections, purchase orders, suppliers, CARB approvals, fuel economy from Drivetrain products, customer complaints, and disclosures and other matters in connection with the foregoing.

The SEC has informed the Company that its current investigation is a fact-finding inquiry.

The SEC has also informed the Company that the investigation does not mean that it has concluded that anyone has violated the law and does not mean that it has a negative opinion of any person, entity or security.

To date, the Company has provided the requested information and cooperated fully with the SEC investigation.

At this time, the Company is unable to estimate potential losses, if any, related to the investigation.

Val Kay derivatively on behalf of nominal defendant XL Fleet Corp

On June 23, 2022, the Company received a shareholder derivative complaint filed in the U.S.

District Court, District of Massachusetts, captioned Val Kay derivatively on behalf of nominal defendant XL Fleet Corp, against all current directors and prior officers and directors.

The action was filed by a shareholder purportedly on behalf of the Company, and raises claims for contribution, as well as claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and abuse of control.

The factual allegations concern alleged false or misleading statements about the Company’s sales pipeline, supply chain issues, low reorder rates, and the Company’s technology.

The Company believes that the allegations asserted in the action are without merit and is vigorously defending the lawsuit.

At this time, the Company is unable to estimate potential losses, if any, related to the lawsuit.

On February 9, 2023, US Bank, through its affiliate Firstar Development LLC, filed a motion for summary judgment in lieu of a complaint in New York Supreme Court (the trial level in New York) alleging that the Company failed to fulfill its reimbursement obligations under a 2019 tax recapture guaranty agreement between the parties arising from the alleged recapture by the IRS of tax credits taken by Firstar Development LLC as an investor in the Company’s subsidiary Ampere Solar Owner I, LLC.

The $ 2.5 million alleged liability claim was fully reserved at the time of the Company’s acquisition of Legacy Spruce Power in September 2022, and is not expected to be material to the Company.

The Company believes that the allegations asserted in the action are without merit and is vigorously defending the lawsuit.

At this time, the Company is unable to estimate potential losses, if any, related to the lawsuit.

Master SREC purchase and sale agreement

The Company has forward sales agreements related to a certain number of SRECs to be generated from the Company’s solar energy systems located in Maryland, Massachusetts, Delaware, and New Jersey to be sold at fixed prices over varying terms of up to 20 years.

In the event the Company does not deliver such SRECs to the counter-party, the Company would be forced to pay additional penalties and fees as stipulated within the contracts.

In connection with the acquisition RPV Holdco 1, guaranty agreements were established by and between Spruce Holding Company 1, LLC, Spruce Holding Company 2, LLC, and Spruce Holding Company 3, LLC (“Spruce Guarantors”) and the investor members in the Funds in May 2020.

The Spruce Guarantors entered into guaranties in favor of the tax equity investors under which they guaranteed the payment and performance of Solar Service Experts, LLC, a wholly owned subsidiary of the Company, under the Spruce Power 2 Maintenance Services Agreement, and the Class B Member under the Limited Liability Company Agreement (“LLCA”).

These guaranties are subject to a maximum of the aggregate amount of capital contributions made by the Class A Member under the LLCA.

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Net (Loss) Income Per Share, continued

Indemnities and guarantees

During the normal course of business, Spruce Power has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions.

The duration of Spruce Power's indemnities and guarantees varies, but the majority of these indemnities and guarantees are limited in duration.

Historically, Spruce Power has not been obligated to make significant payments for these obligations, does not anticipate future payments, and no liabilities have been recorded for these indemnities and guarantees.

ITC recapture provisions

The IRS may disallow and recapture some, or all, of the Investment Tax Credits due to improperly calculated basis after a project was placed in service ("Recapture Event").

If a Recapture Event occurs, Spruce Power is obligated to pay the applicable Class A Member a recapture adjustment, which includes the amounts the Class A Members are required to repay the IRS, including interest and penalties, as well as any third-party legal and accounting fees incurred by the Class A Members in connection to the Recapture Event, as specified in the operating agreements.

Such a payment by Spruce Power to the Class A Members are not to be considered a capital contribution to the fund per the operating agreements, nor would it be considered a distribution to the Class A Members.

With the exception of the tax matter related to Ampere Solar Owner I noted above, a Recapture Event was not deemed to be probable by the Company, therefore no accrual has been recorded as of December 31, 2022.

Net (Loss) Income Per Share

The following is a reconciliation of the numerator and denominator

used to calculate basic earnings per share and diluted earnings per share for the years ended December 31, 2021, 2020 and 2019:

The following is a reconciliation of the numerator and denominator used to calculate basic earnings per share and diluted earnings per share for the years ended December 31, 2022 and 2021:

Years Ended December 31,

Net income (loss)

Weighted average shares basic

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

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

Weighted average shares outstanding, basic 142,692,003 138,457,416

Dilutive effect of option, warrants and restricted stock units — 10,053

Weighted average shares outstanding, basic and diluted

Net income (loss) per share, basic

Net income (loss) per share, diluted

Potential dilutive securities, which include stock options,

warrants and restricted stock units have been excluded from the computation of diluted net loss per share for the years ended

December 31, 2020 and 2019 as the effect would be to reduce the net loss per share.

Therefore, for these periods the

weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same.

For the year ended December 31, 2021, certain dilutive securities were excluded from the computation of diluted

earnings per share as the effect would have been to increase net earnings per share.

The number of shares underlying outstanding dilutive securities which

have been excluded from the computation of diluted net loss per share above, are presented below:

Years Ended December 31,

Stock options

Private Warrants

XL Legacy Warrants

XL Fleet Corp.

Weighted average shares outstanding, diluted 142,692,003 148,510,351

Net (loss) income attributable to stockholders per share, basic $ ( 0.66 ) $ 0.21

Net (loss) income attributable to stockholders per share, diluted $ ( 0.66 ) $ 0.19

For the year ended December 31, 2022, potential dilutive securities, which include stock options, warrants and restricted stock units have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share.

Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same.

For the year ended December 31, 2021, certain dilutive securities were excluded from the computation of diluted earnings per share as the effect would have been to increase net earnings per share.

The aggregate shares not included were

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

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

Retirement Plan

The Company has adopted a 401(k) plan to provide all eligible employees

a means to accumulate retirement savings on a tax-advantaged basis.

Discontinued Operations, continued

approximately 4,595,000 shares, which were primarily comprised of 4,233,000 shares related to private warrants and 361,000 shares related to stock options.

Defined Contribution Plan

The Company has adopted a 401(k) plan to provide all eligible employees a means to accumulate retirement savings on a tax-advantaged basis.

The 401(k) plan requires participants to be at least 21 years old.

In addition to the traditional 401(k), eligible employees are given the option of making an after- tax contribution to a Roth 401(k) or

a combination of both.

Plan participants may make before tax elective contributions up to the maximum percentage of compensation and dollar

amount allowed under the Internal Revenue Code.

Participants are allowed to contribute, subject to IRS limitations on total annual contributions

from 1 % to 90 % of eligible earnings.

The plan provides for automatic enrollment at a 3 % deferral rate of an employee’s eligible

The Company provides for safe harbor matching contributions equal to 100% on the first 3% of an employee’s eligible earnings

deferred and an additional 50% on the next 2% of an employee’s eligible earnings deferred.

Employee elective deferrals and safe

harbor matching contributions are 100% vested at all times.

In connection with the acquisition of World Energy, XL Fleet adopted

the World Energy 401(k) plan whose features are the same as those of the XL Fleet 401(k) plan except that (i) Participants are allowed

to contribute, subject to IRS limitations on total annual contributions from 1% to 100% of eligible earnings and (ii) the safe harbor

non-elective contribution is equal to 3% of employee’s compensation.

Subsequent Event

Management has reviewed material events subsequent of the period ended

December 31, 2021 and prior to the filing of financial statements in accordance with FASB ASC 855 “Subsequent Events”.

In February 2022, the Company eliminated 51 positions as part of a

strategic realignment to narrow its focus and reduce some aspects of the Company’s hybrid offerings.

In connection with the elimination

of these positions, the Company incurred severance charges totaling $1,251.

Changes in and Disagreements with Accountants on Accounting

and Financial Disclosure.

There have been no changes in or disagreements

with accountants on accounting and financial disclosure.

In addition to the traditional 401(k), eligible employees are given the option of making an after- tax contribution to a Roth 401(k) or a combination of both.

Plan participants may make before-tax elective contributions up to the maximum percentage of compensation and dollar amount allowed under the Internal Revenue Code.

Participants are allowed to contribute, subject to IRS limitations on total annual contributions from 1 % to 90 % of eligible earnings.

The plan provides for automatic enrollment at a 3 % deferral rate of an employee’s eligible wages.

The Company provides for safe harbor matching contributions equal to 100 % on the first 3 % of an employee’s eligible earnings deferred and an additional 50 % on the next 2 % of an employee’s eligible earnings deferred.

Employee elective deferrals and safe harbor matching contributions are 100 % vested at all times.

In connection with the acquisition of World Energy, the Company adopted the World Energy 401(k) plan whose features are the same as those of the XL Fleet 401(k) plan except that (i) Participants are allowed to contribute, subject to IRS limitations on total annual contributions from 1 % to 100 % of eligible earnings and (ii) the safe harbor non-elective contribution is equal to 3 % of employee’s compensation.

In connection with the acquisition of Legacy Spruce Power, the Company adopted the Spruce Power 401(k) plan whose features are the same as those of the XL Fleet's 401(k) plan except that (i) Participants are allowed to contribute, subject to IRS limitations, on total annual contributions from 1 % to 80 % of eligible earnings and (ii) the safe harbor non-elective contribution is equal to 3 % of employee’s compensation.

The Company recognized expenses related to its 401(k) plans of approximately $ 788,000 and $ 536,000 for the years ended December 31, 2022 and 2021, respectively.

Discontinued Operations

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

Both the Drivetrain and XL Grid operations are presented as discontinued operations in the Consolidated Financial Statements.

Organization and Description of Business for further information.

The following provides supplemental detail of the Company’s discontinued operations as of and for the years ended December 31, 2022 and 2021.

The following table presents financial results from discontinued operations in the Consolidated Statements of Operations:

Years Ended December 31,

(Amounts in thousands) 2022 2021

Net income (loss) from discontinued operations:

Drivetrain $ ( 30,414 ) $ ( 23,829 )

XL Grid ( 1,092 ) 17

Impairment of goodwill ( 8,606 ) —

Total $ ( 40,112 ) $ ( 23,812 )

The following table presents aggregate carrying amounts of assets and liabilities of discontinued operations in the Consolidated Balance Sheets:

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Discontinued Operations, continued

As of December 31,

(Amounts in thousands) 2022 2021

Assets from discontinued operations:

Drivetrain $ 3,604 $ 22,686

XL Grid 7,373 9,395

Goodwill — 8,606

Total assets from discontinued operations $ 10,977 $ 40,687

Liabilities from discontinued operations:

Drivetrain $ 5,743 $ 10,228

XL Grid 3,648 3,636

Total liabilities from discontinued operations $ 9,391 $ 13,864

The following table presents financial results of Drivetrain operations:

Years Ended December 31,

(Amounts in thousands) 2022 2021

Revenues $ 2,419 $ 2,839

Operating expenses:

Cost of revenues - inventory and other direct costs 14,038 7,938

Engineering, research, and development 9,819 10,775

Selling, general, and administrative expenses 8,041 7,955

Total operating expenses 31,898 26,668

Loss from operations ( 29,479 ) ( 23,829 )

Other expense:

Loss on asset disposal 935 —

Net loss from discontinued operations $ ( 30,414 ) $ ( 23,829 )

The following table presents the aggregate carrying amounts of assets and liabilities of discontinued operations for Drivetrain operations:

Spruce Power Holding Corporation

(formerly known as XL Fleet Corp.)

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2022 and 2021

Discontinued Operations, continued

As of December 31,

(Amounts in thousands) 2022 2021

Accounts receivable, net $ 348 $ 519

Inventory, net 498 13,482

Prepaid expenses and other current assets — 599

Other property and equipment, net 84 3,104

Intangible assets, net — 628

Right-of-use asset 2,627 4,310

Other assets 47 44

Total assets of discontinued operations $ 3,604 $ 22,686

Current portion of long-term debt $ — $ 78

Accounts payable 240 1,407

Lease liability, current 414 790

Accrued expenses and other current liabilities 2,272 4,236

Long-term debt, net of current portion — 21

Deferred revenue, non-current 208 237

Lease liability, non-current 2,609 3,459

Total liabilities of discontinued operations $ 5,743 $ 10,228

The following table presents financial results of XL Grid operations:

Years Ended December 31,

(Amounts in thousands) 2022 2021

Revenues $ 12,279 $ 12,761

Operating expenses:

Cost of revenues - inventory and other direct costs 8,577 8,358

Engineering, research, and development — —

Selling, general, and administrative expenses 4,794 4,386

Total operating expenses 13,371 12,744

Net income (loss) from discontinued operations $ ( 1,092 ) $ 17

The following table presents the aggregate carrying amounts of assets and liabilities of discontinued operations for XL Grid operations:

Table of Content s

As of December 31,

(Amounts in thousands) 2022 2021

Accounts receivable, net $ 3,623 $ 5,958

Inventory, net 1,749 1,780

Prepaid expenses and other current assets 95 131

Other property and equipment, net 152 139

Intangible assets, net — 1,235

Right-of-use asset 1,719 108

Other assets 35 44

Total assets of discontinued operations $ 7,373 $ 9,395

Accounts payable $ 495 $ 1,695

Lease liability, current 206 59

Accrued expenses and other current liabilities 395 1,379

Deferred revenue, non-current 976 454

Lease liability, non-current 1,576 49

Total liabilities of discontinued operations $ 3,648 $ 3,636

Subsequent Events

Silicon Valley Bank

In March 2023, one of the Company’s banks, Silicon Valley Bank (“SVB”), failed and was closed.

SVB was placed into receivership by the Federal Deposit Insurance Corporation (“FDIC”).

A new bank, Silicon Valley Bridge Bank, NA was created which will be administered by the FDIC and assumed all ongoing business of SVB.

The Company had cash invested in bank accounts at SVB in excess of the FDIC limit of $250,000 however the accounts were fully protected by the FDIC and the Company was able to withdraw all cash.

In addition, the Company has an open letter of credit for $ 150,000 with the bank that it is currently working to close.

SVB is also a counterparty to certain of the Company’s interest rate swap agreements.

These positions have been assumed by the new bank and the Company does not believe that there is additional credit risk related to the interest rate swap agreements.

SEMTH Acquisition

In furtherance of its growth strategy, on March 23, 2023, the Company completed the acquisition of all the issued and outstanding interests in SS Holdings 2017, LLC and its subsidiaries ("SEMTH" and the “SEMTH Acquisition”) from certain funds managed by HPS Investment Partners, LLC (“HPS”), pursuant to a Membership Interest Purchase And Sale Agreement (“Purchase Agreement”) dated as of March 23, 2023.

The SEMTH assets include 20 -year use rights to the customer payment stream of approximately 22,500 residential solar leases and power purchase agreements.

The Company acquired SEMTH for approximately $ 23 million of cash, net of cash received, and assumed $ 125 million of outstanding senior indebtedness held by SS Holdings 2017, LLC, and its subsidiaries at the close of the acquisition.

Table of Content s

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data