SPRUCE POWER HOLDING CORP 10-K

Item 1. Business. Company Overview The Company is a leading owner and operator of distributed solar energy assets across the United States, offering subscription-based services to more than 72,000 customers with the March 2023 SEMTH Acquisition discussed below 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. In addition to providing management services to its own portfolio, the Company also provides management services to over 7,500 systems owned by other companies. These services include (i) billing and collections, (ii) account management services, (iii) financial reporting, (iv) homeowner support and (v) maintenance monitoring and dispatch. Corporate History and Background 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"). Under the XL Fleet name, the Company was historically a provider of 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). The XL Grid segment included World Energy Efficiency Services, LLC (“World Energy”) after its acquisition in May 2021. 1 Table of Contents In the first quarter of 2022, the Company initiated a strategic review of its overall business operations which included assessing its offerings, strategy, processes and growth opportunities. As a result of the strategic review, in the first quarter of 2022 the Company made the following decisions relating to a restructuring of its Drivetrain business: (i) the elimination of a substantial majority of the Company’s hybrid drivetrain products; (ii) the elimination of its Plug-In Hybrid Electric Vehicles (“PHEV”) products; (iii) the reduction in the size of the Company’s workforce by approximately 50 employees; (iv) the closure of the Company’s production center and warehouse in Quincy, IL; (v) the closure of the Company’s engineering activities in its Boston office; and (vi) the termination of the Company’s partnership with eNow. Following the strategic review, the Company announced its decision to pursue transformational mergers and acquisition (“M&A”) opportunities, enabled by a significant cash balance resulting from the Company’s go-public transaction completed in December 2020. As a result of these efforts, on September 9, 2022, the Company acquired 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”) for $32.6 million which consisted of cash payments of $61.8 million less cash and restricted cash acquired of $29.2 million. With the acquisition of Legacy Spruce Power, the Company also assumed $542.5 million of long-term debt . In November 2022, the Company changed its corporate name from “XL Fleet Corp” to “Spruce Power Holding Corporation”. Additionally, the Company changed its ticker symbol from “XL” to “SPRU.” Discontinued Operations 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 on January 1, 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. Company Strategy The Company believes that the combination of Spruce Power’s existing Customer Agreements' subscriber-base proven servicing platform, together with the Company’s capital resources and relationships gives it the ability to take advantage of rapid growth in distributed solar, energy storage and electric vehicle adoption while creating a path to more predictable revenues, profits and cash flow for the Company’s shareholders. As described above, over the past several quarters, the Company’s Management and Board of Directors conducted a comprehensive review of the Company’s existing business as well as potential acquisitions that could accelerate growth and increase profitability. Based on that review, as well as learnings from the operation of the XL Grid segment, the Company determined to refocus its business on providing subscription-based solutions to homeowners for rooftop solar and servicing of assets and customers to other owners of similar portfolios. In addition, offering consumer power products such as energy storage, EV chargers and other energy-related products would yield greater value for the Company’s shareholders. Key elements of the Company’s new corporate strategy include: 2 Table of Contents a. Leveraging the Spruce Power platform to become a leading provider of subscription-based solutions for distributed energy resources – Spruce Power has more than a decade of experience owning and operating rooftop solar systems, and the Customer Agreements associated with those systems, as well as energy efficiency upgrades. The Company believes that Spruce Power’s proven platform for managing residential solar can be extended to other categories of distributed energy resources. Through leveraging the Spruce Power platform, the Company intends to grow its revenues by providing subscription-based solutions for rooftop solar, energy storage, EV chargers and other energy-related products, as well as the servicing and management of those systems, to homeowners and small businesses. Over the last 18 months, Spruce Power has focused on delivering best-in-class customer service, with investment into process and platform improvement for on-site monitoring, customer billing and working with qualified partners for field services. b. Profitably growing return on assets by focusing on channels with below-average customer acquisition cost – The Company will seek to grow its subscriber revenues by focusing on the channels that have below-average customer acquisition costs and the ability to increase return on assets, including: acquiring existing systems from other companies or investment funds, selling additional services to existing subscribers, selling services to new customers online and partnering with selected independent installers to provide a subscription-based solution for their customers. c. Increasing shareholder value by delivering predictable revenues, profits and cash flow – By focusing on subscription-based solutions with long-term customer agreements, and the adjacent businesses of servicing and managing those systems, the Company will seek to generate consistent revenues, profits and cash flow. Customer Operations Spruce Power has over ten years of experience servicing rooftop solar systems including servicing both the over 72,000 systems (with the March 2023 SEMTH Acquisition) from its own portfolios and over 7,500 systems owned by third parties. The Company’s in-house capabilities include: customer billing and collections, cash administration, account management services, homeowner support, maintenance monitoring and dispatch, and portfolio accounting and financial reporting. The Company has made progress in elevating its customer service and continues to invest resources in its goal of becoming best-in-class. Spruce Power’s in-house customer operations is intended to position the Company to be able to leverage existing relationships to expand beyond solar to comprehensive home energy management. The Company believes that Spruce Power’s customer operations infrastructure has created a scalable opportunity where it is able to improve profitability through growth with lower incremental operational costs. Corporate Development Spruce Power’s growth strategy is different than other public third-party asset owner organizations. Spruce Power does not sell new solar systems directly to consumers and does not have its own sales force. Spruce Power has a dedicated corporate development team that has historically been successful in acquiring high quality portfolios of solar systems that are already in operations and have long-term contracts with the homeowners. Spruce Power’s in-house M&A team acquires operating residential solar energy systems “in-bulk” from other companies. This approach has positioned Spruce Power to achieve step change growth while minimizing its customer acquisition costs. 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. Since 2019, with the acquisition of SEMTH in March 2023, Spruce Power has acquired 11 rooftop solar portfolios' Customer Agreements with a combined capacity of approximately 285 MWdc over 54,000 systems. 3 Table of Contents Spruce Power’s corporate development team additionally brings significant experience in renewable energy credit markets, a critical area of expertise in residential solar power markets that allows additional value creation alongside Spruce Power’s acquisition strategy. Competition Distributed solar generation is a capital-intensive, evolving business with numerous industry participants. While Spruce Power’s solar generation portfolios are currently contracted, Spruce Power may compete in the future primarily on the basis of price of electricity, quality of service and low/no carbon energy. Spruce Power considers the long-term contracted profile of its solar generation assets, among other strengths discussed below, as competitive advantages. Distributed solar generation is a growing industry in the United States and diverse in terms of industry structure. As such, there is a wide variation in terms of the capabilities, resources, nature and identity in the companies Spruce Power competes with depending on the market. In residential distributed solar generation, customers' needs are met through long-term bilateral contracts which supply power and maintenance services. In addition, Spruce Power competes with other companies to acquire operating portfolios of residential solar energy systems with stable contracted cash flows. Spruce Power considers its primary competitors for opportunities in North America as other solar companies with vertically integrated business models, existing solar servicing companies, purely finance focused organizations, and regulated utility holding companies. Spruce Power believes that it is well-positioned to execute its strategy over the long term based on the following competitive strengths: Spruce Power management and operational expertise. Spruce Power believes it benefits from Management's seasoned experience in industry (renewables, utilities, and financial services), corporate development (M&A) and customer focused, cost-efficient operations. Contracted assets with stable cash flows. The contracted nature and diversification of off-takers in Spruce Power's portfolio of residential solar assets supports stable long-term cash flows. Residential solar assets in Spruce Power's portfolio are contracted under long-term contracts that generally provide for lease payments or production-based power purchase payments over the contract term. Spruce Power’s solar residential asset portfolios have a total weighted average remaining contract term of approximately 13 years as of December 31, 2022. Newer, well-maintained portfolio. Approximately 65% of Spruce Power's portfolio, based on expected contributions to cash generated, of residential solar energy systems have been operating on average for fewer than 8 years. Because its portfolio of projects are relatively new relative to their expected useful life and use industry-standard technology, Spruce Power believes that it will achieve the expected levels of performance. Geographic and resource diversification. With the March 2023 SEMTH Acquisition, Spruce Power’s portfolio of over 72,000 systems is geographically diverse across 18 states in the United States which reduces exposure to localized weather events, natural disasters, regional underperformance, and adverse regulatory actions providing a more stable stream of cash flows over the long term than a non-diversified portfolio. Flexible customer service platforms . Spruce Power utilizes scalable, cost-effective customer service platforms and systems in its operations which support efficient integration and service of acquired portfolios and third party owned portfolios. These platforms also provide customers with self-service options to make payments and select other services. Competitiveness of renewable energy. Renewable energy technology has improved in recent years. Solar energy generation is becoming one of the lowest cost energy generation technologies in many regions in the U.S. which is expected to lead to significant growth in the renewable energy industry. Solar technology is improving as solar cell efficiencies improve and installation costs are declining. Seasonality The Company’s revenue is impacted by seasonal weather patterns as the amount of electricity its solar energy systems produce is dependent in part on the amount of sunlight where the assets are located. Less daylight hours in winter months and adverse weather conditions will reduce the output of solar energy systems. Customers purchase electricity under PPAs and SLAs. As 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, the associated revenue is impacted by seasonality. For SLAs, 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 and accordingly is not impacted by seasonality. 4 Table of Contents Intellectual Property Generally, the Company’s residential solar business is not dependent on intellectual property. As needed, the Company relies on intellectual property laws, primarily a combination of copyright and trade secret laws in the U.S., as well as license agreements and other contractual provisions, to protect any proprietary technology. The Company also relies on registered trademarks to protect its brands. Human Capital Management The Company’s mission is to power our customers’ clean and efficient energy use, for a stable future. The Company believes that starts with its employees. The Company’s culture is built upon its values of coordination, being purpose-driven where work is results oriented. The Company has invested in talent management and employee engagement initiatives consistently, fostering a culture of belonging and execution. The Company has implemented several training programs, including an internally designed Spruce University training program to foster an environment of learning, employee development and longer-term internal career paths. Continued Learning: To create a culture of learning, purpose, diversity, and opportunity, the Company's leaders must never stop looking to improve. That is why the Company has committed to training its Senior Leadership twice a year with programs to promote teamwork, accountability, and development of young leaders. In addition, the Company grants access to staff training programs within our internal Spruce University program to cover the foundations of solar energy, management skills, professional communication, and our own business and company history. Investing in our employees is investing in the Company’s future. A Place of Belonging: The Company believes for any workforce to be satisfied with a purpose and direction on the job, they must feel they belong here. The Company works towards creating an environment that is inclusive, creative, and humble. To keep employees engaged and working towards the Company’s objectives, the Company works to meet their basic needs and provide opportunities for them to be represented. Since the Company’s beginnings, a team was formed with purpose to represent each area of the Company so that programs and initiatives that are pursued provide equal amounts of benefits to staff. Annually, the Company conducts a climate survey to measure its results, in addition to holding quarterly Town Halls where Management shares its strategies, goals, and achievements. Human Capital: As of December 31, 2022, the Company had 318 full time employees, including 169 employees from Spruce Power, 107 employees from Drivetrain operations and 42 employees at World Energy. Spruce Power's employees are primarily located in Denver, Colorado and Houston, Texas. In addition, the Company works with independent contractors and consultants. No employees are covered by collective bargaining agreements and the Company has not experienced any work stoppages. Supporting Employee Welfare: In addition to providing employees competitive wages to support everyday living, the Company also offers employees access to comprehensive benefits for medical, dental and vision. Employees also have access to retirement savings through the Company’s 401k plan with a guaranteed match from the Company to those participating. Government Regulations Although the Company is not regulated as a public utility in the United States under applicable national, state or other local regulatory regimes where it conducts business, the Company competes primarily with regulated utilities. As a result, the Company maintains a team that focuses on the key regulatory and legislative issues impacting the entire industry. The Company obtains interconnection permission from the applicable local primary electric utility. Depending on the size of the solar energy system and local law requirements, interconnection permission is provided by the local utility directly to the Company and/or its customers. In almost all cases, interconnection permissions are issued on the basis of a standard process that has been pre-approved by the local public utility commission or other regulatory body with jurisdiction over net metering policies. As such, no additional regulatory approvals are required once interconnection permission is given. 5 Table of Contents The Company's collection activities are regulated in various states in which it operates. As such, the Company obtains and maintains collection agency licenses in the states in which it operates as required by law and is subject to regulatory examination of such collection activities on a regular basis. Corporate Information The Company's principal executive offices are located at 1875 Lawrence Street, Denver, Colorado 80202, and its telephone number is (888) 390-1131. The Company's website address is www.sprucepower.com and the information contained in, or that can be accessed through, the Company's website is not part of this Annual Report on Form 10-K and should not be considered part of this Annual Report on Form 10-K. Information Available on the Internet The Company's internet address is www.sprucepower.com, to which the Company regularly post copies of its press releases as well as additional information about us. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available to you free of charge through the Investor Relations section of the Company's website as soon as reasonably practicable after such materials have been electronically filed with, or furnished to, the SEC. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company includes its web site address in this Annual Report on Form 10-K only as an inactive textual reference. Information contained in the Company's website does not constitute a part of this report or its other filings with the SEC.