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Item 7. Management’s Discussion and Analysis

2024-04-09 compared with 2023-03-30 · 204 added, 272 removed, 95 unchanged (83% of the section changed)

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

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

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

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

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

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

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

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

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

2 unchanged sentences

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

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

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

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

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

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

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

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

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

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

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

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

Acquisition of Legacy Spruce Power and Discontinued Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Company Overview

We are a leading owner and operator of distributed solar energy assets across the U.S., offering subscription-based services to approximately 75,000 home solar assets and customer contracts, making renewable energy more accessible to everyone.

We offer asset management services and operating and maintenance services for home solar energy systems in our portfolio and approximately 5,000 systems owned by other companies.

Refer to Item 1, “Business” within this Annual Report for additional information on our corporate history and background.

Restructuring Actions

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

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

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

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

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

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

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

Subsequent to the acquisition of Legacy Spruce Power, we commenced the evaluation of personnel and processes of various corporate functions between Spruce Power and legacy XL Fleet to optimize our future corporate structure and implemented certain restructuring actions.

As a result of exiting the Drivetrain business and the restructuring actions, we recognized, in the aggregate, restructuring and related charges of approximately $21.6 million during the year ended December 31, 2022, which included (i) $4.4 million of severance charges paid in 2022, (ii) $5.0 million impact of accelerated vesting of certain equity awards and (iii) $12.3 million of charges related to inventory obsolescence.

During the year ended December 31, 2023, we recognized incremental severance charges of approximately $0.7 million, all of which were paid in 2023.

Inventory obsolescence charges are included in net loss from discontinued operations within our consolidated statements of operations for the year ended December 31, 2022.

Severance charges and accelerated vesting of equity awards are included in selling, general and administrative expenses within our consolidated statements of operations for the years ended December 31, 2023 and 2022.

Recent Developments

Capital Investments, Acquisitions and Divestitures

In January 2023, we completed the sale of our legacy operations, including the Drivetrain and XL Grid businesses, each for an immaterial amount.

Both businesses are presented as discontinued operations within our consolidated financial statements.

In March 2023, we completed the acquisition of all the issued and outstanding interests of SEMTH to acquire the rights of the SEMTH Master Lease.

Total consideration for the SEMTH Acquisition included approximately $23.0 million of cash, net of cash received, and the assumption of $125.0 million of outstanding senior indebtedness held by SEMTH at the close of the acquisition.

In August 2023, we completed the Tredegar Acquisition acquiring 2,400 home solar assets and contracts for approximately $20.9 million.

The Tredegar Acquisition was concurrently funded by term loan proceeds from the SP2 Facility Amendment (defined below).

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SP2 Facility Amendment

In August 2023, we entered into a second amendment to our existing credit agreement with Silicon Valley Bank, a division of First-Citizens Bank & Trust Company (the “SP2 Facility Amendment”), resulting in incremental term loans of approximately $21.4 million, of which proceeds were primarily used to fund the Tredegar Acquisition.

In addition, we entered into an interest rate swap agreement to hedge the floating rate of the incremental SP2 Facility term loans, which included a notional amount of $19.0 million, a fixed rate of 4.24% and a maturity date of January 31, 2032.

Common Share Repurchase Program

In May 2023, our Board of Directors approved the Repurchase Program for the repurchase of up to $50.0 million of our outstanding common stock through May 15, 2025.

During the year ended December 31, 2023, we repurchased 0.8 million shares of common stock under the Repurchase Program, for a total purchase price of $5.4 million, inclusive of transaction costs.

Reverse Stock Split

On October 6, 2023, we effected the Reverse Stock Split with respect to our issued and outstanding shares of common stock.

Excluding the par value and the number of authorized shares of our common stock, all share, per share amounts, and the values of our common stock outstanding and related effect on additional paid in capital included in this Form 10-K have been retrospectively presented as if the Reverse Stock Split had been effective from the beginning of the earliest period presented.

No fractional shares of our Common Stock were issued in connection with the Reverse Stock Split.

In late October 2023, certain stockholders entitled to fractional shares of our Common Stock, upon the Reverse Stock Split, received aggregate cash payments of approximately $0.01 million in lieu of receiving fractional shares.

Reportable Segments

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

The Company’s CODM is its Chief Executive Officer.

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

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

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

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

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

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

Our CODM is our Chief Executive Officer.

Our CODM does not evaluate operating segments using asset or liability information.

In December 2022, we determined both our Drivetrain and XL Grid operations were discontinued operations, which have been presented as such within our consolidated financial statements.

As of December 31, 2023, we have one reportable segment, which constitutes selling electricity through approximately 75,000 home solar systems or through residual ownership in master lease agreements in 18 states.

In addition to providing management services to our own portfolio, we also provide management services to approximately 5,000 systems owned by other companies.

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

Key Factors Affecting Operating Results

We are a leading owner and operator of distributed solar energy assets across the U.S., offering subscription-based solutions to homeowners for rooftop solar energy storage, EV chargers and other energy-related products.

Additionally, we provide servicing functions for our assets and customers, as well as for other institutional owners of home solar energy systems.

Our operating results and ability to grow our business over time could be impacted by certain factors and trends that affect our industry, as well as elements of our strategy, including the following factors, as well as the risk factors and other factors set forth under “Risk Factors” or elsewhere in this Annual Report on Form 10-K:

Development of Distributed Energy Assets

Our future growth depends significantly on our ability to acquire operating home solar energy systems “in-bulk” from other companies.

Industry data suggests there is a substantial existing base of operating home solar energy systems, providing us the opportunity to pursue acquisitions.

Over the long-term, our continued ability to pursue acquisitions will be dependent on development of distributed energy assets, namely home solar energy systems, by third parties.

This development may be impacted by numerous factors that influence homeowner demand for home solar energy systems including but not limited to macroeconomic dynamics, utility rates, climate change impacts and government policy and incentives.

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Availability of Financing

Our ability to raise capital from third parties at reasonable terms is a critical element in supporting ownership of our existing home solar energy assets as well as enabling our future growth.

We have historically utilized non-recourse, project-level debt as a primary source of capital for acquisitions.

Our ability to raise debt either as means to refinance existing indebtedness or for future acquisitions may be impacted by general macroeconomic conditions, the health of debt capital markets, the interest rate environment and general concerns over its industry or specific concerns over our business.

Results of Operations

Comparison of Years Ended December 31, 2022 and 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 in the Company’s Consolidated Statements of Operations.

As a result, the continuing operational results reflect the operations

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

Comparison of the Years Ended December 31, 2023 and 2022

The results of operations related to our Drivetrain and XL Grid businesses, which were determined to be discontinued operations in the fourth quarter of 2022, are presented as net loss from discontinued operations in our consolidated statements of operations.

As a result, the continuing operational results reflect the operations related to our corporate functions and the results of operations for Legacy Spruce Power since its acquisition on September 9, 2022.

Information with respect to the consolidated statements of operations for the years ended December 31, 2023 and 2022 are presented below:

Years Ended December 31,

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

Revenues $ 23,194 $ — $ 23,194 N.M.

(in thousands, except per share amounts)

Revenues $ 79,859 $ 23,194 $ 56,665 244 %

Operating expenses:

Cost of revenues 9,949 — 9,949 N.M.

Cost of revenues 37,813 9,949 27,864 280 %

Selling, general and administrative expenses 56,122 73,118 (16,996) (23) %

Litigation settlements, net 27,465 — 27,465 100%

Gain on asset disposal (4,724) (580) (4,144) 714 %

Total operating expenses 116,676 82,487 34,189 41 %

Loss from operations (36,817) (59,293) 22,476 (38) %

Other (income) expense:

Interest income (19,534) (1,339) (18,195) 1359 %

Interest expense, net 41,936 11,401 30,535 268 %

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

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

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

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

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

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

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

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

Other (income) expense, net 3,268 (16,676) 19,944 (120) %

Net loss from continuing operations (62,487) (52,679) (9,808) 19 %

Net loss from discontinued operations (4,123) (40,112) 35,989 (90) %

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

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

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

Revenues and Cost of Revenues

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

Net loss (66,610) (92,791) 26,181 (28) %

Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests (779) 1,140 (1,919) (168) %

Net loss attributable to stockholders $ (65,831) $ (93,931) $ 28,100 (30) %

Revenues increased by $56.7 million, or 244.3%, to $79.9 million in 2023 as compared to 2022.

The increase was due to a full year of PPA and SLA revenues from Legacy Spruce Power assets in 2023 compared to the prior year which included revenues for approximately four months subsequent to the acquisition of those assets effective September 9, 2022.

The increase in revenue was also driven by incremental revenues related to the Tredegar Acquisition effective in August 2023, intangibles amortization related to unfavorable solar renewable energy agreements, and increased sales of SRECs in 2023.

Revenues related to our Drivetrain and XL Grid operations are included in net loss from discontinued operations.

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Cost of Revenues

Cost of revenues increased by $27.9 million, or 280.1%, to $37.8 million in 2023 as compared to 2022.

The increase in cost of revenue correlates with the increase in revenues discussed above, in addition to increase in depreciation expense and certain operation and maintenance costs, including meter upgrade spend.

Cost of revenues related to our Drivetrain and XL Grid operations are included in net loss from discontinued operations.

Selling, General and Administrative

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

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

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

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

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

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

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

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

Selling, general and administrative expenses decreased by $17.0 million, or 23.2%, to $56.1 million in 2023.

The decrease was primarily due to the reduction of bonus expense, severance charges and other restructuring expenses in 2023 as compared to 2022.

Selling, general and administrative expenses related to our Drivetrain and XL Grid businesses are included in net loss from discontinued operations.

Litigation Settlements, Net

Litigation settlements, net of $27.5 million incurred in 2023 relates to costs incurred for settlements on the SEC inquiry, shareholder lawsuits, and a breach of contract lawsuit, net of related insurance recoveries from third parties, for which we are currently pursuing settlements.

Commitments and Contingencies in Part II, Item 8.

Financial Statements and Supplementary Data for a description of our material pending legal proceedings.

Interest Income

Interest income of $19.5 million for 2023 relates to $11.5 million of interest income from the SEMTH Master Lease executed in March 2023 and $8.0 million of interest earned on U.S.

Treasury securities.

In comparison, interest income of $1.3 million for 2022 primarily related to interest earned on U.S.

Treasury securities.

Interest Expense, Net

Interest expense, net of $41.9 million for 2023 primarily relates to (i) $49.6 million of interest expense related to the principal amounts of our debt instruments and (ii) $5.9 million related to the amortization of debt discount and deferred financing costs, both partially offset by $13.7 million of net realized gains from the change in fair value of interest rate swaps.

In comparison, interest expense, net of $11.4 million for 2022 consisted of $13.5 million of interest expense related to the principal amounts of our debt instruments, partially offset by $2.1 million of net realized gains from the change in fair value of interest rate swaps.

Interest expense related to the principal amounts of our outstanding debt increased in 2023 as compared to 2022 due to new debt assumed concurrently with the SEMTH Acquisition in March 2023 and incremental term loans from the SP2 Facility Amendment in August 2023.

Non-Recourse Debt in Part II, Item 8.

Financial Statements and Supplementary Data for further information on our debt.

Other (Income) Expense, Net

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

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

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

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

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

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

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

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

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

Net Loss from Discontinued Operations

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

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

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

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

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

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

Supplemental disclosure of pro forma information:

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

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

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

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

Years Ended December 31,

(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

Other expense, net of $3.3 million for 2023 consists of $4.8 million of unrealized losses from the change in fair value of interest rate swaps, partially offset by $1.3 million of other income, net and $0.2 million of change in fair value of warrant liabilities, while other income, net of $16.7 million for 2022 primarily consisted of $5.6 million of unrealized gains from the change in fair value of interest rate swaps, $5.1 million of change in fair value of warrant liabilities and $4.5 million gain on the extinguishment of debt related to the wind-down of the New Market Tax Credit obligation.

Net Loss from Discontinued Operations

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

Per share amounts:

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

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

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

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

Net loss from discontinued operations of $4.1 million in 2023 and $40.1 million in 2022 includes the discontinued operations of our Drivetrain and XL Grid businesses.

The net loss from discontinued operations in 2023 consists of a net loss from the Drivetrain business of $4.1 million.

The net loss from discontinued operations in 2022 consists of a net loss from the Drivetrain business of $30.4 million, a net loss from the XL Grid business of $1.1 million and an impairment of goodwill of $8.6 million.

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Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

Debt included in the accompanying audited Consolidated Financial Statements.

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

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

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

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

We remain focused on carefully managing costs, including capital expenditures, maintaining a strong balance sheet and ensuring adequate liquidity.

Our primary cash needs are debt service, acquisition of solar energy portfolios, operating expenses, working capital and capital expenditures to support the growth in our business.

Working capital is impacted by the timing and extent of our business needs.

As of December 31, 2023, we had working capital of $131.6 million, including cash and cash equivalents and restricted cash of $172.9 million.

We had net losses attributable to stockholders of $65.8 million and $93.9 million for the years ended December 31, 2023 and 2022, respectively.

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

As of December 31, 2023, our debt balance was $618.8 million, net of $27.6 million of unamortized fair value adjustment and $0.3 million of unamortized deferred financing costs.

Our debt consists of four senior debt facilities and a subordinate facility, of which the loan agreements require quarterly principal payments and the earliest maturity date is April 2026.

For additional information on our debt, refer to Note 8.

Non-Recourse Debt included within the accompanying audited consolidated financial statements.

Based on our current liquidity, we believe no additional capital will be needed to execute our current business plan over the next 12 months.

We continually evaluate our cash needs to raise additional funds or seek alternative sources to invest in growth opportunities and other purposes.

Cash Flows Summary

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

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

Years Ended December 31,

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Cash Flows Used in Operating Activities

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

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

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

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

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

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

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

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

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

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

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

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

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

Historically and prior to the acquisition of Legacy Spruce Power, our cash flows from operating activities were significantly affected by our cash investments to support the growth of the business in areas such as research and development, selling, general and administrative expense and working capital.

Prior to the acquisition of Legacy Spruce Power, operating cash inflows included cash from fleet electrification and related servicing, customer deposits and delivery of turnkey energy efficiency and electric vehicle charging stations.

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

These operating cash inflows were primarily offset by payments to suppliers for production materials and parts used in the manufacturing process, operating expenses, operating lease payments and interest payments on our outstanding debt.

In the fourth quarter of 2022, we discontinued our Drivetrain and XL Grid businesses, of which the related cash flows are reflected as discontinued activities for the years presented.

The net cash used in continuing operating activities in 2023 was $31.7 million.

Cash used in continuing operations decreased in 2023 compared to 2022 by $16.0 million primarily due to decreased stock-based compensation expenses, change in fair value of derivative instruments, offset primarily by increases in depreciation expense, accrued expenses and other current liabilities and interest income related to the SEMTH Master Lease.

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The net cash used in continuing operating activities in 2022 was $47.7 million, which primarily consisted of high operating expenditures primarily due to legal fees, restructuring expenses and transaction expenses related to the acquisition of Legacy Spruce Power and the divestiture of the Drivetrain business.

In addition, there were lower collections of accounts receivables due to reduced revenues in 2022, which were partially offset by lower purchases of inventory.

Cash Flows Used in Investing Activities

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

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

Cash Flows Provided by (Used in) Financing Activities

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

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

The net cash used in continuing investing activities in 2023 was $17.1 million, which primarily relates to (i) $43.1 million of aggregate net cash paid for acquisitions during 2023, consisting of $23.0 million for the SEMTH Acquisition and $20.1 million, net for the Tredegar Acquisition, partially offset by (ii) $20.2 million of proceeds from our investments under the SEMTH Master Lease and (iii) $6.3 million of proceeds from the sale of solar energy systems.

The net cash used in continuing investing activities in 2022 was $30.3 million, which consisted of cash paid for Legacy Spruce Power, net of cash acquired, of $32.6 million, partially offset by $2.3 million of proceeds from the sale of solar energy systems.

Cash Flows Used in Financing Activities

The net cash used in continuing financing activities in 2023 was $16.8 million, which primarily relates to (i) $32.8 million for the repayment of long-term debt and (ii) $5.4 million of shares repurchased under our Repurchase Program, both offset by (iii) $21.4 million of proceeds from the issuance of long-term debt under the SP2 Facility Amendment to fund the Tredegar Acquisition.

The net cash used in continuing financing activities in 2022 was $19.1 million, which primarily consisted of $9.3 million of long-term debt principal repayments, $8.3 million related to the buyout of redeemable non-controlling interest and $1.9 million of capital distributions to non-controlling interests, partially offset by $0.6 million of proceeds from the exercise of stock options in 2022.

Related Parties

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

The lease expired in the third quarter of 2022.

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

Off-Balance Sheet Arrangements

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

We were party to a noncancelable lease agreement for office, research and development, and vehicle development and installation facilities with a holder of more than 5% of our Common Stock.

The lease expired in the third quarter of 2022 and the related rent expense under the operating lease for the year ended December 31, 2022 was $0.1 million.

Critical Accounting Policies and Estimates

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

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

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

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

Our consolidated financial statements are prepared in accordance with U.S.

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

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

We have identified the following as its most critical accounting policies and judgments.

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

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

Our significant accounting policies are discussed in Note 2.

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

Acquisitions:

All acquisitions, regardless of whether a business combination or asset acquisition, are evaluated to determine whether or not the acquired entity is a variable interest entity (“VIE”), including an evaluation of whether there is sufficient equity at risk.

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

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

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

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

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

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

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

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

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

Goodwill is not recognized in an asset acquisition.

The Company concluded that SEMTH does not meet the definition of a business or variable interest entity.

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

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Revenue Recognition

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.

The Company’s revenue is derived from our home solar energy portfolio, which primarily generates revenue through the sale to homeowners of power generated by our home solar energy systems pursuant to long-term agreements, the rental of solar equipment by homeowners pursuant to long-term agreements, and the sale of solar renewable energy credits to third parties.

Previously, we also derived revenue from the Drivetrain operations which generated revenue from the sales of hybrid electric powertrain systems, and the XL Grid operations which generated revenues through turnkey energy efficiency, renewable technology and other energy solutions.

As of and for the years ended December 31, 2023 and 2022, the Drivetrain business and XL Grid business are reported as discontinued operations.

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.

• SLAs - We have SLAs, which do not meet the definition of a lease under ASC 842, Leases , 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.

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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.

Solar renewable energy credit revenues

We enter into contracts with third parties to sell SRECs generated by the solar energy systems for fixed prices.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Drivetrain and XL Grid Revenues

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The incentives are fixed amounts that are readily determinable.

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

Warrant liabilities:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Warranty expense is recorded as a component of discontinued operations.

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

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

Certain SREC contracts meet these requirements and are designated as NPNS contracts.

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

We recognize revenue for SRECs based on pricing predetermined within the respective contracts at a point in time when the SRECs are transferred.

As SRECs can be sold separate from the actual electricity generated by the renewable-based generation source, we account for the SRECs it generates from its solar energy systems as governmental incentives with no costs incurred to obtain them and do not consider those SRECs output of the underlying solar energy systems.

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Investment related to SEMTH master lease agreement and interest income

We account for our investment related to the SEMTH master lease agreement in accordance with Accounting Standards Codification (“ASC”) 325-40, Investments—Other—Beneficial Interests in Securitized Financial Assets .

We recognize accretable yield as interest income over the life of the related beneficial interest using the effective yield method, which is reflected within interest income in our consolidated statements of operations.

On a recurring basis, we evaluate changes in the cash flows expected to be collected from the cash flows previously projected, and when favorable or adverse changes are deemed other than temporary, we prospectively update our expected cash flows accordingly.

Impairment of long-lived assets

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

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

We review 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.

We 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.

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

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

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

Comparing the carrying value of the asset to the fair value, we determined the entire asset was impaired and recognized an impairment charge of $0.9 million, which is included in our discontinued operations results for the year ended December 31, 2022.

There was no long-lived asset impairment charge during the year ended December 31, 2023.

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

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

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

An assessment can be performed by first

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

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

We perform our 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 our single reporting unit.

We 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.

If we believe that, as a result of our 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.

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

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

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

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

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

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

We evaluate the fair value of our reporting unit using the market and income approach.

Under the market approach, we use multiples of EBITDA or revenues of the comparable guideline public companies by selecting a population of public companies with similar operations and attributes.

Using this guideline public company data, a range of multiples of enterprise value to EBITDA or revenue is calculated.

The income approach of computing fair value is based on the present value of the expected future economic benefits generated by the asset or business, such as cash flows or profits which will then be compared to its book value.

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

As a result, we performed an assessment of our goodwill for impairment.

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

We compared the book value of our single reporting unit to the fair value of its public float.

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

As a result, we recorded a charge of $8.6 million to fully impair goodwill related to XL Fleet, which is included in our discontinued operations results for the year ended December 31, 2022.

There was no goodwill impairment charge during the year ended December 31, 2023.

It is likely we may recognize further goodwill impairment losses in the future if, among other factors there is a decline in our overall financial performance such as declining cash flows or revenues, or there is a decline in our market capitalization or stock price.

Valuation of deferred tax assets

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.

We account 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.

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

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

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

We have provided valuation allowances as of December 31, 2023 and 2022 aggregating $74.9 million and $69.4 million, respectively, against such assets based on our assessment of past operating results, estimates of future taxable income and the feasibility of tax planning strategies.

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

Redeemable noncontrolling interests and noncontrolling interests

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

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

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

We consolidate any VIE of which we are the primary beneficiary.

We 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;

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

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

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

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

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

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

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

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

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

We do not consolidate a VIE in which we have a majority ownership interest when we are not considered the primary beneficiary.

We evaluate our relationships with the VIEs on an ongoing basis to determine if we are the primary beneficiary.

Our investments in Volta Solar Owner II, LLC and ORE F4 HoldCo, LLC as of December 31, 2023 (collectively, the “Funds”) were determined to be VIEs upon investment.

As of December 31, 2022, we had investments in the Funds and Level Solar Fund IV LLC (collectively, the “Prior Funds”), which were individually determined to be VIEs upon investment.

We subsequently purchased 100% of the membership interests in Level Solar Fund IV LLC during 2023 and it ceased being a VIE upon purchase.

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We considered the provisions within the contractual arrangements that grant us 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.

We consider the rights granted to the other investors under the contractual arrangements to be more protective in nature rather than substantive participating rights.

As such, we were determined to be the primary beneficiary, and the assets, liabilities and activities of the Funds and Prior Funds (before any ceased being a VIE) were consolidated by us.

The distribution rights and priorities for the Funds and Prior Funds (before any ceased being a VIE) as set forth in their respective operating agreements differ from the underlying percentage ownership interests of the members.

As a result, we allocate income or loss to the noncontrolling interest holders of the Funds and Prior Funds (before any ceased being a VIE) 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.

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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.

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

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

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

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

We classify certain noncontrolling interests with redemption features that are not solely within our 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.

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Interest Rate Swaps

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

We utilize interest rate swaps to manage interest rate risk on existing and planned future debt issuance s.

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

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

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

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

The fair value of interest rate swaps are recorded on the consolidated balance sheets.

Realized gains and losses on interest rate swaps are recognized in interest expense, net on the consolidated statements of operations.

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

Unrealized gains and losses on interest rate swaps are reflected in the consolidated statements of operations and as a non-cash reconciling item in operating activities on the consolidated statements of cash flows.

New and Recently Adopted Accounting Pronouncements

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

Refer to Note 2.

Summary of Significant Accounting Policies to the consolidated financial statements, included below in Item 8.

Financial Statements and Supplementary Data.

Quantitative and Qualitative Disclosures About Market Risk

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis