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Item 7. Management’s Discussion and Analysis

2023-04-14 compared with 2022-03-14 · 99 added, 101 removed, 24 unchanged (89% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Communications Systems, Inc.

classifies its business operations into one segment the Services & Support (“S&S”) segment.

This segment is comprised of CSI’s JDL Technologies and Ecessa Corporation businesses.

With over 30 years of growth and expertise in managed services and SD-WAN solutions in this segment, the Company offers customers:

 Technology services and infrastructure in the commercial, healthcare, financial, and education market segments.

The Company’s portfolio of technology solutions includes IT managed services supporting client infrastructures from the data center to the desktop, security products and services, cloud migrations, network virtualization and resiliency, wired and wireless network design and implementation, and converged infrastructure configuration and deployment.

We also provide these services to a number of commercial, healthcare and education clients.

 SD-WAN Never Down ® networks, sold as a product or as a recurring service, enable organizations of all sizes to reliably run Internet and cloud-based applications, connect offices worldwide and distribute traffic among a fabric of multiple, diverse ISP links, ensuring business continuity by removing bottlenecks and eliminating network downtime.

These capabilities optimize Never Down performance of business-critical applications, aid in lowering IT costs, and make it easier to provision, maintain and support business networks and the applications that run over them.

Key 2021 Developments

 The Company’s 2021 sales were $7.0 million, a 13% decrease from 2020 sales of $8.1 million, excluding S&S services provided by S&S to CSI.

 The Company’s 2021 net loss from continuing operations was $8.2 million, or ($0.85) per diluted share, compared to net loss from continuing operations of $4.7 million or ($0.51) per diluted share in fiscal 2020.

 At December 31, 2021, the Company had cash, cash equivalents and liquid investments of $6.4 million and working capital of $3.9 million compared to cash, cash equivalents and liquid investments of $21.5 million and working capital of $28.3 million at December 31, 2020.

Impact of COVID-19 Pandemic

We are subject to risks and uncertainties as a result of the COVID-19 pandemic.

In response to the pandemic, we instituted temporary office closures, implemented shelter-in-place orders and restrictions, instituted a mandatory work from home policy for substantially all office employees, and instituted social distancing work rules for operations personnel that continued to work in our facilities to satisfy customer orders.

W e experienced supply chain and demand disruptions during 2020 and 2021 and expect the disruption to our supply to continue into 2022, as well as higher logistics and operational costs due to the COVID-19 pandemic.

As noted below, we also saw delays in orders as some projects are pushed out due to the inability to access locations due to the shutdowns.

We may also see a slowdown in our business if one or more of our major customer or suppliers delays its purchase or supplies due to uncertainty in its business operations, encounters difficulties in its production due to employee safety or workforce concerns, is unable to obtain materials or labor from third parties that it needs to complete its projects, and may see a slowdown in our collection of receivables if our customers encounter cash flow difficulties or delay payments to preserve their cash resources.

We are continuing to actively monitor the effects and potential impacts of the COVID-19 pandemic on all aspects of our business, liquidity and capital resources.

The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain at this time.

The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and the related notes that appear elsewhere in this report.

Pineapple Energy Inc.

(formerly Communications Systems, Inc.

(“CSI”) and Pineapple Holdings, Inc.) (herein collectively referred to as “Pineapple,” “PEGY,” “our,” “we” or the “Company”) was originally organized as a Minnesota corporation in 1969.

On March 28, 2022, the Company completed its previously announced merger transaction with Pineapple Energy LLC (“Pineapple Energy”) in accordance with the terms of a merger agreement, pursuant to which a subsidiary of the Company merged with and into Pineapple Energy, with Pineapple Energy surviving the merger as a wholly owned subsidiary of the Company (the “merger”).

Following the closing of the merger (the “Closing”) the Company changed its name from Communications Systems, Inc.

to Pineapple Holdings, Inc.

and subsequently, on April 13, 2022, changed its name to Pineapple Energy Inc.

In addition, on March 28, 2022 and immediately prior to the Closing, the Company completed its acquisition (“HEC Asset Acquisition”) of substantially all of the assets of two Hawaii-based solar energy companies, Hawaii Energy Connection, LLC (“HEC”) and E-Gear, LLC (“E-Gear”).

On November 9, 2022, the Company purchased the equity of New York-based SUNation Solar Systems, Inc.

and five of its affiliated entities (collectively “SUNation”).

Pineapple’s vision is to power the energy transition through grass-roots growth of solar electricity paired with battery storage.

The Company is a growing domestic operator and consolidator of residential and commercial solar, battery storage, and grid services solutions.

Our strategy is focused on acquiring, integrating, and growing leading local and regional solar, storage, and energy services companies nationwide.

Pineapple today is primarily engaged in the sale, design, and installation of photovoltaic solar energy systems and battery storage systems through its Hawaii-based HEC and New York-based SUNation entities.

We install systems that provide clean, reliable solar energy typically at savings relative to traditional utility offerings.

Our primary customers are residential homeowners.

We also provide solar energy systems to commercial owners and other municipal customers.

Through its E-Gear business, Pineapple also develops, manufactures, and sells patented edge-of-grid energy management software and hardware technology, such as energy management control devices.

These products allow homeowners to get the most out of their installed photovoltaic solar energy systems and utility grid support benefits.

Our primary customers for this technology are energy services companies and other utilities.

While CSI was the legal acquirer in the merger, because Pineapple Energy was determined to be the accounting acquirer, the historical financial statements of Pineapple Energy became the historical financial statements of the combined company upon the consummation of the merger.

As a result, the financial statements included in the accompanying consolidated financial statements, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, reflect the historical operating results of Pineapple Energy prior to the merger, the consolidated results of CSI, Pineapple Energy, HEC, and E-Gear following the Closing, including the results of SUNation following that acquisition, and the Company’s equity structure for all periods presented.

Accordingly, references to “the Company” herein are to the applicable entity at the date or during the time period in the applicable discussion.

Forward Looking Statements

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For a detailed discussion of a number of these risk factors, please see Item 1A above.

Critical Accounting Policies

Inventory Valuation:

We value inventories at the lower of cost or net realizable value.

Reserves for excess and obsolescence are estimated and recorded to reduce the carrying value to estimated net realizable value.

The amount of the reserve is determined based on historical usage, projected sales information, plans for discontinued products, and other factors.

Though management considers these reserves adequate and proper, changes in sales volumes due to unexpected economic or competitive conditions are among the factors that could materially affect the adequacy of this reserve.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.

Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances.

Actual results may differ from these estimates and such differences could be material to our financial position and results of operations.

Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.

While our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting estimates, which involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results.

Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results.

Income Taxes:

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We determine the valuation allowance for deferred income tax benefits based upon the expectation of whether the benefits are more likely than not to be realized.

The Company records interest and penalties related to income taxes as income tax expense in the consolidated statements of income (loss) and comprehensive income (loss).

Goodwill Impairment :

We are required to evaluate goodwill for impairment on an annual basis and between annual tests upon the occurrence of certain events or circumstances.

Goodwill is tested for impairment at the reporting unit level.

A qualitative assessment can be performed to determine whether it is more likely than not the fair value of the reporting unit is less than its carrying value.

If the reporting unit does not pass the qualitative assessment, we compare the fair value of each reporting unit to its carrying value using a quantitative assessment.

If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired.

If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss.

For the quantitative assessment, the Company estimates the fair value of each reporting unit based on a discounted cash flow analysis and a market-based valuation approach based on comparable public company trading values.

The Company believes that accounting estimates related to goodwill impairment are critical because the underlying assumptions used for the discounted cash flow can change from period to period and could potentially cause a material impact to the income statement.

Management’s assumptions about inflation rates and other internal and external economic conditions, such as earnings growth rate, require significant judgment based on fluctuating rates and expected revenues.

Revenue Recognition :

The Company recognizes revenue when a customer obtains control of promised goods or services.

The amount of revenue recognized reflects the consideration that the Company expects to receive in exchange for these goods or services.

The Company has determined that the following performance obligations identified in its Services & Support segment are transferred over time:

managed services and professional services (time and materials (“T&M”) and fixed price).

This segment’s managed services performance obligation is a bundled solution, a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are recognized evenly over the term of the contract.

T&M professional services arrangements are measured over time with an input method based on hours expended towards satisfying this performance obligation.

Fixed price professional service arrangements under a relatively longer-term service will also be measured over time with an input method based on hours expended.

The Company has also identified the following performance obligations within its Services & Support segment that are recognized at a point in time which include resale of third-party hardware and software, installation, arranging for another party to transfer services to the customer, and certain professional services.

The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the shipping terms.

Installation services are recognized at a point in time when the services are completed.

The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time as the Company has transferred control upon the service first being made available to the customer by the third-party vendor, which are required to be presented on a net basis.

Depending on the nature of the service, certain professional services transfer control at a point in time.

The Company evaluates these circumstances on a case-by-case basis to determine if revenue should be recognized over time or at a point in time.

The Company records interest and penalties related to income taxes as income tax expense in the consolidated statements loss and comprehensive loss.

Accounting for Business Combinations :

We record all acquired assets and liabilities, including goodwill, other identifiable intangible assets, contingent value rights and contingent consideration at fair value.

The initial recording of goodwill, other identifiable intangible assets, contingent value rights and contingent consideration, requires certain estimates and assumptions concerning the determination of the fair values and useful lives.

The judgments made in the context of the purchase price allocation can materially affect our future results of operations.

The valuations calculated from estimates are based on information available at the acquisition date.

Goodwill is not amortized, but is subject to annual tests for impairment or more frequent tests if events or circumstances indicate it may be impaired.

Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.

The contingent consideration and contingent value rights liability are adjusted to fair value each reporting period with any adjustments recorded within the statement of operations.

For additional details, see Note 3, Business Combinations and Note 10, Goodwill and Intangible Assets.

Convertible Preferred Stock and Warrants:

In March 2022, the Company issued shares of Series A convertible preferred stock (the “Convertible Preferred Stock”) and warrants (the “PIPE Warrants”) to investors as part of a $32.0 million private investment in public equity (“PIPE”) transaction.

The proceeds from the issuance of the Convertible Preferred Stock were allocated between the Convertible Preferred Stock and PIPE Warrants using a relative fair value method.

The Company accounts for the Convertible Preferred Stock and PIPE Warrants based on an assessment of the specific terms and applicable authoritative guidance in Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity”, and ASC 815, “Derivatives and Hedging”.

The Convertible Preferred Stock is reported as part of permanent equity and the PIPE Warrants were determined to be equity-classified.

Results of Operations

2022 Compared to 2021

Consolidated sales from continuing operations were $7,010,000 in 2021, a 13% decrease from sales of $8,080,000 in 2020.

Net loss from continuing operations in 2021 was $8,178,000, or ($0.85) per share compared to net loss from continuing operations of $4,707,000 or ($0.51) per share in 2020.

Services & Support Results

Services & Support sales decreased 15% to $7,483,000 in 2021 compared to $8,777,000 in 2020.

Sales from the S&S segment to CSI were eliminated in consolidation and these intercompany sales are the difference between consolidated sales & S&S sales.

Revenues by customer group were as follows:

Services & Support Revenue by Customer Group

Other commercial clients

CSI IT operations

Revenues by revenue type were as follows:

Services & Support Revenue by Type

Project & product revenue

Services & support revenue

Revenues from the education sector decreased $4,210,000 or 94% in 2021 due to the substantial completion of projects from the Company’s Florida school district customer in the prior year.

The Company was not selected as the primary vendor on the current multi-year project for this school district, but has been selected as the secondary vendor for structured cabling and enterprise networking.

Revenue from small to medium businesses, which are primarily healthcare, financial and commercial clients, increased by 87% or $3,141,000 primarily due to the acquisition of Ecessa on May 14, 2020 and the acquisition of the assets of IVDesk on November 3, 2020 .

The decrease in the CSI IT operations revenue as compared to 2020 is related to the sale of CSI’s E&S business segment.

Project and product revenue decreased $3,952,000 or 77% during 2021 as compared to 2020 due to the decrease in the education sector.

Services and support revenue increased $2,658,000 or 73% as compared to the prior year due to the Company’s acquisition of Ecessa and its service and support revenue on its SD-WAN products as well as the acquisition of IVDesk, which contributed $2,473,000 in revenue during 2021.

Overall, Ecessa contributed $2,275,000 in revenue during 2021, an increase of $1,010,000 over the prior year.

Gross profit decreased 2% to $2,907,000 in 2021 compared to $2,979,000 in 2020.

Gross margin as a percentage of sales increased to 39% in 2021 compared to 34% in 2020 due to the increase in services & support revenue, which has higher margins.

Selling, general and administrative expenses increased 18% in 2021 to $2,906,000, or 39% of sales, compared to $2,464,000 in 2020, or 28% of sales due to the May 2020 acquisition of Ecessa and the November 2020 acquisition of IVDesk, and the inclusion of their associated general and administrative costs, which are not included in full in the prior year.

Services & Support reported an operating loss of $456,000 in 2021 compared to operating income of $310,000 in 2020, primarily due to decreased revenue from the education sector and increased selling, general and administrative expenses, including an increase in amortization expense of $252,000.

“Other” includes non-allocated corporate overhead costs that are not considered discontinued operations.

Other corporate costs increased by $1,808,000 primarily due to outside legal and financial consulting costs related to the previously announced Pineapple Energy merger.

The Company’s loss from continuing operations before income taxes was $8,154,000 in 2021 compared to a loss from continuing operations before income taxes of $4,693,000 in 2020.

The Company recorded net income of $2,974,000, driven by the gain on the sale of the Company’s E&S segment, compared to a net loss of $172,000 for 2020.

The Company’s effective income tax rate was (0.3%) in 2021 compared to (0.3%) in 2020.

The 2021 effective rate differed from the standard rate of 21% primarily due to the valuation allowances related to deferred tax assets, along with the impact of state income taxes, foreign tax rate differences, foreign losses not deductible for U.S.

income tax purposes, and provisions for interest charges for uncertain income tax positions .

As of December 31, 2021, the Company had a federal net operating loss carryforward from 2015 through 2020 activity of approximately $10,008,000 that is available to offset future taxable income and begins to expire in 2035.

See Note 13 for a reconciliation of the standard tax rate to the Company’s effective tax rate for 2021 and 2020.

Effects of Inflation

Inflation has not had a significant effect on operations in recent years.

The Company does not have long-term production or procurement contracts and has historically been able to adjust pricing and purchasing decisions to respond to inflationary pressures.

The consolidated results herein reflect the historical operating results of Pineapple Energy prior to the merger and the consolidated results of CSI (excluding the discontinued operations of JDL & Ecessa), Pineapple Energy, HEC and E-Gear following the Closing on March 28, 2022 and the results of SUNation following the closing on its acquisition on November 9, 2022.

Consolidated sales were $27,522,099 in 2022 and $38,162 in 2021.

As Pineapple Energy had limited revenue in the prior year, the increase in sales was due to the merger and acquisitions during 2022.

Sales in 2022 and 2021 by type were as follows:

Revenue by Type

Consolidated gross profit was $7,377,445 in 2022 as compared to $38,162 in 2021.

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense and transaction costs increased 263.8% to $17,826,124 in 2022 as compared to $4,900,451 in 2021.

Consolidated selling, general and administrative expenses increased to $12,211,135 in 2022 from $1,060,522 in 2021, due primarily to $7,160,670 in selling, general and administrative costs of the acquired businesses and $4,469,080 in corporate overhead costs in 2022.

Amortization expense increased by $1,704,165 to $3,133,460 in 2022 due to intangible assets acquired through the merger, the HEC Asset Acquisition and the SUNation acquisition.

Transaction costs decreased by $179,105 to $2,231,529 in 2022, due to the consummation of the merger and the HEC Asset Acquisition in the first quarter of 2022.

Consolidated other income was $7,182,860 in 2022 as compared to $1,373,261 in consolidated other expense in 2021.

2022 included a $4,684,000 gain on the fair value remeasurement of the Company’s earnout consideration from the merger, a $1,229,883 gain on sale of assets, and a $2,125,949 gain on the fair value remeasurement of the contingent value rights (“CVRs”), as discussed further in Note 16, Fair Value Measurements, partially offset by interest expense of $976,606.

Consolidated operating loss from continuing operation s before income taxes in 2022 was $3,265,819, compared to an operating loss from continuing operations before income taxes of $6,235,550 in 2021.

Net loss from continuing operations in 2022 was $3,278,056.

Net loss attributable to common shareholders (after taking into effect $16,863,892 in deemed dividends) was $27,216,132 or $(2.99) per diluted share from continuing operations, compared to net loss from continuing operations of $6,235,550, or $(2.03) per diluted share, in 2021.

Liquidity and Capital Resources

As of December 31, 2021, the Company had approximately $6,396,000 in cash, cash equivalents and liquid investments, compared to $21,457,000 at December 31, 2020.

Of this amount, $855,000 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the FDIC or other government agency.

As of December 31, 2022, the Company had approximately $7,923,244 in cash, restricted cash and cash equivalents, and liquid investments, compared to $18,966 at December 31, 2021.

Of this amount, $978,462 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or other government agency.

These money market funds seek to preserve the value of the investment at $1.00 per share;

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The Company also had $2,666,766 in investments consisting of corporate notes and bonds that are traded on the open market and are classified as available-for-sale at December 31, 2022.

Of the amounts of cash, restricted cash, cash equivalents and investments on the balance sheet at December 31, 2022, $4,463,089 consist of funds that can only be used to support the legacy CSI business, will be distributed to CVR holders and cannot be used to support the working capital needs of the Pineapple Energy business and $1,272,615 consists of funds that can only be used to support SUNation’s operations.

Per the SUNation transaction agreement, only excess cash over $1,500,000 can be used to support the remaining operations of Pineapple Energy until the Short-Term Note is paid off.

The Company had working capital of $27,366, consisting of current assets of approximately $25,961,524 and current liabilities of $25,934,158 at December 31, 2022 compared to working capital of $(2,872,233), consisting of current assets of $18,966 and current liabilities of $2,891,199 at the end of 2021.

Cash flow used in operating activities was approximately $7,577,199 in 2022 compared to $811,017 used in 2021.

Significant working capital changes from 2020 to 2021 included a $2.6 million decrease in accounts receivable and $386,000 used in discontinued operations.

Cash provided by investing activities was $30,544,000 in 2021 compared to $3,930,000 used in 2020, due to $23,625,000 in proceeds from the E&S Sale Transaction, which is included in discontinued operations.

Net cash used by financing activities was $35,587,000 in 2021 compared to $800,000 in 2020.

Cash dividends paid on common stock increased to $34,038,000 in 2021 ($3.50 per common share) from $564,000 in 2020 ($0.06 per common share).

Proceeds from common stock issuances, principally related to the accelerated vesting of all outstanding equity awards, totaled approximately $3,813,000 in 2021 and $119,000 in 2020.

The Company acquired $1,073,000 and $71,000 in 2021 and 2020, respectively, of Company stock from employees to satisfy withholding tax obligations related to share-based compensation, pursuant to terms of Board and shareholder-approved compensation plans.

The Company did not acquire Company stock in 2021 under a $2,000,000 Stock Repurchase Program authorized by the Board of Directors in August 2019.

At December 31, 2021, there remained $341,000 under the 2019 Stock Repurchase Program.

In the opinion of management, based on the Company’s current financial and operating position and projected future expenditures, sufficient funds are available to meet the Company’s anticipated operating and capital expenditure needs.

If the merger is approved by CSI shareholders and the merger is consummated, the combined company will be subject to the risks set forth under Item 1A – Risk Factors – “Risks Related to the Combined Company Following Consummation of the Merger.” Among these risks, the combined company needs to obtain substantial additional financing arrangements to provide working capital and growth capital and if financing is not available to it on acceptable terms when needed, its ability to continue to grow its business would be materially adversely impacted.

Significant working capital changes from 2021 to 2022 included an increase in customer deposits of $2,148,599 and a decrease in accounts payable of $1,076,350.

Cash used by investing activities was $3,097,406 in 2022 compared to $479,983 provided in 2021.

Net cash used in 2022 was primarily related to $10,991,128 in net cash paid for the HEC Asset Acquisition, the merger and the SUNation acquisition, partially offset by $6,297,865 in proceeds from the sale of assets previously classified as held for sale and $1,500,000 in earnout consideration payments related to legacy CSI’s sale of its Electronics and Software segment in 2021.

Net cash provided by financing activities was $15,912,117 in 2022 compared to $350,000 in 2021.

In the first quarter of 2022, the Company received $32,000,000 in proceeds from the issuance of shares of Convertible Preferred Stock and PIPE Warrants to investors in our March 28, 2022 PIPE offering and paid $2,699,370 in related issuance costs.

The Company also paid $4,500,000 in principal against the Hercules term loan in the first quarter of 2022, as discussed further in Note 11, Commitments and Contingencies.

During the third quarter of 2022, the Company paid $8,745,628 in CVR distributions.

In connection with the SUNation acquisition, on November 9, 2022, the Company issued a $5.0 million Short-Term Limited Recourse Secured Promissory Note (the “Short-Term Note”) and a $5,486,000 Long-Term Promissory Note (the “Long-Term Note”).

The Short-Term Note is secured as described below and matures on August 9, 2023.

It carries an annual interest rate of 4% until the three-month anniversary of issuance, 8% thereafter until the six-month anniversary of issuance, then 12% thereafter until the Short-Term Note is paid in full.

The Long-Term Note is unsecured and matures on November 9, 2025.

It carries an annual interest rate of 4% until the first anniversary of issuance, then 8% thereafter until the Long-Term Note is paid in full.

The Company will be required to make a principal payment of $2.5 million on the second anniversary of the Long- Term Note.

Both the Short-Term Note and Long-Term Note may be prepaid at our option at any time without penalty.

The Short-Term Note is secured by a pledge by the Company of the equity of the acquired SUNation companies.

While the Short-Term Note remains outstanding, the Company also agreed to certain negative covenants with respect to the operation of the acquired companies, including limits on distributions, the incurrence of indebtedness, imposition of liens, and sales of assets outside the ordinary course of business.

The pledge will automatically terminate upon the payment of all amounts due under the Short-Term Note.

As discussed above and in Note 3, Business Combinations and Note 11, Commitments and Contingencies, on November 9, 2022, the Company, in connection with the SUNation acquisition, paid $2.39 million in cash and entered into the Short-Term Note and the Long-Term Note.

Also as discussed above, o f the amounts of cash, restricted cash, cash equivalents and investments on the balance sheet at December 31, 2022, $4,463,089 consist of funds that can only be used to support the legacy CSI business, are restricted under the CVR agreement and cannot be used to support the working capital needs of the Pineapple Energy business and $1,272,615 consists of funds that can only be used to support SUNation’s operations.

Per the SUNation transaction agreement, only excess cash over $1,500,000 can be used to support the remaining operations of Pineapple Energy until the Short-Term Note is paid off.

Based on the Company’s current financial position, the Company’s forecasted future cash flows for twelve months beyond the date of issuance of the financial statements in this report indicate that the Company will not have sufficient cash to repay the Short-Term Note obligation, a factor which raises substantial doubt about the Company’s ability to continue as a going concern.

As a result, the Company requires a dditional funding and seeks to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances.

However, additional funding may not be available on terms acceptable to the Company, or at all.

If the Company is unable to raise additional funds, it would have a negative impact on the Company’s business, results of operations and financial condition.

To the extent that additional funds are raised through the sale of equity or securities convertible into or exercisable for equity securities, the issuance of securities will result in dilution to the Company’s shareholders.

Further, certain transactions could trigger an adjustment to the exercise price of the Convertible Preferred Stock and PIPE Warrants, which would lead to a corresponding increase in the number of shares of common stock issuable upon exercise of the PIPE Warrants, further diluting the Company’s shareholders.

Contingent Value Rights and Impact on Cash

As discussed in Note 3, Business Combinations, the Company issued CVRs prior to the closing of the merger to CSI shareholders of record on the close of business on March 25, 2022.

The CVR entitles the holder to a portion of the cash, cash equivalents, investments and net proceeds of any divestiture, assignment, or other disposition of all legacy assets of CSI and/or its legacy subsidiaries, JDL and Ecessa, that are related to CSI’s pre-merger business, assets, and properties that occur during the 24-month period following the closing of the merger.

The CVR liability as of December 31, 2022 was estimated at $7,402,714 and represented the estimated fair value as of that date of the legacy CSI assets to be distributed to CVR holders as of that date.

This amount is recorded as a long-term liability that includes the remaining restricted cash and cash equivalents, investments, along with the other tangible and intangible assets related to the legacy CSI business.

The proceeds from CSI’s pre-merger business working capital and related long term-assets and liabilities are not available to fund the working capital needs of the post-merger company.

New Accounting Pronouncements

See Note 1 of the “Notes to the Consolidated Financial Statements” under Item 8 herein for a discussion of new accounting standards.

See Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included elsewhere in this report for a discussion of new accounting standards.

Off Balance Sheet Arrangements

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