What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-04-14 compared with 2022-03-14 · 691 added, 514 removed, 377 unchanged (76% of the section changed)

4 unchanged sentences

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

2 unchanged sentences

REPORT OF MANAGEM ENT

The management of Communications Systems, Inc.

The management of Pineapple Energy Inc.

and its subsidiary companies is responsible for the integrity and objectivity of the financial statements and other financial information contained in the annual report.

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The independent auditors have free access to this committee, without management present, to discuss the results of their audit work and their opinion on the adequacy of internal financial controls and the quality of financial reporting.

/s/ Roger H.D.

Interim Chief Executive Officer

/s/ Kyle Udseth

/s/ Eric Ingvaldson

Eric Ingvaldson

Chief Executive Officer

Chief Financial Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC AC COUNTING FIRM

To the shareholders and the board of directors of Communications Systems, Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Communications Systems, Inc.

and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income (loss) and comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the "consolidated financial statements").

To the shareholders and the board of directors of Pineapple Energy Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Pineapple Energy Inc.

and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements").

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

Substantial Doubt About the Company’s Ability to Continue as a Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 17 to the consolidated financial statements, the Company has suffered losses and negative cash flows from operations and has negative working capital due to a note payable which matures in August 2023 that raise substantial doubt about its ability to continue as a going concern.

Management's plans in regards to these matters are also described in Note 17.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

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

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

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

Valuation of Intangible Assets Acquired in Business Combinations

Business Combinations:

Critical Audit Matter Description:

As described in Note 5 to the consolidated financial statements, the Company completed the accounting for the acquisition of IVDesk Minnesota, Inc.

during the year ended December 31, 2021.

The consideration for the acquisition was $1,368,000.

The acquisition was accounted for as a business combination.

The Company measured the assets acquired and liabilities assumed at fair value, which resulted in the recognition of an intangible asset totaling $720,000, which consisted of customer relationships.

The Company has also recorded goodwill of $745,000 as a result of this acquisition.

The valuation of the intangible assets is complex and judgmental due to the use of subjective assumptions in the valuation models used by management when determining the estimated fair values of the assets.

The determination of the fair values of the intangible assets requires management to make significant estimates and assumptions related to forecasts of future revenues, expenses, discount rates, risk-free rates, weighted-average cost of capital, and equity risk premium.

Auditing management’s valuation of the acquired intangible assets is complex due to the judgments required to evaluate management’s previously noted estimates and assumptions.

‎ As disclosed in Note 3, the Company completed several business combinations during 2022, one of which consisted of a merger between Pineapple Energy LLC (Pineapple) and Communications Systems, Inc.

(CSI), which was accounted for as a reverse merger with CSI being determined to be the legal acquirer and Pineapple being determined to be the accounting acquirer.

As part of the reverse merger, Pineapple recognized an obligation for contingent value rights (CVR’s) for the estimated fair value of certain legacy CSI assets which upon disposition, will be monetized and paid to legacy shareholders, and recognized a liability for merger earn-out shares to certain pre-merger holders of Pineapple units issuable based upon the

Company’s stock price in certain post-merger reporting periods.

In aggregate, the consideration in these business combinations, including the value of applicable contingent and non-cash consideration, was valued at more than $63 million.

The Company measured the assets acquired and liabilities assumed at fair value, which resulted in the recognition of intangible assets consisting of customer relationships, developed technology and tradenames and trademarks, and goodwill.

We identified the accounting for the business combinations, including management’s valuation of the acquired intangible assets, contingent consideration, non-cash consideration, the recorded amount of the CVR’s and merger earn-out share obligations, and the determination of the accounting acquirer in a reverse merger as a critical audit matter due to the complex nature of these items, which required the use of significant judgments and estimates on the part of management and increased audit effort, including the need to involve our valuation and business combination specialists in our audit procedures.

How We Addressed the Matter in Our Audit:

‎ The primary procedures we performed to address this critical audit matter included:

 Obtained an understanding of the design and implementation of internal controls relating to the evaluation of the assumptions used to estimate the fair value of the intangible assets acquired, including controls addressing:

 Management’s evaluation of the identification of the assets acquired.

 Management’s evaluation of the completeness, accuracy and reasonableness of the prospective financial information used to determine the fair values of assets acquired.

 Management’s evaluation of the completeness and accuracy of key assumptions and inputs used by a third-party valuation specialist, including discount rate, risk-free rate, weighted-average cost of capital, and equity risk premium used to determine fair values.

 Management’s evaluation of the clerical accuracy of the model used to determine the fair values of assets acquired.

 Substantively tested, with the assistance of firm personnel with experience in the application of fair value and valuation methodologies, the appropriateness of the judgments and assumptions used in management’s estimation process for determining the fair value of the intangible assets acquired, including:

 Tested the mathematical accuracy of the calculations performed along with assessing the completeness of the information used in the calculations.

 Evaluated the appropriateness of the valuation methodologies used, as well as the key assumptions and inputs used, including cash flow projections, discount rate, risk-free rate, weighted-average cost of capital, and equity risk premium.

 Performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result from changes in the assumptions.

 Compared significant assumptions used by management to current industry and competitor data, historical results, third-party market data and evidence obtained in other areas of the audit.

/s/ Baker Tilly US, LLP

 We substantively tested, with the assistance of firm personnel with experience in the application of fair value and valuation methodologies, the appropriateness of the judgments and assumptions used in management’s estimation process for determining the fair value of the intangible assets acquired, contingent consideration, non-cash consideration and recorded amount of the CVR and merger earn-out obligation.

 With the assistance of firm personnel with experience in accounting for business combinations, we evaluated management's research and conclusions regarding the accounting treatment for the transactions.

Convertible Preferred Stock and Warrants:

Critical Audit Matter Description:

‎ As described in Note 14 to the consolidated financial statements, the Company issued $32,000,000 in shares of convertible preferred stock through a private placement.

As part of the offering, the holders of the preferred shares also received warrants.

There is considerable complexity associated with evaluating the proper classification of preferred stock and warrants.

In addition, there is considerable judgment and complexity in determining the estimated fair value of the warrants, including the use of Monte Carlo simulation and significant assumptions related to expected volatility, the risk-free rate, expected annual dividend yield and expected conversion dates.

We identified the proper accounting and valuation of the Company’s preferred stock and warrants as a critical audit matter due to the complexities and judgments involved in analyzing preferred stock and warrants for proper classification and in valuing the warrants, which required the use of significant judgments and estimates on the part of management and increased audit effort, including the need to involve our valuation and financial instrument specialists in our audit procedures.

How We Addressed the Matter in Our Audit:

Our audit procedures related to this critical audit matter included the following:

 We read the applicable agreements and compared the key terms from the agreements to management's analysis of the transaction.

 With the assistance of professionals in our firm having expertise in accounting for debt and equity instruments, we evaluated management’s conclusions regarding the balance sheet classification of the components of the convertible preferred stock and warrants through evaluation of the terms within the applicable agreements and considering the applicable generally accepted accounting standards.

 We evaluated the Company's disclosures related to the financial statement impacts of the transaction.

 We involved firm valuation specialists in evaluating the Company's valuation of the warrants, including the reasonableness of assumptions used in developing an independent calculation of the recorded amount.

We have served as the Company's auditor since 2021.

/s/ Baker Tilly US, LLP

Minneapolis, Minnesota

March 14, 2022

COMMUNICATIONS SYSTEMS, INC.

AND SUBSIDI ARIES

April 14, 2023

PINEAPPLE ENERGY INC.

CONSOLIDATED BALANCE SHEETS

1 unchanged sentence

Cash and cash equivalents

Restricted cash and cash equivalents

Trade accounts receivable, less allowance for

1 unchanged sentence

Inventories, net

Prepaid income taxes

Employee retention credit

Related party receivables

Prepaid expenses

Costs and estimated earnings in excess of billings

Other current assets

4 unchanged sentences

Right of use asset

Intangible assets

Intangible assets, net

Noncurrent assets held for sale

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Operating lease liability

Other accrued liabilities

Accrued consideration

Dividends payable

Deferred revenue

Other current liabilities

Working capital note payable

Related party payables

Income taxes payable

Refundable customer deposits

Billings in excess of costs and estimated earnings

Current portion of loans payable

Current portion of loans payable - related party

Current liabilities held for sale

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LONG TERM LIABILITIES:

Long-term compensation plans

Loans payable and related interest

Loans payable and related interest - related party

Related party payables

Operating lease liability

Deferred revenue

Earnout consideration

Contingent value rights

Long term liabilities held for sale

TOTAL LONG-TERM LIABILITIES

COMMITMENTS AND CONTINGENCIES (Footnote 10)

COMMITMENTS AND CONTINGENCIES (Note 11)

STOCKHOLDERS'

Preferred stock, par value $ 1.00 per share;

3,000,000 shares authorized;

Common stock, par value $.

05 per share;

Convertible preferred stock, par value $ 1.00 per share;

3,000,000 shares authorized;

28,000 and 0 shares issued and outstanding, respectively

Common stock, par value $ 0.05 per share;

75,000,000 and 37,500,000 shares authorized, respectively;

9,915,586 and 3,074,998 shares issued and outstanding, respectively

Additional paid-in capital

(Accumulated deficit) retained earnings

Accumulated deficit

( 19,089,134 )

( 8,736,894 )

Accumulated other comprehensive loss

TOTAL STOCKHOLDERS'

EQUITY (DEFICIT)

( 8,636,894 )

TOTAL LIABILITIES AND STOCKHOLDERS'

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC.

AND SUB SIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

PINEAPPLE ENERGY INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Year Ended December 31

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Impairment loss

Restructuring expense

Total operating expenses

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Gain on sale of assets

Fair value remeasurement of earnout consideration

Fair value remeasurement of contingent value rights

Interest and other expense

Other income, net

( 1,373,261 )

Other income (expense), net

( 1,373,261 )

Operating loss from continuing operations before income taxes

5 unchanged sentences

( 6,235,550 )

Net income from discontinued operations, net of tax

Net income (loss)

Other comprehensive income (loss), net of tax:

Unrealized (losses)/gains on available-for-sale securities

Foreign currency translation adjustment

Total other comprehensive income

Comprehensive income (loss)

Basic net (loss) income per share:

Net loss from discontinued operations, net of tax

( 7,074,184 )

( 10,352,240 )

( 6,235,550 )

Other comprehensive loss, net of tax:

Unrealized losses on available-for-sale securities

Total other comprehensive loss

Comprehensive loss

( 10,362,662 )

( 6,235,550 )

Deemed dividend on extinguishment of Convertible Preferred Stock

( 13,239,892 )

Deemed dividend on modification of PIPE Warrants

( 3,624,000 )

Net loss available to common shareholders

( 27,216,132 )

( 6,235,550 )

Basic net loss per share:

Continuing operations

Discontinued operations

Diluted net (loss) income per share:

Diluted net loss per share:

Continuing operations

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Weighted Average Dilutive Shares Outstanding

Dividends declared per share

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC.

AND SU BSIDIARIES

PINEAPPLE ENERGY INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'

Series A Convertible

Preferred Stock

Comprehensive

Income (Loss)

BALANCE AT DECEMBER 31, 2020

Issuance of common stock under

Employee Stock Purchase Plan

Issuance of common stock to

Employee Stock Ownership Plan

Issuance of common stock under

Executive Stock Plan

( 2,501,344 )

( 6,235,550 )

Share based compensation

Other share retirements

Shareholder dividends ($ 0.04 per share)

Other comprehensive income

BALANCE AT DECEMBER 31, 2021

Issuance of common stock under

Employee Stock Purchase Plan

Issuance of common stock to

Employee Stock Ownership Plan

Issuance of common stock under

Executive Stock Plan

Share based compensation

Other share retirements

( 8,736,894 )

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( 10,352,240 )

Shareholder dividends ($ 3.50 per share)

( 10,352,240 )

Issuance of common stock for

professional services

Issuance of common stock for

conversion of related party payables

Issuance of common stock for

conversion of working capital note payable

Effect of reverse capitalization

Issuance of common stock for

HEC Asset Acquisition

Issuance of common stock for

SUNation Acquisition

Issuance of preferred stock and warrants

to PIPE investors, net of issuance costs

Conversion of Series A convertible

preferred stock to common stock

Contingent consideration related to

merger transaction

( 4,684,000 )

Other comprehensive income

( 4,684,000 )

Share based compensation

Other comprehensive loss

BALANCE AT DECEMBER 31, 2022

1 unchanged sentence

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC.

AND SU BSIDIARIES

PINEAPPLE ENERGY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

1 unchanged sentence

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)

Net income from discontinued operations, net of tax

( 10,352,240 )

( 6,235,550 )

Net loss from discontinued operations, net of tax

( 7,074,184 )

Net loss from continuing operations

1 unchanged sentence

( 6,235,550 )

Adjustments to reconcile net (loss) income to

Adjustments to reconcile net loss to

net cash (used in) provided by operating activities:

1 unchanged sentence

Share based compensation

Deferred taxes

Impairment loss

Fair value remeasurement of earnout consideration

( 4,684,000 )

Fair value remeasurement of contingent value rights

( 2,125,949 )

Gain on sale of assets

Changes in assets and liabilities:

Trade accounts receivables, net

( 1,229,883 )

Interest and accretion expense

Changes in assets and liabilities:

Trade and related party accounts receivables, net

Inventories, net

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Accrued compensation and benefits

Customer deposits

Other accrued liabilities

Net cash used in operating activities - continuing operations

Accrued interest

( 1,098,207 )

Net cash used in operating activities - continuing operations

( 7,652,468 )

Net cash (used in) provided by operating activities - discontinued operations

Net cash provided by operating activities - discontinued operations

Net cash used in operating activities

( 7,577,199 )

( 4,683,529 )

CASH FLOWS FROM INVESTING ACTIVITIES:

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( 10,991,128 )

Purchases of investments

( 18,665,534 )

Proceeds from the sale of fixed assets

Proceeds from the sale of investments

Net cash provided by (used in) investing activities - continuing operations

( 4,694,355 )

Net cash provided by investing activities - discontinued operations

Net cash provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Cash dividends paid

Proceeds from earnout consideration payments

Net cash (used in) provided by investing activities - continuing operations

( 3,081,917 )

Proceeds from issuance of common stock, net of shares withheld

Payment of contingent consideration related to acquisition

Purchase of common stock

Net cash used in investing activities - discontinued operations

Net cash (used in) provided by investing activities

( 3,097,406 )

Net cash used in financing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowing against working capital line of credit

Payments against loans payable

( 4,792,885 )

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH

NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

Payments related to equity issuance costs

( 2,699,370 )

Proceeds from the issuance of preferred stock & warrants to PIPE investors

Payments for contingent value rights distributions

( 8,745,628 )

Net cash provided by financing activities

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Income taxes refunded

Income taxes paid

Interest paid

Dividends declared not paid

Issuance of common stock for conversion of related party payables

Issuance of common stock for conversion of working capital payable

Issuance of common stock for the acquisition of HEC and E-Gear

Issuance of common stock for the acquisition of SUNation

Effect of reverse capitalization

Contingent consideration related to merger transaction

( 4,684,000 )

Deemed dividend on Convertible Preferred Stock and PIPE Warrants

Operating right of use assets obtained in exchange for lease obligations

Accrued consideration

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC.

AND SUBSID IARIES

PINEAPPLE ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2022 and 2021

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 – NATURE OF OPERATIONS

Description of Business

Communications Systems, Inc.

is a Minnesota corporation organized in 1969 that until August 2, 2021 classified its business into two segments:

(1) the Electronics & Software segment (consisted of US-based subsidiary Transition Networks and UK-based subsidiary Net2Edge) which (i) manufactured and sold solutions that provide actionable intelligence, power and connectivity at the edge of networks through PoE products, software and services as well as traditional products such as media converters, network adapters and other connectivity products and (ii) designed, developed, and sold edge network access products, TDM (time-division multiplexing) over IP and other circuit emulation solutions, along with specialized cloud-based software solutions, primarily within the telecommunications market;

and (2) the Services and Support segment (consisting of subsidiaries JDL and Ecessa), which (i) provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment and (ii) designs, develops, and sells SD-WAN (software-designed wide-area network) solutions.

As previously disclosed, on August 2, 2021, the Company and Lantronix, Inc.

(“Lantronix”) completed the sale by CSI to Lantronix of all of the issued and outstanding stock of CSI’s wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of its wholly owned subsidiary, Transition Networks Europe Limited (collectively with Transition Networks, Inc., the “TN Companies”), pursuant to the securities purchase agreement dated April 28, 2021 (“E&S Sale Transaction”).

As a result, sales and expenses related to the operations of the former Electronics & Software segment have been presented as discontinued operations in this Form 10-K.

For purposes of this Form 10-K, the Company classifies operations as those from its Services & Support segment.

Non-allocated general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting.

Intersegment revenues are eliminated upon consolidation.

Pineapple Energy Inc.

(formerly Communications Systems, Inc.

and Pineapple Holdings, Inc.) (“PEGY”, “Pineapple”, “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 that certain Agreement and Plan of Merger dated March 1, 2021, as amended by an Amendment No.

1 to Merger Agreement dated December 16, 2021 (collectively the “merger agreement”), by and among the Company, Helios Merger Co., a Delaware corporation and a wholly-owned subsidiary of the Company (the “Merger Sub”), Pineapple Energy LLC, a Delaware limited liability company, Lake Street Solar LLC as the Members’ Representative, and Randall D.

Sampson as the Shareholders’ Representative, pursuant to which Merger Sub 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 commenced doing business using the Pineapple name, 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 of the merger, Pineapple Energy 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 entered into a Transaction Agreement (the “Transaction Agreement”) with Solar Merger Sub, LLC, a New York limited liability company and wholly owned subsidiary of the Company (“Solar Merger Sub”), Scott Maskin, James Brennan, Scott Sousa and Brian Karp (collectively, the “Sellers”), and Scott Maskin as representative of each seller, pursuant to which the Company directly or indirectly acquired all of the issued and outstanding equity of SUNation Solar Systems, Inc.

and five of its affiliated entities:

SUNation Commercial, Inc., SUNation Service, Inc., SUNation Electric, Inc., SUNation Energy, LLC, and SUNation Roofing, LLC (collectively, “SUNation”).

Each of SUNation Service, Inc.

and SUNation Electric, Inc.

were acquired through a merger with and into Solar Merger Sub, with Solar Merger Sub surviving each merger, pursuant to a Plan of Merger, dated as of November 9, 2022 (the “Plan of Merger”).

The mergers closed contemporaneously with signing the Transaction Agreement (“SUNation Acquisition”) .

This acquisition was a further expansion in the residential and commercial solar markets and fits into the Company’s overall acquisition growth plan as it looks to expand further through the acquisition of regional residential solar companies and energy technology solution providers.

The Company is a growing domestic operator and consolidator of residential 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.

Pursuant to the merger agreement, the Company is working to divest its legacy operations and operating assets.

The Company is actively pursuing the sale of its JDL Technologies, Inc.

(“JDL”) and Ecessa Corporation (“Ecessa”) businesses and has met the criteria to report the operations of these businesses as discontinued operations.

See Note 7, Discontinued Operations.

As a result, unless otherwise noted, all information in this Form 10-K related to the JDL and Ecessa businesses will be discussed and presented as discontinued operations and the Company will report its remaining business operations as continuing operations.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned operating subsidiaries.

Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

Impact of the Merger

The Company accounted for the March 28, 2022 merger as a reverse recapitalization whereby it was determined that Pineapple Energy was the accounting acquirer and CSI was the accounting acquiree.

This determination was primarily based on:

 Former Pineapple Energy stockholders having the largest voting interest in the Company following the merger;

 The implied enterprise value of Pineapple Energy in the merger was well in excess of the market capitalization of CSI prior to the merger;

 At the Closing, the board of directors of the Company was fixed at seven members, two of which were selected by CSI and five of which were selected by Pineapple Energy;

 Pineapple Energy’s Chief Executive Officer serves as the Chief Executive Officer of the Company subsequent to the merger;

 The post-combination company assumed the “Pineapple Energy” name;

 The Company disposed of the pre-existing CSI headquarters during the second quarter of 2022 and expects to dispose of its legacy subsidiaries, JDL and Ecessa, and will continue Pineapple Energy operations in Hawaii.

Accordingly, for accounting purposes, the merger was treated as the equivalent of Pineapple Energy issuing stock for the net assets of CSI, accompanied by a recapitalization.

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 reflect (i) the historical operating results of Pineapple Energy prior to the merger;

(ii) the consolidated results of legacy CSI, Pineapple Energy, HEC, and E-Gear following the closing of the merger;

(iii) the assets and liabilities of Pineapple Energy at their historical cost;

(iv) the assets and liabilities of CSI, HEC and E-Gear at fair value as of the merger date in accordance with ASC 805, Business Combinations, and (v) the Company’s equity structure for all periods presented.

In connection with the merger transaction, we have converted the equity structure for the periods prior to the merger to reflect the number of shares of the Company’s common stock issued to Pineapple Energy’s members in connection with the recapitalization transaction.

As such, the shares, corresponding capital amounts and earnings per share, as applicable, related to Pineapple Energy member units prior to the merger have been retroactively converted by applying the exchange ratio established in the merger agreement.

PIPE Transaction

On March 28, 2022, following the closing of the merger, the Company closed on a $ 32.0 million private investment in public equity (“PIPE”) transaction pursuant to a securities purchase agreement.

Under the terms of the securities purchase agreement, for their $ 32.0 million investment, the PIPE investors received shares of newly authorized CSI Series A convertible preferred stock convertible at a price of $ 13.60 per share into the Company’s common stock, together with warrants to purchase an additional $ 32.0 million of common shares at that same price.

The Company used the proceeds from the PIPE to fund the cash portion of the HEC Asset Acquisition, to repay $ 4.5 million ($ 5.6 million including five-year interest) of Pineapple Energy’s $ 7.5 million term loan from Hercules Capital, Inc., to pay for transaction expenses, and for working capital to support Pineapple Energy’s growth strategy of acquiring leading local and regional solar installers around the United States.

Principles of Consolidation

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Use of Estimates

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions 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 amounts of revenues and expenses during the reporting period.

The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions 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 amounts of revenues and expenses during the reporting period.

The Company uses estimates based on the best information available in recording transactions and balances resulting from operations.

Actual results could differ from those estimates.

The Company’s estimates consist principally of reserves for doubtful accounts, sales returns, warranty costs, asset impairment evaluations, accruals for compensation plans, self-insured medical and dental accruals, lower of cost or market inventory adjustments, provisions for income taxes and deferred taxes, and depreciable lives of fixed assets.

Cash equivalents:

Actual results could materially differ from those estimates.

The Company’s estimates consist principally of reserves for doubtful accounts, asset impairment evaluations, accruals for compensation plans, lower of cost or market inventory adjustments, the fair value of the term loan payable and related assets at the date of acquisition, the fair value of the contingent value rights and contingent consideration, provisions for income taxes and deferred taxes, depreciable lives of fixed assets, and amortizable lives of intangible assets.

Restricted Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.

As of December 31, 2021, the Company had $ 3,491,000 in cash and cash equivalents.

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 federal deposit insurance company (FDIC) or other government agency.

The Company may invest 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 Company (“FDIC”) or other government agency.

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

however, it is possible to lose money investing in these funds.

The remainder is operating cash and certificates of deposit which are fully insured through the FDIC.

Approximately $ 1.8 million of the restricted cash and cash equivalents on the balance sheet as of December 31, 2022 are funds that can only be used to support the legacy CSI business, will be distributed to holders of the Company’s contingent value rights (“CVRs”) and cannot be used to support the working capital needs of the Pineapple Energy business.

The remaining $ 1.3 million is cash related to the SUNation operations and the consolidated Company only has the ability to use cash in excess of $ 1.5 million until the Short-Term Note (as defined below) is paid off.

Investments consist of corporate notes and bonds and commercial paper that are traded on the open market and are classified as available-for-sale and minority investments in strategic technology companies.

Available-for-sale investments are reported at fair value with unrealized gains and losses excluded from operations and reported as a separate component of stockholders’ equity, net of tax (see Accumulated other comprehensive loss below).

Inventories are stated at the lower of cost or net realizable value.

Cost is determined by the first-in, first-out method.

Provision to reduce inventories to the lower of cost or net realizable value is made based on a review of excess and obsolete inventories, estimates of future sales, examination of historical consumption rates and the related value of component parts.

Available-for-sale investments are reported at fair value with unrealized gains and losses excluded from operations and reported as a separate component of stockholders’ equity, net of tax.

The investments on the balance sheet as of December 31, 2022 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.

Accounts Receivable, Net

Accounts receivable are recorded at their net realizable value and are not collateralized.

Accounts receivable include amounts earned less payments received and allowances for doubtful accounts.

Management continually monitors and adjusts its allowances associated with the Company’s receivables to address any credit risks associated with the accounts receivable and periodically writes off receivables when collection is not considered probable.

The Company does not charge interest on past due accounts.

When uncertainty exists as to the collection of receivables, the Company records an allowance for doubtful accounts and a corresponding charge to bad debt expense.

Inventories, Net

Inventories, which consist primarily of materials and supplies used in the installation of solar systems, are stated at the lower of cost or net realizable value, with costs computed on a weighted average cost basis.

The Company periodically reviews its inventories for excess and obsolete items and adjusts carrying costs to estimated net realizable values when they are determined to be less than cost.

Property, Plant and Equipment

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Maintenance and repairs are charged to operations and additions or improvements are capitalized.

Items of property sold, retired or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any gains or losses on disposal are reflected in operations.

Items of property sold, retired or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any gains or losses on disposal are reflected in the statements of operations.

Goodwill and Other Intangible Assets

Goodwill represents the amount by which the purchase prices (including liabilities assumed) of acquired businesses exceed the estimated fair value of the net tangible assets and separately identifiable assets of these businesses.

Goodwill and intangible assets with indefinite useful lives are not amortized but are tested at least annually for impairment.

The Company reassesses the value of our reporting units and related goodwill balances annually on April 1 and at other times if events have occurred or circumstances exist that indicate the carrying amount of goodwill may not be recoverable.

Definite lived intangible assets, consisting primarily of trade names, technology, and backlog are amortized on a straight-line basis over the estimated useful life of the asset.

Goodwill is not amortized but is tested at least annually for impairment.

The Company reassesses the value of our reporting units and related goodwill balances annually on October 1 and at other times if events have occurred or circumstances exist that indicate the carrying amount of goodwill may not be recoverable.

Recoverability of Long-Lived Assets

The Company reviews its long-lived assets periodically when impairment indicators exist as required under generally accepted accounting principles.

Potential impairment is determined by comparing the carrying value of the assets with expected net cash flows expected to be provided by operating activities of the business or related products.

If the sum of the expected future net cash flows is less than the carrying value, an impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the asset.

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable.

If indicators of impairment exist, management identifies the asset group that includes the potentially impaired long-lived asset, at the lowest level at which there are separate, identifiable cash flows.

If the fair value, determined as the total of the expected undiscounted future net cash flows for the asset group is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset.

Accumulated other comprehensive loss

The components of accumulated other comprehensive loss are as follows:

Foreign Currency Translation

Unrealized (loss)/gain on securities

Unrealized Loss on Securities

Accumulated Other Comprehensive Loss

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Revenue Recognition

The Company has determined that the following performance obligations identified in its Services and 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 and 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 agreed upon 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.

See Note 2 for further discussion regarding revenue recognition.

Revenue is recognized when there is a transfer of control of promised goods or services to customers in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services.

The Company sells solar power systems under construction and development agreements to residential and commercial customers.

The completed system is sold as a single performance obligation.

For residential contracts, revenue is recognized at the point-in-time when the systems are placed into service.

Any advance payments received in the form of customer deposits are recorded as contract liabilities.

Commercial contracts are generally completed within three to twelve months from commencement of construction.

Construction on large projects may be completed within eighteen to twenty-four months , depending on the size and location of the project.

Revenue from commercial contracts are recognized under a percentage of completion method, measured by the percentage of hours incurred to date against estimated total hours budgeted for each contract.

Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near future.

Contract costs include all direct material, labor costs and those indirect costs related to contract performance, such as indirect labor and other supplies.

Selling, general and administrative costs are charged to expense as incurred.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

Changes in job performance, job conditions and estimated profitability may result in revisions to costs and revenues which are recognized in which the revisions are determined.

Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.

The Company also arranges for solar power systems to be installed for residential customers by a third party, for which it earns a commission upon the end customer’s acceptance of the installation.

As there are more than two parties involved in the sales transaction, the Company has determined it has an agent relationship in the contracts with these customers, due to the fact that the Company is not primarily responsible for fulfilling the promise to provide the installation of solar arrays to the customer, the Company does not have inventory risk and has only limited discretion in pricing.

Accordingly, the Company has determined that revenue under these arrangements should be recognized on a net basis.

See Note 4, Revenue Recognition, for further discussion regarding revenue recognition.

Gross Excise Tax

The State of Hawaii imposes a gross receipts tax on all business operations done in Hawaii.

The Company records the tax revenue and expense on a gross basis.

Employee Retirement Benefits

The Company has an Employee Savings Plan (401(k)) and matches a percentage of employee contributions up to six percent of compensation.

Contributions to the plan in 2021 and 2020 were $ 122,000 and $ 109,000 , respectively.

Net income (loss) per share:

Basic net income (loss) per common share is based on the weighted average number of common shares outstanding during each year.

Diluted net income (loss) per common share adjusts for the dilutive effect of potential common shares outstanding.

The Company’s only potential common shares outstanding are stock options and shares associated with the long-term incentive compensation plans, which resulted in a dilutive effect of 137,661 shares for 2021 and no dilutive effect in 2020.

Due to the net loss in 2020, there was no dilutive impact from outstanding stock options or unvested shares.

The Company calculates the dilutive effect of outstanding options and unvested shares using the treasury stock method.

There were no options or deferred stock awards excluded from the calculation of diluted earnings per share because there were no outstanding options or deferred stock awards as of December 31, 2021.

Options totaling 697,201 would have been excluded from the calculation of diluted earnings per share for year ended December 31, 2020, because the exercise price was greater than the average market price of common stock during the year and deferred stock awards totaling 110,308 shares would not have been included because of unmet performance conditions.

Employer contributions to the plan in 2022 and 2021 were $ 60,489 and $ 0 , respectively.

Additionally, as part of the November 9, 2022 SUNation Acquisition, the Company also acquired the SUNation Solar Systems, Inc.

401(k) Plan, which included employer contributions of $ 27,656 during the period under Company ownership in 2022.

Share Based Compensation

The Company accounts for share-based compensation awards on a fair value basis.

The estimated grant date fair value of each stock-based award is recognized in income over the requisite service period (generally the vesting period).

The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.

The estimated grant date fair value of each stock-based award is recognized in the statement of operations over the requisite service period (generally the vesting period).

SUNation warrants its products for various periods against defects in material or installation workmanship.

The manufacturers of the solar panels and the inverters provide a warranty period of generally 25 years and 10 years , respectively.

SUNation will assist its customers in the event that the manufacturers'

warranty needs to be used to replace a defective solar panel or inverter.

SUNation provides for warranty up to 10 years in duration on the installation of a system and all equipment and incidental supplies other than solar panels and inverters that are recovered under the manufacturers'

SUNation provides extended workmanship warranties paid by the customer for up to 25 years for the service of inverters, which is reimbursed by the manufacturer.

The Company records a provision for the installation warranty, an expense included in cost of sales, based on management’s best estimate of the probable cost to be incurred in honoring its warranty commitment.

The Company’s accrued warranty provision was $ 276,791 and $ 0 at December 31, 2022 and December 31, 2021, respectively, and is included in other current liabilities.

The Company expenses advertising costs as the expenses are incurred.

Advertising expense was $ 251,335 and $ 0 for the years ended December 31, 2022 and 2021, respectively.

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding the method to allocate resources and assess performance.

Our chief operating decision maker is the chief executive officer.

Based on the financial information presented to and reviewed by our chief operating decision maker in deciding how to allocate resources and in assessing performance, we have determined we have two operating segments, but meet the aggregation criteria in order to aggregate into one reportable segment.

Net Loss Per Share

Basic net loss per common share is based on the weighted average number of common shares outstanding during each year.

Diluted net loss per common share adjusts for the dilutive effect of potential common shares outstanding.

The Company’s only potential additional common shares outstanding are common shares that would result from the conversion of the Series A convertible preferred shares, stock options, warrants and shares associated with the long-term incentive compensation plans, which resulted in no dilutive effect for the year ended December 31, 2022.

The Company calculates the dilutive effect of outstanding options, warrants and unvested shares using the treasury stock method and the dilutive effect of outstanding preferred shares using the if-converted method.

There were no options or deferred stock awards excluded from the calculation of diluted earnings per share because there were no outstanding options or deferred stock awards as of both December 31, 2022 and 2021.

Warrants totaling 5,176,471 would have been excluded from the calculation of diluted earnings per share for the year ended December 31, 2022, even if there had not been a net loss in those periods, because the exercise price was greater than the average market price of common stock during the period.

For the year ended December 31, 2021, there were no potentially dilutive securities.

Accounting Standards Issued

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology in current U.S.

GAAP with a methodology that reflects expected credit losses.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses.

This ASU is intended to provide financial statement users with more decision-useful information about expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023.

Entities may early adopt beginning after December 15, 2018.

We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.

We do not expect the impact of the adoption of ASU 2016-13 to have a material impact on our consolidated financial statements.

Accounting Standards Adopted

In August 2020, FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock and amend the guidance for the derivative scope exception for contracts in an entity’s own equity.

Convertible instruments that continue to be subject to separation models are a) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and b) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital.

The reduction of accounting models is intended to simplify the accounting for convertible instruments, reduce complexity for preparers and practitioners, and improve the decision usefulness and relevance of the information provided to financial statement users.

The amendments to the derivative scope exception guidance a) removes the following conditions from the settlement guidance:

settlement in unregistered shares, collateral, and shareholder rights;

b) clarifies that penalty payments do not preclude equity classification within the settlement guidance in the situation where there is a failure to timely file;

c) requires instruments that are required to be classified as an asset or liability under ASC 815-40-15-8A to be measured subsequently at fair value, with changes reported in earnings and disclosed in the financial statements;

d) clarifies that the scope of the disclosure requirements in ASC 815-40-50 applies only to freestanding instruments, not embedded features;

and e) clarifies that the scope of the reassessment guidance in ASC 815-40-35 on subsequent measurement applies to both freestanding instruments and embedded features.

The amendment to this guidance is intended to reduce form-over-substance-based accounting conclusions.

The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

We adopted this update as of January 1, 2022 and have incorporated this guidance in our evaluation of the accounting for our warrants, which are classified as equity in our consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers"

(“ASU 2021-08”).

The standard requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, “Revenue from Contracts with Customers,” as if it had originated the contracts.

The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

Early adoption is permitted.

The Company adopted this ASU during the second quarter of 2022 and has incorporated this guidance in our evaluation of the accounting for the merger and the HEC Asset Acquisition.

NOTE 3 – BUSINESS COMBINATIONS

On March 28, 2022, the Company and Pineapple Energy consummated the transactions contemplated by the merger agreement.

At the Closing, each member unit of Pineapple Energy that was issued and outstanding immediately prior to the effective time of the merger was cancelled and converted into the right to receive the Company’s common stock.

The Company issued an aggregate of 5,006,245 shares of its common stock, which is inclusive of common shares issued to HEC and E-Gear owners as discussed further below and conversion of certain related party payables and debt outstanding prior to the merger transaction, discussed in Note 11, Commitments and Contingencies.

The purpose of the merger was to provide a path to allow the Company to deliver value to its legacy shareholders through a combination of (i) the opportunity for the legacy CSI shareholders to receive an attractive return from dividends or distributions of the net proceeds from the divestiture of the Company’s pre-merger operating and non-operating assets and properties, and (ii) the opportunity for the legacy CSI shareholders, through ownership of the Company’s common stock following the merger, to participate in the potential growth of the combined company’s residential solar, battery storage, and grid services solutions business.

The Company accounted for the merger as a reverse recapitalization whereby it was determined that Pineapple Energy was the accounting acquirer and CSI was the accounting acquiree.

Refer to Note 2, Summary of Significant Accounting Policies, for

further details.

The accompanying consolidated financial statements and related notes reflect the historical results of Pineapple Energy prior to the merger and do not include the historical results of CSI prior to the consummation of the merger.

As a result of the reverse merger, the acquired assets and assumed liabilities of CSI were remeasured and recognized at fair value as of the acquisition date.

The total purchase price represents the fair value of the Company common stock held by legacy CSI shareholders at the time of the merger ( 2,429,341 shares of common stock).

The fair value of this purchase consideration was $ 19,872,009 using the publicly traded Company stock price at the merger date, which is allocated at the merger date between the liability associated with the Company’s obligation to pay legacy CSI shareholders cash as part of the CVRs discussed below and equity based on their respective fair values (Level 3 fair values).

The merger agreement also included the execution of CVR agreements with holders of record of CSI stock at the close of business on March 25, 2022.

Each shareholder of record received one contractual non-transferable CVR per share of common stock held, which entitles the holders of the CVRs to receive 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, including the sale of JDL and Ecessa, that occur during the 24-month period following the closing of the merger.

As of the merger date, the fair value of the CVR liability was estimated at $ 18,277,230 , a Level 3 fair value, which was determined based on the provisional fair value of the tangible and definite-lived intangibles assets of CSI discussed below.

The CVR liability is adjusted to fair value each reporting period.

The Company is required to review the availability of funds for disbursement to CVR holders on a quarterly basis, starting on June 30, 2022.

If the funds available are less than $ 200,000 , then the amount gets aggregated with the next payment.

During the third quarter of 2022, the Company distributed $ 3.60 per CVR, or $ 8,745,628 in total.

Remaining legacy assets to be sold include the Company’s legacy CSI subsidiaries, JDL and Ecessa, which are classified as held for sale as of December 31, 2022 and included within discontinued operations.

The purchase price allocation for the merger is based on the fair value of assets acquired and liabilities assumed and has been allocated as follows:

Cash and cash equivalents

Accounts receivable

Property, plant, and equipment

Current assets held for sale

Intangible assets

Accounts payable

Accrued expenses

Deferred revenue

Total liabilities

Net assets acquired

The identifiable intangible assets from the merger are definite-lived assets.

These assets include trade names, developed te chnology, and customer relationships and have a provisional weighted average amortization period of four years .

Goodwill recorded as part of the purchase price allocation is not tax deductible.

The trade name fair values were determined using the relief-from-royalty method, an income approach, which included the following significant assumptions:

projected revenue by business, royalty rate, income tax rate, and discount rate.

The fair values of the developed technology associated with the Ecessa business and customer relationships associated with the JDL business were determined using the multiple period excess-earnings method, an income approach, which included the following significant assumptions:

projected Ecessa revenues, obsolescence factor, margins, depreciation, contributory asset charges, discount rates, and income tax rates.

The fair value of the customer relationships associated with the Ecessa business was determined using the distributor method, an income approach, which included the following significant assumptions:

projected Ecessa revenue, customer attrition, margins, contributory asset charges, discount rates, and income tax rates.

The merger included the acquisition of current assets held for sale related to CSI’s company headquarters building located in Minnetonka, Minnesota, pursuant to a purchase agreement entered into with Buhl Investors LLC on November 18, 2021.

The agreement was further amended on February 15, 2022, April 11, 2022 and April 26, 2022, to allow for additional time to complete due diligence.

The assets were recorded at the purchase price of $ 6,800,000 less the costs to sell the building as of March 31, 2022.

On May 26, 2022, the purchase agreement was amended to reduce the purchase price to $ 6,500,000 and the building sale closed on June 10, 2022.

The Company received net proceeds of $ 6,281,000 and recorded a loss on the sale of $ 285,000 during the second quarter of 2022.

The consolidated financial statements include results of operations of CSI following the consummation of the merger for the year ended December 31, 2022, which included $ 5,291,492 of revenue and a net loss of $ 7,074,184 related to its JDL and Ecessa businesses, included in discontinued operations and net income of $ 2,531,457 primarily related to a gain on the fair value remeasurement of the CVR liability, included within continuing operations.

HEC Asset Acquisition

On March 28, 2022, immediately prior to the closing of the merger, Pineapple Energy completed its acquisition of substantially all of the assets of HEC and E-Gear and assumed certain liabilities of HEC and E-Gear pursuant to the Asset Purchase Agreement dated March 1, 2021, as amended by Amendment No.

1 to Asset Purchase Agreement dated December 16, 2021, by and among Pineapple Energy as Buyer, HEC and E-Gear as Sellers, and Steve P.

Godmere, as representative for the Sellers.

This acquisition was an expansion in the residential solar market and is a strategic start to the Company’s overall acquisition growth plan as it looks to expand further through the acquisition of regional residential solar companies and energy technology solution providers.

At the closing of this acquisition, Pineapple Energy issued 6,250,000 Class B units, which upon the closing of the merger were converted into 1,562,498 shares of the Company’s common stock, with a fair value of $ 12,781,234 using the publicly traded stock price at the merger date.

The sellers received $ 12,500,000 in initial cash consideration, less $ 164,888 in working capital adjustments, bringing the aggregate purchase price to $ 25,116,346 , with cash acquired totaling $ 215,684 .

The assets and liabilities of HEC and E-Gear were recorded as of the merger date at their respective fair values.

The purchase price allocation is based on the fair value of assets acquired and liabilities assumed and has been allocated as follows:

Cash and cash equivalents

Accounts receivable

Property, plant, and equipment

Intangible assets

Total liabilities

( 1,471,348 )

Net assets acquired

The identifiable intangible assets from the HEC Asset Acquisition are definite-lived assets.

These assets include a trade name and developed technology and have a weighted average amortization period of seven years .

Goodwill recorded as part of the purchase price allocation is tax deductible.

The developed technology fair values were determined using the relief-from-royalty method, an income approach, which included the following significant assumptions:

projected revenue, obsolescence, royalty rate, income tax rate, and discount rate.

The fair values of the trade names were determined using the multiple period excess-earnings method, an income approach, which included the following significant assumptions:

projected revenues, estimated probability of continued used of tradenames, margins, depreciation, contributory asset charges, discount rates, and income tax rates.

The consolidated financial statements include results of operations of HEC and E-Gear following the consummation of the HEC Asset Acquisition for the year ended December 31, 2022, which included $ 19,843,011 of revenue and a net loss of $ 845,234 .

SUNation Acquisition

On November 9, 2022, the Company completed the SUNation Acquisition as contemplated under the Transaction Agreement.

T his acquisition was a further expansion in the residential and commercial solar markets and fits into the Company’s overall acquisition growth plan as it looks to expand further through the acquisition of regional residential solar companies and energy technology solution providers.

The Company acquired the equity of SUNation from Sellers for an aggregate purchase price of $ 18,440,533 , comprised of (a) $ 2,390,000 in cash consideration paid at closing, (b) the issuance at closing of a $ 5,000,000 Short-Term Limited Recourse Secured Promissory Note (the “Short-Term Note”), (c) the issuance at closing of a $ 5,486,000 Long-Term Promissory Note (the “Long-Term Note”), with a fair value of $ 4,830,533 at the acquisition date, (d) the issuance at closing of an aggregate of 1,480,000 shares (the “Shares”) of Company common stock pursuant to the Plan of Merger, with a fair value of $ 4,070,000 at the acquisition date and (e) potential earn-out payments of up to $ 5,000,000 million based on the percentage of year-over-year EBITDA growth of the SUNation in 2023 and 2024, as set forth in the Transaction Agreement (the “Earnout”), with a fair value of $ 2,150,000 at the acquisition date.

The Company utilized a Monte Carlo simulation to determine the fair value of the earnout liability, which included the following significant assumptions:

the expected probability and timing of achievement of milestone events.

As of December 31, 2022, the fair value of the earnout liability was $ 2,150,000 .

See further discussion regarding the Short-Term Note and Long-Term Note within Note 11, Commitments and Contingencies.

The assets and liabilities of SUNation were recorded as of the merger date at their respective fair values.

The purchase price allocation is based on the fair value of assets acquired and liabilities assumed and has been allocated as follows:

Accounts receivable

Employee retention credit receivable

Right of use asset

Intangible assets

Accounts Payable

Other current liabilities

Related party payables

Operating lease liability

Loans payable

Customer deposits

Deferred revenue

Total liabilities

Net assets acquired

The identifiable intangible assets from the SUNation Acquisition are definite-lived assets.

These assets include a trade name and backlog and have a weighted average amortization period of eight years .

Goodwill recorded as part of the purchase price allocation is not tax deductible.

The trade name fair values were determined an income approach under an estimate developed from the relief-from-royalty method and the projected cash savings over an estimated period of time that would otherwise be required to license this asset.

The backlog amount was determined using an income approach under a multi-period excess earnings approach whereby cash flows in excess of those needed to operate contributory assets over a period of time are otherwise attributed to the fair value of the asset .

The consolidated financial statements include results of operations of SUNation following the consummation of the SUNation Acquisition for the year ended December 31, 2022, which included $ 7,617,848 of revenue and a net loss of $ 99,522 .

Transaction costs related to the merger, the HEC Asset Acquisition and the SUNation Acquisition totaled $ 1,947,425 and $ 2,410,634 incurred during the years ended December 31, 2022 and 2021, respectively, and were recorded in operating expenses within the consolidated statements of operations and comprehensive loss.

Pro Forma Information

The following unaudited pro forma information represents the results of operations as if the Company had completed the merger, the HEC Asset Acquisition and the SUNation Acquisition as of January 1, 2021.

The unaudited pro forma financial information below includes adjustments to amortization expense for intangible assets totaling $ 1,706,086 and $ 3,416,286 and excludes transaction costs totaling $ 4,208,063 and $ 4,757,837 for the years ended December 31, 2022 and 2021, respectively.

The unaudited pro forma financial information below is not necessarily indicative of consolidated results of operations of the combined business had the acquisition occurred at the beginning of the respective period, nor is it necessarily indicative of future results of operations of the combined company.

( 9,180,142 )

Earnout Shares

As part of the merger, the Company agreed to issue up to 3.25 million shares of the Company common stock to the holders of pre-merger Pineapple Energy units, subject to meeting certain milestone events (collectively, the “Merger Earnout Shares”).

The Merger Earnout Shares are issuable in three tranches.

The milestone for the issuance of the first tranche of the Merger Earnout Shares involves repayment of certain of pre-merger Pineapple Energy’s debt obligations within three months of the merger closing, which would result in the issuance of 750,000 shares of the Company’s common stock.

This milestone was met at the merger closing and the 750,000 shares of the Company’s common stock were issued and are reflected in the Company’s consolidated statement of stockholders’ equity as of December 31, 2022.

The milestone for the second tranche of the Merger Earnout Shares is triggered upon the volume weighted average price (“VWAP”) of the Company’s common stock equaling or exceeding $ 24.00 for 30 consecutive trading days within 24 -months of the merger closing.

The milestone for the third tranche of the Merger Earnout Shares is triggered upon the VWAP of the Company’s common stock equaling or exceeding $ 32.00 for 30 consecutive trading days within 24 -months of the merger closing.

Under the second or third tranches, the number of shares of Company common stock to be issued is also affected by whether the Company has disposed or sold certain assets of its business within 24 months of the merger closing date, which could ultimately impact whether 1.0 million or 1.25 million shares of the Company’s common stock are issued under each tranche.

The first tranche of 750,000 shares issued of the Company’s common stock is accounted for as permanent equity in accordance with ASC 815-40, and no subsequent remeasurement is required as long as the shares continue to be classified in equity.

The shares of the Company’s common stock contingently issuable under the second and third tranches, up to an additional 2.5 million shares of the Company’s common stock are classified as a liability, similar to the accounting for written equity options, which requires an initial measurement of the liability at fair value with subsequent remeasurements to fair value at each reporting date and changes in the fair value recognized in the consolidated statement of operations.

As of March 28, 2022, the fair value of the Merger Earnout Shares for the second and third tranches was approximately $ 4.7 million.

The Company utilized a Monte Carlo simulation to determine the fair value of the liability, which included the following significant assumptions:

the expected probability and timing of achievement of milestone events.

As of December 31, 2022, the fair value of the Merger Earnout Shares was $ 0 , resulting in a gain on the fair value remeasurement of the earnout consideration totaling $ 4,684,000 during the year ended December 31, 2022, which was recorded in other income (expense) within the consolidated statements of operations.

NOTE 4 – REVENUE RECOGNITION

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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).

The 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.

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

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.

Significant Judgments

To determine the transaction price, the Company estimates the amount of variable consideration at the outset of the contract, depending on the facts and circumstances relative to the contract.

The Company may provide credits or incentives to its customers, which are accounted for as either variable consideration or consideration payable to the customer.

The Company estimates product returns based on historical return rates.

The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant revenue reversal of previously recognized revenue will not occur throughout the life of the contract.

When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue.

In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue.

The Company will assess if any incentives it offers to its customer is a consideration payable.

The Company accounts for consideration payable to a customer as a reduction of the transaction price, and therefore, of revenue.

For contracts with more than one performance obligation, the consideration is allocated between separate products and services based on their stand-alone selling prices.

Judgment is required to determine standalone selling prices for each distinct performance obligation.

The Company generally determines standalone selling prices based on the actual prices charged to customers and has an established range of amounts that fall within stand-alone selling price for its distinct performance obligations.

The Company evaluates this range quarterly.

Costs to Obtain or Fulfill a Contract

The Company evaluates “Other Assets and Deferred Costs” (ASC 340-40), for the accounting for certain costs to obtain and fulfill contracts (or, in some cases, an anticipated contract) with a customer.

ASC 340-40 is applicable only to incremental contract costs, those that an entity would not have incurred if the contract had not been obtained, and requires the capitalization of these costs as well as provides guidance on the amortization and impairment considerations.

The Company elects the practical expedient and expenses certain costs to obtain contracts when applicable.

Within Services & Support, commissions were paid upfront on certain long-term recurring revenue agreements.

Total costs to obtain a contract in the years ended December 31, 2021 and 2020 were $ 25,000 and $ 52,000 , respectively.

Transaction Price Allocated to Future Performance Obligations

To determine the allocation of the transaction price and amounts allocated to the performance obligations, the Company first determined the standalone selling price for each distinct performance obligation in the contract in order to determine the allocations of the transaction price in proportion to the standalone selling price for each performance obligation in the contract in accordance with ASC 606-10-32-31 and 32-33.

Judgment is required to determine standalone selling price for each distinct performance obligation.

The Company evaluates this range quarterly.

Practical Expedients and Exemptions

The Company adopted various practical expedients and policy elections related to the accounting for significant finance components, sales taxes, shipping and handling, costs to obtain a contract and immaterial promised goods or services.

The practical expedient to disclose the unfulfilled performance obligations was not made as they are expected to be fulfilled within one year.

Disaggregation of revenue

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that best reflects the consideration we expect to receive in exchange for those goods or services.

In accordance with ASC 606-10-50-5, the following tables present how we disaggregate our revenues.

For the Services & Support segment, we analyze revenue by customer group and type, which is as follows for the years ended December 31, 2021 and 2020:

Services & Support Revenue

‎ by Customer Group

Other commercial clients

CSI IT operations

Services & Support Revenue

Project & product revenue

Services & support revenue

The following table disaggregates revenue based on type for the years ended December 31, 2022 and 2021:

Revenue by Type

The following table disaggregates revenue based on the timing of satisfaction of the performance obligations for the years ended December 31, 2022 and 2021:

Performance obligations satisfied at a point in time

Performance obligations satisfied over time

Contract Balances

The contract assets associated with the commission costs noted above were $ 323,000 and $ 267,000 at December 31, 2021 and 2020, respectively.

The Company does no t have material contract liabilities.

Contract assets represent costs and earnings in excess of amounts billed and direct costs, including commissions, financing and permitting fees paid prior to recording revenue.

Contract liabilities represent amounts billed to clients in excess of revenue recognized to date and billings in excess of costs and earnings.

Contract assets were $ 1,477,596 and $ 0 at December 31, 2022 and 2021, respectively.

Contract liabilities were $ 6,990,538 and $ 0 at December 31, 2022 and 2021, respectively.

NOTE 5 – CONTRACTS IN PROGRESS

Billings in excess of costs and estimated earnings as of December 31, 2022 and 2021 are as follows:

Year Ended December 31

Billings to date

Costs incurred on uncompleted contracts

Estimated earnings

Cost plus estimated earnings

Billings in excess of costs plus estimated earnings on uncompleted contracts

Costs and estimated earnings in excess of billings as of December 31, 2022 and 2021 are as follows:

Year Ended December 31

Costs incurred on uncompleted contracts

Estimated earnings

Billings to date

Costs and estimated earnings in excess of billings on uncompleted contracts

NOTE 6 – LEASES

In accordance with ASC Topic 842, the Company recognizes assets and liabilities for the rights and obligations created by leases that extend more than twelve months from the date of the balance sheet.

Right of use (“ ROU”) assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease.

Right of use (“ ROU”) assets represent our right

to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease.

Lease ROU assets and liabilities are recognized at the commencement date of a lease based on the present value of lease payments over the lease term.

Because the rate implicit in each individual lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.

The Company has entered into operating leases for two office locations, including one in February 2019 and one in May 2020 upon the acquisition of Ecessa.

These leases have remaining lease terms of 10 months to 2 years.

One of the leases includes two options to extend the lease for 5 years each.

One lease includes a 3 % rent adjustment on each anniversary of the lease and another includes a 2.5 % annual rent adjustment as well as one free month each year.

In 2022, the Company entered into operating leases for two office locations, including one in April 2022 and one in November 2022 upon the acquisition of SUNation.

These leases have remaining lease terms of 10 to 13 years.

One lease includes a 3 % rent adjustment on each anniversary of the lease and the other includes a fixed annual rent adjustment of $ 6,840 .

As of December 31, 2022, total ROU assets and operating lease liabilities were $ 4,166,838 and $ 4,182,103 , respectively.

As of December 31, 2020, total ROU assets and operating lease liabilities were

$ 284,000 and $ 295,000 , respectively.

There were no operating lease liabilities as of December 31, 2021.

All operating lease expense is recognized on a straight-line basis over the lease term.

In the years ended December 31, 2022 and 2021, the Company recognized $ 212,000 and $ 0 in lease expense, respectively.

The Company also recognized $ 195,000 and $ 82,000 in sublease income for the years ended December 31, 2021 and 2020, respectively.

Information related to the Company’s ROU assets and related lease liabilities were as follows:

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Weighted-average discount rate

(1) 2020 includes $ 209,000 for an operating lease assumed with the Ecessa acquisition in the second quarter.

(1) Includes $ 1,687,334 for operating leases entered into in 2022 and $ 2,602,024 for operating leases acquired as part of the SUNation Acquisition.

Maturities of lease liabilities as of December 31, 2022 were as follows:

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Less imputed interest

( 1,880,726 )

Total operating lease liabilities

As of December 31, 2021, the Company does no t have any additional future operating lease obligations that have not yet commenced.

As of December 31, 2022, the Company has a future operating lease obligation related to its corporate offices, commencing on January 1, 2023.

NOTE 7– DISCONTINUED OPERATIONS

On March 11, 2020, the Company sold the remainder of its Suttle business lines, including the SoHo, MediaMAX, and SpeedStar brands and inventory as well as working capital, certain capital equipment, intellectual property, and customer relationships to Oldcastle Infrastructure, Inc.

(“Oldcastle”) for $ 8,000,000 , with a working capital adjustment 90 days after close.

Oldcastle will operate the majority of the acquired Suttle business through its wholly owned subsidiary, Primex Technologies, Inc.

Through the sale to Primex, a separate online equipment auction held in the fourth quarter of 2020, and various other sales, the Company received total proceeds of $ 8,900,000 and recorded a gain on the sale of $ 2,247,000 in 2020.

The presentation of discontinued operations has been retrospectively applied to all prior periods presented.

On August 2, 2021, the Company and Lantronix completed the sale by CSI to Lantronix of all of the issued and outstanding stock of CSI’s wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of its wholly owned subsidiary, Transition Networks Europe Limited (collectively with Transition Networks, Inc., the “TN Companies”), pursuant to a securities purchase agreement dated April 28, 2021 (“E&S Sale Transaction”).

The Company received net proceeds of $ 23,630,000 , which included a working capital adjustment of $( 1,376,000 ) and recorded a gain on sale of $ 13,455,000 during the third quarter of 2021.

The presentation of discontinued operations with respect to this E&S Sale Transaction has been retrospectively applied to all prior periods presented.

Under the securities purchase agreement, Lantronix has also agreed to pay CSI, if earned, earnout payments of up to $ 7.0 million payable following two successive 180 -day intervals after the closing of the E&S Sale Transaction based on revenue targets for the business of the TN Companies as specified in the securities purchase agreement, subject to certain adjustments and allocations as further described in the securities purchase agreement.

Concurrently with the closing of the transaction, CSI and Lantronix entered into a transition services agreement under which CSI will perform administrative and IT services, and lease office, warehouse and production space to Lantronix at CSI’s Minnetonka, Minnesota facility for a period of up to twelve months .

On December 15, 2021, the Company sold its remaining real and personal property located in Hector, Minnesota, related to its former Suttle operations, with net proceeds of $ 842,000 .

The presentation of discontinued operations related these assets has been retrospectively applied to all prior periods presented.

On November 18, 2021, the Company entered into a purchase agreement with Buhl Investors LLC, a Minnesota limited liability company, or its affiliated assignee for the sale of the Company’s headquarters building located in Minnetonka, Minnesota for

$ 6,800,000 .

The agreement was amended on February 15, 2022 to allow for additional time to complete due diligence.

The Company recorded the assets as held for sale at December 31, 2021.

The assets and liabilities of this discontinued operation that are classified as held for sale are as follows:

Pursuant to the merger agreement, the Company is working to divest its legacy operations and operating assets.

The Company is actively pursuing the sale of its JDL and Ecessa businesses and has met the criteria to report the operations of these businesses as discontinued operations beginning in the fourth quarter of 2022.

The assets and liabilities of the discontinued operations that are classified as held for sale are as follows:

December 31, 2022

December 31, 2021

Cash and cash equivalents

Trade accounts receivable, net

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Right of use asset

Intangible assets

Total noncurrent assets

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Other accrued liabilities

Deferred revenue

Total current liabilities

Operating lease liability

Deferred revenue

Total noncurrent liabilities

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Selling, general and administrative expenses

Amortization expense

Transaction costs

Impairment loss

Restructuring expenses

Gain on sale of assets

( 13,451,000 )

Goodwill impairment loss

Operating loss before income taxes

( 7,070,858 )

Foreign currency translation loss

Other expense

Operating income before income taxes

Income tax expense

Income from discontinued operations

During the year ended December 31, 2021, the Company recorded $ 1,811,000 in restructuring expense, with $ 1,343,000 in discontinued operations.

This consisted of severance and related benefits costs due to the sale of the E&S segment.

The Company incurred $ 960,000 in restructuring costs in 2020 related to the sale of Suttle’s business lines and had $ 252,000 in restructuring accruals recorded in accrued compensation and benefits at December 31, 2020.

The Company paid $ 1,547,000 in restructuring charges during 2021 and had $ 516,000 in restructuring accruals recorded in accrued compensation and benefits at December 31, 2021 that are expected to be paid during 2022.

NOTE 5 –BUSINESS COMBINATIONS

On May 14, 2020, in a reverse triangular merger, the Company completed the acquisition of 100 % of Ecessa Corporation.

Ecessa designs and distributes software-defined wide area networking (SD-WAN) solutions for businesses through the deployment of over 10,000 field installations (since 2002) of Ecessa Edge®, PowerLink®, and WANworX® controllers.

The acquisition expands the Company’s IoT intelligent edge products and services and provides opportunities to expand the Company’s services platform.

purchase price was $ 4,642,000 , with cash acquired totaling $ 666,000 .

The purchase price includes initial consideration of $ 4,666,000 and $( 24,000 ) in working capital adjustments.

The assets and liabilities of Ecessa were recorded in the consolidated balance sheet within the Services & Support segment as of the acquisition date, at their respective fair values.

The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed and has been allocated as follows:

Current assets

Property, plant, and equipment

Other long-term assets

Intangible assets

Total liabilities

Net assets acquired

Identifiable intangible assets are definite-lived assets.

These assets include trade name/trademark/internet domain assets, non-compete agreements, customer relationships, and internally developed software intangible assets, and have a weighted average amortization period of 7 years, which matches the weighted average useful life of the assets.

Goodwill recorded as part of the purchase price allocation is not tax deductible.

On November 3, 2020, the Company acquired the operating assets of privately held IVDesk Minnesota, Inc.

(“IVDesk”) from a third-party receiver (“Receiver”).

IVDesk provides private cloud services to small- and mid-size businesses (SMB), with a particular focus on the financial services industry.

The acquisition expands the Company’s monthly recurring revenue service model, bringing additional resources and experience in cloud-delivered applications.

The purchase price was $ 1,368,000 and includes initial consideration of $ 950,000 , working capital adjustments of $( 132,000 ), and $ 550,000 in contingent consideration, which the Company agreed to pay up to $ 550,000 in additional consideration upon retaining a certain customer level 120 days after closing.

During March 2021, upon meeting the requirements of the earn-out, the Company paid the Receiver the additional consideration.

At December 31, 2021, the Company had no further liabilities related to the contingent consideration.

The assets and liabilities of IVDesk are recorded in the consolidated balance sheet within the Services & Support segment at December 31, 2021.

The purchase price allocation was based on estimates of the fair value of assets acquired and liabilities assumed, and included total assets of $ 1,500,000 , including property, plant, and equipment of $ 35,000 , goodwill of $ 745,000 and intangible assets of $ 720,000 , and total liabilities of $ 132,000 .

Identifiable intangible assets are definite-lived assets.

These assets include customer relationships and have a weighted average amortization period of 8 years, which matches the weighted average useful life of the assets.

NOTE 6 –CASH EQUIVALENTS AND INVESTMENTS

The following tables show the Company’s cash equivalents and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash equivalents or short and long-term investments as of December 31, 2021 and December 31, 2020:

December 31, 2021

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Cash Equivalents

Short-Term Investments

Long-Term Investments

Cash equivalents:

Money Market funds

Corporate Notes/Bonds

Convertible Debt

Net loss from discontinued operations

( 7,074,184 )

Due to CVR Representative’s approval of the planned sale of JDL and Ecessa and its discontinued operations assessment in the fourth quarter of 2022, the Company determined there was a triggering event that warranted an interim impairment assessment.

Based on the quantitative assessment, the Company recorded an impairment loss of $ 6,718,612 .

NOTE 8 –RESTRICTED CASH EQUIVALENTS AND INVESTMENTS

The following tables show the Company’s restricted cash equivalents and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash equivalents or short and long-term investments as of December 31, 2022.

The Company did no t have any restricted cash equivalents and available for sale securities in 2021.

December 31, 2022

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Gross Unrealized Losses

Cash Equivalents

Restricted Cash Equivalents

Short-Term Investments

Long-Term Investments

Cash equivalents:

Restricted cash equivalents:

Money Market funds

Commercial Paper

Corporate Notes/Bonds

Convertible Debt

The following table summarizes the estimated fair value of our investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of December 31, 2022:

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The Company expects such recoveries to occur prior to the contractual maturities.

During 2021, the Company recognized a realized loss on its convertible debt investments and recorded $ 400,000 in expense within investment and other income (expense) in the accompanying consolidated statement of income (loss) and comprehensive income (loss).

The Company did no t recognize any gross realized gains during the years ending December 31, 2021 and 2020, respectively.

In April 2020, the Company made an $ 899,000 minority investment in the common stock of Quortus Ltd., a UK-based company that provides virtual core network software for Private LTE solutions for critical and secure communications.

This investment was important for the Company’s Electronics & Software segment because this segment had been partnering with Quortus to integrate the

Quortus Private LTE core in existing and new products for that segment’s federal business, network extensions, and private networks for enterprises.

The Company’s investment represented less than 10 % of the outstanding equity of Quortus Ltd.

The Company uses the cost method to account for investments in common stock of entities such as Quortus if the Company does not have the ability to exercise significant influence over the operating and financial matters of the entity.

The Company did no t recognize any gross realized gains or losses during the years ended December 31, 2022 or 2021.

As part of the merger, the Company acquired an investment totaling $ 250,000 in preferred shares of Kogniz, Inc., a privately owned artificial intelligence company based in Silicon Valley, CA.

The Company’s investment represented less than 10 % of the outstanding equity of Kogniz.

The Company uses the cost method to account for investments in common stock of entities such as Kogniz if the Company does not have the ability to exercise significant influence over the operating and financial matters of the entity.

The Company also uses the cost method to account for its investments that are not in the form of common stock or in-substance common stock in entities if the Company does not have the ability to exercise significant influence over the entity’s operating and financial matters.

In the fourth quarter of 2021, Quortus was acquired, and the net proceeds were distributed to shareholders.

The Company received $ 650,000 in proceeds and expects to receive an additional $ 43,000 in 2022.

The Company recognized an impairment loss of $ 206,000 within operating expenses in the accompanying consolidated statement of income (loss) and comprehensive income (loss).

NOTE 7 - INVENTORIES

Inventories consist of:

Finished goods

Raw and processed materials

Based on Kogniz’s 2022 performance and overall financial outlook, the Company recognized an impairment loss of $ 250,000 within operating expenses in the accompanying consolidated statement of operations and comprehensive loss.

NOTE 9 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment and the estimated useful lives are as follows:

Buildings and improvements

Leasehold improvements

Machinery and equipment

Furniture and fixtures

Construction in progress

Less accumulated depreciation

( 4,329,000 )

( 3,970,000 )

NOTE 10 – GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the year ended December 31, 2021 by company are as follows:

The changes in the carrying amount of goodwill for the year ended December 31, 2022 by reporting unit are as follows.

January 1, 2022

December 31, 2022

December 31, 2021

Gross goodwill

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December 31, 2022

Estimated Useful Life

Gross Carrying Amount

Accumulated Amortization

Trade Name/Trademark/Internet Domain Assets

Non-compete Agreements

Customer Relationships

Internally Developed Software

Tradenames & trademarks

( 4,141,072 )

Developed technology

( 4,641,072 )

December 31, 2021

Estimated Useful Life

Gross Carrying Amount

Accumulated Amortization

Trade Name/Trademark/Internet Domain Assets

Non-compete Agreements

Customer Relationships

Internally Developed Software

Tradenames & trademarks

( 1,507,612 )

Amortization expense on these identifiable intangible assets was $ 3,133,460 and $ 1,429,295 in 2022 and 2021 respectively.

The weighted average remaining useful life at December 31, 2022 was 6.5 years.

The estimated future amortization expense for identifiable intangible assets during the next five fiscal years is as follows:

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NOTE 11 – COMMITMENTS AND CONTINGENCIES

Line of credit:

On August 28, 2020, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, establishing a $ 5,000,000 line of credit facility agreement that replaced a prior facility.

On October 29, 2020, the Company entered into a First Amendment to the Credit Agreement.

Under the Credit Agreement, as amended, the Company had the ability to obtain one or more letters of credit in an aggregate amount up to $ 2,000,000 , subject to the general terms of the credit agreement.

The Company did not plan to renew the Credit Agreement upon its expiration and terminated the Credit Agreement effective August 13, 2021.

As of December 31, 2021, the Company had no other material commitments (either cancelable or non-cancelable) for capital expenditures or other purchase commitments related to ongoing operations.

Long-term compensation plans:

The Company has a long-term incentive plan that provides long-term competitive compensation to enable the Company to attract and retain qualified executive talent and to reward employees for achieving goals and improving company performance.

The plan provides grants of “performance units” made at the beginning of performance periods and paid at the end of the period if performance goals are met.

Awards are made every year and are paid following the end of the cycle with annual vesting.

Payment in the case of retirement, disability or death will be on a pro rata basis.

The Company recognized expense of $ 115,000 and $ 66,000 in 2021 and 2020, respectively.

Accrual balances for long-term compensation plans at December 31, 2021 and 2020 were $ 0 and $ 230,000 , respectively.

Awards paid were $ 344,000 in 2021 and $ 0 in 2020.

Awards under the 2018 to 2020 plans were paid out 50 % in cash and 50 % in stock.

Awards under the 2019 to 2021 and 2020 to 2022 plans were paid out 75 % in stock and 25 % in cash.

The stock portion of these awards are treated as equity plans and included within the Stock Compensation footnote within the Deferred Stock Outstanding section below.

PIPE Offering:

On September 15, 2021, CSI entered into an amended and restated securities purchase agreement with a group of institutional investors (the “PIPE Investors”) to make a $ 32.0 million private placement investment in CSI in connection with the closing of the previously announced merger transaction between CSI and Pineapple Energy, LLC (“Pineapple”).

Proceeds of this investment will used primarily to fund the cash portion of the purchase price to acquire Hawaii Energy Connection, LLC and E-Gear, LLC assets, to repay $ 4.5 million of Pineapple’s $ 7.5 million term loan from Hercules, for transaction expenses, and for working capital to support Pineapple’s growth strategy.

The closing of the financing is subject to approval of CSI’s shareholders and other customary conditions.

Under the terms of the securities purchase agreement, the PIPE Investors have agreed to purchase $ 32.0 million in newly authorized CSI Series A Convertible Preferred Stock convertible at a price of $ 3.40 per share into CSI common stock, with five year warrants to purchase an additional $ 32.0 million of common shares at that same price (the “PIPE Offering”).

The PIPE Offering is expected to close immediately following the consummation of the CSI-Pineapple merger transaction (the “Merger”).

Therefore the PIPE Investors will invest in the post-Merger company, will not be entitled to receive any cash dividends paid prior to closing and will not receive the Contingent Value Rights (“CVRs”) to be issued to pre-Merger CSI shareholders.

The Series A Convertible Preferred Stock will have no liquidation or dividend preference over CSI common stock and no voting rights until after converted into CSI common stock.

Assuming conversion of the Series A Convertible Preferred Stock, the PIPE Investors would own approximately 9.41 million shares of the Company’s outstanding common stock immediately following the closing of the PIPE Offering, representing approximately 27 % of CSI’s outstanding Common Stock after giving effect to the issuance of shares in the Merger, and approximately 18.8 million shares assuming exercise of all the warrants for cash, representing approximately 43 % of CSI’s outstanding common stock after giving effect to the issuance of shares in the Merger and exercise of the warrants.

The Series A Convertible Preferred Stock and warrants will have anti-dilution provisions that would increase the number of shares issuable upon conversion or exercise, and lower the conversion or exercise price, if CSI issues equity securities at a price less than the conversion or exercise price at the time of such issuance.

The securities purchase agreement also prohibits the combined company from conducting a new equity offering within 30 days of the closing, gives the PIPE Investors in the aggregate the right to purchase up to 25 % of the equity securities in future CSI-Pineapple offerings within one year of closing and requires 30 -day lock-up agreements of CSI common stock by certain CSI-Pineapple officers, directors and major shareholders following the closing.

In connection with the transaction, CSI has agreed to file a registration statement on behalf of the PIPE Investors allowing them to resell the common stock into which the Series A Convertible Preferred Stock is convertible and the warrants are exercisable immediately after issuance.

Closing of the PIPE Offering is also subject to the effectiveness of this registration statement and other customary closing conditions.

As of December 31, 2022 and December 31, 2021, Pineapple Energy had $ 3,000,000 and $ 7,500,000 , respectively, in a loan payable to Hercules Capital, Inc.

(“Hercules”) under a loan and security agreement (the “Term Loan Agreement”).

This loan accrues interest at 10 %, payable-in-kind and was initially due and payable on December 10, 2023.

There are no financial covenants associated with this loan.

This loan was used to acquire fixed assets, inventory, and intangible assets of Sungevity in an asset acquisition in December 2020.

As the transaction did not involve the exchange of monetary consideration, the assets were valued at the Company’s most reliable indication of fair value, which was debt issued in consideration for the assets.

Accordingly, Pineapple Energy assessed the fair market value of the debt instrument at $ 4,768,000 at the asset acquisition date (a non-recurring Level 3 fair value input).

The Company initially accreted the value of the debt over its life at a discount rate of approximately 25 %.

On December 16, 2021, the Term Loan Agreement was amended, whereby the maturity date was extended to December 31, 2024, subject to various prepayment criteria.

In addition, the amendment provided that $ 4,500,000 plus all accrued and unpaid interest and expenses were to be repaid upon closing of the merger and receipt of the PIPE funds, with the remaining principal to be paid upon the loan maturity date.

The amendment represented a modification to the loan agreement with the existing lender as both the original loan agreement and the amendment allow for immediate prepayment and the Company passed the cash flow test.

At December 31, 2021, the combined loan and accrued interest balance was $ 6,194,931 .

The balance at December 31, 2022, after giving effect to the $ 5,557,000 payment of principal and accrued interest on March 29, 2022, was $ 1,428,685 .

A new effective interest rate of approximately 52.9 % was established during the first quarter of 2022 based on the carrying value of the revised cash flows.

Interest and accretion expense was $ 151,024 and $ 618,983 for years ended December 31, 2022 and December 31, 2021 respectively.

The loan is collateralized by all of Pineapple Energy’s personal property and assets.

Working Capital Note

On January 8, 2021, Pineapple Energy and Hercules, as agent for itself and the lenders, entered into a Working Capital Loan and Security Agreement (the “ Working Capital Agreement”) for a working capital loan in the maximum principal amount of $ 500,000 .

The lenders, Hercules and Northern Pacific Growth Investment Advisors, LLC, made working capital loan commitments of $ 400,000 and $ 100,000 , respectively.

Northern Pacific Growth Investment Advisors, LLC is an affiliate of Northern Pacific Group, which controls Lake Street Solar, LLC, a then-member of Pineapple Energy.

Borrowings under the Working Capital Agreement bore interest at 10.00 % per annum with interest compounded daily and payable monthly.

At December 31, 2021, the balance outstanding on the working capital loan was $ 350,000 .

The working capital loan had an initial maturity date of January 7, 2022 and was collateralized by all of Pineapple Energy’s assets.

The Working Capital Agreement included provisions relating to the mandatory and optional conversion of the underlying loan amount into equity of the Company under certain circumstances.

In the case of either a mandatory or optional conversion of the Hercules working capital loan, the working capital loan of Northern Pacific Growth Investment Advisors, LLC, including all accrued and unpaid interest, would be immediately due and payable.

On December 16, 2021, an amendment to the Working Capital Agreement was executed that extended the maturity date to December 31, 2022 and added an additional mandatory conversion provision.

In the event that, on or before the maturity date, Pineapple Energy consummated the merger, then immediately prior to the consummation of the merger, the working capital loan and all accrued and unpaid interest and expenses thereon would automatically convert into Class C Units of Pineapple Energy calculated based on one Class C Unit being issued for every $ 2.00 to be converted.

The conversion option under the amendment was considered clearly and closely related to the host contract.

During the first three months of 2022, Pineapple Energy borrowed an additional $ 150,000 and had $ 500,000 outstanding prior to the merger on March 28, 2022.

Immediately prior to the merger on March 28, 2022, the $ 500,000

outstanding loan balance was converted to 250,000 Class C Units, which upon close of the merger were converted into 62,500 shares of Company common stock .

Interest expense was $ 13,977 and $ 10,178 for the years ended December 31, 2022 and 2021 respectively.

Related Party Payables

During December 2020, Pineapple Energy incurred acquisition-related costs and accrued a payable totaling $ 2,350,000 , with $ 2,000,000 due to one then-member and $ 350,000 to another then-member.

Under the Term Loan Agreement, this $ 2,350,000 in related party payables was subordinate to the payment to Hercules of the amounts due under the Term Loan Agreement and could only be repaid under certain conditions, including the requirement that no obligations were outstanding under the Term Loan Agreement and Pineapple Energy or its subsidiaries had closed on an equity transaction generating at least $ 30 million in proceeds.

On December 16, 2021, the then-members signed subscription agreements where the then-members agreed, in consideration for the full cancellation of the accrued payables, to convert the accrued payables into convertible promissory notes of Pineapple Energy, effective immediately prior to the consummation of the merger.

The convertible promissory notes automatically converted into 1,175,000 Class C Units of Pineapple Energy after issuance of the convertible note to the then-members and immediately prior to the consummation of the merger.

This conversion option was considered clearly and closely related to the host contract and the payables were converted to 1,175,000 Class C Units of Pineapple Energy immediately prior to the merger, which upon close of the merger were converted into 293,750 shares of the Company’s common stock.

SUNation Short-Term and Long-Term Notes

As discussed in Note 3, Business Combinations, the Company entered into short-term and long-term notes in connection with the SUNation Acquisition on November 9, 2022.

The $ 5,000,000 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 $ 5,486,000 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.

As the debt was part of the SUNation purchase price allocation, the Company assessed the fair market value of the debt instrument at $ 4,830,533 at the asset acquisition date (a non-recurring Level 3 fair value input).

The Company accretes the value of the debt over its life at a discount rate of approximately 11.2 %.

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

Pursuant to the Pledge Agreement, the Short-Term Note is secured by a pledge by the Company and Merger Sub of the equity of SUNation purchased under the Transaction Agreement.

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

If Sellers exercise their remedies under the Pledge Agreement (due to an event of default by the Company under the Short-Term Note or the Pledge Agreement), Sellers would be able recover the pledged equity of the acquired companies and the Company’s remaining obligations under the Short-Term Note and the Long-Term Note would be cancelled in their entirety and would be of no further force and effect.

The Company’s obligations to make any Earnout payment under the Transaction Agreement would also be terminated.

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

The balances of the Short-Term Note and Long-Term Note recorded at December 31, 2022 was $ 5,057,299 and $ 4,917,879 , respectively.

Interest and accretion expense related to the notes totaled $ 144,645 for the year ended December 31, 2022.

Equipment Loans

The Company acquired various equipment loan agreements through its SUNation Acquisition.

These loans are secured by machinery and equipment and expire at various dates through September 2025 with interest rates ranging from 5.0 to 6.5 % per annum.

The balance for the equipment loans recorded at December 31, 2022 was $ 168,184 .

Interest expense was $ 1,271 for the year ended December 31, 2022.

Promissory Note

Through the SUNation Acquisition, the Company acquired a promissory note with a former shareholder and member of SUNation through a buyout agreement.

The promissory note includes monthly payments of principal and interest at an annual

rate of 3.25 %.

The promissory note matures on March 1, 2031.

The balance for the promissory note recorded at December 31, 2022 was $ 1,887,616 .

Interest expense was $ 14,726 for the year ended December 31, 2022.

Future Minimum Principal Payments

Future minimum principal payments under the aforementioned loans and notes for the next five years are as follows:

Other Contingencies

The Company is aware of two lawsuits that have been filed on behalf of purported CSI shareholders relating to the registration statement on S-4 that we filed on November 12, 2021 (“Registration Statement”) in connection with the Pineapple Merger Transaction, among other matters.

During the first quarter of 2022, the two lawsuits that were filed on behalf of purported CSI shareholders relating to the Registration Statement on S-4 that we filed on November 12, 2021 (the “Registration Statement”) in connection with the merger, among other matters, were voluntarily dismissed.

The first complaint was filed on December 13, 2021 by Bashir Rivera in the United States District Court for the Southern District of New York and is captioned Rivera v.

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1:21-cv-07155-MKB-VMS.

The Rivera action was subsequently voluntarily dismissed on February 24, 2022.

Both complaints name CSI and all of its current directors as defendants.

Both complaints allege violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and claim that the Registration Statement omits material information with respect to the Pineapple Merger Transaction.

The plaintiffs in the actions purport to seek equitable relief and damages.

Additionally, CSI has received seven letters from individuals purporting to be shareholders of the Company (which we refer to collectively as the “Demands”) which also generally allege that the Registration Statement omits material information with respect to the Pineapple Merger Transaction.

In addition, one of the Demands seeks certain books and records of the Company.

The Company intends to vigorously defend the lawsuits and Demands.

Further, we have vigorously denied, and continues vigorously to deny, that we have committed or aided and abetted in the commission of any violation of law or duties or engaged in any of the wrongful acts that were alleged in the Rivera or Chaidez complaints and the Demands.

CSI is subject to claims and lawsuits in the ordinary course of business.

From time to time, the Company brings suit against others to enforce contract rights or property rights, or to collect debts in the ordinary course of business.

Management believes that the resolution or settlement of any pending litigation will not have a material adverse effect on the results of operations or liquidity of the Company.

NOTE 11 – STOCK COMPENSATION

2011 Executive Incentive Compensation Plan

On March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Incentive Plan”).

The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash.

The 2011 Incentive Plan, as amended, allows the issuance of up to 2,500,000 shares of common stock.

At December 31, 2021, 1,425,008 shares have been issued under the 2011 Incentive Plan, there are no shares subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and 1,074,992 shares are eligible for grant under future awards.

The closing of the E&S Sale Transaction on August 2, 2021 constituted a “Change in Control” as defined in the Company’s 2011 Incentive Plan.

In accordance with the determinations and approvals of the Compensation Committee, effective on August 1, 2021, each Incentive Award granted and outstanding under the 2011 Incentive Plan and not otherwise forfeited or expired in accordance with its terms was fully vested and exercisable and any restrictions lapsed.

After giving effect to such acceleration and vesting, on the August 2, 2021 closing date:

 All then-outstanding restricted stock units (RSUs”) were settled by exchanging them for the equivalent number of shares of the Company’s common stock specified in the respective RSU award agreements, with the shares of the Company’s common stock issued on settlement of the RSUs being issued and outstanding as of the closing date.

 All then-outstanding stock options having an exercise price less than the Fair Market Value (as defined in the 2011 Incentive Plan) on the closing date were settled by exchanging the options for a “net” number of shares of the Company’s common stock as if exercised on a net or cashless basis as provided in the 2011 Incentive Plan (for administrative convenience, rounded up to the next whole share), with the net shares of the Company’s common stock issued on settlement of these stock options being issued and outstanding as of the closing date.

 Following the disposition of the outstanding RSUs and stock options as described above, these Incentive Awards were terminated and cancelled as of the closing date.

 All then-outstanding stock options having an exercise price equal to or greater than the Fair Market Value on the closing date were terminated and cancelled as of the closing date without any payment therefor.

 Due to conditions of the Pineapple merger agreement, no additional awards have been made under the 2011 Incentive Plan following August 2, 2021.

Stock Options Outstanding

The following table summarizes changes in the number of outstanding stock options under the Director Plan, Stock Plan and the 2011 Incentive Plan during the two years ended December 31, 2021.

Weighted average

exercise price

contractual term

Outstanding – December 31, 2019

Outstanding – December 31, 2020

Outstanding – December 31, 2021

Exercisable at December 31, 2021

Expected to vest December 31, 2021

The fair value of awards issued under the Company’s 2011 Incentive Plan is estimated at grant date using the Black-Scholes option-pricing model.

The following table displays the assumptions used in the model.

No awards were granted in 2021.

Year Ended December 31

Expected volatility

Risk free interest rate

Expected holding period

Dividend yield

Because all outstanding options were either vested and exercised or cancelled, the aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at December 31, 2021 was $ 0 .

The intrinsic value of options exercised during the year was $ 1,961,000 in 2021 and $ 18,000 in 2020.

Net cash proceeds from the exercise of all stock options were $ 0 in 2021 and 2020.

The Company receives an income tax benefit related to the gains received by officers and key employees who make disqualifying dispositions of stock received on exercise of qualified incentive stock options and on non-qualified options.

The amount of tax benefit received by the Company was $ 0 in both 2021 and 2020.

The tax benefit amounts have been credited to additional paid-in capital.

Deferred Stock Outstanding

The following table summarizes the changes in the number of deferred stock shares under the Stock Plan and 2011 Incentive Plan over the period from December 31, 2019 to December 31, 2021:

The Rivera action was voluntarily dismissed on February 24, 2022.

The Chaidez action was voluntarily dismissed on March 24, 2022.

In the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against these actions and claims.

Company management is not aware of any outstanding or pending legal actions or claims that could materially affect the Company’s financial position or results of operations.

NOTE 12 – RELATED PARTY TRANSACTIONS

Related party receivables

The Company has provided advances to employees resulting in a balance as of December 31, 2022 of $ 116,710 .

Related party payables

As part of the SUNation Acquisition, the Company agreed to reimburse the sellers for proceeds received related to SUNation’s employee retention credit (a refundable tax credit against certain employment taxes incurred during the first nine months of 2021), totaling $ 1,584,541 as of December 31, 2022.

The Company also agreed to reimburse the sellers approximately $ 597,219 for tax payments due related to the period prior to acquisition.

The Company leases its offices in Hawaii and New York from companies owned by the prior owners of HEC and SUNation, respectively, most of whom are still employees and one who is a current director of the Company.

See further information regarding these leases within Note 6, Leases.

NOTE 13 – SHARE BASED COMPENSATION

2022 Equity Incentive Plan

On January 24, 2022 the board of directors adopted, and on March 16, 2022 the Company’s shareholders approved, the Company’s 2022 Equity Incentive Plan (the “2022 Plan”), which became effective on March 28, 2022.

The 2022 Plan authorizes incentive awards to officers, key employees, non-employee directors, and consultants in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock awards, stock unit awards, and other stock-based awards.

The 2022 Plan authorizes the issuance of up to 750,000 shares of common stock.

On December 7, 2022, the

shareholders approved an additional 500,000 for issuance, for a total of 1,250,000 shares.

At December 31, 2022, no shares had been issued under the 2022 Plan, 470,888 shares were subject to currently outstanding unvested restricted stock units (“RSUs”), and 779,112 shares were available for future awards.

Inducement Grants

On October 10, 2022, the board of directors approved an inducement grant of 82,278 RSUs in connection with the hiring of a new Chief Financial Officer.

On November 6, 2022, the board of directors approved inducement grants totaling 134,546 RSUs in connection with the hiring of Senior Vice Presidents in connection with the SUNation Acquisition.

Restricted Stock Units

The following table summarizes the changes in the number of restricted stock units under the 2022 Equity Incentive Plan and inducement awards over the period from December 31, 2020 to December 31, 2022:

Weighted Average

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Share-based compensation expense is recognized based on the fair value of awards granted over the vesting period of the award.

Share-based compensation expense recognized for 2021 and 2020 was $ 559,000 and $ 463,000 before income taxes and $ 442,000 and $ 366,000 after income taxes, respectively.

There was no unrecognized compensation expense for the Company’s plans at December 31, 2021 due to the acceleration of all outstanding equity awards as part of the E&S Sale Transaction.

Share-based compensation expense recognized for 2022 and 2021 was $ 309,205 and $ 0 respectively.

Unrecognized compensation expense related to outstanding RSUs was $ 1,462,400 at December 31, 2022 and is expected to be recognized over a weighted-average period of 2.4 years.

Share-based compensation expense is recorded as a part of selling, general and administrative expenses.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at 85 % of the price at the end of each current quarterly plan term.

On December 7, 2022, the Company’s shareholders approved an Employee Stock Purchase Plan (“ESPP”), pursuant to which eligible employees are able to acquire shares of common stock at a purchase price determined by the board of directors or compensation committee prior to the start of each six-month plan phase, which price may not be less than 85 % of the fair market value of the lower of the value on the first day or the last day of the phase, or the value on the last day of the phase .

The ESPP is considered compensatory under current Internal Revenue Service rules.

At December 31, 2022, 200,000 shares remain available for purchase under the ESPP.

The ESPP was suspended effective March 31, 2021 due to conditions of the Pineapple merger agreement.

The first plan phase will commence on January 1, 2023.

Employee Stock Ownership Plan (ESOP)

All eligible employees of the Company participate in the ESOP after completing one year of service.

Contributions are allocated to each participant based on compensation and vest 20 % after two years of service and incrementally thereafter, with full vesting after six years .

The Company has an Employee Stock Ownership Plan under Legacy CSI.

Under the conditions of the merger, this plan has been suspended for future contributions.

At December 31, 2022, the ESOP held 126,904 shares of the Company’s common stock, all of which have been allocated to the accounts of eligible employees.

Contributions to the plan are determined by the Board of Directors and can be made in cash or shares of the Company’s stock.

The 2020 ESOP contribution was $ 329,968 for which the Company issued 72,203 shares in 2021.

Due to conditions of the Pineapple Merger Agreement, no additional contributions will be made to the ESOP.

NOTE 12 – COMMON STOCK

In August 2019, the Company announced the adoption of a $ 2.0 million stock repurchase program running through the end of 2020.

Under the stock repurchase program, repurchases can be made from time to time using a variety of methods, including through open market purchases or in privately negotiated transactions in compliance with the rules of the United States Securities and Exchange Commission and other applicable legal requirements.

This new $ 2.0 million repurchase program replaces a stock repurchase program that the Company had adopted in 2008.

At December 31, 2021, there remained $ 341,000 under this repurchase program.

NOTE 14 – EQUITY

Convertible Preferred Stock and Warrants

On June 28, 2021, the Company entered into a securities purchase agreement (“SPA”) in which, subsequent to the closing of the merger, the Company would authorize the issuance and sale of 25,000 restricted shares of Series A Preferred Stock, par value $ 1.00 per share (“Convertible Preferred Stock”), to certain investors in a private offering (“PIPE Investors”).

September 15, 2021, the Company amended the SPA to issue 32,000 restricted shares of Convertible Preferred Stock, to the PIPE Investors for $ 32.0 million in cash.

This Convertible Preferred Stock is convertible into underlying shares of the Company’s common stock at any time after the issuance date at the option of the PIPE Investors, subject to certain restrictions, and has a liquidation preference over the Company’s common stock.

The Convertible Preferred Stock may be converted by the Company to common stock upon meeting certain market conditions, of which none had been met as of December 31, 2022, and may be redeemed by the Company for cash upon delivery of written notice for a redemption price as defined in the SPA.

The PIPE Investors in the Convertible Preferred Stock were granted certain registration rights as set forth in the SPA.

Holders of the Convertible Preferred Stock have no voting rights and no dividend preference over common stock.

Concurrent with the amendment, the Company entered into warrant agreements with the PIPE Investors to purchase common stock (the “Warrant Agreement”), whereby the Company would issue 2,352,936 warrants (“PIPE Warrants”) to purchase restricted shares of the Company’s common stock for cash or in a cashless exercise.

These PIPE Warrants have an exercise price of $ 13.60 ($ 4.00 for half of the warrants after the November 2022 amendment as further discussed below) with a five-year term, commencing on the date of issuance.

These Convertible Preferred Stock and PIPE Warrants were issued on March 28, 2022 upon the consummation of the merger.

As of December 31, 2022, there were 3,000,000 shares of Convertible Preferred Stock authorized and 28,000 shares of Convertible Preferred Stock issued and outstanding.

No PIPE Warrants were exercised prior to December 31, 2022.

All PIPE Warrants remain outstanding as of December 31, 2022.

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

As of March 28, 2022, the fair value of the Convertible Preferred Stock was estimated at $ 756.06 per share with a total fair value recognized in the consolidated financial statements of approximately $ 24.2 million.

The fair value of the PIPE Warrants was estimated at $ 3.32 per share with a total fair value of approximately $ 7.8 million.

The Company utilized a Monte Carlo simulation to determine the fair value of these instruments, which included the following significant assumptions:

the expected volatility, risk-free rate, expected annual dividend yield, and expected conversion dates.

The Convertible Preferred Stock is reported as part of permanent equity in the consolidated balance sheet and consolidated statement of stockholders’ equity as of December 31, 2022.

The PIPE Warrants were determined to be equity-classified and the fair value of $ 7.8 million was recognized in additional paid-in capital as of December 31, 2022.

In addition, approximately $ 2.0 million and $ 0.7 million of offering costs were recorded as a reduction to the carrying values of the Convertible Preferred Stock and PIPE Warrants, respectively.

As a result of certain Convertible Preferred Stock modifications, an increase of $ 13.2 million in the Convertible Preferred Shares was recognized as a deemed dividend (see “Preferred Stock Modifications” below) as of December 31, 2022.

As a result of certain PIPE Warrant modifications, an increase of $ 3.6 million in the PIPE Warrants was recognized as a deemed dividend (see “Warrant Modifications” below) as of December 31, 2022.

Warrant Modifications

In September 2021, the Company entered into transactions with holders of its outstanding Series A Preferred Stock to issue PIPE Warrants to purchase the Company's common stock.

At such time, the PIPE Warrants contained certain anti-dilution provisions.

In November 2022, the Company amended and restated the agreement under which PIPE Warrant holders agreed to waive such provisions in exchange for certain concessions from the Company.

Management evaluated the warrants after the modifications and determined that they continued to be equity-classified under the derivative scope exception of ASC 815-40.

The PIPE Warrants were valued immediately before and immediately after the modifications to calculate the $ 3.6 million incremental value of the modified PIPE Warrants.

The Company considers this incremental value to be a deemed dividend that reduces retained earnings and earnings per share.

As the Company does not have any retained earnings, the Company has the option of recording the deemed dividend by reducing additional paid-in capital (“APIC”) or increasing accumulated deficit.

Therefore, in the consolidated statement of stockholders’ equity as of December 31, 2022, management recorded the deemed dividend by reducing APIC.

Preferred Stock Modifications

In June 2021, the Company entered into a stock purchase agreement to issue Series A Preferred Stock.

At such time, the Series A Preferred Stock contained certain anti-dilution provisions.

In November 2022, the Company amended and restated the agreement under which Series A Preferred stockholders agreed to waive such provisions in exchange for certain concessions from the Company.

Management evaluated the Series A Preferred Shares after the modifications and determined that they continued to be permanent equity-classified under ASC 480-10-S99-3A(3)(f).

The Company is required to analyze amendment to preferred stock terms to determine the appropriate method of accounting to be applied.

While guidance exists in ASC 470-50 to address the accounting for debt modifications, including preferred stock that is accounted for as a liability, there is no comparable guidance to address the accounting for modifications to preferred stock instruments that are accounted for as equity or temporary equity, which necessitates the subjective determination of

whether a modification or exchange represents an extinguishment.

Current accounting guidance permits the analysis of preferred stock modifications by using either the qualitative approach, the fair value approach or the cash flow approach.

Due to the nature of amendment made to the preferred stock terms, the Company determined that the fair value approach was the most appropriate methodology.

The Company determined that the amendments resulted in an extinguishment of the Preferred Stock.

The Preferred Stock was revalued immediately after the amendment in November 2022 and would recognize the $ 13.2 million incremental value above the carrying value as a deemed dividend that reduces retained earnings and earnings per share.

As the Company does not have any retained earnings, the Company has the option of recording the deemed dividend by reducing APIC or increasing accumulated deficit.

Therefore, in the consolidated statement of stockholders’ equity as of December 31, 2022, management recorded the deemed dividend by reducing APIC.

NOTE 15 - INCOME TAXES

1 unchanged sentence

Year Ended December 31

Current year income taxes (benefit):

Deferred income taxes:

Current year income taxes :

Income tax expense (benefit)

7 unchanged sentences

Accordingly, the Company has continued to maintain its deferred tax valuation allowance against any potential carry-forward benefit from Austin Taylor.

Net2Edge, Ltd., formally known as Transition Networks EMEA, Ltd., operates in the U.K.

and is subject to U.K.

rather than U.S.

income taxes.

Net2Edge, Ltd.

had pretax losses of $ 120,000 and $ 955,000 in 2021 and 2020, respectively.

At the end of 2021, Net2Edge, Ltd.’s net operating loss carry-forward was $ 10,195,000 .

Net2Edge was included in the E&S Sale Transaction, which resulted in all deferred balances being reduced to zero as of December 31, 2021.

The provision for income taxes for continuing operations varied from the federal statutory tax rate as follows:

2 unchanged sentences

State income taxes, net of federal benefit

Foreign income taxes, net of

foreign tax credits

Other nondeductible items

7 unchanged sentences

Domestic net operating loss carry-forward

Capital loss carry-forward

Nonemployee director stock compensation

Other stock compensation

Intangible assets

Foreign net operating loss carry-forwards and credits

8 unchanged sentences

Lease right-of-use asset

( 1,051,007 )

Net deferred tax liability

( 2,058,644 )

Total net deferred tax asset

The Company assesses available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three -year period ending December 31, 2021.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three -year period ended December 31, 2022.

This objective evidence limits the ability to consider other subjective evidence such as the projections for future growth.

2 unchanged sentences

At December 31, 2022, the Company has a federal net operating loss carryforward from 2015 through 2022 activity of approximately $ 16,975,459 that is available to offset future taxable income and begins to expire in 2035 .

This includes the removal of all Transition Networks’ net operating losses from prior years due to the E&S Sale Transaction in 2021.

During 2015, the Company engaged in a research and development tax credit study for the tax years 2011 to 2014.

3 unchanged sentences

At December 31, 2022, the Company has an estimated federal research and development credit carryforward of approximately $ 220,207 and a state research and development credit carryforward of approximately $ 387,202 .

The utilization of these credits may be limited under the provisions of Section 383 of the Internal Revenue Code and similar state statutes.

Section 383 governs the utilization of tax attribute carryforwards such as the research and development credit in the event of a change in control of the Company, such as that which occurred as of March 28, 2022.

The Company assesses uncertain tax positions in accordance with ASC 740.

Under this method, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the financial statements from these uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

The tax benefits recognized in the financial statements from these uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent

likelihood of being realized upon ultimate resolution.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense.

1 unchanged sentence

Uncertain tax positions – January 1

Opening balance sheet

Gross increases - current period tax positions

5 unchanged sentences

The Company’s 2022 income tax expense decreased by $ 0 due to net decreases for accrued interest and penalties.

The Company’s federal and state tax returns and tax returns it has filed in Costa Rica and the United Kingdom are open for review going back to the 2018 tax year.

NOTE 14 - INFORMATION CONCERNING INDUSTRY SEGMENTS AND MAJOR CUSTOMERS

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

Management has chosen to organize the enterprise and disclose reportable segments based on products and services.

Intersegment revenues are eliminated upon consolidation.

“Other” includes non-allocated corporate overhead costs.

As a result of our treatment of Suttle and the E&S Segment as discontinued operations, “Other” includes amounts previously allocated to Suttle and the E&S Segment that do not meet the criteria to be included in income from discontinued operations.

Services & Support operates in the U.S.

and primarily makes sales in the U.S.

Consolidated sales to U.S.

customers were approximately 98 % and 99 % of sales from continuing operations in 2021 and 2020 respectively.

In 2021, no customers had sales greater than 10% of consolidated sales.

In 2020, sales to one customer accounted for 54 % consolidated sales.

At December 31, 2021, Services & Support had one customer that made up 53 % of consolidated accounts receivable.

At December 31, 2020, Services & Support had one customer that made up 87 % of consolidated accounts receivable.

Information concerning the Company’s operations in the various segments for the years ended December 31, 2021 and 2020 is as follows:

Cost of sales

Selling, general and

administrative expenses

Amortization expense

Transaction costs

Impairment loss

Restructuring expense

Operating (loss) income

( 7,743,000 )

( 8,172,000 )

(Loss) income from continuing operations before tax

( 7,737,000 )

( 8,154,000 )

Depreciation and amortization

Capital expenditures

Cost of sales

Selling, general and

administrative expenses

Amortization expense

Transaction costs

Operating income (loss)

( 5,935,000 )

( 5,625,000 )

Other (expense) income

Income (loss) from continuing operations before tax

( 4,971,000 )

( 4,693,000 )

Depreciation and amortization

Capital expenditures

NOTE 16 – FAIR VALUE MEASUREMENTS

6 unchanged sentences

The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial instruments.

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020, are summarized below:

December 31, 2021

Total Fair Value

Cash equivalents:

Money Market funds

Short-term investments:

Corporate Notes/Bonds

Long-term investments:

Corporate Notes/Bonds

Convertible Debt

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022, are summarized below.

There were no assets or liabilities measured at fair value on a recurring basis as of December 31, 2021.

December 31, 2022

3 unchanged sentences

Short-term investments:

Commercial Paper

Corporate Notes/Bonds

Long-term investments:

Corporate Notes/Bonds

Convertible Debt

Current Liabilities:

Accrued Consideration

The estimated fair value of contingent consideration as of December 31, 2020 was $ 550,000 , as noted above.

The estimated fair value is considered a level 3 measurement because the probability weighted discounted cash flow methodology used to estimate fair value includes the use of significant unobservable inputs, primarily the contractual contingent consideration revenue targets and assumed probabilities.

The Company paid the full amount of the contingent consideration during the first quarter of 2021 and there was no liability at December 31, 2021.

Contingent value rights

( 7,402,714 )

Earnout consideration

( 2,150,000 )

( 9,552,714 )

( 5,907,486 )

The estimated fair value of the CVRs as of December 31, 2022 was $ 7,402,714 , as noted above.

The Company recorded a $ 2,125,949 gain on the fair value remeasurement of the CVRs in 2022 related to a decrease in the fair value of the JDL and Ecessa assets and a loss on held for sale assets sold in the second quarter of 2022, offset by a gain on an earnout payment realized in the second quarter of 2022 related to legacy CSI’s sale of its Electronics and Software segment in 2021.

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

The estimated fair value of all earnout consideration as of December 31, 2022 was $ 2,150,000 , all attributed to the earnout consideration related to the SUNation Acquisition.

As noted in Note 3, Business Combinations, the Company recorded a liability for earnout shares to holders of certain per-merger Pineapple Energy shareholders in the amount of $ 4,684,000 and $ 2,150,000 in earnout consideration related to the SUNation Acquisition.

As described in Note 3, the estimated fair value is considered a Level 3 measurement.

In order to update the fair value of the earnout consideration, the Company utilized a Monte Carlo simulation, which included the following significant assumptions:

the expected probability and timing of achievement of milestone events.

As a result of the fair value remeasurement, the Company recorded a remeasurement gain of $ 4,684,000 during the year ended December 31, 2022 related to the remeasurement of the value of the liability for the earnout shares.

The fair value remeasurements noted above were both recorded within other income (expense) in the consolidated statements of operations.

We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period.

There were no transfers between levels during 2021 and 2020.

There were no transfers between levels during the year ended December 31, 2022.

NOTE 17 – GOING CONCERN

The Company’s financial statements as of December 31, 2022 have been prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

As noted in Note 11, Commitments and Contingencies, the Company entered into a $ 5.0 million Short-Term Note that is due on August 9, 2023.

Based on the Company’s current financial position, which includes approximately $ 5.7 million of restricted cash, cash equivalents and investments that are restricted under the CVR agreement or the SUNation agreement and cannot be used by the Company for its own working capital needs, the Company’s forecasted future cash flows for twelve months beyond the date of issuance of these financial statements indicate that the Company will not have sufficient cash to repay the Short-Term Note obligation, a factor which raises substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time.

In order to continue as a going concern, the Company will need additional capital resources.

Management plans to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances.

However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

These financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern .

NOTE 18 – SUBSEQUENT EVENTS

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What changed 10-K

Item 8. Financial Statements and Supplementary Data