SUNation Energy, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF MANAGEMENT 28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 23 ) 29 CONSOLIDATED BALANCE SHEETS 31 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS 33 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 34 CONSOLIDATED STATEMENTS OF CASH FLOWS 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 ‎ 27 REPORT OF MANAGEM ENT 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. The financial statements and related information were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s informed judgments and estimates. In fulfilling its responsibilities for the integrity of financial information, management maintains accounting systems and related controls. These controls provide reasonable assurance, at appropriate costs, that assets are safeguarded against losses and that financial records are reliable for use in preparing financial statements. Management recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct. The Audit and Finance Committee of the Board of Directors, comprised solely of independent, non-employee directors, meets with the independent auditors and management periodically to review accounting, auditing, financial reporting and internal control matters. 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/ Kyle Udseth /s/ Eric Ingvaldson Kyle Udseth Eric Ingvaldson Chief Executive Officer Chief Financial Officer ‎ 28 REPORT OF INDEPENDENT REGISTERED PUBLIC AC COUNTING FIRM 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 These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the 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 they relate. Business Combinations: Critical Audit Matter Description: ‎ 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 29 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:  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 April 14, 2023 ‎ 30 PINEAPPLE ENERGY INC. CONSOLIDATED BALANCE SHEETS ASSETS December 31 December 31 2022 2021 CURRENT ASSETS: Cash and cash equivalents $ 2,187,540 $ 18,966 Restricted cash and cash equivalents 3,068,938 — Investments 2,666,766 — Trade accounts receivable, less allowance for doubtful accounts of $ 108,636 and $ 0 , respectively 5,564,532 — Inventories, net 6,054,493 — Employee retention credit 1,584,541 — Related party receivables 116,710 — Prepaid expenses 2,152,058 — Costs and estimated earnings in excess of billings 777,485 — Other current assets 634,362 — Current assets held for sale 1,154,099 — TOTAL CURRENT ASSETS 25,961,524 18,966 PROPERTY, PLANT AND EQUIPMENT, net 1,190,932 — OTHER ASSETS: Goodwill 20,545,850 — Right of use asset 4,166,838 — Intangible assets, net 20,546,810 2,780,270 Other assets 12,000 — Noncurrent assets held for sale 2,271,533 — TOTAL OTHER ASSETS 47,543,031 2,780,270 TOTAL ASSETS $ 74,695,487 $ 2,799,236 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 7,594,181 $ 2,233,371 Accrued compensation and benefits 859,774 307,828 Operating lease liability 220,763 — Other current liabilities 1,238,777 — Working capital note payable — 350,000 Related party payables 2,181,761 — Income taxes payable 1,650 — Refundable customer deposits 4,285,129 — Billings in excess of costs and estimated earnings 2,705,409 — Current portion of loans payable 346,290 — Current portion of loans payable - related party 5,339,265 — Current liabilities held for sale 1,161,159 — TOTAL CURRENT LIABILITIES 25,934,158 2,891,199 LONG TERM LIABILITIES: Loans payable and related interest 3,138,194 6,194,931 Loans payable and related interest - related party 4,635,914 — Related party payables — 2,350,000 Operating lease liability 3,961,340 — Earnout consideration 2,150,000 — Contingent value rights 7,402,714 — Long term liabilities held for sale 250,875 — TOTAL LONG-TERM LIABILITIES 21,539,037 8,544,931 COMMITMENTS AND CONTINGENCIES (Note 11) STOCKHOLDERS' EQUITY 31 Convertible preferred stock, par value $ 1.00 per share; 3,000,000 shares authorized; 28,000 and 0 shares issued and outstanding, respectively 28,000 — 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 495,779 153,750 Additional paid-in capital 45,798,069 ( 53,750 ) Accumulated deficit ( 19,089,134 ) ( 8,736,894 ) Accumulated other comprehensive loss ( 10,422 ) — TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 27,222,292 ( 8,636,894 ) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,695,487 $ 2,799,236 The accompanying notes are an integral part of the consolidated financial statements. ‎ 32 PINEAPPLE ENERGY INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Year Ended December 31 2022 2021 Sales $ 27,522,099 $ 38,162 Cost of sales 20,144,654 — Gross profit 7,377,445 38,162 Operating expenses: Selling, general and administrative expenses 12,211,135 1,060,522 Amortization expense 3,133,460 1,429,295 Transaction costs 2,231,529 2,410,634 Impairment loss 250,000 — Total operating expenses 17,826,124 4,900,451 Operating loss from continuing operations ( 10,448,679 ) ( 4,862,289 ) Other income (expenses): Investment and other income 119,634 — Gain on sale of assets 1,229,883 — Fair value remeasurement of earnout consideration 4,684,000 — Fair value remeasurement of contingent value rights 2,125,949 — Interest and other expense ( 976,606 ) ( 1,373,261 ) Other income (expense), net 7,182,860 ( 1,373,261 ) Operating loss from continuing operations before income taxes ( 3,265,819 ) ( 6,235,550 ) Income tax expense 12,237 — Net loss from continuing operations ( 3,278,056 ) ( 6,235,550 ) Net loss from discontinued operations, net of tax ( 7,074,184 ) — Net loss ( 10,352,240 ) ( 6,235,550 ) Other comprehensive loss, net of tax: Unrealized losses on available-for-sale securities ( 10,422 ) — Total other comprehensive loss ( 10,422 ) — Comprehensive loss $ ( 10,362,662 ) $ ( 6,235,550 ) Less: Deemed dividend on extinguishment of Convertible Preferred Stock ( 13,239,892 ) — Less: 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 $ ( 2.99 ) $ ( 2.03 ) Discontinued operations ( 1.05 ) — $ ( 4.04 ) $ ( 2.03 ) Diluted net loss per share: Continuing operations $ ( 2.99 ) $ ( 2.03 ) Discontinued operations ( 1.05 ) — $ ( 4.04 ) $ ( 2.03 ) Weighted Average Basic Shares Outstanding 6,741,446 3,074,998 Weighted Average Dilutive Shares Outstanding 6,741,446 3,074,998 The accompanying notes are an integral part of the consolidated financial statements. ‎ 33 PINEAPPLE ENERGY INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Accumulated Series A Convertible Additional Other Preferred Stock Common Stock Paid-in Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Loss Total BALANCE AT DECEMBER 31, 2020 — $ — 3,074,998 $ 153,750 $ ( 153,750 ) $ ( 2,501,344 ) $ — $ ( 2,501,344 ) Net loss — — — — — ( 6,235,550 ) — ( 6,235,550 ) Share based compensation — — — — 100,000 — — 100,000 BALANCE AT DECEMBER 31, 2021 — — 3,074,998 153,750 ( 53,750 ) ( 8,736,894 ) — ( 8,636,894 ) Net loss — — — — — ( 10,352,240 ) — ( 10,352,240 ) Issuance of common stock for professional services — — 12,499 625 ( 625 ) — — — Issuance of common stock for conversion of related party payables — — 293,750 14,687 2,335,313 — — 2,350,000 Issuance of common stock for conversion of working capital note payable — — 62,500 3,125 496,875 500,000 Effect of reverse capitalization — — 2,429,341 121,467 1,473,312 — — 1,594,779 Issuance of common stock for HEC Asset Acquisition — — 1,562,498 78,125 12,703,109 — — 12,781,234 Issuance of common stock for SUNation Acquisition — — 1,480,000 74,000 3,996,000 — — 4,070,000 Issuance of preferred stock and warrants to PIPE investors, net of issuance costs 32,000 32,000 — — 29,268,630 — — 29,300,630 Conversion of Series A convertible preferred stock to common stock ( 4,000 ) ( 4,000 ) 1,000,000 50,000 ( 46,000 ) — — — Contingent consideration related to merger transaction — — — — ( 4,684,000 ) — — ( 4,684,000 ) Share based compensation — — — — 309,205 — — 309,205 Other comprehensive loss — — — — — — ( 10,422 ) ( 10,422 ) BALANCE AT DECEMBER 31, 2022 28,000 $ 28,000 9,915,586 $ 495,779 $ 45,798,069 $ ( 19,089,134 ) $ ( 10,422 ) $ 27,222,292 The accompanying notes are an integral part of the consolidated financial statements. ‎ 34 PINEAPPLE ENERGY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 10,352,240 ) $ ( 6,235,550 ) Net loss from discontinued operations, net of tax ( 7,074,184 ) — Net loss from continuing operations ( 3,278,056 ) ( 6,235,550 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 3,232,621 1,429,295 Share based compensation 309,205 100,000 Impairment loss 250,000 — Fair value remeasurement of earnout consideration ( 4,684,000 ) — Fair value remeasurement of contingent value rights ( 2,125,949 ) — Gain on sale of assets ( 1,229,883 ) — Interest and accretion expense 976,606 1,373,261 Changes in assets and liabilities: Trade and related party accounts receivables, net ( 899,804 ) — Inventories, net 392,658 — Prepaid income taxes 5,024 — Other assets ( 61,973 ) — Accounts payable ( 706,350 ) 2,214,149 Accrued compensation and benefits ( 637,894 ) 307,828 Customer deposits 2,148,599 — Other accrued liabilities ( 245,065 ) — Accrued interest ( 1,098,207 ) — Net cash used in operating activities - continuing operations ( 7,652,468 ) ( 811,017 ) Net cash provided by operating activities - discontinued operations 75,269 — Net cash used in operating activities ( 7,577,199 ) ( 811,017 ) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 116,909 ) — Acquisition of business, net of cash acquired ( 10,991,128 ) — Proceeds from the sale of fixed assets 6,297,865 479,983 Proceeds from the sale of investments 228,255 — Proceeds from earnout consideration payments 1,500,000 — Net cash (used in) provided by investing activities - continuing operations ( 3,081,917 ) 479,983 Net cash used in investing activities - discontinued operations ( 15,489 ) — Net cash (used in) provided by investing activities ( 3,097,406 ) 479,983 CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing against working capital line of credit 150,000 350,000 Payments against loans payable ( 4,792,885 ) — Payments related to equity issuance costs ( 2,699,370 ) — Proceeds from the issuance of preferred stock & warrants to PIPE investors 32,000,000 — Payments for contingent value rights distributions ( 8,745,628 ) — Net cash provided by financing activities 15,912,117 350,000 NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 5,237,512 18,966 CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR 18,966 — CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR $ 5,256,478 $ 18,966 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income taxes paid $ 11,297 $ — Interest paid 1,071,906 8,222 Issuance of common stock for conversion of related party payables 2,350,000 — Issuance of common stock for conversion of working capital payable 500,000 — 35 Issuance of common stock for the acquisition of HEC and E-Gear 12,781,234 — Issuance of common stock for the acquisition of SUNation 4,070,000 — Effect of reverse capitalization 1,594,779 — Contingent consideration related to merger transaction ( 4,684,000 ) — Deemed dividend on Convertible Preferred Stock and PIPE Warrants 16,863,892 Operating right of use assets obtained in exchange for lease obligations 4,289,358 — The accompanying notes are an integral part of the consolidated financial statements. 36 PINEAPPLE ENERGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2022 and 2021 NOTE 1 – NATURE OF OPERATIONS Description of Business 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. 37 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; and  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 The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and accounts have been eliminated. 38 Use of Estimates 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 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. 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. 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 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. 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 Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method. Depreciation included in cost of sales and selling, general and administrative expenses for continuing operations was $ 99,161 and $ 0 for 2022 and 2021, respectively. 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 the statements of operations. 39 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 intangible assets of these businesses. 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 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: Unrealized Loss on Securities Accumulated Other Comprehensive Loss December 31, 2020 $ — $ — Net current period change — — December 31, 2021 $ — $ — Net current period change ( 10,422 ) ( 10,422 ) December 31, 2022 $ ( 10,422 ) $ ( 10,422 ) 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. 40 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. 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 the statement of operations over the requisite service period (generally the vesting period). Warranty 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' warranty. 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. Advertising 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. 41 Accounting Standards Issued 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. 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 CSI Merger 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 42 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 $ 1,919,593 Investments 3,155,443 Accounts receivable 1,735,570 Inventory 138,767 Other assets 946,813 Property, plant, and equipment 117,774 Current assets held for sale 6,566,855 Intangible assets 2,607,000 Goodwill 6,764,300 Total assets 23,952,115 Accounts payable 2,192,346 Accrued expenses 1,013,004 Deferred revenue 874,756 Total liabilities 4,080,106 Net assets acquired $ 19,872,009 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. 43 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 $ 215,684 Accounts receivable 880,169 Inventory 1,572,062 Other assets 108,432 Property, plant, and equipment 182,135 Intangible assets 13,800,000 Goodwill 9,829,212 Total assets 26,587,694 Total liabilities ( 1,471,348 ) Net assets acquired $ 25,116,346 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 . 44 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: Cash $ 1,598,707 Accounts receivable 2,824,029 Inventory 4,875,089 Employee retention credit receivable 1,584,541 Right of use asset 2,602,024 Other assets 2,880,014 Fixed assets 960,514 Intangible assets 7,100,000 Goodwill 10,716,638 Total assets 35,141,556 Accounts Payable 3,316,867 Other current liabilities 1,349,501 Related party payables 2,191,761 Operating lease liability 2,602,024 Loans payable 2,348,685 Customer deposits 1,606,054 Deferred revenue 3,286,131 Total liabilities 16,701,023 Net assets acquired $ 18,440,533 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. 45 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. 2022 2021 Net revenue $ 73,990,209 $ 55,704,930 Net loss ( 357,441 ) ( 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 In accordance with Accounting Standards Codification (“ASC”) 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to receive in exchange for these goods or services. 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. 46 The following table disaggregates revenue based on type for the years ended December 31, 2022 and 2021: Revenue by Type 2022 2021 Residential $ 25,375,067 $ — Commercial 1,673,403 — Service 412,388 — Commission 61,241 38,162 $ 27,522,099 $ 38,162 The following table disaggregates revenue based on the timing of satisfaction of the performance obligations for the years ended December 31, 2022 and 2021: 2022 2021 Performance obligations satisfied at a point in time $ 25,848,696 $ 38,162 Performance obligations satisfied over time 1,673,403 — $ 27,522,099 $ 38,162 Contract Balances 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 2022 2021 Billings to date $ 4,208,409 $ — Costs incurred on uncompleted contracts 1,122,453 — Estimated earnings 380,547 — Cost plus estimated earnings 1,503,000 — Billings in excess of costs plus estimated earnings on uncompleted contracts $ 2,705,409 $ — Costs and estimated earnings in excess of billings as of December 31, 2022 and 2021 are as follows: Year Ended December 31 2022 2021 Costs incurred on uncompleted contracts $ 931,801 $ — Estimated earnings 513,648 — 1,445,449 — Billings to date 667,964 — Costs and estimated earnings in excess of billings on uncompleted contracts $ 777,485 $ — 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 47 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. 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. 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. Information related to the Company’s ROU assets and related lease liabilities were as follows: Year Ended December 31 2022 2021 Cash paid for operating leases $ 196,258 $ — Right-of-use assets obtained in exchange for new operating lease obligations (1) $ 4,289,358 $ — As of December 31 2022 2021 Weighted-average remaining lease term 11.5 years — Weighted-average discount rate 6.4 % 0.0 % (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: 2023 $ 479,201 2024 488,249 2025 497,364 2026 506,547 2027 515,801 Thereafter 3,575,667 Total lease payments 6,062,829 Less imputed interest ( 1,880,726 ) Total operating lease liabilities $ 4,182,103 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 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 Trade accounts receivable, net $ 752,420 $ — Inventories, net 145,808 — Other current assets 255,871 — Total current assets $ 1,154,099 $ — 48 Property, plant, and equipment, net $ 69,270 $ — Right of use asset 46,025 — Intangible assets 2,110,550 — Goodwill 45,688 — Total noncurrent assets $ 2,271,533 $ — Total assets held for sale $ 3,425,632 $ — Accounts payable $ 381,992 $ — Accrued compensation and benefits 184,585 — Operating lease liability 50,170 — Other accrued liabilities 10,727 — Deferred revenue 533,685 — Total current liabilities $ 1,161,159 $ — Deferred revenue $ 250,875 $ — Total noncurrent liabilities $ 250,875 $ — Total liabilities held for sale $ 1,412,034 $ — The financial results of the discontinued operations are as follows: Year Ended December 31 2022 2021 Sales $ 5,291,492 $ — Cost of sales 3,798,807 — Selling, general and administrative expenses 1,295,120 — Amortization expense 496,450 — Transaction costs 53,361 — Goodwill impairment loss 6,718,612 — Operating loss before income taxes ( 7,070,858 ) — Income tax expense 3,326 — 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. 49 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Restricted Cash Equivalents Short-Term Investments Long-Term Investments Restricted cash equivalents: Money Market funds $ 978,462 $ — $ — $ 978,462 $ 978,462 $ — $ — Subtotal 978,462 — — 978,462 978,462 — — Investments: Corporate Notes/Bonds 2,715,607 — ( 48,841 ) 2,666,766 — 2,666,766 — Subtotal 2,715,607 — ( 48,841 ) 2,666,766 — 2,666,766 — Total $ 3,694,069 $ — $ ( 48,841 ) $ 3,645,228 $ 978,462 $ 2,666,766 $ — 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: Amortized Cost Estimated ‎ Market Value Due within one year $ 2,715,607 $ 2,666,766 Due after one year through five years — — $ 2,715,607 $ 2,666,766 The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The Company intends to hold the investments until it can recover the full principal amount and has the ability to do so based on other sources of liquidity. The Company expects such recoveries to occur prior to the contractual maturities. 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. 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. 50 NOTE 9 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment and the estimated useful lives are as follows: Estimated December 31 useful life 2022 2021 Leasehold improvements 3 - 10 years 686,840 — Machinery and equipment 3 - 15 years 544,479 — Furniture and fixtures 3 - 10 years 57,753 — 1,289,072 — Less accumulated depreciation ( 98,140 ) — $ 1,190,932 $ — NOTE 10 – GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the year ended December 31, 2022 by reporting unit are as follows. HEC SUNation Total January 1, 2022 $ — $ — $ — Acquisition 9,829,212 10,716,638 20,545,850 December 31, 2022 $ 9,829,212 $ 10,716,638 $ 20,545,850 Gross goodwill 9,829,212 10,716,638 20,545,850 Accumulated impairment loss — — — Balance at December 31, 2022 $ 9,829,212 $ 10,716,638 $ 20,545,850 The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and were as follows: December 31, 2022 Estimated Useful Life Gross Carrying Amount Accumulated Amortization Net Tradenames & trademarks 3 - 8 years $ 22,187,882 $ ( 4,141,072 ) $ 18,046,810 Developed technology 4 years 2,400,000 ( 450,000 ) 1,950,000 Backlog 1 year 600,000 ( 50,000 ) 550,000 $ 25,187,882 $ ( 4,641,072 ) $ 20,546,810 December 31, 2021 Estimated Useful Life Gross Carrying Amount Accumulated Amortization Net Tradenames & trademarks 3 years $ 4,287,882 $ ( 1,507,612 ) $ 2,780,270 $ 4,287,882 $ ( 1,507,612 ) $ 2,780,270 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: 51 Year Ending December 31: 2023 $ 4,738,462 2024 2,837,500 2025 2,837,500 2026 2,387,500 2027 2,237,500 Thereafter 5,508,348 NOTE 11 – COMMITMENTS AND CONTINGENCIES Loan Payable 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 52 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 53 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: 2023 $ 5,345,894 2024 6,014,898 2025 2,997,846 2026 263,253 2027 271,937 Thereafter 611,420 Other Contingencies 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. Communications Systems, Inc., et al. , No. 1:21-cv-10637-NRB. The second complaint was filed on December 28, 2021 by Allen Chaidez in the United States District Court for the Eastern District of New York and is captioned Chaidez v. Communications Systems, Inc., et al. , No. 1:21-cv-07155-MKB-VMS. 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. Leases 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 54 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 Grant Date Shares Fair Value Outstanding – December 31, 2020 — $ — Granted — — Vested — — Forfeited — — Outstanding – December 31, 2021 — — Granted 687,712 2.58 Vested — — Forfeited — — Outstanding – December 31, 2022 687,712 2.58 The grant date fair value is calculated based on the Company’s closing stock price as of the grant date. Compensation Expense 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 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 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 first plan phase will commence on January 1, 2023. Employee Stock Ownership Plan (ESOP) 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. 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”). On 55 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 56 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 Income tax (benefit) expense from continuing operations consists of the following: Year Ended December 31 2022 2021 Current year income taxes : Federal $ — $ — State 12,237 — Income tax expense (benefit) $ 12,237 $ — The Company’s Austin Taylor Communications, Ltd. unit operated in the United Kingdom (U.K.) and is subject to U.K. rather than U.S. income taxes. Austin Taylor had no activity in 2022 and 2021. At the end of 2022, Austin Taylor’s net operating loss carry-forward was $ 7,462,000 . The Company remains uncertain whether it will be able to generate the future income needed to realize the tax benefit of the carry-forward. Accordingly, the Company has continued to maintain its deferred tax valuation allowance against any potential carry-forward benefit from Austin Taylor. The provision for income taxes for continuing operations varied from the federal statutory tax rate as follows: Year Ended December 31 2022 2021 Tax at U.S. statutory rate 21.0 % 21.0 % State income taxes, net of federal benefit ( 5.3 ) — Other nondeductible items 31.2 — Change in valuation allowance ( 44.1 ) ( 21.0 ) Other ( 3.2 ) — Effective tax rate ( 0.4 )% 0.0 % 57 Deferred tax assets and liabilities as of December 31 related to the following: 2022 2021 Deferred tax assets: Allowance for doubtful accounts $ 47,353 $ — Inventory 30,528 — Accrued and prepaid expenses 184,418 — Lease liability 1,055,975 — Domestic net operating loss carry-forward 4,612,193 490,180 Other stock compensation 82,973 — Intangible assets — — Foreign net operating loss carry-forwards and credits 1,451,985 — Federal and state credits 366,964 — Other 786,904 1,776,156 Gross deferred tax assets 8,619,293 2,266,336 Valuation allowance ( 6,560,649 ) ( 2,266,336 ) Net deferred tax assets 2,058,644 — Deferred tax liabilities Depreciation ( 154,507 ) — Intangible assets ( 853,130 ) — 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 ended December 31, 2022. This objective evidence limits the ability to consider other subjective evidence such as the projections for future growth. On the basis of this evaluation, as of December 31, 2022, a valuation allowance of $ 6,560,649 has been recorded to reflect the portion of the deferred tax asset that is more likely to not be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the Company’s projections for growth. 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 . During 2015, the Company engaged in a research and development tax credit study for the tax years 2011 to 2014. As a result of this study, the Company claimed $ 1,554,447 of federal and $ 1,024,373 of state research and development credits. The Company amended prior year tax returns to claim these credits and offset prior year taxes paid. Credits not used to reduce taxes are available to be carried forward. 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 58 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. Changes in the Company’s uncertain tax positions are summarized as follows: 2022 2021 Uncertain tax positions – January 1 $ — $ — Opening balance sheet 112,850 Gross increases - current period tax positions ( 37,503 ) — Uncertain tax positions – December 31, 2022 $ 75,347 $ — Included in the balance of uncertain tax positions at December 31, 2022 are $ 75,347 of tax benefits that if recognized would affect the tax rate. The Company’s unrecognized tax benefits will be reduced by $ 0 in the next twelve months due to statute of limitations expirations. There are no other expected significant changes in the Company’s uncertain tax positions in the next twelve months. The Company’s income tax liability accounts included accruals for interest and penalties of $ 0 at December 31, 2022. The Company’s 2022 income tax expense decreased by $ 0 due to net decreases for accrued interest and penalties. NOTE 16 – FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date: Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated by observable market data. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities. Level 3 – Significant inputs to pricing that have little or no observability as of the reporting date. 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, 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 Level 1 Level 2 Level 3 Total Fair Value Cash equivalents: Money Market funds $ 978,462 $ — $ — $ 978,462 Subtotal 978,462 — — 978,462 Short-term investments: Corporate Notes/Bonds — 2,666,766 — 2,666,766 Subtotal — 2,666,766 — 2,666,766 Current Liabilities: Contingent value rights — — ( 7,402,714 ) ( 7,402,714 ) Earnout consideration — — ( 2,150,000 ) ( 2,150,000 ) Subtotal — — ( 9,552,714 ) ( 9,552,714 ) Total $ 978,462 $ 2,666,766 $ ( 9,552,714 ) $ ( 5,907,486 ) 59 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 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 The Company has evaluated subsequent events through the date of this filing. We do not believe there are any material subsequent events other than those disclosed in the footnotes to these financial statements that require further disclosure. ‎ 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.