What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-04-14 · 61 added, 33 removed, 90 unchanged (51% of the section changed)

3 unchanged sentences

(formerly Communications Systems, Inc.

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

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

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

8 unchanged sentences

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.

Pineapple 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.

12 unchanged sentences

Shareholders and the investing public should understand that these forward-looking statements are subject to risks and uncertainties that could cause actual performance, activities, anticipated results, outcomes or plans to differ significantly from those indicated in the forward-looking statements.

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

For a detailed discussion of a number of these risk factors, please see Item 1A, “Risk Factors,” of this Annual Report on Form 10-K.

Critical Accounting Estimates

22 unchanged sentences

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

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the assets acquired and liabilities assumed from acquisitions.

We test goodwill for impairment annually on October 1 or more frequently if events and circumstances warrant.

Such events and circumstances may be a significant change in our business climate, economic and industry trends, legal factors, negative operating performance indicators, significant competition or changes in strategy.

We perform our goodwill impairment test at the reporting unit level, which is the same as our operating segments.

An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount.

In applying the goodwill impairment assessment, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value.

Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit.

If after assessing these qualitative factors, the Company determines it is "more-likely-than not" that the fair value is less than the carrying value, a quantitative assessment of goodwill is required.

The quantitative impairment test requires judgment, including the identification of reporting units, the assignment of assets, liabilities and goodwill to reporting units, and the determination of fair value of each reporting unit.

The impairment test requires the comparison of the fair value of each reporting unit with its carrying amount, including goodwill.

We estimate the reporting units’ fair value using a combination of the income approach based upon projected discounted cash flows of the reporting unit and the market approach based upon the market multiple of comparable publicly traded companies.

If the estimated fair value of the reporting entity exceeds the carrying value, the goodwill is not impaired, and no further review is required.

However, if the carrying value exceeds the estimated fair value of the reporting unit, an impairment expense should be recognized for the excess of the carrying value over the fair value.

Under the income approach, the estimated discounted cash flows are based on the best information available to us at the time, including supportable assumptions and projections we believe are reasonable.

Our discounted cash flow estimates use discount rates that correspond to a weighted-average cost of capital consistent with a market-participant view.

Certain other key assumptions utilized, including revenue and cash flow projections, are based on estimates consistent with those utilized in our annual budgeting and planning process that we believe are reasonable.

However, if we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion or all of our goodwill, which would adversely affect our operating results in the period of impairment.

The market approach identifies the revenue multiples of comparable publicly traded companies.

The reporting unit’s revenue projections are multiplied by the market multiple to estimate its current estimated fair value.

If the market multiples or revenue value assumptions are incorrect, our goodwill impairment evaluation could also be adversely affected, and we may impair a portion or all of our goodwill, which would adversely affect our operating results in the period of impairment.

No goodwill impairment was recorded during the years ended December 31, 2023 and 2022.

Convertible Preferred Stock and Warrants:

7 unchanged sentences

Consolidated sales were $79,632,709 in 2023 and $27,522,099 in 2022.

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

As Pineapple Energy had limited revenue in the first quarter of the prior year, the increase in sales was due to the merger, the HEC Asset Acquisition and the acquisition of SUNation during 2022.

Sales in 2023 and 2022 by type were as follows:

Revenue by Type

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

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

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

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

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

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

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

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

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

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

Residential contracts

Commercial contracts

Service revenue

Software revenue

Consolidated gross profit increased to $27,696,190 in 2023 as compared to gross profit of $7,377,445 in 2022 due to the increase in revenue through acquisitions.

Gross margin increased to 34.8% in 2023 compared to 26.8% in 2022 due to the SUNation acquisition, normalization of the supply chain and an overall decrease in product costs.

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense, transaction costs and a fair value remeasurement loss on SUNation earnout consideration increased 97.3% to $35,163,055 in 2023 as compared to $17,826,124 in 2022.

Consolidated selling, general and administrative expenses increased to $29,072,558 in 2023 from $12,211,135 in 2022, due primarily to a $16,038,900 increase in selling, general and administrative costs associated with acquired businesses.

Amortization expense increased by $1,605,017 to $4,738,477 in 2023 due to additional intangible assets acquired through acquired businesses.

Transaction costs decreased by $2,229,509 to $2,020 in 2023, due to the consummation

of the merger and the HEC Asset Acquisition in the first quarter of 2022 and limited activity in 2023.

There was also a $1,350,000 fair value remeasurement loss related to the SUNation acquisition earnout consideration in 2023.

Consolidated other income decreased $6,536,711 to $646,149 in 2023 as compared to $7,182,860 in 2022.

The decrease was related to a $4,684,000 gain on the fair value remeasurement of the merger earnout consideration in 2022, a $792,767 decrease in the gain on sale of assets in 2023 compared to the same period of 2022 and a $1,680,911 increase in interest and accretion expense, partially offset by a $549,017 increase in fair value remeasurement gain on the CVRs.

Consolidated operating loss from continuing operation s before income taxes in 2023 was $6,820,716, compared to a consolidated operating loss from continuing operations before income taxes of $3,265,819 in 2022.

Net loss from continuing operations in 2023 was $6,939,892, or ($0.69) per diluted share.

Net loss attributable to common shareholders in 2022 (after taking into effect $16,863,892 in deemed dividends) was $27,216,132, or ($2.99) per diluted share from continuing operations.

Liquidity and Capital Resources

5 unchanged sentences

The Company also had $0 in investments consisting of corporate notes and bonds that are traded on the open market and are classified as available-for-sale at December 31, 2023.

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

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

Of the amounts of cash, restricted cash, and restricted cash equivalents on the balance sheet at December 31, 2023, $1,821,060 consist of funds that can only be used to support the legacy CSI business, will be distributed to CVR holders and cannot be used to support the working capital needs of the Pineapple Energy business.

The Company had working capital of $(6,594,834), consisting of current assets of approximately $15,778,648 and current liabilities of $22,373,482 at December 31, 2023 compared to working capital of $27,366, consisting of current assets of $25,961,524 and current liabilities of $25,934,158 at the end of 2022.

Cash flow used in operating activities was approximately $667,177 in 2023 compared to $7,577,199 used in 2022.

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

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

Significant working capital changes from 2022 to 2023 included a decrease in other accrued liabilities of $4,494,247, a decrease in other assets of $3,333,146, a decrease in inventory of $2,475,825, and a decrease in customer deposits of $2,172,766.

$1,584,541 of the decrease in other assets and $2,181,761 of the decrease in other accrued liabilities was related to the receipt and payment out of the employee retention credit receivable and other related party payables.

Other accrued liabilities also decreased by approximately $2.3 million due to a decrease in billings in excess of costs and estimated earnings as commercial projects were completed during the year.

Cash provided by investing activities was $3,567,278 in 2023 compared to $3,097,406 provided in 2022.

Net cash provided in 2023 was the result of proceeds from the sale of investments and proceeds from the sale of the JDL and Ecessa assets included within discontinued operations, partially offset by capital expenditures.

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

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

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

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

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

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

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

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

Net cash used in financing activities was $2,760,236 in 2023 compared to $15,912,117 in 2022.

Net cash used in financing activities in 2023 was due to $3,036,676 in CVR distributions and $5,000,000 in payments against the SUNation Short-Term Note and $1,500,000 in payments against the Hercules Capital, Inc.

(“Hercules”) term loan, as discussed further in Note 11, Commitments and Contingencies, partially offset by $7,500,000 in borrowings from Decathlon Specialty Finance, LLC (“Decathlon”).

In 2022, the Company received $32,000,000 in proceeds from the issuance of convertible preferred stock and warrants to PIPE Investors and paid $2,699,370 in related issuance costs.

The Company also paid $8,745,628 in CVR distributions and $4,500,000 in principal against the Hercules term loan in 2022, as discussed further in Note 11, Commitments and Contingencies.

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

The Short-Term Note was secured as described below and was scheduled to mature on August 9, 2023.

It carried 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 Short-Term Note was paid in full in conjunction

with the Decathlon loan.

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

1 unchanged sentence

The Company will be required to make a principal payment of $2.74 million on the second anniversary of the Long- Term Note.

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

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

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

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

The Long-Term Note may be prepaid at our option at any time without penalty.

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

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

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

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

Based on the Company’s current financial position, the Company’s forecasted future cash flows for twelve months beyond the date of issuance of the financial statements in this report indicate that the Company will not have sufficient cash to make the first SUNation earnout payment in the second quarter of 2024 or the first principal payment of the Long-Term Note due on November 9, 2024, factors which raise substantial doubt about the Company’s ability to continue as a going concern.

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

5 unchanged sentences

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

The CVR entitles the holder to a portion of the cash, cash equivalents, investments and net proceeds of any divestiture, assignment, or other disposition of all legacy assets of CSI and/or its legacy subsidiaries, JDL and Ecessa, that are related to CSI’s pre-merger business, assets, and properties that occur during the period following the closing of the merger and ending initially on March 28, 2024, but was extended through December 31, 2024 by the First Amendment to the Contingent Value Rights Agreement entered into on March 27, 2024.

The CVR liability as of December 31, 2023 was estimated at $1,691,072 and represented the estimated fair value as of that date of the legacy CSI assets to be distributed to CVR holders as of that date.

5 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis