Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis summarizes
the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented
below. The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto
included elsewhere in this Report. The discussion contains forward-looking statements that are based on the beliefs of management, as
well as assumptions made by, and information currently available to, management. Actual results could differ materially from those discussed
in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Report,
particularly in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
Unless the context otherwise requires, references
in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “Zeo,”
“we”, “us”, “our”, and the “Company” are intended to refer to (i) following the Business
Combination (as defined below), the business and operations of Zeo and its consolidated subsidiaries, and (ii) prior to the Business Combination,
Sunergy (the predecessor entity in existence prior to the consummation of the Business Combination) and its consolidated subsidiary.
Overview
Our company and personnel are passionate about
delivering cost savings and increased independence and reliability to energy consumers. Our mission is to expedite the country’s
transition to renewable energy by offering our customers an affordable and sustainable means of achieving energy independence. We are
a vertically integrated company offering energy solutions and services that include sale, design, procurement, installation, and maintenance
of residential solar energy systems. Many of our solar energy system customers also purchase other energy efficient-related equipment
or services or roofing services from us. The majority of our customers are located in Florida, Texas, Arkansas, Missouri, Ohio, and Illinois,
and we have an expanding base of customers in California, Colorado, Minnesota, Missouri, Ohio, Utah, and Virginia. Sunergy was created
on October 1, 2021 through the Contribution of Sun First Energy, LLC, a rapidly growing solar sales management company, and Sunergy Solar,
LLC, a large solar installation company based in Florida, to Sunergy Renewables, LLC.
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We believe that we have built (and continue to
build) the infrastructure and capabilities necessary to rapidly acquire and serve customers in a low-cost and scalable manner. Today,
our scalable regional operating platform provides us with a number of advantages, including the marketing of our solar service offerings
through multiple channels, including our diverse sales partner network and direct-to-consumer vertically integrated sales and installation
operations. We believe that this multi-channel model supports rapid sales and installation growth, allowing us to achieve capital-efficient
growth in the regional markets we serve.
Since our founding, we have continued to invest
in a platform of services and tools to enable large scale operations for us and our partner network, which includes sales partners, installation
partners and other strategic partners. The platform includes processes and software, as well as the capacity for the fulfillment and acquisition
of marketing leads. We believe our platform empowers our in-house sales team and external sales dealers to profitably serve our regional
and underpenetrated markets and helps us compete effectively against larger, more established industry players without making significant
investment in technology and infrastructure.
We have focused to date on a simple, capital light
business strategy utilizing, as of December 31, 2024, approximately 290 sales agents and approximately 22 independent sales dealers to
produce our sales pipeline. We engineer and design projects and process building permit applications on behalf of our customers to timely
install their systems and assist their connections to the local utility power grid. Most of the equipment we install is drop-shipped to
the installation site by our regional distributors, requiring minimal inventory to be held by the Company during any given period. We
depend on our distributors to timely handle logistics and related requirements in moving equipment to the installation sites. In addition
to our main offering of residential solar energy systems, we sell and install products such as roofing, insulation, energy efficient appliances
and battery storage systems for the residential market.
We believe that continued government policy support
of solar energy and increasing conventional utility costs provide the solar energy market with material headwinds for accelerating adoption
in the United States, which currently lags other international markets, including Australia and Europe. The majority of our customers
are located in Florida, Texas, Arkansas, Missouri, Ohio and Illinois and we have an expanding base of customers in California, Colorado,
Minesota, Utah and Virginia. We plan to continue to enter new markets selectively where favorable net metering policies or cost incentives
exist and we can implement efficient operations. Most of our sales were generated in Florida in 2023 and were largely split between Florida
and Ohio in 2024. We have focused on improving our operational efficiency to meet the decrease in revenues we faced in 2024
Our core solar service offerings are paid for
by customer purchases and financed through either third-party long-term lenders or third-party operators who offer leasing products that
provide customers with simple, predictable pricing for solar energy that is insulated from rising retail electricity prices. Most of our
customers finance their purchases with affordable loans or leases that require minimal or no upfront capital or down payment.
Recent Developments
On October 25, 2024, the Company closed an Asset
Purchase Agreement with Lumio Holdings, Inc., a Delaware corporation, and Lumio HX, Inc., a Delaware corporation, pursuant to which, subject
to the terms and conditions set forth in the Asset Purchase Agreement, the Company agreed to acquire certain assets of the Sellers on
an as-is, where-is basis, including uninstalled residential solar energy contracts, certain inventory, intellectual property and intellectual
property rights, equipment, records, goodwill and other intangible assets, free and clear of any liens other than certain specified liabilities
of the Sellers that are being assumed for a total purchase price of (i) $4 million in cash and (ii) 6,206,897 shares of the Company’s
Class A Common Stock, par value $0.0001, to be paid to LHX Intermediate, LLC, a Delaware limited liability company. The Asset Purchase
Agreement contains customary representations, warranties and covenants of the parties for a transaction involving the acquisition of assets
from a debtor in bankruptcy, including the condition that the bankruptcy court enter an order authorizing and approving the Transaction.
Business Combination
On March 13, 2024, we consummated the Business
Combination with ESGEN Acquisition Corp. Prior to the Closing, (i) except as otherwise specified in the Business Combination Agreement,
each issued and outstanding ESGEN Class B ordinary share was converted into one ESGEN Class A ordinary; and (ii) ESGEN was domesticated
into the State of Delaware so as to become a Delaware corporation. In connection with the Closing, we changed our name from “ESGEN
Acquisition Corporation” to “Zeo Energy Corp.”
Following the Domestication, each then-outstanding
ESGEN Class A ordinary share was converted into one share of Class A common stock, and each then-outstanding ESGEN Public Warrant converted
automatically into a Warrant, exercisable for one share of Zeo Class A Common Stock. Additionally, each outstanding unit of ESGEN was
cancelled and separated into one share of Class A Common Stock and one-half of one Warrant.
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In accordance with the terms of the Business Combination
Agreement, Sunergy caused all holders of any options, warrants or rights to subscribe for or purchase any equity interests of Sunergy
or its subsidiaries or securities (including debt securities) convertible into or exchangeable for, or that otherwise conferred on the
holder any right to acquire, any equity interests of Sunergy or any subsidiary thereof (collectively, the “Sunergy Convertible Interests”)
existing immediately prior to the Closing to either exchange or convert all such holder’s Sunergy Convertible Interests into limited
liability interests of Sunergy (the “Sunergy Company Interests”) in accordance with the governing documents of Sunergy or
the Sunergy Convertible Interests.
At the Closing, ESGEN contributed to OpCo (1)
all of its assets (excluding its interests in OpCo, but including the amount of cash in ESGEN’s Trust Account as of immediately
prior to the Closing (after giving effect to the exercise of redemption rights by ESGEN stockholders)), and (2) a number of newly issued
shares of Class V common stock, which are non-economic, voting shares of Zeo, equal to the number of Seller OpCo Units (as defined in
the Business Combination Agreement) and (y) in exchange, OpCo issued to ESGEN (i) a number of Class A common units of OpCo (the “OpCo
Manager Units”) which equaled the total number of shares of Class A Common Stock issued and outstanding immediately after the Closing
and (ii) a number of warrants to purchase OpCo Manager Units which equaled the number of Warrants issued and outstanding immediately after
the Closing (the transactions described above in this paragraph, the “ESGEN Contribution”). Immediately following the ESGEN
Contribution, (x) the Sellers contributed to OpCo the Sunergy Company Interests and (y) in exchange therefor, OpCo transferred to the
Sellers the Seller OpCo Units and the Seller Class V Shares.
Prior to the Closing, Sellers transferred 24.167%
of their Sunergy Company Interests (which were thereafter exchanged for Seller OpCo Units and Seller Class V Shares at the Closing, as
described above) pro rata to Sun Managers, LLC, a Delaware limited liability company (“Sun Managers”), in exchange for Class
A Units (as defined in the Sun Managers limited liability company agreement (the “SM LLCA”)) in Sun Managers. In connection
with such transfer, Sun Managers executed a joinder to, and became a “Seller” for purposes of, the Business Combination Agreement.
Sun Managers intends to grant Class B Units (as defined in the SM LLCA) in Sun Managers through the Sun Managers, LLC Management Incentive
Plan (the “Management Incentive Plan”) adopted by Sun Managers to certain eligible employees or service providers of OpCo,
Sunergy or their subsidiaries, in the discretion of Timothy Bridgewater, as manager of Sun Managers. Such Class B Units may be subject
to a vesting schedule, and once such Class B Units become vested, there may be an exchange opportunity through which the grantees may
request (subject to the terms of the Management Incentive Plan and the OpCo A&R LLC Agreement) the exchange of their Class B Units
into Seller OpCo Units (together with an equal number of Seller Class V Shares), which may then be converted into Class A Common Stock
(subject to the terms of the Management Incentive Plan and the OpCo A&R LLC Agreement). Grants under the Management Incentive Plan
will be made after Closing.
Common Stock and Class V Common Stock.
In connection with entering into the Business
Combination Agreement, ESGEN and the Sponsor entered the Sponsor Subscription Agreement, pursuant to which, among other things, the Sponsor
agreed to purchase an aggregate of 1,000,000 Convertible OpCo Preferred Units convertible into Exchangeable OpCo units (and be issued
an equal number of shares of Class V Common Stock) concurrently with the Closing at a cash purchase price of $10.00 per unit and up to
an additional 500,000 Convertible OpCo Preferred Units (together with the concurrent issuance of an equal number of shares of Zeo Class
V Common Stock) during the six months after Closing if called for by Zeo. Prior to the Closing, ESGEN informed the Sponsor that it wished
to call for the additional 500,000 Convertible OpCo Preferred Units at the Closing and, as a result, a total of 1,500,000 Convertible
OpCo Preferred Units and an equal number of shares of Class V Common Stock were issued to Sponsor in return for aggregate consideration
of $15,000,000.
Accounting for the Business Combination
Following the Business Combination, we are organized
in an “Up-C” structure, such that Sunergy and the subsidiaries of Sunergy hold and operate substantially all of the assets
and businesses of the registrant, and the registrant is a publicly listed holding company that holds a certain amount of equity interests
in OpCo, which holds all of the equity interests in Sunergy. The Class A Common Stock and public warrants are traded on Nasdaq under the
ticker symbols “ZEO” and “ZEOWW,” respectively.
The Business Combination was accounted for as
a reverse recapitalization with ESGEN being treated as the acquired company since there was no change in control in accordance with the
guidance for common control transactions in ASC 805-50. Accordingly, the financial statements of the combined entity will represent a
continuation of the financial statements of Sunergy with the business combination treated as the equivalent of Sunergy issuing stock for
the net assets of ESGEN, accompanied by a recapitalization. The net assets of ESGEN were stated at historical cost, with no goodwill or
other intangible assets recorded. Operations prior to the Business Combination were those of Sunergy.
Sunergy was determined to be the accounting acquirer
based on evaluation of the following facts and circumstances.
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Based upon the evaluation of the OpCo A&R
LLC Agreement, the Sellers contributed their interests of Sunergy into OpCo. OpCo’s members did not have substantive kickout or
participating rights and therefore OpCo is a VIE. Consideration of OpCo as a VIE was necessary to determine the accounting treatment between
ESGEN and Sunergy. Upon evaluation, ESGEN Acquisition Corp. is considered to be the primary beneficiary through its membership interest
and manager powers conferred to it through the Class A Units. For VIEs, the accounting acquirer is always considered to be the primary
beneficiary. As such, ESGEN will consolidate OpCo and is considered to the accounting acquirer; however, further consideration of whether
the entities are under common control was required in order to determine whether there is an ultimate change in control and the acquisition
method of accounting is required under ASC 805.
While Sunergy did not control or have common ownership
of ESGEN prior to the consummation of the Business Combination, the Company evaluated the ownership of the new entity subsequent to the
consummation of the transaction to determine if a change in control occurred by evaluating whether Sunergy was under common control prior
to and subsequent to the consummation of the transaction. If the business combination is between entities under common control, then the
acquisition method of accounting is not applicable and the guidance in ASC 805-50 regarding common control should be applied instead.
EITF Issue 02-5 “Definition of ‘Common Control’ in Relation to FASB Statement No. 141” indicates that common control
would exist if a group of stockholders holds more than 50 percent of the voting ownership of each entity, and contemporaneous written
evidence of an agreement to vote a majority of the entities’ shares in concert exists. Prior to the Business Combination, Sunergy
was majority owned by five entities (the “ Primary Sellers ”), who entered into a Voting Agreement, dated September
7, 2023. The term of the Voting Agreement is for five years from the date of the Voting Agreement. The consummation of the Business Combination
with ESGEN occurred within the term of the Voting Agreement.
Prior to the Business Combination and the contributions
to Sun Managers as described above, the Primary Sellers had 98% ownership in Sunergy. Immediately following the Business Combination,
the Sellers now own 83.8% of the equity of the Company.
The Voting Agreement constitutes contemporaneous
written evidence of an agreement to vote a majority of the Primary Sellers’ shares of the Company in concert. Accordingly, the Primary
Sellers retain majority control through the voting of their units in conjunction with the Voting Agreement immediately prior to the Business
Combination and their shares following the Business Combination and, therefore, there was no change of control before or after the Business
Combination. This conclusion was appropriate even though there was no relationship or common ownership or control between Sunergy and
ESGEN prior to the Business Combination. Accordingly, the Business Combination should be accounted for in accordance with the guidance
for common control transactions in ASC 805-50.
Additional factors that were considered include
the following:
●
Since the Business Combination, the Board has been comprised of one individual designated by ESGEN and five individuals designated by Sunergy.
●
Since the Business Combination, management of the Company has been the existing management at Sunergy immediately prior to the Business Combination. The individual that was serving as the chief executive officer and chief financial officer of Sunergy’s management team immediately prior to the Business Combination continued substantially unchanged upon completion of the Business Combination.
For common control transactions that include the
transfer of a business, the reporting entity is required to account for the transaction in accordance with the procedural guidance in
ASC 805-50. In essence, the Business Combination will be treated as a reverse recapitalization with ESGEN being treated as the acquired
company since there was no change in control. Accordingly, the financial statements of the combined entity will represent a continuation
of the financial statements of Sunergy with the business combination treated as the equivalent of Sunergy issuing equity for the net assets
of ESGEN, accompanied by a recapitalization.
Public Company Costs
Following the Business Combination, we have ongoing
reporting and other compliance requirements relating to our Exchange Act registration and Nasdaq listing. We expect to see an increase
in general and administrative, compared to historical results, to support the legal and accounting requirements of the combined publicly
traded company. We also expect to incur substantial additional expenses for, among other things, directors’ and officers’
liability insurance, director fees, internal control compliance, and additional costs for investor relations, accounting, audit, legal
and other functions.
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Key Operating and Financial Metrics and Outlook
We regularly review a number of metrics, including
the following key operating and financial metrics, to evaluate our business, measure our performance, identify trends in our business,
prepare financial projections and make strategic decisions. We believe the operating and financial metrics presented below are useful
in evaluating our operating performance, as they are similar to measures by our public competitors and are regularly used by security
analysts, institutional investors and other interested parties in analyzing operating performance and prospects. Adjusted EBITDA and Adjusted
EBITDA margin are non-GAAP measures, as they are not financial measures calculated in accordance with GAAP and should not be considered
as substitutes for net (loss) income or net (loss) income margin, respectively, calculated in accordance with GAAP. See “Non-GAAP
Financial Measures ” for additional information on non-GAAP financial measures and a reconciliation of these non-GAAP measures
to the most comparable GAAP measures.
The following table sets forth these metrics for
the periods presented:
Year Ended December 31,
(In thousands, except percentages)
2024
2023
Revenue, net
$ 73,244
$ 109,691
Gross Profit
34,395
49,810
Gross Margin
47.0 %
45.4 %
Contribution profit
$ 14,558
$ 19,733
Contribution margin
19.9 %
18.0 %
(Loss) income from operations
$ (10,830 )
$ 5,139
Net (loss) income
$ (9,872 )
$ 4,845
Adjusted EBITDA
$ 1,958
$ 6,981
Adjusted EBITDA margin
2.7 %
6.4 %
Gross Profit and Gross Margin
We define gross profit as revenue, net less cost
of goods sold and depreciation and amortization related to cost of goods sold, and define gross margin, expressed as a percentage, as
the ratio of gross profit to revenue, net. See “— Non-GAAP Financial Measures ” for a reconciliation of Gross
Profit and Gross Margin.
Contribution Profit and Contribution Margin
We define contribution profit as revenue, net
less direct costs of revenue, commissions expense and depreciation and amortization, and define contribution margin, expressed as a percentage,
as the ratio of contribution profit to revenue, net. Contribution profit and margin can be used to understand our financial performance
and efficiency and allows investors to evaluate our pricing strategy and compare against competitors. Our management uses these metrics
to make strategic decisions, identify areas for improvement, set targets for future performance and make informed decisions about how
to allocate resources going forward. Contributions margin reflects our Contribution profit as a percentage of revenues. See “—
Non-GAAP Financial Measures ” for a reconciliation of Gross Profit to Contribution Profit and Contribution Margin.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA, a non-GAAP financial
measure, as earnings (loss) before interest expense, income tax expense (benefit), depreciation and amortization, other income (expenses),
net, and stock compensation, as adjusted to exclude merger transaction related expenses. Adjusted EBITDA margin reflects our Adjusted
EBITDA as a percentage of revenues. See “— Non-GAAP Financial Measures ” for a reconciliation of GAAP net loss
to Adjusted EBITDA and Adjusted EBITDA Margin.
Key Factors that May Influence Future Results
of Operations
Our financial results of operations may not be
comparable from period to period due to several factors. Key factors affecting the results of our operations are summarized below.
Tariffs and Inflation. We are seeing an
increase in the costs of labor and components as the result of higher inflation rates. In particular, we are experiencing an increase
in raw material costs and supply chain constraints, which may continue to put pressure on our operating margins and increase our costs.
Increased tariffs will likely result in an increase in the cost of our raw materials which are sourced both domestically and abroad. We
do not have information that allows us to quantify the specific amount of cost increases attributable to inflation or tariffs.
Expansion of Residential Sales into New Markets .
Our future revenue growth is, in part, dependent on our ability to expand our product offerings and services in the select residential
markets where we operate. As of December 31, 2024, we have operations in eight states and service customers in 16 states. We primarily
generate revenue from our sales, product offerings and services in the residential housing market. To continue our growth, we intend to
expand our presence in the residential market into additional states based on markets underserved by national sales and installation providers
that also have favorable incentives and net metering policies. We believe that our entry into new markets will continue to facilitate
revenue growth and customer diversification.
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Expansion of New Products and Services .
We offer roofing replacements to facilitate our solar installations and to repair rooftops on homes in Florida damaged by severe weather.
We plan to expand our roofing business in all markets we enter in the future. Roofing facilitates a faster processing time for our solar
installations in cases where the customer is in need of a roof replacement prior to installing a solar system. In addition, to provide
more financing options for our prospective residential solar energy customers, we have partnered with several third-party operators which
allows our customers to choose a leasing option to finance their systems. We will continue to work with financing partners to find products
which best meet the needs of our customers and help them to reduce the cost of their energy consumption.
Adding New Customers and Expansion of Sales
with Existing Customers . We intend to continue to grow our in-house sales force and external sales dealers. Through 2024, our in-house
sales have been generated through a summer-sales effort. In 2025, we will introduce a year-round sales team with sales representatives
who live in the markets where they sell. Our efforts to increase sales will be focused on increasing the concentration of sales in the
markets where we operate, improving operational efficiency. We provide competitive compensation packages to our in-house sales teams and
external sales dealers, which incentivizes the acquisition of new customers.
Interest rates. Interest rate increases
for both short-term and long-term debt have stabilized but remain high. Historically, most of our customers have financed the purchase
of their solar systems. Higher interest rates have resulted in higher monthly costs to customers, which has the effect of slowing the
financing-related sales of solar systems in the areas in which we sell and operate. We do not have information that allows us to quantify
the adverse effects attributable to increased interest rates. Lease financing products have become popular with our customers as the third-party
operators can offer a monthly payment lower than a loan product. The company will continue to offer both loan and lease financing products
to our customers.
Managing our Supply Chain . We rely on contract
manufacturers and suppliers to produce our components. Our suppliers are generally meeting our materials needs and we are realizing a
decrease in pricing for our solar components compared to the prior year. We do not anticipate continued decrease in pricing in the coming
year. Our ability to grow depends, in part, on the ability of our contract manufacturers and suppliers to provide high quality services
and deliver components and finished products on time and at reasonable costs. In the event we are unable to mitigate the impact of delays
and/or price increases in raw materials, electronic components and freight, it could delay the manufacturing and installation of our systems,
which would adversely impact our cash flows and results of operations, including revenue and contribution margin.
Components of Condensed Consolidated Statements
of Operations
Revenue, net
Our primary source of revenue is the sale of our
residential solar systems. Our systems are fully functional at the time of installation and require an inspection prior to interconnection
to the utility power grid. We sell our systems primarily direct to end user customers for use in their residences. When a customer uses
a third-party operator (TPO) lease to finance their system, the TPO is the contracted customer with ZEO. Upon installation inspection,
we satisfy our performance obligation and recognize revenue. Many of the Company’s customers finance their obligations with third
parties. In these situations, the finance company deducts their financing fees and remits the net amount to the Company. Revenue is recorded
net of these financing fees (and/or dealer fees). The volume of sales and installations of rooftop solar systems, our primary product,
increase from April to September when a majority of our sales teams are most active in our areas of service. In addition to sales of solar
systems, “adders” or accessories to a sale may include roofing, energy efficient appliances, upgraded insulation and/or energy
storage systems. All adders consisted of less than 10% of the total revenue, net in each of the year ended December 31, 2024, and 2023.
Our revenue is affected by changes in the volume
and average selling prices of our solutions and related accessories, supply and demand, sales incentives and fluctuating interest rates
that increase or decrease the monthly payments for customers purchasing systems through third party financing. Approximately 5% of our
sales were paid in cash by the customer in each of the year ended December 31, 2024, and 2023. Our revenue growth is dependent on our
ability to compete effectively in the marketplace by remaining cost competitive, developing and introducing new sales teams within existing
and new territories, scaling our installation teams to keep up with demand and maintaining a strong internal operations team to process
orders while working with building departments and utilities to permit and interconnect our customers to the utility grid.
Cost of Goods Sold
Cost of goods sold consists primarily of product
costs (including solar panels, inverters, metal racking, connectors, shingles, wiring, warranty costs and logistics costs), installation
labor, vehicle costs, and permitting costs.
During 2024, costs of goods sold decreased in
association with a reduction in revenues. Revenues declined because of the effect of higher interest rates on the consumer financing rates.
The increased cost of consumer lending has reduced the advantage provided by financed solar power relative to standard utility costs,
which has negatively affected the demand for our products.
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Revenue, net less cost of goods sold may vary
from period-to-period and is primarily affected by our average selling prices, financing or dealer fees, fluctuations in equipment costs
and our ability to effectively and timely deploy our field installation teams to project sites once permitting departments have approved
the design and engineering of systems on customer sites.
Operating Expenses
Operating expenses consist of sales and marketing
and general and administrative expenses. Personnel-related costs are the most significant component of each of these expense categories
and include salaries, benefits and payroll taxes. In the future, the Company intends to provide more benefits to its employees, including
an employee stock purchase plan, which will increase operating expenses.
Sales and marketing expenses consist primarily
of personnel-related expenses including sales commissions, as well as advertising, travel, trade shows, marketing, customer support and
other indirect costs. We expect to continue to make the necessary investments to enable us to execute our strategy to increase our market
penetration geographically and enter into new markets by expanding our base sales teams, installers and strategic sales dealer and partner
network.
General and administrative expenses consist primarily
of personnel-related expenses for our executive, finance, human resources, information technology, operations support and software, facilities
costs and fees for professional services. Fees for professional services consist primarily of outside legal, accounting and information
technology consulting costs.
Depreciation and amortization consist primarily
of depreciation of our vehicles, furniture and fixtures, internally developed software and amortization of our acquired intangibles.
Other income (expenses), net
Other income (expenses), net primarily consists
of change in fair value of warrant liabilities and interest income. It also includes interest income on our cash balances, and accrued
interest on tariffs previously paid and approved for a refund.
Year Ended December 31, 2024, Compared to
Year Ended December 31, 2023
The following table sets forth a summary of our
consolidated statements of operations for the periods presented:
Year ended
December 31,
Change
2024
2023
$
%
Revenue, net
$ 73,244,083
$ 109,691,001
$ (36,446,918 )
(33.2 )%
Costs and expenses:
Cost of goods sold (exclusive of depreciation and amortization)
38,021,519
59,436,674
(21,415,155 )
(36.0 )%
Depreciation and amortization
4,836,538
1,841,874
2,994,664
162.6 %
Sales and marketing
19,587,073
30,324,059
(10,736,986 )
(35.4 )%
General and administrative
21,628,725
12,949,067
8,679,658
67.0 %
Total operating expenses
84,073,855
104,551,674
(20,447,819 )
(19.6 )%
(Loss) income from operations
(10,829,772 )
5,139,327
(15,969,099 )
(310.7 )%
Other income (expense), net:
Other income (expense), net
233,151
(183,401 )
416,552
(227.1 )%
Change in fair value of warrant liabilities
69,000
-
69,000
- %
Interest expense
(333,539 )
(110,857 )
(222,682 )
200.9 %
Total other income (expense), net
(31,388 )
(294,258 )
262,870
(89.3 )%
Net (loss) income before taxes
$ (10,861,160 )
$ 4,845,069
$ (15,706,229 )
(324,2 )%
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Revenue, net
Revenue, net decreased by approximately $36.4
million, from $109.7 million for the year ended December 31, 2023 to $73.2 million for the year ended December 31, 2024. The decrease
was primarily due to the effect of higher interest rates on consumer financing. The increased cost of consumer lending reduced the advantage
provided by financed solar power relative to standard utility costs, which negatively affected the demand for our products. The more difficult
selling environment resulted in a decrease in sales from our sales force and dealer network.
Cost of Goods Sold
Cost of goods sold decreased by $21.4 million,
from $59.4 million for the year ended December 31, 2023 to $38.0 million for the year ended December 31, 2024. The decrease was due to
the decrease in revenue. As a percentage of revenue, the cost of goods sold was 52.4% for the year ended December 31, 2024, which was
consistent with the year ended December 31, 2023.
Depreciation and amortization
Depreciation and amortization increased by $3.0
million, from $1.8 million for the year ended December 31, 2023, to $4.8 million for the year ended December 31, 2024. The increase was
due to an increase in the amortization of the cost of acquired contracts from the Lumio Asset Purchase Agreement.
Sales and Marketing
Sales and marketing expenses decreased by $10.7
million, from $30.3 million for the year ended December 31, 2023 to $19.6 million for the year ended December 31, 2024. The decrease was
primarily due to a result of a reduction in commissions earned due to the decrease in revenue.
General and Administrative expenses
General and administrative expenses increased
by $8.7 million from $12.9 million for the year ended December 31, 2023 to $21.6 million for the year ended December 31, 2024. The increase
was primarily due to $7.8 million of stock compensation expense in 2024 of which there was none in 2023.
Other income (expense), net
Other income (expense), net increased from $294,258
of other expense to $31,388 of income primarily due to a decrease in losses on the disposition of assets, a gain on fair value of warrant
liabilities and an increase in interest income partly offset by an increase in interest expense.
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Liquidity and Capital Resources
Our primary source of funding to support operations
have historically been from cash flows from operations. Our primary short-term requirements for liquidity and capital are to fund general
working capital and capital expenses. Our principal long-term working capital uses include ensuring revenue growth, expanding our sales
and marketing efforts and potential acquisitions.
As of December 31, 2024 and 2023, our cash and
cash equivalents balance was approximately $5.6 million and $8.0 million, respectively. The Company maintains its cash in checking and
savings accounts.
Our future capital requirements depend on many
factors, including our revenue growth rate, the timing and extent of our spending to support further sales and marketing, the degree to
which we are successful in launching new business initiatives and the cost associated with these initiatives, and the growth of our business
generally.
In order to finance these opportunities and associated
costs, it is possible that we will need to raise additional capital through either debt or equity financing. In December of 2024, we entered
into a the Promissory Note for $2.4 million to help fund the creation of a year-round sales team.
While we believe that our cash and cash equivalents
will be sufficient to meet our currently contemplated business needs for the next twelve months, we cannot assure you that this will be
the case. If additional financing is required by us from outside sources, we may not be able to raise it on terms acceptable to us or
at all. If we are unable to raise additional capital on acceptable terms when needed, our business, results of operations and financial
condition would be materially and adversely affected.
Cash Flows
The following table summarizes our cash flows
for the periods presented:
Year ended December 31,
2024
2023
Change
Net cash (used in) provided by operating activities
$ (8,716,717 )
$ 11,977,134
$ (20,693,851 )
Net cash (used in) investing activities
(7,369,137 )
(1,034,666 )
(6,334,471 )
Net cash provided by (used in) financing activities
13,697,663
(5,188,468 )
18,886,131
Cash flows from operating activities
Net cash used in operating activities was approximately
$8.7 million during the year ended December 31, 2024 compared to a net cash provided by operating activities of approximately $12.0 million
during year ended December 31, 2023. The decrease was primarily due to an increase in accounts receivable. Accounts receivable increased
as our customers transitioned to financing their systems through lease arrangements. Revenues associated with lease arrangements were
64% of sales in 2024 compared to 21% in 2023. In loan arrangements, 100% of the cash is received shortly after installation. Loan arrangements
provide for a holdback of 20% of the cash due until the customer has received permission to operate from the utility, which delays full
payment of products by 90-120 days past installation.
Cash flows from investing activities
Net cash used in investing activities was approximately
$7.4 million for the year ended December 31, 2024. The company used $4.0 million for the Lumio asset purchase, $3.0 million to issue debt
to a related party, and $0.4 million to purchase property and equipment. Net cash used in investing activities for the year ended December
31, 2023 was approximately $1.0 million, relating to purchases of vehicles.
Cash flows from financing activities
Net cash provided by financing activities was
approximately $13.7 million for the year ended December 31, 2024, primarily relating to $9.2 million in net proceeds from the issuance
of convertible preferred stock at the time of the Business Combination, $2.7 million from a private placement to finance the Lumio asset
purchase and $2.4 million from a convertible promissory note with a related party, offset by principal payments on debt and dividends
paid on convertible preferred stock. Net cash used in financing activities for the year ended December 31, 2023 was approximately $5.2
million, primarily relating to distributions to members.
Current Indebtedness
The Company has approximately $3.6 million in
trade-credit with solar equipment distributors, approximately $0.8 million of debt on service trucks and vehicles valued at approximately
$1.3 million, net of depreciation and $2.4 million in a convertible promissory note with a related party.
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Non-GAAP Financial Measures
The non-GAAP financial measures below have not
been calculated in accordance with GAAP and should be considered in addition to results prepared in accordance with GAAP and should not
be considered as a substitute for, or superior to, GAAP results. In addition, Adjusted EBITDA and Adjusted EBITDA Margin should not be
construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities,
as there may be significant factors or trends that they fail to address. We caution investors that non-GAAP financial information, by
its nature, departs from traditional accounting conventions. Therefore, its use can make it difficult to compare our current results with
our results from other reporting periods and with the results of other companies.
Our management uses these non-GAAP financial measures,
in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things: (i) monitor and
evaluate the performance of our business operations and financial performance; (ii) facilitate internal comparisons of the historical
operating performance of our business operations; (iii) facilitate external comparisons of the results of our overall business to the
historical operating performance of other companies that may have different capital structures and debt levels; (iv) review and assess
the operating performance of our management team; (v) analyze and evaluate financial and strategic planning decisions regarding future
operating investments; and (vi) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating
results and trends, and in comparing our financial results with other companies in our industry, many of which present similar non-GAAP
financial measures to investors.
Contribution Profit and Contribution Margin
We define contribution profit as revenue, net
less direct costs of revenue, commissions expense and depreciation and amortization, and define contribution margin, expressed as a percentage,
as the ratio of contribution profit to revenue, net. Contribution profit and margin can be used to understand our financial performance
and efficiency and allows investors to evaluate our pricing strategy and compare against competitors. Our management uses these metrics
to make strategic decisions, identify areas for improvement, set targets for future performance and make informed decisions about how
to allocate resources going forward. Contributions margin reflects our Contribution profit as a percentage of revenues.
The following table provides a reconciliation
of gross profit to contribution profit for the periods presented:
Year ended December 31,
2024
2023
Total revenue
$ 73,244,083
$ 109,691,001
Less: Cost of goods sold (exclusive of depreciation and amortization shown below)
38,021,519
59,436,674
Less: Depreciation and amortization related to Cost of goods sold
827,848
444,663
Gross Profit
$ 34,394,716
$ 49,809,664
Adjustment:
Depreciation and amortization
4,008,690
1,397,211
Commissions expense
15,827,850
28,679,176
Contribution Profit
14,588,176
19,733,277
Gross Margin
47.0 %
45.4 %
Contribution margin
19.9 %
18.0 %
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Adjusted EBITDA
We define Adjusted EBITDA, a non-GAAP financial
measure, as net income (loss) before interest and other income (expenses), net, income tax expense, depreciation and amortization, as
adjusted to exclude merger and acquisition expenses (“ M&A expenses ”). We utilize Adjusted EBITDA as an internal
performance measure in the management of our operations because we believe the exclusion of these non-cash and non-recurring charges allow
for a more relevant comparison of our results of operations to other companies in our industry. Adjusted EBITDA should not be viewed as
a substitute for net (loss) income calculated in accordance with GAAP, and other companies may define Adjusted EBITDA differently. Adjusted
EBITDA margin reflects our Adjusted EBITDA as a percentage of revenues. The following table provides a reconciliation of net (loss) income
to Adjusted EBITDA for the periods presented:
Year ended December 31,
2024
2023
Net (loss) income
$ (9,872,358 )
$ 4,845,069
Adjustment:
Other income, net
(233,151 )
183,401
Change in fair value of warrant liabilities
(69,000 )
-
Interest expense
333,539
110,857
Income tax benefit
(988,802 )
-
Stock compensation
7,951,248
-
Depreciation and amortization
4,836,538
1,841,874
Adjusted EBITDA
1,958,014
6,981,201
Net (loss) income margin
(13.5 )%
4.4 %
Adjusted EBITDA margin
2.7 %
6.4 %
Critical Accounting Estimates
The preparation of financial statements in conformity
with GAAP requires us to establish accounting policies and make estimates and assumptions that affect our reported amounts of assets and
liabilities at the date of the condensed consolidated financial statements. These financial statements include some estimates and assumptions
that are based on informed judgments and estimates of management. We evaluate our policies and estimates on an on-going basis and discuss
the development, selection and disclosure of critical accounting policies with those charged with governance. Predicting future events
is inherently an imprecise activity and as such requires the use of judgment. Our condensed consolidated financial statements may differ
based upon different estimates and assumptions.
We discuss our significant accounting policies
in Note 3, Summary of Significant Accounting Policies, to our condensed consolidated financial statements. Our significant accounting
policies are subject to judgments and uncertainties that affect the application of such policies. We believe these financial statements
include the most likely outcomes with regard to amounts that are based on our judgment and estimates. Our financial position and results
of operations may be materially different when reported under different conditions or when using different assumptions in the application
of such policies. In the event estimates or assumptions prove to be different from the actual amounts, adjustments are made in subsequent
periods to reflect more current information. We believe the following accounting policies are critical to the preparation of our consolidated
financial statements due to the estimation process and business judgment involved in their application:
Valuation of Business Combinations
The Company recognizes and measures the assets
acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or
surplus of the purchase consideration when compared to the fair value of the net tangible assets acquired, if any, is recorded as goodwill
or gain from a bargain purchase. The fair value of assets and liabilities as of the acquisition date are often estimated using a combination
of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; and
the market approach which uses market data and adjusts for entity-specific differences. We use all available information to make these
fair value determinations and engage third-party consultants for valuation assistance. The estimates used in determining fair values are
based on assumptions believed to be reasonable, but which are inherently uncertain. Accordingly, actual results may differ materially
from the projected results used to determine fair value.
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Goodwill
Goodwill is recognized and initially measured
as any excess of the acquisition-date consideration transferred in a business combination over the acquisition-date amounts recognized
for the net identifiable assets acquired.
Goodwill is not amortized but is tested for impairment
annually, or more frequently if an event occurs or circumstances change that would more likely than not result in an impairment of goodwill.
First, the Company assesses qualitative factors to determine whether or not it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount, the Company conducts a quantitative goodwill impairment test comparing the fair value of the applicable
reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the
Company recognizes an impairment loss in the condensed consolidated statements of operations for the amount by which the carrying amount
exceeds the fair value of the reporting unit. The Company performs its annual goodwill impairment test at December 31 of each year. There
was no goodwill impairment recorded for the year ended December 31, 2024, and 2023.
Intangible assets subject to amortization
Intangible assets include tradename, customer
lists and non-compete agreements. Amounts are subject to amortization on a straight-line basis over the estimated period of benefit and
are subject to annual impairment consideration. Costs incurred to renew or extend the term of a recognized intangible asset, such as the
acquired tradename, are capitalized as part of the intangible asset and amortized over its revised estimated useful life.
Intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of the intangible assets may not be recoverable. Conditions that
would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change
in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount
of an asset or group of assets may not be recoverable. The Company evaluates the recoverability of intangible assets by comparing their
carrying amounts to future net undiscounted cash flows expected to be generated by the intangible assets. If such intangible assets are
considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the intangible assets exceeds
the fair value of the assets. The Company determines fair value based on discounted cash flows using a discount rate commensurate with
the risk inherent in the Company’s current business model for the specific intangible asset being valued. No impairment charges
were recorded for the year ended December 31, 2024, and 2023.
67