UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20212022
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______to _____
Commission File Number: 001-31588
COMMUNICATIONS SYSTEMS,PINEAPPLE ENERGY INC.
(Exact name of registrant as specified in its charter)
MINNESOTA |
| 41-0957999 |
(State or other jurisdiction of incorporation or organization) |
| (Federal Employer Identification No.) |
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10900 Red Circle Drive, Minnetonka, MN |
| 55343 |
(Address of principal executive offices) |
| (Zip Code) |
(952) 996-1674
Registrant’s telephone number, including area code
Securities Registered Pursuant to Section 12(b) of the Act
Title of Each Class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value |
| The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Accelerated Filer ☐ Non-accelerated Filer ☒
Smaller Reporting Company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. YES ☐ NO ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding at November |
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COMMUNICATIONS SYSTEMS,PINEAPPLE ENERGY INC. AND SUBSIDIARIES
INDEX
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Part I. | Financial Information |
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| Item 1. | Financial Statements (Unaudited) |
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| Condensed Consolidated Statements of |
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| Condensed Consolidated Statements of Changes in Stockholders’ Equity |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES | |||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||
(Unaudited) | |||||
ASSETS | |||||
Audited | |||||
September 30 | December 31 | ||||
2021 | 2020 | ||||
CURRENT ASSETS: | |||||
Cash and cash equivalents | $ | 35,284,786 | $ | 12,789,975 | |
Investments | 2,861,394 | 2,759,024 | |||
Trade accounts receivable, less allowance for | |||||
doubtful accounts of $33,000 and $14,000, respectively | 2,119,022 | 4,402,023 | |||
Inventories, net | 121,098 | 136,264 | |||
Prepaid income taxes | 15,910 | 35,948 | |||
Other current assets | 1,068,799 | 556,953 | |||
Current assets held for sale | - | 15,078,066 | |||
TOTAL CURRENT ASSETS | 41,471,009 | 35,758,253 | |||
PROPERTY, PLANT AND EQUIPMENT, net | 5,800,827 | 6,087,975 | |||
OTHER ASSETS: | |||||
Investments | 3,942,825 | 7,109,212 | |||
Goodwill | 2,086,393 | 2,086,393 | |||
Operating lease right of use asset | 191,134 | 284,251 | |||
Intangible assets, net | 2,440,562 | 2,775,361 | |||
Other assets, net | 183,373 | 171,619 | |||
Non-current assets held for sale | 846,000 | 1,283,261 | |||
TOTAL OTHER ASSETS | 9,690,287 | 13,710,097 | |||
TOTAL ASSETS | $ | 56,962,123 | $ | 55,556,325 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
CURRENT LIABILITIES: | |||||
Accounts payable | $ | 1,716,451 | $ | 709,283 | |
Accrued compensation and benefits | 1,247,228 | 1,531,595 | |||
Operating lease liability | 132,690 | 127,243 | |||
Other accrued liabilities | 203,203 | 318,650 | |||
Accrued consideration | — | 550,000 | |||
Dividends payable | 34,022,195 | 16,147 | |||
Deferred revenue | 608,712 | 456,912 | |||
Current liabilities held for sale | — | 3,727,821 | |||
TOTAL CURRENT LIABILITIES | 37,930,479 | 7,437,651 | |||
LONG TERM LIABILITIES: | |||||
Long-term compensation plans | — | 116,460 | |||
Operating lease liability | 69,613 | 167,697 | |||
Deferred revenue | 397,076 | 310,179 | |||
Long term liabilities held for sale | — | 29,611 | |||
TOTAL LONG-TERM LIABILITIES | 466,689 | 623,947 | |||
COMMITMENTS AND CONTINGENCIES (Footnote 9) |
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STOCKHOLDERS' EQUITY | |||||
Preferred stock, par value $1.00 per share; |
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Common stock, par value $0.05 per share; 30,000,000 shares authorized; | |||||
9,720,627 and 9,321,927 shares issued and outstanding, respectively | 486,031 | 466,096 | |||
Additional paid-in capital | 44,878,533 | 43,572,114 | |||
Retained earnings (accumulated deficit) | (26,815,002) | 4,135,284 | |||
Accumulated other comprehensive income (loss) | 15,393 | (678,767) | |||
TOTAL STOCKHOLDERS' EQUITY | 18,564,955 | 47,494,727 | |||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 56,962,123 | $ | 55,556,325 | |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
PINEAPPLE ENERGY INC. | |||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||
(Unaudited) | |||||
ASSETS | |||||
September 30 | December 31 | ||||
2022 | 2021 | ||||
CURRENT ASSETS: | |||||
Cash and cash equivalents | $ | 5,658,354 | $ | 18,966 | |
Restricted cash and cash equivalents | 1,923,716 | — | |||
Investments | 2,654,383 | — | |||
Trade accounts receivable, less allowance for | |||||
doubtful accounts of $70,000 and $0, respectively | 3,938,002 | — | |||
Inventories, net | 1,793,093 | — | |||
Prepaid income taxes | 14,671 | — | |||
Other current assets | 1,223,013 | — | |||
TOTAL CURRENT ASSETS | 17,205,232 | 18,966 | |||
PROPERTY, PLANT AND EQUIPMENT, net | 341,518 | — | |||
OTHER ASSETS: | |||||
Investments | 250,000 | — | |||
Goodwill | 16,566,853 | — | |||
Operating lease right of use asset | 63,684 | — | |||
Intangible assets, net | 16,777,225 | 2,780,270 | |||
Other assets, net | 44,843 | — | |||
TOTAL OTHER ASSETS | 33,702,605 | 2,780,270 | |||
TOTAL ASSETS | $ | 51,249,355 | $ | 2,799,236 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
CURRENT LIABILITIES: | |||||
Accounts payable | $ | 2,404,964 | $ | 2,233,371 | |
Accrued compensation and benefits | 458,177 | 307,828 | |||
Operating lease liability | 53,879 | — | |||
Other accrued liabilities | 96,631 | — | |||
Working capital note payable | — | 350,000 | |||
Customer deposits | 4,992,632 | — | |||
Deferred revenue | 663,480 | — | |||
TOTAL CURRENT LIABILITIES | 8,669,763 | 2,891,199 | |||
LONG-TERM LIABILITIES: | |||||
Loan payable and related interest | 1,257,038 | 6,194,931 | |||
Related party payables | — | 2,350,000 | |||
Operating lease liability | 16,632 | — | |||
Deferred revenue | 327,189 | — | |||
Contingent value rights | 10,743,224 | — | |||
TOTAL LONG-TERM LIABILITIES | 12,344,083 | 8,544,931 | |||
COMMITMENTS AND CONTINGENCIES (Note 8) |
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STOCKHOLDERS' EQUITY | |||||
Convertible preferred stock, par value $1.00 per share; | 32,000 | — | |||
Common stock, par value $0.05 per share; 37,500,000 shares authorized; | |||||
7,435,586 and 3,074,998 shares issued and outstanding, respectively | 371,779 | 153,750 | |||
Additional paid-in capital | 41,562,362 | (53,750) | |||
Accumulated deficit | (11,697,872) | (8,736,894) | |||
Accumulated other comprehensive loss | (32,760) | — | |||
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | 30,235,509 | (8,636,894) | |||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 51,249,355 | $ | 2,799,236 | |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
PINEAPPLE ENERGY INC. | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS | |||||||||||
(Unaudited) | |||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Sales | $ | 7,709,062 | $ | 25,417 | $ | 13,918,498 | $ | 25,417 | |||
Cost of sales | 5,695,320 | — | 10,533,362 | — | |||||||
Gross profit | 2,013,742 | 25,417 | 3,385,136 | 25,417 | |||||||
Operating expenses: | |||||||||||
Selling, general and administrative expenses | 3,122,976 | 241,728 | 6,653,796 | 697,985 | |||||||
Amortization expense | 1,026,362 | 357,324 | 2,410,045 | 1,071,971 | |||||||
Transaction costs | 265,383 | 545,934 | 1,447,284 | 1,977,436 | |||||||
Total operating expenses | 4,414,721 | 1,144,986 | 10,511,125 | 3,747,392 | |||||||
Operating loss | (2,400,979) | (1,119,569) | (7,125,989) | (3,721,975) | |||||||
Other income (expense): | |||||||||||
Investment and other income | 8,215 | — | 106,974 | — | |||||||
Gain on sale of assets | 14,573 | — | 1,229,133 | — | |||||||
Fair value remeasurement of earnout consideration | 13,000 | — | 4,684,000 | — | |||||||
Fair value remeasurement of contingent value rights | — | — | (1,214,560) | — | |||||||
Interest and other expense | (154,805) | (275,694) | (640,536) | (1,004,964) | |||||||
Other income (expense), net | (119,017) | (275,694) | 4,165,011 | (1,004,964) | |||||||
Net loss before income taxes | (2,519,996) | (1,395,263) | (2,960,978) | (4,726,939) | |||||||
Income tax expense | — | — | — | — | |||||||
Net loss | (2,519,996) | (1,395,263) | (2,960,978) | (4,726,939) | |||||||
Other comprehensive gain (loss), net of tax: | |||||||||||
Unrealized gain (loss) on available-for-sale securities | 38 | — | (32,760) | — | |||||||
Total other comprehensive gain (loss) | 38 | — | (32,760) | — | |||||||
Comprehensive loss | $ | (2,519,958) | $ | (1,395,263) | $ | (2,993,738) | $ | (4,726,939) | |||
Basic net loss per share: | $ | (0.34) | $ | (0.45) | $ | (0.49) | $ | (1.54) | |||
Diluted net loss per share: | $ | (0.34) | $ | (0.45) | $ | (0.49) | $ | (1.54) | |||
Weighted Average Basic Shares Outstanding | 7,435,586 | 3,074,998 | 6,049,611 | 3,074,998 | |||||||
Weighted Average Dilutive Shares Outstanding | 7,435,586 | 3,074,998 | 6,049,611 | 3,074,998 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements. |
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) | |||||||||||
(Unaudited) | |||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Sales | $ | 1,828,299 | $ | 3,354,306 | $ | 5,313,047 | $ | 5,321,683 | |||
Cost of sales | 1,112,528 | 2,181,589 | 3,459,331 | 3,756,475 | |||||||
Gross profit | 715,771 | 1,172,717 | 1,853,716 | 1,565,208 | |||||||
Operating expenses: | |||||||||||
Selling, general and administrative expenses | 1,687,930 | 1,959,583 | 5,566,808 | 5,016,736 | |||||||
Amortization expense | 110,489 | 106,333 | 346,277 | 106,333 | |||||||
Transaction costs | 542,509 | 71,301 | 1,854,382 | 485,886 | |||||||
Restructuring expense | 242,275 | — | 242,275 | — | |||||||
Total operating expenses | 2,583,203 | 2,137,217 | 8,009,742 | 5,608,955 | |||||||
Operating loss from continuing operations | (1,867,432) | (964,500) | (6,156,026) | (4,043,747) | |||||||
Other income (expenses): | |||||||||||
Investment and other income (expense) | 67,791 | 281,794 | (178,874) | 665,158 | |||||||
Gain on sale of assets | 4,078 | — | 20,326 | 308,403 | |||||||
Interest and other expense | (2,352) | (7,060) | (7,290) | (26,151) | |||||||
Other income (expense), net | 69,517 | 274,734 | (165,838) | 947,410 | |||||||
Operating loss from continuing operations before income taxes | (1,797,915) | (689,766) | (6,321,864) | (3,096,337) | |||||||
Income tax expense | 5,170 | 8,952 | 5,760 | 4,049 | |||||||
Net loss from continuing operations | (1,803,085) | (698,718) | (6,327,624) | (3,100,386) | |||||||
Net income from discontinued operations, net of tax | 10,411,404 | 961,083 | 10,835,605 | 2,931,863 | |||||||
Net income (loss) | 8,608,319 | 262,365 | 4,507,981 | (168,523) | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||
Unrealized gain (loss) on available-for-sale securities | 1,231 | (15,897) | (5,416) | (5,800) | |||||||
Foreign currency translation adjustment | 644,590 | 81,146 | 699,576 | (59,859) | |||||||
Total other comprehensive income (loss) | 645,821 | 65,249 | 694,160 | (65,659) | |||||||
Comprehensive income (loss) | $ | 9,254,140 | $ | 327,614 | $ | 5,202,141 | $ | (234,182) | |||
Basic net income (loss) per share: | |||||||||||
Continuing operations | $ | (0.19) | $ | (0.07) | $ | (0.67) | $ | (0.33) | |||
Discontinued operations | 1.08 | 0.10 | 1.15 | 0.31 | |||||||
$ | 0.89 | $ | 0.03 | $ | 0.48 | $ | (0.02) | ||||
Diluted net income (loss) per share: | |||||||||||
Continuing operations | $ | (0.18) | $ | (0.07) | $ | (0.65) | $ | (0.33) | |||
Discontinued operations | 1.07 | 0.10 | 1.12 | 0.31 | |||||||
$ | 0.89 | $ | 0.03 | $ | 0.47 | $ | (0.02) | ||||
Weighted Average Basic Shares Outstanding | 9,631,064 | 9,355,425 | 9,476,264 | 9,323,902 | |||||||
Weighted Average Dilutive Shares Outstanding | 9,715,252 | 9,444,986 | 9,660,317 | 9,323,902 | |||||||
Dividends declared per share | $ | 3.50 | $ | — | $ | 3.50 | $ | 0.04 | |||
The accompanying notes are an integral part of the condensed consolidated financial statements. |
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES | ||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | ||||||||||||||||
(Unaudited) | ||||||||||||||||
For the Nine Months Ended September 30, 2021 | ||||||||||||||||
Retained | Accumulated | |||||||||||||||
Additional | Earnings | Other | ||||||||||||||
Common Stock | Paid-in | (Accumulated | Comprehensive | |||||||||||||
Shares | Amount | Capital | Deficit) | (Loss) Income | Total | |||||||||||
BALANCE AT DECEMBER 31, 2020 | 9,321,927 | $ | 466,096 | $ | 43,572,114 | $ | 4,135,284 | $ | (678,767) | $ | 47,494,727 | |||||
Net income | — | — | — | 4,507,981 | — | 4,507,981 | ||||||||||
Issuance of common stock under | ||||||||||||||||
Employee Stock Purchase Plan | 9,540 | 477 | 48,532 | — | — | 49,009 | ||||||||||
Issuance of common stock to | ||||||||||||||||
Employee Stock Ownership Plan | 72,203 | 3,610 | 326,358 | — | — | 329,968 | ||||||||||
Issuance of common stock under | ||||||||||||||||
Executive Stock Plan | 993,977 | 49,699 | 3,714,658 | — | — | 3,764,357 | ||||||||||
Share based compensation | — | — | 559,397 | — | — | 559,397 | ||||||||||
Other share retirements | (677,020) | (33,851) | (3,342,526) | (1,436,068) | — | (4,812,445) | ||||||||||
Shareholder dividends ($3.50 per share) | — | — | — | (34,022,199) | — | (34,022,199) | ||||||||||
Other comprehensive income | — | — | — | — | 694,160 | 694,160 | ||||||||||
BALANCE AT SEPTEMBER 30, 2021 | 9,720,627 | $ | 486,031 | $ | 44,878,533 | $ | (26,815,002) | $ | 15,393 | $ | 18,564,955 |
PINEAPPLE ENERGY INC. | |||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | |||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||
For the Nine Months Ended September 30, 2022 | |||||||||||||||||||||
Accumulated | |||||||||||||||||||||
Series A | Additional | Other | |||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | ||||||||||||||
BALANCE AT DECEMBER 31, 2021 | — | $ | — | 3,074,998 | $ | 153,750 | $ | (53,750) | $ | (8,736,894) | $ | — | $ | (8,636,894) | |||||||
Net loss | — | — | — | — | — | (2,960,978) | — | (2,960,978) | |||||||||||||
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 preferred stock and warrants | |||||||||||||||||||||
to PIPE investors, net of issuance costs | 32,000 | 32,000 | — | — | 29,268,630 | — | — | 29,300,630 | |||||||||||||
Contingent consideration related to | |||||||||||||||||||||
merger transaction | — | — | — | — | (4,684,000) | — | — | (4,684,000) | |||||||||||||
Share based compensation | — | — | — | — | 23,498 | — | — | 23,498 | |||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (32,760) | (32,760) | |||||||||||||
BALANCE AT SEPTEMBER 30, 2022 | 32,000 | $ | 32,000 | 7,435,586 | $ | 371,779 | $ | 41,562,362 | $ | (11,697,872) | $ | (32,760) | $ | 30,235,509 |
For the Three Months Ended September 30, 2021 | ||||||||||||||||
Accumulated | ||||||||||||||||
Additional | Other | |||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||
Shares | Amount | Capital | Deficit | (Loss) Income | Total | |||||||||||
BALANCE AT JUNE 30, 2021 | 9,470,424 | $ | 473,521 | $ | 44,053,498 | $ | (7,772) | $ | (630,428) | $ | 43,888,819 | |||||
Net income | — | — | — | 8,608,319 | — | 8,608,319 | ||||||||||
Issuance of common stock under | ||||||||||||||||
Executive Stock Plan | 898,096 | 44,905 | 3,714,658 | — | — | 3,759,563 | ||||||||||
Share based compensation | — | — | 317,065 | — | — | 317,065 | ||||||||||
Other share retirements | (647,893) | (32,395) | (3,206,688) | (1,393,355) | — | (4,632,438) | ||||||||||
Shareholder dividends ($3.50 per share) | — | — | — | (34,022,194) | — | (34,022,194) | ||||||||||
Other comprehensive income | — | — | — | — | 645,821 | 645,821 | ||||||||||
BALANCE AT SEPTEMBER 30, 2021 | 9,720,627 | $ | 486,031 | $ | 44,878,533 | $ | (26,815,002) | $ | 15,393 | $ | 18,564,955 | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements. |
For the Three Months Ended September 30, 2022 | |||||||||||||||||||||
Accumulated | |||||||||||||||||||||
Series A | Additional | Other | |||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | ||||||||||||||
BALANCE AT JUNE 30, 2022 | 32,000 | $ | 32,000 | 7,435,586 | $ | 371,779 | $ | 41,538,864 | $ | (9,177,876) | $ | (32,798) | $ | 32,731,969 | |||||||
Net loss | — | — | — | — | — | (2,519,996) | — | (2,519,996) | |||||||||||||
Share based compensation | — | — | — | — | 23,498 | — | — | 23,498 | |||||||||||||
Other comprehensive income | — | — | — | — | — | — | 38 | 38 | |||||||||||||
BALANCE AT SEPTEMBER 30, 2022 | 32,000 | $ | 32,000 | 7,435,586 | $ | 371,779 | $ | 41,562,362 | $ | (11,697,872) | $ | (32,760) | $ | 30,235,509 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements. |
For the Nine Months Ended September 30, 2020 | ||||||||||||||||
Accumulated | ||||||||||||||||
Additional | Other | |||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||
Shares | Amount | Capital | Earnings | Loss | Total | |||||||||||
BALANCE AT DECEMBER 31, 2019 | 9,252,749 | $ | 462,637 | $ | 42,977,914 | $ | 4,649,395 | $ | (697,664) | $ | 47,392,282 | |||||
Net loss | — | — | — | (168,523) | — | (168,523) | ||||||||||
Issuance of common stock under | ||||||||||||||||
Employee Stock Purchase Plan | 12,968 | 648 | 66,246 | — | — | 66,894 | ||||||||||
Issuance of common stock to | ||||||||||||||||
Employee Stock Ownership Plan | 66,059 | 3,303 | 404,281 | — | — | 407,584 | ||||||||||
Issuance of common stock under | ||||||||||||||||
Executive Stock Plan | 64,352 | 3,218 | 20,720 | — | — | 23,938 | ||||||||||
Share based compensation | — | — | 319,777 | — | — | 319,777 | ||||||||||
Other share retirements | (82,964) | (4,148) | (387,265) | 37,192 | — | (354,221) | ||||||||||
Shareholder dividends ($0.04 per share) | — | — | — | (380,041) | — | (380,041) | ||||||||||
Other comprehensive loss | — | — | — | — | (65,659) | (65,659) | ||||||||||
BALANCE AT SEPTEMBER 30, 2020 | 9,313,164 | $ | 465,658 | $ | 43,401,673 | $ | 4,138,023 | $ | (763,323) | $ | 47,242,031 |
For the Nine Months Ended September 30, 2021 | |||||||||||||||||||||
Accumulated | |||||||||||||||||||||
Additional | Other | ||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | ||||||||||||||||||
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 | — | — | — | (4,726,939) | — | (4,726,939) | |||||||||||||||
BALANCE AT SEPTEMBER 30, 2021 | 3,074,998 | $ | 153,750 | $ | (153,750) | $ | (7,228,283) | $ | — | $ | (7,228,283) |
For the Three Months Ended September 30, 2020 | ||||||||||||||||
Accumulated | ||||||||||||||||
Additional | Other | |||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||
Shares | Amount | Capital | Earnings | Loss | Total | |||||||||||
BALANCE AT JUNE 30, 2020 | 9,351,486 | $ | 467,573 | $ | 43,495,046 | $ | 3,830,132 | $ | (828,572) | $ | 46,964,179 | |||||
Net income | — | — | — | 262,365 | — | 262,365 | ||||||||||
Issuance of common stock under | ||||||||||||||||
Employee Stock Purchase Plan | 4,899 | 245 | 24,593 | — | — | 24,838 | ||||||||||
Issuance of common stock under | ||||||||||||||||
Executive Stock Plan | 15,768 | 789 | 15,540 | — | — | 16,329 | ||||||||||
Share based compensation | — | — | 143,150 | — | — | 143,150 | ||||||||||
Other share retirements | (58,989) | (2,949) | (276,656) | 44,309 | — | (235,296) | ||||||||||
Shareholder dividends ($0.00 per share) | — | — | — | 1,217 | — | 1,217 | ||||||||||
Other comprehensive income | — | — | — | — | 65,249 | 65,249 | ||||||||||
BALANCE AT SEPTEMBER 30, 2020 | 9,313,164 | $ | 465,658 | $ | 43,401,673 | $ | 4,138,023 | $ | (763,323) | $ | 47,242,031 | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements. |
For the Three Months Ended September 30, 2021 | |||||||||||||||||||||
Accumulated | |||||||||||||||||||||
Additional | Other | ||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Total | ||||||||||||||||
BALANCE AT JUNE 30, 2021 | 3,074,998 | $ | 153,750 | $ | (153,750) | $ | (5,833,020) | $ | — | $ | (5,833,020) | ||||||||||
Net loss | — | — | — | (1,395,263) | — | (1,395,263) | |||||||||||||||
BALANCE AT SEPTEMBER 30, 2021 | 3,074,998 | $ | 153,750 | $ | (153,750) | $ | (7,228,283) | $ | — | $ | (7,228,283) | ||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements. |
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES | ||||||||||
PINEAPPLE ENERGY INC. | PINEAPPLE ENERGY INC. | |||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||
Nine Months Ended September 30 | Nine Months Ended September 30 | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net income (loss) | $ | 4,507,981 | $ | (168,523) | ||||||
Net income from discontinued operations, net of tax | 10,835,605 | 2,931,863 | ||||||||
Net loss from continuing operations | (6,327,624) | (3,100,386) | ||||||||
Adjustments to reconcile net income (loss) to | ||||||||||
net cash (used in) provided by operating activities: | ||||||||||
Net loss | $ | (2,960,978) | $ | (4,726,939) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||
Depreciation and amortization | 643,541 | 621,363 | 2,483,615 | 1,071,971 | ||||||
Share based compensation | 559,397 | 319,777 | 23,498 | — | ||||||
Deferred taxes | — | 9,534 | ||||||||
Investment impairment loss | 399,829 | — | ||||||||
Fair value remeasurement of earnout consideration | (4,684,000) | — | ||||||||
Fair value remeasurement of contingent value rights | 1,214,560 | — | ||||||||
Gain on sale of assets | (20,326) | (303,899) | (1,229,133) | — | ||||||
Interest and accretion expense | 618,983 | 1,004,964 | ||||||||
Changes in assets and liabilities: | ||||||||||
Trade accounts receivable | 2,238,172 | (3,852,877) | (1,236,634) | — | ||||||
Inventories | 15,167 | (136,732) | (82,264) | — | ||||||
Prepaid income taxes | 20,039 | (15,587) | (11,297) | — | ||||||
Other assets, net | (507,020) | (319,063) | 26,113 | — | ||||||
Accounts payable | 1,007,228 | 1,125,157 | (3,065,340) | 1,819,194 | ||||||
Accrued compensation and benefits | (70,858) | (73,895) | (903,425) | 267,451 | ||||||
Customer deposits | 4,462,156 | — | ||||||||
Other accrued liabilities | 123,729 | 114,762 | 59,850 | — | ||||||
Net cash used in operating activities - continuing operations | (1,918,726) | (5,611,846) | ||||||||
Net cash (used in) provided by operating activities - discontinued operations | (707,243) | 32,012 | ||||||||
Accrued interest | (1,056,876) | — | ||||||||
Net cash used in operating activities | (2,625,969) | (5,579,834) | (6,341,172) | (563,359) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
Capital expenditures | (20,264) | (101,032) | (116,307) | — | ||||||
Acquisition of business, net of cash acquired | — | (3,975,894) | (10,199,835) | — | ||||||
Purchases of investments | — | (18,415,534) | ||||||||
Proceeds from the sale of property, plant and equipment | 20,326 | 420,000 | ||||||||
Proceeds from the sale of property, plant and equipment held for sale | 6,297,115 | 479,983 | ||||||||
Proceeds from the sale of investments | 2,703,601 | 15,277,710 | 218,301 | — | ||||||
Net cash provided by (used in) investing activities - continuing operations | 2,703,663 | (6,794,750) | ||||||||
Net cash provided by investing activities - discontinued operations | 23,625,453 | 7,977,300 | ||||||||
Net cash provided by investing activities | 26,329,116 | 1,182,550 | ||||||||
Proceeds from earnout consideration on sale of assets | 1,500,000 | — | ||||||||
Net cash (used in) provided by investing activities | (2,300,726) | 479,983 | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Cash dividends paid | (16,152) | (563,766) | ||||||||
Proceeds from issuance of common stock, net of shares withheld | 3,813,366 | 90,832 | ||||||||
Payment of contingent consideration related to acquisition | (550,000) | — | ||||||||
Purchase of common stock | (4,812,445) | (354,221) | ||||||||
Net cash used in financing activities | (1,565,231) | (827,155) | ||||||||
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH | 54,386 | (7,725) | ||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 22,192,302 | (5,232,164) | ||||||||
Borrowings against working capital note payable | 150,000 | 150,000 | ||||||||
Payments against loan payable principal | (4,500,000) | — | ||||||||
Payments related to equity issuance costs | (2,699,370) | — | ||||||||
Proceeds from the issuance of preferred stock upon closing of private placement | 32,000,000 | — | ||||||||
Payments for contingent value rights distributions | (8,745,628) | — | ||||||||
Net cash provided by financing activities | 16,205,002 | 150,000 | ||||||||
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 7,563,104 | 66,624 | ||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD | 13,092,484 | 14,607,510 | 18,966 | — | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | 35,284,786 | $ | 9,375,346 | $ | 7,582,070 | $ | 66,624 | ||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||
Income taxes (refunded) paid | $ | (17,971) | $ | 10,102 | ||||||
Income taxes paid | $ | 11,297 | $ | — | ||||||
Interest paid | 4,639 | 25,387 | 1,070,853 | 3,097 | ||||||
Dividends declared not paid | 34,022,195 | 16,637 | ||||||||
NONCASH FINANCING AND INVESTING ACTIVITIES: | ||||||||||
Issuance of common stock for conversion of related party payables | 2,350,000 | — | ||||||||
Issuance of common stock for conversion of working capital note payable | 500,000 | — | ||||||||
Issuance of common stock for the acquisition of HEC and E-Gear | 12,781,234 | — | ||||||||
Effect of reverse capitalization | 1,594,779 | — | ||||||||
Contingent consideration related to merger transaction | (4,684,000) | — | ||||||||
Operating right of use assets obtained in exchange for lease obligations | — | 208,650 | 127,902 | — | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements. |
The accompanying notes are an integral part of the condensed consolidated financial statements. |
COMMUNICATIONS SYSTEMS,
PINEAPPLE ENERGY INC.
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS
Description of Business
Pineapple Energy Inc. (formerly Communications Systems, Inc. and Pineapple Holdings, Inc.) (“PEGY”, “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”). Subsequent to these transactions, the Company operates in two distinct business segments – the Solar segment, which consists of the residential and commercial solar businesses of Pineapple Energy, HEC, and E-Gear, and the IT Solutions & Services segment, which consists of the solutions services business of legacy Communications Systems, Inc. (“CSI”).
The Company is a growing domestic operator and consolidator of residential solar, battery storage, and grid service solutions. The Company’s focus is acquiring and growing leading local and regional solar, storage and energy service companies nationwide, which commenced with Pineapple Energy’s acquisitions of certain assets of Horizon Solar Power and Sungevity in December 2020. Through the Company’s HEC business, the Company also operates as a recognized solar integrator, dedicated to providing affordable energy solutions in Hawaii with its offerings of solar panels, communication filters, web monitoring systems, batteries, water heating systems, and other related products that help residential and commercial users reduce electric costs and earn tax credits related to installing renewable energy systems. The Company’s E-Gear business is a renewable energy innovator that offers proprietary patented and patent pending edge-of-grid energy management and storage solutions that offer intelligent and real-time adaptive control, flexibility, visibility, predictability and support to energy consumers, energy service companies, and utilities.
Through the Company’s legacy CSI subsidiaries, JDL Technologies, Inc. (“JDL”) and Ecessa Corporation (“Ecessa”), the Company provides technology solutions, including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment, and designs, develops and sells SD-WAN (software-designed wide-area network) solutions.
NOTE 12 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DescriptionBasis of Business
Communications Systems, Inc. (herein collectively referred to as “CSI,” “our,” “we” or the “Company”) is a Minnesota corporation organized in 1969 that until August 2, 2021 classified its business into 2 segments: (1) the Electronics & Software segment (consisting of US-based subsidiary Transition Networks and UK-based subsidiary Net2Edge) which (i) manufactures and sells solutions that provide actionable intelligence, power and connectivity at the edge of networks through PoE products, software and services as well as traditional products such as media converters, network adapters and other connectivity products and (ii) designs, develops, and sells edge network access products, TDM (time-division multiplexing) over IP and other circuit emulation solutions, along with specialized cloud-based software solutions, primarily within the telecommunications market; and (2) the Services and Support segment (consisting of subsidiaries JDL and Ecessa), which (i) provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment and (ii) designs, develops, and sells SD-WAN (software-designed wide-area network) solutions.
As previously disclosed, on August 2, 2021, the Company and Lantronix, Inc. completed the sale by CSI to Lantronix of all of the issued and outstanding stock of CSI’s wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of its wholly owned subsidiary, Transition Networks Europe Limited (collectively with Transition Networks, Inc., the “TN Companies”), pursuant to the securities purchase agreement dated April 28, 2021 (“E&S Sale Transaction”). As a result, sales and expenses related to the operations of the former Electronics & Software segment have been presented as discontinued operations in this Form 10-Q.
For purposes of this Form 10-Q, the Company classifies operations from its Services & Support segment. Non-allocated general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting. Intercompany revenues are eliminated upon consolidation.
Financial Statement Presentation
The accompanying condensed consolidated balance sheet as of September 30, 2021, the related condensed consolidatedfinancial statements of income (loss) and comprehensive income (loss), the condensed consolidated statements of changes in stockholders’ equity for the three and nine months ended September 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the periods ended September 30, 2021 and 2020 have been prepared byin conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company management. Inand its wholly owned operating subsidiaries. Any reference in these notes to applicable guidance is meant to refer to the opinion
authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 2021 and 2020 and for the periods then ended have been made.Financial Accounting Standards Board (“FASB”).
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of AmericaGAAP have been condensed or omitted. We recommend theseThe condensed consolidated financial statements and notes thereto should be read in conjunction with thePineapple Energy’s audited financial statements and notes thereto for the year ended December 31, 2021 included on the Company’s Current Report on Form 8-K/A, as filed with the Securities and Exchange Commission (“SEC”) on May 19, 2022. The accompanying condensed balance sheet at December 31, 2021 has been derived from the audited balance sheet at December 31, 2021 contained in the Company’s December 31, 2020 Annual Report to Shareholders onabove-referenced Form 10-K (“2020 Form 10-K”). The results8-K/A. Results of operations for the period ended September 30, 2021interim periods are not necessarily indicative of the results of operations for a full year.
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 condensed 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 entire year.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 entity (“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.
Use of Estimates
The presentation of financial statements in conformity with generally accepted accounting principlesGAAP 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 balance sheet 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 assumptions used in the accompanying condensed consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the time of the financial statements.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.
ExceptRestricted Cash and Cash Equivalents
For purposes of the condensed 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. The restricted cash and cash equivalents on the balance sheet as of September 30, 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.
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 September 30, 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 extent updated or described below,collection of receivables, the significant accounting policies set forth in Note 1Company records an allowance for doubtful accounts and a corresponding charge to the consolidated financial statementsbad debt expense.
Inventories, Net
Inventories, which consist primarily of materials and supplies used in the December 31, 2020 Form 10-K, appropriately represent,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. 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 all material respects, the current statusstatements of accounting policies,operations.
Goodwill and Other Intangible Assets
Goodwill represents the amount by which the purchase prices (including liabilities assumed) of acquired businesses exceed the estimated fair value of the net tangible assets and separately identifiable intangible assets of these businesses. Definite lived intangible assets, consisting primarily of trade names, technology, and customer relationships are incorporated herein by reference.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. Ifthe 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 accumulatedAccumulated other comprehensive loss, net of tax, are as follows:is comprised of unrealized losses on debt securities.
Accumulated Other Comprehensive Loss | |||||||||
Other | |||||||||
Foreign Currency | Unrealized gain | Comprehensive | |||||||
Translation | (loss) on securities | Loss | |||||||
December 31, 2020 | $ | (700,000) | $ | 21,000 | $ | (679,000) | |||
Net current period change | 700,000 | (6,000) | 694,000 | ||||||
September 30, 2021 | $ | — | $ | 15,000 | $ | 15,000 |
NOTE 2 – REVENUE RECOGNITIONRevenue Recognition
Services & SupportWithin the Company’s Solar segment, 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 as work is performed based on the estimated ratio of costs incurred to date to the total estimated costs at the completion of the performance obligation.
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.
Within the following performance obligations identified in itsCompany’s IT Solutions & Services & Support segment, are transferredrevenue is recognized over time:time for managed services and professional services (time and materials (“T&M”) and fixed price) as well as services under maintenance and service contracts. Theperformance obligations. This segment’s managed services performance obligation is a bundled solution, consisting of a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are therefore recognized evenly over the term of the contract. T&M professional services arrangements are recognizedmeasured over time with an input method based on hours expended towards satisfying thethis performance obligation. Fixed price professional service arrangements under a relatively longer-term service arewill also recognizedbe measured over time with an input method based on hours expended. Maintenance and service contracts are recognized evenly over the life of the contract.
The Company has also identified the following performance obligations within its ServicesIT Solutions & SupportServices segment that are recognized at a point in time:time, which include resale of third-party hardware and software; installation;software, installation services, arranging for another party to transfer services to the customer;customer, and certain professional services. The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the agreed upon shipping terms. Installation services are recognized at a point in time when the services are completed. The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time afteras the Company has transferred control whenupon the service is first being made available to the customer by the third-party vendor. The Company reports revenue from these third-party servicesvendor, which are required to be presented on a net basis in its financial statements.basis. Depending on the nature of the service, certain
professional services transfer control at a point in time. The Company evaluates these circumstances on a case-by-case basis to determine if revenue should be recognized over time or at a point in time. See Note 4, Revenue Recognition, for further discussion regarding revenue recognition.
Disaggregation of revenueGross Excise Tax
Revenues are recognized when controlThe State of Hawaii imposes a gross receipts tax on all business operations done in Hawaii. The Company records the promised goods or services is transferred to our customers, in an amount that best reflects the consideration we expect to receive in exchange for those goods or services. In accordance with ASC 606-10-50-5, the following tables present how we disaggregate our revenues.tax revenue and expense on a gross basis.
ForEmployee Retirement Benefits
The Company has an Employee Savings Plan (401(k)) and matches a percentage of employee contributions up to six percent of compensation.
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 Services & Support segment, we analyze revenue by customer groupstatement of operations over the requisite service period (generally the vesting period). The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.
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 type,shares associated with the long-term incentive compensation plans, which isresulted in no dilutive effect for the three and nine-month periods ended September 30, 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 followsof both September 30, 2022 and 2021. Warrants totaling 2,353,936 would have been excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 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 three and nine months ended September 30, 2021, and 2020:there were no potentially dilutive securities.
Accounting Standards Issued
Services & Support Revenue by Customer Group | |||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Financial | $ | 482,000 | $ | 117,000 | $ | 1,306,000 | $ | 314,000 | |||
Healthcare | 261,000 | 244,000 | 760,000 | 674,000 | |||||||
Education | 64,000 | 2,312,000 | 212,000 | 3,031,000 | |||||||
Other commercial clients | 1,021,000 | 682,000 | 3,035,000 | 1,302,000 | |||||||
CSI IT operations | 119,000 | 175,000 | 406,000 | 561,000 | |||||||
$ | 1,947,000 | $ | 3,530,000 | $ | 5,719,000 | $ | 5,882,000 |
Services & Support Revenue by Type | |||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Project & product revenue | $ | 297,000 | $ | 2,611,000 | $ | 927,000 | $ | 3,498,000 | |||
Services & support revenue | 1,650,000 | 919,000 | 4,792,000 | 2,384,000 | |||||||
$ | 1,947,000 | $ | 3,530,000 | $ | 5,719,000 | $ | 5,882,000 |
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. This ASU is intended to provide financial statement users with more decision-useful information about expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
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 condensed 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 – DISCONTINUED OPERATIONSBUSINESS COMBINATIONS
CSI Merger
On March 11, 2020,28, 2022, the Company soldand Pineapple Energy consummated the remaindertransactions 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 Suttle business lines, includingcommon 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 SoHo, MediaMAX,merger transaction, discussed in Note 8, Commitments and SpeedStar brands and inventory as well as working capital, certain capital equipment, intellectual property, and customer relationships to Oldcastle Infrastructure, Inc. (“Oldcastle”) for $8,000,000, with a working capital adjustment 90 days after close. Oldcastle will operate the majorityContingencies. The purpose of the acquired Suttle businessmerger was to provide a path to allow the Company to deliver value to its legacy shareholders through its wholly-owned subsidiary, Primex Technologies, Inc. The Company received 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 $8,900,000the Company’s pre-merger operating and recorded a gain onnon-operating assets and properties, and (ii) the saleopportunity for the legacy CSI shareholders, through ownership of $2,247,000 during 2020.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.
ConcurrentThe Company accounted for the merger as a reverse recapitalization whereby it was determined that Pineapple Energy was the accounting acquirer and CSI was the accounting acquiree. Refer to Note 2, Summary of Significant Accounting Policies, for further details. The accompanying condensed 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 transaction,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. The assets and liabilities of CSI were recorded within the IT Solutions & Services segment and reporting unit as of the merger date at their respective fair value. 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 JDL and Oldcastle entered into a TransitionEcessa, the Company’s IT Solutions & Services Agreement (“TSA”) under which Suttle continued to manufacture products for Oldcastle for six months, to ensure seamless supply and quality assurance to the existing customer base. Concurrently with the closing of the transaction and the TSA, the Company and Oldcastle also entered into a lease agreement under which Oldcastle agreed to lease 2 buildings in Hector, Minnesota, where Suttle had conducted operations. Base rents under the lease agreement range from $6,970 to $7,180 per month. The presentation of discontinued operations with respect to this Suttle sale has been retrospectively applied to all prior periods presented.operating segment.
On August 2, 2021,The purchase price allocation for the Companymerger is based on the estimated fair value of assets acquired and Lantronix, Inc. (“Lantronix”) completed the sale by CSI to Lantronix of all of the issuedliabilities assumed and outstanding stock of CSI’s wholly owned subsidiary, Transition Networks, Inc., and the entire issued share capital of its wholly owned subsidiary, Transition Networks Europe Limited (collectively with Transition Networks, Inc., the “TN Companies”), pursuant to a securities purchase agreement dated April 28, 2021 (“E&S Sale Transaction”).has been provisionally allocated as follows:
Cash and cash equivalents | $ | 1,919,593 | |
Investments | 3,155,443 | ||
Accounts receivable | 1,821,199 | ||
Inventory | 138,767 | ||
Other assets | 1,316,813 | ||
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 | 24,407,744 | ||
Accounts payable | 2,562,346 | ||
Accrued expenses | 1,013,004 | ||
Deferred revenue | 960,385 | ||
Total liabilities | 4,535,735 | ||
Net assets acquired | $ | 19,872,009 |
The identifiable intangible assets from the merger are definite-lived assets. These assets include trade names, developed technology, 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 preliminary 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 preliminary 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 preliminary fair value of the customer relationships associated with the Ecessa business was determined using the distributor method, an income approach, which included the following significant assumptions: projected Ecessa revenue, customer attrition, margins, contributory asset charges, discount rates, and income tax rates.
The initial accounting for the acquired assets and liabilities is incomplete and is expected to be finalized during the twelve-month post-closing measurement period. The areas of the purchase price allocation that are not yet finalized for the merger include the valuation of intangible assets and income tax related matters. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
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 $23,630,000, which included a working capital adjustment of $(1,376,000)$6,281,000 and recorded a gainloss on the sale of $13,455,000$285,000 during the thirdsecond quarter of 2021. The presentation of discontinued operations with respect to this E&S Sale Transaction has been retrospectively applied to all prior periods presented.2022.
Under
The condensed consolidated financial statements include results of operations of CSI following the securities purchase agreement, Lantronix has also agreed to pay CSI, if earned, earnout payments of up to $7.0 million payable following 2 successive 180-day intervals after the closingconsummation of the E&S Sale Transaction based on revenue targetsmerger for the businessthree and nine months ended September 30, 2022, which included $1,860,111 and $3,679,990 of the TN Companies as specifiedrevenue (including $39,211 and $99,975 in the securities purchase agreement, subject to certain adjustmentsintercompany revenue), respectively, and allocations as further described in the securities purchase agreement. Concurrently with the closinga net loss of the transaction, CSI$116,668 and Lantronix entered into a transition services agreement under which CSI will perform administrative and IT services, and lease office, warehouse and production space to Lantronix at CSI’s Minnetonka, Minnesota facility for a period of up to twelve months.$618,626, respectively.
HEC Asset Acquisition
On August 31,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, the Company entered into a purchase agreement with Winport Holdings, LLCas 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 saleSellers. 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 real and personal property located in Hector, Minnesota including the leasecommon stock, with Oldcastle for $900,000. The Company recorded a $100,000 impairment loss on these assets in order to write down the assets to the 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 costsaggregate purchase price to sell and recorded the assets as held for sale at September 30, 2021.$25,116,346, with cash acquired totaling $215,684.
The assets and liabilities of HEC and E-Gear were recorded within the Solar segment as of the discontinuedmerger date at their respective fair values. The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed and has been provisionally 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 | 9,802,552 | ||
Total assets | 26,561,034 | ||
Total liabilities | (1,444,688) | ||
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 fair value of the acquired identifiable intangible assets is provisional depending on the final valuation of those assets. The developed technology preliminary 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 preliminary 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 initial accounting for the acquired assets and liabilities is incomplete and is expected to be finalized during the twelve-month post-closing measurement period. The areas of the purchase price allocation that are not yet finalized for the HEC Asset Acquisition include the valuation of intangible assets and income tax related matters. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
The condensed consolidated financial statements include results of operations classifiedof HEC and E-Gear following the consummation of the HEC Asset Acquisition for the three and nine months ended September 30, 2022, which included $5,873,707 and $10,289,655 of revenue, respectively and a net loss of $305,482 and $816,180, respectively.
Transaction costs related to the merger and HEC Asset Acquisition totaled $0 and $545,934 incurred by Pineapple Energy during the three months ended September 30, 2022 and 2021, respectively and $968,505 and $1,977,436 incurred during the nine months ended September 30, 2022 and 2021, respectively, and were recorded in operating expenses within the condensed consolidated statements of operations and comprehensive loss.
Pro Forma Information
The following unaudited pro forma information represents the results of operations as heldif the Company had completed the merger and HEC Asset Acquisition as of January 1, 2021. The unaudited pro forma financial information below includes adjustments to amortization expense for sale are as follows:intangible assets totaling $0 and $548,726 and excludes transaction costs totaling $265,383 and $1,088,444 for the three months ended September 30, 2022 and 2021, respectively. The unaudited pro forma financial information below includes adjustments to amortization expense for intangible assets totaling $539,389 and $1,647,709 and excludes transaction costs totaling $3,177,327 and $3,831,818 for the nine months ended September 30, 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.
September 30, 2021 | December 31, 2020 | |||||
Cash and cash equivalents | $ | — | $ | 303,000 | ||
Trade accounts receivable | — | 5,775,000 | ||||
Inventories | — | 8,561,000 | ||||
Other current assets | — | 439,000 | ||||
Total current assets | $ | — | $ | 15,078,000 | ||
Property, plant, and equipment | $ | 846,000 | $ | 1,154,000 | ||
Right of use asset | 129,000 | |||||
Total noncurrent assets | $ | 846,000 | $ | 1,283,000 | ||
Total assets held for sale | $ | 846,000 | $ | 16,361,000 | ||
Accounts payable | $ | — | $ | 1,669,000 | ||
Accrued compensation and benefits | — | 767,000 | ||||
Operating lease liability | — | 86,000 | ||||
Other accrued liabilities | — | 1,206,000 | ||||
Total current liabilities | $ | — | $ | 3,728,000 | ||
Operating lease liability | $ | — | $ | 30,000 | ||
Total noncurrent liabilities | $ | — | $ | 30,000 | ||
Total liabilities held for sale | $ | — | $ | 3,758,000 |
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Net revenue | $ | 7,709,062 | $ | 6,072,680 | $ | 19,124,301 | $ | 16,025,351 | |||
Net loss | (2,257,309) | (2,386,451) | (3,162,376) | (8,701,410) |
The financial results of the discontinued operations are as follows:
Earnout Shares
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Sales | $ | 2,806,000 | $ | 9,067,000 | $ | 20,478,000 | $ | 30,354,000 | ||||
Cost of sales | 1,789,000 | 5,027,000 | 11,774,000 | 17,894,000 | ||||||||
Selling, general and administrative expenses | 1,044,000 | 2,848,000 | 7,090,000 | 10,310,000 | ||||||||
Transaction costs | 982,000 | — | 2,141,000 | — | ||||||||
Impairment loss | 100,000 | — | 100,000 | — | ||||||||
Restructuring expenses | 1,287,000 | 194,000 | 1,287,000 | 958,000 | ||||||||
Gain on sale of assets | (13,455,000) | (19,000) | (13,455,000) | (2,057,000) | ||||||||
Foreign currency translation loss | 642,000 | — | 642,000 | — | ||||||||
Other expense | 4,000 | 61,000 | 61,000 | 317,000 | ||||||||
Operating income before income taxes | 10,413,000 | 956,000 | 10,838,000 | 2,932,000 | ||||||||
Income tax expense | 2,000 | (5,000) | 2,000 | — | ||||||||
Income from discontinued operations | $ | 10,411,000 | $ | 961,000 | $ | 10,836,000 | $ | 2,932,000 |
DuringAs 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 nine months endedthe 750,000 shares of the Company’s common stock were issued and are reflectedin the Company’s condensed consolidated statement of stockholders’ equity as of September 30, 2021,2022.
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 recorded $1,529,000has 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 restructuring expense,accordance with $1,287,000ASC 815-40, and no subsequent remeasurement is required as long as the shares continue to be classified in discontinued operations. This consistedequity. The shares of severancethe Company’s common stock contingently issuable under the second and related benefits costs duethird tranches, up to an additional 2.5 million shares of the Company’s common stock are classified as a liability, similar to the saleaccounting for written equity options, which requires an initial measurement of the E&S segment.liability at fair value with subsequent remeasurements to fair value at each reporting date and changes in the fair value recognized in the condensed 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 incurred $958,000utilized 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 September 30, 2022, the fair value of the Merger Earnout Shares was $0, resulting in restructuring costsa gain on the fair value remeasurement of the earnout consideration totaling $4,684,000 during the nine months ended September 30, 2020 related to severance and related benefits due to the sale of Suttle’s business lines. The Company paid $1,169,000 in restructuring charges during the first nine months of 2021 and had $612,000 in restructuring accruals2022, which was recorded in accrued compensation and benefits at September 30, 2021 that are expected to be paid during 2021 and 2022.
NOTE 4 – CASH EQUIVALENTS AND INVESTMENTS
The following tables show the Company’s cash equivalents and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short- and long-term investments as of September 30, 2021 and December 31, 2020:
September 30, 2021 | ||||||||||||||||||||
Amortized Cost | Gross Unrealized | Gross Unrealized | Fair Value | Cash Equivalents | Short-Term | Long-Term | ||||||||||||||
Cash equivalents: | ||||||||||||||||||||
Money Market funds | $ | 33,138,000 | $ | — | $ | — | $ | 33,138,000 | $ | 33,138,000 | $ | — | $ | — | ||||||
Subtotal | 33,138,000 | — | — | 33,138,000 | 33,138,000 | — | — | |||||||||||||
Investments: | ||||||||||||||||||||
Corporate Notes/Bonds | 5,653,000 | 3,000 | (1,000) | 5,655,000 | — | 2,861,000 | 2,794,000 | |||||||||||||
Convertible Debt | 250,000 | — | — | 250,000 | — | — | 250,000 | |||||||||||||
Subtotal | 5,903,000 | 3,000 | (1,000) | 5,905,000 | — | 2,861,000 | 3,044,000 | |||||||||||||
Total | $ | 39,041,000 | $ | 3,000 | $ | (1,000) | $ | 39,043,000 | $ | 33,138,000 | $ | 2,861,000 | $ | 3,044,000 |
December 31, 2020 | ||||||||||||||||||||
Amortized Cost | Gross Unrealized | Gross Unrealized | Fair Value | Cash Equivalents | Short-Term | Long-Term | ||||||||||||||
Cash equivalents: | ||||||||||||||||||||
Money Market funds | $ | 9,424,000 | $ | — | $ | — | $ | 9,424,000 | $ | 9,424,000 | $ | — | $ | — | ||||||
Subtotal | 9,424,000 | — | — | 9,424,000 | 9,424,000 | — | — | |||||||||||||
Investments: | ||||||||||||||||||||
Commercial Paper | 700,000 | — | — | 700,000 | — | 700,000 | — | |||||||||||||
Corporate Notes/Bonds | 7,658,000 | 7,000 | (1,000) | 7,664,000 | — | 2,059,000 | 5,605,000 | |||||||||||||
Convertible Debt | 605,000 | — | — | 605,000 | — | — | 605,000 | |||||||||||||
Subtotal | 8,963,000 | 7,000 | (1,000) | 8,969,000 | — | 2,759,000 | 6,210,000 | |||||||||||||
Total | $ | 18,387,000 | $ | 7,000 | $ | (1,000) | $ | 18,393,000 | $ | 9,424,000 | $ | 2,759,000 | $ | 6,210,000 |
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 September 30, 2021:
Amortized Cost | Estimated Market | |||||
Due within one year | $ | 2,860,000 | $ | 2,861,000 | ||
Due after one year through five years | 3,043,000 | 3,044,000 | ||||
$ | 5,903,000 | $ | 5,905,000 |
During the first nine months of 2021, the Company recognized a realized loss on its convertible debt investments and recorded $400,000 in expense within investment and other income (expense) inwithin the accompanying condensed consolidated statementstatements of income (loss) and comprehensive income (loss). The Company did 0t recognize any gross realized gains during either of the three or nine-month periods ending September 30, 2021.operations.
In April 2020, the Company made an $899,000 investment in the common stock of Quortus Ltd., a UK-based company that provides virtual core network software for Private LTE solutions for critical and secure communications. This investment was important for the Company’s Electronics & Software segment because this segment was partnering with Quortus to integrate the Quortus Private LTE core in existing and new products for that segment’s federal business, network extensions, and private networks for enterprises. The Company’s investment represents less than 10% of the outstanding equity of Quortus Ltd. The Company uses the cost method to account for investments in common stock of entities such as Quortus if the Company does not have the ability to exercise significant influence over the operating and financial matters of the entity. The Company 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.
NOTE 5 - STOCK-BASED COMPENSATION
Employee Stock Purchase PlanNOTE 4 – REVENUE RECOGNITION
Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire sharesDisaggregation of common stock at 85% of the price at the end of each current quarterly plan term. The ESPP is considered compensatory under current Internal Revenue Service rules. At September 30, 2021, 59,303 shares remain available for future issuance under the ESPP. The ESPP was suspended effective March 31, 2021 due to conditions of the Pineapple Merger Agreement.revenue
2011 Executive Incentive Compensation Plan
On March 28, 2011Revenues are recognized when control of the Board adoptedpromised goods or services is transferred to our customers, in an amount that best reflects the consideration we expect to receive in exchange for those goods or services. In accordance with ASC 606-10-50-5, the following tables present how we disaggregated our revenues for the three and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Plan”). The 2011 Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash. The 2011 Plan, as amended, allows the issuance of up to 2,500,000 shares of common stock.
Atnine months ended September 30, 2021, 1,425,008 shares have been issued under2022. There was $25,417 in commission revenue during each of the 2011 Plan, there are 0 shares subject to currently outstanding options, deferred stock awards,three and unvested restricted stock units, and 1,074,992 shares are eligible for grant under future awards.nine months ended September 30, 2021.
The closing of the E&S Sale Transaction on August 2, 2021 constituted a “Change in Control”Solar segment classifies its revenue by type as defined in the Company’s 2011 Plan. In accordance with the determinations and approvals of the Compensation Committee, effective on August 1, 2021, each Incentive Award granted and outstanding under the 2011 Plan and not otherwise forfeited or expired in accordance with its terms was fully vested and exercisable and any restrictions lapsed. After giving effect to such acceleration and vesting, on the August 2, 2021 closing date:
All then-outstanding restricted stock units (RSUs”) were settled by exchanging them for the equivalent number of shares of the Company’s common stock specified in the respective RSU award agreements, with the shares of the Company’s common stock issued on settlement of the RSUs being issued and outstanding as of the closing date.
All then-outstanding stock options having an exercise price less than the Fair Market Value (as defined in the 2011 Plan) on the closing date were settled by exchanging the options for a “net” number of shares of the Company’s common stock as if exercised on a net or cashless basis as provided in the 2011 Plan (for administrative convenience, rounded up to the next whole share), with the net shares of the Company’s common stock issued on settlement of these stock options being issued and outstanding as of the closing date.
Following the disposition of the outstanding RSUs and stock options as described above, these Incentive Awards were terminated and cancelled as of the closing date.
All then-outstanding stock options having an exercise price equal to or greater than the Fair Market Value on the closing date were terminated and cancelled as of the closing date without any payment therefor.
Due to conditions of the Pineapple Merger Agreement, no additional awards have been made under the 2011 Plan.follows:
Solar Revenue by Type | |||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||
2022 | 2022 | ||||
Residential contracts | $ | 5,800,813 | $ | 10,180,214 | |
Commercial contracts | 72,894 | 109,441 | |||
Commission revenue | 14,455 | 48,828 | |||
$ | 5,888,162 | $ | 10,338,483 |
Changes in Stock Options Outstanding
The IT Solutions & Services segment classifies its revenue (including $39,211 and $99,975 of intercompany revenue for the three and nine months ended September 30, 2022, respectively) by customer group and type as follows:
IT Solutions & Services Revenue by Customer Group | |||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||
2022 | 2022 | ||||
Financial & Legal | $ | 577,145 | $ | 1,122,624 | |
Healthcare | 242,638 | 488,574 | |||
Education | 57,476 | 115,171 | |||
Other commercial clients | 982,852 | 1,953,621 | |||
$ | 1,860,111 | $ | 3,679,990 |
IT Solutions & Services Revenue by Type | |||||
Three Months Ended September 30 | Nine Months Ended September 30 | ||||
2022 | 2022 | ||||
Project & product revenue | $ | 209,127 | $ | 468,145 | |
Services & support revenue | 1,650,984 | 3,211,845 | |||
$ | 1,860,111 | $ | 3,679,990 |
NOTE 5 – RESTRICTED CASH EQUIVALENTS AND INVESTMENTS
The following table summarizes changes intables show the numberCompany’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 restricted cash and cash equivalents or short- and long-term investments as of outstanding stock options under the 2011 Plan over the periodSeptember 30, 2022. There were no restricted cash equivalents or investments as of December 31, 2020 to September 30, 2021:2021.
Weighted average | ||||||
Weighted average | remaining | |||||
exercise price | contractual term | |||||
Options | per share | in years | ||||
Outstanding – December 31, 2020 | 1,173,190 | $ | 6.52 | 3.35 | ||
Awarded | — | — | ||||
Exercised | (799,390) | 4.70 | ||||
Forfeited | (373,800) | 10.43 | ||||
Outstanding – September 30, 2021 | 0 | — | — | |||
Exercisable at September 30, 2021 | — | $ | — | — | ||
Expected to vest September 30, 2021 | — | — | — |
September 30, 2022 | ||||||||||||||||||||
Amortized Cost | Gross Unrealized | Gross Unrealized | Fair Value | Cash Equivalents | Short-Term | Long-Term | ||||||||||||||
Cash equivalents: | ||||||||||||||||||||
Money Market Funds | $ | 959,541 | $ | — | $ | — | $ | 959,541 | $ | 959,541 | $ | — | $ | — | ||||||
Subtotal | 959,541 | — | — | 959,541 | 959,541 | — | — | |||||||||||||
Investments: | ||||||||||||||||||||
Corporate Notes/Bonds | 2,725,561 | — | (71,178) | 2,654,383 | — | 2,654,383 | — | |||||||||||||
Subtotal | 2,725,561 | — | (71,178) | 2,654,383 | — | 2,654,383 | — | |||||||||||||
Total | $ | 3,685,102 | $ | — | $ | (71,178) | $ | 3,613,924 | $ | 959,541 | $ | 2,654,383 | $ | — |
Because all outstanding options were either vested and exercised or cancelled, the aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at September 30, 2021 was $0. The intrinsic value of all options exercised during the nine months ended September 30, 2021 was $1,961,000. Net cash proceeds from the exercise of all stock options were $15,000 and $0 in each of the nine-month periods ended September 30, 2021 and 2020.
ChangesThe Company tests for other-than-temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in Deferred Stock Outstandingnature. 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 following table summarizes the changes inestimated fair value of our investments, designated as available-for-sale and classified by the numbercontractual maturity date of deferred stock shares under the 2011 Plan over the period December 31, 2020 tosecurities as of September 30, 2021:2022:
Weighted Average | |||||
Grant Date | |||||
Shares | Fair Value | ||||
Outstanding – December 31, 2020 | 272,695 | $ | 3.91 | ||
Granted | — | — | |||
Vested | (194,586) | 4.05 | |||
Forfeited | (78,109) | 3.56 | |||
Outstanding – September 30, 2021 | — | — |
Amortized Cost | Estimated Market | |||||
Due within one year | $ | 2,725,561 | $ | 2,654,383 | ||
Due after one year through five years | — | — | ||||
$ | 2,725,561 | $ | 2,654,383 |
Compensation Expense
Share-based compensation expense recognized for the nine months ended September 30, 2021 was $559,000 before income taxes and $442,000 after income taxes. Share-based compensation expense recognized for the nine months ended September 30, 2020 was $320,000 before income taxes and $253,000 after income taxes. There was 0 unrecognized compensation expense for the Company’s plans at September 30, 2021 due to the acceleration of all outstanding equity awards asAs part of the E&S Sale Transaction. Share-based compensation expense is recorded asmerger, the Company acquired an investment totaling $250,000 in preferred shares of Kogniz, Inc., a part of selling, general and administrative expenses.
Employee Stock Ownership Plan (ESOP)
All eligible employeesprivately 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 participateuses 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 ESOP after completing one yearform of service. Contributions are allocated to each participant based on compensation and vest 20% after two years of service and incrementally thereafter, with full vesting after six years. The Company contributed $329,968 for whichcommon stock or in-substance common stock in entities if the Company issued 72,203 shares in March 2021 fordoes not have the 2020 ESOP contribution. Dueability to conditions ofexercise significant influence over the Pineapple Merger Agreement, no additional contributions will be made to the ESOP.entity’s operating and financial matters.
NOTE 6 -– INVENTORIES
Inventories are summarized below are priced at the lower of first-in, first-out cost or net realizable value:
September 30 | December 31 | |||||
2021 | 2020 | |||||
Finished goods | $ | 35,000 | $ | 22,000 | ||
Raw and processed materials | 86,000 | 114,000 | ||||
$ | 121,000 | $ | 136,000 |
NOTE 7 – BUSINESS COMBINATIONS
On May 14, 2020, in a reverse triangular merger, the Company completed the acquisition of 100% of Ecessa Corporation. Ecessa designs and distributes software-defined wide area networking (SD-WAN) solutions for businesses through the deployment of over 10,000 field installations (since 2002) of Ecessa Edge®, PowerLink®, and WANworX® controllers. The acquisition expands the Company’s IoT intelligent edge products and services and provides opportunities to expand the Company’s services platform. The purchase price was $4,642,000, with cash acquired totaling $666,000. The purchase price includes initial consideration of $4,666,000 and $(24,000) in working capital adjustments.
The assets and liabilities of Ecessabelow. There were recorded in the consolidated balance sheet within the Services & Support segmentno inventories as of the acquisition date, at their respective fair values. The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed and has been allocated as follows:
December 31, 2021.
September 30, | ||||
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1,778,886 | ||||
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Identifiable intangible assets are definite-lived assets. These assets include trade name/trademark/internet domain assets, non-compete agreements, customer relationships, and internally developed software intangible assets, and have a weighted average amortization period ofNOTE 7 years, which matches the weighted average useful life of the assets. Goodwill recorded as part of the purchase price allocation is not tax deductible.– GOODWILL AND INTANGIBLE ASSETS
On NovemberThe Company recorded a provisional goodwill balance totaling $16,567,000 as of September 30, 2022. See further discussion within Note 3, 2020,Business Combinations. As noted in Note 2, Summary of Significant Accounting Policies, goodwill is tested annually for impairment on October 1st and at other times if events have occurred or circumstances exist that indicate the carrying amount of goodwill may not recoverable. As a result of the Company’s declining stock price during the third quarter of 2022, the Company acquiredperformed an interim qualitative impairment assessment. Based on this assessment, the operatingCompany concluded that it was more likely than not that our goodwill and long-lived assets were not impaired.
Including the provisional intangible assets totaling $16,407,000 as of privately held IVDesk Minnesota, Inc. (“IVDesk”) from a third-party receiver (“Receiver”). IVDesk provides private cloud services to small-September 30, 2022 discussed within Note 3, Business Combinations, the Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and mid-were as follows:
size businesses
September 30, 2022 | |||||||||
Gross Carrying Amount | Accumulated Amortization | Net | |||||||
Tradenames & trademarks | $ | 15,988,882 | $ | (3,322,182) | $ | 12,666,700 | |||
Developed technology | 3,397,000 | (466,500) | 2,930,500 | ||||||
Customer relationships | 1,309,000 | (128,975) | 1,180,025 | ||||||
$ | 20,694,882 | $ | (3,917,657) | $ | 16,777,225 |
December 31, 2021 | |||||||||
Gross Carrying Amount | Accumulated Amortization | Net | |||||||
Tradename & trademark | $ | 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 $1,026,362 and $357,324 during the three months ended September 30, 2022 and 2021, respectively and $2,410,045 and $1,071,971 during the nine months ended September 30, 2022 and 2021, respectively. The estimated future amortization expense for identifiable intangible assets during the next fiscal years is as follows:
Year Ending December 31: | |||
Q4 2022 | $ | 1,034,449 | |
2023 | 4,037,896 | ||
2024 | 2,686,933 | ||
2025 | 2,437,683 | ||
2026 | 1,876,100 | ||
Thereafter | 4,704,164 |
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Loan Payable
As of September 30, 2022 and December 31, 2021, Pineapple Energy had $3,000,000 and $7,500,000, respectively, in a loan payable to Hercules Capital, Inc. (“SMB”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 a particular focus onthis loan. This loan was used to acquire fixed assets, inventory, and intangible assets of Sungevity in an asset acquisition in December 2020. As the financial services industry. The acquisition expandstransaction did not involve the exchange of monetary consideration, the assets were valued at the Company’s monthly recurring revenue service model, bringing additional resources and experiencemost reliable indication of fair value, which was debt issued in cloud-delivered applications. The purchase price was $1,368,000 and includes initial consideration of $950,000, working capital adjustments of $(132,000), and $550,000 in contingent consideration, whichfor the Company agreed to pay in additional consideration upon retaining a certain customer level 120 days after closing. During March 2021, upon meetingassets. Accordingly, Pineapple Energy assessed the requirementsfair market value of the earn-out,debt instrument at $4,768,000 at the asset acquisition date (a non-recurring Level 3 fair value input). The Company paidinitially accreted the Receivervalue of the additional consideration. At September 30,debt over its life at a discount rate of approximately 25%.
On December 16, 2021, the Company had 0 further liabilities relatedTerm Loan Agreement was amended, whereby the maturity date was extended to December 31, 2024, subject to various prepayment criteria. In addition, the contingent consideration.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 assetsamendment represented a modification to the loan agreement with the existing lender as both the original loan agreement and liabilities of IVDesk are recorded in the consolidatedamendment allow for immediate prepayment and the Company passed the cash flow test. At December 31, 2021, the combined loan and accrued interest balance sheet within the Services & Support segmentwas $6,194,931. The balance at September 30, 2021. The purchase price allocation2022, after giving effect to the $5,557,000 payment of principal and accrued interest on March 29, 2022, was $1,257,038. A new
effective interest rate of approximately 52.9% was established during the first quarter of 2022 based on estimatesthe carrying value of the fair valuerevised cash flows.
Interest and accretion expense was $151,024 and $618,983 for three and nine months ended September 30, 2022, respectively, and $266,473 and $995,743 for the three and nine months ended September 30, 2021, respectively. The loan is collateralized by all of assets acquiredPineapple Energy’s personal property and liabilities assumed,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 total assets of $1,500,000, including property, plant,provisions relating to the mandatory and equipment of $35,000, goodwill of $745,000 and intangible assets of $720,000, and total liabilities of $132,000. Identifiable intangible assets are definite-lived assets. These assets include customer relationships and have a weighted average amortization period of 8 years, which matches the weighted average useful lifeoptional conversion of the assets.underlying loan amount into equity of the Company under certain circumstances. In the case of either a mandatory or optional conversion of the Hercules working capital loan, the working capital loan of Northern Pacific Growth Investment Advisors, LLC, including all accrued and unpaid interest, would be immediately due and payable. On December 16, 2021, an amendment to the Working Capital Agreement was executed that extended the maturity date to December 31, 2022 and added an additional mandatory conversion provision. In the event that, on or before the maturity date, Pineapple Energy consummated the merger, then immediately prior to the consummation of the merger, the working capital loan and all accrued and unpaid interest and expenses thereon would automatically convert into Class C Units of Pineapple Energy calculated based on one Class C Unit being issued for every $2.00 to be converted. The conversion option under the amendment was considered clearly and closely related to the host contract. During the first three months of 2022, Pineapple Energy borrowed an additional $150,000 and had $500,000 outstanding prior to the merger on March 28, 2022. Immediately prior to the merger on March 28, 2022, the $500,000 outstanding loan balance was converted to 250,000 Class C Units, which upon close of the merger were converted into 62,500 shares of Company common stock.
Interest expense was $0 and $13,977 for the three and nine months ended September 30, 2022, respectively, and was $7,402 and $9,221 for the three and nine months ended September 30, 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.
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. As of September 30, 2022, there were no material legal proceedings pending relating to the Registration Statement.
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 89 – GOODWILL AND INTANGIBLE ASSETSSTOCK-BASED COMPENSATION
2022 Equity Incentive Plan
On January 24, 2022 the CSI board of directors adopted, and on March 16, 2022 the Company’s shareholders approved, the Company’s 2022 Equity Incentive Plan (“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. At September 30, 2022, no shares had been issued under the 2022 Plan, 470,888 shares were subject to currently outstanding unvested restricted stock units (“RSUs”), and 279,112 shares were available for grant under future awards.
Changes in Restricted Stock Units Outstanding
The following table summarizes the changes in the carrying amountnumber of goodwillRSUs under the 2022 Plan over the period December 31, 2021 to September 30, 2022:
Weighted Average | ||||||
Grant Date | ||||||
RSUs | Fair Value | |||||
Outstanding – December 31, 2021 | — | $ | — | |||
Granted | 470,888 | 2.00 | ||||
Issued | — | — | ||||
Forfeited | — | — | ||||
Outstanding – September 30, 2022 | 470,888 | $ | 2.00 |
Compensation Expense
Share-based compensation expense recognized for each of the three and the nine months ended September 30, 2022 was $23,498. There was no share-based compensation expense for the year ended December 31, 2020three and nine months ended September 30, 2021 by company are2021. Unrecognized compensation expense related to outstanding RSUs was $918,278 at September 30, 2022 and is expected to be recognized over a weighted-average period of 2.2 years. Share-based compensation expense is recorded as follows:a part of selling, general and administrative expenses.
Ecessa | IVDesk | Total | |||||||
January 1, 2020 | $ | — | $ | — | $ | — | |||
Acquisition | 1,341,000 | 745,000 | 2,086,000 | ||||||
December 31, 2020 | $ | 1,341,000 | $ | 745,000 | $ | 2,086,000 | |||
September 30, 2021 | $ | 1,341,000 | $ | 745,000 | $ | 2,086,000 | |||
Gross goodwill | 1,341,000 | 745,000 | 2,086,000 | ||||||
Accumulated impairment loss | — | — | — | ||||||
Balance at September 30, 2021 | $ | 1,341,000 | $ | 745,000 | $ | 2,086,000 |
The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and were as follows:
September 30, 2021 | |||||||||
Gross Carrying Amount | Accumulated Amortization | Net | |||||||
Trade Name/Trademark/Internet Domain Assets | $ | 101,000 | $ | (12,000) | $ | 89,000 | |||
Non-compete Agreements | 80,000 | (36,000) | 44,000 | ||||||
Customer Relationships | 1,010,000 | (160,000) | 850,000 | ||||||
Internally Developed Software | 1,800,000 | (342,000) | 1,458,000 | ||||||
$ | 2,991,000 | $ | (550,000) | $ | 2,441,000 |
December 31, 2020 | |||||||||
Gross Carrying Amount | Accumulated Amortization | Net | |||||||
Trade Name/Trademark/Internet Domain Assets | $ | 90,000 | $ | (5,000) | $ | 85,000 | |||
Non-compete Agreements | 80,000 | (16,000) | 64,000 | ||||||
Customer Relationships | 1,010,000 | (34,000) | 976,000 | ||||||
Internally Developed Software | 1,800,000 | (150,000) | 1,650,000 | ||||||
$ | 2,980,000 | $ | (205,000) | $ | 2,775,000 |
Amortization expense on these identifiable intangible assets was $346,000 and $106,000 in first nine months of 2021 and 2020 respectively. The amortization expense is included in selling, general and administrative expenses. The estimated future amortization expense for identifiable intangible assets during the next five fiscal years is as follows:NOTE 10 – EQUITY
Year Ending December 31: | |||
Q4 2021 | $ | 111,000 | |
2022 | 442,000 | ||
2023 | 426,000 | ||
2024 | 415,000 | ||
2025 | 381,000 | ||
Thereafter | 666,000 |
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 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 September 30, 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 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 September 30, 2022, there were 3,000,000 shares of Convertible Preferred Stock authorized and 32,000 shares of Convertible Preferred Stock issued and outstanding. No PIPE Warrants were exercised prior to September 30, 2022. All 2,352,936 PIPE Warrants remain outstanding as of September 30, 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 condensed 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 condensed consolidated balance sheet and condensed consolidated statement of stockholders’ equity as of September 30, 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 September 30, 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.
NOTE 9 – COMMITMENTS & CONTINGENCIES
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.
On September 15, 2021, CSI entered into an amended and restated securities purchase agreement with a group of institutional investors (the “PIPE Investors”) to make a $32.0 million private placement investment in CSI in connection with the closing of the previously announced merger transaction between CSI and Pineapple Energy, LLC (“Pineapple”). Proceeds of this investment will used primarily to fund Pineapple strategic initiatives. The closing of the financing is subject to approval of CSI’s shareholders and other customary conditions.
Under the terms of the securities purchase agreement, the PIPE Investors have agreed to purchase $32.0 million in newly authorized CSI Series A Convertible Preferred Stock convertible at a price of $3.40 per share into CSI common stock, with five year warrants to purchase an additional $32.0 million of common shares at that same price (the “PIPE Offering”). The PIPE Offering is expected to close immediately following the consummation of the CSI-Pineapple merger transaction (the “Merger”). Therefore the PIPE Investors will invest in the post-Merger company, will not be entitled to receive any cash dividends paid prior to closing and will not receive the Contingent Value Rights (“CVRs”) to be issued to pre-Merger CSI shareholders.
The Series A Convertible Preferred Stock will have no liquidation or dividend preference over CSI common stock and no voting rights until after converted into CSI common stock. Assuming conversion of the Series A Convertible Preferred Stock, the PIPE Investors would own approximately 9.41 million shares of the Company’s outstanding common stock immediately following the closing of the PIPE Offering, representing approximately 27% of CSI’s outstanding Common Stock after giving effect to the issuance of shares in the
Merger, and approximately 18.8 million shares assuming exercise of all the warrants for cash, representing approximately 43% of CSI’s outstanding common stock after giving effect to the issuance of shares in the Merger and exercise of the warrants.
The Series A Convertible Preferred Stock and warrants will have anti-dilution provisions that would increase the number of shares issuable upon conversion or exercise, and lower the conversion or exercise price, if CSI issues equity securities at a price less than the conversion or exercise price at the time of such issuance. The securities purchase agreement also prohibits the combined company from conducting a new equity offering within 30 days of the closing, gives the PIPE Investors in the aggregate the right to purchase up to 25% of the equity securities in future CSI-Pineapple offerings within one year of closing and requires 30-day lock-up agreements of CSI common stock by certain CSI-Pineapple officers, directors and major shareholders following the closing. In connection with the transaction, CSI has agreed to file a registration statement on behalf of the PIPE Investors allowing them to resell the common stock into which the Series A Convertible Preferred Stock is convertible and the warrants are exercisable immediately after issuance. Closing is subject to the effectiveness of this registration statement and other customary closing conditions.
Line of Credit
On August 28, 2020, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, establishing a $5,000,000 line of credit facility agreement that replaced a prior facility. On October 29, 2020, the Company entered into a First Amendment to the Credit Agreement. Under the Credit Agreement, as amended, the Company has the ability to obtain 1 or more letters of credit in an aggregate amount up to $2,000,000, subject to the general terms of the credit agreement. The Company did not plan to renew the Credit Agreement upon its expiration and terminated the Credit Agreement effective August 13, 2021.
NOTE 1011 – INCOME TAXES
In the preparation of the Company’s condensed consolidated financial statements, management calculates income taxes based upon the estimated effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. Management analyzes these assets and liabilities regularly and assesses the likelihood that deferred tax assets will be recovered from future taxable income.
At September 30, 2021 there was $117,000 of net uncertain tax benefit positions that would reduce the effective income tax rate if recognized. The Company records interest and penalties related to income taxes as income tax expense in the condensed consolidated statements of income (loss) and comprehensive income (loss).
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The tax years 2018-2020 remain open to examination by the Internal Revenue Service and the years 2017-2020 remain open to examination by various state tax departments. The tax year of 2018 remains open in Costa Rica.
The Company’s effective income tax rate was (0.1%)0% for the firstthree and nine months of 2021.ended September 30, 2022. The effective tax rate differs from the federal tax rate of 21% due to state income taxes the effect of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred tax assets. The foreign operating losses may ultimately be deductibleCompany was a pass through entity in the countries in which they occurred; however, the Company has 0t recorded a deferred tax asset for these losses due to uncertainty regarding the eventual realization of the benefit. The effect of the foreign operations was an overall rate decrease of approximately 0.0% for the nine months ended September 30, 2021. There were 0 additional uncertain tax positions identified in the first nine
months of 2021. The Company's effective income tax rate for the nine months ended September 30, 2020 was (0.1%), and differed from the federal tax rate due to state income taxes, changes in the reserve for uncertain income tax positions, provisions for interest charges for uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred tax assets.
NOTE 1112 – SEGMENT INFORMATION
The Company classifies its business operations into 1 segmenttwo segments as follows:
ServicesSolar: generates revenue through the sale and installation of residential and commercial solar systems, battery storage, and grid service solutions.
IT Solutions & Support:Services: provides technology solutions that address prevalent IT challenges, including network resiliency, security products and services, network virtualization, and cloud migrations, IT managed services, wired and wireless network design and implementation, and converged infrastructure configuration, deployment and management.
Our chief operating decision maker evaluates segment financial performance based on segment revenues and segment operating income and allocates resources to achieve our operating profit goals through these two operating segments. Management has chosen to historically organize the Company and disclose reportable segments based on our products and services. Intercompany revenues are eliminated upon consolidation. “Other” includes non-allocated corporate overhead costs. As a result of our treatment of Suttle and the E&S Segment as discontinued operations, “Other” includes amounts previouslycosts that are not allocated to Suttle and E&S that do not meet the criteria to be included in income from discontinued operations.segments.
Information concerning the Company’s continuing operations in its S&S segmentsegments for the threethree- and nine monthnine-month periods ended September 30, 20212022 and 20202021 are as follows:
Services & | Intercompany | IT Solutions & | Intercompany | |||||||||||||||||||||||
Support | Other | Eliminations | Total | Solar | Services | Other | Eliminations | Total | ||||||||||||||||||
Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||
Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||
Sales | $ | 1,947,000 | $ | — | $ | (119,000) | $ | 1,828,000 | $ | 5,888,162 | $ | 1,860,111 | $ | — | $ | (39,211) | $ | 7,709,062 | ||||||||
Cost of sales | 1,113,000 | — | — | 1,113,000 | 4,483,989 | 1,211,331 | — | — | 5,695,320 | |||||||||||||||||
Gross profit | 834,000 | — | (119,000) | 715,000 | 1,404,173 | 648,780 | — | (39,211) | 2,013,742 | |||||||||||||||||
Selling, general and | ||||||||||||||||||||||||||
administrative expenses | 669,000 | 1,138,000 | (119,000) | 1,688,000 | 1,250,734 | 620,471 | 1,290,982 | (39,211) | 3,122,976 | |||||||||||||||||
Amortization expense | 110,000 | — | 110,000 | 863,574 | 162,788 | — | — | 1,026,362 | ||||||||||||||||||
Transaction costs | — | 543,000 | — | 543,000 | — | 3,018 | 262,365 | — | 265,383 | |||||||||||||||||
Restructuring expense | — | 242,000 | — | 242,000 | ||||||||||||||||||||||
Operating income (loss) | 55,000 | (1,923,000) | — | (1,868,000) | ||||||||||||||||||||||
Other income | 4,000 | 66,000 | — | 70,000 | ||||||||||||||||||||||
Income (loss) before income tax | $ | 59,000 | $ | (1,857,000) | $ | — | $ | (1,798,000) | ||||||||||||||||||
Operating loss | (710,135) | (137,497) | (1,553,347) | — | (2,400,979) | |||||||||||||||||||||
Other income (expense) | (149,065) | 20,829 | 9,219 | — | (119,017) | |||||||||||||||||||||
Loss before income tax | $ | (859,200) | $ | (116,668) | $ | (1,544,128) | $ | — | $ | (2,519,996) | ||||||||||||||||
Depreciation and amortization | $ | 133,000 | $ | 72,000 | $ | — | $ | 205,000 | $ | 878,853 | $ | 184,204 | $ | — | $ | — | $ | 1,063,057 | ||||||||
Capital expenditures | $ | 5,000 | $ | 9,000 | $ | — | $ | 14,000 | $ | 101,456 | $ | 3,736 | $ | — | $ | — | $ | 105,192 | ||||||||
Assets | $ | 6,776,000 | $ | 50,213,000 | $ | (27,000) | $ | 56,962,000 | $ | 41,572,863 | $ | 9,676,492 | $ | — | $ | — | $ | 51,249,355 |
Services & | Intercompany | IT Solutions & | Intercompany | |||||||||||||||||||||||
Support | Other | Eliminations | Total | Solar | Services | Other | Eliminations | Total | ||||||||||||||||||
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||
Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||
Sales | $ | 3,530,000 | $ | — | $ | (176,000) | $ | 3,354,000 | $ | 25,417 | $ | — | $ | — | $ | — | $ | 25,417 | ||||||||
Cost of sales | 2,190,000 | — | (9,000) | 2,181,000 | — | — | — | — | — | |||||||||||||||||
Gross profit | 1,340,000 | — | (167,000) | 1,173,000 | 25,417 | — | — | — | 25,417 | |||||||||||||||||
Selling, general and | ||||||||||||||||||||||||||
administrative expenses | 803,000 | 1,324,000 | (167,000) | 1,960,000 | 241,728 | — | — | — | 241,728 | |||||||||||||||||
Amortization expense | 106,000 | — | — | 106,000 | 357,324 | — | — | — | 357,324 | |||||||||||||||||
Transaction costs | — | 72,000 | — | 72,000 | 545,934 | — | — | — | 545,934 | |||||||||||||||||
Operating income (loss) | 431,000 | (1,396,000) | — | (965,000) | ||||||||||||||||||||||
Other income | — | 275,000 | — | 275,000 | ||||||||||||||||||||||
Income (loss) before income tax | $ | 431,000 | $ | (1,121,000) | $ | — | $ | (690,000) | ||||||||||||||||||
Operating loss | (1,119,569) | — | — | — | (1,119,569) | |||||||||||||||||||||
Other expense | (275,694) | — | — | — | (275,694) | |||||||||||||||||||||
Loss before income tax | $ | (1,395,263) | $ | — | $ | — | $ | — | $ | (1,395,263) | ||||||||||||||||
Depreciation and amortization | $ | 146,000 | $ | 128,000 | $ | — | $ | 274,000 | $ | 357,324 | $ | — | $ | — | $ | — | $ | 357,324 | ||||||||
Capital expenditures | $ | — | $ | 79,000 | $ | — | $ | 79,000 | ||||||||||||||||||
Assets | $ | 8,334,000 | $ | 47,410,000 | $ | (27,000) | $ | 55,717,000 | $ | 3,205,000 | $ | — | $ | — | $ | — | $ | 3,205,000 |
Services & | Intercompany | IT Solutions & | Intercompany | |||||||||||||||||||||||
Support | Other | Eliminations | Total | Solar | Services | Other | Eliminations | Total | ||||||||||||||||||
Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||
Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||
Sales | $ | 5,719,000 | $ | — | $ | (406,000) | $ | 5,313,000 | $ | 10,338,483 | $ | 3,679,990 | $ | — | $ | (99,975) | $ | 13,918,498 | ||||||||
Cost of sales | 3,459,000 | — | — | 3,459,000 | 7,966,159 | 2,567,203 | — | — | 10,533,362 | |||||||||||||||||
Gross profit | 2,260,000 | — | (406,000) | 1,854,000 | 2,372,324 | 1,112,787 | — | (99,975) | 3,385,136 | |||||||||||||||||
Selling, general and | ||||||||||||||||||||||||||
administrative expenses | 2,290,000 | 3,683,000 | (406,000) | 5,567,000 | 2,683,953 | 1,442,286 | 2,627,532 | (99,975) | 6,653,796 | |||||||||||||||||
Amortization expense | 346,000 | — | — | 346,000 | 2,084,470 | 325,575 | — | — | 2,410,045 | |||||||||||||||||
Transaction costs | — | 1,855,000 | — | 1,855,000 | 949,330 | 80,501 | 417,453 | — | 1,447,284 | |||||||||||||||||
Restructuring expense | — | 242,000 | — | 242,000 | ||||||||||||||||||||||
Operating loss | (376,000) | (5,780,000) | — | (6,156,000) | (3,345,429) | (735,575) | (3,044,985) | — | (7,125,989) | |||||||||||||||||
Other income (expense) | 20,000 | (186,000) | — | (166,000) | (628,376) | 116,949 | 4,676,438 | — | 4,165,011 | |||||||||||||||||
Loss before income tax | $ | (356,000) | $ | (5,966,000) | $ | — | $ | (6,322,000) | ||||||||||||||||||
Income (loss) before income tax | $ | (3,973,805) | $ | (618,626) | $ | 1,631,453 | $ | — | $ | (2,960,978) | ||||||||||||||||
Depreciation and amortization | $ | 426,000 | $ | 218,000 | $ | — | $ | 644,000 | $ | 2,108,901 | $ | 374,714 | $ | — | $ | — | $ | 2,483,615 | ||||||||
Capital expenditures | $ | 11,000 | $ | 9,000 | $ | — | $ | 20,000 | $ | 106,421 | $ | 9,886 | $ | — | $ | — | $ | 116,307 |
Services & | Intercompany | IT Solutions & | Intercompany | |||||||||||||||||||||||
Support | Other | Eliminations | Total | Solar | Services | Other | Eliminations | Total | ||||||||||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||
Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||
Sales | $ | 5,882,000 | $ | — | $ | (561,000) | $ | 5,321,000 | $ | 25,417 | $ | — | $ | — | $ | — | $ | 25,417 | ||||||||
Cost of sales | 3,792,000 | — | (36,000) | 3,756,000 | — | — | — | — | — | |||||||||||||||||
Gross profit | 2,090,000 | — | (525,000) | 1,565,000 | 25,417 | — | — | — | 25,417 | |||||||||||||||||
Selling, general and | ||||||||||||||||||||||||||
administrative expenses | 1,614,000 | 3,928,000 | (525,000) | 5,017,000 | 697,985 | — | — | — | 697,985 | |||||||||||||||||
Amortization expense | 106,000 | — | — | 106,000 | 1,071,971 | — | — | — | 1,071,971 | |||||||||||||||||
Transaction costs | — | 486,000 | — | 486,000 | 1,977,436 | — | — | — | 1,977,436 | |||||||||||||||||
Operating income (loss) | 370,000 | (4,414,000) | — | (4,044,000) | ||||||||||||||||||||||
Other income | — | 948,000 | — | 948,000 | ||||||||||||||||||||||
Income (loss) before income tax | $ | 370,000 | $ | (3,466,000) | $ | — | $ | (3,096,000) | ||||||||||||||||||
Operating loss | (3,721,975) | — | — | — | (3,721,975) | |||||||||||||||||||||
Other expense | (1,004,964) | — | — | — | (1,004,964) | |||||||||||||||||||||
Loss before income tax | $ | (4,726,939) | $ | — | $ | — | $ | — | $ | (4,726,939) | ||||||||||||||||
Depreciation and amortization | $ | 178,000 | $ | 443,000 | $ | — | $ | 621,000 | $ | 1,071,971 | $ | — | $ | — | $ | — | $ | 1,071,971 | ||||||||
Capital expenditures | $ | 1,000 | $ | 100,000 | $ | — | $ | 101,000 |
NOTE 13 – FAIR VALUE MEASUREMENTS
The accounting guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
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 September 30, 2021 and2022 are summarized below. There were no assets or liabilities measured at fair value on a recurring basis as of December 31, 2020, are summarized below:2021.
September 30, 2021 | September 30, 2022 | |||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Fair Value | Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||||||||||
Cash equivalents: | ||||||||||||||||||||||
Money Market Funds | $ | 33,138,000 | $ | — | $ | — | $ | 33,138,000 | ||||||||||||||
Money market funds | $ | 959,541 | $ | — | $ | — | $ | 959,541 | ||||||||||||||
Subtotal | 33,138,000 | — | — | 33,138,000 | 959,541 | — | — | 959,541 | ||||||||||||||
Short-term investments: | ||||||||||||||||||||||
Corporate Notes/Bonds | — | 2,861,000 | — | 2,861,000 | ||||||||||||||||||
Corporate notes/bonds | — | 2,654,383 | — | 2,654,383 | ||||||||||||||||||
Subtotal | — | 2,861,000 | — | 2,861,000 | — | 2,654,383 | — | 2,654,383 | ||||||||||||||
Long-term investments: | ||||||||||||||||||||||
Corporate Notes/Bonds | — | 2,794,000 | — | 2,794,000 | ||||||||||||||||||
Convertible debt | — | — | 250,000 | 250,000 | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||
Contingent value rights | — | — | (10,743,224) | (10,743,224) | ||||||||||||||||||
Earnout consideration | — | — | — | — | ||||||||||||||||||
Subtotal | — | 2,794,000 | 250,000 | 3,044,000 | — | — | (10,743,224) | (10,743,224) | ||||||||||||||
Total | $ | 33,138,000 | $ | 5,655,000 | $ | 250,000 | $ | 39,043,000 | $ | 959,541 | $ | 2,654,383 | $ | (10,743,224) | $ | (7,129,300) |
December 31, 2020 | |||||||||||
Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||
Cash equivalents: | |||||||||||
Money Market Funds | $ | 9,424,000 | $ | — | $ | — | $ | 9,424,000 | |||
Subtotal | 9,424,000 | — | — | 9,424,000 | |||||||
Short-term investments: | |||||||||||
Commercial Paper | — | 700,000 | — | 700,000 | |||||||
Corporate Notes/Bonds | — | 2,059,000 | — | 2,059,000 | |||||||
Subtotal | — | 2,759,000 | — | 2,759,000 | |||||||
Long-term investments: | |||||||||||
Corporate Notes/Bonds | — | 5,605,000 | — | 5,605,000 | |||||||
Convertible debt | — | — | 605,000 | 605,000 | |||||||
Subtotal | — | 5,605,000 | 605,000 | 6,210,000 | |||||||
Current Liabilities: | |||||||||||
Contingent Consideration | — | — | (550,000) | (550,000) | |||||||
Subtotal | — | — | (550,000) | (550,000) | |||||||
Total | $ | 9,424,000 | $ | 8,364,000 | $ | 55,000 | $ | 17,843,000 |
The estimated fair value of the CVRs as of September 30, 2022 was $10,743,224, as noted above. The Company recorded a $1,214,560 loss on the fair value remeasurement of the CVRs during the second quarter of 2022 related to a $1,500,000 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 offset with a $285,440 loss on held for sale assets. The Company paid $8,745,628 in CVR distributions during the third quarter of 2022.
The estimated fair value of the earnout consideration as of September 30, 2022 was $0. As noted in Note 3, Business Combinations, the estimated fair value is considered a Level 3 measurement. In order to update the fair value at September 30, 2022, 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 total gain of $4,684,000 during the nine months ended September 30, 2022 related to the earnout consideration.
The estimated fair value remeasurements noted above were both recorded within other income (expense) in the condensed consolidated statements of contingent consideration as of December 31, 2020 was $550,000, as noted above. The estimated fair value is considered a level 3 measurement because the probability weighted discounted cash flow methodology used to estimate fair value includes the use of significant unobservable inputs, primarily the contractual contingent consideration revenue targets and assumed probabilities. The Company paid the full amount of the contingent consideration during the first quarter of 2021 and there was 0 liability at September 30, 2021.operations.
We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period. There were 0no transfers between levels during the three months ended September 30, 2021.2022.
NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, 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 U.S. GAAP with a methodology that reflects expected credit losses. This ASU is intended to provide financial statement users with more decision-useful information about the expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
NOTE 1514 – SUBSEQUENT EVENTS
SUNation Acquisition
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 (“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, the “Acquired Companies”). Each of SUNation Service, Inc. and SUNation Electric, Inc. were acquired through a merger with and into Merger Sub, with 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. 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 has evaluated subsequent events throughacquired the equity of the Acquired Companies from Sellers for an aggregate purchase price of approximately $21.9 million, comprised of (a) $2.39 million in cash consideration paid at closing, (b) the issuance at closing of a $5.0 million 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”), (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, and (e) potential earn-out payments of up to $2.5 million for each of fiscal years 2023 and 2024, based on the percentage of year-over-year EBITDA growth of the Acquired Companies, as set forth in the Transaction Agreement (the “Earnout”).
The Short-Term Note is secured as described below and matures on August 9, 2023. It carries an annual interest rate of 4% until the three-month anniversary of issuance, 8% thereafter until the six-month anniversary of issuance, then 12% thereafter until the Short-Term Note is paid in full. The Long-Term Note is unsecured and matures on November 9, 2025. It carries an annual interest rate of 4% until the first anniversary of issuance, then 8% thereafter until the Long-Term Note is paid in full. The Company will be required to make a principal payment of $2.5 million on the second anniversary of the Long-Term Note. Both the Short-Term Note and Long-Term Note may be prepaid at the Company’s option at any time without penalty.
Pursuant to a Limited Pledge and Security Agreement among the Company and Sellers, dated November 9, 2022 (the “Pledge Agreement”), the Short-Term Note is secured by a pledge by the Company and Merger Sub of the equity of the Acquired Companies 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 the Acquired Companies, 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.
As a result of the timing of the acquisition in proximity to the filing date, not all disclosures as required under ASC 805 are presented herein (including a preliminary purchase price allocation and certain pro-forma information) as the initial accounting for the business combination is incomplete at the time the financial statements were issued.
PIPE Investment Reset
Following market close on November 9, 2022, the Company also entered into a separate Consent, Waiver and Amendment with each of the Company’s existing PIPE Investors whereby these investors provided certain waivers to the anti-dilution protections that reset the conversion price of the Convertible Preferred Stock to $4.00 and reset the strike price on certain of the PIPE Warrants to $4.00 from $13.60. Following the adjustments, the Company’s $32 million of Convertible Preferred Stock preference is currently convertible into approximately 8.0 million shares of common stock at $4.00 per share and the PIPE Investors hold PIPE Warrants to purchase approximately 4.0 million shares of common stock at $4.00 per share and PIPE Warrants to purchase approximately 1.2 million shares of common stock at $13.60 per share. The conversion price of the Convertible Preferred Stock and the conversion price of the PIPE Warrants and the number of shares issuable upon exercise of the PIPE Warrants continue to be subject to further adjustment in accordance with their terms.
NOTE 15 – GOING CONCERN
The Company’s financial statements as of September 30, 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 14, 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 $4.6 million of restricted cash, cash equivalents and investments that are restricted under the CVR 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 this filing. We do not believe there are any material subsequent events other than those disclosed in the footnotes toissuance of these financial statements indicate that require further disclosure.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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent Development: Proposed MergerThe following discussion and analysis should be read in conjunction with Pineapple Energyour interim unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited financial statements and notes thereto as of and for the years ended December 31, 2021 and 2020, which are contained in our amended Current Report on Form 8-K/A filed with the Securities and Exchange Commission (“SEC”) on May 19, 2022.
As previously disclosed, on March 1, 2021, CSI entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Helios Merger Co., a Delaware corporation and a wholly-owned subsidiary of CSI (the “Merger Sub”), Pineapple Energy LLC, a Delaware limited liability company (“Pineapple”), Lake Street Solar LLC, a Delaware limited liability company (the “Members’ Representative”), and Randall D. Sampson, as the Shareholders’ Representative (the “Shareholders’ Representative,” and together with CSI, the Merger Sub, Pineapple and the Members’ Representative, the “Parties”), pursuant to which Merger Sub will merge with and into Pineapple with Pineapple surviving the merger as a wholly owned subsidiary of CSI (the “Pineapple Merger”).
Simultaneously with the execution of the Merger Agreement, Pineapple entered into a Voting Agreement, dated March 1, 2021 (the “Voting Agreement”) with officers and director of CSI (the “CSI Holders”). The CSI Holders hold in the aggregate approximately 13.8% of CSI’s outstanding shares. Pursuant to the Voting Agreement, each CSI Holder has agreed, with respect to all of the voting securities of CSI that such CSI Holder beneficially owns as of the date thereof or thereafter, to vote in favor of the Merger. The Voting Agreement will terminate on the Effective Time (as defined therein) or upon termination of the Merger Agreement in accordance with its terms.
Pursuant to the Merger Agreement, at the closing of the Merger, CSI will enter into a Contingent Value Rights Agreement (the “CVR Agreement”) with a person designated by CSI as the Holders’ Representative (as defined therein), and the Rights Agent (as defined therein). Pursuant to the CVR Agreement, each shareholder of CSI as of immediately prior to the closing of the Merger will receive one non-transferable Contingent Value Right (“CVR”) for each outstanding share of common stock of CSI held as of the close of business on the day immediately before the Effective Time of the Merger, which will represent the right to receive pro-rata distributions of proceeds from Dispositions that occur following the Effective Time.
A detailed description of the Pineapple Merger, the Voting Agreement and the CVR Agreement is contained in the Form 8-K dated March 1, 2021, and the Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 31, 2021.
On November 12, 2021, the Company filed with the SEC a combined Form S-4 Registration Statement/Proxy Statement (the “Pineapple Merger Proxy Statement”). CSI urges investors, shareholders and other interested persons to read, when available, the definitive registration statement/proxy statement as well as other documents filed with the SEC because these documents will contain important information about CSI, Pineapple, and the proposed transaction. The definitive Pineapple Merger Proxy Statement will be mailed to CSI shareholders as of a record date to be established for voting on the proposed transaction. Shareholders will also be able to obtain a copy of the definitive Pineapple Merger Proxy Statement (when available), without charge, by directing a request to: Communications Systems, Inc., 10900 Red Circle Drive, Minnetonka, MN 55343. The preliminary and definitive proxy statement, once available, can also be obtained, without charge, at the SEC’s website (www.sec.gov).
Overview
Except as otherwise expressly discussed, all operating results for 2020 and 2021 only reflect the Company’s continuing operations and exclude the discontinued operations of the Company’s former E&S and Suttle businesses.
Communications Systems, Inc. provides network infrastructure and services for global deployments of enterprise and industrial broadband networks through the following business segment:
Services & SupportForward-Looking Statements
This segment is comprised of CSI’s JDL Technologies and Ecessa Corporation businesses. With over 30 years of growth and expertise in managed services and, more recently, SD-WAN solutions in this segment, the Company offers customers:
Technology services and infrastructure in the commercial, healthcare, financial, and education market segments. The Company’s portfolio of technology solutions includes IT managed services supporting client infrastructures from the data center to the desktop, security products and services, cloud migrations, network virtualization and resiliency, wired and wireless network design and implementation, and converged infrastructure configuration and deployment. We provide many of these technology services to the education space, including having provided services to one of the largest school districts in the US for more than 30 years. We also provide these services to a number of commercial and healthcare clients.
SD-WAN Never Down® networks, sold as a product or as a recurring service, enable organizations of all sizes to reliably run Internet and cloud-based applications, connect offices worldwide and distribute traffic among a fabric of multiple, diverse ISP links, ensuring business continuity by removing bottlenecks and eliminating network downtime. These capabilities optimize Never Down performance of business-critical applications, aid in lowering IT costs, and make it easier to provision, maintain and support business networks and the applications that run over them.
Third Quarter 2021 Summary
Consolidated sales were $1.8 million in Q3 2021 compared to $3.4 million in Q3 2020.
The Company incurred an operating loss from continuing operations of $1.9 million in Q3 2021 compared to an operating loss from continuing operations of $965,000 in Q3 2020.
Net loss from continuing operations was $1.8 million, or ($0.19) per diluted share in Q3 2021, compared to net loss from continuing operations of $699,000, or ($0.07) per diluted share, in Q3 2020.
Forward-looking statements
In thisquarterly report and, from time to time, in reports filed with the Securities and Exchange Commission (“SEC”), in press releases, and in other communications to shareholders or the investing public, the Company may makecontain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We may make these forward-lookingForward-looking statements concerning possible or anticipated future financial performance,
business activities, plans, pending claims, investigations or litigation, which are typically precededcan be identified by the words “believes,fact that they do not relate strictly to historical or current facts. Words such as “may,” “expects,“will,” “anticipates,“can,” “intends” or“should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,” “believe,” “are confident that,” “look forward to,” “predict,” “estimate,” “potential,” “project,” “target,” “forecast,” “see,” “intend,” “design,” “strive,” “strategy,” “future,” “opportunity,” “assume,” “guide,” “position,” “continue” and similar expressions. For theseexpressions are intended to identify forward-looking statements. Forward-looking statements the Company claims the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholdersare based on current beliefs, expectations and the investing public should understandassumptions that these forward-looking statements are subject to significant risks, uncertainties and uncertaintieschanges in circumstances that could cause actual performance, activities, anticipated results outcomes or plans to differ significantlymaterially from those indicated in thesuch forward-looking statements. These risks, uncertainties and uncertaintieschanges in circumstances include, but are not limited to:
GeneralSolar Segment Risks and Uncertainties:
In addition to these factors and the specific factors related to the Company’s continuing segment described below, there are factors related to the Company’s sale of its E&S segment subsidiaries to Lantronix and the CSI-Pineapple merger transaction, including:
Up to $7.0 millionour growth strategy depends on the continued origination of the purchase price of the Company’s sale of its E&S segment business to Lantronix is structured in the form of an earnout based on revenues generated by Lantronix in the 360 days following closing, and there is no guaranty that sufficient revenues will be recognized for the earnout to be paid to the Company;
solar service agreements;
The fact that with the August 2, 2021 sale of the E&S segment businessif sufficient additional demand for residential solar power systems does not develop or takes longer to Lantronix the Company will no longer be allocating a portion of its general and administrative expensesdevelop than we anticipate, our ability to this segment. Therefore, the Company expects its non-allocated general and administrative expenses, which are separately accounted for as “Other,” to increase in the remainder of 2021.
originate solar service agreements may decrease;
Conditions toa material reduction in the closingretail price of the previously announced CSI-Pineapple merger transaction may not be satisfiedelectricity charged by electric utilities or the merger may involve unexpected costs, liabilities or delays;
other retail electricity providers could harm our business, financial condition and results of operations;
Relatedwe need to the CSI-Pineapple announced merger, the Company’s abilityobtain substantial additional financing arrangements to successfully sell its other existing operating business assetscontinue as a going concern and its real estate assets at a value close to their current fair market valueprovide working capital and distribute these proceeds to its existing shareholder base;
growth capital;
The fact thatour business prospects are dependent in part on a continuing decline in the continuing CSI-Pineapple entity will be entitled to retain ten percentcost of the net proceeds of CSI legacy assets that are sold pursuant to agreements entered into after the effective date of the CSI-Pineapple closing;
solar energy system components;
The occurrence of any other risks to consummation of the CSI-Pineapple merger, including the risk that the CSI-Pineapple merger will not be consummated within the expected time period or any event, change or other circumstances that could give rise to the termination of the CSI-Pineapple merger;
we face competition from centralized electric utilities, retail electric providers, independent power producers and renewable energy companies;
Risks that the CSI-Pineapple merger will disrupt current CSI plansdevelopments in technology or improvements in distributed solar energy generation and operationsrelated technologies or that the business or stock price of CSIcomponents may suffer as a result of uncertainty surrounding the CSI-Pineapple merger;
materially adversely affect demand for our offerings;
The outcomewe depend on a limited number of any legal proceedings related to the CSI-Pineapple merger;
suppliers of solar energy system components;
The fact that CSI cannot yet determineincreases in the exact amountcost of our solar power systems due to tariffs imposed by the Contingent Value U.S. government could have a material adverse effect on our business, financial condition and results of operations;
Rights that CSI intendsour operating results may fluctuate from quarter to distributequarter and year to its year;
shareholdersif we are unable to make acquisitions on economically acceptable terms, our future growth would be limited, and any acquisitions we may make could reduce, rather than increase, our cash flows;
immediately priorthe installation and operation of solar power systems depends heavily on suitable solar and meteorological conditions;
the loss of one or more members of our senior management or key employees may adversely affect our ability to implement our strategy;
our inability to protect our intellectual property could adversely affect our business;
we may be subject to interruptions, failures or breaches in our information technology systems;
we may be subject to regulation as an electric utility in the future;
electric utility policies and regulations, including those affecting electric rates, may present regulatory and economic barriers to the effective datepurchase and use of solar power systems;
we rely on net metering and related policies for competitive pricing to our customers;
our business depends in part on the CSI-Pineapple merger;availability of financial incentives;
Any short-term or long-term effect thatlimitations regarding the COVID-19 Pandemicinterconnection of solar power systems to the electrical grid may have on the American and world economies generally, or us as a manufacturing entity, includingsignificantly reduce our ability to manufacture, market,sell electricity from our solar power systems; and sell our products while complying
compliance with applicable or otherwise appropriate social distancing policies, as discussed throughout the “Forward-looking statements” sectionoccupational safety and more thoroughly below in the section “Impact of COVID-19 Pandemic”;health requirements and best practices can be costly.
IT Solutions & Services Segment Risks and Uncertainties:
The fact that our information technology systems may be exposed to various cybersecurity risks and other disruptions that could impair our ability to operate.
Our ability to continue to obtain and manage the historically fluctuating business from our traditional South Florida school district customer, particularly because we were not selected as the primary vendor on the next multi-year project for this school district customer, but have been selected as the secondary vendor for structured cabling and enterprise networking;
Our ability to expand to other educational customers;
Our ability to profitably increase our business serving SMBsmall and mid-size businesses (“SMB”) commercial businesses as well as any decreased spending by our existing SMB customers due to uncertainty or lower customer demand due to the COVID-19 pandemic;
Ourour ability to successfully and profitably manage a large number of small accounts;
Ourour ability to establish and maintain a productive and efficient workforce;
Ourour ability to compete in a fast growing and large field of SD-WAN competitors, some of whomwhich have more features than our current product offering; and
our ability to successfully sell the legacy CSI businesses at a value close to their fair market value.
Other risks and uncertainties are discussed more fully under the caption “Risk Factors” in our filings with the SEC, including in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q. Our abilityAccordingly, you should not place undue reliance on forward-looking statements. To the extent permitted by applicable law, we expressly disclaim any intent or obligation to continueupdate any forward-looking statements to integratereflect subsequent events or circumstances.
Overview
Pineapple Energy Inc. (formerly Communications Systems, Inc. (“CSI”) and Pineapple Holdings, Inc.) (“PEGY,” “we” or the recently acquired Ecessa SD-WAN business“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 IVDesk private cloud services into this operating segment.merger as a wholly owned subsidiary of the Company (the “merger”). Following the closing of the merger (the “Closing”) the Company changed its name from Communications Systems, Inc. to Pineapple Holdings, Inc. and subsequently, on April 13, 2022, changed its name to Pineapple Energy Inc.
In addition, on March 28, 2022 and immediately prior to the closing of the merger, the Company completed its acquisition (“HEC Asset Acquisition”) of substantially all of the assets of two Hawaii-based solar energy companies, Hawaii Energy Connection, LLC (“HEC”) and E-Gear, LLC (“E-Gear”).
The Company discusses theseis a growing domestic operator and consolidator of residential solar, battery storage, and grid service solutions. The Company’s focus is acquiring and growing leading local and regional solar, storage and energy service companies nationwide. Through the Company’s HEC business, the Company also operates as a recognized solar integrator, dedicated to providing affordable energy solutions in Hawaii with its offerings of solar panels, communication filters, web monitoring systems, batteries, water heating systems, and other risk factors from timerelated products that help residential and commercial users reduce electric costs and earn tax credits related to time in its filings with the SEC, including risk factors presented under Item 1A of the Company's most recently filed Annual Report on Form 10-Kinstalling renewable energy systems. The Company’s E-Gear business is a renewable energy innovator that offers proprietary patented and Quarterly Reports on Form 10-Q.patent pending edge-of-grid energy management and storage solutions that offer intelligent and real-time adaptive control, flexibility, visibility, predictability and support to energy consumers, energy service companies, and utilities.
Impact of COVID-19 PandemicThrough the Company’s legacy CSI subsidiaries, JDL Technologies, Inc. (“JDL”) and Ecessa Corporation (“Ecessa”), the Company provides technology solutions, including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment, and designs, develops and sells SD-WAN (software-designed wide-area network) solutions.
We are subjectWhile CSI was the legal acquirer in the merger, because Pineapple Energy was determined to risks and uncertainties asbe 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, of the COVID-19 pandemic. In response to the pandemic, we instituted temporary office closures, implemented shelter-in-place orders and restrictions, instituted a mandatory work from home policy for substantially all office employees, and instituted social distancing work rules for operations personnel that continued to work in our facilities to satisfy customer orders. We may also see a slowdown in our business if one or more of our major customer or suppliers delays its purchase or supplies due to uncertainty in its business operations, encounters difficulties in its production due to employee safety or workforce concerns, is unable to obtain materials or labor from third parties that it needs to complete its projects, and may see a slowdown in our collection of receivables if our customers encounter cash flow difficulties or delay payments to preserve their cash resources. We are continuing to actively monitor the effects and potential impacts of the COVID-19 pandemic on all aspects of our business, liquidity and capital resources. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain at this time.
Three Months Ended September 30, 2021 Compared to
Three Months Ended September 30, 2020
Consolidated sales decreased 45.5% in the third quarter of 2021 to $1,828,000 compared to $3,354,000 in the same period of 2020. Consolidated operating loss from continuing operations in the third quarter of 2021 increased to $1,868,000 from an operating loss from continuing operations of $965,000 in the third quarter of 2020. Net loss from continuing operations in the third quarter of 2021 was $1,803,000 or $ (0.19) per diluted share compared to net loss from continuing operations of $699,000 or $ (0.07) per diluted share in the third quarter of 2020.
Services & Support
Services & Support sales decreased 45% to $1,947,000 in the third quarter of 2021 compared to $3,530,000 in the third quarter of 2020.
Revenues by customer group were as follows:
Services & Support Revenue by Customer Group | |||||
2021 | 2020 | ||||
Financial | $ | 482,000 | $ | 117,000 | |
Healthcare | 261,000 | 244,000 | |||
Education | 64,000 | 2,312,000 | |||
Other commercial clients | 1,021,000 | 682,000 | |||
CSI IT operations | 119,000 | 175,000 | |||
$ | 1,947,000 | $ | 3,530,000 |
Revenues by revenue type were as follows:
Services & Support Revenue by Type | |||||
2021 | 2020 | ||||
Project & product revenue | $ | 297,000 | $ | 2,611,000 | |
Services & support revenue | 1,650,000 | 919,000 | |||
$ | 1,947,000 | $ | 3,530,000 |
Revenues from the education sector decreased $2,248,000 or 97% in the third quarter of 2021 as compared to the 2020 third quarter due to the substantial completion of projects from the Company’s Florida school district customer in the prior year. The Company was not selected as the primary vendor on the next multi-year project for this school district, but has been selected as the secondary vendor for structured cabling and enterprise networking.
Revenue from sales to SMBs, which are primarily financial, healthcare and commercial clients increased $721,000 or 69% in the third quarter of 2021 as compared to the third quarter of 2020 due to the acquisition of the assets of IVDesk on November 3, 2020. Project and product revenue decreased $2,314,000 or 89% in the third quarter of 2021 as compared to the third quarter of 2020 primarily due to the decrease in the education sector. Services and support revenue increased $731,000 or 80% as compared to the same quarter of the prior year due to the Company’s acquisition of Ecessa and its service and support revenue on its SD-WAN products as well as the acquisition of IVDesk, which contributed $634,000 in revenue during the quarter. Overall, Ecessa contributed $565,000 in revenue during the quarter, an increase of $30,000 over the third quarter of the prior year.
Gross profit decreased 38% to $834,000 in the third quarter of 2021 compared to $1,340,000 in the same period in 2020 due to the decrease in the education sector revenue. Gross margin increased to 42.8% in the third quarter of 2021 compared to 38.0% in the third quarter of 2020 due to the increase in services & support revenue, which has higher margins. Selling, general and administrative expenses decreased 17% in the third quarter of 2021 to $669,000, or 34.4% of sales, compared to $803,000, or 22.7% of sales, in the third quarter of 2020 due to lower compensation related expenses on lower headcount.
Services & Support reported operating income of $55,000 in the third quarter of 2021 compared to operating income of $431,000 in the same period of 2020, primarily due to lower revenues into the education sector.
Other
“Other” includes non-allocated corporate overhead costs that are not considered discontinued operations.
Other corporate costs increased by $527,000 due to outside legal and financial consulting costs related to the previously announced Pineapple Energy merger and additional expense related to the accelerated vesting of all outstanding equity awards.
Income Taxes
The Company’s loss from continuing operations before income taxes was $1,798,000 in the third quarter of 2021 compared to a loss from continuing operations before income taxes of $690,000 in the third quarter of 2020. The Company’s effective income tax rate was (0.3%) in the third quarter of 2021 and (1.3%) in 2020. This effective tax rate for 2021 differs from the federal tax rate of 21% due to state income taxes, the effect of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred tax assets. As of December 31, 2020, the Company had a federal net operating loss carryforward from 2015 through 2020 activity of approximately $10,940,000 that is available to offset future taxable income and begins to expire in 2035. The Company also has a federal capital loss carryforward from 2018 of approximately $1,930,000 that is available to offset future capital gains and expires in 2023. The Company expects to offset a substantial portion of the loss carryforwards against the gain on sale of the E&S segment in 2021.
Nine Months Ended September 30, 2021 Compared to
Nine Months Ended September 30, 2020
Consolidated sales decreased slightly in the first nine months of 2021 to $5,313,000 compared to $5,321,000 in the same period of 2020. Consolidated operating loss from continuing operations in the first nine months of 2021 increased to $6,156,000 from an operating loss from continuing operations of $4,044,000 in the first nine months of 2020. Net loss from continuing operations in the first nine months of 2021 was $6,328,000 or $ (0.65) per diluted share compared to net loss from continuing operations of $3,100,000 or $ (0.33) per diluted share in the first nine months of 2020.
Services & Support
Services & Support sales decreased 3% to $5,719,000 in the first nine months of 2021 compared to $5,882,000 in the first nine months of 2020.
Revenues by customer group were as follows:
Services & Support Revenue by Customer Group | |||||
2021 | 2020 | ||||
Financial | $ | 1,306,000 | $ | 314,000 | |
Healthcare | 760,000 | 674,000 | |||
Education | 212,000 | 3,031,000 | |||
Other commercial clients | 3,035,000 | 1,302,000 | |||
CSI IT operations | 406,000 | 561,000 | |||
$ | 5,719,000 | $ | 5,882,000 |
Revenues by revenue type were as follows:
Services & Support Revenue by Type | |||||
2021 | 2020 | ||||
Project & product revenue | $ | 927,000 | $ | 3,498,000 | |
Services & support revenue | 4,792,000 | 2,384,000 | |||
$ | 5,719,000 | $ | 5,882,000 | ||
Revenues from the education sector decreased $2,819,000 or 93% in the first nine months of 2021 as compared to the 2020 first nine months due to the substantial completion of projects from the Company’s Florida school district customer in the prior year. The Company was not selected as the primary vendor on the next multi-year project for this school district, but has been selected as the secondary vendor for structured cabling and enterprise networking.
Revenue from sales to SMBs, which are primarily financial, healthcare and commercial clients increased $2,811,000 or 123% in the first nine months of 2021 as compared to the first nine months of 2020 due to the acquisition of Ecessa on May 14, 2020 and the acquisition of the assets of IVDesk on November 3, 2020. Project and product revenue decreased $2,571,000 or 73% in the first nine months of 2021 as compared to the first nine months of 2020 primarily due to the decrease in the education sector. Services and support revenue increased $2,408,000 or 101% as compared to the same period of the prior year due to the Company’s acquisition of Ecessa and its service and support revenue on its SD-WAN products as well as the acquisition of IVDesk, which contributed $1,847,000 in revenue during the first nine months. Overall, Ecessa contributed $1,736,000 in revenue during the first nine months, an increase of $938,000 over the same period of the prior year.
Gross profit increased 8% to $2,260,000 in the first nine months of 2021 compared to $2,090,000 in the same period in 2020. Gross margin increased to 39.5% in the first nine months of 2021 compared to 35.5% in 2020 due to the increase in services & support revenue, which has higher margins. Selling, general and administrative expenses increased 42% in the first nine months of 2021 to $2,290,000, or 40.0% of sales, compared to $1,614,000, or 27.4% of sales, in the first nine months of 2020 due to the May 2020 acquisition of Ecessa and the November 2020 acquisition of IVDesk, and the inclusion of their associated general and administrative costs, which are notstatements included in the accompanying condensed consolidated financial statements, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, reflect the historical operating results of Pineapple Energy prior year.
Services & Support reported an operating lossto the merger, the consolidated results of $376,000 inCSI, Pineapple Energy, HEC, and E-Gear following the first nine monthsclosing of 2021 compared to operating income of $370,000 in the same period of 2020, primarily due to decreased revenue from the education sector and increased selling, general and administrative expenses, including an increase in amortization expense of $240,000.
merger, and the Company’s equity structure for all periods presented. Accordingly, references to “the Company” herein are to the applicable entity at the date or during the time period in the applicable discussion.
OtherFollowing the merger, the Company operates in two distinct business segments as follows:
Solar Segment
“Other” includes non-allocated corporate overheadThrough the Company’s Pineapple Energy, HEC and E-Gear businesses, the Company operates as follows:
As a recognized solar integrator, dedicated to providing affordable energy solutions in Hawaii with its offerings of solar panels, communication filters, web monitoring systems, batteries, water heating systems, and other related products that help residential and commercial users reduce electric costs that are not considered discontinued operations. Other corporate costs increased by $1,366,000 due to outside legal and financial consulting costsearn tax credits related to the previously announced Pineapple Energy merger.installing renewable energy systems.
As a renewable energy innovator that offers proprietary patented and patent pending edge-of-grid energy management and storage solutions that offer intelligent and real-time adaptive control, flexibility, visibility, predictability and support to energy consumers, energy service companies, and utilities.
Income TaxesIT Solutions & Services Segment
Through the Company’s legacy subsidiaries, JDL and Ecessa, the Company provides technology solutions, including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment, and designs, develops and sells SD-WAN (software-designed wide-area network) solutions. As previously disclosed, the Company expects to dispose of JDL and Ecessa.
SUNation Acquisition
On November 9, 2022, we 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 (“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 we 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, the “Acquired Companies”). This acquisition was a further expansion in the residential and commercial solar markets and fits into our overall acquisition growth plan as we look to expand further through the acquisition of regional residential solar companies and energy technology solution providers.
We acquired the equity of the Acquired Companies from Sellers for an aggregate purchase price of approximately $21.9 million, comprised of (a) $2.39 million in cash consideration paid at closing, (b) the issuance at closing of a $5.0 million 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”), (d) the issuance at closing of an aggregate of 1,480,000 shares (the “Shares”) of Company common stock, and (e) potential earn-out payments of up to $2.5 million for each of fiscal years 2023 and 2024, based on the percentage of year-over-year EBITDA growth of the Acquired Companies, as set forth in the Transaction Agreement (the “Earnout”).
The Company’sShort-Term Note is secured as described below and matures on August 9, 2023. It carries an annual interest rate of 4% until the three-month anniversary of issuance, 8% thereafter until the six-month anniversary of issuance, then 12% thereafter until the Short-Term Note is paid in full. The Long-Term Note is unsecured and matures on November 9, 2025. It carries an annual interest rate of 4% until the first anniversary of issuance, then 8% thereafter until the Long-Term Note is paid in full. We will be required to make a principal payment of $2.5 million on the second anniversary of the Long-Term Note. Both the Short-Term Note and Long-Term Note may be prepaid at our option at any time without penalty.
Pursuant to a Limited Pledge and Security Agreement among the Company and Sellers, dated November 9, 2022 (the “Pledge Agreement”), the Short-Term Note is secured by a pledge by us and Merger Sub of the equity of the Acquired Companies. While the Short-Term Note remains outstanding, we also agree 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. If Sellers exercise their remedies under the Pledge Agreement (due to an event of default by us under the Short-Term Note or the Pledge Agreement), Sellers would be able recover the pledged equity of the Acquired Companies and our 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. Our 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.
Results of Operations
Comparison of the Three Months Ended September 30, 2022 and 2021
The consolidated results herein reflect the historical operating results of Pineapple Energy prior to the merger and the consolidated results of CSI, Pineapple Energy, HEC and E-Gear following the closing of the merger on March 28, 2022.
Consolidated sales were $7,709,062 in the third quarter of 2022 and $25,417 in the third quarter of 2021. Sales in the third quarter of 2022 consisted of $5,888,162 from the Solar segment (primarily from residential solar sales by HEC), $1,860,111 from the IT Solutions & Services segment, and $(39,211) in intercompany eliminations. Sales in the third quarter of 2021 were related to commissions revenue on third-party installations.
Consolidated gross profit was $2,013,742 in the third quarter of 2022, with $1,404,173 generated from the Solar segment, $648,780 from the IT Solutions & Services segment, and $(39,211) in intercompany eliminations. Consolidated gross profit was $25,417 in the third quarter of 2021.
Consolidated operating expenses included selling, general and administrative expenses, amortization expense and transaction costs and increased 285.6% to $4,414,721 in the third quarter of 2022 as compared to $1,144,986 in the third quarter of 2021. Consolidated selling, general and administrative expenses increased to $3,122,976 in the third quarter of 2022 from $241,728 in the third quarter of 2021 due primarily to $1,811,471 in selling, general and administrative costs of the acquired businesses and $1,290,982 in corporate overhead costs in the third quarter of 2022. Amortization expense increased $669,038 to $1,026,362 in the third quarter of 2022 due to amortization of intangible assets acquired through the merger and HEC Asset Acquisition. Transaction costs decreased $280,551 to $265,383 in the third quarter of 2022, since the merger and HEC Asset Acquisition were consummated in the first quarter of 2022.
Consolidated other expense was $119,017 in the third quarter of 2022 as compared to $275,694 in the third quarter of 2021. The decrease is primarily related to a decrease in interest and accretion expense.
Consolidated operating loss in the third quarter of 2022 increased to $2,400,979 from continuing operations before income taxesan operating loss of $1,119,569 in the third quarter of 2021. Net loss in the third quarter of 2022 was $6,322,000$2,519,996, or $(0.34) per diluted share, compared to net loss of $1,395,263, or $(0.45) per diluted share, in the third quarter of 2021.
Comparison of the Nine Months Ended September 30, 2022 and 2021
Consolidated sales were $13,918,498 in the first nine months of 2022 and $25,417 in the first nine months of 2021. Sales in the first nine months of 2022 consisted of $10,338,483 from the Solar segment (primarily from residential solar sales by HEC), $3,679,990 from the IT Solutions & Services segment, and $(99,975) in intercompany eliminations.
Consolidated gross profit was $3,385,136 in the first nine months of 2022, with $2,372,324 generated from the Solar segment, $1,112,787 from the IT Solutions & Services segment, and $(99,975) in intercompany eliminations. Consolidated gross profit was $25,417 in the first nine months of 2021.
Consolidated operating expenses included selling, general and administrative expenses, amortization expense and transaction costs increased 180.5% to $10,511,125 in the first nine months of 2022 as compared to $3,747,392 in the first nine months of 2021. Consolidated selling, general and administrative expenses increased to $6,653,796 in the first nine months of 2022 from $697,985 in the first nine months of 2021 compareddue primarily to a loss from continuing operations before income taxes$3,574,286 in selling, general and administrative costs of $3,096,000the acquired businesses and $2,627,532 in corporate overhead costs in the first nine months of 2020. The Company’s effective income tax rate was (0.1%)
2022. Amortization expense increased $1,338,074 to $2,410,045 in the first nine months of 2021 and (0.1%) in 2020. This effective tax rate for 2021 differs from the federal tax rate of 21%2022 due to state income taxes,intangible assets acquired through the effectmerger and HEC Asset Acquisition. Transaction costs decreased $530,152 to $1,447,284 in the first nine months of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related2022, due to deferred tax assets. As of December 31, 2020, the Company had a federal net operating loss carryforward from 2015 through 2020 activity of approximately $10,940,000 that is available to offset future taxable income and begins to expire in 2035. The Company also has a federal capital loss carryforward from 2018 of approximately $1,930,000 that is available to offset future capital gains and expires in 2023. The Company expects to offset a substantial portionconsummation of the loss carryforwards againstmerger and HEC Asset Acquisition in the first quarter of 2022.
Consolidated other income was $4,165,011 in the first nine months of 2022 as compared to $1,004,964 in consolidated other expense in the first nine months of 2021. The current year period included a $4,684,000 gain on the fair value remeasurement of the Company’s earnout consideration and a $1,229,133 gain on sale of assets, partially offset by a $1,214,560 loss on the E&S segmentfair value remeasurement of the CVRs, as discussed further in 2021.Note 13, Fair Value Measurements.
Consolidated operating loss in the first nine months of 2022 increased to $7,125,989 from an operating loss of $3,721,975 in the first nine months of 2021. Net loss in the first nine months of 2022 was $2,960,978, or $(0.49) per diluted share, compared to net loss of $4,726,939, or $(1.54) per diluted share, in the first nine months of 2021.
Liquidity and Capital Resources
As of September 30, 2021,2022, the Company had $40,940,000$10,236,453 in cash, restricted cash and cash equivalents, restricted cash, and liquid investments. Of this amount, $33,138,000$959,541 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the FDIC or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating cash. The Company also had $5,655,000$2,654,383 in investments consisting of corporate notes and bonds that are traded on the open market and are classified as available-for-sale at September 30, 2021.2022.
Of the amounts of cash, restricted cash, cash equivalents and investments on the balance sheet at September 30, 2022, $4,578,099 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 $3,541,000$8,535,469 at September 30, 2022, consisting of current assets of $17,205,232 and current liabilities of $8,669,763, compared to working capital of $(2,872,233) at December 31, 2021 consisting of current assets of approximately $41,471,000$18,966 and current liabilities of $37,930,000 compared to working capital of $28,320,000 at December 31, 2020 consisting of current assets of $35,758,000 and current liabilities of $7,438,000.$2,891,199.
Cash flow used in operating activities was approximately $2,626,000$6,341,172 in the first nine months of 20212022 as compared to $5,580,000 used$563,359 in the same period of 2020.2021. Significant working capital changes from December 31, 20202021 to September 30, 20212022 included an increase in customer deposits of $4,462,156, a decrease in receivablesaccounts payable of $2,238,000$3,065,340 and an increase in payablesaccounts receivable of $1,007,000.$1,236,634.
Net cash used in investing activities was $2,300,726 in the first nine months of 2022 compared to net cash provided by investing activities of $479,983 in the same period of 2021. Net cash used in the 2022 period was primarily related to $10,199,835 in net cash paid for the HEC Asset Acquisition and the merger, partially offset by $6,297,115 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 investing activities was $26,329,000 in first nine months of 2021 compared to $1,183,000 2020, due to $23,625,000 in proceeds from the E&S Sale Transaction in discontinued operations.
Net cash used in financing activities was $1,565,000$16,205,002 in the first nine months of 20212022 compared to $827,000 used$150,000 in financing activitiesthe same period of 2021. In the first quarter of 2022, the Company received $32,000,000 in 2020.proceeds from the issuance of preferred stock and warrants to PIPE Investors and paid $2,699,370 in related issuance costs. The Company also paid $550,000$4,500,000 in contingent consideration related toprincipal against the November 2020 IVDesk acquisition. Cash dividends paid on common stock decreased to $16,000 in 2021 from $564,000 in 2020 ($0.04 per common share). Dividends paidHercules term loan in the first nine monthsquarter of 2021 consisted2022, as discussed further in Note 8, Commitments and Contingencies. During the third quarter of 2022, the Company paid $8,745,628 in CVR distributions.
As discussed above and in Note 14, Subsequent Events, 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. The Short-Term Note matures on August 9, 2023. Also as discussed above, of the amounts of cash, restricted cash, cash equivalents and investments on the balance sheet at September 30, 2022, $4,578,099 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 accrued dividends that were paid on deferred stock or restricted stock units that vested and were issued in 2021. Proceeds from common stock issuances, principally related to the accelerated vesting of all outstanding equityPineapple Energy business.
awards, totaled approximately $3,813,000 in 2021 and $91,000 in 2020. The Company acquired $1,073,000 and $70,000 of Company stock from employees in 2021 and 2020, respectively, to satisfy withholding tax obligations related to share-based compensation, pursuant to terms of Board and shareholder-approved compensation plans. The Company has not acquired Company stock during the first nine months of 2021 under a $2,000,000 Stock Repurchase Program authorized by the Board of Directors in August 2019. At September 30, 2021, there remained $341,000 under the 2019 Stock Repurchase Program. See “Issuer Purchases of Equity Securities” in Part II, Item 2 of this Form 10-Q.
Line of Credit
On August 28, 2020, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association, establishing a $5.0 million line of credit facility that replaced a prior facility. On October 29, 2020, the Company entered into a First Amendment to the Credit Agreement. Under the Credit Agreement, as amended, the Company had the ability to obtain one or more letters of credit in an aggregate amount up to $2.0 million, subject to the general terms of the Credit Agreement. The Company terminated the Credit Agreement effective August 13, 2021.
In the opinion of management, basedBased on the Company’s current financial and operating position, and projected future expenditures, sufficient funds are available to meet the Company’s anticipated operating and capital expenditure needsforecasted future cash flows for twelve months beyond the date of issuance of the financial statements in this report indicate that the Company will not have sufficient cash to repay the Short-Term Note obligation, .a factor which raises substantial doubt about the Company’s ability to continue as a going concern.
As a result, the Company requires additional funding and seeks to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances. However, additional funding may not be available on terms acceptable to the Company, or at all. If the Company is unable to raise additional funds, it would have a negative impact on the Company’s business, results of operations and financial condition. To the extent that additional funds are raised through the sale of equity or securities convertible into or exercisable for equity securities, the issuance of securities will result in dilution to the Company’s shareholders. Further, certain transactions could trigger an adjustment to the exercise price of the Convertible Preferred Stock and PIPE OfferingWarrants, which would lead to a corresponding increase in the number of shares of common stock issuable upon exercise of the PIPE Warrants, further diluting the Company’s shareholders.
On September 15, 2021, CSI entered into a securities purchase agreement with a group of institutional investors (the “PIPE Investors”)
Contingent Value Rights and Impact on Cash
As discussed in Note 3, Business Combinations, the Company issued CVRs prior to make a $32.0 million private placement investment in CSI in connection with the closing of the previously announced merger between CSI and Pineapple Energy, LLC (“Pineapple”). Proceeds of this investment will be used primarily to fund Pineapple strategic initiatives. The closing of the financing is subject to approval of CSI’s shareholders. See further information in Note 9 in Notes to Financial Statements.
Cash Dividend
On September 13, 2021, CSI announced that its board of directors had declared a special dividend of $3.50 per share payable on October 15, 2021 to CSI shareholders of record aton the close of business on September 30, 2021.March 25, 2022. The aggregate amountCVR entitles the holder to a portion of the special dividend was approximately $34.0 million, which was funded from thecash, 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 E&S Sale Transaction24-month period following the closing of the merger. The CVR liability as of September 30, 2022 was estimated at $10,743,224 and represented the estimated fair value as of that date of the legacy CSI assets to be distributed to CVR holders as of that date. This amount is recorded as a long-term liability that includes the remaining restricted cash and cash equivalents, investments, along with the other tangible and intangible assets related to the legacy CSI business. The proceeds from CSI’s existing cash on hand.
pre-merger business working capital and related long term-assets and liabilities are not available to fund the working capital needs of the post-merger company.
Critical Accounting Policies
Our critical accounting policies, including the assumptions and judgments underlying them, are discussed in our 2020 Form 10-K in Note 1 Summary of Significant Accounting Policies included in our Consolidated Financial Statements. There were no other significant changes to our critical accounting policies during the nine months ended September 30, 2021.Estimates
The Company’s accounting policiesdiscussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been consistently appliedprepared in all material respectsaccordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and disclose matters such as allowance for doubtful accounts, sales returns, inventory valuation, warranty expense, income taxes, revenue recognition, asset impairment recognition,judgments that affect the reported amounts of assets and foreign currency translation. On an ongoing basis,liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Generally, we evaluatebase our estimates based on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances,circumstances. Actual results may differ from these estimates and such differences could be material to our financial position and results of operations. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.
While our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting estimates, which involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results.
Income Taxes: In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating the Company’s current tax liability as well as assessing temporary differences resulting from different treatment of items for tax and book accounting purposes. These differences result of which form the basis for making judgments about the carrying value ofin deferred tax assets and liabilities, thatwhich are recorded on the balance sheet. These assets and liabilities are analyzed regularly and management assesses the likelihood it will realize these deferred assets from future taxable income. We determine the valuation allowance for deferred income tax benefits based upon the expectation of whether the benefits are more likely than not readily apparent from other sources. Results may differ from theseto
be realized. The Company records interest and penalties related to income taxes as income tax expense in the consolidated statements loss and comprehensive loss.
Accounting for Business Combinations: We record all acquired assets and liabilities, including goodwill, other identifiable intangible assets, contingent value rights and contingent consideration at fair value. The initial recording of goodwill, other identifiable intangible assets, contingent value rights and contingent consideration, requires certain estimates and assumptions concerning the determination of the fair values and useful lives. The judgments made in the context of the purchase price allocation can materially affect our future results of operations. The valuations calculated from estimates are based on information available at the acquisition date. Goodwill is not amortized, but is subject to annual tests for impairment or more frequent tests if events or circumstances indicate it may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The contingent consideration and contingent value rights liability are adjusted to fair value each reporting period with any adjustments recorded within the statement of operations. For additional details, see Note 3, Business Combinations and Note 7, Goodwill and Intangible Assets.
Revenue Recognition: The Company recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to receive in exchange for these goods or services.
Within the Company’s Solar segment, 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 is recognized as work is performed based on the estimated ratio of costs incurred to date to the total estimated costs at the completion of the performance obligation.
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 actual outcomesthe 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.
Within the Company’s IT Solutions & Services segment, revenue is recognized over time for managed services and professional services (time and materials (“T&M”) and fixed price) performance obligations. This segment’s managed services performance obligation is a bundled solution, a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are recognized evenly over the term of the contract. T&M professional services arrangements are measured over time with an input method based on hours expended towards satisfying this performance obligation. Fixed price professional service arrangements under a relatively longer-term service will also be measured over time with an input method based on hours expended.
The Company has also identified the following performance obligations within its IT Solutions & Services segment that are recognized at a point in time which include resale of third-party hardware and software, installation, arranging for another party to transfer services to the customer, and certain professional services. The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the agreed upon shipping terms. Installation services are recognized at a point in time when the services are completed. The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time as the Company has transferred control upon the service first being different from thosemade available to the customer by the third-party vendor, which are required to be presented on which we based our assumptions. Management reviewsa net basis. Depending on the nature of the service, certain professional services transfer control at a point in time. The Company evaluates these estimates and judgmentscircumstances on an ongoing basis.a
case-by-case basis to determine if revenue should be recognized over time or at a point in time. See Note 4, Revenue Recognition, for further discussion regarding revenue recognition.
Recently Issued Accounting Pronouncements
Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are also described in Note 14, Recent2, Summary of Significant Accounting Pronouncements,Policies, to the Condensed Consolidated Financial Statements.Statements included in this report.
The Company has no freestanding or embedded derivatives. The Company’s policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales.
The vast majority of our transactions are denominated in U.S. dollars; as such, fluctuations in foreign currency exchange rates have historically not been material to the Company.
Based on the Company’s operations, in the opinion of management, no material future losses or exposure exist relative to market risk.Not applicable.
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act, of 1934, as of the end of the period covered by this report. Based on that evaluation, as detailed below, management concluded that the Company’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls over Financial Reporting
There have beenwere no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during our most recently completed fiscal quarterthe three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, we concluded that our internal control over financial reporting was effective.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 1A. Risk Factors
In addition to the Risk Factors includedother information set forth under Item 1A Risk Factors in this Quarterly Report on Form 10-Q, you should carefully consider the Company’sfactors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020,2021 (the “Form 10-K”), which could materially affect our business, financial condition or future results. That “Risk Factors” discussion was divided into two parts: (1) “Risks Related to the Combined Company Following Consummation of the Merger” applicable if the merger was consummated (the “Combined Company Risks”), and in factors included in this Form 10-Q, in(2) “Risks Related to CSI Following Termination of the section “Management's Discussion and Analysis of Financial Condition and Result of Operations, Forward-Looking Statements, GeneralMerger” applicable if the merger was not consummated. Since the merger was consummated, the Combined Company Risks and Uncertainties and Services & Support Segment Risks and Uncertainties,” we are including the following specific Risk Factors.apply.
PartThere have been no material changes in the risk factors from the Combined Company Risks section disclosed in the Form 10-K, except the following two new risk factors are added:
The Company needs to raise additional capital to fund its operations and repay its obligations, which funding may not be available on favorable terms or at all and may lead to substantial dilution to the Company’s existing shareholders. Further, there is substantial doubt about the Company’s ability to continue as a going concern, which conditions may adversely affect the Company’s stock price and its ability to raise capital.
Based on the Company’s current financial position, including the approximately $4.6 million of cash, restricted cash, cash equivalents and investments that are restricted under the CVR 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 the purchasefinancial statements in this report indicate that the Company will not have sufficient cash to repay the Short-Term Note obligation. As a result, the Company requires additional funding and seeks to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances. However, additional funding may not be available on terms acceptable to the Company, or at all. If the Company is unable to raise additional funds, it would have a negative impact on the Company’s business, results of operations and financial condition.
Raising additional capital may be costly or difficult to obtain and could significantly dilute the Company’s shareholders’ ownership interests or inhibit the Company’s ability to achieve its business objectives. If the Company raises additional funds through public or private equity offerings or convertible debt or other exchangeable securities, the terms of these securities may include liquidation or other preferences that adversely affect the rights of the Company’s common shareholders. To the extent that the Company raises additional capital through the sale of common stock or securities convertible or exchangeable into common stock, the Company’s existing shareholders with be diluted. In addition, any debt financing may subject the Company to fixed payment obligations and covenants limiting or restricting its ability to take specific actions, such as incurring additional debt or making capital expenditures. Further, certain transactions could trigger a reset of the exercise price of our E&S Sale Transactionthe Convertible Preferred Stock and PIPE Warrants, which would lead to a corresponding increase in the number of shares of common stock issuable upon exercise of the PIPE Warrants, further diluting the Company’s shareholders.
In addition, the fact that there is substantial doubt about the Company’s ability to continue as a going concern and that the Company is operating under these conditions may adversely affect the Company’s stock price and its ability to raise capital.
The Company may have difficulty integrating the businesses from the SUNation transaction with its existing operations or otherwise obtaining the strategic benefits of the acquisition.
The impact of the SUNation acquisition on the Company’s business, operating results and financial condition is uncertain. The Company may have difficulty assimilating the Acquired Companies’ businesses and their products, services,
technologies and personnel into the Company’s existing operations. These difficulties could disrupt the Company’s ongoing business, distract its management and workforce, increase the Company’s expenses and materially adversely affect the Company’s operating results and financial condition.
The acquisition involves other potential risks, including:
the failure to successfully integrate personnel, departments and systems, including IT and accounting systems, technologies, books and records, and procedures;
the need for additional investments post-acquisition that could be greater than anticipated;
the assumption of liabilities of the Acquired Companies that could be greater than anticipated;
incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill or other assets that could adversely affect the Company’s operating results;
unforeseen difficulties related to entering geographic regions or industries in which it does not have prior experience; and
the potential loss of key employees or existing customers or adverse effects on existing business relationships with suppliers and customers.
Additionally, the Company cannot ensure that the expected benefits of SUNation acquisition will be realized or will be realized within the time frames it expects. Unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not recoverable through indemnification or as an adjustment to the purchase price. The price the Company paid for the Acquired Companies may exceed the value it realizes, the Company cannot provide assurance that it will obtain the expected revenues, anticipated synergies and strategic benefits of the SUNation acquisition within the time it expects or at all.
In connection with the SUNation acquisition, the Company incurred additional indebtedness with the issuance of the Short-Term Note and the Long-Term Note. While the Short-Term Note remains outstanding, the Company is subject to an earnout.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.
Up
Further, although the Company looks to $7.0 millionexpand further through the acquisition of regional residential solar companies and energy technology solution providers, there can be no assurance that the purchase price of the Company’s sale of its E&S segment business to Lantronix is structured in the form of an earnout based on revenues generated by Lantronix in the 360 days following closing, and there is no guaranty that sufficient revenuesCompany will be recognizedable to find appropriate candidates for acquisitions, reach agreement to acquire them, have sufficient capital or funding to acquire them, or obtain any required shareholder or regulatory approvals needed, despite the earnout to be paid to the Company.effort and management attention invested.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities (registered pursuant to Section 12 of the Exchange Act)Not Applicable.
In the three months ending September 30, 2021, the Company repurchased shares of stock as follows:
ISSUER PURCHASES OF EQUITY SECURITIES | |||||||
Period | (a) Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (b) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||
July 2021 | — | $ | — | — | $ | 341,242 | |
August 2021 | 647,893 | 7.15 | — | 341,242 | |||
September 2021 | — | — | — | 341,242 | |||
Total | 647,893 | $ | 7.15 | — | $ | 341,242 |
(1)The total number of shares purchased generally includes shares purchased under the Board’s authorization, including market purchases and privately negotiated purchases, but in this quarter consisted solely of shares purchased by the Company in connection with the net exercise of options or share withholding with respect to the exercise of options or vesting of restricted stock units by employees.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits.
The following exhibits are included herein:herewith:
Form of Restricted Stock Unit Award Agreement under the 2022 Equity Incentive Plan | |
Form of Performance Stock Unit Award Agreement under the 2022 Equity Incentive Plan | |
Form of Incentive Stock Option Award Agreement under the 2022 Equity Incentive Plan | |
Form of Non-Qualified Stock Option Award Agreement under the 2022 Equity Incentive Plan | |
Certifications pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). | |
Press Release dated November | |
101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
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Date: November |
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Date: November | Chief Financial Officer |