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 endedSeptember 30, 20172022
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________ ______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.) | |
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 $0.05 per share | PEGY | 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, (as defined by” and “emerging growth company” in Rule 12b-2 of the Exchange Act).Act.
Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated 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 | ||||
9,415,586 |
PINEAPPLE ENERGY INC.
INDEX
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page No. | ||||
Part I. | Financial Information | |||
Item 1. | Financial Statements (Unaudited) | |||
2 | ||||
Condensed Consolidated Statements of | 4 | |||
Condensed Consolidated | 5 | |||
7 | ||||
8 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | |||
36 | ||||
36 | ||||
37 | ||||
40 |
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) |
|
| |||
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. |
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. |
The accompanying notes are an integral part of the condensed consolidated financial statements.
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 |
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. |
The accompanying notes are an integral part of the condensed consolidated financial statements.
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, 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,
PINEAPPLE ENERGY INC. | |||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||
(Unaudited) | |||||
Nine Months Ended September 30 | |||||
2022 | 2021 | ||||
CASH FLOWS FROM 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 | 2,483,615 | 1,071,971 | |||
Share based compensation | 23,498 | — | |||
Fair value remeasurement of earnout consideration | (4,684,000) | — | |||
Fair value remeasurement of contingent value rights | 1,214,560 | — | |||
Gain on sale of assets | (1,229,133) | — | |||
Interest and accretion expense | 618,983 | 1,004,964 | |||
Changes in assets and liabilities: | |||||
Trade accounts receivable | (1,236,634) | — | |||
Inventories | (82,264) | — | |||
Prepaid income taxes | (11,297) | — | |||
Other assets, net | 26,113 | — | |||
Accounts payable | (3,065,340) | 1,819,194 | |||
Accrued compensation and benefits | (903,425) | 267,451 | |||
Customer deposits | 4,462,156 | — | |||
Other accrued liabilities | 59,850 | — | |||
Accrued interest | (1,056,876) | — | |||
Net cash used in operating activities | (6,341,172) | (563,359) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||
Capital expenditures | (116,307) | — | |||
Acquisition of business, net of cash acquired | (10,199,835) | — | |||
Proceeds from the sale of property, plant and equipment held for sale | 6,297,115 | 479,983 | |||
Proceeds from the sale of investments | 218,301 | — | |||
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: | |||||
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 | 18,966 | — | |||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | 7,582,070 | $ | 66,624 | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||
Income taxes paid | $ | 11,297 | $ | — | |
Interest paid | 1,070,853 | 3,097 | |||
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 | 127,902 | — | |||
The accompanying notes are an integral part of the condensed consolidated financial statements. |
PINEAPPLE ENERGY INC.
(Unaudited)
(Unaudited)
NOTE 1 – SUMMARYNATURE OF SIGNIFICANT ACCOUNTING POLICIESOPERATIONS
Description of Business
Pineapple Energy Inc. (formerly Communications Systems, Inc. (herein collectively called “CSI”and Pineapple Holdings, Inc.) (“PEGY”, “we” or the “Company”) is, was originally organized as a Minnesota corporation organized in 19691969. 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 operates primarilycertain 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 holding company conductingwholly-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 through fourusing 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 units having operations insegments – the United StatesSolar segment, which consists of the residential and commercial solar businesses of Pineapple Energy, HEC, and E-Gear, and the United Kingdom. CSIIT Solutions & Services segment, which consists of the solutions services business of legacy Communications Systems, Inc. (“CSI”).
The Company is principally engaged througha 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 Suttle business unit in the manufacture and saleofferings of connectivity infrastructure products for broadband and voice communications and through its Transition Networks business unit in the manufacture of core media conversion products, Ethernet switches,solar panels, communication filters, web monitoring systems, batteries, water heating systems, and other connectivityrelated products that help residential and data transmission products. 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 itsthe Company’s legacy CSI subsidiaries, JDL Technologies, business unitInc. (“JDL”) and Ecessa Corporation (“Ecessa”), the Company provides technology solutions, including virtualization, managed services, wired and wireless network design and implementation, HIPAA-compliant IT services, and convergedhybrid cloud infrastructure configuration and deployment. Through its Net2Edge business unit, the Company enables telecommunications carriers to connect legacy networks to high-speed services.deployment, and designs, develops and sells SD-WAN (software-designed wide-area network) solutions.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company classifies its businesses into four segments corresponding to the Suttle, Transition Networks, JDL Technologies and Net2Edge business units. Non-allocated general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting. Intersegment revenues are eliminated upon consolidation.
Financial Statement Presentation
Theaccompanying condensed consolidated balance sheets and condensed consolidated statement of changes in stockholders’ equity as of September 30, 2017 and the related condensed consolidatedfinancial statements of loss and comprehensive loss, and the condensed consolidated statements of cash flows for the periods ended September 30, 2017 and 2016 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, 2017 and 2016 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, 2016 Annual Report to Shareholders onabove-referenced Form 10-K. The results8-K/A. Results of operations for the period ended September 30, 2017interim 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 assumptionsbalances resulting from operations. Actual results could materially differ from those estimates. The Company’s estimates consist principally of reserves for doubtful accounts, asset impairment evaluations, accruals for compensation plans, lower of cost or market inventory adjustments, the fair value of the term loan payable and related assets at the date of acquisition, the fair value of the contingent value rights and contingent consideration, provisions for income taxes and deferred taxes, depreciable lives of fixed assets, and amortizable lives of intangible assets.
Restricted Cash and Cash Equivalents
For purposes of the 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 collection of receivables, the Company records an allowance for doubtful accounts and a corresponding charge to bad debt expense.
Inventories, Net
Inventories, which consist primarily of materials and supplies used in the accompanying condensed consolidated financialinstallation 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 the statements are based upon management’s evaluationof 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 relevant factsnet tangible assets and circumstances asseparately identifiable intangible assets of these businesses. Definite lived intangible assets, consisting primarily of trade names, technology, and customer relationships are amortized on a straight-line basis over the estimated useful life of the timeasset. 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 financial statements. Actual results could differ from those estimates.
Except toassets may not be fully recoverable. If indicators of impairment exist, management identifies the extent updated or described below,asset group that includes the significant accounting policies set forth in Note 1 topotentially impaired long-lived asset, at the consolidated financial statements in lowest level at which there are separate, identifiable cash flows. Ifthe Company’s Annual Report on Form 10-Kfair value, determined as the total of the expected undiscounted future net cash flows for the year ended December 31, 2016, appropriately represent, in all material respects,asset group is less than the current statuscarrying amount of accounting policies,the asset, a loss is recognized for the difference between the fair value and are incorporated herein by reference.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.
Foreign Currency | Unrealized (loss)/gain on securities | Accumulated Other Comprehensive Loss | ||||||||||
December 31, 2016 | $ | (704,000 | ) | $ | 17,000 | $ | (687,000 | ) | ||||
Net current period change | 64,000 | (3,000 | ) | 61,000 | ||||||||
September 30, 2017 | $ | (640,000 | ) | $ | 14,000 | $ | (626,000 | ) |
Revenue Recognition
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 $4,238,000at the point-in-time when the systems are placed into service. Any advance payments received in foreign currency translation lossesthe 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 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 services, arranging for another party to transfer services to the customer, and certain professional services. The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the agreed upon shipping terms. Installation services are recognized at a point in time when the services are completed. The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time as the Company has transferred control upon the service first being made available to the customer by the third-party vendor, which are required to be presented on a net basis. Depending on the nature of the service, certain professional services transfer control at a point in time. The Company evaluates these circumstances on a case-by-case basis to determine if revenue should be recognized over time or at a point in time. See Note 4, Revenue Recognition, for further discussion regarding revenue recognition.
Gross Excise Tax
The State of Hawaii imposes a gross receipts tax on all business operations done in Hawaii. The Company records the tax revenue and expense on a gross basis.
Employee Retirement Benefits
The Company has an Employee Savings Plan (401(k)) and matches a percentage of employee contributions up to six percent of compensation.
Share Based Compensation
The Company accounts for share-based compensation awards on a fair value basis. The estimated grant date fair value of each stock-based award is recognized in the statement of operations over the requisite service period (generally the vesting period). 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 comprehensiveshares associated with the long-term incentive compensation plans, which resulted 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 of 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, there were no potentially dilutive securities.
Accounting Standards Issued
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. This ASU is intended to provide financial statement users with more decision-useful information about expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the impact of 2016 duethe 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 liquidationpremiums for which the premiums are recorded as paid-in capital. The reduction of our Austin Taylor facilityaccounting 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 U.K.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 – BUSINESS COMBINATIONS
CSI Merger
On March 28, 2022, the Company and Pineapple Energy consummated the transactions contemplated by the merger agreement. At the Closing, each member unit of Pineapple Energy that was issued and outstanding immediately prior to the effective time of the merger was cancelled and converted into the right to receive the Company’s common stock. The Company issued an aggregate of 5,006,245 shares of its common stock, which is inclusive of common shares issued to HEC and E-Gear owners as discussed further below and conversion of certain related party payables and debt outstanding prior to the merger transaction, discussed in Note 8, Commitments and Contingencies. The purpose of the merger was to provide a path to allow the Company to deliver value to its legacy shareholders through a combination of (i) the opportunity for the legacy CSI shareholders to receive an attractive return from dividends or distributions of the net
proceeds from the divestiture of the Company’s pre-merger operating and non-operating assets and properties, and (ii) the opportunity for the legacy CSI shareholders, through ownership of the Company’s common stock following the merger, to participate in the potential growth of the combined company’s residential solar, battery storage, and grid services solutions business.
The Company accounted for the merger as a reverse recapitalization whereby it was determined that Pineapple Energy was the accounting acquirer and CSI was the accounting acquiree. Refer to Note 112, 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 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 Ecessa, the Company’s IT Solutions & Services operating segment.
The purchase price allocation for the merger is based on the estimated fair value of assets acquired and liabilities assumed and 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 $6,281,000 and recorded a loss on the sale of $285,000 during the second quarter of 2022.
The condensed consolidated financial statements include results of operations of CSI following the consummation of the merger for the three and nine months ended September 30, 2022, which included $1,860,111 and $3,679,990 of revenue (including $39,211 and $99,975 in intercompany revenue), respectively, and a net loss of $116,668 and $618,626, respectively.
HEC Asset Acquisition
On March 28, 2022, immediately prior to the closing of the merger, Pineapple Energy completed its acquisition of substantially all of the assets of HEC and E-Gear and assumed certain liabilities of HEC and E-Gear pursuant to the Asset Purchase Agreement dated March 1, 2021, as amended by Amendment No. 1 to Asset Purchase Agreement dated December 16, 2021, by and among Pineapple Energy as Buyer, HEC and E-Gear as Sellers, and Steve P. Godmere, as representative for the Sellers. This acquisition was an expansion in the residential solar market and is a strategic start to the Company’s overall acquisition growth plan as it looks to expand further through the acquisition of regional residential solar companies and energy technology solution providers. At the closing of this acquisition, Pineapple Energy issued 6,250,000 Class B units, which upon the closing of the merger were converted into 1,562,498 shares of the Company’s common stock, with a fair value of $12,781,234 using the publicly traded stock price at the merger date. The sellers received $12,500,000 in initial cash consideration, less $164,888 in working capital adjustments, bringing the aggregate purchase price to $25,116,346, with cash acquired totaling $215,684.
The assets and liabilities of HEC and E-Gear were recorded within the Solar segment as of the merger 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 of 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 regardingrepresents the pensionresults of operations as if 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 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.
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) |
Earnout Shares
As part of the merger, the Company agreed to issue up to 3.25 million shares of the Company common stock to the holders of pre-merger Pineapple Energy units, subject to meeting certain milestone events (collectively, the “Merger Earnout Shares”). The Merger Earnout Shares are issuable in three tranches. The milestone for the issuance of the first tranche of the Merger Earnout Shares involves repayment of certain of pre-merger Pineapple Energy’s debt obligations within three months of the merger closing, which would result in the issuance of 750,000 shares of the Company’s common stock. This milestone was met at the merger closing and the 750,000 shares of the Company’s common stock were issued and are reflectedin the Company’s condensed consolidated statement of stockholders’ equity as of September 30, 2022.
The milestone for the second tranche of the Merger Earnout Shares is triggered upon the volume weighted average price (“VWAP”) of the Company’s common stock equaling or exceeding $24.00 for 30 consecutive trading days within 24-months of the merger closing. The milestone for the third tranche of the Merger Earnout Shares is triggered upon the VWAP of the Company’s common stock equaling or exceeding $32.00 for 30 consecutive trading days within 24-months of the merger closing. Under the second or third tranches, the number of shares of Company common stock to be issued is also affected by whether the Company has disposed or sold certain assets of its business within 24 months of the merger closing date, which could ultimately impact whether 1.0 million or 1.25 million shares of the Company’s common stock are issued under each tranche.
The first tranche of 750,000 shares issued of the Company’s common stock is accounted for as permanent equity in accordance with ASC 815-40, and no subsequent remeasurement is required as long as the shares continue to be classified in equity. The shares of the Company’s common stock contingently issuable under the second and third tranches, up to an additional 2.5 million shares of the Company’s common stock are classified as a liability, adjustmentsimilar to the accounting for written equity options, which requires an initial measurement of the liability at fair value with subsequent remeasurements to fair value at each reporting date and changes in the fair value recognized in the 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 utilized a Monte Carlo simulation to determine the fair value of the liability, which included the following significant assumptions: the expected probability and timing of achievement of milestone events. As of September 30, 2022, the fair value of the Merger Earnout Shares was $0, resulting in a gain on the fair value remeasurement of the earnout consideration totaling $4,684,000 during the nine months ended September 30, 2022, which was recorded in other income (expense) within the condensed consolidated statements of operations.
NOTE 4 – REVENUE RECOGNITION
Disaggregation of revenue
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that best reflects the first quarterconsideration 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 nine months ended September 30, 2022. There was $25,417 in commission revenue during each of 2016.the three and nine months ended September 30, 2021.
The Solar segment classifies its revenue by type as 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 |
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 25 – RESTRICTED CASH EQUIVALENTS AND INVESTMENTS
The following tables show the Company’s restricted cash equivalents and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as restricted cash and cash equivalents or shortshort- and long termlong-term investments as of September 30, 2017 and2022. There were no restricted cash equivalents or investments as of December 31, 2016:2021.
September 30, 2017 | ||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash Equivalents | Short-Term Investments | Long-Term Investments | ||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||
Money Market funds | $ | 8,986,000 | $ | — | $ | — | $ | 8,986,000 | $ | 8,986,000 | $ | — | $ | — | ||||||||||||||
Subtotal | 8,986,000 | — | — | 8,986,000 | 8,986,000 | — | — | |||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||
Certificates of deposit | 725,000 | — | — | 725,000 | — | 725,000 | — | |||||||||||||||||||||
Subtotal | 725,000 | — | — | 725,000 | — | 725,000 | — | |||||||||||||||||||||
Total | $ | 9,711,000 | $ | — | $ | — | $ | 9,711,000 | $ | 8,986,000 | $ | 725,000 | $ | — |
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 | $ | — |
December 31, 2016 | ||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash Equivalents | Short-Term Investments | Long-Term Investments | ||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||
Money Market funds | $ | 3,851,000 | $ | — | $ | — | $ | 3,851,000 | $ | 3,851,000 | $ | — | $ | — | ||||||||||||||
Subtotal | 3,851,000 | — | — | 3,851,000 | 3,851,000 | — | — | |||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||
Certificates of deposit | 4,291,000 | 4,000 | (1,000 | ) | 4,294,000 | — | 4,294,000 | — | ||||||||||||||||||||
Corporate Notes/Bonds | 1,511,000 | — | — | 1,511,000 | — | 1,511,000 | — | |||||||||||||||||||||
Subtotal | 5,802,000 | 4,000 | (1,000 | ) | 5,805,000 | — | 5,805,000 | — | ||||||||||||||||||||
Total | $ | 9,653,000 | $ | 4,000 | $ | (1,000 | ) | $ | 9,656,000 | $ | 3,851,000 | $ | 5,805,000 | $ | — |
The Company tests for other-than-temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The Company intends to hold the investments until it can recover the full principal amount and has the ability to do so based on other sources of liquidity. The Company expects such recoveries to occur prior to the contractual maturities.
The 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, 2017:2022:
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 |
Amortized Cost | Estimated Market Value | ||||||||
Due within one year | $ | 725,000 | $ | 725,000 |
As part of the merger, the Company acquired an investment totaling $250,000 in preferred shares of Kogniz, Inc., a privately owned artificial intelligence company based in Silicon Valley, CA. The Company’s investment represented less than 10% of the outstanding equity of Kogniz. The Company did not recognize any gross realized gains or losses duringuses the three and nine month periods ending September 30, 2017 and 2016, respectively. Ifcost method to account for investments in common stock of entities such as Kogniz if the Company had realized gains or losses, they would be included within investmentdoes not have the ability to exercise significant influence over the operating and other income in the accompanying condensed consolidated statement of loss and comprehensive loss.
NOTE 3 - STOCK-BASED COMPENSATION
Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at 85%financial matters of the price atentity. The Company also uses the end of each current quarterly plan term. The most recent term ended September 30, 2017. The ESPP is considered compensatory under current Internal Revenue Service rules. At September 30, 2017, after giving effectcost method to the shares issued as ofaccount for its investments that date, 58,726 shares remain available for purchase under the ESPP.
2011 Executive Incentive Compensation Plan
On March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Incentive Plan”). The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directorsare not in the form of options (incentivecommon 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 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 combinationfinancial matters.
NOTE 6 – INVENTORIES
Inventories are summarized below. There were no inventories as of stock and cash. The 2011 Incentive Plan, as amended, allows the issuance of up to 2,000,000 shares of common stock.December 31, 2021.
September 30, | ||||
2022 | ||||
Finished goods | $ | 14,207 | ||
Raw materials | 1,778,886 | |||
$ | 1,793,093 |
During 2017, stock options covering 259,686 shares have been awarded to key executive employees and directors. These options expire seven years from the date of award and generally vest 25% each year beginning one year after the date of award. NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
The Company also granted deferred stock awards of 100,239 shares to key employees during the first quarter of 2017 under the Company’s long-term incentive plan for performance over the 2017 to 2019 period. The actual number of shares of deferred stock, if any, that are ultimately earned by the respective employees will be determined based on achievement against performance goals at the end of the three-year period ending December 31, 2019 and any shares earned will be issued in the first quarter of 2020 to those key employees still with the Company at that time.
At September 30, 2017, 160,138 shares have been issued under the 2011 Incentive Plan, 1,292,968 shares are subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and 546,894 shares are eligible for grant under future awards.
Stock Option Plan for Directors
Shares of common stock are reserved for issuance to non-employee directors under options granted by the Company prior to 2011 under its Stock Option Plan for Non-Employee Directors (the “Director Plan”). Under the Director Plan nonqualified stock options to acquire shares of common stock were automatically granted to each non-employee director concurrent with annual meetings of shareholders in 2010 and earlier years, with the exercise price of options granted being the fair market value of the common stock on the date of the respective shareholder meetings. Options granted under the Director Plan expire 10 years from date of grant. No options have been granted under the Director Plan since 2011 when the Company amended the Director Plan to prohibit future option grants. Asrecorded a provisional goodwill balance totaling $16,567,000 as of September 30, 2017, there were 51,000 shares subject to outstanding options under the Director Plan.
1992 Stock Plan
Under the Company’s 1992 Stock Plan (“the Stock Plan”), shares2022. See further discussion within Note 3, Business Combinations. As noted in Note 2, Summary of common stock may be issued pursuant to stock options, restricted stock or deferred stock grants to officers and key employees. Exercise prices of stock options under the Stock Plan cannot be less than fair market value of the stock on the date of grant. Rules and conditions governing awards of stock options, restricted stock and deferred stock are determined by the Compensation Committee of the Board of Directors, subject to limitations in the Stock Plan. The Company amended the Stock Plan in 2011 to prohibit future equity awards. At September 30, 2017, after reserving for stock options and deferred stock awards granted in prior years and adjusting for forfeitures and issuances during the year, there were 10,230 shares reserved for issuance under the Stock Plan.
Changes in Stock Options Outstanding
The following table summarizes changes in the number of outstanding stock options under the 2011 Incentive Plan, the Director Plan and Stock Plan over the period December 31, 2016 to September 30, 2017:
Weighted average | Weighted average | |||||||||||
exercise price | remaining | |||||||||||
Options | per share | contractual term | ||||||||||
Outstanding – December 31, 2016 | 922,930 | $ | 10.10 | 4.90 | ||||||||
Awarded | 259,686 | 4.42 | ||||||||||
Exercised | — | — | ||||||||||
Forfeited | (37,199 | ) | 11.57 | |||||||||
Outstanding – September 30, 2017 | 1,145,417 | 8.76 | 4.74 | |||||||||
Exercisable at September 30, 2017 | 669,186 | $ | 10.50 | 3.97 | ||||||||
Expected to vest September 30, 2017 | 1,145,417 | 8.76 | 4.74 |
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, 2017 was $0. The intrinsic value of all options exercised during the nine months ended September 30, 2017 was $0. Net cash proceeds from the exercise of all stock options were $0 in each of the nine month periods ended September 30, 2017 and 2016.
Changes in Deferred Stock Outstanding
The following table summarizes the changes in the number of deferred stock shares under the Stock Plan and 2011 Incentive Plan over the period December 31, 2016 to September 30, 2017:
Weighted Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Outstanding – December 31, 2016 | 149,260 | $ | 9.55 | |||||
Granted | 100,239 | 4.42 | ||||||
Vested | (9,214 | ) | 12.29 | |||||
Forfeited | (44,845 | ) | 10.28 | |||||
Outstanding – September 30, 2017 | 195,440 | 6.62 |
Changes in Restricted Stock Units Outstanding
The following table summarizes the changes in the number of restricted stock units under the 2011 Incentive Plan over the period December 31, 2016 to September 30, 2017:
Weighted Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Outstanding – December 31, 2016 | 27,134 | $ | 8.65 | |||||
Granted | — | — | ||||||
Issued | (13,341 | ) | 11.05 | |||||
Forfeited | — | — | ||||||
Outstanding – September 30, 2017 | 13,793 | 6.33 |
Compensation Expense
Share-based compensation expense recognized for the nine month period ended September 30, 2017 was $327,000 before income taxes and $213,000 after income taxes. Share-based compensation expense recognized for the nine month period ended September 30, 2016 was $505,000 before income taxes and $328,000 after income taxes. Unrecognized compensation expense for the Company’s plans was $378,000 at September 30, 2017 andSignificant Accounting Policies, goodwill is expected to be recognized over a weighted-average period of 2.1 years. Excess tax benefits from the exercise of stock options and issuance of stock included in financing cash flows for the nine month periods ended September 30, 2017 and 2016 were $ 0 and $ (63,000), respectively. Share-based compensation expense is recorded as a part of selling, general and administrative expenses.
NOTE 4 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost or market:
September 30 | December 31 | |||||||
2017 | 2016 | |||||||
Finished goods | $ | 8,406,000 | $ | 12,083,000 | ||||
Raw and processed materials | 6,612,000 | 10,122,000 | ||||||
$ | 15,018,000 | $ | 22,205,000 |
The Company’s reserve for obsolete inventory increased by $3,131,000 during the nine months ended September 30, 2017, or $0.35 per basic and diluted share.
NOTE 5 –GOODWILL AND INTANGIBLE ASSETS
Goodwill is required to be evaluatedtested annually for impairment on an annual basisOctober 1st and between annual tests upon the occurrence of certainat other times if events have occurred or circumstances. In January 2017, the FASB issued new accounting guidance regarding the simplification of the test for goodwill impairment. The new standard eliminates the quantitative goodwill impairment analysis requirement to determine the fair value of individual assets and liabilities of a reporting unit to determine the amount of any goodwill impairment and instead permits an entity to recognize goodwill impairment loss as the excess of a reporting unit’s carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The Company chose to adopt this standard early for the annual impairment analysis in 2017. The Company performed the first step of the previous two-step process, which requirescircumstances exist that the fair value of the reporting unit be compared to its book value including goodwill. If the fair value is higher than the book value, no impairment is recognized. If the fair value is lower than the book value, an impairment adjustment must be recorded.
The Company performs its annual impairment analysis as of April 1 each year. The Company analyzed the reporting unit that had the goodwill and also analyzed the company as a whole, including the Company’s four separate reporting units. Although JDL Technologies had been profitable for the prior eight quarters, the cyclical and unpredictable nature of revenues from its education sector raised issues in forecasting cash flows in future quarters used to estimate the reporting unit’s fair value. Based on this analysis of comparing the fair value of each reporting unit to the book value, and comparing the Company’s overall book value with its market capitalization, the Company determined that the book value exceeded the overall fair value of the reporting units as well as the Company’s overall market value. As a result, the Company recorded a goodwill impairment charge totaling $1,463,000 during the second quarter of 2017.
The changes inindicate the carrying amount of goodwill in the JDL Technologies segment for the nine months ended September 30, 2017 are as follows:
JDL Technologies | ||||
January 1, 2017 | $ | 1,463,000 | ||
Impairment loss | (1,463,000 | ) | ||
September 30, 2017 | $ | — | ||
Gross goodwill | 1,463,000 | |||
Accumulated impairment loss | (1,463,000 | ) | ||
Balance at September 30, 2017 | $ | — |
may not recoverable. As parta result of the overall annual impairment analysis noted above,Company’s declining stock price during the third quarter of 2022, the Company also reviewed other intangible assets for potential impairment.performed an interim qualitative impairment assessment. Based on this analysis,assessment, the Company deemedconcluded that it was more likely than not that our goodwill and long-lived assets were not impaired.
Including the provisional intangible assets related to customer relationships to be impaired and recorded a $154,000 impairment loss duringtotaling $16,407,000 as of September 30, 2022 discussed within Note 3, Business Combinations, the second quarter of 2017.
The Company’s identifiable intangible assets with finite lives included in other assets, net on the condensed consolidated balance sheets, are being amortized over their estimated useful lives and were as follows:
September 30, 2017 | ||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Impairment loss | Foreign Currency Translation | Net | ||||||||||||||||
Trademarks | $ | 98,000 | $ | (63,000 | ) | $ | — | $ | (16,000 | ) | $ | 19,000 | ||||||||
Customer relationships | 491,000 | (230,000 | ) | (154,000 | ) | (107,000 | ) | — | ||||||||||||
Technology | 229,000 | (187,000 | ) | — | (42,000 | ) | — | |||||||||||||
$ | 818,000 | $ | (480,000 | ) | $ | (154,000 | ) | $ | (165,000 | ) | $ | 19,000 |
December 31, 2016 | ||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Impairment loss | Foreign Currency Translation | Net | ||||||||||||||||
Trademarks | $ | 91,000 | $ | (50,000 | ) | $ | — | $ | (20,000 | ) | $ | 21,000 | ||||||||
Customer relationships | 491,000 | (200,000 | ) | — | (122,000 | ) | 169,000 | |||||||||||||
Technology | 229,000 | (172,000 | ) | — | (57,000 | ) | — | |||||||||||||
$ | 811,000 | $ | (422,000 | ) | $ | — | $ | (199,000 | ) | $ | 190,000 |
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 $27,000$1,026,362 and $63,000 2017 and 2016, respectively. The amortization expense is included in selling, general and administrative expenses.At$357,324 during the three months ended September 30, 2017,2022 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 definite-livedidentifiable intangible assets forduring the remainder of2017and all of the following fournext fiscal years is as follows:
Year Ending December 31: | |||||
2017 | $ | 3,000 | |||
2018 | 7,000 | ||||
2019 | 2,000 | ||||
2020 | 2,000 | ||||
2021 | 2,000 | ||||
Thereafter | 2,000 |
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 68 – WARRANTYCOMMITMENTS AND CONTINGENCIES
We provide reservesLoan 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. (“Hercules”) under a loan and security agreement (the “Term Loan Agreement”). This loan accrues interest at 10%, payable-in-kind and was initially due and payable on December 10, 2023. There are no financial covenants associated with this loan. This loan was used to acquire fixed assets, inventory, and intangible assets of Sungevity in an asset acquisition in December 2020. As the transaction did not involve the exchange of monetary consideration, the assets were valued at the Company’s most reliable indication of fair value, which was debt issued in consideration for the estimated costassets. Accordingly, Pineapple Energy assessed the fair market value of product warrantiesthe debt instrument at $4,768,000 at the time revenue is recognized. We estimateasset acquisition date (a non-recurring Level 3 fair value input). The Company initially accreted the costsvalue of our warranty obligationsthe debt over its life at a discount rate of approximately 25%.
On December 16, 2021, the Term Loan Agreement was amended, whereby the maturity date was extended to December 31, 2024, subject to various prepayment criteria. In addition, the amendment provided that $4,500,000 plus all accrued and unpaid interest and expenses were to be repaid upon closing of the merger and receipt of the PIPE funds, with the remaining principal to be paid upon the loan maturity date.
The amendment represented a modification to the loan agreement with the existing lender as both the original loan agreement and the amendment allow for immediate prepayment and the Company passed the cash flow test. At December 31, 2021, the combined loan and accrued interest balance was $6,194,931. The balance at September 30, 2022, 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 our warranty policy or applicable contractual warranty, historical experiencethe carrying value of known product failure rates,the revised cash flows.
Interest and use of materialsaccretion expense was $151,024 and service delivery costs incurred in correcting product failures. Management reviews the estimated warranty liability on a quarterly basis to determine its adequacy. The actual warranty expense could differ from the estimates made by the Company based on product performance. The warranty liability is included in other accrued liabilities on the condensed consolidated balance sheet.
The following table presents the changes in the Company’s warranty liability$618,983 for thethree and nine month periodsmonths ended September 30, 20172022, respectively, and 2016,$266,473 and $995,743 for the three and nine months ended September 30, 2021, respectively. The loan is collateralized by all of Pineapple Energy’s personal property and assets.
Working Capital Note
On January 8, 2021, Pineapple Energy and Hercules, as agent for itself and the lenders, entered into a Working Capital Loan and Security Agreement (the “Working Capital Agreement”) for a working capital loan in the maximum principal amount of $500,000. The lenders, Hercules and Northern Pacific Growth Investment Advisors, LLC, made working capital loan commitments of $400,000 and $100,000, respectively. Northern Pacific Growth Investment Advisors, LLC is an affiliate of Northern Pacific Group, which controls Lake Street Solar, LLC, a then-member of Pineapple Energy. Borrowings under the Working Capital Agreement bore interest at 10.00% per annum with interest compounded daily and payable monthly. At December 31, 2021, the balance outstanding on the working capital loan was $350,000. The working capital loan had an initial maturity date of January 7, 2022 and was collateralized by all of Pineapple Energy’s assets. The Working Capital Agreement included provisions relating to the mandatory and optional conversion of the underlying loan amount into equity of the Company under certain circumstances. In the case of either a mandatory or optional conversion of the Hercules working capital loan, the working capital loan of Northern Pacific Growth Investment Advisors, LLC, including all accrued and unpaid interest, would be immediately due and payable. On December 16, 2021, an amendment to the Working Capital Agreement was executed that extended the maturity date to December 31, 2022 and added an additional mandatory conversion provision. In the event that, on or before the maturity date, Pineapple Energy consummated the merger, then immediately prior to the consummation of the merger, the working capital loan and all accrued and unpaid interest and expenses thereon would automatically convert into Class C Units of Pineapple Energy calculated based on one Class C Unit being issued for every $2.00 to be converted. The conversion option under the amendment was considered clearly and closely related to the host contract. During the first three months of 2022, Pineapple Energy borrowed an additional $150,000 and had $500,000 outstanding prior to the merger on March 28, 2022. Immediately prior to the merger on March 28, 2022, the $500,000 outstanding loan balance was converted to 250,000 Class C Units, which upon close of the merger were converted into 62,500 shares of Company common stock.
Interest expense was $0 and $13,977 for the three and nine months ended September 30, 2022, respectively, and was $7,402 and $9,221 for the majoritythree 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 relatesupon 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 a five-year obligationthe 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 provide for potential future liabilities for network equipment sales.
2017 | 2016 | |||||||
Beginning balance | $ | 600,000 | $ | 554,000 | ||||
Amounts charged to expense | 43,000 | 119,000 | ||||||
Actual warranty costs paid | (57,000 | ) | (75,000 | ) | ||||
Ending balance | $ | 586,000 | $ | 598,000 |
the Registration Statement.
NOTE 7 – 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 ofoperations.
NOTE 89 – DEBTSTOCK-BASED COMPENSATION
Long-term Debt2022 Equity Incentive Plan
The mortgageOn January 24, 2022 the CSI board of directors adopted, and on March 16, 2022 the Company’s headquarters building was payable in monthly installments and carried an interest rate of 6.83%. The mortgage maturedshareholders approved, the Company’s 2022 Equity Incentive Plan (“2022 Plan”), which became effective on March 1, 201628, 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 number of RSUs 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 Company paid $104,000 innine months ended September 30, 2022 was $23,498. There was no share-based compensation expense for the first quarter of 2016three and nine months ended September 30, 2021. Unrecognized compensation expense related to fully settle the liability.
Line of Credit
The Company has a $15,000,000 line of credit from Wells Fargo Bank. The Company had no outstanding borrowings against the line of creditRSUs was $918,278 at September 30, 20172022 and December 31, 2016. Dueis expected to be recognized over a weighted-average period of 2.2 years. Share-based compensation expense is recorded as a part of selling, general and administrative expenses.
NOTE 10 – EQUITY
Convertible Preferred Stock and Warrants
On June 28, 2021, the Company entered into a securities purchase agreement (“SPA”) in which, subsequent to the revolving natureclosing of loans under our credit facility, additional borrowingsthe merger, the Company would authorize the issuance and periodic repaymentssale 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 re-borrowingshas a liquidation preference over the Company’s common stock. The Convertible Preferred Stock may be made untilconverted by the maturity date. The total amount available for borrowings under our credit facility atCompany to common stock upon meeting certain market conditions, of which none had been met as of September 30, 2017 was $11,200,000, based2022, 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 borrowing base calculation. Interestdate of issuance.
These Convertible Preferred Stock and PIPE Warrants were issued on borrowings onMarch 28, 2022 upon the credit line is at LIBOR plus 2.0% (3.2% atconsummation of the merger. As of September 30, 2017). 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 credit agreement expires August 12, 2021proceeds from the issuance of Convertible Preferred Stock were allocated between the Convertible Preferred Stock and is secured by assetsPIPE Warrants using a relative fair value method. As of March 28, 2022, the fair value of the Company. Our credit agreement containsConvertible Preferred Stock was estimated at $756.06 per share with a total fair value recognized in the condensed consolidated financial covenants includingstatements of approximately $24.2 million. The fair value of the PIPE Warrants was estimated at $3.32 per share with a minimum liquiditytotal 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 $10,000,000. Liquidity is calculatedstockholders’ equity as the sum of unrestricted cash, marketable securitiesSeptember 30, 2022. The PIPE Warrants were determined to be equity-classified and the availability on the linefair value of credit. The Company$7.8 million was recognized in compliance with its financial covenants atadditional paid-in capital as of September 30, 2017.2022. 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 911 – 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, 2017 there was $44,000 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 loss and comprehensive 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 2014-2016 remain open to examination by the Internal Revenue Service and the years 2012-2016 remain open to examination by various state tax departments. The tax years from 2013-2016 remain open in Costa Rica. In April 2016, we received notification from the Internal Revenue Service that they would be performing an examination of our 2012 and 2013 federal consolidated income tax returns. Asof September 30, 2017, theexamination was complete. The settlement and payment that resulted from the examination did not have a material effect on our results of operations.
The Company’s effective income tax rate was 0.7%0% for the firstthree and nine months of 2017.ended September 30, 2022. The effective tax rate differs from the federal tax rate of 35%21% due to state income taxes foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, provisions for interest charges for uncertain income tax positions, stock compensation shortfalls and changes in valuation allowances related to deferred tax assets.The foreignoperating losses may ultimately be deductibleCompany was a pass through entity in the countries in which they occurred; however the Company has not 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 (14.0%) for the nine months endedSeptember 30, 2017. There were no additional uncertain tax positions identified in the first nine months of 2017. The Company’s effective income tax rate forthe ninemonthsended September 30, 2016 was(4.0%), and differed from the federal tax rate due to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, provisions for interest charges for uncertain income tax positions, and changes in valuation allowances related to deferred tax assets.2021.
NOTE 1012 – SEGMENT INFORMATION
The Company classifies its businessesbusiness operations into two segments as follows:
Solar: generates revenue through the following four segments:sale and installation of residential and commercial solar systems, battery storage, and grid service solutions.
IT Solutions & 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 organize the enterpriseCompany and disclose reportable segments based on our products and services. IntersegmentIntercompany revenues are eliminated upon consolidation. “Other” includes corporate costs that are not allocated to the segments.
Information concerning the Company’s continuing operations in the variousits segments for the threethree- and nine monthnine-month periods ended September 30, 20172022 and 2016 is2021 are as follows:
Transition | JDL | Intersegment | ||||||||||||||||||||||||||
Suttle | Networks | Technologies | Net2Edge | Other | Eliminations | Total | ||||||||||||||||||||||
Three Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
Sales | $ | 7,536,000 | $ | 9,327,000 | $ | 3,613,000 | $ | 182,000 | $ | — | $ | (245,000 | ) | $ | 20,413,000 | |||||||||||||
Cost of sales | 8,967,000 | 5,342,000 | 2,730,000 | 122,000 | — | (52,000 | ) | 17,109,000 | ||||||||||||||||||||
Gross profit | (1,431,000 | ) | 3,985,000 | 883,000 | 60,000 | — | (193,000 | ) | 3,304,000 | |||||||||||||||||||
Selling, general and administrative expenses | 2,239,000 | 3,809,000 | 471,000 | 836,000 | — | (193,000 | ) | 7,162,000 | ||||||||||||||||||||
Impairment loss | — | — | — | — | — | — | — | |||||||||||||||||||||
Restructuring expense | 796,000 | — | — | — | — | — | 796,000 | |||||||||||||||||||||
Operating (loss) income | $ | (4,466,000 | ) | $ | 176,000 | $ | 412,000 | $ | (776,000 | ) | $ | — | $ | — | $ | (4,654,000 | ) | |||||||||||
Depreciation and amortization | $ | 525,000 | $ | 158,000 | $ | 76,000 | $ | 9,000 | $ | — | $ | — | $ | 768,000 | ||||||||||||||
Capital expenditures | $ | 52,000 | $ | 174,000 | $ | — | $ | 3,000 | $ | 23,000 | $ | — | $ | 252,000 | ||||||||||||||
Assets | $ | 21,389,000 | $ | 12,593,000 | $ | 4,809,000 | $ | 1,258,000 | $ | 21,239,000 | $ | (27,000 | ) | $ | 61,261,000 |
Transition | JDL | Intersegment | ||||||||||||||||||||||||||
Suttle | Networks | Technologies | Net2Edge | Other | Eliminations | Total | ||||||||||||||||||||||
Three Months Ended September 30, 2016 | ||||||||||||||||||||||||||||
Sales | $ | 10,420,000 | $ | 11,789,000 | $ | 3,397,000 | $ | 275,000 | $ | — | $ | (264,000 | ) | $ | 25,617,000 | |||||||||||||
Cost of sales | 10,080,000 | 6,350,000 | 2,384,000 | 128,000 | — | (16,000 | ) | 18,926,000 | ||||||||||||||||||||
Gross profit | 340,000 | 5,439,000 | 1,013,000 | 147,000 | — | (248,000 | ) | 6,691,000 | ||||||||||||||||||||
Selling, general and administrative expenses | 2,891,000 | 3,824,000 | 563,000 | 836,000 | — | (248,000 | ) | 7,866,000 | ||||||||||||||||||||
Operating (loss) income | $ | (2,551,000 | ) | $ | 1,615,000 | $ | 450,000 | $ | (689,000 | ) | $ | — | $ | — | $ | (1,175,000 | ) | |||||||||||
Depreciation and amortization | $ | 627,000 | $ | 205,000 | $ | 65,000 | $ | 23,000 | $ | — | $ | — | $ | 920,000 | ||||||||||||||
Capital expenditures | $ | 593,000 | $ | 26,000 | $ | 44,000 | $ | 16,000 | $ | (4,000 | ) | $ | — | $ | 675,000 | |||||||||||||
Assets | $ | 36,830,000 | $ | 17,758,000 | $ | 3,729,000 | $ | 1,488,000 | $ | 16,692,000 | $ | (26,000 | ) | $ | 76,471,000 |
Transition | JDL | Intersegment | ||||||||||||||||||||||||||
Suttle | Networks | Technologies | Net2Edge | Other | Eliminations | Total | ||||||||||||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
Sales | $ | 24,888,000 | $ | 27,831,000 | $ | 10,504,000 | $ | 719,000 | $ | — | $ | (661,000 | ) | $ | 63,281,000 | |||||||||||||
Cost of sales | 24,447,000 | 15,667,000 | 7,699,000 | 262,000 | — | (74,000 | ) | 48,001,000 | ||||||||||||||||||||
Gross profit | 441,000 | 12,164,000 | 2,805,000 | 457,000 | — | (587,000 | ) | 15,280,000 | ||||||||||||||||||||
Selling, general and administrative expenses | 6,775,000 | 11,481,000 | 1,604,000 | 2,244,000 | — | (587,000 | ) | 21,517,000 | ||||||||||||||||||||
Impairment loss | — | — | 1,463,000 | 154,000 | — | — | 1,617,000 | |||||||||||||||||||||
Restructuring expense | 2,326,000 | — | — | — | — | — | 2,326,000 | |||||||||||||||||||||
Operating (loss) income | $ | (8,660,000 | ) | $ | 683,000 | $ | (262,000 | ) | $ | (1,941,000 | ) | $ | — | $ | — | $ | (10,180,000 | ) | ||||||||||
Depreciation and amortization | $ | 1,695,000 | $ | 518,000 | $ | 230,000 | $ | 47,000 | $ | — | $ | — | $ | 2,490,000 | ||||||||||||||
Capital expenditures | $ | 100,000 | $ | 199,000 | $ | 5,000 | $ | 63,000 | $ | 23,000 | $ | — | $ | 390,000 |
Transition | JDL | Intersegment | ||||||||||||||||||||||||||
Suttle | Networks | Technologies | Net2Edge | Other | Eliminations | Total | ||||||||||||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||||||
Sales | $ | 33,424,000 | $ | 30,294,000 | $ | 12,360,000 | $ | 1,434,000 | $ | — | $ | (918,000 | ) | $ | 76,594,000 | |||||||||||||
Cost of sales | 29,939,000 | 17,270,000 | 8,025,000 | 682,000 | — | (157,000 | ) | 55,759,000 | ||||||||||||||||||||
Gross profit | 3,485,000 | 13,024,000 | 4,335,000 | 752,000 | — | (761,000 | ) | 20,835,000 | ||||||||||||||||||||
Selling, general and administrative expenses | 10,038,000 | 13,224,000 | 2,531,000 | 2,499,000 | — | (742,000 | ) | 27,550,000 | ||||||||||||||||||||
Pension liability adjustment gains | — | — | — | — | (4,148,000 | ) | — | (4,148,000 | ) | |||||||||||||||||||
Operating (loss) income | $ | (6,553,000 | ) | $ | (200,000 | ) | $ | 1,804,000 | $ | (1,747,000 | ) | $ | 4,148,000 | $ | (19,000 | ) | $ | (2,567,000 | ) | |||||||||
Depreciation and amortization | $ | 1,819,000 | $ | 658,000 | $ | 189,000 | $ | 88,000 | $ | — | $ | — | $ | 2,754,000 | ||||||||||||||
Capital expenditures | $ | 1,414,000 | $ | 185,000 | $ | 128,000 | $ | 18,000 | $ | 220,000 | $ | (19,000 | ) | $ | 1,946,000 |
NOTE 11 – PENSIONS
IT Solutions & | Intercompany | |||||||||||||
Solar | Services | Other | Eliminations | Total | ||||||||||
Three Months Ended September 30, 2022 | ||||||||||||||
Sales | $ | 5,888,162 | $ | 1,860,111 | $ | — | $ | (39,211) | $ | 7,709,062 | ||||
Cost of sales | 4,483,989 | 1,211,331 | — | — | 5,695,320 | |||||||||
Gross profit | 1,404,173 | 648,780 | — | (39,211) | 2,013,742 | |||||||||
Selling, general and | ||||||||||||||
administrative expenses | 1,250,734 | 620,471 | 1,290,982 | (39,211) | 3,122,976 | |||||||||
Amortization expense | 863,574 | 162,788 | — | — | 1,026,362 | |||||||||
Transaction costs | — | 3,018 | 262,365 | — | 265,383 | |||||||||
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 | $ | 878,853 | $ | 184,204 | $ | — | $ | — | $ | 1,063,057 | ||||
Capital expenditures | $ | 101,456 | $ | 3,736 | $ | — | $ | — | $ | 105,192 | ||||
Assets | $ | 41,572,863 | $ | 9,676,492 | $ | — | $ | — | $ | 51,249,355 |
The Company’s U.K. based subsidiary Austin Taylor maintained a defined benefit pension plan for its employees through March 31, 2016. The Company does not provide any other post-retirement benefits to its employees. Components of net periodic benefit of the pension plans for the three and nine months ended September 30, 2017 and 2016 were:
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Service cost | $ | — | $ | — | $ | — | $ | — | ||||||||
Interest cost | — | — | — | 26,000 | ||||||||||||
Expected return on assets | — | — | — | (24,000 | ) | |||||||||||
Settlement benefit | — | — | — | (43,000 | ) | |||||||||||
Net periodic pension benefit | $ | — | $ | — | $ | — | $ | (41,000 | ) |
IT Solutions & | Intercompany | |||||||||||||
Solar | Services | Other | Eliminations | Total | ||||||||||
Three Months Ended September 30, 2021 | ||||||||||||||
Sales | $ | 25,417 | $ | — | $ | — | $ | — | $ | 25,417 | ||||
Cost of sales | — | — | — | — | — | |||||||||
Gross profit | 25,417 | — | — | — | 25,417 | |||||||||
Selling, general and | ||||||||||||||
administrative expenses | 241,728 | — | — | — | 241,728 | |||||||||
Amortization expense | 357,324 | — | — | — | 357,324 | |||||||||
Transaction costs | 545,934 | — | — | — | 545,934 | |||||||||
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 | $ | 357,324 | $ | — | $ | — | $ | — | $ | 357,324 | ||||
Assets | $ | 3,205,000 | $ | — | $ | — | $ | — | $ | 3,205,000 |
IT Solutions & | Intercompany | |||||||||||||
Solar | Services | Other | Eliminations | Total | ||||||||||
Nine Months Ended September 30, 2022 | ||||||||||||||
Sales | $ | 10,338,483 | $ | 3,679,990 | $ | — | $ | (99,975) | $ | 13,918,498 | ||||
Cost of sales | 7,966,159 | 2,567,203 | — | — | 10,533,362 | |||||||||
Gross profit | 2,372,324 | 1,112,787 | — | (99,975) | 3,385,136 | |||||||||
Selling, general and | ||||||||||||||
administrative expenses | 2,683,953 | 1,442,286 | 2,627,532 | (99,975) | 6,653,796 | |||||||||
Amortization expense | 2,084,470 | 325,575 | — | — | 2,410,045 | |||||||||
Transaction costs | 949,330 | 80,501 | 417,453 | — | 1,447,284 | |||||||||
Operating loss | (3,345,429) | (735,575) | (3,044,985) | — | (7,125,989) | |||||||||
Other income (expense) | (628,376) | 116,949 | 4,676,438 | — | 4,165,011 | |||||||||
Income (loss) before income tax | $ | (3,973,805) | $ | (618,626) | $ | 1,631,453 | $ | — | $ | (2,960,978) | ||||
Depreciation and amortization | $ | 2,108,901 | $ | 374,714 | $ | — | $ | — | $ | 2,483,615 | ||||
Capital expenditures | $ | 106,421 | $ | 9,886 | $ | — | $ | — | $ | 116,307 |
The Company settled all its obligations under this pension plan in the first quarter of 2016. The Company had contributed $650,000 toward the settlement of the pension into annuities in 2015, which resulted in the recognition of $1,222,000 of pension settlement costs in the income statement in the fourth quarter of 2015. The Company contributed an additional $68,000 toward the settlement in the first quarter of 2016, which resulted in a benefit of $43,000 recorded within operating expenses. As a result of the final settlement of all of its pension obligations, in the first quarter of 2016, the Company recorded $4,148,000 in pension liability adjustment gains previously recorded in accumulated other comprehensive income within operating expenses in the consolidated statement of income.
IT Solutions & | Intercompany | |||||||||||||
Solar | Services | Other | Eliminations | Total | ||||||||||
Nine Months Ended September 30, 2021 | ||||||||||||||
Sales | $ | 25,417 | $ | — | $ | — | $ | — | $ | 25,417 | ||||
Cost of sales | — | — | — | — | — | |||||||||
Gross profit | 25,417 | — | — | — | 25,417 | |||||||||
Selling, general and | ||||||||||||||
administrative expenses | 697,985 | — | — | — | 697,985 | |||||||||
Amortization expense | 1,071,971 | — | — | — | 1,071,971 | |||||||||
Transaction costs | 1,977,436 | — | — | — | 1,977,436 | |||||||||
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 | $ | 1,071,971 | $ | — | $ | — | $ | — | $ | 1,071,971 |
NOTE 12 – NET LOSS PER SHARE
Basic net income per common share is based on the weighted average number of common shares outstanding during each year. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding. The Company’s only potential common shares outstanding are stock options and shares associated with the long-term incentive compensation plans, which resulted in no dilutive effect for the three and nine month periods ended September 30, 2017 and 2016. The Company calculates the dilutive effect of outstanding options using the treasury stock method. Due to the net losses in the first three and nine months of 2017 and 2016, there was no dilutive impact from stock options or unvested shares. Options totaling 1,145,417 were excluded from the calculation of diluted earnings per share for the three months and nine ended September 30, 2017 because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling 181,224 shares would not have been included for the three and nine months ended September 30, 2017 because of unmet performance conditions. Options totaling 964,563 and 846,584 were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2016 because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling 159,689 shares would not have been included for the three and nine months ended September 30, 2016 because of unmet performance conditions.
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.
As discussed in Note 5, we tested our goodwill for impairment as of April 1, 2017. As part of this impairment testing, the Company determined the fair value of the net assets of the JDL Technologies reporting unit, based primarily on discounted cash flows and forecasted future operating results, which represent Level 3 inputs. As a result of our analysis, the Company recorded a non-cash impairment charge of $1,463,000 to fully impair goodwill. A reconciliation of the beginning and ending balances of goodwill are included in Note 5.
Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and2022 are summarized below. There were no assets or liabilities measured at fair value on a recurring basis as of December 31, 2016, are summarized below:
September 30, 2017 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money Market funds | $ | 8,986,000 | $ | — | $ | — | $ | 8,986,000 | ||||||||
Subtotal | 8,986,000 | — | — | 8,986,000 | ||||||||||||
Short-term investments: | ||||||||||||||||
Certificates of deposit | — | 725,000 | — | 725,000 | ||||||||||||
Subtotal | — | 725,000 | — | 725,000 | ||||||||||||
Total | $ | 8,986,000 | $ | 725,000 | $ | — | $ | 9,711,000 |
December 31, 2016 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money Market funds | $ | 3,851,000 | $ | — | $ | — | $ | 3,851,000 | ||||||||
Subtotal | 3,851,000 | — | — | 3,851,000 | ||||||||||||
Short-term investments: | ||||||||||||||||
Certificates of deposit | — | 4,294,000 | — | 4,294,000 | ||||||||||||
Corporate Notes/Bonds | — | 1,511,000 | — | 1,511,000 | ||||||||||||
Subtotal | — | 5,805,000 | — | 5,805,000 | ||||||||||||
Total | $ | 3,851,000 | $ | 5,805,000 | $ | — | $ | 9,656,000 |
2021.
September 30, 2022 | |||||||||||
Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||
Cash equivalents: | |||||||||||
Money market funds | $ | 959,541 | $ | — | $ | — | $ | 959,541 | |||
Subtotal | 959,541 | — | — | 959,541 | |||||||
Short-term investments: | |||||||||||
Corporate notes/bonds | — | 2,654,383 | — | 2,654,383 | |||||||
Subtotal | — | 2,654,383 | — | 2,654,383 | |||||||
Liabilities: | |||||||||||
Contingent value rights | — | — | (10,743,224) | (10,743,224) | |||||||
Earnout consideration | — | — | — | — | |||||||
Subtotal | — | — | (10,743,224) | (10,743,224) | |||||||
Total | $ | 959,541 | $ | 2,654,383 | $ | (10,743,224) | $ | (7,129,300) |
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 fair value remeasurements noted above were both recorded within other income (expense) in the condensed consolidated statements of operations.
We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period. There were no transfers between levels during the ninethree months ended September 30, 2017.2022.
NOTE 14 – RESTRUCTURINGSUBSEQUENT EVENTS
During the nine months ended September 30, 2017,SUNation Acquisition
On November 9, 2022, the Company recorded $2,326,000 in restructuring expense. This consisted of severanceentered into a Transaction Agreement (the “Transaction Agreement”) with Solar Merger Sub, LLC, a New York limited liability company and related benefits costs due to the restructuring within the Suttle business segment, including ongoing costs related to the closurewholly owned subsidiary of the Costa Rica facility. We transferredsubstantiallyCompany (“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 productionissued 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 acquired the equity of the Acquired Companies from Costa RicaSellers 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 Minnesotathe 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 endCompany and Merger Sub of the second quarterequity of 2017 completed the closureAcquired 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 the third quartertheir entirety and would be of 2017. In the third quarter of 2017, we identified $505,000 of equipment, net of accumulated depreciation, that we determined we would no longer use as a result of consolidating our operations in the Minnesota location. We were not ablefurther force and effect. The Company’s obligations to make this determination until we observed and assessedany Earnout payment under the conditionTransaction Agreement would also be terminated. The Pledge Agreement will automatically terminate upon the payment of all amounts due under the equipment once it arrived in Minnesota. We included the loss on the disposal of this equipment has been included in restructuring expense on the consolidated statement of loss and comprehensive loss. The Company paid $1,821,000 in restructuring charges during the first nine months of 2017 and had $0 in restructuringaccruals recorded in accrued compensation and benefits at September 30, 2017. We do not expect any material restructuring costs in the fourth quarter of 2017.Short-Term Note.
NOTE 15 – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard update on revenue recognition from contracts with customers. The new guidance will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. According to the new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. As a result of the FASB’s July 2015 deferraltiming of the standard’sacquisition in proximity to the filing date, not all disclosures as required implementation date,under ASC 805 are presented herein (including a preliminary purchase price allocation and certain pro-forma information) as the guidanceinitial accounting for the business combination is effective for interimincomplete 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 annual reporting periods beginning after December 15, 2017. The Company will adopt the accounting standard using the modified retrospective transition approach. The modified retrospective transition approach will recognize any changes from the beginningAmendment with each of the year of initial application through retained earnings with no restatement of comparative periods.
We have established an implementation team and engaged a third-party consultantCompany’s existing PIPE Investors whereby these investors provided certain waivers to assist with our assessmentthe anti-dilution protections that reset the conversion price of the impactConvertible Preferred Stock to $4.00 and reset the strike price on certain of the new revenue guidance on our operations, consolidatedPIPE 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 related disclosures. To date, this assessment has included (1) utilizing questionnaires to identify our revenue streams, (2) performing detailed contract analyses for each material revenue stream identified, and (3) assessingliquidation of liabilities in the normal course of business. As noted differences in recognition and measurementNote 14, the Company entered into a $5.0 million Short-Term Note that may result from adopting this new standard.is due on August 9, 2023. Based on the preliminary resultsCompany’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 issuance of these financial statements indicate that the Company will not have sufficient cash to repay the Short-Term Note obligation, a factor which raises substantial doubt about the ability of the evaluation, which we expectCompany to complete duringcontinue as a going concern for a reasonable period of time.
In order to continue as a going concern, the fourth quarterCompany 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 2017, we believe the most significant potential changes relate to variable consideration, the timing of recognition for certain promises included within service contracts, and net recognition of third-party maintenance and support services, although our technical analysis of these potential impacts is still on-going. We also anticipate changes to the consolidated balance sheet related to accounts receivable, contract assets, and contract liabilities.
We expect to adopt certain practical expedients and make certain policy electionsits plans. These financial statements do not include any adjustments related to the accounting for significant finance components, sales taxes, shippingrecoverability and handling, right to invoice, costs to obtain a contract and immaterial promised goods or services, which will mitigate certain impactsclassification of adopting this new standard. We are also currently reviewing the tax impact, if any, that the new standard will have on our financial statements. We are in the process of evaluating and designing the necessary changes to our business processes, policies, systems and controls to support recognition and disclosure under the new standard. Further, we are continuing to assess what incremental disaggregated revenue disclosures will be required in our consolidated financial statements.
In July 2015, the FASB issued an accounting standard on inventory, which simplifies the subsequent measurement of inventory by requiring entities to measure inventory at the lower of cost or net realizable value, except for inventory measured using the last-in, first-out (LIFO)assets or the retail inventory methods. This standard requires entities to compare the cost of inventory to one measure – net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposalamounts and transportation. The standard is effective for the annual period beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted, and is to be applied prospectively. The Company adopted this standard in the first quarter of 2017 with no material impact on its consolidated financial statements.
In November 2015, the FASB issued an accounting standard on deferred taxes, which removes the requirement to present deferred tax assets and liabilities as current and noncurrent on the balance sheet based on the classification of the related asset or liability, and instead requires classification of all deferred tax assets and liabilities as noncurrent. This guidance willthat might be effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company adopted this guidance in the first quarter of 2017 and other than the prescribed classification of all deferred tax assets and liabilities as noncurrent, there was no material impact on its consolidated financial statements.
In February 2016, the FASB issued new accounting requirements regarding accounting for leases, which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, and early adoption is permitted. We have not yet determined the potential effects on our financial condition or results of operations.
In March 2016, the FASB issued a new accounting standard that changed certain aspects of accounting for share-based payments to employees, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this standard during the first quarter of 2017 with no material impact on our financial condition or results of operations.
In August 2016, the FASB issued new accounting guidance regarding the classification of cash receipts and payments in the Statement of Cash Flows. This guidance isintended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. The new standard is effective retrospectively on January 1, 2018, with early adoption permitted.We are still evaluating the impact of this standard, but do not believe it will have a material impact on our Consolidated Statement of Cash Flows.
In January 2017, the FASB issued new accounting guidance regarding the simplification of the test for goodwill impairment. The new standard eliminates the quantitative goodwill impairment analysis requirement to determine the fair value of individual assets and liabilities of a reporting unit to determine the amount of any goodwill impairment and instead permits an entity to recognize goodwill impairment loss as the excess of a reporting unit’s carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The new guidance continues to allow an entity to perform a qualitative assessment over goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The standard will be effective for annual and interim periods beginning January 1, 2020, with early adoption permitted. The Company adopted this standard during 2017. As noted above in Note 5,necessary should the Company analyzed the reporting unit that had the goodwill and also analyzed the Companybe unable to continue as a whole, including the Company’s four separate reporting units. Based on this analysis of comparing the fair value of each reporting unit to the book value and comparing the Company’s overall book value with its market capitalization, the Company determined that the book value exceeds the overall fair value of the reporting units as well as the Company’s overall market value. As a result, the Company recorded a goodwill impairment charge totaling $1,463,000 during the second quarter of 2017.going concern.
NOTE 16 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of this filing. We do not believe there are any material subsequent events that would require further disclosure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OverviewThe following discussion and analysis should be read in conjunction with our 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.
Communications Systems, Inc. provides physical connectivity infrastructure and services for global deployments of broadband networks through the following business units:Forward-Looking Statements
Third Quarter 2017 Summary
● Consolidated sales of $20.4 million compared to $25.6 million in Q3 2016, resulting primarily from lower sales at Suttle.
23
Forward-looking statements
In thisThis quarterly 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 make “forward lookingcontain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 concerning possible or anticipated future financial performance, business activities, plans, pending claims, investigations or litigation, which are typically preceded1995. Forward-looking statements can 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:
Suttleour growth strategy depends on the continued origination of solar service agreements;
if sufficient additional demand for residential solar power systems does not develop or takes longer to develop than we anticipate, our ability to originate solar service agreements may decrease;
a material reduction in the retail price of electricity charged by electric utilities or other retail electricity providers could harm our business, financial condition and results of operations;
we need to obtain substantial additional financing arrangements to continue as a going concern and provide working capital and growth capital;
our business prospects are dependent in part on a continuing decline in the cost of solar energy system components;
we face competition from centralized electric utilities, retail electric providers, independent power producers and renewable energy companies;
developments in technology or improvements in distributed solar energy generation and related technologies or components may materially adversely affect demand for our offerings;
we depend on a limited number of suppliers of solar energy system components;
increases in the cost of our solar power systems due to tariffs imposed by the U.S. government could have a material adverse effect on our business, financial condition and results of operations;
our operating results may fluctuate from quarter to quarter and year to year;
if 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;
the 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 purchase 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 availability of financial incentives;
limitations regarding the interconnection of solar power systems to the electrical grid may significantly reduce our ability to sell electricity from our solar power systems; and
compliance with occupational safety and health requirements and best practices can be costly.
IT Solutions & Services Segment Risks and Uncertainties:
Transition Networks Risksour ability to profitably increase our business serving small and Uncertainties: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;
our ability to successfully and profitably manage a large number of small accounts;
JDL Technologies Risksour ability to establish and Uncertainties:maintain a productive and efficient workforce;
Net2Edge’s Risksour ability to compete in a fast growing and Uncertainties:large field of SD-WAN competitors, some of which 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.
The Company discusses these
Other risks and other risk factors from time to timeuncertainties are discussed more fully under the caption “Risk Factors” in itsour filings with the SEC, including risk factors presented underin Part II, Item 1A1A. “Risk Factors” of the Company’s most recently filed Annualthis Quarterly Report on Form 10-K10-Q. Accordingly, 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 update any forward-looking statements to reflect subsequent events or circumstances.
Overview
Pineapple Energy Inc. (formerly Communications Systems, Inc. (“CSI”) and Quarterly ReportsPineapple 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 a merger agreement, pursuant to which a subsidiary of the Company merged with and into Pineapple Energy, with Pineapple Energy surviving the merger as a wholly owned subsidiary of the Company (the “merger”). Following the closing of the merger (the “Closing”) the Company changed its name from Communications Systems, Inc. to Pineapple Holdings, Inc. and subsequently, on Form 10-Q.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 Resultscompleted 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 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. 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.
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, 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 to the merger, the consolidated results of CSI, Pineapple Energy, HEC, and E-Gear following the closing of the
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.
Following the merger, the Company operates in two distinct business segments as follows:
Solar Segment
Through 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 and earn tax credits related to 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.
IT 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 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. 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, 2017 Compared2022 and 2021
The consolidated results herein reflect the historical operating results of Pineapple Energy prior toThree Months Ended September 30, 2016 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 declined 20%were $7,709,062 in the third quarter of 20172022 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 $20,413,000commissions 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 $25,617,000$1,144,986 in the same periodthird quarter of 2016. 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 2017 was $4,654,000 compared2022 increased to $2,400,979 from an operating loss of $1,175,000$1,119,569 in the third quarter of 2016. The Company incurred $796,000 in restructuring expense in the third quarter of 2017 related to the closure of its Costa Rica facility in 2017.2021. Net loss in the third quarter of 20172022 was $4,522,000$2,519,996, or $ (0.50)$(0.34) per diluted share, compared to net loss of $1,264,000$1,395,263, or $ (0.14)$(0.45) per diluted share, in the third quarter of 2016.2021.
Suttle Results
Suttle sales decreased 28% inComparison of the third quarter of 2017 to $7,536,000 compared to $10,420,000 in the same period of 2016 due to continuing pricing pressures from major telecommunications customers, volume declines in legacy products, and a continuing shift in purchasing decisions from Tier 1 telecom suppliers to contractors and installers.
Sales by customer groups in the third quarters of 2017 and 2016 were:
Suttle Sales by Customer Group | ||||||||
2017 | 2016 | |||||||
Communication service providers | $ | 6,912,000 | $ | 9,441,000 | ||||
International | 173,000 | 368,000 | ||||||
Distributors | 451,000 | 611,000 | ||||||
$ | 7,536,000 | $ | 10,420,000 |
Suttle’s sales by product groups in third quarter of 2017 and 2016 were:
Suttle Sales by Product Group | ||||||||
2017 | 2016 | |||||||
Structured cabling and connecting system products | $ | 7,230,000 | $ | 9,649,000 | ||||
DSL and other products | 306,000 | 771,000 | ||||||
$ | 7,536,000 | $ | 10,420,000 |
Sales to the major communication service providers decreased 27% in 2017 due to continuing pricing pressures and volume declines in legacy products. Sales to major communication service providers accounted for 92% of Suttle’s sales in the third quarter of 2017 compared to 91% of sales in 2016. Sales to distributors decreased 26% in 2017 due to the continued decline in DSL products and the impact from the discontinuation of certain legacy products, and accounted for 6% and 6% of sales in the third quarters of 2017 and 2016, respectively. International sales decreased 53% in 2017 and accounted for 2% of Suttle’s third quarter 2017 sales.
Sales of structured cabling and connecting system products decreased 25% due to volume declines as a result of project delays from major telecommunications customers.
Suttle’s gross margin decreased 521% in the third quarter of 2017 to $ (1,431,000) compared to $340,000 in the same period of 2016. Gross margin as a percentage of sales decreased to -19.0% from 3.3% in the same period of 2016 due to the $417,000 write off of prepaid royalties under a product development agreement and excess and obsolete inventory adjustments. The margin impact of excess and obsolete inventory adjustments was $2,637,000 in the third quarter of 2017 (35.1% of sales) compared to $353,000 (3.4% of sales) in the same period of last year. Selling, general and administrative expenses decreased 23% to $2,239,000, or 29.7% of sales, in the third quarter of 2017 compared to $2,891,000, or 27.7% of sales, in the same period in 2016 due to reduced research and development expenditures and ongoing expense control measures. Suttle incurred $112,000 and $592,000 in research and development expenses in the respective 2017 and 2016 third quarters. Suttle incurred $796,000 in restructuring expense in the third quarter of 2017 related to the closure of its Costa Rica facility in 2017.
Suttle incurred an operating loss of $4,466,000 in the third quarter of 2017 compared to an operating loss of $2,551,000 in 2016.
Transition Networks Results
Transition Networks sales decreased 21% to $9,327,000 in the third quarter of 2017 compared to $11,789,000 in 2016. Transition Networks organizes its sales force by vertical markets and segments its customers geographically. Third quarter sales by region are presented in the following table:
Transition Networks Sales by Region | ||||||||
2017 | 2016 | |||||||
North America | $ | 7,404,000 | $ | 9,469,000 | ||||
Rest of World | 1,301,000 | 1,512,000 | ||||||
Europe, Middle East, Africa (“EMEA”) | 622,000 | 808,000 | ||||||
$ | 9,327,000 | $ | 11,789,000 |
The following table summarizes Transition Networks’ 2017 and 2016 third quarter sales by its major product groups:
Transition Networks Sales by Product Group | ||||||||
2017 | 2016 | |||||||
Media converters | $ | 4,950,000 | $ | 6,703,000 | ||||
Ethernet switches and adapters | 2,263,000 | 3,045,000 | ||||||
Other products | 2,114,000 | 2,041,000 | ||||||
$ | 9,327,000 | $ | 11,789,000 |
Sales in North America decreased $2,065,000, or 22%, due to a delay in federal government spending and disruptions in our supply chain. International sales decreased $397,000, or 17%, primarily due to generally slow global markets. Media converter sales decreased 26% or $1,753,000 due to delays in the federal sector and product availability. Sales of ethernet switches and adapters decreased 26% or $782,000 due to federal government spending delays. All other product sales increased 4% or $73,000 due to strong accessory sales.
Gross margin on third quarter sales decreased to $3,985,000 in 2017 as compared to $5,439,000 in 2016. Gross margin as a percentage of sales decreased to 42.7% in 2017 from 46.1% in 2016. The margin impact of excess and obsolete inventory adjustments was $344,000 in third quarter 2017 (3.7% of sales) compared to $88,000 (0.7% of sales) the same period last year. Selling, general and administrative expenses remained fairly flat at $3,809,000, or 40.8% of sales, in 2017 compared to $3,824,000, or 32.4% of sales, in 2016.
Transition Networks had operating income of $176,000 in 2017 compared to income of $1,615,000 in 2016, with the decrease primarily due to lower sales and gross margins.
JDL Technologies Results
JDL Technologies sales increased 6% to $3,613,000 compared to $3,397,000 in 2016.
JDL’s revenues by customer group were as follows:
JDL Revenue by Customer Group | ||||||||
2017 | 2016 | |||||||
Education | $ | 2,870,000 | $ | 2,383,000 | ||||
Healthcare and commercial clients | 743,000 | 1,014,000 | ||||||
$ | 3,613,000 | $ | 3,397,000 |
Revenues from the education sector increased $487,000 or 20% in the third quarter of 2017 as compared to the 2016 third quarter due to the addition un-forecasted projects by our primary education customer. Revenue from sales to small and medium-sized commercial businesses (“SMBs”), which are primarily healthcare and commercial clients, decreased $271,000, or 27% due to a decrease in the number of infrastructure and professional services projects completed in the third quarter, due, in part, to JDL’s continued focus on building managed services revenue rather than incident-based or project-based opportunities, and fewer bids for, and therefore, contracts for infrastructure refresh projects.
Gross margin decreased 13% to $883,000 in the third quarter of 2017 compared to $1,013,000 in the same period in 2016. Gross margin as a percentage of sales decreased to 24.4% in 2017 compared to 29.8% in 2016 due to a change in revenue mix. Selling, general and administrative expenses decreased 16% in 2017 to $471,000, or 13.0% of sales, compared to $563,000, or 16.6% of sales, in 2016 due to cost saving measures taken over the past year.
JDL Technologies reported operating income of $412,000 in the third quarter of 2017 compared to income of $450,000 in the same period of 2016.
Net2Edge Results
Net2Edge’s sales decreased 34% to $182,000 in the third quarter of 2017 compared to $275,000 in 2016 due to delays in the release of new products. Gross margin decreased 59% to $60,000 in the third quarter of 2017 compared to $147,000 in the same period of 2016. Gross margin as a percentage of sales decreased to 33.0% in 2017 from 53.5% in 2016 due to an increase in the excess and obsolete inventory reserve during the quarter. Selling, general and administrative expenses remained flat year over year. Net2Edge reported an operating loss of $776,000 in the third quarter of 2017 compared to an operating loss of $689,000 in the same period of 2016.
Income Taxes
The Company’s loss before income taxes decreased to $4,631,000 in 2017 compared to $1,260,000 in 2016. The Company’s effective income tax rate was 2.4% in 2017 and (0.3%) in 2016.
Nine Months Ended September 30, 2017 Compared toNine Months Ended September 30, 20162022 and 2021
Consolidated sales decreased 17% in 2017 to $63,281,000 compared to $76,594,000 in 2016. Consolidated operating loss in 2017 was $10,180,000 compared to a loss of $2,567,000were $13,918,498 in the first nine months of 2016, which2022 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 $4,148,000selling, general and administrative expenses, amortization expense and transaction costs increased 180.5% to $10,511,125 in pension liability adjustment gains recognizedthe first nine months of 2022 as compared to $3,747,392 in operating incomethe 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 due primarily to $3,574,286 in selling, general and administrative costs of the acquired businesses and $2,627,532 in corporate overhead costs in the first nine months of
2022. Amortization expense increased $1,338,074 to $2,410,045 in the first nine months of 2022 due to intangible assets acquired through the merger and HEC Asset Acquisition. Transaction costs decreased $530,152 to $1,447,284 in the first nine months of 2022, due to the consummation of the merger and HEC Asset Acquisition in the first quarter of 2016 from2022.
Consolidated other income was $4,165,011 in the settlementfirst nine months of the pension plan. The Company incurred $2,326,0002022 as compared to $1,004,964 in restructuringconsolidated other expense in the first nine months of 2017 related2021. 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 fair value remeasurement of the CVRs, as discussed further in 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 closurefirst nine months of its Costa Rica facility in 2017 and $1,617,000 in asset impairment losses related to goodwill at JDL and intangible assets at Net2Edge.2021. Net loss in 2017the first nine months of 2022 was $10,128,000$2,960,978, or $ (1.13)$(0.49) per diluted share, compared to net loss of $6,275,000$4,726,939, or $ (0.71)$(1.54) per diluted share, in the first nine months of 2016.2021.
Suttle Results
Suttle sales decreased 26% in the first nine months of 2017 to $24,888,000 compared to $33,424,000 in the same period of 2016 due to continuing pricing pressures from major telecommunications customers, volume declines in legacy products, and a shift in purchasing decisions from Tier 1 telecom suppliers to installers. Sales by customer groups in the first nine months of 2017 and 2016 were:
Suttle Sales by Customer Group | ||||||||
2017 | 2016 | |||||||
Communication service providers | $ | 22,468,000 | $ | 30,252,000 | ||||
International | 545,000 | 1,147,000 | ||||||
Distributors | 1,875,000 | 2,025,000 | ||||||
$ | 24,888,000 | $ | 33,424,000 |
Suttle’s sales by product groups in first nine months of 2017 and 2016 were:
Suttle Sales by Product Group | ||||||||
2017 | 2016 | |||||||
Structured cabling and connecting system products | $ | 22,798,000 | $ | 30,332,000 | ||||
DSL and other products | 2,090,000 | 3,092,000 | ||||||
$ | 24,888,000 | $ | 33,424,000 |
Sales to the major communication service providers decreased 26% in 2017 due to continuing pricing pressures and volume declines in legacy products. Sales to major communication service providers accounted for 90% of Suttle’s sales in the first nine months of 2017 compared to 91% of sales in 2016. Sales to distributors decreased 7% in 2017 due to the continued decline in DSL product sales and the impact from the discontinuation of certain legacy products, and accounted for 8% and 6% of sales in the first nine months of 2017 and 2016, respectively. International sales decreased 52% in 2017 and accounted for 2% of Suttle’s first nine month 2017 sales, due to reduced volume from legacy products in major telecommunications customers.
Sales of structured cabling and connecting system products decreased 25% due to volume declines as a result of project delays from major telecommunications customers.
Suttle’s gross margin decreased 87% in the first nine months of 2017 to $441,000 compared to $3,485,000 in the same period of 2016. Gross margin as a percentage of sales decreased to 1.8% from 10.4% in the same period in 2016 primarily due to due to the $417,000 write off of prepaid royalties under a product development agreement and increases to the inventory reserves, driven by Suttle’s decision to discontinue certain legacy products. The margin impact of excess and obsolete inventory adjustments was $3,752,000 in the first nine months of 2017 (15.1% of sales) compared to $589,000 (1.8% of sales) the same period last year. Selling, general and administrative expenses decreased 33% to $6,775,000, or 27.2% of sales, in the first nine months of 2017 compared to $10,038,000, or 30.0% of sales, in the same period in 2016 due to reduced research and development expenditures and ongoing expense control measures. Suttle incurred $495,000 and $2,137,000 in research and development expenses in the respective 2017 and 2016 first nine months. Suttle incurred $2,326,000 in restructuring expense in the first nine months of 2017 related to the planned closure of its Costa Rica facility in 2017.
Suttle incurred an operating loss of $8,660,000 in the first nine months of 2017 compared to an operating loss of $6,553,000 in 2016.
Transition Networks Results
Transition Networks sales decreased 8% to $27,831,000 in the first nine months of 2017 compared to $30,294,000 in 2016. Transition Networks organizes its sales force by vertical markets and segments its customers geographically. First nine month sales by region are presented in the following table:
Transition Networks Sales by Region | ||||||||
2017 | 2016 | |||||||
North America | $ | 22,560,000 | $ | 24,296,000 | ||||
Rest of World | 3,751,000 | 3,888,000 | ||||||
Europe, Middle East, Africa (“EMEA”) | 1,520,000 | 2,110,000 | ||||||
$ | 27,831,000 | $ | 30,294,000 |
The following table summarizes Transition Networks’ 2017 and 2016 first nine months sales by its major product groups:
Transition Networks Sales by Product Group | ||||||||
2017 | 2016 | |||||||
Media converters | $ | 16,004,000 | $ | 18,817,000 | ||||
Ethernet switches and adapters | 5,750,000 | 6,083,000 | ||||||
Other products | 6,077,000 | 5,394,000 | ||||||
$ | 27,831,000 | $ | 30,294,000 |
Sales in North America decreased $1,736,000, or 7%, due to delays in federal projects and disruptions in our supply chain. International sales decreased $727,000, or 12%, due to continued weakness in the EMEA region and project timing. Media converter sales decreased 15% or $2,813,000 due to delays in federal spending. Sales of ethernet switches and adapters decreased 5% or $333,000 due to delays in federal projects. All other products increased 13% or $683,000 due to strong accessory sales.
Gross margin on first nine month sales decreased 7% to $12,164,000 in 2017 as compared to $13,024,000 in 2016. Gross margin as a percentage of sales increased to 43.7% in 2017 from 43.0% in 2016 due to favorable product mix and efficiencies in manufacturing operations. Selling, general and administrative expenses decreased 13% to $11,481,000, or 41.3% of sales, in 2017 compared to $13,224,000, or 43.7% of sales, in 2016 due to actions taken in 2016 to reduce selling and administrative expenses.
Transition Networks had operating income of $683,000 in 2017 compared to an operating loss of $200,000 in 2016.
JDL Technologies Results
JDL Technologies sales decreased 15% to $10,504,000 in the first nine months of 2017 compared to $12,360,000 in 2016.
JDL’s revenues by customer group were as follows:
JDL Revenue by Customer Group | ||||||||
2017 | 2016 | |||||||
Education | $ | 8,085,000 | $ | 9,154,000 | ||||
Healthcare and commercial clients | 2,419,000 | 3,206,000 | ||||||
$ | 10,504,000 | $ | 12,360,000 |
Revenues from the education sector decreased $1,069,000 or 12% in the first nine months of 2017 as compared to the 2016 first nine months due to the timing of the current network refresh cycle. Revenue from sales to small and medium-sized commercial businesses (SMBs), which are primarily healthcare and commercial clients, decreased $787,000, or 25% due to a decrease in the number of infrastructure and professional services projects completed in the first nine months, due, in part, to JDL’s continued focus on building managed services revenue rather than incident-based or project-based opportunities, and fewer bids for, and therefore, contracts for infrastructure refresh projects.
Gross margin decreased 35% to $2,805,000 in the first nine months of 2017 compared to $4,335,000 in the same period in 2016. Gross margin as a percentage of sales decreased to 26.7% in 2017 compared to 35.1% in 2016 due to a lower margin project in our education sector during the second quarter of 2017. Selling, general and administrative expenses decreased 37% in 2017 to $1,604,000, or 15.3% of sales, compared to $2,531,000, or 20.5% of sales, in 2016 due to cost saving measures taken over the past year.
JDL Technologies reported an operating loss of $262,000 in the first nine months of 2017 compared to operating income of $1,804,000 in the same period of 2016, due to a $1,463,000 goodwill impairment loss recognized in the second quarter of 2017.
Net2Edge Results
Net2Edge’s sales decreased 50% to $719,000 in the first nine months of 2017 compared to $1,434,000 in 2016 due to a large legacy customer project in the second quarter of 2016. Gross margin decreased 39% to $457,000 in the first nine months of 2017 compared to $752,000 in the same period of 2016. Gross margin as a percentage of sales increased to 63.6% in 2017 from 52.4% in 2016 due to lower margins realized on the large customer project in 2016. Selling, general and administrative expenses decreased 10% in 2017 to $2,244,000 compared to $2,499,000 in 2016 due primarily to the decrease in the exchange rate. Net2Edge reported an operating loss of $1,941,000 in the first nine months of 2017 compared to a loss of $1,747,000 in the same period of 2016, due to a $154,000 impairment loss related to intangible assets during the second quarter of 2017.
Income Taxes
The Company’s loss before income taxes increased to $10,195,000 in 2017 compared to $6,032,000 in 2016. The Company’s effective income tax rate was 0.7% in 2017 and (4.0%) in 2016. This effective tax rate for 2017 differs from the federal tax rate of 35% due to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, provisions for interest charges for uncertain income tax positions, stock compensation shortfalls and changes in valuation allowances related to deferred tax assets.
Liquidity and Capital Resources
As of September 30, 2017,2022, the Company had approximately $17,792,000$10,236,453 in cash, restricted cash and cash equivalents, and liquid investments. Of this amount, $8,986,000$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 and certificates of deposit that are insured through the FDIC.cash. The Company also had $725,000$2,654,383 in investments consisting of certificates of depositcorporate notes and bonds that are traded on the open market and are classified as available-for-sale at September 30, 2017.2022.
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 $38,157,000$8,535,469 at September 30, 2017,2022, consisting of current assets of approximately $48,277,000$17,205,232 and current liabilities of $10,120,000$8,669,763, compared to working capital of $44,005,000$(2,872,233) at December 31, 20162021 consisting of current assets of $55,373,000$18,966 and current liabilities of $11,368,000.$2,891,199.
Cash flow provided byused in operating activities was approximately $2,728,000$6,341,172 in 2017the first nine months of 2022 as compared to $2,942,000 used$563,359 in the same period of 2016.2021. Significant working capital changes from December 31, 20162021 to September 30, 20172022 included a decreasean increase in inventorycustomer deposits of $7,232,000, offset by$4,462,156, a decrease in accounts payable of $1,648,000. Additionally,$3,065,340 and an increase in accounts receivable of $1,236,634.
Net cash used in investing activities was $2,300,726 in the Company had a $1,617,000 non-cash impairment charge.
Netfirst 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 $4,908,000primarily related to $10,199,835 in 2017net cash paid for the HEC Asset Acquisition and $1,097,000the merger, partially offset by $6,297,115 in 2016, due to proceeds from the sale of investments.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 used inprovided by financing activities was $1,023,000$16,205,002 in 2017the first nine months of 2022 compared to $4,644,000 used$150,000 in financing activitiesthe same period of 2021. In the first quarter of 2022, the Company received $32,000,000 in 2016. Cash dividendsproceeds from the issuance of preferred stock and warrants to PIPE Investors and paid on common stock decreased to $1,097,000$2,699,370 in 2017 ($0.12 per common share) from $4,269,000 in 2016 ($0.36 per common share). Proceeds from common stock issuances, principally shares sold to the Company’s Employee Stock Ownership Plan and issued under the Company’s Employee Stock Purchase Plan, totaled approximately $82,000 in 2017 and $118,000 in 2016.related issuance costs. The Company did not repurchase any sharesalso paid $4,500,000 in 2017 or 2016 underprincipal against the Board-authorized program. At September 30, 2017, BoardHercules term loan in the first quarter of Director authority to purchase approximately 411,910 additional shares remained2022, as discussed further in effect.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 Company acquired $8,000Short-Term Note matures on August 9, 2023. Also as discussed above, of the amounts of cash, restricted cash, cash equivalents and $26,000 in 2017 and 2016, respectively, of Company stock from employees to satisfy withholding tax obligations related to share-based compensation, pursuant to terms of Board and shareholder-approved compensation plans.
The Company has a $15,000,000 line of credit from Wells Fargo Bank. Interest on borrowingsinvestments on the credit line is at LIBOR plus 2.0% (3.2%balance sheet at September 30, 2017). The Company had no outstanding borrowings against2022, $4,578,099 consist of funds that can only be used to support the line of credit at September 30, 2017. The creditlegacy CSI business, are restricted under the CVR agreement expires August 12, 2021 and is secured by assetscannot be used to support the working capital needs of the Company.Pineapple Energy business.
Based on the Company’s current financial position, the Company’s forecasted future cash flows for twelve months beyond the date of issuance of the financial statements in this report indicate that the Company will not have sufficient cash to repay the Short-Term Note obligation, a factor which raises substantial doubt about the Company’s ability to continue as a going concern.
As a result, the Company requires additional funding and operating positionseeks 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 projected future expenditures, sufficientfinancial 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 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.
Contingent Value Rights and Impact on Cash
As discussed in Note 3, Business Combinations, the Company issued CVRs prior to the closing of the merger to CSI shareholders of record on the close of business on March 25, 2022. The CVR entitles the holder to a portion of the cash, cash equivalents, investments and net proceeds of any divestiture, assignment, or other disposition of all legacy assets of CSI and/or its legacy subsidiaries, JDL and Ecessa, that are related to CSI’s pre-merger business, assets, and properties that occur during the 24-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 pre-merger business working capital and related long term-assets and liabilities are not available to meetfund the Company’s anticipated operating andworking capital expenditure needs. of the post-merger company.
Critical Accounting PoliciesEstimates
Our criticalThe discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting policies, includingprinciples in the assumptionsUnited States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments underlying them, are discussed in our 2016 Form 10-K in Note 1 Summarythat affect the reported amounts of Significant Accounting Policies included in our Consolidated Financial Statements. There were no significant changes to our critical accounting policiesassets and 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 nine months ended September 30, 2017.
The Company’s accounting policies have been consistently applied in all material respects and disclose matters such as allowance for doubtful accounts, sales returns, inventory valuation, warranty expense, income taxes, revenue recognition, asset impairment recognition and foreign currency translation. On an ongoing basis,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, the result of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Resultscircumstances. Actual results may differ from these estimates dueand such differences could be material to actual outcomes being different fromour 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 based our assumptions. Management reviewsconsider 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 in deferred tax assets and liabilities, which 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 to
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 ongoingamount 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 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 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 made available to the customer by the third-party vendor, which are required to be presented on a net basis. Depending on the nature of the service, certain professional services transfer control at a point in time. The Company evaluates these circumstances on a
case-by-case basis to determine if revenue should be recognized over time or at a point in time. See Note 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 15, Recent2, Summary of Significant Accounting Pronouncements,Policies, to the Condensed Consolidated Financial Statements.Statements included in this report.
Item 3
.Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
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. At September 30, 2017 our bank line of credit carried a variable interest rate based on LIBOR plus 2.0%. As noted above, we had no outstanding borrowings at September 30, 2017.
Based on the Company’s operations, in the opinion of management, no material future losses or exposure exist relative to market risk.
Item 4
.Controls and Procedures
(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 the third quarter of 2017three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the registrant’sour internal control over financial reporting, except forreporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 1A. Risk Factors
In addition to the successful implementation of the remediation planother information set forth in this section. As disclosedQuarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, we concluded that2021 (the “Form 10-K”), which could materially affect our internal control overbusiness, financial reportingcondition 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 (2) “Risks Related to CSI Following Termination of the Merger” applicable if the merger was not effective. As detailed below, management concludedconsummated. Since the merger was consummated, the Combined Company Risks apply.
There 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 financial statements in this report indicate that the Company’ internal control over financial reporting was effective at September 30, 2017.
Financial Management/Enterprise Resource Planning Systems.
Based on management’s testing and evaluation, we identifiedCompany will not have sufficient cash to repay the Short-Term Note obligation. As a material weakness in our internal controls at December 31, 2016 surrounding segregation of duty conflicts in our financial management/enterprise resource planning (“ERP”) systems. We did not design and maintain processes (i) to restrict access to appropriate users or (ii) to evaluate whether appropriate segregation of duties was maintained throughout the year. Several individuals had access to programs and data, or had approval authority, beyond what they needed to perform their individual job responsibilities, and result, the Company didrequires 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 maintain adequate independent monitoring of these individuals. In addition, we did not trackbe available on terms acceptable to the Company, or verify changes madeat all. If the Company is unable to our vendor master file data were appropriate. These failuresraise additional funds, it would have allowed individual users to override other internal controls by setting up a vendor and approving payments to that vendor.
We have performed incremental procedures and concluded that the segregation of duty conflicts did not result in misstatements within the Company’s consolidated financial statements. We concluded, however, that there was a reasonable possibility that a material misstatement in the Company’s consolidated financial statements may not have been prevented or detected on a timely basis.
In order to remediate the material weakness related to segregation of duty conflicts within our ERP systems, we completed a thorough assessment of system access and have modified access accordingly to either reduce or eliminate conflicts wherever possible and have designed, implemented and tested compensating controls for design and operating effectiveness in those instances where complete duty segregation could not be achieved without substantial negative impact on ourthe Company’s business, operations.results of operations and financial condition.
As a resultRaising 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 management actions andsecurities may include liquidation or other preferences that adversely affect the remediation actions completed duringrights of the first, second and third quarters of 2017, andCompany’s common shareholders. To the related controls validation testing performed, management has concludedextent that the material weaknessCompany 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 the 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 segregation of duty conflicts within our financial management/enterprise resource planning systems was remediated as of September 30, 2017.
Goodwill Impairment Testing. Based on management’s testing and evaluation, we determined that we did not design and maintain effective internal control over our step one goodwill impairment testing that we performedentering geographic regions or industries in accordance with ASC 350,Intangibles – Goodwill and Other as of December 31, 2016 and April 1, 2017. Specifically, the Company’s review control did not operate at a sufficient level of precision to identify the improper assumptions used in our step one goodwill impairment test for our JDL reporting unit. We concluded that this lack of detailed analysis was a material weakness in our internal controls.
In January 2017, the FASB issued new accounting guidance regarding the simplification of the test for goodwill impairment. The new standard eliminates the quantitative goodwill impairment analysis requirement to determine the fair value of individual assets and liabilities of a reporting unit to determine the amount of any goodwill impairment and instead permits an entity to recognize goodwill impairment loss as the excess of a reporting unit’s carrying value over the estimated fair value of the reporting unit, the extent this amountwhich it does not exceed have prior experience; and
the carrying amountpotential loss of goodwill. The Company chose to adopt this standard early for the annual impairment analysis in 2017.key employees or existing customers or adverse effects on existing business relationships with suppliers and customers.
In the second quarter of 2017,Additionally, the Company performed the first step of the previous two-step process, which requirescannot ensure that the fair valueexpected benefits of SUNation acquisition will be realized or will be realized within the reporting unit be compared to its book value, including goodwill. Iftime frames it expects. Unforeseen issues could arise which adversely affect the fair value is higher than the book value, no impairment is recognized. If the fair value is lower than the book value, an impairment adjustment must be recorded. The Company analyzed the reporting unit that had the goodwill and initially concluded that the fair value of that reporting unit was greater than its book value, and the Company wasanticipated returns or which are otherwise not required to impair the goodwill. Upon further review and after analyzing the Companyrecoverable through indemnification or as a whole, the Company determined that some assumptions it used in the determination of the fair value of the reporting unit required revision, resulting in a determination that the fair value of the reporting unit was less than the book value of the reporting unit. The Company also analyzed the Company as a whole, including the Company’s four separate reporting units. Based on this analysis of comparing the fair value of each reporting unit to the book value and comparing the Company’s overall book value with its market capitalization, the Company determined that the book value exceeded the overall fair value of the reporting units as well as the Company’s overall market value. As a result, the Company recorded an adjustment to record a goodwill impairment charge totaling $1,463,000 during the second quarter of 2017, which reduced our balance sheet amountpurchase price. The price the Company paid for goodwill to $0.
Becausethe 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 inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will beSUNation acquisition within the time it expects or have been detected. These inherent limitations includeat all.
In connection with the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented bySUNation acquisition, the individual acts of some persons, by collusion of two or more people, or by management overrideCompany incurred additional indebtedness with the issuance of the control. The designShort-Term Note and the Long-Term Note. While the Short-Term Note remains outstanding, the Company is subject to certain negative covenants with respect to the operation of any systemthe Acquired Companies, including limits on distributions, the incurrence of controls also is based in part upon certain assumptions aboutindebtedness, imposition of liens, and sales of assets outside the likelihoodordinary course of future eventsbusiness.
Further, although the Company looks to expand further through the acquisition of regional residential solar companies and energy technology solution providers, there can be no assurance that the Company will be able to find appropriate candidates for acquisitions, reach agreement to acquire them, have sufficient capital or funding to acquire them, or obtain any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions,required shareholder or regulatory approvals needed, despite the degree of compliance with the policies or procedures may deteriorate.effort and management attention invested.
Except as noted above, there were no other changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings
Not Applicable.
Item 1A. Risk Factors
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
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:
Certification of |
Certifications pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). | ||
Press Release dated November 14, 2022 Announcing Third Quarter Results | ||
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) |
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.
Pineapple Energy Inc. | |||||
By | /s/ Kyle Udseth | ||||
Kyle Udseth | |||||
Date: November | Chief Executive Officer |
By | /s/ Eric Ingvaldson | |||
Eric Ingvaldson | ||||
Date: November | Chief Financial Officer |