本季度的10-Q表格中包含根據1933年證券法（經修訂）第27A條和1934年證券交易法（經修訂）第21E條的前瞻性陳述，涉及未來事件或我們未來的財務表現，包括但不限於涉及Spruce Power Holding Corporation（「公司」）的業務和財務計劃、戰略和前景、我們的增長計劃、未來的財務和運營結果、成本和費用、事件可能結果、財務狀況、運營結果、流動性、成本節約、業務策略，包括根據公司於2024年9月簽署的非約束性意向書擬議的收購約1萬套家庭太陽能資產及合同（「潛在收購」），以及其他並非歷史事實的陳述。前瞻性陳述可通過使用「預期」、「相信」、「可能」、「期望」、「打算」、「可能性」、「計劃」、「預測」、「潛力」、「估計」、「應當」、「將」、「可能」等前瞻性詞語或短語來識別，或這些術語的否定形式或類似含義的其他詞語。這些陳述基於公司目前的計劃和戰略，反映了公司對與其業務相關的風險和不確定性的當前評估，並截至本報告日期作出。這些陳述本質上受已知和未知風險和不確定性的影響。請仔細閱讀這些陳述，因爲它們討論我們的未來期望或陳述其他「前瞻性」信息。未來可能發生我們無法準確預測或控制的事件，我們的實際結果可能與我們在前瞻性陳述中描述的預期有重大不同。目前可能導致實際結果與目前預期有重大不同的因素包括：
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Organization and Description of Business
Description of Business
Spruce Power Holding Corporation and its subsidiaries (“Spruce Power” or the “Company”) is a leading owner and operator of distributed solar energy assets across the United States (the “U.S.”), offering subscription-based services to approximately 75,000 home solar assets and customer contracts, making renewable energy more accessible to everyone.
The Company is engaged in the ownership and maintenance of home solar energy systems for homeowners in the U.S. The Company provides clean, solar energy typically at savings compared to traditional utility energy. The Company’s primary customers are homeowners and the Company’s core solar service offerings generate revenues primarily through (i) the sale of electricity generated by its home solar energy systems to homeowners pursuant to long-term agreements, which requires the Company’s subscribers to make recurring monthly payments, (ii) third party contracts to sell solar renewable energy credits (“SRECs”) generated by the solar energy systems for fixed prices and (iii) the servicing of those agreements for other institutional owners of home solar energy systems. In addition, the Company generates cash flows and earns interest income from an investment through a master lease agreement described below.
The Company holds subsidiary fund companies, defined below as the Funds, that own and operate portfolios of home solar energy systems, which are subject to solar lease agreements (“SLAs”) and power purchase agreements (“PPAs”, together with the SLAs, “Customer Agreements”) with residential customers who benefit from the production of electricity generated by the solar energy systems. The solar energy systems may qualify for subsidies, renewable energy credits and other incentives as provided by various states and local agencies. These benefits have generally been retained by the Company's subsidiaries that own the systems, with the exception of the investment tax credit (“ITCs”) under Section 48 of the Internal Revenue Code, as amended, which were generally passed through to the various financing partners of the solar energy systems. The Company also offers services which include asset management services and operating and maintenance services for home solar energy systems.
Historically, the Company provided fleet electrification solutions for commercial vehicles in North America, offering its systems for vehicle electrification (the “Drivetrain” operations) and through its energy efficiency and infrastructure solutions business, offering and installing charging stations to enable customers develop the charging infrastructure required for their electrified vehicles (the “XL Grid” operations). The Company ceased the Drivetrain and XL Grid operations in late 2022, and both are presented as discontinued operations in the unaudited condensed consolidated financial statements (see Note 16. Discontinued Operations).
Note 2. Summary of Significant Accounting Policies
Basis of unaudited condensed consolidated financial statement presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 8 of Regulation S-X. The Company has condensed or omitted certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. As such, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s 2023 annual audited consolidated financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2023. The Company’s interim unaudited condensed consolidated financial statements reflect all normal and recurring adjustments necessary, in its opinion, to state fairly the financial position and results of operations for the reported periods. Amounts reported for interim periods may not be indicative of a full year period due to the Company’s continual growth, seasonal fluctuations in solar energy generation, timing of maintenance and other expenditures, changes in interest expense and other factors.
The Company's accompanying unaudited condensed consolidated financial statements include the accounts of its wholly owned subsidiaries and variable interest entities (“VIEs”), for which the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies, continued
reclassified to conform to the Company’s current presentation and such reclassifications had no effect on the Company’s previously reported financial position, results of operations, or cash flows.
On October 6, 2023, the Company effected a one-for-eight reverse stock split with respect to its issued and outstanding shares of common stock (the “Reverse Stock Split”). Excluding the par value and the number of authorized shares of the Company’s common stock, all share amounts, all per share amounts, and the values of the common stock outstanding and related effect on additional paid in capital included in this Form 10-Q have been retrospectively presented as if the Reverse Stock Split had been effective from the beginning of the earliest period presented.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of income and expenses during the reporting period. The Company’s most significant estimates and judgments involve (i) deferred income taxes, (ii) warranty reserves, (iii) valuation of stock-based compensation, (iv) valuation of warrant liability, (v) the useful lives of certain assets and liabilities, (vi) the allowance for current expected credit losses and (vii) the valuation of business combinations, including the fair values and useful lives of acquired assets and assumed liabilities, goodwill and the fair value of purchase consideration of asset acquisitions. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to the Company’s financial statements.
Variable interest entities
The Company consolidates any VIE of which it is the primary beneficiary. The Company formed or acquired VIEs which are partially funded by tax equity investors in order to facilitate the funding and monetization of certain attributes associated with solar energy systems. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. A variable interest holder is required to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company does not consolidate a VIE in which it has a majority ownership interest when the Company is not considered the primary beneficiary. The Company evaluates its relationships with the VIEs on an ongoing basis to determine if it is the primary beneficiary. The Company's initial investments in Volta Solar Owner II, LLC and ORE F4 HoldCo, LLC (collectively, the “Funds”) were determined to be VIEs and remained as such as of September 30, 2024. During the three months ended September 30, 2023, the Company purchased all membership interests in Level Solar Fund IV and it ceased being a VIE as of September 30, 2023.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents include cash held in banks, money market accounts, and U.S. Treasury securities. Cash equivalents are carried at cost, which approximates fair value due to their short-term nature. The Company’s cash and cash equivalents are placed with large financial institutions, and at times exceed federally insured limits. To date, the Company has not experienced any credit loss relating to its cash and cash equivalents.
Concentration of credit and revenue risks
Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents. At times, such cash may be in excess of the Federal Deposit Insurance Corporation limit. At September 30, 2024 and December 31, 2023, the Company had cash in excess of the $250,000 federally insured limit. The Company
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies, continued
believes that its credit risk is not significant on cash and cash equivalents as most of the balances are kept in treasury bills, which are government backed securities.
For the three and nine months ended September 30, 2024 and 2023, the Company had no customers that represented at least 10% of the Company’s revenues. As of September 30, 2024 and December 31, 2023, the Company had no customers that represented at least 10% of the Company’s accounts receivable balances.
Restricted cash
Restricted cash held at September 30, 2024 and December 31, 2023 of $36.3 million and $31.6 million, respectively, primarily consists of cash that is subject to restriction due to provisions in the Company's financing agreements and the operating agreements of the Funds. The carrying amount reported in the unaudited condensed consolidated balance sheets for restricted cash approximates its fair value.
The following table provides a reconciliation of the Company’s cash and cash equivalents and restricted cash balances to the total amounts shown in the unaudited condensed consolidated statements of cash flows for the end of the periods:
As of
(Amounts in thousands)
September 30, 2024
September 30, 2023
Cash and cash equivalents
$
113,658
$
154,209
Restricted cash
36,323
38,524
Total cash, cash equivalents and restricted cash
$
149,981
$
192,733
Accounts receivable, net
Accounts receivable primarily represent amounts due from the Company’s customers. Accounts receivable is recorded net of an allowance for expected credit losses, which is determined by the Company’s assessment of the collectability of customer accounts based on the best available data at the time of the assessment. Management reviews the allowance by considering factors such as historical experience, contractual term, aging category and current economic conditions that may affect customers.The following table presents the changes in the allowance for credit losses recorded against accounts receivable, net on the unaudited condensed consolidated balance sheets:
As of
(Amounts in thousands)
September 30, 2024
December 31, 2023
Balance at the beginning of the period
$
1,693
$
12,164
Impact of ASC 326 adoption
—
(1,285)
Write-off of uncollectible accounts
(1,881)
(11,447)
Provision recognized upon valuation of assets acquired
—
420
Provision for current expected credit losses
1,128
1,841
Balance at the end of the period
$
940
$
1,693
Investment related to SEMTH master lease agreement and interest income
The Company accounts for its investment related to the SEMTH (as defined below) master lease agreement in accordance with Accounting Standards Codification (“ASC”) 325-40, Investments—Other—Beneficial Interests in Securitized Financial Assets. The Company recognizes accretable yield as interest income over the life of the related beneficial interest using the effective yield method, which is reflected within interest income in the unaudited condensed consolidated statements of operations in the amount of $4.8 million and $12.3 million for the three and nine months ended September 30, 2024, respectively. On a recurring basis, the Company evaluates changes in the cash flows expected to be collected from the cash flows previously projected, and when favorable or adverse changes are deemed other than temporary, the
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies, continued
Company prospectively updates its expectation of cash flows to be collected and recalculates the amount of accretable yield for the related beneficial interest.
Favorable or adverse changes deemed other than temporary are accounted for as a change in estimate in conformity with ASC 250, Accounting Changes and Error Corrections, with the amount of periodic accretion adjusted over the remaining life of the master lease agreement. During the three months period ended September 30, 2024, the Company revised its estimated cash flows expected to be collected related to the SEMTH master lease agreement. As a result, the Company recognized additional accretable yield of $0.9 million within interest income in the unaudited condensed consolidated statements of operations. The Company estimates approximately $3.0 million of additional interest income per year over the life of the related beneficial interest.
Impairment of long-lived assets
The Company reviews long-lived assets, such as property and equipment and intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that an asset group’s carrying amount may not be recoverable. The Company groups assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluates the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value. There were no long-lived asset impairment charges for the three and nine months ended September 30, 2024 and 2023.
Impairment of goodwill
Goodwill represents the excess of cost over the fair market value of tangible and intangible assets acquired and liabilities assumed of acquired businesses. Goodwill is not amortized, however it is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. The Company has historically recorded goodwill in connection with its business acquisitions.
The Company performs its annual goodwill impairment assessment on October 1 of each fiscal year, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. An assessment can be performed by first completing a qualitative assessment of the Company’s single reporting unit. The Company can also bypass the qualitative assessment in any period and proceed directly to the quantitative impairment test, and then resume the qualitative assessment in any subsequent period. Qualitative indicators that may trigger the need for annual or interim quantitative impairment testing include, among other things, deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of the reporting unit. Additionally, a significant change in business climate, a loss of a significant customer, increased competition, a sustained decrease in share price, or a decrease in estimated fair value below book value may trigger the need for interim impairment testing of goodwill.
If the Company believes that, as a result of its qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the quantitative impairment test is required. The quantitative test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recorded as a reduction to goodwill with a corresponding charge to earnings in the period the goodwill is determined to be impaired. The income tax effect associated with an impairment of tax-deductible goodwill is also considered in the measurement of the goodwill impairment. Any goodwill impairment is limited to the total amount of goodwill.
The Company evaluates the fair value of the Company’s reporting unit using the market and income approach. Under the market approach, the Company uses multiples of EBITDA or revenues of the comparable guideline public companies by selecting a population of public companies with similar operations and attributes. Using this guideline public company data, a range of multiples of enterprise value to EBITDA or revenue is calculated. The income approach of computing fair value is based on the present value of the expected future economic benefits generated by the asset or business, such as cash flows or profits which will then be compared to its book value. See Note 11. Goodwill for further information on the Company’s determination relating to impairment of goodwill.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies, continued
Contingencies
When it is probable that a loss has occurred and the loss amount can be reasonably estimated, the Company records liabilities for loss contingencies. In certain cases, the Company may be covered by one or more corporate insurance policies, resulting in insurance loss recoveries. When such recoveries are in excess of a loss recognized in the Company’s financial statements, the Company recognizes a gain contingency at the earlier of when the gain has been realized or when it is realizable, however when the Company expects recovery of proceeds up to the amount of the loss recognized, a receivable, which offsets the related loss contingency, is recognized when realization of the claim for recovery is determined to be probable.
Fair value measurements
The fair value of the Company’s financial assets and liabilities reflects Management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair value measurement as follows:
•Level 1: Observable inputs that reflect unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
•Level 2: Observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy must be determined based on the lowest level input that is significant to the fair value measurement. An assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability being measured.
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, net, accounts payable, accrued expenses and other current liabilities, non-recourse debt, and interest rate swaps. The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses and other current liabilities approximates fair value due to the short-term nature of those instruments. See Note 10. Fair Value Measurements for additional information on assets and liabilities measured at fair value.
Revenues
The Company’s revenue is derived from its home solar energy portfolio and servicing platform, which primarily generates revenue through the sale to homeowners of power generated by the home solar energy systems and the rental of solar equipment by certain homeowners, pursuant to long-term agreements. Pursuant to Accounting Standard Codification 606 (“ASC 606”) defined below, the Company has elected the “right to invoice” practical expedient, and revenues for the performance obligations related to energy generation and servicing revenue are recognized as services are rendered based upon the underlying contractual arrangements.
The following table presents the detail of the Company’s revenues as reflected within the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2024 and 2023:
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies, continued
Three Months Ended September 30,
Nine Months Ended September 30,
(Amounts in thousands)
2024
2023
2024
2023
PPA revenues
$
11,458
$
11,370
$
31,297
$
30,731
SLA revenues
6,702
7,596
20,574
22,543
Solar renewable energy credit revenues
1,222
2,072
4,396
5,268
Government incentives
110
68
333
164
Servicing revenues
178
100
534
325
Intangibles amortization, unfavorable solar renewable energy agreements
746
974
2,239
2,393
Other revenues
962
1,070
2,508
2,734
Total
$
21,378
$
23,250
$
61,881
$
64,158
Energy generation
Customers purchase solar energy from the Company under PPAs or SLAs, both defined above. Revenue is recognized from contracts with customers as performance obligations are satisfied at a transaction price reflecting an amount of consideration based upon an estimated rate of return which is expressed as the solar rate per kilowatt hour or a flat rate per month as defined in the customer contracts.
•PPA revenues - Under ASC 606, Revenue from Contracts with Customers issued by the Financial Accounting Standards Board (“FASB”), PPA revenue is recognized when generated based upon the amount of electricity delivered as determined by remote monitoring equipment at solar rates specified under the PPAs.
•SLA revenues - The Company has SLAs, which do not meet the definition of a lease under ASC 842, Leases, and are accounted for as contracts with customers under ASC 606. Revenue is recognized on a straight-line basis over the contract term as the obligation to provide continuous access to the solar energy system is satisfied. The amount of revenue recognized may not equal customer cash payments due to the performance obligation being satisfied ahead of cash receipt or evenly as continuous access to the solar energy system has been provided. The differences between revenue recognition and cash payments received are reflected as deferred rent assets on the unaudited condensed consolidated balance sheets. Certain SLAs contain provisions to provide customers a performance guarantee that each solar energy system will achieve certain specified minimum solar energy production output. If the solar energy system does not produce the guaranteed production amount, the Company is obligated to pay a performance guarantee calculated as the product of (a) the shortfall production amount and (b) guaranteed rate per kWh as defined in the SLA.
Solar renewable energy credit revenues
The Company enters contracts with third parties to sell Solar Renewable Energy Credits ("SRECs") generated by the solar energy systems for fixed prices. Certain contracts that meet the definition of a derivative may be exempted as normal purchase or normal sales transactions ("NPNS"). NPNS are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Certain SREC contracts meet these requirements and are designated as NPNS contracts. Such SRECs are exempted from the derivative accounting and reporting requirements, and the Company recognizes revenues in accordance with ASC 606. The Company recognizes revenue for SRECs based on pricing predetermined within the respective contracts at a point in time when the SRECs are transferred. As SRECs can be sold separate from the actual electricity generated by the renewable-based generation source, the Company accounts for the SRECs it generates from its solar energy systems as governmental incentives and do not consider those SRECs output of the underlying solar energy systems. The Company classifies these SRECs as inventory held until sold and delivered to third parties. As the Company did not incur costs to obtain these governmental incentives, the inventory carrying value for the SRECs was $0 as of September 30, 2024 and December 31, 2023.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies, continued
Deferred revenue
Deferred revenue consists of amounts for which the criteria for revenue recognition have not yet been met and includes prepayments received for unfulfilled performance obligations that will be recognized on a straight-line basis over the remaining term of the respective customer agreements. Deferred revenue, in the aggregate, as of September 30, 2024 and December 31, 2023 was $4.6 million and $2.7 million, respectively. The Company recognized revenues of $0.1 million related to deferred revenue as of the start of the period during each of the three and nine months ended September 30, 2024 and 2023.
Income taxes
The Company accounts for income taxes using the asset and liability method under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss and tax credit carryforwards. Deferred income taxes are provided for the temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and net operating loss carry-forwards and credits. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which the differences are expected to be recovered or settled. The effect of changes in tax rates on deferred tax assets and liabilities is recognized in the unaudited condensed consolidated statements of operations in the period in which the enactment rate changes. The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income and other factors, such as the taxing jurisdiction in which the asset is to be recovered. Deferred tax assets are reduced through the establishment of a valuation allowance if, based on available evidence, it is more likely than not that the deferred tax assets will not be realized.
Uncertain tax positions taken or expected to be taken in a tax return are accounted for using the more likely than not threshold for financial statement recognition and measurement. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. For the three and nine months ended September 30, 2024 and 2023, there were no uncertain tax positions taken or expected to be taken in the Company’s tax returns.
In the normal course of business, the Company is subject to regular audits by U.S. federal and state and local tax authorities. With few exceptions, the Company is no longer subject to federal, state or local tax examinations by tax authorities in its major jurisdictions for tax years prior to 2021. However, net operating loss carryforwards remain subject to examination to the extent they are carried forward and impact a year that is open to examination by tax authorities.
The Company did not recognize any tax related interest or penalties during the periods presented in the accompanying unaudited condensed consolidated financial statements, however, would record any such interest and penalties as a component of the provision for income taxes.
There has historically been no federal or state provision for income taxes since the Company has historically incurred net operating losses and maintains a full valuation allowance against its net deferred tax assets. For the three and nine months ended September 30, 2024 and 2023, the Company recognized no provision for income taxes consistent with its losses incurred and the valuation allowance against its deferred tax assets. As a result, the Company's effective income tax rate was 0% for the three and nine months ended September 30, 2024 and 2023.
Related parties
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, the board of directors, as well as members of their immediate families and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or that has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies, continued
SEC Climate Disclosure Rule
In March 2024, the SEC adopted final rules requiring public entities to disclose certain climate-related information in their registration statements and annual reports. The rules will be effective for non-accelerated filers and smaller reporting companies commencing with the fiscal year beginning on or after January 1, 2027. In April 2024, the SEC issued an administrative stay of the implementation of these rules, pending judicial review. The Company is evaluating the impact of the final rules on its unaudited condensed consolidated financial statements and related disclosures.
Recent Accounting Pronouncements
In December 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, (“ASU 2023-09”), which requires enhancements regarding the transparency and decision usefulness of income tax disclosures. ASU 2023-09 is effective for the Company on December 31, 2025. The Company will adopt this ASU as of December 31, 2025 and will prospectively apply its requirements to income tax disclosures presented in the notes to the condensed consolidated financial statements in the period of adoption. The Company is currently evaluating the impact of this standard but does not expect that it will have a material impact on its unaudited condensed consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvement to Reportable Segment Disclosures, (“ASU 2023-07”), which requires enhanced disclosures for reportable segments, primarily in relation to significant segment expenses, even in the event an entity has a single reportable segment in accordance with Topic 280. ASU 2023-07 is effective for the Company on December 31, 2024. The Company will adopt this ASU as of December 31, 2024 and will retrospectively apply its requirements to all prior periods based on the significant segment expense categories identified and disclosed in its condensed consolidated financial statements in the period of adoption. The Company is currently evaluating the impact of this standard but does not expect that it will have a material impact on its unaudited condensed consolidated financial statements.
Note 3. Business Combinations
Legacy Spruce Power
On September 9, 2022 (the “Acquisition Date”), the Company acquired Spruce Holding Company 1 LLC, Spruce Holding Company 2 LLC, Spruce Holding Company 3 LLC, and Spruce Manager LLC (collectively and together with their subsidiaries, “Legacy Spruce Power”) for $32.6 million, which consisted of cash payments of $61.8 million less cash and restricted cash acquired of $29.2 million. Management evaluated which entity should be considered the accounting acquirer in the transaction by giving consideration to the form of consideration transferred, the composition of the equity holders, the composition of voting rights of the Board of Directors, continuity of management structure, and size of the respective organizations. Based on the evaluation of the applicable factors, management noted that all factors, with the exception of the relative size of organization, were indicators that the Company was the acquiring entity resulting in management’s conclusion that for accounting purposes, the Company acquired Legacy Spruce Power.
The acquisition was accounted for as a business combination. The Company allocated the Legacy Spruce Power purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the Acquisition Date. The excess of the purchase price over those fair values was recorded as goodwill.
The Company’s evaluations of the facts and circumstances available as of the Acquisition Date, to assign fair values to assets acquired and liabilities assumed, remained ongoing subsequent to the Acquisition Date. As the Company completed further analysis of assets including solar systems, intangible assets, as well as noncontrolling interests and non-recourse debt, additional information on the assets acquired and liabilities assumed became available. Changes in information related to the value of net assets acquired changed the amount of the purchase price initially assigned to goodwill, and as a result, the fair values set forth below were subject to adjustments as additional information was obtained and valuations completed. These provisional adjustments were recognized during the reporting period in which the adjustments were determined. The Company has finalized its purchase price allocation as of September 8, 2023.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the Acquisition Date, including the Company’s estimates of the fair value of solar systems, production based incentives,
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3. Business Combinations, continued
solar renewable energy agreements, non-controlling interest, trade name and non-recourse debt, where applicable. The Company believes the assumptions and estimates are based on information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing solar systems under the income approach include future expected cash flows and discount rate. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the acquisition of Legacy Spruce Power, as adjusted, during the measurement period:
(Amounts in thousands)
Initial Purchase Price Allocation
Measurement Period Adjustments
Updated Purchase Price Allocation
Total purchase consideration:
Cash, net of cash acquired, and restricted cash
$
32,585
$
—
$
32,585
Allocation of consideration to assets acquired and liabilities assumed:
Accounts receivable, net
10,995
—
10,995
Prepaid expenses and other current assets
6,768
(2,405)
4,363
Solar energy systems
406,298
89,268
495,566
Other property and equipment
337
—
337
Intangible assets
—
11,980
11,980
Interest rate swap assets
26,698
—
26,698
Right-of-use asset
3,279
(328)
2,951
Other assets
358
(102)
256
Goodwill
158,636
(129,879)
28,757
Accounts payable
(2,620)
(22)
(2,642)
Unfavorable solar renewable energy agreements
—
(10,500)
(10,500)
Accrued expenses
(13,061)
(241)
(13,302)
Lease liability
(3,382)
42
(3,340)
Long-term debt
(510,002)
2,772
(507,230)
Other liabilities
(335)
292
(43)
Redeemable noncontrolling interests and noncontrolling interests
(51,384)
39,123
(12,261)
Total assets acquired and liabilities assumed
$
32,585
$
—
$
32,585
As reflected in the preceding table, as a result of third party valuation reports received in the first quarter of 2023, the Company adjusted solar energy systems and intangible assets with corresponding changes to goodwill. In the first quarter of 2023, due to a change in the provisional amounts assigned to intangible assets and solar energy systems, the Company recognized $0.4 million of revenue, $1.9 million of depreciation expense and $0.4 million of trade name amortization, of which $0.5 million of revenue, $0.9 million of depreciation expense and $0.3 million of trade name amortization related to the previous year.
During the first quarter of 2023, the Company adjusted the fair value of its noncontrolling interest and its redeemable noncontrolling interest in the Company's financials, which resulted in related downward revision of $5.5 million and upward revision of $0.2 million, respectively. Additional paid in capital was also downward revised by $1.8 million, which included the fair value adjustment associated with the purchase of 100% of the membership interests in Ampere Solar Owner IV, LLC, ORE F5A HoldCo, LLC, ORE F6 HoldCo, LLC, RPV Fund 11 LLC and RPV Fund 13 LLC,Sunserve Residential Solar I, LLC's and Level Solar Fund III, LLC in 2022.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3. Business Combinations, continued
The gross intangibles acquired are amortized over their respective estimated useful lives as follows:
(Amounts in thousands)
Asset
Liability
Estimated Life (in years)
Solar renewable energy agreements
$
340
$
10,500
3 to 6
Performance based incentives agreements
3,240
—
13
Trade name
8,400
—
30
Total intangibles acquired
$
11,980
$
10,500
The weighted-average useful life of the intangibles identified above is approximately 16 years, which approximates the period over which the Company expects to gain the estimated economic benefits.
Goodwill represents the excess of the purchase consideration over the estimated fair value of the net assets acquired. Goodwill is primarily attributable to the Company's ability to leverage and use its existing capital and access to capital markets along with Legacy Spruce Power's established operations and mergers and acquisition capabilities to grow the Spruce Power business.
Note 4. Acquisitions
SEMTH Master Lease Agreement
In furtherance of its growth strategy, on March 23, 2023, the Company completed the acquisition of all the issued and outstanding interests in SS Holdings 2017, LLC and its subsidiaries (“SEMTH”) from certain funds, pursuant to a membership interest purchase and sale agreement dated March 23, 2023 (the “SEMTH Acquisition”). SEMTH’s assets include 20-year use rights to customer payment streams of approximately 22,500 home SLAs and PPAs (the “SEMTH Master Lease”). The Company acquired SEMTH for approximately $23.0 million of cash, net of cash received, and assumed $125.0 million of outstanding senior indebtedness under the SP4 Facility (See Note 8. Non-Recourse Debt) and interest rate swaps with Deutsche Bank AG, New York Bank held by SEMTH and its subsidiaries at the close of the acquisition.
The purchase of SEMTH's future revenue has been accounted for as an acquisition of financial assets. Under the acquisition method, the purchase price was allocated to the assets acquired and liabilities assumed based on their relative fair value. All fair value measurements of assets acquired and liabilities assumed were based on significant estimates and assumptions, including Level 3 (unobservable) inputs, which require judgment. Estimates and assumptions include the projected timing and amount of future cash flows, discount rates reflecting risk inherent in future cash flows and future utility prices.
For the purposes of establishing the fair value of the Company's investment in the SEMTH Master Lease, its analysis considered cash flows beginning in March 2023 (the effective date of the transaction). The Company estimated the fair value of its investment in the SEMTH Master Lease to be approximately $146.9 million on the transaction date.
Tredegar Acquisition
On August 18, 2023, the Company acquired approximately 2,400 home solar assets and contracts from a publicly traded, regulated utility company for $20.9 million (the “Tredegar Acquisition”). The home solar assets acquired had an average remaining contract life of approximately 11 years. The Tredegar Acquisition was funded by term loans from the concurrent amendment of the Company’s existing debt facility as of the acquisition date.
The Tredegar Acquisition has been accounted for as an acquisition of assets, wherein the total consideration paid was allocated to the assets acquired and liabilities assumed based on their relative fair value. The Company’s determination of the fair value of assets acquired and liabilities assumed was based on an independent third-party valuation, which involved significant estimates and assumptions, including Level 3 (unobservable) inputs, using the income method approach to value long-lived assets. The Company estimated the fair value of the Tredegar Acquisition to be approximately $21.2 million, inclusive of transaction costs of $0.3 million, of which $19.6 million was allocated to the solar energy systems.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 5. Property and Equipment, Net
Property and equipment, net consisted of the following as of September 30, 2024 and December 31, 2023:
As of
(Amounts in thousands)
September 30, 2024
December 31, 2023
Solar energy systems
$
510,947
$
513,526
Less: Accumulated depreciation
(46,732)
(29,594)
Solar energy systems, net
$
464,215
$
483,932
Equipment
$
—
$
157
Furniture and fixtures
430
461
Computers and related equipment
272
218
Software
—
8
Leasehold improvements
30
59
Gross other property and equipment
732
903
Less: Accumulated depreciation
(252)
(429)
Other property and equipment, net
$
480
$
474
Property and equipment, net
$
464,695
$
484,406
Depreciation expense related to solar energy systems is included within cost of revenues in the unaudited condensed statements of operations, and for the three and nine months ended September 30, 2024 was $5.7 million and $17.1 million, respectively, and for the three and nine months ended September 30, 2023 was $6.3 millionand$17.9 million, respectively. Depreciation expense related to other property and equipment is included within selling, general and administrative expenses in the unaudited condensed statements of operations, and for the three and nine months ended September 30, 2024 was $0.1 million and $0.2 million, respectively, and for each of three and nine months ended September 30, 2023 was $0.1 million.
Note 6. Intangible Assets, Net
The following table presents the detail of intangible assets, net as recorded in the unaudited condensed consolidated balance sheets:
As of
(Amounts in thousands)
September 30, 2024
December 31, 2023
Intangible assets:
Solar renewable energy agreements
$
340
$
340
Performance based incentives agreements
3,240
3,240
Trade name
8,400
8,400
Gross intangible assets
11,980
11,980
Less: Accumulated amortization
(2,713)
(1,784)
Intangible assets, net
$
9,267
$
10,196
Amortization of intangible assets for the three and nine months ended September 30, 2024 was $0.3 million and $0.9 million, respectively. For the three months ended September 30, 2024, $0.1 million and $0.2 million were recorded within revenues and selling, general and administrative expenses in the unaudited condensed consolidated statements of
Notes to Unaudited Condensed Consolidated Financial Statements
operations, respectively, and for the nine months ended September 30, 2024, $0.3 million and $0.6 million were recorded within revenues and selling, general and administrative expenses in the unaudited condensed consolidated statements of operations, respectively. Amortization of intangible assets for the three and nine months ended September 30, 2023 was $0.3 million and $0.9 million, respectively. For the three months ended September 30, 2023, $0.1 million and $0.2 million were recorded within revenues and selling, general and administrative expenses in the unaudited condensed consolidated statements of operations, respectively, and for the nine months ended September 30, 2023, $0.3 million and $0.5 million were recorded within revenues and selling, general and administrative expenses in the unaudited condensed consolidated statements of operations, respectively.
As of September 30, 2024, expected amortization of intangible assets for each of the five succeeding fiscal years and thereafter is as follows:
As of September 30,
(Amounts in thousands)
2024
Remainder of 2024
$
310
2025
1,126
2026
1,122
2027
978
2028
878
Thereafter
4,853
Total
$
9,267
Note 7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following as of September 30, 2024 and December 31, 2023:
As of
(Amounts in thousands)
September 30, 2024
December 31, 2023
Accrued interest
$
11,545
$
8,587
Accrued professional fees
2,249
2,386
Accrued contingencies (See Note 14. Commitments and Contingencies)
Notes to Unaudited Condensed Consolidated Financial Statements
Note 8. Non-Recourse Debt
The following table provides a summary of the Company’s non-recourse debt as of September 30, 2024 and December 31, 2023:
As of
(Amounts in thousands)
Due
September 30, 2024
December 31, 2023
SVB Credit Agreement, SP1 Facility (1)
April 2026
$
202,753
$
214,803
Second SVB Credit Agreement, SP2 Facility (1)
May 2027
80,233
85,231
KeyBank Credit Agreement, SP3 Facility (1)
November 2027
55,260
58,962
Second KeyBank Credit Agreement (1)
April 2030
162,712
162,725
Deutsche Bank Credit Agreement, SP4 Facility
August 2025
—
125,000
Barings GPSF Credit Agreement, SET Facility
April 2042
130,000
—
Less: Unamortized fair value adjustment (1)
(23,348)
(27,600)
Less: Unamortized deferred financing costs (1)
(2,254)
(341)
Total Non-recourse debt
605,356
618,780
Less: Non-recourse debt, current
(28,351)
(27,914)
Non-recourse debt, non-current
$
577,005
$
590,866
(1) In connection with the acquisition of Legacy Spruce Power effective September 9, 2022, the Company assumed all non-recourse debt instruments valued at approximately $507.2 million as of that date. In connection with accounting for the business combination, the Company adjusted the carrying value of this non-recourse debt to its fair value as of the Acquisition Date. This fair value adjustment resulted in a reduction of the carrying value of the debt by $35.2 million. This adjustment to fair value and associated adjustment to unamortized deferred financing costs is being amortized to interest expense over the life of the related debt instruments using the effective interest method. Amortization expense for the fair value adjustment and deferred financing costs for the three and nine months ended September 30, 2024 were $1.5 million and $4.4 million, respectively, and for the three and nine months ended September 30, 2023 were $1.5 million and $4.4 million, respectively.
On June 26, 2024, Spruce SET Borrower 2024, LLC (the “Borrower”), a wholly owned subsidiary of the Company, entered into a non-recourse Credit Agreement with Barings GPSF LLC, which provided a fixed interest term loan in the aggregate principal amount of $130.0 million (the “SET Facility”). The proceeds of the SET Facility were primarily used to repay the SP4 Facility of $125.0 million. The repayment of the SP4 Facility was treated as a debt extinguishment under ASC 470-50, Debt—Modifications and Extinguishments. In connection with the repayment of the SP4 Facility, the Company settled the related interest rate swap contracts (see Note 9. Interest Rate Swaps for further discussion). The Borrower incurred approximately $2.1 million of deferred financing costs related to the SET Facility, which are being amortized on a straight-line basis over the anticipated debt servicing period. The SET Facility matures on April 17, 2042 and requires quarterly interest payments at 6.889% per annum beginning August 2024. Effective December 26, 2027, the SET Facility requires additional interest to be accrued on any outstanding aggregate principal or unpaid accrued interest. The SET Facility is collateralized by all of the assets and property of the Borrower. The SET Facility requires the Borrower to be in compliance with various covenants, and the Borrower was in compliance with the required covenants under the SET Facility as of September 30, 2024.
Note 9. Interest Rate Swaps
The purpose of the Company’s interest rate swaps is to convert the floating interest rate on the Company's Credit Agreements to a fixed rate. As of September 30, 2024, the notional amount of the interest rate swaps covers approximately 99% of the balance of the Company’s floating rate term loans.
During the three and nine months ended September 30, 2024, the change in the fair value of the interest rate swaps was $(11.3) million and $(8.2) million, respectively, and for the three and nine months ended September 30, 2023 was $8.1 million and $11.8 million, respectively, which are reflected in change in fair value of interest rate swaps within the unaudited condensed consolidated statements of operations. The Company also recognized $3.0 million and $13.8 million
Notes to Unaudited Condensed Consolidated Financial Statements
Note 9. Interest Rate Swaps, continue
of realized gains for the three and nine months ended September 30, 2024, and for the three and nine months ended September 30, 2023, realized gains of $3.8 million and $9.7 million, respectively, reflected within interest expense, net within the unaudited condensed consolidated statements of operations.
In June 2024, interest rate swaps related to the SP4 Facility were settled concurrently with the full repayment of the SP4 Facility (see Note 8. Non-Recourse Debt), and as a result, the Company recorded a gain of approximately $3.6 million within interest expense, net during the nine months ended September 30, 2024.
See Note 10. Fair Value Measurements for further information on the Company’s determination of the fair value of its interest rate swaps.
Note 10. Fair Value Measurements
The Company uses various assumptions and methods in estimating the fair values of its financial instruments.
The Company’s private warrants are valued using a Black-Scholes model, pursuant to the inputs provided in the table below:
Input
September 30, 2024
December 31, 2023
Risk-free rate
3.9
%
4.2
%
Remaining term in years
1.23
1.98
Expected volatility
59.7
%
82.0
%
Exercise price
$
92.00
$
92.00
Fair value of common stock
$
2.84
$
4.42
The Company's interest rate swaps are not traded on a market exchange and the fair values are determined using a valuation model based on a discounted cash flow analysis. This analysis reflects the contractual terms of the interest rate swap agreements and uses observable market-based inputs, including estimated future SOFR interest rates. The fair value of the Company's interest rate swap is the net difference in the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates and are observable inputs available to a market participant. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy.
The fair value of the Company’s non-recourse debt as of September 30, 2024 and December 31, 2023 was $626.1 million and $628.2 million, respectively.
The following table sets forth the Company’s assets and liabilities which are measured at fair value on a recurring basis by level within the fair value hierarchy:
Notes to Unaudited Condensed Consolidated Financial Statements
Note 10. Fair Value Measurements, continued
Fair Value Measurements as of December 31, 2023
(Amounts in thousands)
Level I
Level II
Level III
Total
Asset:
Interest rate swaps
$
—
$
27,883
$
—
$
27,883
Money market accounts
21,475
—
—
21,475
U.S. Treasury securities
108,964
—
—
108,964
Total
$
130,439
$
27,883
$
—
$
158,322
Liabilities:
Private warrants
$
—
$
—
$
17
$
17
Total
$
—
$
—
$
17
$
17
The following is a roll forward of the Company’s Level 3 liability instruments:
Three Months Ended September 30, 2024
Nine Months Ended September 30, 2024
(Amounts in thousands)
Balance at the beginning of the period
$
2
$
17
Fair value adjustments – warrant liability
(2)
(17)
Balance at the end of the period
$
—
$
—
Note 11. Goodwill
During the three months ended September 30, 2024, the Company identified that there were indicators that the carrying amount of its goodwill may be impaired due to a continuous decline in the Company’s stock price and market capitalization. The Company performed a quantitative test using a market approach, which resulted in an impairment of goodwill during the three months ended September 30, 2024. As a result, the Company recorded a charge of $28.8 million to fully impair its goodwill within the unaudited condensed consolidated statements of operations.
As of
September 30, 2024
December 31, 2023
(Amounts in thousands)
Goodwill, beginning balance
$
28,757
$
28,757
Impairment of goodwill
(28,757)
—
Goodwill, ending balance
$
—
$
28,757
Note 12. Stock-Based Compensation Expense
Stock-based compensation expense related to stock options and restricted stock units for the three and nine months ended September 30, 2024 was $0.7 million and $2.1 million, and for the three and nine months ended September 30, 2023 was $0.9 million and $2.4 million, respectively. As of September 30, 2024, there was $8.2 million of unrecognized compensation cost related to stock options and restricted stock units which is expected to be recognized over the remaining vesting periods, with a weighted-average period of 2.7 years.
Stock Options
The Company grants stock options to certain employees that will vest over a period of one to four years. A summary of stock option award activity for the nine months ended September 30, 2024 was as follows:
Notes to Unaudited Condensed Consolidated Financial Statements
Note 12. Stock-Based Compensation Expense, continued
Options
Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Outstanding at December 31, 2023
193,156
$
17.89
5.8
Granted
295,229
3.74
Exercised
—
—
Cancelled or forfeited
—
—
Outstanding at September 30, 2024
488,385
$
9.34
7.8
Exercisable at September 30, 2024
192,523
$
17.76
5.0
The aggregate intrinsic value of stock options outstanding as of September 30, 2024 was $0.1 million. During the nine months ended September 30, 2024, the Company granted 295,229 stock options to its President and Chief Executive Officer (“CEO”) upon his appointment to such positions effective April 12, 2024.
A summary of stock option award activity for the nine months ended September 30, 2023 was as follows:
Options
Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Outstanding at December 31, 2022
761,408
$
11.12
2.7
Granted
—
—
Exercised
(331,091)
1.95
Cancelled or forfeited
(78,797)
51.48
Outstanding at September 30, 2023
351,520
$
10.69
3.4
Exercisable at September 30, 2023
349,529
$
10.38
3.4
Restricted Stock Units
The Company grants restricted stock units to certain employees that will generally vest over a period of four years. The fair value of restricted stock unit awards is estimated by the fair value of the Company’s common stock at the date of grant. Restricted stock units activity during the nine months ended September 30, 2024 was as follows:
Number of Shares
Weighted Average Grant Date Fair Value Per Share
Non-vested, at December 31, 2023
1,102,095
$
7.74
Granted
1,925,157
3.50
Vested
(305,192)
6.63
Cancelled or forfeited
(635,299)
5.22
Non-vested, at September 30, 2024
2,086,761
$
4.77
During the nine months ended September 30, 2024, the Company granted restricted stock unit awards of 88,636 shares of common stock to the CEO upon his appointment effective April 12, 2024. In addition, upon the separation of the prior President and Chief Executive Officer (“Former CEO”) from the Company effective April 12, 2024, 97,994 and 244,267 restricted stock units awarded to the Former CEO were vested and forfeited, respectively. The Company recorded $0.5 million of expense related to the 97,994 vested awards during the nine months ended September 30, 2024.
Restricted stock units activity during the nine months ended September 30, 2023 was as follows:
Notes to Unaudited Condensed Consolidated Financial Statements
Note 12. Stock-Based Compensation Expense, continued
Number of Shares
Weighted Average Grant Date Fair Value Per Share
Non-vested, at December 31, 2022
1,229,089
$
10.40
Granted
653,425
6.50
Vested
(521,313)
12.63
Cancelled or forfeited
(266,162)
10.32
Non-vested, at September 30, 2023
1,095,039
$
7.88
Former CEO's Ladder Restricted Stock Unit Award
On September 9, 2022, in connection with the acquisition of Legacy Spruce Power and his appointment as the Company's President, the Company granted to its Former CEO, a restricted stock unit award (the “Ladder RSUs”) of 208,333 shares of common stock. The Ladder RSUs vest in 10% increments on the dates the Plan administrator certifies the applicable milestone stock prices have been achieved or exceeded, provided that the Former CEO remains employed on the date of certification and such achievement occurs within ten years of the date of the grant.
The Company used a Monte Carlo simulation valuation model to determine the fair value of the award as of the Acquisition Date. The following inputs were used in the simulation: grant date stock price of $9.36 per share, annual volatility of 85.0%, risk-free interest rate of 3.3% and dividend yield of 0.0%. For each tranche, a fair value was calculated as well as a derived service period which represents the median number of years it is expected to take for the Ladder RSUs to meet their corresponding milestone stock price excluding the simulation paths that result in the Ladder RSUs not vesting within the 10-year term of the agreement. Each tranche's fair value will be amortized ratably over the respective derived service period.
The Company recognized expense related to the Ladder RSUs of approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively. Upon separation of the Former CEO from the Company effective April 12, 2024, the Ladder RSUs were terminated and the Company recorded a gain of $0.7 million during the nine months ended September 30, 2024.
Note 13. Noncontrolling Interests
The following table summarizes the Company’s noncontrolling interests as of September 30, 2024:
Tax Equity Entity
Date Class A Member Admitted
ORE F4 Holdco, LLC
August 2014
Volta Solar Owner II, LLC
August 2017
The tax equity entities were structured at inception so that the allocations of income and loss for tax purposes will flip at a future date. The terms of the tax equity entities' operating agreements contain allocations of taxable income (loss), Section 48(a) ITCs and cash distributions that vary over time and adjust between the members on an agreed date (referred to as the flip date). The operating agreements specify either a certain flip date or an internal rate of return ("IRR") flip date. The certain flip date is based on the passage of a fixed period of time as defined in the operating agreements for each entity. The IRR flip date is the date on which the tax equity investor has achieved a contractual rate of return. From inception through the flip date, the Class A members' allocation of taxable income (loss) and Section 48(a) ITCs is generally 99% and the Class B members' allocation of taxable income (loss) and Section 48(a) ITCs is generally 1%. After the related flip date (or, if the tax equity investor has a deficit capital account, typically after such deficit has been eliminated), the Class A members' allocation of taxable income (loss) will typically decrease to 5% (or, in some cases, a higher percentage if required by the tax equity investor) and the Class B members' allocation of taxable income (loss) will increase by an inverse amount.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 13. Noncontrolling Interests, continued
The historical redeemable noncontrolling interests and noncontrolling interests are comprised of Class A units, which represent the tax equity investors' interest in the tax equity entities. Both the Class A members and Class B members may have call options to allow either member to redeem the other member's interest in the tax equity entities upon the occurrence of certain contingent events, such as bankruptcy, dissolution/liquidation and forced divestitures of the tax equity entities. Additionally, the Class B members may have the option to purchase all Class A units, which is typically exercisable at any time during the periods specified under their respective governing documents, and, in regards to the tax equity entities historically classified as redeemable noncontrolling interests, they had the contingent obligation to purchase all Class A units if the Class A members exercise their right to withdraw, which is typically exercisable at any time during the three-month period commencing upon the applicable flip date. The Company had no redeemable noncontrolling interests as ofSeptember 30, 2024 and December 31, 2023.
Total assets on the unaudited condensed consolidated balance sheets includes $37.0 million as of September 30, 2024 and $38.0 million as of December 31, 2023 of assets held by the Company's VIEs, which can only be used to settle obligations of the VIEs.
Total liabilities on the unaudited condensed consolidated balance sheets includes $0.8 million as of September 30, 2024 and $0.8 million as of December 31, 2023 of liabilities that are the obligations of the Company's VIEs.
Note 14. Commitments and Contingencies
Legal Proceedings
The Company is periodically involved in legal proceedings and claims arising in the normal course of business, including proceedings relating to intellectual property, employment and other matters. Management believes the outcome of these proceedings will not have a significant adverse effect on the Company’s financial position, operating results, or cash flow.
Securities Class Action Proceedings
On March 8, 2021, two putative securities class action complaints were filed against the Company, and certain of its current and former officers and directors in the federal district court for the Southern District of New York. Those cases were ultimately consolidated under C.A. No. 1:21-cv-2002, and a lead plaintiff was appointed in June 2021. On July 20, 2021, an amended complaint was filed alleging that certain public statements made by the defendants between October 2, 2020, and March 2, 2021, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Following negotiations with a mediator, in September 2023, the Company and the plaintiffs agreed on a settlement in principle in the aggregate amount of $19.5 million (the “Settlement Amount”), and on December 6, 2023, the lead plaintiff and the defendants entered into a stipulation and agreement of settlement requiring the Company to pay the Settlement Amount to resolve the class action litigation and the related legal fees and administration costs. On April 30, 2024, the New York Court approved a final settlement of the Class Action Litigation. The Settlement Amount was offset by approximately $4.5 million of related loss recoveries from the Company’s directors and officers liability insurance policy with third parties, which was paid out in February 2024. The Company paid the $15.0 million net settlement amount to the settlement claims administrator in February 2024.
On September 20, 2021, and October 19, 2021, two class action complaints were filed in the Delaware Court of Chancery against certain of the Company’s current officers and directors, and the Company’s sponsor of its special purpose acquisition company merger, Pivotal Investment Holdings II LLC. These actions were consolidated as in re XL Fleet Corp. (Pivotal) Stockholder Litigation, C.A. No. 2021-0808, and an amended complaint was filed on January 31, 2022. Defendants filed a motion to dismiss the amended complaint on May 13, 2022, and on July 11, 2022, plaintiffs filed a second amended complaint. The second amended complaint alleges various breaches of fiduciary duty against the Company and/or its officers, several allegedly misleading statements made in connection with the merger, and aiding and abetting breaches of fiduciary duty in connection with the negotiation and approval of the December 21, 2020 merger and organization of XL Hybrids, Inc., a Delaware corporation (“Legacy XL”) to become XL Fleet Corp. On August 19, 2022, defendants moved to dismiss the second amended complaint, which was granted in part and denied in part on June 9, 2023. The parties then engaged in discovery. On November 13, 2024, the Company filed a stipulation and settlement agreement
Notes to Unaudited Condensed Consolidated Financial Statements
Note 14. Commitments and Contingencies, continued
seeking court approval to settle this matter in full for $4.75 million, which is currently accrued for as of September 30, 2024 (See Note 7. Accrued Expenses and Other Current Liabilities).
Shareholder Derivative Actions
On June 23, 2022, the Company received a shareholder derivative complaint filed in the U.S. District Court for the District of Massachusetts, captioned Val Kay derivatively on behalf of nominal defendant XL Fleet Corp., against all current directors and former officers and directors, C.A. No. 1:22-cv-10977. The action was filed by a shareholder purportedly on XL Fleet Corp.’s behalf, and raises claims for contribution, as well as claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and abuse of control. In March 2023, two shareholder derivative actions were filed in the U.S. District Court for the District of Delaware, namely Reali v. Griffin, et al., C.A. No. 1:23-cv-00289 and Tucci v. Ledecky, et al., C.A. 1:23-cv-00322. These actions were consolidated and captioned In re Spruce Power Holding Corporation Shareholder Derivative Litigation, C.A. No. 1:23-cv-00289. In August 2023, an additional derivative action was filed in the U.S. District Court for the Southern District of New York, captioned Boyce v. Ledecky, et al., C.A. No. 1:23-cv-8591 (collectively, the “Derivative Matters”).
On December 8, 2023, the parties reached a settlement-in-principle to settle, the Derivative Matters. The court granted preliminary approval of the settlement on May 1, 2024, and final approval in full on August 8, 2024. The settlement provides for certain corporate governance enhancements and no monetary payments. On August 14, 2024, the court awarded attorney fees of $1.0 million, which were paid in September 2024.
State Attorney Generals' Investigations
The Company has been asked to provide information and documents in response to subpoenas and other requests for information from certain state attorney generals’ offices regarding, among other things, its sales and marketing protocols. The Company has been cooperating with these investigations and intends to continue to do so until they are resolved. At this time, the Company is unable to estimate potential losses, if any, related to these matters.
Securities and Exchange Commission Civil Enforcement Action
On January 6, 2022, the Company received a subpoena from the Division of Enforcement of the SEC requesting, among other things, information and documents concerning the XL Fleet Corp. business combination with Legacy XL, the Company’s sales pipeline and revenue projections, California Air Resources Board approvals, and other related matters. In June 2023, the SEC proposed an Offer of Settlement for the purpose of resolving the proposed SEC action against the Company. Following negotiations with the SEC staff, in September 2023, the Company reached a settlement with the SEC pursuant to which the Company did not admit or deny the SEC’s allegations regarding the above-referenced issues. In connection with the settlement, in October 2023, the Company (among other things) paid a civil monetary penalty of $11.0 million which, subject to the discretion of the SEC, will be made available to eligible legacy shareholders through a Fair Fund, termed and administered by the SEC.
US Bank
On February 9, 2023, US Bank, through its affiliate, Firstar Development, LLC (“Firstar”), filed a motion for summary judgment in lieu of a complaint in New York Supreme Court (the trial level in New York) alleging that the Company failed to fulfill its reimbursement obligations under a 2019 tax recapture guaranty agreement between the parties arising from the alleged recapture by the Internal Revenue Service of tax credits taken by Firstar as an investor in the Company’s subsidiary, Ampere Solar Owner I, LLC. On May 23, 2023, the Company reached a settlement agreement with Firstar, as the plaintiff, for $2.3 million whereby the plaintiff discharged all claims filed against the Company.
BMZ USA, Inc.
On February 11, 2022, BMZ USA Inc. (“BMZ”), a battery manufacturer, sued XL Hybrids for breach of contract, alleging that XL Hybrids failed to timely purchase the full allotment of batteries required under a certain master supply agreement between the parties. In January 2024, BMZ obtained a judgment for $3.9 million against XL Hybrids, Inc. The Company is appealing the ruling while simultaneously pursuing a settlement. The Company currently estimates the potential loss to be
Notes to Unaudited Condensed Consolidated Financial Statements
Note 14. Commitments and Contingencies, continued
approximately $1.2 million, which has been accrued for as of September 30, 2024 (See Note 7. Accrued Expenses and Other Current Liabilities).
ITC Recapture Provisions
The IRS may disallow and recapture some, or all, of the Investment Tax Credits due to improperly calculated basis after a project was placed in service ("Recapture Event"). If a Recapture Event occurs, Spruce Power is obligated to pay the applicable Class A Member a recapture adjustment, which includes the amounts the Class A Members are required to repay the IRS, including interest and penalties, as well as any third-party legal and accounting fees incurred by the Class A Members in connection to the Recapture Event, as specified in the operating agreements. Such a payment by Spruce Power to the Class A Members are not to be considered a capital contribution to the fund per the operating agreements, nor would it be considered a distribution to the Class A Members. With the exception of the tax matter related to Ampere Solar Owner I noted above, a Recapture Event was not deemed to be probable by the Company, therefore no accrual has been recorded as ofSeptember 30, 2024.
Plastic Omnium
Plastic Omnium is the assignee of the contractual rights of Actia Corp. under a certain battery purchase order between XL Hybrids and Actia Corp. On March 17, 2023, Plastic Omnium sued Legacy XL and the Company for breach of contract, alleging that Legacy XL ordered a total of 1,000 batteries from Plastic Omnium, paid for 455 of those batteries, and then reneged on 545 of those products. While Plastic Omnium admits it never actually delivered the remaining 545 products, it claims it purchased materials to complete the order, and as a result, Legacy XL and the Company are liable for at least approximately $2.5 million. The Company has reached a settlement in principle to settle the matter for $1.25 million, which is currently accrued for as of September 30, 2024 (See Note 7. Accrued Expenses and Other Current Liabilities).
Parker-Hannifin
On March 11, 2024, the Company filed a lawsuit against Parker-Hannifin for a declaratory judgment, captioned
XL Hybrids, Inc. v. Parker-Hannifin Corporation, No. 1:24-cv-10894-WGY (D. Mass, removed from Mass. State Court No. 2484-CV-00661). The case related to a contract for the purchase of motors designed, produced and manufactured by Parker-Hannifin for XL Hybrids, Inc. which was executed in July 2019. On April 5, 2024, Parker-Hannafin filed counterclaims, alleging that XL Hybrids, Inc. and the Company were in breach of the contract. On November 1, 2024, the parties reached a settlement in principle to settle the matter for $0.5 million, which is currently accrued for as of September 30, 2024 (See Note 7. Accrued Expenses and Other Current Liabilities).
Master SREC Purchase and Sale Agreement
The Company has forward sales agreements, which are related to a certain number of SRECs, to be generated from the Company’s solar energy systems located in Maryland, Massachusetts, Delaware, and New Jersey to be sold at fixed prices over varying terms of up to 20 years. In the event the Company does not deliver such SRECs to the counterparty, the Company could be forced to pay additional penalties and fees as stipulated within the contracts.
Guarantees
In connection with the acquisition of RPV Holdco 1, LLC, a wholly owned subsidiary of the Company, guaranty agreements were established in May 2020 by and between Spruce Holding Company 1, LLC, Spruce Holding Company 2, LLC, and Spruce Holding Company 3, LLC (“Spruce Guarantors”) and the investor members in the Funds. The Spruce Guarantors entered into guarantees in favor of the tax equity investors wherein they guaranteed the payment and performance of Solar Service Experts, LLC, a wholly owned subsidiary of the Company, under the Spruce Power 2 Maintenance Services Agreement and the Class B Member under the Limited Liability Company Agreement (“LLCA”).
Notes to Unaudited Condensed Consolidated Financial Statements
Note 14. Commitments and Contingencies, continued
These guaranties are subject to a maximum of the aggregate amount of capital contributions made by the Class A Member under the LLCA.
Indemnities and Guarantees
During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. The duration of the Company’s indemnities and guarantees varies, however the majority of these indemnities and guarantees are limited in duration. No liabilities have been recorded for these indemnities and guarantees as of September 30, 2024.
Insurance Claims and Recoveries related to Maui Fires
In August 2023, a series of wildfires broke out in Hawaii, predominantly on the island of Maui, resulting in real and personal property and natural resource damage, personal injuries and loss of life and widespread power outages. The Company received $0.2 million related to the insurance recoveries during the three and nine months ended September 30, 2024.
Note 15. Net Loss Per Share
The following is a reconciliation of the numerator and denominator used to calculate basic earnings per share and diluted earnings per share for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
(Amounts in thousands, except share data)
2024
2023
2024
2023
Numerator:
Net loss attributable to stockholders
$
(53,529)
$
(19,313)
$
(64,561)
$
(35,643)
Denominator:
Weighted average shares outstanding, basic
18,566,015
17,351,796
18,438,375
18,072,115
Dilutive effect of stock options and restricted stock units
—
—
—
—
Weighted average shares outstanding, diluted
18,566,015
17,351,796
18,438,375
18,072,115
Net loss attributable to stockholders per share, basic and diluted
$
(2.88)
$
(1.11)
$
(3.50)
$
(1.97)
For any periods presented with a net loss, potentially dilutive outstanding securities, which include stock options, restricted stock units, and warrants, have been excluded from the computation of diluted net loss per share as their effect would be anti-dilutive for those periods. As such, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share are the same for those periods.
Note 16. Discontinued Operations
In the fourth quarter of 2022, the Company discontinued the operations of its Drivetrain and XL Grid operations. The following table provides supplemental detail of the Company’s discontinued operations contained within the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2024 and 2023:
Notes to Unaudited Condensed Consolidated Financial Statements
Note 16. Discontinued Operations, continued
The following table presents aggregate carrying amounts of assets and liabilities of discontinued operations contained within the unaudited condensed consolidated balance sheets:
As of
(Amounts in thousands)
September 30, 2024
December 31, 2023
Assets from discontinued operations:
Drivetrain
$
—
$
32
Total assets from discontinued operations
$
—
$
32
Liabilities from discontinued operations:
Drivetrain
$
117
$
170
Total liabilities from discontinued operations
$
117
$
170
Note 17. Subsequent Events
Management has reviewed events subsequent to September 30, 2024 and prior to the filing of financial statements, and except as referenced within this Form 10-Q, the Company has determined there have been no other events that have occurred that would require adjustments or disclosures within the unaudited condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion and analysis should be read together with our results of operations and financial condition and the unaudited condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 9, 2024 (the “Annual Report”). In addition to historical financial information, this discussion and analysis contains forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q and under “Risk Factors” in Item 1A of the Annual Report.
Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our unaudited condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
As used in this discussion and analysis, references to “SPRU,” “the Company,” “we,” “us” or “our” refer only to Spruce Power Holding Corporation and its consolidated subsidiaries. Depending on the context, "Spruce Power" may refer to Legacy Spruce Power prior to its acquisition by the Company on September 9, 2022, or it may also refer to the operation of Legacy Spruce Power's business by the Company after such acquisition.
Overview
Spruce Power is a leading owner and operator of distributed solar energy assets across the United States, owning cash flows from approximately 75,000 home solar assets and contracts across the United States and making renewable energy more accessible to everyone. We generate revenues primarily through the sale of electricity generated by our home solar energy systems to homeowners pursuant to long-term agreements that obligate our subscribers to make recurring monthly payments, and the servicing of those agreements for other institutional owners of home solar energy systems. In addition, we also earn interest income from the investment made under the master lease with SS Holdings 2017, LLC and its subsidiaries ("SEMTH").
Corporate Strategy
Our corporate strategy has three key elements:
Leveraging the Spruce Power platform to become a leading provider of subscription-based solutions for distributed energy resources
We have more than a decade of experience owning and operating rooftop solar systems, as well as energy efficiency upgrades. We believe our proven platform for managing home solar can be extended to other categories of distributed energy resources, and by leveraging our platform, we intend to grow our revenues by providing subscription-based solutions for rooftop solar and energy storage and other future energy-related products to homeowners and businesses, including commercial and industrial (“C&I”) solar developers. We are focused on delivering best-in-class customer service, with investment into process and platform improvement for on-site monitoring, customer billing and working with qualified partners for field services.
Profitably growing return on assets by focusing on channels with the lowest customer acquisition cost
We seek to grow our subscriber revenues by focusing on those channels that have lowest customer acquisition costs and the ability to increase return on assets, including acquiring existing systems from other companies or investment funds, selling additional services to existing subscribers, selling services to new customers online and partnering with selected independent installers to provide a subscription-based solution for their customers. During the three months ended
September 30, 2024, we entered into a non-binding letter of intent to acquire a portfolio of approximately 10,000 home solar assets and contracts (the “Potential Acquisition”), which if completed would bring ownership of total home solar assets and contracts to approximately 85,000. While management is pursuing the Potential Acquisition, there is no guarantee that we will complete the intended acquisition.
Increasing shareholder value by delivering predictable revenues, profits and cash flow
By focusing on subscription-based solutions with long-term customer contracts, we seek to generate consistent revenues, profits and cash flow.
Key Factors Affecting Operating Results
We are a leading owner and operator of distributed solar energy assets across the United States, offering subscription-based solutions to homeowners for rooftop solar energy storage and other energy-related products. Additionally, we provide servicing functions for our assets and customers, as well as for other institutional owners of home solar energy systems. Our operating results and ability to grow its business over time could be impacted by certain factors and trends that affect our industry, as well as elements of our strategy, such as:
Development of Distributed Energy Assets
Our future growth depends significantly on our ability to acquire operating home solar energy systems “in-bulk” from other companies. Industry data suggests there is a substantial existing base of operating home solar energy systems, providing us opportunities to pursue acquisitions. Over the long-term, the continued ability to pursue acquisitions is dependent on development of distributed energy assets, namely home solar energy systems, by third parties. This development may be impacted by numerous factors that influence homeowner demand for home solar energy systems including but not limited to macroeconomic dynamics, climate change impacts, and government policy and incentives.
Availability of Financing
Our ability to raise capital from third parties at reasonable terms is a critical element in supporting ownership of our existing home solar energy assets as well as enabling our future growth. We have historically utilized non-recourse, project-level debt as a primary source of capital for acquisitions. Our ability to raise debt either as means to refinance existing indebtedness or for future acquisitions may be impacted by general macroeconomic conditions, the health of debt capital markets, the interest rate environment, and general concerns over its industry or specific concerns over its business.
Results of Operations
The results of operations related to our Drivetrain and XL Grid businesses, which were determined to be discontinued operations in the fourth quarter of 2022, are presented as net income (loss) from discontinued operations in our unaudited condensed consolidated statements of operations. As a result, the continuing operational results reflect the operations related to our corporate functions and the results of operations for Legacy Spruce Power since its acquisition on September 9, 2022.
Comparison of the Three Months Ended September 30, 2024 and 2023
Information with respect to our unaudited condensed consolidated statements of operations for the three months ended September 30, 2024 and 2023 are presented below:
Three Months Ended September 30,
(In thousands, except per share and share amounts)
2024
2023
$ Change
% Change
Revenues
$
21,378
$
23,250
$
(1,872)
(8)
%
Operating expenses:
Cost of revenues
9,657
9,810
(153)
(2)
Selling, general and administrative expenses
13,521
12,391
1,130
9
Litigation settlements, net
7,205
26,339
(19,134)
(73)
Gain on asset disposal
(603)
(773)
170
(22)
Impairment of goodwill
28,757
—
28,757
—
Loss from operations
(37,159)
(24,517)
(12,642)
52
Other (income) expense:
Interest income
(6,265)
(8,255)
1,990
(24)
Interest expense, net
11,367
11,192
175
2
Other (income) expense, net
11,289
(8,491)
19,780
(233)
Net loss from continuing operations
(53,550)
(18,963)
(34,587)
182
Net income (loss) from discontinued operations
(4)
(204)
200
(98)
Net loss
(53,554)
(19,167)
(34,387)
179
Less: Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests
(25)
146
(171)
(117)
Net loss attributable to stockholders
$
(53,529)
$
(19,313)
$
(34,216)
177
Net loss per common share:
Basic and diluted
$
(2.88)
$
(1.11)
$
(1.77)
159
Revenues and Cost of Revenues
Revenues decreased by $1.9 million, or 8.1%, to $21.4 million in the three months ended September 30, 2024 from $23.3 million for the three months ended September 30, 2023. The decrease was primarily due to a decrease in SREC revenues and a decrease in SLA revenue primarily due to higher performance guarantee obligations recorded during the three months ended September 30, 2024.
Cost of revenues decreased by less than $0.2 million, or 1.6%, to $9.7 million in the three months ended September 30, 2024 from $9.8 million for the three months ended September 30, 2023. The decrease was primarily due to lower cost of operations and maintenance in the current period. Cost of revenues related to our Drivetrain and XL Grid operations are included in net income (loss) from discontinued operations.
Selling, General and Administrative
Selling, general and administrative expenses increased by $1.1 million, or 9.1%, to $13.5 million in the three months ended September 30, 2024 from $12.4 million for the three months ended September 30, 2023. The increase was primarily due to various factors including an increase in legal fees incurred in connection with our legal settlements and other ongoing legal proceedings (See Note 14. Commitments and Contingencies) and an increase in compensation expense for the three months ended September 30, 2024 as compared to the prior period. Selling, general and administrative expenses for the three months ended September 30, 2023 include the ongoing operations of our home solar business and corporate functions, as
well as certain remaining costs associated with our historic operations, including certain integration related costs. Selling, general and administrative expenses related to the Drivetrain and XL Grid operations are included in net income (loss) from discontinued operations.
Litigation settlement, net
Litigation settlement, net decreased by $19.1 million, or 72.6%, to $7.2 million in the three months ended September 30, 2024 from $26.3 million for the three months ended September 30, 2023. The decrease is primarily attributed to $26.0 million incurred during the three months ended September 30, 2023, associated with settlements of the SEC inquiry and shareholder lawsuits, net of related insurance recoveries from third parties, partially offset by $7.2 million in additional settlement costs associated with various settled and ongoing legal proceedings (See Note 14. Commitments and Contingencies) recorded during the three months ended September 30, 2024.
Impairment of Goodwill
Impairment of goodwill of $28.8 million was recognized during the three months ended September 30, 2024 due to a continuous decline in our stock price and market capitalization.
Interest Income
Interest income decreased by $2.0 million, or 24.1%, to $6.3 million in the three months ended September 30, 2024 from $8.3 million for the three months ended September 30, 2023. The decrease is primarily due to additional interest income of $2.4 million associated with the SEMTH Master Lease recognized in the prior period, slightly offset by a $0.4 million decrease in interest income earned on investments in U.S. Treasury securities during the current period.
Other (Income) Expense, net
Other (income) expense, net was a $11.3 million expense for the three months ended September 30, 2024, an increase of $19.8 million from an income of $8.5 million for the three months ended September 30, 2023. The increase is primarily the result of change in fair value of our interest rate swap agreements.
Comparison of the Nine Months Ended September 30, 2024 and 2023
Information with respect to our unaudited condensed consolidated statements of operations for the nine months ended September 30, 2024 and 2023 are presented below:
(In thousands, except per share and share amounts)
2024
2023
$ Change
% Change
Revenues
$
61,881
$
64,158
$
(2,277)
(4)
%
Operating expenses:
Cost of revenues
28,500
26,257
2,243
9
Selling, general and administrative expenses
43,426
44,093
(667)
(2)
Litigation settlements, net
7,205
26,339
(19,134)
(73)
Gain on asset disposal
(2,055)
(4,225)
2,170
(51)
Impairment of goodwill
28,757
—
28,757
—
Loss from operations
(43,952)
(28,306)
(15,646)
55
Other (income) expense:
Interest income
(16,908)
(13,846)
(3,062)
22
Interest expense, net
29,900
30,815
(915)
(3)
Other income, net
7,683
(13,121)
20,804
(159)
Net loss from continuing operations
(64,627)
(32,154)
(32,473)
101
Net income (loss) from discontinued operations
50
(4,253)
4,303
(101)
Net loss
(64,577)
(36,407)
(28,170)
77
%
Less: Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests
(16)
(764)
748
(98)
Net loss attributable to stockholders
$
(64,561)
$
(35,643)
$
(28,918)
81
Net loss per common share:
Basic and diluted
$
(3.50)
$
(1.97)
$
(1.53)
78
Revenues and Cost of Revenues
Revenues decreased by $2.3 million, or 3.5%, to $61.9 million in the nine months ended September 30, 2024 from $64.2 million for the nine months ended September 30, 2023. The decrease is primarily due to a decrease in SREC revenue and a decrease in SLA revenue primarily due to higher performance guarantee obligations recorded during the nine months ended September 30, 2024. This decrease was partially offset by an increase in PPA revenues in the current period related to the Tredegar Acquisition.
Cost of revenues increased by $2.2 million, or8.5%, to $28.5 million in the nine months ended September 30, 2024 from $26.3 million for the nine months ended September 30, 2023. The increase is primarily due to an increase in certain operation and maintenance costs. Cost of revenues related to our Drivetrain and XL Grid operations are included in net income (loss) from discontinued operations.
Selling, General and Administrative
Selling, general and administrative expenses decreased by $0.7 million, or 1.5%, to $43.4 million in the nine months ended September 30, 2024 from $44.1 million for the nine months ended September 30, 2023. Selling, general and administrative expenses for the three months ended September 30, 2023 include the ongoing operations of our home solar business and corporate functions, as well as certain remaining costs associated with our historic operations, including certain integration related costs. Selling, general and administrative expenses related to the Drivetrain and XL Grid operations are included in net income (loss) from discontinued operations.
Litigation settlement, net decreased by $19.1 million, or 72.6%, to $7.2 million in the nine months ended September 30, 2024 from $26.3 million for the nine months ended September 30, 2023. The decrease is primarily attributed to $26.0 million incurred during the nine months ended September 30, 2023 associated with settlements of the SEC inquiry and shareholder lawsuits, net of related insurance recoveries from third parties, partially offset by $7.2 million in additional settlement costs associated with various settled and ongoing legal proceedings (See Note 14. Commitments and Contingencies) recorded during the nine months ended September 30, 2024.
Gain on Asset Disposal
Gain on asset disposal decreased by less than $2.2 million, or 51.4%, to $2.1 million in the nine months ended September 30, 2024 from $4.2 million for the nine months ended September 30, 2023. The decrease is primarily the result of updated valuation reports and adjustments to provisional amounts assigned to gain on asset disposal recognized in the prior period, partially offset by a $0.2 million gain recognized in the current period for insurance proceeds related to Maui wildfire.
Impairment of Goodwill
Impairment of goodwill of $28.8 million was recognized during the nine months ended September 30, 2024 due to a continuous decline in our stock price and market capitalization.
Interest Income
Interest income increased by $3.1 million, or 22.1%, to $16.9 million in the nine months ended September 30, 2024 from $13.8 million for the nine months ended September 30, 2023. The increase is primarily due to three full quarters of interest income related to the SEMTH Acquisition, which was completed in March 2023, recognized in the current period as compared to the prior period.
Interest Expense, net
Interest expense, net decreased by $0.9 million, or 3.0%, to $29.9 million in the nine months ended September 30, 2024 from $30.8 million for the nine months ended September 30, 2023. The decrease is primarily due to a gain recognized during the current period due to settlement of our interest rate swaps related to the repayment of SP4 Facility, partially offset by incremental expenses associated with three full quarters of interest expense related to the SP4 Facility assumed in connection with the SEMTH acquisition completed in 2023.
Other (Income) Expense, net
Other (income) expense, net was $7.7 million for the nine months ended September 30, 2024, a decrease of $20.8 million from income of $13.1 million for the nine months ended September 30, 2023. The decrease is primarily due to an unfavorable change in the value of interest swaps in the current period.
Our cash requirements depend on many factors, including the execution of our business strategy. We remain focused on carefully managing costs, including capital expenditures, maintaining a strong balance sheet, and ensuring adequate liquidity. Our primary cash needs are for debt service, acquisition of solar systems, operating expenses, working capital and capital expenditures to support the growth of our business. Working capital is impacted by the timing and extent of the business needs. As of September 30, 2024, we had net working capital of $110.2 million, including cash and cash equivalents and restricted cash of $150.0 million.
With the acquisition of Legacy Spruce Power in September 2022, we assumed all of the outstanding non-recourse debt of Legacy Spruce Power, which had a principal balance of $542.5 million on the date of the acquisition. With the SEMTH acquisition in the first quarter of 2023, we assumed $125.0 million of non-recourse debt, which was repaid in full in June 2024, see Note 8. Non-Recourse Debt to the accompanying unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. During the third quarter of 2023, we entered into a second amendment to our existing SP2 Facility, resulting in incremental term loans of approximately $21.4 million, proceeds of which were used to primarily fund the Tredegar acquisition.
During the second quarter of 2024, we obtained new term loans in the aggregate principal amount of $130.0 million, the proceeds of which were primarily used to repay $125.0 million related to the SEMTH acquisition. As of September 30, 2024, we had $605.4 million of aggregate non-recourse debt, including current portions. We are required to complete debt service coverage ratio calculations on a quarterly basis as part of our debt covenants. All debt covenant requirements were satisfied as of September 30, 2024. Based on our current liquidity, management believes that no additional capital will be needed to execute its current business plan over the next 12 months. We continually evaluate our cash needs to raise additional funds or seek alternative sources to invest in growth opportunities and other purposes.
Cash Flows Summary
Presented below is a summary of our operating, investing and financing cash flows:
Nine Months Ended
(Amounts in thousands)
September 30, 2024
September 30, 2023
Net cash provided by (used in)
Continuing operating activities
$
(28,266)
$
(13,820)
Discontinued operating activities
(87)
(2,104)
Continuing investing activities
23,398
(25,126)
Discontinued investing activities
—
325
Continuing financing activities
(18,086)
(6,686)
Discontinued financing activities
81
—
Net change in cash and cash equivalents and restricted cash
$
(22,960)
$
(47,411)
Cash Flows Used in Operating Activities
The net cash used in continuing operations for the nine months ended September 30, 2024 consists of our corporate costs and certain other costs that were not allocated to our discontinued operations.
Cash provided by investing activity related to continuing operations for the nine months ended September 30, 2024 primarily includes $18.9 million of proceeds from the SEMTH investment and $4.7 million of proceeds from the sale of solar energy systems.
Cash Flows Used in Financing Activities
The net cash used in financing activities related to continuing operations for the nine months ended September 30, 2024 primarily includes $145.8 million for the repayment of our long term non-recourse debt, inclusive of the $125 million of SP4 Facility repayment, partially offset by new long term non-recourse debt obtained via the SET Facility of $130.0 million.
Critical Accounting Policies and Estimates
The unaudited condensed consolidated financial statements have been prepared in accordance with the generally accepted accounting principles of the U.S. as set forth in the Financial Accounting Standards Board’s Accounting Standards Codification, and we evaluate the various staff accounting bulletins and other applicable guidance issued by the SEC. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the consolidated balance sheet date, as well as the reported expenses incurred during the reporting periods. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to our unaudited condensed consolidated financial statements.
Our significant accounting policies are consistent with those discussed in Note 2. Summary of Significant Accounting Policies of the consolidated financial statements and the MD&A sections of our Annual Report on Form 10-K for the year ended December 31, 2023 and Note 2. Summary of Significant Accounting Policies to the accompanying unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
New and Recently Adopted Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements in our unaudited condensed consolidated financial statements, see Note 2. Summary of Significant Accounting Policies to the accompanying unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.” The Company’s disclosure controls and procedures are designed to ensure that material information relating to the Company and its consolidated subsidiaries is accumulated and communicated to its management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures as of September 30, 2024. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were not effective as of that date, due to the material weaknesses in internal control over financial reporting described below.
Material Weaknesses in Internal Control over Financial Reporting
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the financial statements would not be prevented or detected on a timely basis. These deficiencies could result in misstatements to the Company's condensed consolidated financial statements that would be material and would not be prevented or detected on a timely basis.
As previously disclosed under “Item 9A – Controls and Procedures” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, management concluded that the Company did not maintain an effective control environment based on the criteria established in the Committee of Sponsoring Organizations (“COSO”) Framework, and its relevant components, which resulted in deficiencies that constitute material weaknesses, either individually or in the aggregate.
Control Environment
The Company failed to maintain a sufficient complement of qualified personnel to perform control activities. The lack of sufficient appropriately qualified personnel contributed to our failure to: (i) design and implement certain risk-mitigating internal controls; and (ii) consistently operate our internal controls. The control environment material weaknesses contributed to material weaknesses within our system of internal control over financial reporting in the Control Activities component of the Committee of Sponsoring Organizations (“COSO”) Framework.
Control Activities
The Company did not maintain effective control activities based on the criteria established in the COSO Framework and identified the following control deficiencies that constitute material weaknesses from the lack of effectively designed and implemented controls, either individually or in the aggregate:
•review and approval of manual journal entries, including implementing appropriate segregation of duties;
•complex transactions, inclusive of accounting for business combinations and the Company’s investment related to the SEMTH Master Lease Agreement and the related interest income; and
•revenue recognition, including the review of the contracts upon inception and/or acquisition and the accounting for revenue recognition under ASC 606, Revenue from Contracts with Customers.
These deficiencies in control activities contributed to the potential for there to have been material accounting errors in multiple financial statement account balances and disclosures that would not have been prevented or detected timely.
However, after giving full consideration to these material weaknesses, and the additional analyses and other procedures that were performed to ensure that the Company’s unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with GAAP, management has concluded that our unaudited condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows as of and for the periods disclosed in conformity with GAAP.
Remediation Plan
The Company is committed to maintaining strong internal control over financial reporting. In response to the material weaknesses described above, management, with the oversight of the Audit Committee, has taken and is taking comprehensive actions to remediate the above material weaknesses. The remediation plan includes the following:
•developed and presented a training program educating control owners concerning financial statement risk and the principles of the Internal Control - Integrated Framework issued by COSO;
•implemented a formal journal entry review policy to govern the process by which all manual journal entry approvers would adhere to;
•implemented a system-based journal entry approval workflow to ensure manual journal entries have proper segregation of duties between journal entry creators and approvers;
•hiring professionals with the appropriate skills to perform control activities, including those involving complex and/or non-routine transactions;
•designing and implementing additional and/or enhanced controls in the areas of account reconciliations, contract accounting, revenue recognition, and financial statement analysis prepared in conformity with GAAP, and manual journal entries; and
•designing and implementing controls to address the identification, accounting, review and reporting of complex and/or non-routine transactions.
While management believes that these efforts will improve the Company's internal control over financial reporting, the implementation of these measures is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles.
Management believes the Company is making progress toward achieving the effectiveness of its internal controls and disclosure controls. The actions that management is taking are subject to ongoing management review, as well as Audit Committee oversight. Management will continue to assess the effectiveness of the Company’s internal control over financial reporting and take steps to remediate the known material weaknesses expeditiously.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2024, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
For a description of our material pending legal proceedings, see Legal Proceedings in Note 14. Commitments and Contingencies to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties relating to the Company's business disclosed in Part I, Item 1A, "Risk Factors," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, except as described below. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations.
Our performance may be negatively impacted by our recent Chief Executive Officer transition
On April 12, 2024, we announced that our Chairman, Christopher Hayes, had been named President and Chief Executive Officer to replace our Former CEO. There are a number of risks associated with a CEO transition, any of which may harm the Company. If the new CEO is unsuccessful at leading the management team or is unable to articulate and execute the Company’s strategy and vision, our business may be harmed, and our stock price may decline. If we do not successfully manage our CEO transition, it could be viewed negatively by our customers, employees or investors and could have an adverse impact on our business, financial condition, and operating results. With the change in leadership, there is a risk to retention of other members of senior management, as well as to continuity of business initiatives, plans, and strategies through the transition period and if we are unable to execute an orderly transition, our business may be adversely affected.
We are subject to risks associated with proxy contests and other actions of activist stockholders.
Publicly traded companies have increasingly become subject to campaigns by activist investors advocating corporate actions such as governance changes, financial restructurings, increased borrowings, special dividends, stock repurchases or even sales of assets or entire companies to third parties or the activists themselves. We received a notice dated April 17, 2024 from Clayton Capital Appreciation Fund, L.P. and its affiliates, Clayton Partners LLC, the JSCC Family Trust, and Jason Stankowski (collectively, “Clayton”), which owned approximately 2.1% of the Company’s outstanding shares at the time of submission, purporting to nominate a slate of two candidates for election as directors at our 2024 Annual Meeting of Stockholders. On June 21, 2024, we entered into a Cooperation Agreement with Clayton (the “Cooperation Agreement”) pursuant to which, among other things, we agreed to increase the size of our Board from six to seven directors and to take all necessary actions to appoint Clara Nagy McBane to our Board to fill the directorship resulting from the increase in the size of our Board and Clayton agreed to certain customary standstill provisions that will remain in effect until the date that is the earlier of (i) the date Clayton receives notice that we will not nominate Ms. McBane for re-election to our Board at the 2025 Annual Meeting of Stockholders, (ii) immediately following the closing of the polls on the election of directors at the 2025 Annual Meeting of Stockholders, (iii) August 31, 2025 if the 2025 Annual Meeting of Stockholders has not been held by that date, and (iv) in the event that any party materially breaches the Cooperation Agreement, the date that is 30 calendar days following written notice of such breach from the non-breaching party, if such breach (if capable of being cured) has not been cured by such date, or, if impossible to cure within 30 calendar days, such party has not taken substantive action to correct by such date. A proxy contest or related activities on the part of activist stockholders could adversely affect our business for a number of reasons, including, without limitation, the following:
•responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of our Board of Directors, management and our employees;
•perceived uncertainties as to our future direction may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel, business partners, customers and others important to our success, any of which could negatively affect our business and our results of operations and financial condition;
•actions by activist stockholders may be exploited by our competitors, cause concern to our current or potential customers and make it more difficult to attract and retain qualified personnel;
•if nominees advanced by activist stockholders are elected or appointed to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plans or to realize long-term value from our assets, and this could in turn have an adverse effect on our business and on our results of operations and financial condition; and
•proxy contests may cause our stock price to experience periods of volatility.
We have received subpoenas from states attorneys general requesting information about our business. These investigations could result in substantial legal fees, fines, penalties or damages and may divert Management’s time and attention from our business
We have received subpoenas from state attorneys general requesting information about our business. These investigations could result in substantial legal fees, fines, penalties, or damages and may divert Management’s time and attention from our business. Specifically, we have received subpoenas from the attorneys general for the states of Connecticut, New Jersey, New York, and Texas regarding, among other things, our sales, marketing and billing practices. We are cooperating with these investigations, each of which have involved requests for a substantial volume of documents to be produced by the Company. While we are responding to these subpoenas with the assistance of counsel, it is possible that these investigations may result in a fine, penalty or injunction which may adversely affect our ability to operate in these states.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no share repurchases during the three months ended September 30, 2024.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
Herewith
*
Filed herewith
+
Indicates a management contract or compensatory plan or arrangement.
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In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933 except to the extent that the registrant specifically incorporates it by reference.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.