# SUNation Energy, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [SUNation Energy, Inc.](/companies/sune.md) (CIK 22701)
- Form: 10-Q
- Filed: 2023-11-13
- Accepted by EDGAR: Nov 13, 2023, 16:34 ET
- Period: 2023-09-30
- Accession: 0000022701-23-000017
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/22701/000002270123000017/pegy-20230930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/22701/000002270123000017/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $18.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $60.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $11.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $38.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $7.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $22.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $7.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $22.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$1.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$5.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $0 | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$4.2k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | −$1.4k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$2.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$6.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.24 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.24 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.65 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 10,050,015 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 9,973,311 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$825.1k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $614.4k | us-gaap:PaymentsToAcquireProductiveAssets |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $31.2k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $3.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $18.9m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $62.5m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $22.2m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-09-30 | $21.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 28,913 characters.

*The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited financial statements and notes thereto as of and for the years ended December 31, 2022 and 2021, which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 14, 2023.*

### Forward-Looking Statements

This quarterly report and, from time to time, reports filed with the SEC, in press releases, and in other communications to shareholders or the investing public, may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “may,” “will,” “can,” “should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,” “believe,” “are confident that,” “look forward to,” “predict,” “estimate,” “potential,” “project,” “target,” “forecast,” “see,” “intend,” “design,” “strive,” “strategy,” “future,” “opportunity,” “assume,” “guide,” “position,” “continue” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on current beliefs, expectations and assumptions that are subject to significant risks, uncertainties and changes in circumstances that could cause actual results to differ materially from such forward-looking statements. These risks, uncertainties and changes in circumstances include, but are not limited to:

our growth strategy depends on the continued origination of solar installation agreements;

if we fail to manage our operations and growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges;

we need to raise additional capital to fund our operations and repay our obligations, which funding may not be available on favorable terms or at all and may lead to substantial dilution to our existing shareholders. Further, there is substantial doubt about our ability to continue as a going concern, which conditions may adversely affect our stock price and our ability to raise capital;

our common stock may be delisted from Nasdaq if we cannot increase the share price within the time period and for the duration as required by Nasdaq;

we depend on a limited number of suppliers of solar energy system components and technologies to adequately meet demand for our solar energy systems;

increases in the cost of our solar energy systems due to tariffs and other trade restrictions imposed by the U.S. government could have a material adverse effect on our business, financial condition and results of operations;

our operating results and our ability to grow may fluctuate from quarter to quarter and year to year, which could make our future performance difficult to predict and could cause our operating results for a particular period to fall below expectations.

we may have difficulty integrating the businesses from the SUNation transaction with our existing operations or otherwise obtaining the strategic benefits of the acquisition;

if we are unable to make acquisitions on economically acceptable terms, our future growth would be limited, and any acquisitions we may make could reduce, rather than increase, our cash flows;

product liability and property damage claims against us or accidents could result in adverse publicity and potentially significant monetary damages;

we will not be able to insure against all potential risks and we may become subject to higher insurance premiums;

damage to our brand and reputation or change or loss of use of our brand could harm our business and results of operations;

the loss of one or more members of our senior management or key employees may adversely affect our ability to implement our strategy;

our inability to protect our intellectual property could adversely affect our business. We may also be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies;

we may be subject to interruptions or failures in our information technology systems;

our information technology systems may be exposed to various cybersecurity risks and other disruptions that could impair our ability to operate, adversely affect our business, and damage our brand and reputation;

our failure to hire and retain a sufficient number of key employees, such as installers and electricians, would constrain our growth and our ability to timely complete projects;

our business is concentrated in certain markets, putting us at risk of region-specific disruptions;

if sufficient additional demand for residential solar energy systems does not develop or takes longer to develop than we anticipate, our ability to originate solar installation agreements may decrease;

our business prospects are dependent in part on a continuing decline in the cost of solar energy system components and our business may be adversely affected to the extent the cost of these components stabilize or increase in the future;

we face competition from centralized electric utilities, retail electric providers, independent power producers and renewable energy companies;

developments in technology or improvements in distributed solar energy generation and related technologies or components may materially adversely affect demand for our offerings;

a material reduction in the retail price of electricity charged by electric utilities or other retail electricity providers could harm our business, financial condition and results of operations;

terrorist or cyberattacks against centralized utilities could adversely affect our business;

climate change may have long-term impacts on our business, industry, and the global economy;

increases in the cost of our solar energy systems due to tariffs imposed by the U.S. government could have a material adverse effect on our business, financial condition and results of operations;

we are not currently regulated as an electric public utility under applicable law, but may be subject to regulation as an electric utility in the future;

electric utility policies and regulations, including those affecting electric rates, may present regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our solar energy systems and adversely impact our ability to originate new solar installation agreements;

we rely on net metering and related policies to sell solar systems to our customers in most of our current markets, and changes to policies governing net metering may significantly reduce demand for electricity from residential solar energy systems and thus for our installation services;

a customer’s decision to procure installation services from us depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or our ability to monetize them could adversely impact our business;

technical and regulatory limitations regarding the interconnection of solar energy systems to the electrical grid may significantly delay interconnections and customer in-service dates, harming our growth rate and customer satisfaction; and

compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties, operational delays and adverse publicity.

Other risks and uncertainties are discussed more fully under the caption “Risk Factors” in our filings with the SEC, including in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 and in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q. Accordingly, you should not place undue reliance on forward-looking statements. To the extent permitted by applicable law, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

### Overview

Pineapple Energy Inc. (formerly Communications Systems, Inc. (“CSI”) and Pineapple Holdings, Inc.) (herein collectively referred to as “Pineapple,” “PEGY,” “our,” “we”, “us” or the “Company”) was originally organized as a Minnesota corporation in 1969. On March 28, 2022, the Company completed its previously announced merger transaction with Pineapple Energy LLC (“Pineapple Energy”) in accordance with the terms of a merger agreement, pursuant to which a subsidiary of the Company merged with and into Pineapple Energy, with Pineapple Energy surviving the merger as a wholly owned subsidiary of the Company (the “merger”). Following the closing of the merger (the “Closing”) the Company changed its name from Communications Systems, Inc. to Pineapple Holdings, Inc. and subsequently, on April 13, 2022, changed its name to Pineapple Energy Inc.

In addition, on March 28, 2022 and immediately prior to the Closing, the Company completed its acquisition (“HEC Asset Acquisition”) of substantially all of the assets of two Hawaii-based solar energy companies, Hawaii Energy Connection, LLC (“HEC”) and E-Gear, LLC (“E-Gear”). On November 9, 2022, the Company purchased the equity of New York-based SUNation Solar Systems, Inc. and five of its affiliated entities (collectively “SUNation”).

Pineapple’s vision is to power the energy transition through grass-roots growth of solar electricity paired with battery storage. The Company is a growing domestic operator and consolidator of residential and commercial solar, battery storage, and grid services solutions. Our strategy is focused on acquiring, integrating, and growing leading local and regional solar, storage, and energy services companies nationwide.

Pineapple today is primarily engaged in the sale, design, and installation of photovoltaic solar energy systems and battery storage systems through its Hawaii-based HEC and New York-based SUNation entities. We install systems that provide clean, reliable solar energy typically at savings relative to traditional utility offerings. Our primary customers are residential homeowners. We also provide solar energy systems to commercial owners and other municipal customers.

Through its E-Gear business, Pineapple also develops, manufactures, and sells patented edge-of-grid energy management software and hardware technology, such as energy management control devices. These products allow homeowners to get the most out of their installed photovoltaic solar energy systems and utility grid support benefits. Our primary customers for this technology are energy services companies and other utilities.

While CSI was the legal acquirer in the merger, because Pineapple Energy was determined to be the accounting acquirer, the historical financial statements of Pineapple Energy became the historical financial statements of the combined company upon the consummation of the merger. As a result, the financial statements included in the accompanying condensed consolidated financial statements, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, reflect the historical operating results of Pineapple Energy prior to the merger, the consolidated results of CSI, Pineapple Energy, HEC, and E-Gear following the Closing, including the results of SUNation following that acquisition, and the Company’s equity structure for all periods presented. Accordingly, references to “the Company” herein are to the applicable entity at the date or during the time period in the applicable discussion.

In addition, the Company sold substantially all of the remaining assets of its JDL Technologies, Inc. (“JDL”) and Ecessa Corporation (“Ecessa”) businesses on June 30, 2023. Because the Company was working to divest such assets pursuant to the merger agreement, it previously met the criteria to report the operations of these businesses as discontinued operations. As a result, unless otherwise noted, all information in this Form 10-Q related to the JDL and Ecessa businesses are discussed and presented as discontinued operations and the Company reports its remaining business operations as continuing operations.

### Results of Operations

### Comparison of the Three Months Ended September 30, 2023 and 2022

The consolidated results herein reflect the historical operating results of Pineapple Energy prior to the merger and the consolidated results of CSI (excluding the discontinued operations of JDL & Ecessa), Pineapple Energy, HEC and E-Gear following the Closing on March 28, 2022 and the results of SUNation following the closing on its acquisition on November 9, 2022.

Consolidated sales were $18,288,697 in the third quarter of 2023 and $5,888,162 in the third quarter of 2022. The significant increase in revenue was primarily related to the SUNation acquisition that occurred in the fourth quarter of 2022 and contributed $12.0 million of the $12.4 million increase in the third quarter of 2023. The additional increase was due to an increase in residential contract revenue in Hawaii. Sales in the third quarter of 2023 and 2022 by type were as follows:

|  | Revenue by Type Three Months Ended September 30 2023 | 2022 |
| --- | ---: | ---: |
| Residential contracts | $15,300,411 | $5,800,813 |
| Commercial contracts | 2,201,888 | 72,894 |
| Service revenue | 764,063 | — |
| Software revenue | 22,335 | — |
| Other | — | 14,455 |
|  | $18,288,697 | $5,888,162 |

Consolidated gross profit increased to $7,032,458 in the third quarter of 2023 from gross profit of $1,404,173 in the third quarter of 2022. Gross margin increased to 38% in the third quarter of 2023 compared to 24% in the third quarter of 2022 due to the SUNation acquisition and an improvement in equipment costs and financing fees.

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense, transaction costs and a fair value remeasurement loss on SUNation earnout consideration, increased to $8,596,808 in the third quarter of 2023 as compared to $3,827,944 in the third quarter of 2022. Consolidated selling, general and administrative expenses increased to $7,150,110 in the third quarter of 2023 from $2,702,005 in the third quarter of 2022, due primarily to a $4.5 million increase in selling, general and administrative costs associated with the SUNation business. Amortization expense increased by $353,124 to $1,216,698 in the third quarter of 2023 as compared to the same period of the prior year due to additional intangible assets acquired through the SUNation acquisition. Transaction costs decreased by $262,365 in the third quarter of 2023 as compared to the same period of the prior year, due to limited activity in the third quarter of 2023. There was also a $230,000 fair value remeasurement loss related to the SUNation acquisition earnout consideration in the third quarter of 2023.

Consolidated other expense increased by $649,920 to $768,937 in the third quarter of 2023 as compared to $119,017 in the third quarter of 2022. The increase was primarily related to a $655,218 increase in interest and accretion expense and a $239,922 increase in fair value remeasurement loss on the contingent value rights (“CVRs”), partially offset by a $258,220 increase in gain on sale of assets and other income.

Consolidated operating loss from continuing operations in the third quarter of 2023 was $1,564,350 as compared to $2,423,771 in the third quarter of 2022. Net loss from continuing operations in the third quarter of 2023 was $2,329,053, or $ (0.23) per diluted share, compared to net loss of $2,542,788, or $ (0.34) per diluted share, in the third quarter of 2022.

### Comparison of the Nine Months Ended September 30, 2023 and 2022

Consolidated sales were $60,190,413 in the first nine months of 2023 and $10,338,483 in the first nine months of 2022. As Pineapple Energy had limited revenue in the first quarter of the prior year, the increase in sales was due to the merger, the HEC Asset Acquisition and the acquisition of SUNation during 2022. Sales in the first nine months of 2023 and 2022 by type were as follows:

|  | Revenue by Type Nine Months Ended September 30 2023 | 2022 |
| --- | ---: | ---: |
| Residential contracts | $48,635,741 | $10,180,214 |
| Commercial contracts | 8,789,930 | 109,441 |
| Service revenue | 2,429,433 | — |
| Software revenue | 323,815 | — |
| Other | 11,494 | 48,828 |
|  | $60,190,413 | $10,338,483 |

35

Consolidated gross profit increased to $22,175,708 in the first nine months of 2023 as compared to gross profit of $2,372,324 in the first nine months of 2022 due to the increase in revenue through acquisitions. Gross margin increased to 37% in the first nine months of 2023 compared to 23% in the first nine months of 2022 due to the SUNation acquisition, normalization of the supply chain and a decrease in product costs.

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense, transaction costs and a fair value remeasurement loss on SUNation earnout consideration, increased to $27,304,903 in the first nine months of 2023 as compared to $9,275,887 in the first nine months of 2022. Consolidated selling, general and administrative expenses increased to $22,442,788 in the first nine months of 2023 from $5,792,270 in the first nine months of 2022, due primarily to a $16.6 million increase in selling, general and administrative costs associated with the acquired businesses. Amortization expense increased by $1,615,625 to $3,700,095 in the first nine months of 2023 as compared to the same period of the prior year due to additional intangible assets acquired through the acquired businesses. Transaction costs decreased by $1,397,127 in the first nine months of 2023 as compared to the same period of the prior year, due to the consummation of the merger and HEC Asset Acquisition in the first quarter of 2022 and limited activity in the first nine months of 2023. There was also a $1,160,000 fair value remeasurement loss related to the SUNation acquisition earnout consideration in the first nine months of 2023.

Consolidated other (expense) income decreased $4,299,746 to expense of $134,735 in the first nine months of 2023 as compared to income of $4,165,011 in the first nine months of 2022. The decrease was related to a $4,684,000 gain on the fair value remeasurement of the merger earnout consideration in the first nine months of 2022, a $792,017 decrease in the gain on sale of assets in the first nine months of 2023 compared to the same period of 2022 and a $1,227,040 increase in interest and accretion expense, partially offset by a $2,366,833 increase in fair value remeasurement gain on the CVRs.

Consolidated operating loss from continuing operations in the first nine months of 2023 was $5,129,195 as compared to $6,903,563 in the first nine months of 2022. Net loss from continuing operations in the first nine months of 2023 was $5,262,534, or $ (0.53) per diluted share, compared to $2,738,552, or $ (0.45) per diluted share, in the first nine months of 2022.

### Liquidity and Capital Resources

As of September 30, 2023, the Company had $5,593,402 in cash, restricted cash and cash equivalents. Of this amount, $1,777,737 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating cash.

Of the amounts of cash, restricted cash and cash equivalents on the balance sheet at September 30, 2023, $2,175,753 consist of funds that can only be used to support the legacy CSI business, will be distributed to CVR holders and cannot be used to support the working capital needs of the Pineapple Energy business.

The Company had working capital of $ (3,247,218) at September 30, 2023, consisting of current assets of $18,922,799 and current liabilities of $22,170,017 compared to working capital of $27,366 at December 31, 2022 consisting of current assets of $25,961,524 and current liabilities of $25,934,158.

Cash flow used in operating activities was $825,114 in the first nine months of 2023 as compared to $6,341,172 in the same period of 2022. Significant working capital changes in the nine months ended September 30, 2023 included a decrease in other accrued expenses of $3,095,746, a decrease in other assets of $2,198,423, a decrease in inventory of $1,427,729, and a decrease in customer deposits of $921,228. $1,584,541 of the decrease in other assets and $2,181,761 of the decrease in other accrued liabilities was related to the receipt and payment out of the employee retention credit receivable and other related party payables. Other accrued liabilities also decreased by approximately $1.0 million due to a decrease in billings in excess of costs and estimated earnings as commercial projects were completed during the first nine months of the year.

Net cash provided by investing activities was $3,608,534 in the first nine months of 2023 compared to net cash used in investing activities of $2,300,726 in the same period of 2022. Net cash provided in the 2023 period was the result of proceeds from the sale of investments and proceeds from the sale of the JDL and Ecessa assets included within discontinued operations, partially offset by capital expenditures. Net cash used in the 2022 period was primarily related to $10,199,835 in net cash paid for the HEC Asset Acquisition and the merger, partially offset by $6,297,115 in proceeds from the sale of assets previously classified as held for sale and $1,500,000 in earnout consideration payments related to legacy CSI’s sale of its Electronics and Software segment in 2021.

Net cash used in financing activities was $2,446,496 in the first nine months of 2023 compared to net cash provided by financing activities of $16,205,002 in the same period of 2022. Net cash used in financing activities in the first nine months of 2023 was due to $3,036,676 in CVR distributions and $5,000,000 in payments against the SUNation Short-Term Note and $1,500,000 in payments against the Hercules Capital, Inc. (“Hercules”) term loan, as discussed further in Note 9, Commitments and Contingencies, partially offset by $7,500,000 in borrowings from Decathlon Specialty Finance, LLC (“Decathlon”). In the first nine months of 2022, the Company received $32,000,000 in proceeds from the issuance of preferred stock and warrants to PIPE Investors and paid $2,699,370 in related issuance costs. The Company also paid $8,745,628 in CVR distributions and $4,500,000 in principal against the Hercules term loan in the first nine months of 2022, as discussed further in Note 9, Commitments and Contingencies.

In connection with the SUNation Acquisition, on November 9, 2022, the Company issued a $5,000,000 Short-Term Limited Recourse Secured Promissory Note (the “Short-Term Note”) and a $5,486,000 Long-Term Promissory Note (the “Long-Term Note”). The Short-Term Note was secured as described below and was scheduled to mature on August 9, 2023. It carried an annual interest rate of 4% until the three-month anniversary of issuance, 8% thereafter until the six-month anniversary of issuance, then 12% thereafter until the Short-Term Note is paid in full. The Short-Term Note was paid in full in conjunction with the Decathlon loan. The Long-Term Note is unsecured and matures on November 9, 2025. It carries an annual interest rate of 4% until the first anniversary of issuance, then 8% thereafter until the Long-Term Note is paid in full. The Company will be required to make a principal payment of $2.5 million on the second anniversary of the Long-Term Note. The Long-Term Note may be prepaid at our option at any time without penalty.

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

Based on the Company’s current financial position, the Company’s forecasted future cash flows for twelve months beyond the date of issuance of the financial statements in this report indicate that the Company will not have sufficient cash to make the first SUNation earnout payment in the second quarter of 2024, a factor which raises substantial doubt about the Company’s ability to continue as a going concern.

As a result, the Company requires additional funding and seeks to raise capital through sources that may include public or private equity offerings, debt financings and/or strategic alliances. However, additional funding may not be available on terms acceptable to the Company, or at all. If the Company is unable to raise additional funds, it would have a negative impact on the Company’s business, results of operations and financial condition. To the extent that additional funds are raised through the sale of equity or securities convertible into or exercisable for equity securities, the issuance of securities will result in dilution to the Company’s shareholders. Further, certain transactions could trigger an adjustment to the exercise price of the Convertible Preferred Stock and PIPE Warrants, which would lead to a corresponding increase in the number of shares of common stock issuable upon exercise of the PIPE Warrants, further diluting the Company’s shareholders.

#### Contingent Value Rights and Impact on Cash

As discussed in Note 3, Business Combinations, the Company issued CVRs prior to the closing of the merger to CSI shareholders of record on the close of business on March 25, 2022. The CVR entitles the holder to a portion of the cash, cash equivalents, investments and net proceeds of any divestiture, assignment, or other disposition of all legacy assets of CSI and/or its legacy subsidiaries, JDL and Ecessa, that are related to CSI’s pre-merger business, assets, and properties that occur during the 24-month period following the closing of the merger. The CVR liability as of September 30, 2023 was estimated at $3,213,765 and represented the estimated fair value as of that date of the legacy CSI assets to be distributed to CVR holders as of that date. This amount is recorded as a current liability that includes the remaining restricted cash and cash equivalents, investments, along with the other tangible and intangible assets related to the legacy

CSI business. The proceeds from CSI’s pre-merger business working capital and related long term-assets and liabilities are not available to fund the working capital needs of the post-merger company.

### Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and such differences could be material to our financial position and results of operations. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. For additional information, please see the discussion of our critical accounting estimates in our Annual Report on Form 10-K for the year ended December 31, 2022.

### Recently Issued Accounting Pronouncements

Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are also described in Note 2, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in this report.

## Controls and procedures

As filed, 1,524 characters.

#### (a) Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, management concluded that the Company’s disclosure controls and procedures are effective.

#### (b) Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 3,685 characters.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”), which could materially affect our business, financial condition or future results.

There have been no material changes in the risk factors disclosed in the Form 10-K, except the following new risk factor is added:

***Our failure to maintain compliance with the Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock.***

Our common stock is currently listed on The Nasdaq Capital Market. In order to maintain this listing, we must satisfy minimum financial and other requirements. On October 27, 2023, we received a notice from the Listing Qualifications Department of the Nasdaq Stock Market informing us that because the closing bid price for our common stock listed on Nasdaq was below $1.00 per share for the last 31 consecutive business days, we did not comply with the minimum closing bid price requirement for continued listing on The Nasdaq Capital Market under Nasdaq Marketplace Rule 5550(a)(2) (the "Rule"). In accordance with Nasdaq’s Listing Rules, we have a period of 180 calendar days, or until April 24, 2024, to regain compliance with the Rule. If at any time during this 180-day period, the closing bid price of our common stock is at least $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will provide written confirmation that we achieved compliance with the Rule. The notice also disclosed that in the event we do not regain compliance by April 24, 2024, we may be able to request additional time, but there is no assurance that such additional time will be granted.

We intend to continue actively monitoring the bid price for our common stock between now and April 24, 2024, and will consider available options to resolve the deficiency. These options include effecting a reverse stock split, if approved by shareholders. We have scheduled our annual meeting of shareholders for later this year, at which we will ask, among other matters, shareholders to vote to approve a reverse stock split of our outstanding common stock, within a specified range as determined by the Board of Directors. However, there can be no assurance that shareholders will approve a reverse stock split or that any reverse stock split that is effected will increase the share price of our common stock at or above the required $1.00 per share, initially or in the future, or for any certain number of days. Further, there is no assurance that we will be eligible for an additional compliance period or that our common stock will not be delisted from Nasdaq.

The perception among investors that we are at a heightened risk of delisting could negatively affect the market price and trading volume of our common stock. If our common stock is delisted from Nasdaq, the delisting could: substantially decrease trading in our common stock; adversely affect the market liquidity of our common stock as a result of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws; adversely affect our ability to issue additional securities or obtain additional financing in the future on acceptable terms, if at all; result in the potential loss of confidence by investors, suppliers, partners and employees and fewer business development opportunities; and result in limited analyst interest. Additionally, the market price of our common stock may decline further, and shareholders may lose some or all of their investment.

Filed Nov 13, 2023.
Source: SEC EDGAR, the filing index for accession 0000022701-23-000017. Last ingested by Listed: Nov 10, 2026, 16:48 ET. No prices; not investment advice.