SUNation Energy, Inc.: Form 10-Q for the period ended Jun 30, 2024

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 our audited financial statements and notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on April 1, 2024.

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:

if our shareholders sell, or indicate an intention to sell, substantial amounts of our stock in the public market, the trading price of our common stock could decline;

if we fail to design and implement and maintain effective internal controls over financial reporting, we may be subject to sanctions or investigations by regulatory authorities or lose investor confidence in the accuracy and completeness of our financial reports;

if our common stock market price continues to be highly volatile, it may harm the value of the investment of our shareholders in our common stock;

if we issue additional common stock, it may materially dilute the ownership interests of our shareholders;

anti-takeover provisions in our organizational documents and agreements may discourage or prevent a change in control, even if a sale of Pineapple could be beneficial to our shareholders;

our board of directors may establish shares of preferred stock in series and fix the designation, powers, preferences and rights of the shares of each series which may be senior to or on parity with our common stock, which may reduce its value;

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 maintain compliance with the applicable listing standards;

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, 2023 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. (“Pineapple,” “PEGY,” “we,” “our”, “us” or the “Company”) was originally organized as a Minnesota corporation in 1969.

Pineapple’s vision is to power the energy transition through grass-roots growth of solar electricity paired with battery storage. The Company is a 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 subsidiary, Hawaii Energy Connection, LLC (“HEC”), and New York-based subsidiaries, the SUNation entities (collectively, “SUNation”). 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.

On June 30, 2023, the Company sold substantially all of the remaining assets of its JDL Technologies, Inc. (“JDL”) and Ecessa Corporation (“Ecessa”) businesses. 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.

Reverse Stock Split

On January 3, 2024, the Company’s shareholders approved a reverse stock split of the Company’s common stock at a ratio within a range of 1-for-2 and 1-for-15 and granted the Company’s board of directors the discretion to determine the timing and ratio of the split within such range.

On May 28, 2024, the Company’s board of directors determined to effect the reverse stock split of the common stock at a 1-for-15 ratio (the “Reverse Stock Split”) and approved an amendment (“Reverse Stock Split Amendment”) to the Fourth Amended and Restated Articles of Incorporation of the Company to effect the Reverse Stock Split.

Effective June 12, 2024, the Company amended its Fourth Amended and Restated Articles of Incorporation to implement the Reverse Stock Split. The Company's common stock began trading on a split-adjusted basis when the market opened on June 12, 2024 (the "Effective Date").

As a result of the Reverse Stock Split, at 12:01 a.m. Central Time on the Effective Date, every 15 shares of common stock then issued and outstanding automatically were combined into one share of common stock, with no change in par value per share. No fractional shares were outstanding following the Reverse Stock Split, and any fractional shares that would have resulted from the Reverse Stock Split were settled in cash. The number of shares of common stock outstanding was reduced from 108,546,773 to 7,235,731, with 720.901 fractional shares paid out in cash totaling $1,132. The total number of shares authorized for issuance was reduced to 7,500,000 in proportion to the Reverse Stock Split ratio.

Effective as of the same time as the Reverse Stock Split, the number of shares of common stock available for issuance under the Company's equity compensation plans were automatically reduced in proportion to the Reverse Stock Split. Upon effectiveness, the Reverse Stock Split also resulted in reductions in the number of shares of common stock issuable upon exercise or vesting of equity awards in proportion to the Reverse Stock Split ratio and caused a proportionate increase in exercise price or share-based performance criteria, if any, applicable to such awards.

Results of Operations

Comparison of the Three Months Ended June 30, 2024 and 2023

Consolidated sales decreased $6,286,871, or 31.7% to $13,549,420 in the second quarter of 2024 from $19,836,291 in the second quarter of 2023. Sales in the second quarter of 2024 and 2023 by type were as follows:

Residential contract sales decreased $2,691,079, or 18%, due to a 7% reduction in residential kilowatts installed and also a decrease in average price per system installed as result of lower financing fees and lower battery attachment rate. The residential market within the solar industry is seeing an overall decline in installations due to higher interest rates. Commercial contract sales decreased $3,268,061, or 87%, due to a delay in the start of commercial pipeline projects into the second half of 2024.

Consolidated gross profit decreased to $4,792,354 in the second quarter of 2024 as compared to gross profit of $7,136,934 in the second quarter of 2023 due primarily to the decrease in revenue during the quarter. Gross margin decreased slightly to 35% during the second quarter of 2024 as compared to 36% in the second quarter of 2023.

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense, transaction costs and a fair value remeasurement gain (loss) of SUNation earnout consideration, decreased to $6,818,298 in the second quarter of 2024 as compared to $8,552,254 in the second quarter of 2023. Consolidated selling, general and administrative expenses decreased $671,632, or 18%, to $6,558,923 in the second quarter of 2024 from $7,230,555 in the second quarter of 2023, due primarily to a $312,120 decrease in stock compensation expense and overall decreased personnel expenses on lower headcount. Amortization expense decreased by $507,324 to $709,375 in the second quarter of 2024 as compared to $1,216,699 in the same period of the prior year due to the completion of the amortization of certain intangible assets in late 2023. The fair value remeasurement related to the SUNation acquisition earnout consideration in the second quarter of 2024 was a gain of $450,000 compared to a loss of $105,000 in the same period of the prior year.

Consolidated other (expense) income decreased by $5,993,320 to expense of $4,914,704 in the second quarter of 2024 as compared to $1,078,616 in income in the second quarter of 2023. The decrease was primarily related to a $3,267,571 fair value remeasurement loss on the warrant liability, a $1,055,600 fair value remeasurement loss on the embedded derivative liability, a $1,525,420 decrease in fair value remeasurement gain on the contingent value rights (“CVRs”), and a $136,297 increase in interest and accretion expense.

Consolidated operating loss from continuing operations in the second quarter of 2024 was $2,025,944 as compared to $1,415,320 in the second quarter of 2023. Net loss from continuing operations attributable to shareholders in the second quarter of 2024 was $6,934,015, or $(1.11) per diluted share, compared to net loss from continuing operations of $333,810, or $(2.34) per diluted share, in the second quarter of 2023.

Comparison of the Six Months Ended June 30, 2024 and 2023

Consolidated sales decreased $15,133,099, or 36.1% to $26,768,617 in the first six months of 2024 from $41,901,716 in the first six months of 2023. Sales in the first six months of 2024 and 2023 by type were as follows:

Residential contract sales decreased $9,434,879, or 28%, due to a 19% reduction in residential kilowatts installed and also a decrease in average price per system installed as result of lower financing fees and lower battery attachment rate. The residential market within the solar industry is seeing an overall decline in installations due to higher interest rates. Commercial contract sales decreased $5,098,647, or 77%, due to a delay in the start of commercial pipeline projects into the second half of 2024.

Consolidated gross profit decreased to $9,597,802 in the first six months of 2024 as compared to gross profit of $15,143,250 in the first six months of 2023 due primarily to the decrease in revenue during the quarter. Gross margin remained flat at 36% during each of the first six months of 2024 and the first six months of 2023.

Consolidated operating expenses, which include selling, general and administrative expenses, amortization expense, transaction costs and a fair value remeasurement gain of SUNation earnout consideration, decreased to $13,806,700 in the first six months of 2024 as compared to $18,708,095 in the first six months of 2023. Consolidated selling, general and administrative expenses decreased $2,104,728, or 14%, to $13,187,950 in the first six months of 2024 from $15,292,678 in the first six months of 2023, due primarily to a $427,259 decrease in stock compensation expense, decreased sales and marketing expense, including commissions, on lower revenue in the quarter, and decreased personnel expenses on lower headcount. Amortization expense decreased by $1,064,647 to $1,418,750 in the first six months of 2024 as compared to $2,483,397 in the same period of the prior year due to the completion of the amortization of certain intangible assets in late 2023. The fair value remeasurement related to the SUNation acquisition earnout consideration in the first six months of 2024 was a gain of $800,000 compared to a loss of $930,000 in the same period of the prior year.

Consolidated other (expense) income decreased by $2,157,139 to expense of $1,522,937 in the first six months of 2024 as compared to $634,202 in income in the first six months of 2023. The decrease was primarily related to a $442,950 increase in interest and accretion expense, a $1,055,600 fair value remeasurement loss on the embedded derivative liability, and a $899,335 decrease in fair value remeasurement gain on the CVRs, partially offset by a $461,022 fair value remeasurement gain on the warrant liability.

Consolidated operating loss from continuing operations in the first six months of 2024 was $4,208,898 as compared to $3,564,845 in the first six months of 2023. Net loss from continuing operations attributable to shareholders in the first six months of 2024 (after taking into effect $11,322,639 in deemed dividends) was $17,054,003, or $(3.83) per diluted share, compared to net loss from continuing operations of $2,933,481, or $(4.43) per diluted share, in the first six months of 2023.

Liquidity and Capital Resources

As of June 30, 2024, the Company had $2,132,055 in cash, restricted cash and cash equivalents. Of this amount, $1,225,988 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 June 30, 2024, $1,085,712 consisted 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 deficit of $(11,600,420) at June 30, 2024, consisting of current assets of $12,230,447 and current liabilities of $23,830,867 compared to working capital deficit of $(6,594,834) at December 31, 2023.

Cash used in operating activities was $3,425,726 in the first six months of 2024 as compared to $1,660,982 in the same period of 2023. Significant working capital changes in the six months ended June 30, 2024 included an increase in accounts payable of $822,503, a decrease in customer deposits of $774,524, and an increase in other accrued liabilities of $758,737 due to an increase in deferred revenue on upcoming commercial projects.

Net cash used in investing activities was $11,461 in the first six months of 2024 compared to $2,301,591 provided by investing activities in the same period of 2023. Net cash provided in the 2023 period was the result of proceeds from the sale of investments, proceeds from the sale of JDL and Ecessa assets included within discontinued operations, partially offset by capital expenditures.

Net cash provided by financing activities was $172,899 in the first six months of 2024 compared to $791,378 in the same period of 2023. Net cash provided by financing activities in the first six months of 2024 was due to $1,000,000 in proceeds from the issuance of common stock under a registered direct offering, partially offset by payments against loans payable. Net cash provided by financing activities in the six months of 2023 was due to $7,500,000 in borrowings from Decathlon Specialty Finance, LLC (“Decathlon”), partially offset by $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.

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 $2.74 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.

Based on the Company’s current financial position, the Company did not have sufficient cash to make the first SUNation earnout payment, which was due on May 6, 2024, and the Company’s forecasted future cash flows for the 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 principal payment of the Long-Term Note that is due on November 9, 2024, a factor which raises substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. Notwithstanding the Company’s ability to make such payments, the Company is not permitted to make any earnout payments under the SUNation Transaction Agreement or any payments under the Long-Term Note unless Decathlon has provided prior written consent to such payment pursuant to the Company’s Revenue Loan and Security Agreement, dated as of June 1, 2023, by and among the Company, Decathlon, and the other parties thereto (the “Loan Agreement”). Pursuant to that certain subordination letter dated May 31, 2023, each holder of the Long-Term Note has subordinated all payments under the Long-Term Note to the obligations owed to Decathlon under the Loan Agreement (the “Decathlon Obligations”) and has agreed that, until the Decathlon Obligations have been paid in full, any payment under the Long-Term Note is subject to Decathlon’s prior written consent. Therefore, if Decathlon does not consent to the first principal payment of the Long-Term Note, such non-payment will not result in a default under the Long-Term Note. Failure to make earnout payments under the SUNation Transaction Agreement, which are prohibited under the Loan Agreement, could result in a breach under the SUNation Transaction Agreement.

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

The Company issued CVRs prior to the Closing 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. The CVR liability as of June 30, 2024 was estimated at $1,198,212 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, 2023. There have been no changes to our critical accounting estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2023, except as set forth below.

Convertible Preferred Stock and Warrants: In March 2022, the Company issued shares of Series A convertible preferred stock (the “Convertible Preferred Stock”) and PIPE Warrants to investors as part of a $32.0 million private investment in public equity (“PIPE”) transaction. The proceeds from the issuance of the Convertible Preferred Stock were allocated between the Convertible Preferred Stock and PIPE Warrants using a relative fair value method. The Company accounts for the Convertible Preferred Stock and PIPE Warrants based on an assessment of the specific terms and applicable authoritative guidance in Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity”, and ASC 815, “Derivatives and Hedging”. The Convertible Preferred Stock was originally reported as part of permanent equity and the PIPE Warrants were originally determined to be equity-classified. As discussed in Notes 10 and 11, the Convertible Preferred Stock and PIPE Warrants were modified during the first quarter of 2024, which resulted in the Company not having sufficient authorized and unissued shares to settle the conversion and exercise to common stock and the reclassification of the Convertible Preferred Stock to mezzanine equity and the PIPE Warrants to a liability.

Embedded Derivative Liability: The Company’s Decathlon Fixed Loan includes a mandatory prepayment feature upon a contingent event that is considered an embedded derivative that requires bifurcation under ASC 815. Under ASC 815, the embedded derivative is bifurcated and recorded at fair value at inception and each subsequent reporting period. However, based on management’s estimates of the likelihood of certain events, the embedded derivative liability had no fair value at issuance and at the end of each of the reporting periods ended prior to June 30, 2024. As of June 30, 2024, the fair value of this embedded derivative was ascribed value. See further discussion in Note 7.

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.

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 Interim 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 were not effective because of material weaknesses in the Company’s internal control over financial reporting described below.

Material Weakness in Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of the Company’s management, including the CEO and CFO, the Company conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, based on Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “Framework”). Based on that evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2023, due to material weaknesses in the Company’s internal control over financial reporting. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We identified material weaknesses in our internal control over financial reporting due to our limited accounting and finance resources, which resulted in inappropriate preparation, review and maintenance of documentation and information that is critical to the design and consistent execution of internal controls. These material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.

Remediation Plan

To address the material weaknesses in our internal control over financial reporting, the Company is in the process of formalizing a remediation plan that will address our limited resources and also includes implementing a new Enterprise Resource Planning (“ERP”) system which provides the necessary control environment to help mitigate the potential for misstatements in financial reporting, including but not limited to segregation of duties, user permission and access controls, and automated processes. While we believe that these efforts will improve our internal control over financial reporting, the design and implementation of our remediation is ongoing and will require validation and testing of the design and operating effectiveness of our internal controls over a sustained period of time. We will not be able to conclude whether the steps we are taking will fully remediate the material weaknesses in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. Until these weaknesses are remediated, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with U.S. GAAP.

Inherent Limitations on Control Systems

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected. These inherent limitations include the realities that judgments in decision making can by faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

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 June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As reported in our Annual Report on Form 10-K for the year ended December 31, 2023, we concluded that our internal control over financial reporting was not effective.

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, 2023 (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 risk factors are hereby amended and restated as reflected below:

Our failure to maintain compliance with the Nasdaq Stock Market’s continued listing requirements could result in the delisting of our common stock, which could negatively affect the market price of our common stock, our liquidity and our ability to raise capital.

On October 27, 2023, the Company received a notice from the Listing Qualifications Department of the Nasdaq Stock Market informing it that because the closing bid price for its common stock listed on Nasdaq was below $1.00 per share for the last 31 consecutive business days, it 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 “Minimum Bid Rule”). In accordance with Nasdaq’s Listing Rules, the Company had a period of 180 calendar days, or until April 24, 2024, to regain compliance with the Minimum Bid Rule.

Additionally, on February 27, 2024, the Staff issued another notice (the “February Notice”) notifying the Company that its common stock had a closing bid price of $0.10 or less for 10 consecutive trading days (February 12, 2024 to February 26, 2024). Accordingly, the Company is subject to the provisions contemplated under Nasdaq Listing Rule 5810(c)(3)(A)(iii) (the “Low Priced Stock Rule”). As a result, the Staff had determined to delist the Company’s securities from Nasdaq effective as of the opening of business on March 7, 2024, unless the Company requested an appeal before the Nasdaq Hearings Panel (the “Panel”) of the Staff’s determination by March 5, 2024. The Company requested a hearing before the Panel to appeal the February Notice, and Nasdaq initially scheduled the hearing for April 30, 2024. Subsequently, the Company was granted an expedited review process and extension as described below, and received notice that an oral hearing was not necessary.

Following the Company’s Special Meeting of Shareholders that was held on April 12, 2024, at which the reverse stock split proposal was not approved, the Company provided the Panel with an update on the Company’s plan to regain compliance with the Minimum Bid Rule and an extension request until July 24, 2024. On April 19, 2024, the Panel granted an extension for the Company to regain compliance with the Minimum Bid Rule until July 24, 2024.

On May 16, 2024, the Company received a notice from the Staff of the Nasdaq Stock Market informing the Company that it no longer complies with the requirement under Nasdaq Listing Rule 5550(b)(1) to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing on the Nasdaq Capital Market (the “Equity Rule”) because the Company reported stockholders’ equity of negative $11.2 million in its Form 10-Q for the period ended March 31, 2024, and, as of the date of the Notice, the Company did not meet the alternatives of market value of listed securities or net income from continuing operations. Accordingly, the Notice indicates that this matter serves as an additional basis for delisting the Company’s securities from the Nasdaq Stock Market.

On June 12, 2024, the Company effected a 1-for-15 reverse stock split in an effort to regain compliance with the Minimum Bid Rule. On July 18, 2024, the Company received a notice from the Staff informing the Company that it has regained compliance with the Bid Price Rule, and that, as a result, the Company will be subject to a Mandatory Panel Monitor for a period of one year from the date of this letter in accordance with Listing Rule 5815(d)(4)(B). If, within that one-year monitoring period, the Staff finds the Company again out of compliance with the Bid Price Rule, the Company will not be permitted to provide the Staff with a plan of compliance with respect to that deficiency and the Staff will not be permitted to grant additional time for the Company to regain compliance with respect to that deficiency, nor will the Company be afforded an applicable cure or compliance period pursuant to Rule 5810(c)(3). Instead, the Staff will issue a Delist Determination Letter and the Company will have an opportunity to request a new hearing with the initial panel or a newly convened Hearings Panel if the initial panel is unavailable. The Company will have the opportunity to respond/present to the Hearings Panel as provided by Listing Rule 5815(d)(4)(C). The Company’s securities may be at that time delisted from Nasdaq.

On July 19, 2024, the shareholders approved an increase in authorized shares which gives the Company sufficient shares to settle the conversion of the Company’s convertible preferred stock and warrants into common stock. As a result, on July 26, 2024, the Company received a decision from the Nasdaq Hearings Panel (the “Panel”) informing the Company that Nasdaq has determined and agreed that the Company is now in compliance with the Equity Rule. The Company will remain on a one-year Nasdaq Panel Monitor, which means that if the Company falls out of compliance again, it will not be able to submit a remediation plan to the Staff, but rather it will be required to go back into the hearings process.

While on July 19, 2024 the Company’s shareholders approved a reverse stock split of the outstanding shares of the Company’s common stock at a ratio within a range of 1-for-2 to 1-for-200, as determined by our board of directors, the board has not implemented a reverse stock split pursuant to that approval.

Failure to meet any of the terms of Nasdaq Panel Monitor could result in the immediate delisting of the Company’s securities from the Nasdaq Stock Market, subject to a request by the Company for a new hearing with the initial panel or a newly convened Hearings Panel. There can be no assurances that the Company will be able to continue satisfying the continued listing requirements during the compliance period or in the future or effect another reverse stock split. If the Company is unable to maintain compliance with these Nasdaq requirements, its common stock will 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.

The Company needs to raise additional capital to fund its operations and repay its obligations, which funding may not be available on favorable terms or at all and may lead to substantial dilution to the Company’s existing shareholders. Further, there is substantial doubt about the Company’s ability to continue as a going concern, which conditions may adversely affect the Company’s stock price and its ability to raise capital.

Based on the Company’s financial position as of June 30, 2024, including the approximately $1.1 million of cash, restricted cash, cash equivalents and investments that are restricted under the Company’s contingent value rights (“CVR”) agreement and cannot be used by the Company for its own working capital needs, the Company did not have sufficient cash to make the first earnout payment under the SUNation Transaction Agreement, which was due on May 6, 2024, and 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 principal payment of the long-term note that is due on November 9, 2024. 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. Furthermore, failure to make earnout payments under the SUNation Transaction Agreement, which are prohibited under the Loan Agreement, could result in a breach under the SUNation Transaction Agreement.

Raising additional capital may be costly or difficult to obtain and could significantly dilute the Company’s shareholders’ ownership interests or inhibit the Company’s ability to achieve its business objectives. If the Company raises additional funds through public or private equity offerings or convertible debt or other exchangeable securities, the terms of these securities may include liquidation or other preferences that adversely affect the rights of the Company’s common shareholders. To the extent that the Company raises additional capital through the sale of common stock or securities convertible or exchangeable into common stock, the Company’s existing shareholders will be diluted. In addition, any debt financing may subject the Company to fixed payment obligations and covenants limiting or restricting its ability to take specific actions, such as incurring additional debt or making capital expenditures. Further, certain transactions could trigger a reset of the exercise price of the Company’s outstanding Series A preferred stock (the “Convertible Preferred Stock”) and outstanding warrants (the “PIPE Warrants”) issued to investors in the March 28, 2022 private investment in public equity (“PIPE”) offering, which would lead to a corresponding increase in the number of shares of common stock issuable upon exercise of the PIPE Warrants, further diluting the Company’s shareholders.

On February 5, 2024, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Purchasers”) for the sale by the Company of 2,702,703 shares of the Company’s common stock in a registered direct offering (the “Offering”). The Purchasers in this offering agreed to purchase, and the Company has agreed to sell, the Shares at a purchase price per share of $0.37 per share. The aggregate gross proceeds for the sale of the Shares were approximately $1.0 million, before deducting the placement agent fees and related offering expenses. Following the Offering, the share price of the Company’s stock price fell due to the dilutive effects of the newly issued shares. If the Company was to undertake another similar offering, its share price could be reduced further.

In addition, the fact that there is substantial doubt about the Company’s ability to continue as a going concern and that the Company is operating under these conditions may adversely affect the Company’s stock price and its ability to raise capital.

While the bridge loan financing the Company obtained on July 22, 2024 will assist with the Company’s working capital needs, this additional financing is not sufficient to make the outstanding earnout payment or the first principal payment on the long-term note.