# Spruce Power Holding Corp: Form 10-Q for the period ended Sep 30, 2024

- Company: [Spruce Power Holding Corp](/companies/spru.md) (CIK 1772720)
- Form: 10-Q
- Filed: 2024-11-14
- Accepted by EDGAR: Nov 14, 2024, 15:55 ET
- Period: 2024-09-30
- Accession: 0001628280-24-047866
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1772720/000162828024047866/spru-20240930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1772720/000162828024047866/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-07-01 to 2024-09-30 | $21.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2024-01-01 to 2024-09-30 | $61.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-07-01 to 2024-09-30 | $9.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2024-01-01 to 2024-09-30 | $28.5m | us-gaap:CostOfGoodsAndServicesSold |
| Selling, general and administrative | 3 months, 2024-07-01 to 2024-09-30 | $13.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2024-01-01 to 2024-09-30 | $43.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-07-01 to 2024-09-30 | −$37.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2024-01-01 to 2024-09-30 | −$44.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-07-01 to 2024-09-30 | $11.4m | us-gaap:InterestExpenseNonoperating |
| Interest expense | 9 months, 2024-01-01 to 2024-09-30 | $29.9m | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | −$53.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | −$64.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | −$2.88 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | −$3.50 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | −$2.88 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | −$3.50 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 18,566,015 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 18,438,375 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | −$28.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $182.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2024-01-01 to 2024-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-09-30 | $113.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-09-30 | $173.0m | us-gaap:AssetsCurrent |
| Total assets | at 2024-09-30 | $806.8m | us-gaap:Assets |
| Current liabilities | at 2024-09-30 | $62.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-09-30 | $655.1m | us-gaap:Liabilities |
| Long-term debt | at 2024-09-30 | $577.0m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2024-09-30 | $28.4m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-09-30 | $151.6m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 24,849 characters.

*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:

*(In thousands, except per share and share amounts)*

|  | Three Months Ended September 30, 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)*

|  | Nine Months Ended September 30, 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, or 8.5%, 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

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.

### Liquidity and Capital Resources

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:

*(Amounts in thousands)*

| Net cash provided by (used in) | Nine Months Ended September 30, 2024 | September 30, 2023 |
| --- | ---: | ---: |
| 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 Flows Provided by Investing Activities

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.

## Market risk

As filed, 144 characters.

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.

## Controls and procedures

As filed, 7,125 characters.

### 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.

## Risk factors

As filed, 6,246 characters.

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.

Filed Nov 14, 2024.
Source: SEC EDGAR, the filing index for accession 0001628280-24-047866. Last ingested by Listed: Oct 30, 2026, 17:41 ET. No prices; not investment advice.