Sunation Energy, Inc. quarterly report, Q2 FY2023

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Business context and reporting period

This is Pineapple Energy Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2023 (ticker PEGY), not a filing under the name Sunation Energy. SUNation is a New York solar business Pineapple acquired in November 2022. Pineapple’s continuing operations focus on residential and commercial solar, battery storage, and related services, primarily through SUNation and Hawaii-based HEC/E-Gear. Results exclude JDL and Ecessa, which were sold on June 30, 2023 and presented as discontinued operations.

Financial results and liquidity

  • Revenue: Second-quarter sales were $19.84 million, versus $4.22 million a year earlier; first-half sales were $41.90 million, versus $4.45 million. SUNation contributed $13.34 million of second-quarter 2023 revenue and $30.24 million for the first half.
  • Margins and operating results: Gross profit was $7.14 million in Q2 and $15.14 million in the first half; gross margin was 36% in both periods, compared with 21% and 22%, respectively, in 2022. Continuing-operations operating losses were $1.42 million for Q2 and $3.56 million for the first half.
  • Net income (loss): Q2 continuing-operations net loss was $0.33 million, versus $1.69 million income in Q2 2022; including discontinued operations, net loss was $1.55 million versus $1.44 million income. First-half continuing-operations net loss was $2.93 million, versus $0.20 million; total net loss was $4.11 million, versus $0.44 million. First-half diluted loss per share was $0.41.
  • Cash flow: Operating cash use was $1.66 million in the first half, versus $7.50 million in 2022. Investing activities provided $2.30 million and financing activities provided $0.79 million. Cash, cash equivalents, and restricted cash totaled $6.69 million at June 30.
  • Liquidity: Cash, restricted cash, cash equivalents, and investments totaled $8.04 million, but $5.60 million was reserved for legacy CSI/CVR holders and unavailable for Pineapple’s working capital. Working capital was negative $2.50 million, compared with positive $0.03 million at year-end 2022. Unrestricted cash and cash equivalents were $2.44 million.
  • Debt and liabilities: The company obtained a $7.5 million Decathlon loan in June, used in part to repay the $5.0 million SUNation short-term note and $1.5 million of Hercules debt. The Decathlon facility is secured by company assets and has a June 2027 maturity; its minimum-interest provisions increase the required repayment depending on repayment timing. Balance-sheet loan amounts totaled approximately $14.9 million across current and long-term, related and other loan lines. Total liabilities were $41.77 million.

Material changes versus prior period

  • Revenue and gross profit rose substantially, largely reflecting acquisitions, especially SUNation; the comparison is not like-for-like because SUNation was acquired in late 2022 and HEC/E-Gear joined in March 2022.
  • Higher revenue and gross margin helped reduce the continuing-operations operating loss, but SG&A and amortization also increased with the acquired businesses.
  • Prior-year other income included a $4.67 million gain from remeasurement of merger earnout consideration and a $1.21 million asset-sale gain. These did not recur. In 2023, a CVR fair-value gain partly offset lower other income.
  • On June 30, 2023, Pineapple sold substantially all JDL and Ecessa assets for net proceeds of $1.23 million and recorded a sale loss. Discontinued operations reported a first-half net loss of $1.17 million.

Outlook, risks, and unusual items

  • Going concern: Management states that forecast cash flows are insufficient to fund the first SUNation earnout payment expected in Q2 2024, raising substantial doubt about the company’s ability to continue as a going concern. It plans to seek capital through equity, debt, or strategic alliances, but cannot assure success or acceptable terms.
  • Potential dilution: Management warns that equity financing could dilute shareholders; certain transactions could also adjust conversion or warrant terms and increase potential common shares.
  • Business risks: Disclosed risks include reliance on continued solar agreement origination, access to capital, supplier concentration and component costs, acquisition integration, installer staffing, competition, and changes to net-metering rules, utility rates, interconnection processes, and customer incentives.
  • Unusual accounting items: The SUNation earnout liability generated a $0.93 million first-half remeasurement loss. The CVR liability was $6.01 million at June 30 and is tied to legacy assets and proceeds for CVR holders, not working capital. The filing provides no revenue, earnings, or margin guidance.

Important facts for investors to verify

  1. Whether Pineapple can raise sufficient additional capital and meet its 2024 earnout obligations; review the going-concern disclosure and financing developments.
  2. How much of reported cash and investments is actually available for operations, given the $5.60 million restricted for CVR holders.
  3. The Decathlon loan’s effective repayment cost, minimum-interest requirements, covenants, and payment schedule, along with the company’s full debt maturities.
  4. Whether acquired-business revenue and the 36% gross margin are sustainable, and how much operating expense is required to support them.
  5. The amount and timing of any CVR distributions, SUNation earnout payments, and potential dilution from preferred stock, warrants, and equity financing.