Spruce Power Holding Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Spruce Power acquired Legacy Spruce Power on September 9, 2022; therefore, reported continuing results include the solar business only from the acquisition date. Drivetrain and XL Grid are reported as discontinued operations.
Business context and reporting period
The Company is now focused on owning and operating residential solar systems and servicing solar portfolios for other owners. At year-end it reported approximately 51,000 customer subscribers across 16 states, plus management services for more than 30,000 third-party systems. Revenue is primarily generated under long-term solar lease and power purchase agreements, along with servicing fees and renewable energy credits.
In September 2022, the Company acquired Legacy Spruce Power for $32.6 million net of cash and restricted cash acquired, and assumed its debt. It changed its name from XL Fleet Corp. to Spruce Power Holding Corporation in November 2022.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Reported continuing-operations revenue | $23.2 million | $0 |
| Loss from operations | $59.9 million | $35.1 million |
| Continuing-operations net income (loss) | $(52.7) million | $52.6 million |
| Discontinued-operations net loss | $(40.1) million | $(23.8) million |
| Net income (loss) attributable to stockholders | $(93.9) million | $28.8 million |
| Cash used in continuing operating activities | $(47.7) million | $(28.2) million |
Reported 2022 revenue largely reflects the solar business from September 9 through year-end. Unaudited pro forma results, which assume the relevant acquisitions occurred at the start of each year, show revenue of $79.3 million in 2022 versus $79.2 million in 2021, and continuing-operations net loss of $28.9 million versus income of $66.2 million. These pro forma figures are not actual reported results; 2021 included a substantial noncash warrant-valuation gain.
Reported revenue was $23.2 million and cost of revenue was $9.9 million, including solar-system depreciation, operations and maintenance, and loan servicing. Selling, general and administrative expense was $73.1 million. The filing does not present a consolidated gross-margin measure.
At December 31, 2022, cash and cash equivalents were $220.3 million and restricted cash was $19.8 million; working capital was $215.3 million. Total assets were $826.6 million and total liabilities were $537.6 million. Debt was reported at $499.8 million net of a $33.4 million acquisition-date fair-value adjustment; scheduled principal payments totaled $533.2 million. The earliest stated debt maturity is May 2026. The facilities require quarterly principal payments and include financial covenants; the Company reported compliance at year-end. Interest-rate swaps covered approximately 97% of floating-rate term-loan balances.
Cash used in continuing investing activities was $30.3 million, primarily reflecting the Legacy Spruce acquisition net of cash acquired. Continuing financing activities used $19.1 million, including debt repayments and purchases of noncontrolling interests. Cash, cash equivalents and restricted cash declined by $111.7 million during the year to $240.1 million.
Material changes versus the prior comparable period
- The business shifted from fleet electrification and energy-efficiency services to residential solar following the Legacy Spruce acquisition. The 2022 reported continuing results include only a partial year of solar operations.
- In the fourth quarter, the Company decided to exit Drivetrain and sell World Energy, the principal XL Grid business. Those operations were classified as discontinued; the divestitures closed in January 2023.
- Net loss attributable to stockholders was $93.9 million in 2022, versus net income of $28.8 million in 2021. The comparison is affected by acquisition timing, discontinued operations and the much larger favorable warrant fair-value change in 2021.
- Cash and restricted cash fell from $351.8 million at year-end 2021 to $240.1 million at year-end 2022, while the acquisition added substantial debt.
Outlook, risks, contingencies and unusual items
- Management expects continued near-term losses while completing the transition and restructuring. It stated that available liquidity should fund the current business plan for the next 12 months, while noting that future growth or strategic initiatives could require additional capital.
- In March 2023, the Company completed the SEMTH acquisition for approximately $23 million cash net of cash received and assumed $125 million of senior debt. SEMTH adds 20-year use rights to payment streams from approximately 22,500 residential solar agreements; this is a subsequent event, not included in year-end 2022 results.
- Fourth-quarter restructuring and related charges were $19.1 million, including severance, accelerated equity-award vesting and inventory obsolescence. The Company also recorded an $8.6 million goodwill impairment associated with discontinued businesses.
- The Company reported material weaknesses in internal control over financial reporting related to IT general controls, including user access and segregation of duties. Management concluded both internal control over financial reporting and disclosure controls were ineffective at year-end. The prior management-review-controls weakness was reported as remediated. The external auditor issued an unqualified opinion on the financial statements but was not required to opine on internal controls.
- Pending matters include securities and derivative shareholder litigation and an SEC fact-finding investigation; the Company said it could not estimate potential losses. A February 2023 U.S. Bank claim alleges $2.5 million under a tax-recapture guaranty; the amount was fully reserved at acquisition and the Company does not expect it to be material. The Company is also exposed to possible SREC delivery penalties and tax-credit recapture obligations.
- SVB failed in March 2023. The Company reported that its deposits there were fully protected and withdrawn, and that swap positions were assumed by the successor bank; it did not believe there was additional swap-counterparty credit risk.
- Key ongoing risks include debt service and interest rates, solar-system performance and weather, regulatory and incentive changes, integration and acquisition execution, customer servicing and cybersecurity, and the unresolved internal-control weakness. The Company reported no current plan to pay dividends.
Important facts for investors to verify
- Reconcile reported partial-year revenue with the unaudited pro forma figures, and assess the solar portfolio’s recurring cash generation and servicing economics.
- Review debt principal, scheduled amortization, covenant headroom, interest-rate exposure and the effects of the SEMTH acquisition and its assumed debt.
- Track liquidity and cash use against management’s stated 12-month funding assessment and any future acquisition plans.
- Monitor remediation and testing of IT general controls, and whether management concludes the material weakness has been resolved.
- Follow the outcomes and potential costs of the SEC investigation, shareholder litigation and U.S. Bank claim, along with SREC and tax-credit contingencies.
- Confirm post-year-end integration and operating performance of SEMTH and completion of the Drivetrain and XL Grid exits.