Spruce Power Holding Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The company owns and operates U.S. residential solar assets and earns revenue primarily from long-term customer agreements, servicing, and an investment in the SEMTH master lease. Former Drivetrain and XL Grid businesses are reported as discontinued operations.
Financial performance and position
- Revenue: Q3 revenue was $23.25 million, up 358% from $5.08 million in Q3 2022. Nine-month revenue was $64.16 million versus $5.08 million. These comparisons are not like-for-like: the 2022 periods include Legacy Spruce Power only after its September 9, 2022 acquisition, while 2023 includes the acquired solar business and subsequent acquisitions.
- Profit and margins: Q3 continuing-operations loss was $18.96 million and net loss attributable to stockholders was $19.31 million, or $1.11 per share. Nine-month continuing-operations loss was $32.15 million and stockholder-attributable net loss was $35.64 million, or $1.97 per share. Cost of revenue was $9.81 million in Q3 and $26.26 million for nine months. Revenue less cost of revenue implies approximate gross margins of 57.8% and 59.1%, respectively, before other operating expenses. Q3 operating loss included $26.34 million of net litigation settlements.
- Cash flow: Nine-month cash used in continuing operating activities was $10.74 million; continuing investing activities used $25.13 million and continuing financing activities used $6.69 million. Including discontinued operations, cash and restricted cash decreased $47.41 million to $192.73 million. Cash interest paid was $24.11 million.
- Liquidity: At September 30, cash and cash equivalents were $154.21 million and restricted cash was $38.52 million. Net working capital was $146.8 million. Management said current liquidity should fund its current business plan for the next 12 months.
- Debt: Debt totaled $627.33 million, including $27.72 million current and $599.61 million long-term, net of specified adjustments and financing costs. Debt rose from $499.76 million at December 31, 2022, primarily reflecting the SEMTH acquisition and financing associated with the Tredegar acquisition. The company reported compliance with debt covenants. Interest-rate swaps covered approximately 96% of floating-rate term loans.
- Balance sheet: Total assets were $940.12 million and stockholders’ equity was $244.14 million. Property and equipment, principally solar systems, was $488.39 million. Goodwill was $28.76 million.
Material changes and notable items
- Q3 revenue increased 2% from Q2 2023, primarily from the Tredegar assets and higher solar renewable energy credit sales; seasonal production declines partly offset the increase. Cost of revenue rose 14% sequentially, while SG&A declined 22%.
- In March 2023, Spruce acquired SEMTH, including 20-year rights to payment streams from approximately 22,500 home solar agreements, for approximately $23 million cash net of cash received and assumed $125 million of debt. In August, it acquired approximately 2,400 solar assets and contracts for $20.9 million, primarily funded by incremental term loans.
- The company recorded a $26.34 million net litigation-settlement expense in Q3. It accrued a $19.5 million securities class-action settlement in principle, subject to documentation and court approval, and expected approximately $4.5 million of related insurance recoveries. It also accrued an $11 million SEC civil penalty, paid in October 2023; the SEC settlement did not include an admission or denial of allegations.
- Management disclosed a $2.4 million SEMTH interest-income recognition error relating to Q1 and Q2 2023 that was recorded in Q3. The filing describes the resulting prior-quarter effects; investors should review the explanation and accounting treatment.
- The company repurchased approximately 0.7 million shares for $5.1 million during the first nine months under a $50 million authorization; $44.9 million remained available at September 30. A one-for-eight reverse stock split took effect October 6, 2023, and share and per-share amounts in the filing are retrospectively adjusted.
- Goodwill declined from $128.55 million at year-end 2022 to $28.76 million at September 2023 following finalization of the Legacy Spruce purchase-price allocation, including measurement-period adjustments.
Outlook, risks, and controls
- No specific revenue, earnings, or acquisition guidance is provided. The strategy emphasizes acquiring operating solar portfolios, expanding subscription-based distributed-energy offerings, and pursuing growth while managing acquisition costs and returns.
- Management identified acquisition integration and financing availability as important business considerations. Other disclosed risks include solar-system performance, customer demand, interest rates and debt service, regulatory and tax changes, cybersecurity, natural disasters, and financial-institution liquidity risks.
- The filing reports ineffective disclosure controls and material weaknesses in internal control over financial reporting, including IT access and segregation-of-duties controls, review and approval of manual journal entries, and accounting for complex transactions. Remediation is ongoing and has not been completed or validated through sustained testing.
- Other contingencies include derivative lawsuits for which potential losses were not estimable, and battery-related lawsuits seeking $4.5 million and approximately $2.5 million, respectively, which the company is defending. Spruce was assessing potential effects of the Maui wildfires; it recorded approximately $0.1 million of asset write-offs and no material claims or insurance recoveries as of September 30.
Important facts for investors to verify
- Final approval, documentation, insurance recoveries, and cash payments related to the securities class-action and SEC settlements; reconcile these items to the $26.34 million litigation expense and accrued contingencies.
- The SEMTH interest-income correction, including its effect on quarterly comparisons and the company’s controls over complex accounting.
- Debt balances, debt-service coverage and covenant compliance, interest costs, and the cash available for operations after restricted cash and debt service.
- Acquisition performance and cash generation from SEMTH and Tredegar, including whether acquired customer payment streams meet expectations.
- Progress in remediating the disclosed material weaknesses and whether controls are ultimately tested and found effective.
- Potential outcomes of unestimable derivative and other legal claims, and any subsequent developments concerning the Maui assets.