Spruce Power Holding Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited. Spruce Power owns and operates U.S. residential solar assets and provides related servicing, serving approximately 72,000 home solar assets and contracts. The 2022 comparison is not directly comparable: the Legacy Spruce Power business was acquired in September 2022, while the former Drivetrain and XL Grid businesses are reported as discontinued operations.
Key financial results
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Revenue | $22.8 million | $40.9 million |
| Cost of revenue | $8.6 million | $16.4 million |
| Operating loss | $1.8 million | $7.2 million |
| Continuing-operations net income (loss) | $1.8 million | $(13.2) million |
| Net income (loss) attributable to stockholders | $3.1 million | $(16.3) million |
| Basic and diluted EPS attributable to stockholders | $0.02 | $(0.11) |
Q2 gross profit was approximately $14.2 million, or 62% of revenue; operating loss was about 8% of revenue. Q2 continuing-operations income included a $9.2 million noncash gain from the change in fair value of interest-rate swaps. For the six months, net loss included $4.0 million from discontinued operations, including a $3.1 million loss on disposal. The filing reports no income tax provision.
- Sequential change: Revenue increased 26% from Q1 2023, primarily due to seasonal increases in PPA generation. Cost of revenue rose 9%, partly due to meter upgrades and underperformance of precontracted SRECs.
- Prior-year comparison: Continuing-operations revenue was zero in the 2022 periods because the residential solar business had not yet been acquired. SG&A was $16.0 million in Q2 and $31.7 million for the first half of 2023, including solar-business and corporate costs, integration costs and, for the first half, legal costs related to the SEC investigation and shareholder litigation.
Cash, debt and liquidity
- At June 30, 2023, cash and cash equivalents were $162.7 million and restricted cash was $29.4 million, totaling $192.1 million. Total cash and restricted cash declined $48.0 million during the first half.
- Net working capital was $177.7 million. Management said it believes current liquidity is sufficient to execute its current business plan over the next 12 months; this is not a guarantee of funding for future growth or acquisitions.
- Total debt, including current maturities, was $613.4 million, versus approximately $499.8 million at December 31, 2022. The increase mainly reflects the SEMTH acquisition, which added $125.0 million of debt. The acquired Deutsche Bank term loan’s effective rate was 7.16% at quarter-end; the company said swaps covered approximately 96% of floating-rate term-loan balances. Required debt covenants were met at June 30.
- First-half cash flows: continuing operating activities used $13.0 million; continuing investing activities used $14.6 million; and continuing financing activities used $15.5 million. Investing cash use included $23.4 million paid, net of cash acquired, for SEMTH. Financing cash use included $14.3 million of debt repayments and $1.6 million of share repurchases.
Transactions, outlook and notable items
- In March 2023, Spruce acquired SEMTH, obtaining 20-year rights to payment streams from approximately 22,500 residential solar leases and PPAs. Consideration included approximately $23.0 million cash, net of cash received, and assumed $125.0 million debt. The related investment was recorded at an estimated $146.9 million transaction-date fair value, using significant unobservable assumptions.
- The board authorized a share repurchase program of up to $50.0 million through May 15, 2025. The company repurchased 1.9 million shares for $1.6 million in the first half; $48.4 million remained authorized at June 30. Repurchases are discretionary.
- No specific financial guidance was provided. Management’s stated strategy is to grow through acquisitions of operating solar portfolios and subscription-based distributed-energy services, while managing costs and targeting predictable revenue, profits and cash flow.
- Material weaknesses in internal control over financial reporting remained unremediated: IT general controls and access/segregation of duties, manual journal-entry review and approval, and controls for complex transactions. Management is using third-party assistance and says remediation requires sustained testing.
- The SEC investigation remains ongoing. In June 2023 the SEC proposed a settlement offer that management rejected; the company cannot estimate potential losses and says an adverse outcome could materially affect its financial statements. Several securities, derivative and commercial lawsuits remain pending; losses are generally not estimable. A $2.3 million settlement with Firstar/US Bank resolved its tax-credit recapture claims.
- Other risks include reliance on acquisitions and financing availability, variable-rate debt and interest costs, solar system performance and monitoring, customer collections, SREC delivery obligations, and financial-sector disruption. The company also noted potential penalties if it fails to deliver contracted SRECs.
Important facts for investors to verify
- Whether solar portfolio production, customer collections and servicing costs support sustainable operating profitability and cash generation.
- Debt-service capacity, covenant compliance, interest-rate exposure after swaps, and the effect of additional acquisition financing.
- Progress and independent validation of remediation for the disclosed material weaknesses.
- Developments and potential financial exposure from the SEC investigation and outstanding litigation, including the rejected settlement offer.
- SEMTH cash-flow assumptions and valuation, and whether the share-repurchase program remains consistent with liquidity and investment needs.