Spruce Power Holding Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Spruce Power owns and operates residential distributed-solar assets and provides related servicing. It reported approximately 72,000 home-solar assets and contracts. The former Drivetrain and XL Grid businesses are presented as discontinued operations.
Financial performance and position
- Revenue: $18.1 million, comprising primarily solar lease and power-purchase revenue. Q1 2022 continuing-operations revenue was zero; the periods are not directly comparable because Legacy Spruce Power was acquired in September 2022.
- Profitability: Cost of revenue was $7.9 million, producing a calculated gross margin of approximately 56.6%. Operating loss was $5.5 million (approximately negative 30.3% of revenue). Continuing-operations net loss was $15.0 million; total net loss was $18.8 million, and net loss attributable to stockholders was $19.4 million, or $0.13 per share. Total net loss was $16.1 million in Q1 2022.
- Key expenses and items: SG&A was $15.7 million, up from $7.7 million, including solar-business and corporate costs, integration costs, and legal expenses. Net interest expense was $6.8 million. A $5.6 million fair-value expense on interest-rate swaps was partly offset by $2.7 million of gains on solar-system sales and $2.7 million of gains on asset disposals. Discontinued operations recorded a $3.9 million loss, including a loss on disposal of World Energy.
- Cash flow: Continuing operating activities used $3.7 million, versus $10.5 million in Q1 2022. Continuing investing activities used $20.4 million, including $23.1 million paid, net of cash acquired, for SEMTH. Continuing financing activities used $5.9 million, including $6.1 million of debt repayments. Cash, cash equivalents, and restricted cash declined $34.2 million to $205.9 million.
- Liquidity and debt: Management reported working capital of $182.7 million. Cash and cash equivalents were $172.8 million, with a further $33.1 million restricted. Long-term debt, including current portions, was approximately $620.1 million. The company said it met debt covenant requirements at quarter-end; approximately 96% of floating-rate term-loan balances were covered by swaps.
- Balance sheet: Total assets were $926.4 million and stockholders’ equity was $265.2 million at March 31, 2023. The company recorded no income-tax provision for the quarter.
Material changes versus the prior comparable period
- Revenue and cost of revenue reflect the residential-solar business acquired in September 2022; Q1 2022 results largely reflected corporate costs and legacy operations, so reported year-over-year comparisons are substantially affected by the acquisition and discontinued-operations presentation.
- Net loss attributable to stockholders increased to $19.4 million from $16.1 million. Lower losses from discontinued operations partly offset higher continuing-operations expenses, including interest and swap fair-value changes.
- Cash used in continuing operating activities decreased year over year, which management attributed to the residential-solar business.
- In March 2023, Spruce acquired SEMTH, obtaining 20-year use rights to payment streams from approximately 22,500 residential solar leases and PPAs. It paid approximately $23 million net of cash received and assumed $125 million of debt. The related investment was recorded at an estimated fair value of $146.9 million.
Outlook, risks, and unusual matters
- Management stated that current liquidity should be sufficient to execute its current business plan for the next 12 months. It provided no specific financial guidance in the supplied filing text and said it continues to evaluate funding needs and growth opportunities.
- The board authorized a common-stock repurchase program of up to $50 million, effective through May 15, 2025. Repurchases are discretionary; no shares or dollar amount are committed.
- Disclosure controls were deemed ineffective at March 31, 2023 because of material weaknesses involving IT general controls, review and approval of manual journal entries and segregation of duties, and accounting for complex transactions. Remediation is ongoing.
- Risks include acquisition integration and valuation, solar-system performance and demand, access to financing, variable interest rates, and liquidity. The filing also added risks related to financial-institution liquidity and access to deposits.
- The company is defending securities and shareholder lawsuits and cooperating with an SEC fact-finding investigation. It said potential losses cannot currently be estimated. A $2.5 million US Bank tax-recapture claim was fully reserved at acquisition and is not expected to be material, according to the company. Other potential solar-credit recapture obligations were not considered probable and were not accrued.
Investor verification priorities
- Track remediation and testing of the disclosed material weaknesses in financial reporting controls.
- Review SEMTH’s realized cash flows against the $146.9 million estimated investment value, and assess debt service, interest-rate exposure, and covenant headroom.
- Monitor liquidity, restricted-cash availability, and the company’s statement that current resources cover its plan for the next 12 months.
- Follow developments in the SEC investigation, shareholder litigation, and tax-recapture matters, including any changes to estimated exposure.
- Check whether the authorized $50 million repurchase is executed and how it affects cash available for debt service and acquisitions.