SUNation Energy, Inc.

To the Board of Directors and

‎Stockholders of SUNation Energy, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of SUNation Energy, Inc. and subsidiaries (the Company) as of December 31, 2024 and 2023, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2024, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt About the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 16 to the consolidated financial statements, the Company’s current financial position and the Company’s forecasted future cash flows for twelve months beyond the date of issuance of these financial statements indicate substantial doubt around the Company’s ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 16. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Critical Audit Matter - Goodwill Impairment

At December 31, 2024, the consolidated carrying value of the Company’s goodwill was $20,545,850, of which $9,829,212 and $10,716,638 were allocated to the HEC and SUNation reporting units, respectively. As disclosed in Note 2 to the consolidated financial statements, goodwill is tested for impairment at the reporting unit level, annually on October 1 or more frequently if events or circumstances indicate that an impairment may have occurred. Management determined that a quantitative goodwill impairment analysis was required as of December 31, 2024. The impairment test was performed by calculating the fair value of the Company’s reporting units, using a combination of an income approach and market approach, and comparing the fair value to the carrying value to determine if there was an impairment loss which would be equal to the carrying value exceeding the fair value. Management engaged a third-party valuation specialist to assist with the analysis. As disclosed in Note 8 to the consolidated financial statements, the Company determined that HEC’s goodwill was impaired and recorded an impairment loss of $3,101,981 as of December 31, 2024.

Auditing management’s goodwill impairment test was complex and judgmental, due to the significant estimation required to determine the present value of each reporting unit’s future discounted cash flows. The discounted cash flows were sensitive to the projected revenue growth rates, EBITDA margins, terminal growth rates and the discount rate applied. These significant assumptions are affected by expectations about future market and economic conditions. There was also management judgment in selecting the comparable publicly traded companies used by the Company to determine the revenue multiples under the market approach.

Our audit procedures performed to evaluate the reasonableness of management’s estimates and assumptions included assessing the methodologies used by the Company and testing the significant assumptions used in the quantitative models. To test the fair value of the Company’s reporting units, we performed audit procedures that included the following:

Compared the projected revenue growth rates to the Company’s historical results and industry and economic data, and compared projected EBITDA margins to historical results and industry data. We assessed the historical accuracy of management’s prior forecasts to actual results to evaluate management’s ability to accurately forecast future revenues and gross profit.

Involved our valuation specialists to 1) assess management’s fair value methodology, compare the terminal growth rates to external industry and economic data, and determine an independent estimate of the discount rates and 2) evaluated the comparable public companies utilized by management under the market approach.

Evaluated certain inputs and assumptions for consistency where they were used by management in other accounting estimates impacting the consolidated financial statements.

Tested management’s fair value calculations for clerical accuracy.

Performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in these assumptions.

Critical Audit Matter – Convertible Preferred Stock and Warrants

In 2022, the Company issued shares of Series A convertible preferred stock and warrants to investors. The Company accounted for the convertible preferred stock and warrants in permanent equity. The convertible preferred stock and the warrants were modified during the first quarter of 2024, which resulted in the Company not having sufficient authorized and unissued shares to settle the conversion and exercise to common stock. As a result, the Company reclassified the convertible preferred stock to mezzanine equity and the warrants to a liability.

During the third quarter of 2024, the Company received shareholder approval on an increase in authorized shares, resulting in the convertible preferred stock and warrants being reclassified to permanent equity. Additionally, the Series A convertible preferred stock and warrants were further modified prior to being exchanged for Series C convertible preferred stock in September 2024. No preferred stock or warrants remained outstanding as of December 31, 2024.

As disclosed in Notes 2 and 12 to the consolidated financial statements, these transactions resulted in the following impact on the consolidated financial statements:

Change in fair value of the warrant liability resulting in a loss of $974,823.

Deemed dividends on modifications of Series A convertible preferred stock and warrants of ($11,447,251) and ($4,215,551), respectively, that reduced APIC and income available to common shareholders in calculating earnings per share (EPS).

Deemed contribution on exchange of Series A preferred stock and warrants for Series C convertible preferred stock of $4,075,681 that increased APIC and income available to common shareholders in calculating EPS.

The accounting for convertible preferred stock and warrants required analysis under applicable authoritative guidance in Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity”, and ASC 815, “Derivatives and Hedging”. Furthermore, the amounts recognized for the change in fair value of the warrant liability, deemed dividends, and deemed contribution were based on management’s estimates of fair value for these financial instruments. Management engaged a third-party specialist to assist with the accounting and fair value analysis.

Auditing management’s conclusions related to these transactions required the interpretation of complex accounting literature in the areas of financial instruments and modifications of equity instruments. In addition, auditing management’s fair value estimates was complex and judgmental because the measurements involved subjective models and unobservable inputs. There was also management judgment in selecting the comparable publicly traded companies used by the Company to determine the volatility input.

Our audit procedures to evaluate the reasonableness of management’s accounting for the modifications of the Series A convertible preferred stock and warrants, and the exchange of the Series A convertible preferred stock and warrants for Series C convertible preferred stock included the following:

Involved financial instrument accounting subject matter specialists to assess the Company's conclusions on equity vs liability classification of the convertible preferred stock and warrants and the EPS treatment of the modification and exchange transactions.

Evaluated management’s accounting memorandums and read the underlying contracts and board resolutions for consistency with the conclusions reached.

Involved our valuation specialists to 1) assess management’s fair value methodologies and 2) develop independent estimates of the fair values of the convertible preferred stock and warrants at each modification date and the exchange date.

Critical Audit Matter - Embedded Derivative Liability

The Company’s Decathlon Fixed Loan includes a mandatory prepayment feature upon a contingent event that is considered an embedded derivative requiring separate accounting under ASC 815. Under ASC 815, the embedded derivative is bifurcated and recorded at fair value at inception with subsequent changes in fair value recorded in earnings. Based on management’s estimates of the likelihood of certain events occurring, the Company recognized an embedded derivative liability as of December 31, 2024. As disclosed in Note 9 to the consolidated financial statements, the amortized cost of the Decathlon Fixed Loan was $6,586,325 and the fair value of the embedded derivative was $24,800 as of December 31, 2024. Management engaged a third-party valuation specialist to assist with the accounting and fair value analysis.

Auditing management’s conclusions required the interpretation of complex accounting literature related to financial instruments, more specifically embedded derivatives in debt instruments. In addition, auditing management’s fair value estimates was complex and judgmental because the measurements involved unobservable inputs. There was management judgment in determining the probability of various payoff alternatives occurring as well as the estimated payoff date under each alternative.

Our audit procedures to evaluate the reasonableness of management’s accounting and fair value estimates for the Decathlon Fixed Loan included the following:

Involved financial instrument accounting subject matter specialists to assess the Company's embedded derivative accounting conclusions.

Evaluated management’s accounting memorandum and read the underlying contract for consistency with the conclusions reached.

Involved our valuation specialists to 1) assess management’s fair value methodology and 2) develop an independent estimate of the fair value of the embedded derivative liability.

Assessed the reasonableness of management’s payoff assumptions, more specifically the probabilities of various payoff alternatives occurring and the estimated payoff dates of each alternative. We 1) made inquiries of management and the board, 2) inspected board meeting minutes, 3) compared forecasts used to support the assumptions with forecasts used by management in other accounting estimates as of December 31, 2024, and 4) evaluated events occurring subsequent to December 31, 2024.

/s/ UHY LLP

We have served as the Company’s auditor since 2023.

Melville, New York

April 15, 2025

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