SPRUCE POWER HOLDING CORP

Company Overview

Spruce Power (formerly known as XL Fleet Corp.) is a leading owner and operator of distributed solar energy assets across the United States (the “U.S.”), offering subscription-based services to approximately 75,000 home solar assets and customer contracts, making renewable energy more accessible to everyone. Our mission is to provide our customers with clean, affordable solar energy systems and an extraordinary customer experience.

We are engaged in the ownership and maintenance of home solar energy systems for homeowners in the U.S. We provide clean, solar energy typically at savings compared to traditional utility energy. Our primary customers are homeowners and our core solar service offerings generate revenues primarily through (i) the sale of electricity generated by our home solar energy systems to homeowners pursuant to long-term agreements, which requires our subscribers to make recurring monthly payments, (ii) third party contracts to sell solar renewable energy credits (“SRECs”) generated by the solar energy systems for fixed pricesand (iii) the servicing of those agreements for other institutional owners of home solar energy systems. In addition, we generate cash flows and earn interest income from an investment through a master lease agreement.

We hold subsidiary fund companies that own and operate portfolios of home solar energy systems, which are subject to solar lease agreements (“SLAs”) and power purchase agreements (“PPAs”, together with the SLAs, “Customer Agreements”) with home solar customers who benefit from the production of electricity generated by the solar energy systems. The solar energy systems may qualify for subsidies, renewable energy credits and other incentives as provided by various states and local agencies. These benefits have generally been retained by our subsidiaries that own the solar energy systems, with the exception of the investment tax credit (“ITC”) under Section 48 of the Internal Revenue Code as amended, (the “IRC”), which were generally passed through to the various financing partners of the solar energy systems.

Our business offers services which include asset management services and operating and maintenance services for home solar energy systems. In addition to providing management services to our portfolio, we also provide portfolio management services through our Spruce Pro platform to approximately 5,000 systems owned by other companies, which include (i) billing and collections, (ii) account management services, (iii) financial reporting, (iv) homeowner support and (v) maintenance monitoring and dispatch.

Corporate History and Background

Historically, we provided fleet electrification solutions for commercial vehicles in North America, offering our systems for vehicle electrification (the “Drivetrain” business) and through our energy efficiency and infrastructure solutions business, offering and installing charging stations to enable customers develop the charging infrastructure required for their electrified vehicles (the “XL Grid” business).

In the first quarter of 2022, we initiated a strategic review of our overall business operations, which included assessing our offerings, strategy, processes and growth opportunities. As a result of the strategic review, we made the following decisions relating to the restructuring of our Drivetrain business in the first quarter of 2022: (i) the elimination of a substantial majority of our hybrid drivetrain products; (ii) the elimination of our plug-in hybrid electric vehicles products; (iii) the reduction in the size of our workforce by approximately 50 employees; (iv) the closure of our production center and warehouse in Quincy, IL; (v) the closure of engineering activities in our Boston office; and (vi) the termination of our partnership with eNow.

Following the strategic review, we decided to pursue transformational mergers and acquisition (“M&A”) opportunities, which included the implementation of a process to institutionalize the M&A effort and resulted in the formation of an investment committee comprised of senior members of our executive team (“Management”) and members of our Board of Directors. The objective of the investment committee was to continue the exploration of value-generative opportunities in the decarbonization and energy transition ecosystem, focused on three core requirements: (i) a business that makes an impact on decarbonization, (ii) a leader in an established, growing market segment and (iii) a company that generates positive earnings before interest, taxes, depreciation and amortization (“EBITDA”). As a result of these efforts, on September 9, 2022, we acquired 100% of the membership interests of Legacy Spruce Power, which was one of the largest privately held owner and operator of home solar energy systems in the U.S. at the time of the transaction, with approximately 51,000 customer subscribers as of December 31, 2022.

For reference, on December 21, 2020 (the “Closing Date”), Pivotal Investment Corporation II (“Pivotal”), a special purpose acquisition company (“SPAC”) incorporated on March 20, 2019, consummated a business combination pursuant to that certain Agreement and Plan of Reorganization, dated as of September 17, 2020 (the “Merger Agreement”), by and among (i) Pivotal, PIC II Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of Pivotal (“Merger Sub”) and (ii) XL Hybrids, Inc., a Delaware corporation (“Legacy XL”). Pursuant to the terms of the Merger Agreement, a business combination between Pivotal and Legacy XL was effected through the merger of Merger Sub with and into Legacy XL, resulting in Legacy XL as the surviving company and a wholly-owned subsidiary of Pivotal. On the Closing Date, Pivotal changed its name to XL Fleet Corp (“XL Fleet”). In November 2022, following the acquisition of Legacy Spruce Power, we changed our corporate name from “XL Fleet Corp.” to “Spruce Power Holding Corporation.” Additionally, we changed our ticker symbol from “XL” to “SPRU.”

With the completion of the acquisition of Legacy Spruce Power, we analyzed strategic alternatives related to our Drivetrain business, and subsequently in December 2022, set plans to exit our Drivetrain business and sold a portion of the business to Shyft Group USA (“Shyft”), which closed in January 2023. Shyft also (i) acquired certain technical equipment and assumed our Wixom, Michigan facility, (ii) offered employment to certain engineers and sales personnel and (iii) assumed completion of our pilot development agreement with the Department of Defense related to vehicle hybridization, wherein we retained the rights to potential future royalties from the program. We also sold certain battery inventory and our legacy hybrid technology to RMA Group, an automotive and equipment supplier in Southeast Asia, during the fourth quarter of 2022. Furthermore, we assessed the operations of our XL Grid business to evaluate its strategic fit with Legacy Spruce Power, and in the fourth quarter of 2022, we entered into a non-binding letter of intent for the sale of World Energy Efficiency Services, LLC (“World Energy”). The divestiture of World Energy closed in January 2023, and we subsequently ceased our XL Grid business.

On March 28, 2023, we were notified by the NYSE that we were not in compliance with Section 802.01C of the NYSE Listed Company Manual (the “NYSE Manual”) because the average closing price of our common stock was less than $1.00 over a consecutive 30 day trading period. As a result, on October 6, 2023, we filed an Amendment to our Second Amended and Restated Certificate of Incorporation (the “Amended Certificate of Incorporation”) to effect a 1-for-8 reverse stock split of our issued and outstanding shares of common stock, par value $0.0001 per share (the “Reverse Stock Split”). On November 17, 2023, we received a notice from the NYSE confirming we regained compliance with the continued listing standards set forth in the NYSE Manual.

In the first quarter of 2023, we completed the acquisition of all issued and outstanding interests in SS Holdings 2017, LLC and its subsidiaries (“SEMTH”) from certain funds managed by HPS Investment Partners, LLC, pursuant to a membership interest purchase and sale agreement as of that date (the “SEMTH Acquisition”). The SEMTH related asset includes a 20-year use rights to customer payment streams of approximately 22,500 home SLAs and PPAs (the “SEMTH Master Lease”). Subsequently on August 18, 2023, we acquired approximately 2,400 home solar assets and contracts, with an average remaining contract life of approximately 11 years, from a publicly traded, regulated utility company (the “Tredegar Acquisition”).

With the completion of the SEMTH and Tredegar Acquisitions, we have, in the aggregate, 12 portfolios of rooftop solar Customer Agreements with a combined capacity of approximately 426 MWdc. In the aggregate, as of December 31, 2023, we offered subscription-based services and owned the cash flows from approximately 75,000 home solar assets and customer contracts.

Corporate Strategy

We believe the combination of our existing subscriber-base and proven servicing platform related to our Customer Agreements, together with our capital resources and relationships, gives us the ability to take advantage of rapid growth in distributed solar and battery storage services, while creating a path to more predictable revenues, profits, and cash flow for our shareholders. Our corporate strategy has three key elements:

Leveraging the Spruce Power platform to become a leading provider of subscription-based solutions for distributed energy resources

We have more than a decade of experience owning and operating rooftop solar systems, as well as energy efficiency upgrades. We believe our proven platform for managing home solar can be extended to other categories of distributed energy resources, and by leveraging our platform, we intend to grow our revenues by providing subscription-based solutions for rooftop solar and energy storage and other future energy-related products to homeowners and businesses, including commercial and industrial (“C&I”) solar developers. We are focused on delivering best-in-class customer service, with investment into process and platform improvement for on-site monitoring, customer billing and working with qualified partners for field services.

Profitably growing return on assets by focusing on channels with the lowest customer acquisition cost

We seek to grow our subscriber revenues by focusing on those channels that have lowest customer acquisition costs and the ability to increase return on assets, including acquiring existing systems from other companies or investment funds, selling additional services to existing subscribers, selling services to new customers online and partnering with selected independent installers to provide a subscription-based solution for their customers.

Increasing shareholder value by delivering predictable revenues, profits and cash flow

By focusing on subscription-based solutions with long-term customer contracts, we seek to generate consistent revenues, profits and cash flow.

Customer Operations

We have more than a decade of experience servicing rooftop solar systems, including servicing approximately 75,000 home solar systems and customer contracts from our own portfolios and approximately 5,000 systems owned by third parties. A noteworthy differential is our in-house capabilities which include customer billing and collections, account management services, customer support, systems monitoring and maintenance, and portfolio accounting and financial reporting. We have made progress in elevating our customer service and continue to invest resources in our goal of becoming best-in-class customer experience. Our in-house capabilities and operations infrastructure has established a scalable platform where we are able to continually improve profitability through growth while reducing incremental operational costs.

Corporate Development

Our corporate growth strategy provides a unique differential from our competitors. While our competitors lose future long-term value creation for short-term cash flow by selling new solar systems outright directly to consumers, we focus on long-term positive cash flow. We have a dedicated corporate development M&A team that has historically been successful in acquiring high quality portfolios of solar energy systems that are already in operation and have existing long-term contracts with homeowners. Our in-house M&A team acquires operating home solar energy systems “in-bulk” from other companies, and such approach has enabled us to achieve step-change growth while minimizing our customer acquisition costs. Our corporate development M&A team also brings significant experience in renewable energy credit markets, and other tax incentives programs, which enables additional value creation alongside our acquisition strategy.

Competition

Distributed solar generation is a capital-intensive, evolving business with numerous industry participants. While our solar generation portfolios are currently contracted, we may compete in the future primarily on the basis of price of electricity, quality of service and low/no carbon energy. We consider the long-term contracted profile of our solar generation assets, among other strengths discussed below, as competitive advantages. Distributed solar generation is a growing industry in the U.S. and diverse in terms of industry structure, and as such, there is a wide variation in terms of the capabilities, resources, nature and identity in the companies we compete with depending on the market. In residential distributed solar generation, customers’ needs are met through long-term bilateral contracts, which supply power and maintenance services.

We also compete with other companies to acquire operating portfolios of home solar energy systems with stable contracted cash flows. We consider our primary competitors for opportunities in North America as other solar companies with vertically integrated business models, existing solar servicing companies, purely finance focused organizations and regulated utility holding companies. We believe we are well-positioned to execute our strategy over the long term based on the following competitive strengths:

Our management and operational expertise

We benefit from our Management’s seasoned experience in industry (renewables, utilities and financial services), corporate development (M&A) and customer focused, cost-efficient operations.

Contracted assets with stable cash flows

The contracted nature and diversification of off-takers in our portfolio of home solar assets supports stable long-term cash flows. Home solar assets in our portfolio are contracted under long-term contracts, which generally provide for lease payments or production-based power purchase payments over the contract term. Our home solar asset portfolios have a total weighted average remaining contract term of approximately 12 years as of December 31, 2023.

Newer, well-maintained portfolio

Based on expected contributions to cash generated, approximately 50% of our portfolio of home solar energy systems have been operating on average for fewer than 9 years. Due to the portfolio of our projects being in the first half of their expected useful life and using industry-standard technology, we believe the projects will achieve the expected levels of performance.

Geographic and resource diversification

With the SEMTH and Tredegar Acquisitions, our portfolio of approximately 75,000 home solar systems and customer contracts is geographically diverse across 18 states in the U.S., which reduces exposure to localized weather events, natural disasters, regional underperformance, and adverse regulatory actions and provides a more stable stream of cash flows over the long term when compared to a non-diversified portfolio.

Flexible customer service platforms

We utilize scalable, cost-effective customer service platforms and systems in our operations, which support efficient integration and service of acquired portfolios and third party owned portfolios. These service platforms also provide our customers with self-service options to make payments and other services.

Competitiveness of renewable energy

Renewable energy technology has improved in recent years. Solar energy generation is becoming one of the lowest cost energy generation technologies in many regions in the U.S. which is expected to lead to significant growth in the renewable energy industry. Solar technology is improving as solar cell efficiencies improve and installation costs are declining.

Intellectual Property

Generally, the solar installation business is not dependent on intellectual property. Within our residential business, we utilize licensed software, which enables our organization to efficiently manage thousands of customer portfolios. The success of our business depends, in part, on our ability to maintain and protect our proprietary information, license agreements and other contractual provisions, processes and know-how.

Human Capital Management

With our mission of “Powering Our Customers’ Clean and Efficient Energy use, for a Sustainable Future”, we believe that starts with our employees. We aim to attract top talent by building a culture upon our values of coordination, purpose-driven and results oriented. We make investments in talent management and employee engagement initiatives, in order to foster a culture of belonging and inclusion. As of December 31, 2023, we had 142 full time employees primarily located in Denver, Colorado and Houston, Texas. As of December 31, 2023, no employees were covered by collective bargaining agreements, and we have not experienced any work stoppages.

To develop, attract and retain personnel, we establish an environment of learning, purpose, diversity and opportunity and our leadership continually looks for ways to improve. We do this by implementation of several training programs, which includes our internally developed educational platform, Spruce University, to nurture an environment of learning, employee development and talent retention. Bi-annually, we are committed to enhancing our senior leadership with curriculums to promote and develop teamwork and accountability.

Attraction and retention of key employees contributes to our ability to remain competitive, and we have comprehensive rewards programs to help ensure we are compensating and rewarding our employees in line with market practice, providing a competitive benefits program, paid time off, retirement 401(k) matching, education assistance, internally developed trainings, and flexibility through programs like our floating holidays. Our ongoing support of our employees’ financial, health and wellness needs will continue to be essential.

Government Regulations

Although we are not regulated as a public utility in the U.S. under applicable federal, state, or other local regulatory regimes where we conduct business, we compete primarily with regulated utilities. As a result, we maintain a team that focuses on the key regulatory and legislative issues impacting the entire industry.

Interconnection permission from any applicable local primary electric utility is already granted upon acquisition of existing home solar systems. Depending on the size of the solar energy system and local law requirements, interconnection permission is provided by the local utility to our customers upon initial installation. In almost all cases, interconnection permissions are issued on the basis of a standard process which has been pre-approved by the local public utility commission or other regulatory body with jurisdiction over net metering policies. As such, no additional regulatory approvals are required once interconnection permission is given.

Our collection activities are regulated in various states in which they operate. As such, we obtain and maintain collection agency licenses in the states in which we operate, as required by law, and are subject to regulatory examination of such collection activities on a regular basis.

Government Incentives

Federal, state, and local government bodies provide incentives to owners, distributors, system integrators and manufacturers of solar energy systems to promote solar energy in the form of rebates, tax credits, payments for renewable energy credits associated with renewable energy generation and exclusion of solar energy systems from property tax assessments. These incentives enable us to lower the price we charge customers for energy from, and to lease, our solar energy systems, helping to catalyze customer adoption of solar energy as an alternative to utility-provided power. In addition, for some investors, the acceleration of depreciation creates a valuable tax benefit that reduces the overall cost of the solar energy system and increases the return on investment. The federal government also currently offers an ITC under Section 48(a) of the IRC for the installation of certain energy properties, including solar power facilities owned for business purposes.

Inflation Reduction Act

The Inflation Reduction Act (“IRA”) was enacted August 16, 2022, which President Biden signed into law as of that date. This legislative package includes major policy initiatives enacted to enhance the clean energy industry. While there are numerous federal, state, and local government incentives that benefit our business, some adverse actions, interpretations or determinations of new or existing laws or regulations could have a negative impact on our business. Congress could revise or eliminate certain provisions in the IRA that could negatively impact our business. Federal agencies may also issue tax guidance or regulations that could negatively impact our business or prevent certain businesses from participating.

Corporate Information

Our principal executive offices are located at 2000 S Colorado Blvd, Suite 2-825, Denver, Colorado, and our telephone number is (866) 777-8235. Our website address is www.sprucepower.com and the information contained in, or that can be accessed through our website, is not part of this Annual Report on Form 10-K and should not be considered part of this Annual Report on Form 10-K.

Information Available on the Internet

Our website address is www.sprucepower.com, to which we regularly post copies of our press releases as well as additional information about us. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available free of charge through the Investor Relations section of our website as soon as reasonably practicable after such materials have been electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. We include our website address in this Annual Report on Form 10-K only as an inactive textual reference. Information contained on our website does not constitute a part of this report or our other filings with the SEC.