SPRUCE POWER HOLDING CORP

Note 3. Business Combination

Legacy Spruce Power

On September 9, 2022 (the “Acquisition Date”), the Company acquired Legacy Spruce Power for $32.6 million, which consisted of cash payments of $61.8 million less cash and restricted cash acquired of $29.2 million. Management evaluated which entity should be considered the accounting acquirer in the transaction by giving consideration to the form of consideration transferred, the composition of the equity holders, the composition of voting rights of the Board of Directors, continuity of management structure, and size of the respective organizations. Based on the evaluation of the applicable factors, Management noted that all factors, with the exception of the relative size of organization, were indicators that the Company was the acquiring entity resulting in Management’s conclusion that for accounting purposes, the Company acquired Legacy Spruce Power.

Notes to Consolidated Financial Statements

The acquisition was accounted for as a business combination. The Company allocated the Legacy Spruce Power purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the Acquisition Date. The excess of the purchase price over those fair values was recorded as goodwill.

The Company’s evaluations of the facts and circumstances available as of the Acquisition Date, to assign fair values to assets acquired and liabilities, remained ongoing subsequent to the Acquisition Date. As the Company completed further analysis of assets including solar systems, intangible assets, as well as noncontrolling interests and debt, additional information on the assets acquired and liabilities assumed became available. Changes in information related to the value of net assets acquired changed the amount of the purchase price initially assigned to goodwill, and as a result, the fair values set forth below were subject to adjustments as additional information was obtained and valuations completed. These provisional adjustments were recognized during the reporting period in which the adjustments were determined. The Company has finalized its purchase price allocation as of September 8, 2023.

Accounting for business combinations requires management to make significant estimates and assumptions, especially at the Acquisition Date, including the Company’s estimates of the fair value of solar systems, production based incentives, solar renewable energy agreements, non-controlling interest, trade name and debt, where applicable. The Company believes the assumptions and estimates are based on information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing solar systems under the income approach include future expected cash flows and discount rate. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the acquisition of Legacy Spruce Power, as adjusted, during the measurement period:

Notes to Consolidated Financial Statements

As reflected in the preceding table, as a result of third party valuation reports received in the first quarter of 2023, the Company adjusted solar energy systems and intangible assets with corresponding changes to goodwill. In the first quarter of 2023, due to a change in the provisional amounts assigned to intangible assets and solar energy systems, the Company recognized $0.4 million of revenue, $1.9 million of depreciation expense and $0.4 million of trade name amortization, of which $0.5 million of revenue, $0.9 million of depreciation expense and $0.3 million of trade name amortization related to the previous year.

During the first quarter of 2023, the Company adjusted the fair value of its noncontrolling interest and its redeemable noncontrolling interest in the Company's financials, which resulted in related downward revision of $5.5 million and upward revision of $0.2 million, respectively. Additional paid in capital was also downward revised by $1.8 million, which included the fair value adjustment associated with the purchase of 100% of the membership interests in Ampere Solar Owner IV, LLC, ORE F5A HoldCo, LLC, ORE F6 HoldCo, LLC, RPV Fund 11 LLC and RPV Fund 13 LLC, Sunserve Residential Solar I, LLC's and Level Solar Fund III, LLC in 2022.

The gross intangibles acquired are amortized over their respective estimated useful lives as follows:

The weighted-average useful life of the intangibles identified above is approximately 16 years, which approximates the period over which the Company expects to gain the estimated economic benefits.

Goodwill represents the excess of the purchase consideration over the estimated fair value of the net assets acquired. Goodwill is primarily attributable to the Company's ability to leverage and use its existing capital and access to capital markets along with Legacy Spruce Power's established operations and M&A capabilities to grow the Spruce Power business.

Supplemental disclosure of pro forma information

The following unaudited pro forma financial information represents the combined results of the operations of the Company, including Legacy Spruce Power, as if the acquisition of Legacy Spruce Power on the Acquisition Date had occurred as of January 1, 2021. The results of operations related to the Company’s Drivetrain and XL Grid businesses, which were determined to be discontinued operations in the fourth quarter of 2022, are presented as net loss from discontinued operations. The unaudited pro forma revenues and pro forma net income (loss) reflect the continuing operational results of the Company’s corporate functions and the results of operations for Legacy Spruce Power. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations actually would have been had the respective acquisitions been completed on January 1, 2021. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined Company.

Notes to Consolidated Financial Statements

The following table presents the Company’s pro forma combined results of operations for the year ended December 31, 2022:

Note 4. Acquisitions

SEMTH Master Lease Agreement

In furtherance of its growth strategy, on March 23, 2023, the Company completed the acquisition of all the issued and outstanding interests in SEMTH from certain funds, pursuant to a membership interest purchase and sale agreement dated March 23, 2023 (the “SEMTH Acquisition”). The SEMTH related asset includes 20-year use rights to customer payment streams of approximately 22,500 home SLAs and PPAs (the “SEMTH Master Lease”). The Company acquired SEMTH for approximately $23.0 million of cash, net of cash received, and assumed $125.0 million of outstanding senior indebtedness (See Note 8. Non-Recourse Debt) and interest rate swaps with Deutsche Bank AG, New York Bank (See Note 9. Interest Rate Swaps) held by SEMTH and its subsidiaries at the close of the acquisition.

The Company concluded that SEMTH does not meet the definition of a business or variable interest entity. The purchase of SEMTH's future revenue has been accounted for as an acquisition of financial assets. Under the acquisition method, the purchase price was allocated to the assets acquired and liabilities assumed based on their relative fair value. All fair value measurements of assets acquired and liabilities assumed were based on significant estimates and assumptions, including Level 3 (unobservable) inputs, which require judgment. Estimates and assumptions include the projected timing and amount of future cash flows, discount rates reflecting risk inherent in future cash flows and future utility prices.

For the purposes of establishing the fair value of the Company's investment in the SEMTH Master Lease, its analysis considered cash flows beginning in March 2023 (the effective date of the transaction). The Company estimated the fair value of its investment in the SEMTH Master Lease to be approximately $146.9 million on the transaction date.

Tredegar Acquisition

On August 18, 2023, the Company acquired approximately 2,400 home solar assets and contracts from a publicly traded, regulated utility company for $20.9 million (the “Tredegar Acquisition”). The home solar assets acquired have an average remaining contract life of approximately 11 years. The Tredegar Acquisition was funded by term loans from the concurrent amendment of the Company’s existing debt facility as of the acquisition date (See Note 8. Non-Recourse Debt).

The Tredegar Acquisition has been accounted for as an acquisition of assets, wherein the total consideration paid was allocated to the assets acquired and liabilities assumed based on their relative fair value. The Company’s determination of the fair value of assets acquired and liabilities assumed was based on an independent third-party valuation, which involved significant estimates and assumptions, including Level 3 (unobservable) inputs, using the income method approach to value long-lived assets. The Company engages third-party appraisal firms to assist in the fair value determination, however management is responsible for, and ultimately determines the fair value. The Company estimated the fair value of the Tredegar Acquisition to be approximately $21.2 million, inclusive of transaction costs of $0.3 million, of which $19.6 million was allocated to the solar energy systems.

Notes to Consolidated Financial Statements

Note 5. Property and Equipment, Net

Property and equipment consisted of the following as of December 31, 2023 and 2022:

Depreciation expense related to solar energy systems is included within cost of revenues in the consolidated statements of operations, and for the years ended December 31, 2023 and 2022 was $23.8 million and $6.5 million, respectively. Depreciation expense related to other property and equipment is included within selling, general and administrative expenses in the consolidated statements of operations, and for the years ended December 31, 2023 and 2022 was $0.4 million and $0.8 million, respectively.

Note 6. Intangible Assets, Net

The following table presents the detail of intangible assets, net as recorded in the consolidated balance sheets as of December 31, 2023:

Amortization of intangible assets for the year ended December 31, 2023 was $1.8 million, of which $0.8 million and $1.0 million were recorded within revenues and selling, general and administrative expenses, respectively. As of December 31, 2023, expected amortization of intangible assets for each of the five succeeding fiscal years and thereafter is as follows:

Notes to Consolidated Financial Statements

Note 7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of December 31, 2023 and 2022:

Notes to Consolidated Financial Statements

Note 8. Non-Recourse Debt

The following table provides a summary of the Company’s debt as of December 31, 2023 and 2022:

(1) In connection with the acquisition of Legacy Spruce Power effective September 9, 2022, the Company assumed long-term debt instruments valued at approximately $507.2 million as of that date. In connection with accounting for the business combination, the Company adjusted the carrying value of this long-term debt to its fair value as of the Acquisition Date. This fair value adjustment resulted in a reduction of the carrying value of the debt by $35.2 million. This adjustment to fair value is being amortized to interest expense over the life of the related debt instruments using the effective interest method. Amortization expense for the fair value adjustment for the years ended December 31, 2023 and 2022 was $5.9 million and $1.8 million, respectively.

SVB Credit Agreement

The SVB Credit Agreement (the “SP 1 Facility”), executed with Silicon Valley Bank (“SVB”), a division of First-Citizens Bank & Trust Company, includes a debt service reserve letter of credit (the “SP 1 LC”) with related amounts outstanding of$6.1 million as of December 31, 2023. Amounts outstanding under the SP 1 LC bear interest of 2.25% per annum and unused amounts bear interest at 0.50% per annum. The term loans under the SP 1 Facility require quarterly principal payments, paid a month in arrears, with the remaining balance due in a single payment in April 2026 and bear interest at the Secured Overnight Financing Rate (the “SOFR”) plus the applicable margin. The applicable margin is 2.25% per annum for the first three years,2.375% per annum from the third anniversary through the sixth anniversary and 2.5% per annum starting on the sixth anniversary. The effective interest rate on the SP 1 Facility as of December 31, 2023 was 7.96%.

The obligations of the Company under the SP 1 Facility are secured by substantially all of the assets and equity interest in the Company. The SP 1 Facility requires the Company to be in compliance with various covenants, including debt service coverage ratios and as of December 31, 2023, the Company was in compliance with the required covenants under the SP 1 Facility.

Second SVB Credit Agreement

The Second SVB Credit Agreement (the “SP 2 Facility”) includes a debt service reserve letter of credit (the “SP 2 LC”). Amounts outstanding under the SP 2 LC bear interest of 2.30% per annum and unused amounts bear interest at 0.50% per annum. The term loans under the SP 2 Facility require quarterly principal payments, mature in April 2027 and bear interest at the SOFR plus the applicable margin. The applicable margin is 2.30% per annum for the first three years,2.425% per annum from the third anniversary through the sixth anniversary and 2.55% per annum starting on the sixth anniversary.

Notes to Consolidated Financial Statements

On August 18, 2023, the Company entered into a second amendment to the SP2 Facility with SVB, which provided the Company (i) incremental term loans with a principal amount of approximately $21.4 million, of which proceeds were primarily used to fund the Tredegar Acquisition (See Note 4. Acquisition) and (ii) incremental letters of credit in the aggregate amount of approximately $2.7 million (collectively, the “SP2 Facility Amendment”). Excluding the aforementioned amounts, all other terms of the original SP2 Facility remain unchanged. The SP2 Facility Amendment was treated as a debt modification under ASC 470-50, Debt—Modifications and Extinguishments. The Company also incurred related $0.4 million of deferred financing costs, which is being amortized to interest expense over the term of the loan. Related unamortized deferred financing costs were $0.3 million as of December 31, 2023.

Amounts outstanding under the SP 2 LC, as amended, were $7.0 million as of December 31, 2023. The effective interest rate on the SP 2 Facility as of December 31, 2023 was 8.04%. The obligations of the Company under the SP 2 Facility are secured by substantially all of the assets and equity interest in one of the Company’s subsidiaries. The SP 2 Facility requires the Company to be in compliance with various covenants, including debt service coverage ratios, and as of December 31, 2023, the Company was in compliance with the required covenants under the SP 2 Facility.

Key Bank Credit Agreement

The Key Bank Credit Agreement (the “SP 3 Facility”), executed with KeyBank National Association, includes a debt service reserve letter of credit (the “SP 3 LC”) with related amounts outstanding of $4.1 million as of December 31, 2023. Amounts outstanding under the SP 3 LC bear interest of 3.00% per annum. The term loans under the SP 3 Facility require quarterly principal payments, mature in November 2027 and bear interest at the SOFR plus the applicable margin. The applicable margin is 3.00% per annum for the first three years,3.125% per annum from the third anniversary through the fifth anniversary and 3.25% per annum starting on the fifth anniversary. The effective interest rate on the SP 3 Facility as of December 31, 2023 was 8.66%.

The obligations of the Company under the SP 3 Facility are secured by substantially all of the assets and equity interest in one of the Company’s subsidiaries. The SP 3 Facility requires the Company to be in compliance with various covenants, including debt service coverage ratios, and as of December 31, 2023, the Company was in compliance with those required covenants under the SP 3 Facility.

Second Key Bank Credit Agreement

The Second Key Bank Credit Agreement, executed with Key Bank National Association as the administrative agent and certain third parties as the lenders, includes term loans which require quarterly principal payments, mature in April 2030 and bear interest at 8.25% per annum. The effective interest rate on term loans under the Second Key Bank Agreement as of December 31, 2023 was 8.25%. The obligations of the Company under the Second Key Bank Agreement are secured by substantially all of the assets and equity interest in certain of the Company’s subsidiaries. The Second Key Bank Credit Agreement requires the Company to be in compliance with various covenants, including debt service coverage ratios, and as of December 31, 2023, the Company was in compliance with those required covenants under the Second Key Bank Credit Agreement.

Deutsche Bank Credit Agreement

As part of the acquisition of SEMTH (See Note 4. Acquisition) in March 2023, the Company assumed debt with Deutsche Bank AG, New York Bank (“Deutsche Bank”). Prior to the SEMTH Acquisition, SET Borrower 2022, LLC (“SET Borrower”), a wholly owned subsidiary of SEMTH, entered into a credit agreement effective June 10, 2022 (the “Closing Date”) with Deutsche Bank as the facility agent, which consisted of a term loan of $125.0 million (the “SP4 Facility”) and is collateralized by all of the assets and property of SET Borrower. The term loan bears interest at the SOFR rate, plus the applicable margin. For the period from the Closing Date through the first twelve months, the applicable margin is 2.25% per annum,2.50% for the following six months, and 2.75% for the next six months, and 3.00% through the maturity date. The effective interest rate on the SP4 Facility as of December 31, 2023 was 7.09%. The term loan requires quarterly payments, which began on August 17, 2022 and should the outstanding loan balance exceed the borrowing base on such calculation date, the remaining balance would become due in a single payment in August 2025.

The SP4 Facility requires the Company to be in compliance with various affirmative and negative covenants and as of December 31, 2023, the Company was in compliance with the covenants under the SP 4 Facility.

Notes to Consolidated Financial Statements

As of December 31, 2023, the principal maturities of the Company’s debt were as follows:

Note 9. Interest Rate Swaps

In connection with the acquisition of Legacy Spruce Power, the Company assumed interest rate swaps from agreements Legacy Spruce Power executed with four financial institutions. The purpose of the swap agreements is to convert the floating interest rate on the Company's debt obligation under its credit agreements to a fixed rate. As of December 31, 2023 and 2022, the notional amount of the interest rate swaps covers approximately 95% and 97% of the balance of the Company’s floating rate term loans, respectively.

As of December 31, 2023, the following interest rate swaps are outstanding (in thousands):

Notes to Consolidated Financial Statements

(1) The amounts reflect, respectively, the Deutsche Bank swap assumed by the Company as part of the SEMTH Acquisition and an additional swap related to the SP2 Facility Amendment transacted concurrently with the Tredegar Acquisition to hedge the floating rate of the incremental term loans (See Note 8. Non-Recourse Debt).

During the year ended December 31, 2023, the aggregate change in the fair value of the interest rate swaps was $8.9 million, of which $4.8 million related to unrealized losses as reflected in the consolidated statements of operation and $13.7 million related to realized gains and is recognized within interest expense, net.

During the year ended December 31, 2022, the aggregate change in the fair value of the interest rate swaps was $7.7 million, of which $5.6 million related to unrealized gains as reflected in the consolidated statements of operation and $2.1 million related to realized gains and is recognized within interest expense, net in the consolidated statements of operations.

See Note 11. Fair Value Measurements for further information on the Company’s determination of the fair value of its interest rate swaps.

Note 10. Right-of-Use Assets and Lease Liabilities

The Company’s operating leases are primarily office space, while finance leases are certain office equipment. The Company’s related Right-of-Use (“ROU”) assets and lease liabilities are comprised of the following as of each period end:

Other information related to leases is presented below:

Notes to Consolidated Financial Statements

During the year ended December 31, 2023, the Company (i) recognized $0.9 million of operating right-of-use assets and lease liabilities due to a new lease for the relocation of its corporate office in September 2023, (ii) remeasured its operating right-of-use assets due to changes in the lease terms of certain underlying leases, resulting in an aggregate increase in the related right-of-use assets and lease liabilities of approximately $1.3 million, and (iii) settled certain operating leases, which were either terminated or assumed by a third party, in the amount of approximately $0.4 million (presented in the consolidated statements of cash flows) and a related net gain of less than $0.1 million included within (gain) loss on asset disposal in the consolidated statements of operations.

In addition, during the year ended December 31, 2023, the Company purchased the equipment related to its existing finance leases for approximately $0.1 million, thereby settling all outstanding finance lease liabilities as of December 31, 2023. The Company also recognized a related loss of approximately $0.1 million included within (gain) loss on asset disposal in the consolidated statements of operations.

The Company was a party to a noncancelable lease agreement for office, research and development, and vehicle development and installation facilities with a holder of more than 5% of the Company’s Common Stock, of which the lease expired in the third quarter of 2022. The related operating lease costs for the year ended December 31, 2022 was $0.1 million.

As of December 31, 2023, the annual minimum lease payments of the Company’s operating lease liabilities were as follows (in thousands):

Notes to Consolidated Financial Statements

Note 11. Fair Value Measurements

The Company uses various assumptions and methods in estimating the fair values of its financial instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Private Warrants are valued using a Black-Scholes model, pursuant to the inputs provided in the table below:

The Company’s interest rate swaps are not traded on a market exchange and the fair values are determined using a valuation model based on a discounted cash flow analysis. This analysis reflects the contractual terms of the interest rate swap agreements and uses observable market-based inputs, including estimated future SOFR interest rates. The fair value of the Company's interest rate swap is the net difference in the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates and are observable inputs available to a market participant. The interest rate swap valuation is classified as Level 2 of the fair value hierarchy.

The following table sets forth the Company’s assets and liabilities which are measured at fair value on a recurring basis by level within the fair value hierarchy:

Notes to Consolidated Financial Statements

The following is a roll forward of the Company’s Level 3 liability instruments:

(1) Related to discontinued operations.

Note 12. Stock-Based Compensation Expense

Stock-based compensation expense for stock options and restricted stock units for the years ended December 31, 2023 and 2022 was $2.9 million and $10.0 million, respectively. As of December 31, 2023, there was $7.1 million of unrecognized compensation cost, respectively, related to stock options and restricted stock units which is expected to be recognized over the remaining vesting periods, with a weighted-average period of 2.8 years.

Stock Options

The Company grants stock options to certain employees that will vest over a period ofone tofour years. A summary of stock option award activity for the years ended December 31, 2023 and 2022 was as follows:

Notes to Consolidated Financial Statements

The aggregate intrinsic value of stock options outstanding as of December 31, 2023 and 2022 was $0.3 million and $3.3 million, respectively. Cash received from options exercised for the years ended December 31, 2023 and 2022 was approximately $0.9 million and $0.6 million, respectively.

There were no stock options issued during the year ended December 31, 2023. The fair value of stock options issued during the year ended December 31, 2022 was measured with the following assumptions:

Restricted Stock Units

The Company grants restricted stock units to certain employees that will generally vest over a period offour years. The fair value of restricted stock unit awards is estimated by the fair value of the Company’s common stock at the date of grant. Restricted stock units activity during the years ended December 31, 2023 and 2022 was as follows:

Notes to Consolidated Financial Statements

Restricted Stock Award Modifications

In connection with the sale of the Company’s Drivetrain business to Shyft which closed in January 2023, the Company modified certain stock awards to employees of the Drivetrain business who were terminated in December 2022 and subsequently commenced employment at Shyft. The modification consisted of the acceleration of the vesting of all awards including stock options and restricted stock units scheduled to vest in 2023, which would have otherwise been forfeited. The vesting date of these awards was accelerated to December 31, 2022, resulting in an incremental stock based compensation expense of $0.3 million in 2022.

CEO's Ladder Restricted Stock Unit Award

On September 9, 2022, in connection with the acquisition of Legacy Spruce Power and his appointment as the Company's President, the Company granted to its CEO a restricted stock unit award (the “Ladder RSUs”) of 208,333 shares of common stock. The Ladder RSUs vest in 10% increments on the dates the Plan administrator certifies the applicable milestone stock prices have been achieved or exceeded, provided that the CEO remains employed on the date of certification and such achievement occurs withinten years of the date of the grant.

The Company used a Monte Carlo simulation valuation model to determine the fair value of the award as of the Acquisition Date, which is presently accounted for as a liability. The following inputs were used in the simulation: grant date stock price of $9.36 per share, annual volatility of 85.0%, risk-free interest rate of 3.3% and dividend yield of 0.0%. For each tranche, a fair value was calculated as well as a derived service period which represents the median number of years it is expected to take for the Ladder RSUs to meet their corresponding milestone stock price excluding the simulation paths that result in the Ladder RSUs not vesting within the 10-year term of the agreement. Each tranche's fair value will be amortized ratably over the respective derived service period.

The fair value and derived service period of each tranche was as follows:

The Company recognized expense related to the Ladder RSUs of approximately $0.5 million and $0.1 million for the years ended December 31, 2023 and 2022.

Note 13. Redeemable Noncontrolling Interest and Noncontrolling Interests

In November 2022, the Company purchased the remaining membership interests in Ampere Solar Owner IV, LLC, RPV Fund 13, LLC and Level Solar Fund III, LLC for aggregate cash payments of $4.6 million. In August 2023, the Company also purchased the remaining membership interests in Level Solar Fund IV for approximately $0.1 million, thereby owning 100% of the membership interests and eliminating its only remaining redeemable noncontrolling interest upon the purchase.

Notes to Consolidated Financial Statements

The following table summarizes the Company’s noncontrolling interests as of December 31, 2023:

The tax equity entities were structured at inception so that the allocations of income and loss for tax purposes will flip at a future date. The terms of the tax equity entities' operating agreements contain allocations of taxable income (loss), Section 48(a) ITCs and cash distributions that vary over time and adjust between the members on an agreed date (referred to as the flip date). The operating agreements specify either a date certain flip date or an internal rate of return (“IRR”) flip date. The date certain flip date is based on the passage of a fixed period of time as defined in the operating agreements for each entity. The IRR flip date is the date on which the tax equity investor has achieved a contractual rate of return. From inception through the flip date, the Class A members' allocation of taxable income (loss) and Section 48(a) ITCs is generally 99% and the Class B members' allocation of taxable income (loss) and Section 48(a) ITCs is generally 1%. After the related flip date (or, if the tax equity investor has a deficit capital account, typically after such deficit has been eliminated), the Class A members' allocation of taxable income (loss) will typically decrease to 5% (or, in some cases, a higher percentage if required by the tax equity investor) and the Class B members' allocation of taxable income (loss) will increase by an inverse amount.

The historical redeemable noncontrolling interests and noncontrolling interests are comprised of Class A units, which represent the tax equity investors' interest in the tax equity entities. Both the Class A members and Class B members may have call options to allow either member to redeem the other member's interest in the tax equity entities upon the occurrence of certain contingent events, such as bankruptcy, dissolution/liquidation and forced divestitures of the tax equity entities. Additionally, the Class B members may have the option to purchase all Class A units, which is typically exercisable at any time during the periods specified under their respective governing documents, and, in regards to the tax equity entities historically classified as redeemable noncontrolling interests, they had the contingent obligation to purchase all Class A units if the Class A members exercise their right to withdraw, which is typically exercisable at any time during thenine-month period commencing upon the applicable flip date. The carrying values of the Company’s historical redeemable noncontrolling interests were equal to or greater than the estimated redemption values as of December 31, 2022. The Company hadno redeemable noncontrolling interests as of December 31, 2023.

Total assets on the consolidated balance sheets include $38.0 million as of December 31, 2023 and $47.8 million as of December 31, 2022 of assets held by the Company's VIEs, which can only be used to settle obligations of the VIEs.

Total liabilities on the consolidated balance sheets include $0.8 million as of December 31, 2023 and $0.8 million as of December 31, 2022 of liabilities that are the obligations of the Company's VIEs.

Note 14. Restructuring

Subsequent to the acquisition of Legacy Spruce Power, the Company commenced the evaluation of personnel and processes of various corporate functions between Spruce Power and legacy XL Fleet Corp. to optimize the Company’s future corporate structure and implemented certain restructuring actions.

As a result of exiting the Drivetrain business and corporate restructuring actions, the Company recognized, in the aggregate, restructuring and related charges of approximately $21.6 million during the year ended December 31, 2022, which included (i) $4.4 million of severance charges paid in 2022 or 2023, (ii) $5.0 million impact of accelerated vesting of certain equity awards and (iii) $12.3 million of charges related to inventory obsolescence. During the year ended December 31, 2023, the Company recognized incremental restructuring charges of approximately $0.7 million related to severance charges, all of which were paid in 2023. The severance charges and accelerated vesting of equity awards are included in selling, general and administrative expenses within the Company’s consolidated statements of operations for the years ended December 31, 2023 and 2022. Inventory obsolescence charges are included in net loss from discontinued operations within the Company’s consolidated statements of operations for the year ended December 31, 2022.

The following table summarizes the activity during the years ended December 31, 2023 and 2022 for the Company's restructuring liability:

Notes to Consolidated Financial Statements

Note 15. Commitments and Contingencies

Sponsorship Commitment

In February 2021, the Company agreed to a sponsorship agreement with several entities related to the UBS Arena, Belmont Park and the NY Islanders Hockey Club. Pursuant to that agreement, the Company was designated an “Official Electric Transportation Partner of UBS Arena” with various associated marketing and branding rights, including the development of electric vehicle charging stations. The sponsorship agreement had a term ofthree years with a sponsor fee of approximately $0.5 million per year, of which approximately $0.3 million and $0.2 million were paid in June 2021 and January 2022, respectively. One of the Company’s directors is a co-owner of the NY Islanders Hockey Club. During the second quarter of 2022, the Company exercised its option to terminate the finaltwo years of the agreement and incurredno further sponsor fees.

The Company is periodically involved in legal proceedings and claims arising in the normal course of business, including proceedings relating to intellectual property, employment and other matters. Management believes the outcome of these proceedings will not have a significant adverse effect on the Company’s financial position, operating results, or cash flows.

Securities Class Action Proceedings

On March 8, 2021, two putative securities class action complaints were filed against the Company, and certain of its current and former officers and directors in the federal district court for the Southern District of New York. Those cases were ultimately consolidated under C.A. No. 1:21-cv-2002, and a lead plaintiff was appointed in June 2021. On July 20, 2021, an amended complaint was filed alleging that certain public statements made by the defendants between October 2, 2020, and March 2, 2021, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Following negotiations with a mediator, in September 2023, the Company and the plaintiffs agreed on a settlement in principle in the aggregate amount of $19.5 million (the “Settlement Amount”), and on December 6, 2023, the lead plaintiff and the defendants entered into a stipulation and agreement of settlement requiring the Company to pay the Settlement Amount to resolve the class action litigation and the related legal fees and administration costs. Furthermore, on January 18, 2024, the court preliminarily approved the proposed settlement as being fair, reasonable, and adequate, and scheduled a hearing for April 30, 2024, to, among other things, consider whether to approve the proposed settlement. The Company expects the Settlement Amount to be offset by approximately $4.5 million of related loss recoveries from the Company’s directors and officers liability insurance policies with third parties, which the amount is included in prepaid expenses and other current assets on the consolidated balance sheet as of December 31, 2023. The Company accrued for the $19.5 million Settlement Amount as of December 31, 2023 (See Note 7. Accrued Expenses and Other Current Liabilities) and paid the $15.0 million net settlement amount to the settlement claims administrator in February 2024.

Notes to Consolidated Financial Statements

On September 20, 2021, and October 19, 2021, two class action complaints were filed in the Delaware Court of Chancery against certain of the Company’s current officers and directors, and the Company’s sponsor of its special purpose acquisition company merger, Pivotal Investment Holdings II LLC. These actions were consolidated as in re XL Fleet Corp. (Pivotal) Stockholder Litigation, C.A. No. 2021-0808, and an amended complaint was filed on January 31, 2022. The amended complaint alleges various breaches of fiduciary duty against the Company and/or its officers, several allegedly misleading statements made in connection with the merger, and aiding and abetting breaches of fiduciary duty in connection with the negotiation and approval of the December 21, 2020 merger and organization of Legacy XL to become XL Fleet Corp. The Company believes the allegations asserted in both class action complaints are without merit and is vigorously defending the lawsuit. At this time, the Company is unable to estimate potential losses, if any, related to the lawsuit.

Shareholder Derivative Actions

On June 23, 2022, the Company received a shareholder derivative complaint filed in the U.S. District Court for the District of Massachusetts, captioned Val Kay derivatively on behalf of nominal defendant XL Fleet Corp., against all current directors and former officers and directors, C.A. No. 1:22-cv-10977. The action was filed by a shareholder purportedly on XL Fleet Corp.’s behalf, and raises claims for contribution, as well as claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and abuse of control. On December 8, 2023, the parties submitted a joint status report advising the court that they had reached a settlement-in-principle to settle this action, the Reali v. Griffin, et al. action, the Tucci v. Ledecky, et al. action, and a stockholder litigation demand (collectively, the “Derivative Matters”). Plaintiffs filed a motion for preliminary approval of the settlement on March 1, 2024, which is pending a decision from the court. The settlement provides for certain corporate governance enhancements and no monetary payments. Plaintiffs also intend to submit a petition for attorneys’ fees, which defendants intend on opposing. At this time, the Company is unable to estimate potential losses, if any, related to the potential fee petition.

In March 2023, two shareholder derivative actions were filed in the U.S. District Court for the District of Delaware (the “Delaware Derivative Actions”). One action is captioned Reali v. Griffin, et al., C.A. No. 1:23-cv-00289 and the other action is captioned Tucci v. Ledecky, et al., C.A. 1:23-cv-00322. These actions were consolidated and captioned In re Spruce Power Holding Corporation Shareholder Derivative Litigation, C.A. No. 1:23-cv-00289. As noted above, the consolidated action is part of a settlement agreement that has been filed in the U.S. District Court for the District of Massachusetts.

In August 2023, an additional derivative action was filed in the U.S. District Court for the Southern District of New York, captioned Boyce v. Ledecky, et al., C.A. No. 1:23-cv-8591. On March 11, 2024, all defendants filed motions to dismiss the complaint in its entirety, which are pending before the court. The settlement agreement for the Derivative Matters described above contains a release that would apply to claims in this action if the settlement agreement is approved by the U.S. District Court for the District of Massachusetts. On March 22, 2024, Boyce agreed to voluntarily dismiss the lawsuit.

Notes to Consolidated Financial Statements

Securities and Exchange Commission Civil Enforcement Action

On January 6, 2022, the Company received a subpoena from the Division of Enforcement of the SEC requesting, among other things, information and documents concerning the XL Fleet Corp. business combination with Legacy XL, the Company’s sales pipeline and revenue projections, California Air Resources Board approvals, and other related matters. In June 2023, the SEC proposed an Offer of Settlement for the purpose of resolving the proposed SEC action against the Company. Following negotiations with the SEC staff, in September 2023, the Company reached a settlement with the SEC pursuant to which the Company did not admit or deny the SEC’s allegations regarding the above-referenced issues. In connection with the settlement, in October 2023, the Company (among other things) paid a civil monetary penalty of $11.0 million which, subject to the discretion of the SEC, will be made available to eligible legacy shareholders through a Fair Fund, termed and administered by the SEC.

US Bank

On February 9, 2023, US Bank, through its affiliate, Firstar Development, LLC (“Firstar”), filed a motion for summary judgment in lieu of a complaint in New York Supreme Court (the trial level in New York) alleging that the Company failed to fulfill its reimbursement obligations under a 2019 tax recapture guaranty agreement between the parties arising from the alleged recapture by the Internal Revenue Service of tax credits taken by Firstar as an investor in the Company’s subsidiary, Ampere Solar Owner I, LLC. On May 23, 2023, the Company reached a settlement agreement with Firstar, as the plaintiff, for $2.3 million whereby the plaintiff discharged all claims filed against the Company.

BMZ USA, Inc.

On February 11, 2022, BMZ USA Inc. (“BMZ”), a battery manufacturer, sued Legacy XL for breach of contract, alleging that Legacy XL failed to timely purchase the full allotment of batteries required under a certain master supply agreement between the parties. In January 2024, BMZ obtained a judgment for $3.9 million against XL Hybrids, Inc. The Company is appealing the ruling while simultaneously pursuing a settlement. The Company currently estimates the potential loss to be approximately $1.2 million, which has been accrued for as of December 31, 2023 (See Note 7. Accrued Expenses and Other Current Liabilities).

Plastic Omnium

Plastic Omnium is the assignee of the contractual rights of Actia Corp. under a certain battery purchase order between Legacy XL and Actia Corp. On March 17, 2023, Plastic Omnium sued Legacy XL and the Company for breach of contract, alleging that Legacy XL ordered a total of 1,000 batteries from Plastic Omnium, paid for 455 of those batteries, and then reneged on 545 of those products. While Plastic Omnium admits it never actually delivered the remaining 545 products, it claims it purchased materials to complete the order, and as a result, Legacy XL and the Company are liable for at least approximately $2.5 million. The Company believes the allegations asserted in this action lack substantial merit, and as a result, is vigorously defending the lawsuit. At this time, the Company is unable to estimate potential losses, if any, related to the lawsuit.

Master SREC Purchase and Sale Agreement

The Company has forward sales agreements, which are related to a certain number of SRECs, to be generated from the Company’s solar energy systems located in Maryland, Massachusetts, Delaware, and New Jersey to be sold at fixed prices over varying terms of up to 20 years. In the event the Company does not deliver such SRECs to the counterparty, the Company could be forced to pay additional penalties and fees as stipulated within the contracts.

Notes to Consolidated Financial Statements

Guarantees

In connection with the acquisition of RPV Holdco 1, LLC, a wholly owned subsidiary of the Company, guaranty agreements were established in May 2020 by and between Spruce Holding Company 1, LLC, Spruce Holding Company 2, LLC, and Spruce Holding Company 3, LLC (“Spruce Guarantors”) and the investor members in certain of the Funds and Prior Funds. The Spruce Guarantors entered into guarantees in favor of the tax equity investors wherein they guaranteed the payment and performance of Solar Service Experts, LLC, a wholly owned subsidiary of the Company, under the Spruce Power 2 Maintenance Services Agreement and the Class B Member under the Limited Liability Company Agreement (“LLCA”). These guaranties are subject to a maximum of the aggregate amount of capital contributions made by the Class A Member under the LLCA.

Indemnities and Guarantees

During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. The duration of the Company’s indemnities and guarantees varies, however the majority of these indemnities and guarantees are limited in duration. Historically, the Company has not been obligated to make significant payments for such obligations, does not anticipate future payments, and as such, no liabilities have been recorded for these indemnities and guarantees as of December 31, 2023 and 2022.

ITC Recapture Provisions

The IRS may disallow and recapture some, or all, of the ITCs due to improperly calculated basis after a project has been placed in service (“Recapture Event”). If a Recapture Event occurs, the Company is obligated to pay the applicable Class A Member a recapture adjustment, which includes the amounts the Class A Members are required to repay the IRS, including interest and penalties, as well as any third-party legal and accounting fees incurred by the Class A Members in connection with the Recapture Event, as specified in the operating agreements. Such a payment by the Company to the Class A Members is not to be considered a capital contribution to the fund per the operating agreements, nor would it be considered a distribution to the Class A Members. With the exception of the tax matter related to Ampere Solar Owner I, LLC noted above, a Recapture Event was not deemed probable by the Company, therefore no related accrual has been recorded as of December 31, 2023 and 2022.

Insurance Claims and Recoveries related to Maui Fires

In August 2023, a series of wildfires broke out in Hawaii, predominantly on the island of Maui, resulting in real and personal property and natural resource damage, personal injuries and loss of life and widespread power outages. The Company is currently assessing the impact of these wildfires on its home solar systems and customer contracts in the area; however, the Company has not been able to validate the extent of the related damage due to limited access to the area. Based on the Company’s current assessment, the Company wrote off approximately $0.1 million during the year ended December 31, 2023, which is reflected within gain (loss) on asset disposal in the consolidated statements of operations. No material loss claims have been reported to date or recognized within the consolidated financial statements as of December 31, 2023. In addition, the Company has not recorded any related insurance recoveries as of December 31, 2023. The Company does not expect this event to have a material impact on its financial position, operating results or cash flows.

Note 16. Stockholders’ Equity

Common Stock

As of December 31, 2023 and 2022, the Company had 350,000,000 authorized shares of Common Stock. The holders of Common Stock are entitled to vote on all matters and are entitled to the number of votes equal to the number of shares of Common Stock held. Common stockholders are entitled to dividends when and if declared by the Board of Directors.

Notes to Consolidated Financial Statements

The following shares of Common Stock are reserved for future issuance as of December 31, 2023:

Reverse Stock Split

On October 6, 2023, the Company effected the Reverse Stock Split. Prior to the effective time of the Reverse Stock Split, the Company had 151,441,768 and 145,595,792 shares of common stock issued and outstanding, respectively, and upon the Reverse Stock Split, the Company had approximately 18,930,196 and 18,199,449 shares of common stock issued and outstanding, respectively. The par value and the number of authorized shares of the common stock were not adjusted in connection with the Reverse Stock Split. The value of the Company’s common stock outstanding and the related effect on additional paid in capital, all references to stock options, restricted stock units, private warrants, per share data, and related information contained within these consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. Subsequent to the Reverse Stock Split, each stockholder’s percentage ownership interest in the Company and proportional voting power remained unchanged.

No fractional shares of the Company’s common stock were issued in connection with the Reverse Stock Split. In late October 2023, certain stockholders entitled to fractional shares as a result of the Reverse Stock Split received aggregate cash payments of approximately $0.01 million in lieu of receiving fractional shares.

Share Repurchase Program

On May 9, 2023, the Company's Board of Directors authorized a share repurchase program (the “Repurchase Program”) for the repurchase of up to $50.0 million of the Company's outstanding common stock through May 15, 2025. The shares may be repurchased from time to time in open market transactions or privately negotiated transactions at the Company's discretion, subject to market conditions and other factors, including regulatory considerations.

The Repurchase Program does not require the Company to purchase a minimum number of shares, and may be suspended, modified or discontinued at any time without prior notice. During the year ended December 31, 2023, the Company repurchased 0.8 million shares of common stock under the Repurchase Program in open market transactions at a weighted-average price of $6.77 per share for an aggregate purchase price of $5.4 million, inclusive of transaction costs. As of December 31, 2023, $44.7 million remained available for future share repurchases under the Repurchase Program.