PINEAPPLE ENERGY INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

The following discussion and analysis should be read in conjunction with our
interim unaudited condensed consolidated financial statements and related notes
included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the
audited financial statements and notes thereto as of and for the years ended
December 31, 2021 and 2020, which are contained in our amended Current Report on
Form 8-K/A filed with the Securities and Exchange Commission (“SEC”) on May 19,
2022
.

Forward-Looking Statements

This quarterly report and, from time to time, reports filed with the Securities
and Exchange Commission
(“SEC”), in press releases, and in other communications
to shareholders or the investing public, may contain “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements can be identified by the fact that they do
not relate strictly to historical or current facts. Words such as “may,” “will,”
“can,” “should,” “would,” “could,” “anticipate,” “expect,” “plan,” “seek,”
“believe,” “are confident that,” “look forward to,” “predict,” “estimate,”
“potential,” “project,” “target,” “forecast,” “see,” “intend,” “design,”
“strive,” “strategy,” “future,” “opportunity,” “assume,” “guide,” “position,”
“continue” and similar expressions are intended to identify forward-looking
statements. Forward-looking statements are based on current beliefs,
expectations and assumptions that are subject to significant risks,
uncertainties and changes in circumstances that could cause actual results to
differ materially from such forward-looking statements. These risks,
uncertainties and changes in circumstances include, but are not limited to:

Solar Segment Risks and Uncertainties:


?our growth strategy depends on the continued origination of solar service
agreements;
?if sufficient additional demand for residential solar power systems does not
develop or takes longer to develop than we anticipate, our ability to originate
solar service agreements may decrease;
?a material reduction in the retail price of electricity charged by electric
utilities or other retail electricity providers could harm our business,
financial condition and results of operations;
?we need to obtain substantial additional financing arrangements to provide
working capital and growth capital;
?our business prospects are dependent in part on a continuing decline in the
cost of solar energy system components;
?we face competition from centralized electric utilities, retail electric
providers, independent power producers and renewable energy companies.;
?developments in technology or improvements in distributed solar energy
generation and related technologies or components may materially adversely
affect demand for our offerings;
?we depend on a limited number of suppliers of solar energy system components;
?increases in the cost of our solar power systems due to tariffs imposed by the
U.S. government could have a material adverse effect on our business, financial
condition and results of operations;
?our operating results may fluctuate from quarter to quarter and year to year;
?if we are unable to make acquisitions on economically acceptable terms, our
future growth would be limited, and any acquisitions we may make could reduce,
rather than increase, our cash flows;
?the installation and operation of solar power systems depends heavily on
suitable solar and meteorological conditions;
?the loss of one or more members of our senior management or key employees may
adversely affect our ability to implement our strategy;
?our inability to protect our intellectual property could adversely affect our
business;
?we may be subject to interruptions, failures or breaches in our information
technology systems;
?we may be subject to regulation as an electric utility in the future;
?electric utility policies and regulations, including those affecting electric
rates, may present regulatory and economic barriers to the purchase and use of
solar power systems;
?we rely on net metering and related policies for competitive pricing to our
customers;
?our business depends in part on the availability of financial incentives;

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?limitations regarding the interconnection of solar power systems to the
electrical grid may significantly reduce our ability to sell electricity from
our solar power systems; and
?compliance with occupational safety and health requirements and best practices
can be costly.

IT Solutions & Services Segment Risks and Uncertainties:

?our ability to profitably increase our business serving small and mid-size
businesses (“SMB”) commercial businesses as well as any decreased spending by
our existing SMB customers due to uncertainty or lower customer demand due to
the COVID-19 pandemic;

?our ability to successfully and profitably manage a large number of small
accounts;

?our ability to establish and maintain a productive and efficient workforce;

?our ability to compete in a fast growing and large field of SD-WAN competitors,
some of which have more features than our current product offering; and

?our ability to successfully sell the legacy CSI businesses at a value closes to
their fair market value.

Accordingly, you should not place undue reliance on forward-looking statements.
To the extent permitted by applicable law, we expressly disclaim any intent or
obligation to update any forward-looking statements to reflect subsequent events
or circumstances.

Overview

Pineapple Energy Inc. (formerly Communications Systems, Inc. (“CSI”) and
Pineapple Holdings, Inc.) (“PEGY,” “we” or the “Company”) was originally
organized as a Minnesota corporation in 1969. On March 28, 2022, the Company
completed its previously announced merger transaction with Pineapple Energy LLC
(“Pineapple Energy”) in accordance with the terms of a merger agreement,
pursuant to which a subsidiary of the Company merged with and into Pineapple
Energy
, with Pineapple Energy surviving the merger as a wholly-owned subsidiary
of the Company (the “merger”). Following the closing of the merger (the
“Closing”) the Company changed its name from Communications Systems, Inc. to
Pineapple Holdings, Inc. and subsequently, on April 13, 2022, changed its name
to Pineapple Energy Inc.

In addition, on March 28, 2022 and immediately prior to the closing of the
merger, the Company completed its acquisition (“HEC Asset Acquisition”) of
substantially all of the assets of two Hawaii-based solar energy companies,
Hawaii Energy Connection, LLC (“HEC”) and E-Gear, LLC (“E-Gear”).

The Company is a growing domestic operator and consolidator of residential
solar, battery storage, and grid service solutions. The Company’s focus is
acquiring and growing leading local and regional solar, storage and energy
service companies nationwide. Through the Company’s HEC business, the Company
also operates as a recognized solar integrator, dedicated to providing
affordable energy solutions in Hawaii with its offerings of solar panels,
communication filters, web monitoring systems, batteries, water heating systems,
and other related products that help residential and commercial users reduce
electric costs and earn tax credits related to installing renewable energy
systems. The Company’s E-Gear business is a renewable energy innovator that
offers proprietary patented and patent pending edge-of-grid energy management
and storage solutions that offer intelligent and real-time adaptive control,
flexibility, visibility, predictability and support to energy consumers, energy
service companies, and utilities.

Through the Company’s legacy CSI subsidiaries, JDL Technologies, Inc. (“JDL”)
and Ecessa Corporation (“Ecessa”), the Company provides technology solutions,
including virtualization, managed services, wired and wireless network design
and implementation, and hybrid cloud infrastructure and deployment, and designs,
develops and sells SD-WAN (software-designed wide-area network) solutions.

While CSI was the legal acquirer in the merger, because Pineapple Energy was
determined to be the accounting acquirer, the historical financial statements of
Pineapple Energy became the historical financial statements of the combined
company upon the consummation of the merger. As a result, the financial
statements included in the accompanying condensed consolidated financial
statements, and the discussion in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations, reflect the historical operating
results of Pineapple Energy prior to the merger, the consolidated results of
CSI, Pineapple Energy, HEC, and E-Gear following the closing of the

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merger, and the Company’s equity structure for all periods presented.
Accordingly, references to “the Company” herein are to the applicable entity at
the date or during the time period in the applicable discussion.
Following the merger, the Company operates in two distinct business segments as
follows:




Solar Segment

Through the Company’s Pineapple Energy, HEC and E-Gear businesses, the Company
operates as follows:
?

?As a recognized solar integrator, dedicated to providing affordable energy
solutions in Hawaii with its offerings of solar panels, communication filters,
web monitoring systems, batteries, water heating systems, and other related
products that help residential and commercial users reduce electric costs and
earn tax credits related to installing renewable energy systems.
?

?As a renewable energy innovator that offers proprietary patented and patent
pending edge-of-grid energy management and storage solutions that offer
intelligent and real-time adaptive control, flexibility, visibility,
predictability and support to energy consumers, energy service companies, and
utilities.

IT Solutions & Services Segment

Through the Company’s legacy subsidiaries, JDL Technologies, Inc. and Ecessa
Corporation
, the Company provides technology solutions, including
virtualization, managed services, wired and wireless network design and
implementation, and hybrid cloud infrastructure and deployment, and designs,
develops and sells SD-WAN (software-designed wide-area network) solutions.

Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021

The consolidated results herein reflect the historical operating results of
Pineapple Energy prior to the merger and the consolidated results of CSI,
Pineapple Energy, HEC and E-Gear following the closing of the merger on March
28, 2022
. Due to the limited activity included in the first quarter related to
the acquired businesses, the following discussion on operations is at the
consolidated level rather than a segment level.

Consolidated sales were $319,000 in the first quarter of 2022. There were no
sales in the first quarter of 2021 as the Company was initially founded in
December of 2020. The first quarter 2022 sales consisted of $232,000 from the
Solar segment (primarily from residential solar sales by HEC) and $87,000 from
the IT Solutions & Services segment.

Consolidated gross profit was $95,000 in the first quarter of 2022, with $66,000
generated from the Solar segment and $29,000 from the IT Solutions & Services
segment. As the Company did not have sales in the first quarter of 2021, there
was no gross profit for that period.

Consolidated operating expenses included selling, general and administrative
expenses, amortization expense and transaction costs and increased 114.4% to
$1,623,000 in the first quarter of 2022 as compared to $757,000 in the first
quarter of 2021 due primarily to an $800,000 increase in transaction costs the
Company incurred related to the consummation of the merger and HEC Asset
Acquisition. The first quarter of 2022 also included $78,000 in selling, general
and administrative costs of the acquired businesses.

Consolidated operating loss in the first quarter of 2022 increased to $1,528,000
from an operating loss of $757,000 in the first quarter of 2021. Net loss in the
first quarter of 2022 was $1,884,000 or $(0.58) per diluted share compared to
net loss of $1,068,000 or $(0.35) per diluted share in the first quarter of
2021.

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Liquidity and Capital Resources

As of March 31, 2022, the Company had $12,558,000 in cash, restricted cash and
cash equivalents, and liquid investments. Of this amount, $682,000 was invested
in short-term money market funds that are not considered to be bank deposits and
are not insured or guaranteed by the FDIC or other government agency. These
money market funds seek to preserve the value of the investment at $1.00 per
share; however, it is possible to lose money investing in these funds. The
remainder in cash and cash equivalents is operating cash. The Company also had
$2,839,000 in investments consisting of corporate notes and bonds that are
traded on the open market and are classified as available-for-sale at March 31,
2022
.

Of the amounts of cash, restricted cash, cash equivalents and investments on the
balance sheet at March 31, 2022, $6,808,000 consist of funds that can only be
used to support the legacy CSI business, will be distributed to CVR holders and
cannot be used to support the working capital needs of the Pineapple Energy
business.

The Company had working capital of $11,457,000 at March 31, 2022, consisting of
current assets of approximately $22,467,000 and current liabilities of
$11,010,000 compared to working capital of $(2,872,000) at December 31, 2021
consisting of current assets of $19,000 and current liabilities of $2,891,000.

Cash flow used in operating activities was approximately $5,542,000 in the first
quarter of 2022 as compared to $219,000 of net cash used in the same period of
2021. Significant working capital changes from December 31, 2021 to March 31,
2022
included a decrease in payables of $2,533,000, a decrease in accrued
interest of $1,057,000 a decrease in accrued compensation and benefits of
$504,000.

Net cash used in investing activities was $10,208,000 in the first quarter of
2022 compared to $345,000 provided by investing activities in the same period of
2021 due to $10,257,000 in net cash paid for the HEC Asset Acquisition and the
merger.

Net cash provided by financing activities was $25,451,000 in the first quarter
of 2022 compared to $50,000 provided by financing activities in 2021. In the
first quarter of 2022, the Company received $32,000,000 in proceeds from the
issuance of preferred stock and warrants to PIPE Investors and paid $2,699,000
in related issuance costs. The Company also paid $4,500,000 in principal against
the Hercules term loan as discussed further in Note 8, Commitments and
Contingencies.

In the opinion of management, based on the Company’s current financial and
operating position and projected future expenditures, sufficient funds are
available to meet the Company’s anticipated operating and capital expenditure
needs for at least the next 12 months.

The Company expects to continue its efforts to identify and acquire companies
that complement or enhance its business. In connection with any such
acquisitions, the Company likely would need to seek additional financing, which
may not be available on favorable terms, or at all.

Contingent Value Rights and Impact on Cash

As discussed in Note 3, Business Combinations, the Company issued CVRs prior to
the closing of the merger to CSI shareholders of record on the close of business
on March 25, 2022. The CVR entitles the holder to a portion of the cash, cash
equivalents, investments and net proceeds of any divestiture, assignment, or
other disposition of all legacy assets of CSI and/or its legacy subsidiaries,
JDL and Ecessa, that are related to CSI’s pre-merger business, assets, and
properties that occur during the 24-month period following the closing of the
merger. The CVR liability as of March 31, 2022 was estimated at $18,277,000 and
represented the estimated fair value as of that date of the legacy CSI assets to
be distributed to CVR holders as of that date. This includes $6,567,000 as a
current CVR liability related to the current assets held for sale and
$12,545,000 recorded as a long-term liability that includes the restricted cash
and cash equivalents, investments, along with the other tangible and intangible
assets related to the legacy CSI business. The proceeds from CSI’s pre-merger
business working capital and related long term-assets and liabilities are not
available to fund the working capital needs of the post-merger company.

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Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with generally accepted accounting principles in the United States, or GAAP. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities, and
related disclosure of contingent assets and liabilities, revenue and expenses at
the date of the financial statements. Generally, we base our estimates on
historical experience and on various other assumptions in accordance with GAAP
that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates and such differences could be material to our
financial position and results of operations. Critical accounting estimates are
those that involve a significant level of estimation uncertainty and have had or
are reasonably likely to have a material impact on our financial condition and
results of operations.

While our significant accounting policies are more fully described in Note 2,
Summary of Significant Accounting Policies, to the Condensed Consolidated
Financial Statements included elsewhere in this report, we believe the following
discussion addresses our most critical accounting estimates, which involve
significant subjectivity and judgment, and changes to such estimates or
assumptions could have a material impact on our financial condition or operating
results. Therefore, we consider an understanding of the variability and judgment
required in making these estimates and assumptions to be critical in fully
understanding and evaluating our reported financial results.

Income Taxes: In the preparation of the Company’s consolidated financial
statements, management calculates income taxes. This includes estimating the
Company’s current tax liability as well as assessing temporary differences
resulting from different treatment of items for tax and book accounting
purposes. These differences result in deferred tax assets and liabilities, which
are recorded on the balance sheet. These assets and liabilities are analyzed
regularly and management assesses the likelihood it will realize these deferred
assets from future taxable income. We determine the valuation allowance for
deferred income tax benefits based upon the expectation of whether the benefits
are more likely than not to be realized. The Company records interest and
penalties related to income taxes as income tax expense in the consolidated
statements loss and comprehensive loss.

Accounting for Business Combinations: We record all acquired assets and
liabilities, including goodwill, other identifiable intangible assets,
contingent value rights and contingent consideration at fair value. The initial
recording of goodwill, other identifiable intangible assets, contingent value
rights and contingent consideration, requires certain estimates and assumptions
concerning the determination of the fair values and useful lives. The judgments
made in the context of the purchase price allocation can materially affect our
future results of operations. The valuations calculated from estimates are based
on information available at the acquisition date. Goodwill is not amortized, but
is subject to annual tests for impairment or more frequent tests if events or
circumstances indicate it may be impaired. Other intangible assets are amortized
over their estimated useful lives and are subject to impairment if events or
circumstances indicate a possible inability to realize the carrying amount. The
contingent consideration and contingent value rights liability will be adjusted
to fair value each reporting period with any adjustments recorded within the
statement of operations. For additional details, see Note 3, Business
Combinations and Note 7, Goodwill and Other Intangible Assets.

Revenue Recognition: The Company recognizes revenue when a customer obtains
control of promised goods or services. The amount of revenue recognized reflects
the consideration that the Company expects to receive in exchange for these
goods or services.

Within the Company’s Solar segment, revenue is recognized when there is a
transfer of control of promised goods or services to customers in an amount that
reflects the consideration that the Company expects to be entitled to in
exchange for those goods or services. The Company sells solar power systems
under construction and development agreements to residential and commercial
customers. The completed system is sold as a single performance obligation. For
residential contracts, revenue is recognized at the point-in-time when the
systems are placed into service. Any advance payments received in the form of
customer deposits are recorded as contract liabilities. Commercial contracts are
generally completed within three to twelve months from commencement of
construction. Construction on large projects may be completed within eighteen to
twenty-four months, depending on the size and location of the project. Revenue
from commercial contracts are recognized as work is performed based on the
estimated ratio of costs incurred to date to the total estimated costs at the
completion of the performance obligation.

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The Company also arranges for solar power systems to be installed for
residential customers by a third party, for which it earns a commission upon the
end customer’s acceptance of the installation. As there are more than two
parties involved in the sales transaction, the Company has determined it has an
agent relationship in the contracts with these customers, due to the fact that
the Company is not primarily responsible for fulfilling the promise to provide
the installation of solar arrays to the Customer, the Company does not have
inventory risk and has only limited discretion in pricing. Accordingly, the
Company has determined that revenue under these arrangements should be
recognized on a net basis.

Within the Company’s IT Solutions & Services segment, revenue is recognized over
time for managed services and professional services (time and materials (“T&M”)
and fixed price) performance obligations. This segment’s managed services
performance obligation is a bundled solution, a series of distinct services that
are substantially the same and that have the same pattern of transfer to the
customer and are recognized evenly over the term of the contract. T&M
professional services arrangements are measured over time with an input method
based on hours expended towards satisfying this performance obligation. Fixed
price professional service arrangements under a relatively longer-term service
will also be measured over time with an input method based on hours expended.

The Company has also identified the following performance obligations within its
IT Solutions & Services segment that are recognized at a point in time which
include resale of third-party hardware and software, installation, arranging for
another party to transfer services to the customer, and certain professional
services. The resale of third-party hardware and software is recognized at a
point in time, when the goods are shipped or delivered to the customer’s
location, in accordance with the agreed upon shipping terms. Installation
services are recognized at a point in time when the services are completed. The
service the Company provides to arrange for another party to transfer services
to the customer is satisfied at a point in time as the Company has transferred
control upon the service first being made available to the customer by the
third-party vendor, which are required to be presented on a net basis. Depending
on the nature of the service, certain professional services transfer control at
a point in time. The Company evaluates these circumstances on a case-by-case
basis to determine if revenue should be recognized over time or at a point in
time. See Note 4 for further discussion regarding revenue recognition.

Recently Issued Accounting Pronouncements

Recently issued accounting standards and their estimated effect on the Company’s
condensed consolidated financial statements are also described in Note
2, Summary of Significant Accounting Policies, to the Condensed Consolidated
Financial Statements included in this report.

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