Zeo Energy Corp 8-K/A, filed Aug 19, 2024
Zeo Energy Corp. (ZEO)
About this 8-K/A
Zeo Energy Corp filed this 8-K/A on August 19, 2024, reporting on events of March 13, 2024.
Items reported
- Item 2.01: Completed an acquisition or sale of assets
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 2)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
(Exact name of registrant as specified in its charter)
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(Commission File Number) |
(IRS Employer Identification No.) |
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(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Stock Market LLC | ||||
| The Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
EXPLANATORY NOTE
On August 2, 2024, the Company filed a Form 8-K with the SEC (the “Non-Reliance 8-K”) noting that during the preparation of the Company’s consolidated interim financial statements for the quarter ended June 30, 2024, the Company’s management identified the following misstatements and adjustments previously not recorded during the audit, as deemed immaterial at the time, to the Company’s financial statements for the year ended December 31, 2023 and the three months ended March 31, 2024:
For the year ended December 31, 2023
| ● | Corrections to accounts payable related to a manual entry from interim periods which should not have been included in accounts payable at December 31, 2023. The correction of this error results in a $844,000 increase in accounts payable and expenses. |
| ● | Accrued expenses not previously recorded at December 31, 2023 of $336,000 resulting in an increase in accrued liabilities and an increase in expenses. |
| ● | An owner distribution paid to the owners of Sunergy in the first and second quarters of 2024 related to the 2023 fiscal year was not accrued for as of December 31, 2023. The correction of this error resulted in a $325,000 increase in accrued liabilities and a reduction of members’ equity. |
| ● | Other miscellaneous adjustments known at December 31, 2023, but not recorded due to materiality, have now been recorded. The impact of these adjustments was to reduce revenue $376,000, reduce expenses $139,000, reduce accounts receivable $66,000, and increase liabilities $380,000. |
The net impact of correcting these misstatements is a reduction to net income of $1,417,000, and increase in total assets of $144,045, an increase to total liabilities of $1,885,868, and a decrease to total equity of $1,741,823.
For the three months ended March 31, 2024
| ● | Corrections to the December 31, 2023 period which reversed in the quarter ended March 31, 2024 which resulted in a reduction to the Company’s net loss attributable to Class A common stock by approximately $361,000 as follows: a) revenue increased by $376,000, b) cost of sales increased by $180,000 and c) general and administrative expenses decreased by $165,000. |
| ● | Stock-based compensation relating to an executive had not been recorded of approximately $505,000 as general and administrative expenses with the offset being additional paid in capital. |
| ● | Transaction costs relating to the business combination of approximately $572,000 had not been recorded in additional paid-in capital and accrued expenses. |
| ● | The related tax impacts of the above adjustments which resulted in a reduction to the tax benefit of approximately $49,000. |
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The net impact of correcting the misstatements in the March 31, 2024 period is an increase in the net loss of approximately $193,000, a decrease in total assets of approximately $49,000, an increase in total liabilities of $2.0 million, and an increase in the accumulated deficit of approximately $2,0 million.
As described in the Non-Reliance 8-K, on July 29, 2024, the audit committee of the Company’s board of directors, after discussion with the Company’s management concluded, that(i) the Company’s previously issued financial statements for the fiscal year ended December 31, 2023 included in the Company’s First Amended Report; (ii) the Company’s Quarterly Report on Form 10-Q as filed with the SEC on May 16, 2024 (the “Form 10-Q”); and (iii) the financial statements noted in items (i) and (ii) above included in the Company’s Registration Statement on Form S-1, which was declared effective by the SEC on May 31, 2024, should no longer be relied upon and should be corrected for the errors described above. Additionally, the Company’s management have discussed with Grant Thornton LLP, the Company’s independent registered public accounting firm, the matters disclosed in the Non-Reliance 8-K.
As such, the Company is filing this Amendment No. 2 on Form 8-K/A (“Amendment No. 2”) to restate its audited financial statements, Management’s Discussion and Analysis of Financial Condition and Results of Operation and unaudited pro forma combined financial information for the fiscal year ended December 31, 2023. The Company intends to correct the errors referenced above related to the quarterly period ended March 31, 2024 in an amendment to its Form 10-Q for the quarterly period ended March 31, 2024.
Further, the Company’s management has concluded that the errors arose due to its previously reported material weaknesses in the Company’s internal control over financial reporting relating to ineffective controls over period end financial disclosure and reporting processes, including, (i) not timely performing certain reconciliations and the completeness and accuracy of those reconciliations; (ii) lack of effectiveness of controls over accurate accounting and financial reporting and reviewing the underlying financial statement elements; and (iii) recording incorrect journal entries that did not have sufficient review and approval. The Company’s remediation plan with respect to such material weaknesses will be described in more detail in Item 4 of Part I to its Amendment No. 1 to the Form 10-Q, which it expects to file in the near-term.
This Amendment No. 2 reflects events that occurred after the filing of the First Amended Report, and, modifies and updates all disclosures in the Original Filing and the First Amended Report.
The information previously reported in or filed with the Original Report is hereby incorporated by reference to this Form 8-K/A. Capitalized terms used but not defined herein have the meanings assigned to them in the Original Report.
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Item 2.01 Completion of Acquisition or Disposition of Assets.
Financial Information
The audited financial statements of Sunergy as of and for the years ended December 31, 2023 and 2022, as restated, are set forth in Exhibit 99.1hereto and incorporated herein by reference.
The unaudited pro forma condensed combined financial information of Sunergy and ESGEN as of and for the year ended December 31, 2023, as restated, is set forth in Exhibit 99.2 hereto and incorporated herein by reference.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the year ended December 31, 2023, as restated, is set forth in Exhibit 99.3 hereto and incorporated herein by reference.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9.01. Financial Statement and Exhibits.
(a) Financial statements of businesses acquired.
The audited financial statements of Sunergy as of and for the years ended December 31, 2023 and 2022, as restated are set forth in Exhibit 99.1 hereto and incorporated herein by reference.
The unaudited pro forma condensed combined financial information of Sunergy and ESGEN as of and for the year ended December 31, 2023, as restated is set forth in Exhibit 99.2 hereto and incorporated herein by reference.
(c) Exhibits
EXHIBIT INDEX
| Exhibit Number |
Description | |
| 99.1 | Audited Consolidated Financial Statements of Sunergy as of and for the years ended December 31, 2023 and 2022, as restated. | |
| 99.2 | Unaudited Pro Forma Condensed Combined Financial Information, as restated. | |
| 99.3 | Management’s Discussion and Analysis of Financial Condition and Results of Operations, as restated. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Dated: August 19, 2024 | Zeo Energy Corp. | |
| By: | /s/ Timothy Bridgewater | |
| Name: | Timothy Bridgewater | |
| Title: | Chief Executive Officer and Chief Financial Officer | |
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Exhibit 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Members
Sunergy Renewables, LLC
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Sunergy Renewables, LLC (a Nevada limited liability company) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in members’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Restatement of Financial Statements
As discussed in Note 3 to the consolidated financial statements, the consolidated financial statements as of and for the year ended December 31, 2023 have been restated to correct misstatements.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
GRANT THORNTON LLP
We have served as the Company’s auditor since 2023.
Kansas City, Missouri
August 16, 2024
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SUNERGY RENEWABLES, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| As of December 31, | ||||||||
| 2023 | 2022 | |||||||
| (As Restated) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 8,022,306 | $ | 2,268,306 | ||||
| Accounts receivable, including $396,488 and $0 from related parties, net of allowance for credit losses of $862,580 and $742,772, as of December 31, 2023 and 2022, respectively | 2,905,205 | 564,279 | ||||||
| Inventories | 350,353 | 287,146 | ||||||
| Prepaid installation costs | 4,915,064 | 119,755 | ||||||
| Prepaid expenses and other current assets | 40,403 | 102,255 | ||||||
| Total current assets | 16,233,331 | 3,341,741 | ||||||
| Other assets | 62,140 | 62,140 | ||||||
| Property, equipment and other fixed assets, net | 2,918,320 | 1,699,720 | ||||||
| Operating lease right of use assets | 1,135,668 | 1,017,717 | ||||||
| Intangibles, net | 771,028 | 2,069,358 | ||||||
| Goodwill | 27,010,745 | 27,010,745 | ||||||
| Total assets | $ | 48,131,232 | $ | 35,201,421 | ||||
| Liabilities and members’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 4,699,855 | $ | 198,057 | ||||
| Accrued expenses and other current liabilities, including $2,415,966 and $0 with related parties at December 31, 2023 and 2022, respectively | 4,646,365 | 369,082 | ||||||
| Due to officers - related party | - | 104,056 | ||||||
| Current portion of long-term debt | 404,871 | 229,842 | ||||||
| Current operating lease liabilities | 539,599 | 473,797 | ||||||
| Contract liabilities, including $1,160,848 and $0 with related parties as of December 31, 2023 and 2022, respectively | 5,223,518 | 1,149,047 | ||||||
| Total current liabilities | 15,514,208 | 2,523,882 | ||||||
| Non-current operating lease liabilities | 636,414 | 580,980 | ||||||
| Long-term debt | 1,389,545 | 820,714 | ||||||
| Total liabilities | 17,540,167 | 3,925,575 | ||||||
| Commitments and contingencies (Note 11) | ||||||||
| Members’ Equity | 30,591,065 | 31,275,846 | ||||||
| Total liabilities and members’ equity | $ | 48,131,232 | $ | 35,201,421 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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SUNERGY RENEWABLES, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| (As Restated) | ||||||||
| Revenue, net of financing fees of $38,123123,502 and $32,485,288 for the years ended December 31, 2023 and 2022, respectively | $ | 94,226,149 | $ | 88,963,855 | ||||
| Related party revenue, net of financing fees of $6,851,232 and $0 for the years ended December 31, 2023 and 2022, respectively | 15,464,852 | - | ||||||
| Total revenue | 109,691,001 | 88,963,855 | ||||||
| Operating costs and expenses: | ||||||||
| Cost of goods sold (exclusive of items shown below) | 88,188,291 | 71,208,982 | ||||||
| Depreciation and amortization | 1,860,188 | 1,706,243 | ||||||
| Sales and marketing | 1,157,910 | 1,399,452 | ||||||
| General and administrative | 13,363,600 | 6,003,412 | ||||||
| Total operating expenses | 104,569,989 | 80,318,089 | ||||||
| Income from operations | 5,121,012 | 8,645,766 | ||||||
| Other income (expense), net: | ||||||||
| Other expense, net | (183,401 | ) | (2,510 | ) | ||||
| PPP loan forgiveness | - | 73,809 | ||||||
| Interest expense | (123,996 | ) | (51,295 | ) | ||||
| Total other income (expense), net | (307,397 | ) | 20,004 | |||||
| Net income | $ | 4,813,615 | $ | 8,665,770 | ||||
| Basic and diluted net income per common unit | $ | 44.81 | $ | 8.67 | ||||
| Weighted average units outstanding, basic and diluted | 1,000,000 | 1,000,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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SUNERGY RENEWABLES, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
| | Retained Earnings | Total | ||||||||||||||
| | Common Units | (Accumulated | Members’ | |||||||||||||
| | Units | Amount | Deficit) | Equity | ||||||||||||
| Balance, December 31, 2021 | 1,000,000 | $ | 31,155,864 | $ | (340,245 | ) | $ | 30,815,619 | ||||||||
| Member distributions | - | - | (8,205,543 | ) | (8,205,543 | ) | ||||||||||
| Net income | - | - | 8,665,770 | 8,665,770 | ||||||||||||
| Balance, December 31, 2022 | 1,000,000 | 31,155,864 | 119,982 | 31,275,846 | ||||||||||||
| Member distributions, as restated | - | - | (5,498,396 | ) | (5,498,396 | ) | ||||||||||
| Net income, as restated | - | - | 4,813,615 | 4,813,615 | ||||||||||||
| Balance, December 31, 2023, as restated | 1,000,000 | $ | 31,155,864 | $ | (564,799 | ) | $ | 30,591,065 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
SUNERGY RENEWABLES, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| (As Restated) | ||||||||
| Cash Flows from Operating Activities | ||||||||
| Net income | $ | 4,813,615 | $ | 8,665,770 | ||||
| Adjustment to reconcile net loss to cash used in operating activities | ||||||||
| Depreciation and amortization | 1,860,188 | 1,706,243 | ||||||
| PPP loan forgiveness | - | (73,809 | ) | |||||
| Provision for credit losses | 1,531,223 | 742,772 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (3,475,661 | ) | (916,993 | ) | ||||
| Accounts receivable due from related parties | (396,488 | ) | - | |||||
| Inventories | (63,207 | ) | (287,146 | ) | ||||
| Prepaid installation costs | (4,795,309 | ) | - | |||||
| Prepaids and other current assets | 61,852 | (108,671 | ) | |||||
| Other assets | - | (51,930 | ) | |||||
| Accounts payable | 4,501,798 | (477,649 | ) | |||||
| Accrued expenses and other current liabilities | 1,536,287 | 268,255 | ||||||
| Accrued expenses and other current liabilities due to related parties | 2,415,996 | - | ||||||
| Due to officers | (104,056 | ) | 104,056 | |||||
| Contract liabilities | 2,913,623 | 1,149,047 | ||||||
| Contract liabilities due to related parties | 1,160,848 | - | ||||||
| Operating lease payments | 3,285 | - | ||||||
| Net cash provided by operating activities | 11,963,994 | 10,719,945 | ||||||
| Cash flows from Investing Activities | ||||||||
| Purchases of property, equipment and other fixed assets | (1,780,458 | ) | (1,077,628 | ) | ||||
| Net cash used in investing activities | (1,780,458 | ) | (1,077,628 | ) | ||||
| Cash flows from Financing Activities | ||||||||
| Proceeds from the issuance of debt | 1,057,004 | 561,795 | ||||||
| Repayments of debt | (313,144 | ) | (181,109 | ) | ||||
| Distributions to members | (5,173,396 | ) | (8,205,543 | ) | ||||
| Net cash used in financing activities | (4,429,536 | ) | (7,824,857 | ) | ||||
| Net increase in cash and cash equivalents | 5,754,000 | 1,817,460 | ||||||
| Cash and cash equivalents, beginning of period | 2,268,306 | 450,846 | ||||||
| Cash and cash equivalents, end of the period | $ | 8,022,306 | $ | 2,268,306 | ||||
| Supplemental Cash Flow information | ||||||||
| Cash paid for interest | $ | 93,176 | $ | 54,738 | ||||
| Accrual of distribution to owners | 325,000 | - | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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1. NATURE OF OPERATIONS
Sunergy Renewables, LLC (together with its subsidiaries, “Sunergy” or the “Company”) is in the business of marketing, sales and installation, warranty coverage and maintenance of solar panel technology to individual households within the United States. As part of this, the Company may also provide roofing repairs and construction. The Company owns 100% of Sun First Energy, LLC, Sunergy Solar LLC and Sunergy Roofing and Construction, LLC.
Business Combination
On March 13, 2024 (the “Closing Date”), the registrant consummated its previously announced business combination (the “Closing”), pursuant to that certain Business Combination Agreement, dated as of April 19, 2023 (as amended on January 24, 2024, the “Business Combination Agreement”), by and among Zeo Energy Corp., a Delaware corporation (f/k/a ESGEN Acquisition Corporation, a Cayman Islands exempted company), ESGEN OpCo, LLC, a Delaware limited liability company (“OpCo”), Sunergy Renewables, LLC, a Nevada limited liability company (“Sunergy”), the Sunergy equityholders set forth on the signature pages thereto or joined thereto (collectively, “Sellers” and each, a “Seller”, and collectively with Sunergy, the “Sunergy Parties”), for limited purposes, ESGEN LLC, a Delaware limited liability company (the “Sponsor”), and for limited purposes, Timothy Bridgewater, an individual, in his capacity as the Sellers Representative (collectively, the “Business Combination”). Prior to the Closing, (i) except as otherwise specified in the Business Combination Agreement, each issued and outstanding Class B ordinary share of ESGEN was converted into one Class A ordinary share of ESGEN (the “ESGEN Class A Ordinary Shares” and such conversion, the “ESGEN Share Conversion”); and (ii) ESGEN was domesticated into the State of Delaware so as to become a Delaware corporation (the “Domestication”). In connection with the Closing, the registrant changed its name from “ESGEN Acquisition Corporation” to “Zeo Energy Corp.”
Following the Domestication, each then-outstanding ESGEN Class A Ordinary Share was converted into one share of Class A common stock of the registrant, par value $0.0001 per share (“Zeo Class A Common Stock”), and each then-outstanding ESGEN Public Warrant converted automatically into a warrant of the registrant, exercisable for one share of Zeo Class A Common Stock. Additionally, each outstanding unit of ESGEN was cancelled and separated into one share of Zeo Class A Common Stock and one-half of one warrant of the registrant.
In accordance with the terms of the Business Combination Agreement, Sunergy caused all holders of any options, warrants or rights to subscribe for or purchase any equity interests of Sunergy or its subsidiaries or securities (including debt securities) convertible into or exchangeable for, or that otherwise confer on the holder any right to acquire, any equity interests of Sunergy or any subsidiary thereof (collectively, the “Sunergy Convertible Interests”) existing immediately prior to the Closing to either exchange or convert all such holder’s Sunergy Convertible Interests into limited liability interests of Sunergy (the “Sunergy Company Interests”) in accordance with the governing documents of Sunergy or the Sunergy Convertible Interests.
At the Closing, ESGEN contributed to OpCo (1) all of its assets (excluding its interests in OpCo, but including the amount of cash in ESGEN’s Trust Account (the “Trust Account”) as of immediately prior to the Closing (after giving effect to the exercise of redemption rights by ESGEN shareholders)), and (2) a number of newly issued shares (the “Seller Class V Shares”) of Class V common stock of the registrant, par value $0.0001 per share (“Zeo Class V Common Stock”), which are non-economic, voting shares of Zeo, equal to the number of Seller OpCo Units (as defined in the Business Combination Agreement) and in exchange, OpCo issued to ESGEN (i) a number of Class A common units of OpCo (the “Manager OpCo Units”) which equaled the total number of shares of the Zeo Class A Common Stock issued and outstanding immediately after the Closing and (ii) a number of warrants to purchase Manager OpCo Units which equaled the number of SPAC Warrants (as defined in the Business Combination Agreement) issued and outstanding immediately after the Closing (the transactions described above in this paragraph, the “ESGEN Contribution”). Immediately following the ESGEN Contribution, (x) the Sellers contributed to OpCo the Sunergy Company Interests and (y) in exchange therefor, OpCo transferred to the Sellers the Seller OpCo Units and the Seller Class V Shares.
Prior to the Closing, Sellers transferred 24.167% of their Sunergy Company Interests (which were thereafter exchanged for Seller OpCo Units and Seller Class V Shares at the Closing, as described above) pro rata to Sun Managers, LLC, a Delaware limited liability company (“Sun Managers”), in exchange for Class A Units (as defined in the Sun Managers limited liability company agreement (the “SM LLCA”) in Sun Managers. In connection with such transfer, Sun Managers executed a joinder to, and became a “Seller” for purposes of, the Business Combination Agreement. Sun Managers intends to grant Class B Units (as defined in the SM LLCA) in Sun Managers through the Sun Managers, LLC Management Incentive Plan (the “Management Incentive Plan”) adopted by Sun Managers to certain eligible employees or service providers of OpCo, Sunergy or their subsidiaries, in the discretion of Timothy Bridgewater, as manager of Sun Managers. Such Class B Units may be subject to a vesting schedule, and once such Class B Units become vested, there may be an exchange opportunity through which the grantees may request (subject to the terms of the Management Incentive Plan and the OpCo A&R LLC Agreement (as defined below)) the exchange of their Class B Units into Seller OpCo Units (together with an equal number of Seller Class V Shares), which may then be converted into Zeo Class A Common Stock (subject to the terms of the Management Incentive Plan and the OpCo A&R LLC Agreement). Grants under the Management Incentive Plan will be made after Closing.
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As of the Closing Date, upon consummation of the Business Combination, the only outstanding shares of capital stock of the registrant were shares of Zeo Class A Common Stock and Zeo Class V Common Stock.
In connection with entering into the Business Combination Agreement, ESGEN and the Sponsor entered into a subscription agreement, dated April 19, 2023, which ESGEN, the Sponsor and OpCo subsequently amended and restated on January 24, 2024 (the “Sponsor Subscription Agreement”), pursuant to which, among other things, the Sponsor agreed to purchase an aggregate of 1,000,000 preferred units of OpCo (“Convertible OpCo Preferred Units”) convertible into Exchangeable OpCo Units (as defined below) (and be issued an equal number of shares of Zeo Class V Common Stock) concurrently with the Closing at a cash purchase price of $10.00 per unit and up to an additional 500,000 Convertible OpCo Preferred Units (together with the concurrent issuance of an equal number of shares of Zeo Class V Common Stock) during the six months after Closing if called for by Zeo. Prior to the Closing, ESGEN informed the Sponsor that it wished to call for the additional 500,000 Convertible OpCo Preferred Units at the Closing and, as a result, a total of 1,500,00 Convertible OpCo Preferred Units and an equal number of shares of Zeo Class V Common Stock were issued to Sponsor pursuant to the Sponsor Subscription Agreement for aggregate consideration of $15,000,000.
Accounting for the Business Combination
Following the Business Combination, the registrant is organized in an “Up-C” structure, such that Sunergy and the subsidiaries of Sunergy hold and operate substantially all of the assets and businesses of the registrant, and the registrant is a publicly listed holding company that holds a certain amount of equity interests in OpCo, which holds all of the equity interests in Sunergy. Zeo Class A Common Stock and warrants are traded on Nasdaq under the ticker symbols “ZEO” and “ZEOWW,” respectively.
Based upon the evaluation of the A&R LLC Agreement, the Sellers contributed their interests of Sunergy into OpCo OpCo LLC. OpCo’s members did not have substantive kickout or participating rights and therefore OpCo is a VIE. Consideration of OpCo as a VIE was necessary to determine the accounting treatment between ESGEN and Sunergy. Upon evaluation, ESGEN was considered to be the primary beneficiary through its membership interest and manager powers conferred to it through the Class A Units. For VIEs, the accounting acquirer is always considered to be the primary beneficiary. As such, ESGEN will consolidate OpCo and is considered to the accounting acquirer; however, further consideration of whether the entities are under common control was required in order to determine whether there is an ultimate change in control and the acquisition method of accounting is required under ASC 805.
While Sunergy did not control or have common ownership of ESGEN prior to the consummation of the Business Combination, the registrant evaluated the ownership of the new entity subsequent to the consummation of the transaction to determine if a change in control occurred by evaluating whether Sunergy is under common control prior to and subsequent to the consummation of the transaction. If the business combination is between entities under common control, then the acquisition method of accounting is not applicable and the guidance in ASC 805-50 regarding common control should be applied instead. EITF Issue 02-5 “Definition of ‘Common Control’ in Relation to FASB Statement No. 141” indicates that common control would exist if a group of shareholders holds more than 50 percent of the voting ownership of each entity, and contemporaneous written evidence of an agreement to vote a majority of the entities’ shares in concert exists. Prior to the Business Combination, Sunergy was majority owned by five entities (the “Primary Sellers”), who entered into a Voting Agreement, dated September 7, 2023. The term of the Voting Agreement is for five years from the date of the Voting Agreement. The consummation of the Business Combination with ESGEN did occur within the term of the Voting Agreement.
Prior to the Business Combination and the contributions to Sun Managers as described above, the Primary Sellers had 98% ownership in Sunergy. Immediately following the Business Combination, the Sellers now own approximately 83.8% of the equity of the registrant.
The Voting Agreement constitutes contemporaneous written evidence of an agreement to vote a majority of the Primary Sellers’ shares of the registrant in concert. Accordingly, the Primary Sellers retain majority control through the voting of their units in conjunction with the Voting Agreement immediately prior to the Business Combination and their shares following the Business Combination and, therefore, there was no change of control before or after the Business Combination. This conclusion was appropriate even though there was no relationship or common ownership or control between Sunergy and ESGEN prior to the Business Combination. Accordingly, the Business Combination should be accounted for in accordance with the guidance for common control transactions in ASC 805-50.
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Additional factors that were considered include the following:
| ● | Subsequent to the Business Combination, the registrant’s Board is comprised of one individual designated by ESGEN and five individuals that are designated by Sunergy; and |
| ● | Subsequent to the Business Combination, management of the registrant is the existing management at Sunergy. The individual serving as the chief executive officer and chief financial officer of Sunergy’s current management team continues substantially unchanged upon completion of the Business Combination. |
For common control transactions that include the transfer of a business, the reporting entity is required to account for the transaction in accordance with the procedural guidance in ASC 805-50. In essence, the Business Combination will be treated as a reverse recapitalization with ESGEN being treated as the acquired company since there was no change in control. Accordingly, the financial statements of the combined entity will represent a continuation of the financial statements of Sunergy with the business combination treated as the equivalent of Sunergy issuing equity for the net assets of ESGEN, accompanied by a recapitalization.
2. LIQUIDITY AND GOING CONCERN
The management of the Company has assessed the going concern assumptions of the Company during the preparation of these consolidated financial statements.
The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Historically, the Company’s primary source of funding to support operations have been cash flows from operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting and consolidation
The consolidated financial statements for the Company as of December 31, 2023 and 2022 include the accounts of the Company’s wholly-owned subsidiaries for years ended 2023 and 2022. The accompanying consolidated financial statements have been prepared pursuant to the accounting principles generally accepted in the United States of America (“US GAAP”). References to the “ASC” hereafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative US GAAP. All intercompany balances and transactions have been eliminated in consolidation.
Restatement to Previously Reported Financial Statements
Restatement Background
On July 29, 2024, the Audit Committee of the Board of Directors of the Company, based upon the recommendation of management, determined that our (i) audited consolidated financial statements included in the Company’s Form 8-K for the period ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on March 20, 2024 and as amended on March 25, 2024 (the “Original Form 8-K”) and (ii) unaudited condensed consolidated financial statements included in our Quarterly Report on Form 10-Q for the quarterly period March 31, 2024, filed with the SEC on May 16, 2024 (collectively, the “Affected Periods”), as well as the relevant portions of any communications which describe or are based on such financial statements, should no longer be relied upon, and that the previously issued financial statements for the Affected Periods should be restated.
This Note discloses the nature of the restatement adjustments and discloses the cumulative effects of these adjustments on the consolidated balance sheet, statement of operations, statement of changes in members’ equity and statement of cash flows for the period ended December 31, 2023 included in the Original Form 8-K.
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Description of Restatement Adjustments
During the preparation of the Company’s consolidated interim financial statements for the quarter ended June 30, 2024, the Company’s management identified the following misstatements and adjustments not recorded during the audit, deemed immaterial at the time, to the Company’s financial statements for the year ended December 31, 2023:
| ● | Corrections to accounts payable related to a manual entry from interim periods which should not have been included in accounts payable at December 31, 2023. The correction of this error results in a $844,000 increase in accounts payable and expenses. |
| ● | Accrued expenses not previously recorded at December 31, 2023 of $336,000 resulting in an increase in accrued liabilities and an increase in expenses. |
| ● | An owner distribution paid to the owners of Sunergy in the first and second quarters related to the 2023 fiscal year was not accrued for as of December 31, 2023. The correction of this error resulted in a $325,000 increase in accrued liabilities and expenses. |
| ● | Other miscellaneous adjustments known at December 31, 2023 but not recorded due to materiality have now been recorded. The impact of these adjustments was to reduce revenue $376,000, reduce expenses $139,000 reduce accounts receivable $66,000 and increase liabilities $380,000. |
The net impact of correcting these errors is a reduction to Net Income of $1,417,000, and increase in total assets of $144,045, an increase to total liabilities of $1,885,868, and a decrease to total equity of $1,741,823.
As a result of the foregoing, in accordance with ASC 250, Accounting Changes and Error Corrections, the Company is restating the previously issued consolidated financial statements for the period ended December 31, 2023 to reflect the effects of the restatement adjustments and to make certain corresponding disclosures. In the following tables, the Company has presented a reconciliation of the accompanying consolidated balance sheet, statement of operations, statement of changes in members’ equity, and statement of cash flows. In addition, the related notes to the consolidated financial statements have also been adjusted as appropriate to reflect the impact of the restatements.
Impact to the consolidated balance sheets as of December 31, 2023
| As reported | Adjustment | As restated | ||||||||||
| Accounts receivable, including $396,488 from related parties, net of allowance for credit losses of $2,270,620, as of December 31, 2023 | $ | 2,970,705 | $ | (65,500 | ) | $ | 2,905,205 | |||||
| Prepaid installation costs | $ | 4,705,519 | $ | 209,545 | $ | 4,915,064 | ||||||
| Total current assets | $ | 16,089,286 | $ | 144,045 | $ | 16,233,331 | ||||||
| Total assets | $ | 47,987,187 | $ | 144,045 | $ | 48,131,232 | ||||||
| Accounts payable | $ | 3,785,755 | $ | 914,100 | $ | 4,699,855 | ||||||
| Accrued expenses and other current liabilities, including $2,415,966 with related parties at December 31, 2023 | $ | 3,874,697 | $ | 771,668 | $ | 4,646,365 | ||||||
| Contract liabilities, including $1,160,848 with related parties as of December 31, 2023 | $ | 5,023,418 | $ | 200,100 | $ | 5,223,518 | ||||||
| Total current liabilities | $ | 13,628,340 | $ | 1,885,868 | $ | 15,514,208 | ||||||
| Total Liabilities | $ | 15,654,299 | $ | 1,885,868 | $ | 17,540,167 | ||||||
| Members’ equity | $ | 32,332,888 | $ | (1,741,823 | ) | $ | 30,591,065 | |||||
| Total liabilities and members’ equity | $ | 47,987,187 | $ | 144,045 | $ | 48,131,232 | ||||||
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Impact to the consolidated statement of operations for the year ended December 31, 2023
| As reported | Adjustment | As restated | ||||||||||
| Revenue, net of financing fees of $38,123,502 for the year ended December 31, 2023 | $ | 94,601,749 | $ | (375,600 | ) | $ | 94,226,149 | |||||
| Total Revenue | $ | 110,066,601 | $ | (375,600 | ) | $ | 109,691,001 | |||||
| Cost of goods sold (exclusive of items shown below) | $ | 88,030,259 | $ | 158,032 | $ | 88,188,291 | ||||||
| General and administrative | $ | 12,480,409 | $ | 883,191 | $ | 13,363,600 | ||||||
| Total operating expenses | $ | 103,528,766 | $ | 1,041,223 | $ | 104,569,989 | ||||||
| Income from operations | $ | 6,537,835 | $ | (1,416,823 | ) | $ | 5,121,012 | |||||
| Net income | $ | 6,230,438 | $ | (1,416,823 | ) | $ | 4,813,615 | |||||
| Basic and diluted net income per common unit | $ | 46.23 | $ | (1.42 | ) | $ | 44.81 | |||||
Impact to the consolidated statement of changes in stockholders’ equity for the year ended December 31, 2023
| As reported | Adjustment | As restated | ||||||||||
| Member distributions | $ | (5,173,396 | ) | $ | (325,000 | ) | $ | (5,498,396 | ) | |||
| Net income | $ | 6,230,438 | $ | (1,416,823 | ) | $ | 4,813,615 | |||||
| Retained Earnings (Accumulated Deficit) | $ | 1,177,024 | $ | (1,741,823 | ) | $ | (564,799 | ) | ||||
| Total Members’ equity | $ | 32,332,888 | $ | (1,741,823 | ) | $ | 30,591,065 | |||||
Impact to the consolidated statement of cash flows for the year ended December 31, 2023
| As reported | Adjustment | As restated | ||||||||||
| Net income | $ | 6,230,438 | $ | (1,416,823 | ) | $ | 4,813,615 | |||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | $ | (3,541,161 | ) | $ | 65,500 | $ | (3,475,661 | ) | ||||
| Prepaid installation costs | $ | (4,585,764 | ) | $ | (209,545 | ) | $ | (4,795,309 | ) | |||
| Accounts payable | $ | 3,587,698 | $ | 914,100 | $ | 4,501,798 | ||||||
| Accrued expenses and other current liabilities | $ | 1,089,619 | $ | 446,668 | $ | 1,536,287 | ||||||
| Contract liabilities | $ | 2,713,523 | $ | 200,100 | $ | 2,913,623 | ||||||
| Accrual of distribution to owners | $ | - | $ | 325,000 | $ | 325,000 | ||||||
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with US GAAP requires it to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Some of the more significant estimates include subsequent realizability of intangible assets, useful lives of depreciation and amortization and collectability of accounts receivable. Due to the uncertainty involved in making estimates, actual results could differ from those estimates which could have a material effect on the financial condition and results of operations in future periods.
The Company bases its estimates and assumptions on historical experience and other factors, including the current economic environment and on various other judgements that it believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Changes in those estimates resulting from continuing changes in the economic environment could have a material effect on the financial condition and results of future operations in future periods.
Segments Information
Operating segments are defined as components of an enterprise for which separate discrete financial information is evaluated regularly by our chief executive officer, who is the chief operating decision maker (“CODM”), in deciding how to allocate resources and assess performance. The CODM reviews financial information presented on a consolidated basis for the purposes of allocating resources and evaluating financial performance. Accordingly, the Company operates and manages its business as one operating and reportable segment.
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Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. The Company maintains its cash in checking and savings accounts. Income generated from cash held in savings accounts is recorded as interest income. The carrying value of the Company’s savings accounts is included in cash and approximates the fair value.
Accounts Receivable and Allowance for Credit losses
Accounts receivable is presented at the invoiced receivable amounts, less any allowance for any potential expected credit loss amounts, and do not bear interest. The Company estimates allowance for doubtful accounts based on the creditworthiness of each customer, historical collections experiences, forward looking information and other information including the aging of the receivables. This analysis resulted in an allowance for credit losses as of December 31, 2023 and 2022 of $862,580 and $742,772, respectively. Additionally, the Company had write-offs of $1,411,415 and $0 and no recoveries for the years ended December 31, 2023 and 2022, respectively. The majority of our customers finance their purchase and installation of solar panels through various financing companies, who then remit payment to Sunergy typically within 3 days after installation. The Company is not deemed a borrower with these financing agreements and as a result is not subject to any of the terms of the financing transaction between the financing company and the customer.
Prepaid installation costs
Prepaid installation costs include costs incurred prior to completion of installations of solar systems. Such costs include the cost of engineering, permits, governmental fees, advances for sales commissions, and other related solar installation costs. These costs are charged to Cost of Goods Sold when each installation is completed.
Prepaid and other current assets
Prepaid and other current assets consist of accrued employee expenses, prepaid insurances, and other current assets.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. The Company maintains its cash and cash equivalent balances in highly rated financial institutions, which at times may exceed federally insured limits. The Company has not experienced any loss relating to cash and cash equivalents in these accounts. The Company performs periodic credit evaluations of its customers’ financial condition as well as monitor the financial condition of the financial counterparties that finance customer transactions and generally does not require collateral. No one customer or financing counterparty exceeded 10% of accounts receivable as of December 31, 2023 and 2022.
Inventories
Inventories are primarily all finished goods comprised of solar panels and other related items necessary for installations and service needs. Inventory is accounted for on a first-in-first-out basis and are measured at the lower of cost or net realizable value, where cost is determined using a weighted-average cost method. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized as Cost of Goods Sold in the consolidated Statements of Operations. As of December 31, 2023 and 2022, inventory was $350,353 and $287,146, respectively.
Property, equipment and other fixed assets
Property, equipment and other fixed assets are carried at cost less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing property and equipment. Maintenance, repairs, and minor renovations are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the related costs and accumulated depreciation are removed from their respective accounts, and any difference between the sale proceeds and the carrying amount of the asset is recognized as a gain or loss on disposal in the combined consolidated Statements of Income.
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Software that is developed for internal use is accounted for pursuant to ASC 350-40, Intangibles, Goodwill and Other-Internal-Use Software. Qualifying costs incurred to develop internal-use software are capitalized when (i) the preliminary project stage is completed, (ii) management has authorized further funding for the completion of the project and (iii) it is probable that the project will be completed and perform as intended. These capitalized costs include compensation for employees who develop internal-use software and external costs related to development of internal use software. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Internally developed software is amortized using the straight-line method over an estimated useful life. All other expenditures, including those incurred in order to maintain an intangible asset’s current level of performance, are expensed as incurred. When these assets are retired or disposed of, the cost and accumulated amortization thereon are removed, and any resulting gain or losses are included in the consolidated statements of operations.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is five years, across all asset classes.
The estimated useful lives and depreciation methods are reviewed at each year-end, with the effect of any changes in estimates accounted for prospectively. All depreciation expense is included with Depreciation and Amortization in the consolidated Statements of Operations.
Impairment of long-lived assets
Management reviews each asset or asset group for impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable, but at least annually. No impairment provisions were recorded by the Company during the years ended December 31, 2023 and 2022.
Goodwill
Goodwill is recognized and initially measured as any excess of the acquisition-date consideration transferred in a business combination over the acquisition-date amounts recognized for the net identifiable assets acquired. Goodwill is not amortized but is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not result in an impairment of goodwill. First, the Company assesses qualitative factors to determine whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company conducts a quantitative goodwill impairment test comparing the fair value of the applicable reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the Company recognizes an impairment loss in the consolidated statement of operations for the amount by which the carrying amount exceeds the fair value of the reporting unit. The Company performs its annual goodwill impairment test at December 31 of each year. There was no goodwill impairment for the years ended December 31, 2023 and 2022.
Intangible assets subject to amortization
Intangible assets include tradename, customer lists and non-compete agreements. Amounts are subject to amortization on a straight-line basis over the estimated period of benefit and are subject to annual impairment consideration. Costs incurred to renew or extend the term of a recognized intangible asset, such as the acquired trademark, are capitalized as part of the intangible asset and amortized over its revised estimated useful life.
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Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the intangible assets may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. The Company evaluates the recoverability of intangible assets by comparing their carrying amounts to future net undiscounted cash flows expected to be generated by the intangible assets. If such intangible assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the intangible assets exceeds the fair value of the assets. The Company determines fair value based on discounted cash flows using a discount rate commensurate with the risk inherent in the Company’s current business model for the specific intangible asset being valued. No impairment charges were recorded for the years ended December 31, 2023 and 2022.
Accrual for Probable Loss Contingencies
In the normal course of business, the Company is involved in various claims and legal proceedings. A liability is recorded for such matters when it is probable that a loss has been incurred and the amounts can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. Legal costs associated with loss contingencies are expensed as incurred.
Revenue Recognition
The Company accounts for its revenue in accordance with ASC 606. The Company applies judgment in the determination of performance obligations in accordance with ASC 606. Performance obligations in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. In addition, a single performance obligation may comprise a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. This principle is achieved through applying the following five-step approach:
| ● | Step 1 - Identification of the contract, or contracts, with a client. |
| ● | Step 2 - Identification of the performance obligations in the contract. |
| ● | Step 3 - Determination of the transaction price. |
| ● | Step 4 - Allocation of the transaction price to the performance obligations in the contract |
| ● | Step 5 - Recognition of revenue when, or as, the Company satisfies a performance obligation. |
The Company recognizes and records revenue from its operations upon completion of installation for both solar system installations and roofing installations. In connection with the sales and installation, a signed contract between the Company and the purchaser defines the duties and obligations of each party. The contract is specific as to the duties and responsibilities which governs the accounting for these transactions. Once the Company’s performance obligations are met with installation completed, according to the signed contract, the Company’s obligations are completed and title is transferred to the buyer. The Company believes its performance obligation is completed once the installation of the solar panels is completed, which is prior to the customer receiving permission to operate the solar panels from the local utility company. The Company records sales revenue at this point in time in its accounting records. Many of the Company’s customers finance their obligations with third parties. In these situations, the finance company deducts their financing fees and remits the net amount to the Company. Revenue recorded is equal to the contract amount signed by the purchaser, net of the financing fees. The Company incurs several costs associated with the installation prior to its completion recorded. In accordance with ASC 340, installation related costs are recorded in Prepaid installation costs and in turn are expensed when installation is completed. Thus, revenue recognition is in turn matched with the installation equipment costs and expense associated with completion each project.
| For the year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Solar Systems Installations, gross | $ | 147,993,183 | $ | 118,048,764 | ||||
| Financing Fees | (45,064,634 | ) | (32,485,288 | ) | ||||
| Solar Systems Installations, net | 102,928,549 | 85,563,476 | ||||||
| Roofing Installations | 6,762,452 | 3,400,279 | ||||||
| Total net revenues | $ | 109,691,001 | $ | 88,963,755 | ||||
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Contract liabilities
The Company receives both customer lender advances and customer advances when the customer does not utilize third-party financing. These amounts are listed on the balance sheet under the caption of Contract liabilities and are considered a liability of the Company until the installation is completed. When an installation is delayed, the lender may withdraw their lender advances until the project installation is completed. The contract liabilities amounts are expected to be recognized as revenue within a few months of the Company’s receipt of the funds. The following table summarizes the change in contract liabilities:
| For the year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Contract liabilities, beginning of the period | $ | 1,149,047 | $ | - | ||||
| Revenue recognized from amounts included in contract liabilities at the beginning of the period | (1,149,047 | ) | - | |||||
| Cash received prior to completion of the performance obligation | 5,223,518 | 1,149,047 | ||||||
| Contract liabilities, as of the end of the period | $ | 5,223,518 | $ | 1,149,047 | ||||
Contract Acquisition Costs
The Company pays sales commissions to sales representatives based on a percentage of the sales contract entered into by the customer and the Company. Payment is made to the sales representative once installation is completed. Such costs are considered a Cost of Goods Sold on the Statement of Operations. Since sales commission payments are subject to completion of the installation, payment is made commensurate with the recognition of revenue from the sale, and therefore the full expense is incurred as the Company does not have any remaining performance obligations.
Earnings Per Share
The Company computes basic earnings per share (“EPS”) by dividing income available to members by the weighted average number of Common Units outstanding for the reporting period. Diluted earnings per share is calculated by dividing net earnings by the weighted average number of Common units equivalents outstanding. During the periods when they are anti-dilutive, Common Unit equivalents, if any, are not considered in the computation. As of December 31, 2023 and 2022, there were no anti-dilutive Common Units or Common Unit equivalents outstanding.
Leases
We determine whether an arrangement contains a lease based on the conveyed rights and obligations at the inception date. If an agreement contains an operating or financing lease, at the commencement date, we record an ROU asset and a corresponding lease liability based on the present value of the minimum lease payments.
As most of our leases do not provide an implicit borrowing rate, to determine the present value of lease payments, we use our hypothetical secured borrowing rate based on information available at lease commencement. Further, we have made a number of estimates and judgments regarding the lease term and lease payments.
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Lease Term — Leases with an term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one month to one year or more. Additionally, some of our leases include an option for early termination. We include renewal periods and exclude termination periods from our lease term if, at commencement, it is reasonably likely that we will exercise the option.
Lease Payments — Certain of our lease agreements include rental payments that are adjusted periodically for inflation or passage of time. These step payments are included within our present value calculation as they are known adjustments at commencement. Some of our lease agreements include variable payments that are excluded from our present value calculation.
Fair value of Financial Instruments
Fair value is the price that would be received to sell an asset, or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). We classify fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
Level 1 — Inputs based on unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable or can be corroborated by observable market data.
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are both unobservable for the asset and liability in the market and significant to the overall fair value measurement.
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. The Company establishes the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a fair value hierarchy based on the inputs used to measure fair value. The recorded amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accrued expenses, advanced funding, accounts payable, and debt approximate fair value due to their relatively short maturities.
Income Taxes
The Company has elected to be taxed as a partnership under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). Under these provisions, the taxable income or tax loss of the Company is passed through to its members and reported on their individual tax returns. Therefore, no provision or liability and no tax benefit or asset related to federal income taxes has been included in these financial statements. There were neither liabilities nor deferred tax assets relating to uncertain income tax positions taken or expected to be taken on the tax returns.
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New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In October 2021, the FASB issued ASU2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. The new guidance will require companies to apply the definition of a performance obligation under accounting standard codification ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current GAAP, an acquirer in a business combination is generally required to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The new guidance will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. These amendments are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The adoption of ASU 2021-08 in 2023 did not have a material impact on the Company’s financial statements or related disclosures.
Recently Issued Accounting Standards
In March 2020, the FASB issued authoritative guidance to provide optional relief for companies preparing for the discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”) and applies to lease and other contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that reference LIBOR or another rate that is expected to be discontinued as a result of reference rate reform. In January 2021, the FASB issued authoritative guidance that makes amendments to the new rules on accounting for reference rate reform. The amendments clarify that for all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in ASC 848. In December 2022, the FASB issued authoritative guidance to defer the sunset date of ASC 848 from December 31, 2022 to December 31, 2024. The Company is currently evaluating the potential impact of modifying treasury related arrangements and applying the relevant ASC 848 optional practical expedients, as needed. For existing lease, debt arrangements and other contracts, the Company does not expect any qualifying contract modifications related to reference rate reform and therefore does not expect that the optional guidance in ASC 848 will need to be applied through December 31, 2024. The Company will continue to monitor new contracts that could potentially be eligible for contract modification relief through December 31, 2024.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions,” which clarifies that contractual sale restrictions are not considered in measuring fair value of equity securities and requires additional disclosures for equity securities subject to contractual sale restrictions. The standard is effective for public companies for fiscal years beginning after December 15, 2023. This guidance became effective for the Company beginning January 1, 2024. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which will add required disclosures of significant expenses for each reportable segment, as well as certain other disclosures to help investors understand how the chief operating decision maker (“CODM”) evaluates segment expenses and operating results. The new standard will also allow disclosure of multiple measures of segment profitability, if those measures are used to allocate resources and assess performance. The amendments will be effective for public companies for fiscal years beginning after December 15, 2023. This guidance became effective for the Company beginning January 1, 2024. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. The standard will be effective for public companies for fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.
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4. PROPERTY, EQUIPMENT AND OTHER FIXED ASSETS
Property, equipment and other fixed assets consisted of the following:
| As of December 31, | ||||||||
| 2023 | 2022 | |||||||
| Internally developed software | $ | 691,745 | $ | - | ||||
| Furniture | 126,007 | 118,245 | ||||||
| Equipment and vehicles | 2,965,961 | 2,004,139 | ||||||
| Property and equipment | 3,783,713 | 2,122,384 | ||||||
| Accumulated depreciation | (865,393 | ) | (422,664 | ) | ||||
| $ | 2,918,320 | $ | 1,699,720 | |||||
Depreciation expense related to the Company’s property and equipment was $561,855 and $314,155 for the year ended December 31, 2023 and 2022, respectively, which were included in depreciation and amortization expenses in the consolidated statement of operations.
5. INTANGIBLE ASSETS
The following is a summary of the Company’s intangible assets, net at December 31, 2023 and 2022:
| Weighted Average | 2023 | |||||||||||||
|
Remaining Useful | Gross Carrying | Accumulated | ||||||||||||
| Life (in years) | Amount | Amortization | Total | |||||||||||
| Tradename | 0.75 | $ | 3,084,100 | $ | 2,313,072 | $ | 771,028 | |||||||
| Customer lists | 0 | 496,800 | 496,800 | - | ||||||||||
| Non-compete | 0 | 224,000 | 224,000 | - | ||||||||||
| $ | 3,804,900 | 3,033,872 | $ | 771,028 | ||||||||||
| Weighted Average | 2022 | |||||||||||||
|
Useful | Gross Carrying | Accumulated | ||||||||||||
| Life (in years) | Amount | Amortization | Total | |||||||||||
| Tradename | 1.5 | $ | 3,084,100 | $ | 1,285,042 | $ | 1,799,058 | |||||||
| Customer lists | 1 | 496,800 | 310,500 | 186,300 | ||||||||||
| Non-compete | 1 | 224,000 | 140,000 | 84,000 | ||||||||||
| $ | 3,804,900 | $ | 1,735,542 | $ | 2,069,358 | |||||||||
The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life. Management has determined there have been no indicators of impairment or change in useful life for the years ended December 31, 2023 and 2022. Amortization expense relating to the Company’s intangible assets was $1,298,333 and $1,388,433 for the years ended December 31, 2023 and 2022, respectively, which were included in depreciation and amortization expenses in the consolidated statement of operations.
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6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes accrued expenses and other current liabilities:
| As of December 31, | ||||||||
| 2023 | 2022 | |||||||
| Credit card accrual | $ | 58,963 | $ | 66,468 | ||||
| Accrued payroll | (136,668 | ) | 34,369 | |||||
| Accrued commissions | 856,360 | 211,092 | ||||||
| Accrued dealer fees | 2,415,966 | - | ||||||
| Accrued transaction costs | 572,429 | - | ||||||
| Accrued distribution to owners | 325,000 | - | ||||||
| Accrued other | 280,979 | 57,153 | ||||||
| $ | 4,646,365 | $ | 369,082 | |||||
7. LEASES
The Company leases both office space and warehouse space for its operations. Lease maturities vary from 2 to 5 years. Leases are viewed and recorded as operating leases and as such periodic payments (monthly) are expensed according to the period for which payment is made. Operating lease costs recorded in general and administrative expenses in the consolidated statements of operations were $599,873 and $309,393 for the years ended December 31, 2023 and 2022, respectively.
The following amounts were recorded in the Company’s balance sheet relating to its operating lease and other supplemental information:
| December 31, 2023 | December 31, 2022 | |||||||
| Operating lease right-of-use assets | $ | 1,135,668 | $ | 1,017,717 | ||||
| Current operating lease liabilities | 539,599 | 473,797 | ||||||
| Non-current operating lease liabilities | 636,414 | 580,980 | ||||||
| Total lease liabilities | $ | 1,176,013 | $ | 1,054,777 | ||||
| Other supplemental information: | ||||||||
| Weighted average remaining lease term (years) | 2.86 | 2.37 | ||||||
| Weighted average discount rate | 4.26 | % | 3.85 | % | ||||
The following table summarizes the supplemental cash flow information related to leases:
| December 31, 2023 | December 31, 2022 | |||||||
| Cash paid for amounts included in lease liabilities | $ | 596,589 | $ | 273,573 | ||||
| Right-of-use assets obtained in exchange for operating lease liabilities, net | $ | 668,376 | $ | 1,301,127 | ||||
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The following table presents the maturity analysis of operating lease liabilities as of December 31, 2023:
| Years | Operating Leases | |||
| 2024 | $ | 575,547 | ||
| 2025 | 291,270 | |||
| 2026 | 186,931 | |||
| 2027 | 138,284 | |||
| 2028 | 58,566 | |||
| Total lease payments | 1,250,598 | |||
| Less interest | 74,585 | |||
| Present value of lease liabilities | $ | 1,176,013 | ||
The Company has deposited security payments related to the facility leases of $62,140 included in the Consolidated Balance Sheets caption Other Assets.
8. DEBT
The Company has financing arrangements for many of the vehicles in its fleet. The financing includes direct loans for each vehicle being financed and the vehicles serve as collateral to the loans. For the years ended December 31, 2023 and 2022 the Company entered into new vehicle financing arrangements totaling $1,055,961 and $380,686, respectively. Payments of debt obligations are based on level monthly payments for 60 months and include interest rates ranging from 4.94% - 11.09%. As of December 31, 2023, the weighted average interest rate on the Company’s short debt obligations is 8.2%. The combined amounts of these financial obligations are included in the Consolidated Balance Sheets captions Current portion of long-term debt and Long-term debt. The Company does not have debt covenants associated with these arrangements.
The following table presents the maturity analysis of the long-term debt as of December 31, 2023:
| Years | Long-term Debt | |||
| 2024 | $ | 404,871 | ||
| 2025 | 436,976 | |||
| 2026 | 451,457 | |||
| 2027 | 285,134 | |||
| 2028 | 215,978 | |||
| Total debt | 1,794,416 | |||
| Less current portion | 404,871 | |||
| Long-term debt | $ | 1,389,545 | ||
9. MEMBERS’ EQUITY
The Company’s Operating Agreement (“LLC Agreement”) authorizes the issuance common units and profit interest units. Common units have the right to vote, and Profit Interest units have no voting rights. As of December 31, 2023 and 2022, 1,000,000 common units were issued and outstanding. The interests and rights of all units are documented in the LLC Agreement. Upon a liquidation event, after payment of all other debts and obligations of the Company, the common and vested profit interest units will share pro rata in proportion to the number of units held by such holders in any remaining funds to be distributed. No profit interest units were issued as of December 31, 2023 and 2023.
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10. RELATED PARTY TRANSACTION
During 2022, the CEO purchased materials on behalf of the Company. The amounts were recorded in cost of goods sold for the year ended December 31, 2022 and the balance at December 31, 2022 is $104,056 and was subsequently repaid in 2023.
There is one operating lease with a related party. Operating lease cost relating to this lease for the years ended December 31, 2023 and 2022 was $28,880 and $25,200, respectively. As of December 31, 2023 and 2022, the related party operating lease ROU asset was $75,378 and $7,399, respectively, and the related party operating lease liability was $58,134 and $7,828, respectively.
In 2023, some of the Company’s customer financed their obligations through third-party leasing companies established and managed by White Horse Energy, LC (“White Horse”), a holding company of which Timothy Bridgewater, Zeo’s Chairman, Chief Executive Officer and Chief Financial Officer, is the owner and manager. Mr. Bridgewater, through White Horse, holds 1% or less of the membership interests of the third-party leasing companies that own the installed solar energy systems leased by Sunergy Customers, with the remainder being held by third parties. These arrangements are similar to those with the Company’s third-party lenders. As such, the third party leasing companies deduct their financing fees and remits the net amount to the Company. For the years ended December 31, 2023 and 2022, the Company recognized $15,464,852 and $0 of revenue, net of financing fees of $6,851,232 and $0, respectively from these arrangements. As of December 31, 2023 and 2022, the Company had $396,488 and $0 of accounts receivable, $2,415,966 and $0 of accrued expenses and $1,160,848 and $0 of contract liabilities due to related parties relating to these arrangements, respectively.
11. COMMITMENTS AND CONTINGENCIES
Risks and Uncertainties - Weather Conditions
A significant portion of the Company’s business is conducted in the state of Florida. During recent years, there have been several hurricanes that have impacted our marketing, sales and installation activities. Future hurricane storms can have an adverse impact on our sales installations.
Workmanship and Warranties
The Company typically warrants solar energy systems sold to customers for periods of one to ten years against defects in design and workmanship, and for periods of one to ten years that installations will remain watertight.
The manufacturers’ warranties on the solar energy system components, which are typically passed through to the customers, have typically product warranty periods of 10 to 20 years and a limited performance warranty period of 25 years. As of December 31, 2023 and 2022, the Company did not record a warranty reserve as the historical costs incurred that the Company is required to pay have not been significant or indicative of the Company performing warranty work in the future. The Company at its discretion may provide certain reimbursement to customers if certain solar equipment is not operating as intended during future periods.
Litigation
In the normal course of business, the Company may become involved in various lawsuits and legal proceedings. While the ultimate results of these matters cannot be predicted with certainty, management does not expect them to have a material adverse effect on the financial position or results of operations of the Company.
Vendor Lien
To secure a line of credit with one of the Company’s primary supply vendor’s, the vendor filed a lien against the Company’s assets.
12. SUBSEQUENT EVENTS
Subsequent events have been evaluated through August 16, 2024, which represents the date the consolidated financial statements were available to be issued, and no events have occurred through that date that would impact the financial statements.
On March 6, 2024, the shareholders of ESGEN approved the Zeo Energy Corp. 2024 Omnibus Incentive Equity Plan (the “Incentive Plan”), which became effective upon the Closing. 3,220,400 of the outstanding shares of Common Stock of the Company (the “Plan Share Reserve”) shall be available for Awards under the Plan. Each Award granted under the Plan will reduce the Plan Share Reserve by the number of shares of Common Stock underlying the Award. Notwithstanding the foregoing, the Plan Share Reserve shall be automatically increased on the first day of the 2025 fiscal year through the 2029 fiscal year by a number of shares of Common Stock equal to the lesser of (i) the positive difference, if any, between 2% of the then-outstanding shares of Common Stock on the last day of the immediately preceding fiscal year, and (ii) a lower number of shares of Common Stock as may be determined by the Board.
On March 13, 2024 (the “Closing Date”), the Company consummated its previously announced business combination (the “Closing”), pursuant to that certain Business Combination Agreement, dated as of April 19, 2023 (as amended on January 24, 2024, the “Business Combination Agreement”), by and among Zeo Energy Corp., a Delaware corporation (f/k/a ESGEN Acquisition Corporation, a Cayman Islands exempted company), ESGEN OpCo, LLC, a Delaware limited liability company(“OpCo”), Sunergy Renewables, LLC, a Nevada limited liability company (“Sunergy”), the Sunergy equity holders set forth on the signature pages thereto or joined thereto (collectively, “Sellers” and each, a “Seller”, and collectively with Sunergy, the “Sunergy Parties”), for limited purposes, ESGEN LLC, a Delaware limited liability company (the “Sponsor”), and for limited purposes, Timothy Bridgewater, an individual, in his capacity as the Sellers Representative (collectively, the “Business Combination”). Prior to the Closing, (i) except as otherwise specified in the Business Combination Agreement, each issued and outstanding Class B ordinary share of ESGEN was converted into one Class A ordinary share of ESGEN (the “ESGEN Class A Ordinary Shares” and such conversion, the “ESGEN Share Conversion”); and (ii) ESGEN was domesticated into the State of Delaware so as to become a Delaware corporation (the “Domestication”). In connection with the Closing, the registrant changed its name from “ESGEN Acquisition Corporation” to “Zeo Energy Corp
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Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(as restated)
Defined terms included below shall have the same meaning as terms defined and included elsewhere in this Current Report on Form 8-K/A Amendment No. 2 (the “Form 8-K/A”) filed with the Securities and Exchange Commission (the “SEC”).
Introduction
The following unaudited pro forma condensed combined financial information presents the combination of financial information of ESGEN and Sunergy, adjusted to give effect to the Business Combination and related transactions. The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses” to depict the accounting for the transaction (“Transaction Accounting Adjustments”) and present the reasonably estimable synergies and other transaction effects that have occurred or are reasonably expected to occur (“Management’s Adjustments”). Both Sunergy and ESGEN have elected not to present Management’s Adjustments and will only be presenting Transaction Accounting Adjustments in the unaudited pro forma condensed combined financial information.
The following restated unaudited pro forma condensed combined balance sheet as of December 31, 2023, assumes that the Business Combination occurred December 31, 2023. The following restated unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023, presents pro forma effect to the Business Combination as if it had occurred on January 1, 2023.
The restated unaudited pro forma condensed combined financial statements have been presented for illustrative purposes only and do not necessarily reflect what the Combined Company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. Further, the pro forma condensed combined financial information also may not be useful in predicting the future financial condition and results of operations of the Combined Company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The restated unaudited pro forma condensed combined balance sheet as of December 31, 2023, has been derived from:
| ● | The historical audited financial statements of ESGEN as of December 31, 2023; and |
| ● | The historical audited financial statements of Sunergy as of December 31, 2023, as restated. |
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023, has been derived from:
| ● | The historical audited financial statements of ESGEN for the year ended December 31, 2023; and |
| ● | The historical audited financial statements of Sunergy for the year ended December 31, 2023, as restated. |
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as in effect on the date of the Current Report on Form 8-K to which this is attached which incorporates Transaction Accounting Adjustments. Sunergy and ESGEN have elected not to present any estimates related to potential synergies and other transaction effects that are reasonably expected to occur or have already occurred and will only be presenting Transaction Accounting Adjustments in the unaudited pro forma condensed combined financial information.
This information should be read together with the financial statements and related notes, as applicable, of each of Sunergy and ESGEN included in the Current, as amended, Original Report to which this is attached and Sunergy’s and ESGEN’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in the Current Report on Form 8-K, as amended, to which this is attached.
Description of the Transactions
Business Combination
On March 13, 2024 (the “Closing Date”), the registrant consummated its previously announced business combination (the “Closing”), pursuant to that certain Business Combination Agreement, dated as of April 19, 2023 (as amended on January 24, 2024, the “Business Combination Agreement”), by and among Zeo Energy Corp., a Delaware corporation (f/k/a ESGEN Acquisition Corporation, a Cayman Islands exempted company), ESGEN OpCo, LLC, a Delaware limited liability company (“OpCo”), Sunergy Renewables, LLC, a Nevada limited liability company (“Sunergy”), the Sunergy equityholders set forth on the signature pages thereto or joined thereto (collectively, “Sellers” and each, a “Seller”, and collectively with Sunergy, the “Sunergy Parties”), for limited purposes, ESGEN LLC, a Delaware limited liability company (the “Sponsor”), and for limited purposes, Timothy Bridgewater, an individual, in his capacity as the Sellers Representative (collectively, the “Business Combination”). Prior to the Closing, (i) except as otherwise specified in the Business Combination Agreement, each issued and outstanding Class B ordinary share of ESGEN was converted into one Class A ordinary share of ESGEN (the “ESGEN Class A Ordinary Shares” and such conversion, the “ESGEN Share Conversion”); and (ii) ESGEN was domesticated into the State of Delaware so as to become a Delaware corporation (the “Domestication”). In connection with the Closing, the registrant changed its name from “ESGEN Acquisition Corporation” to “Zeo Energy Corp.”
Conversion of Securities and Transaction Consideration
Upon the Domestication, each then-outstanding ESGEN Class A Ordinary Share was cancelled and converted into one share of Class A common stock of the registrant, par value $0.0001 per share (“Zeo Class A Common Stock”), and each then-outstanding ESGEN Public Warrant was assumed and converted automatically into a warrant of the registrant, exercisable for one share of Zeo Class A Common Stock. Additionally, each outstanding unit of ESGEN was cancelled and converted into one share of Zeo Class A Common Stock and one-half of one warrant of the registrant.
In accordance with the terms of the Business Combination Agreement, Sunergy caused all holders of any options, warrants or rights to subscribe for or purchase any equity interests of Sunergy or its subsidiaries or securities (including debt securities) convertible into or exchangeable for, or that otherwise confer on the holder any right to acquire, any equity interests of Sunergy or any subsidiary thereof (collectively, the “Sunergy Convertible Interests”) existing immediately prior to the Closing to either exchange or convert all such holder’s Sunergy Convertible Interests into limited liability interests of Sunergy (the “Sunergy Company Interests”) in accordance with the governing documents of Sunergy or the Sunergy Convertible Interests.
At the Closing, ESGEN contributed to OpCo (1) all of its assets (excluding its interests in OpCo, but including the amount of cash in ESGEN’s Trust Account (the “Trust Account”) as of immediately prior to the Closing (after giving effect to the exercise of redemption rights by ESGEN shareholders)), and (2) a number of newly issued shares of Class V common stock of the registrant, par value $0.0001 per share, which generally have only voting rights (the “Zeo Class V Common Stock”), equal to the number of Seller OpCo Units (as defined in the Business Combination Agreement) (the “Seller Class V Shares”) and (y) in exchange, OpCo issued to ESGEN (i) a number of Class A common units of OpCo (the “Manager OpCo Units”) which equaled the number of total shares of the Zeo Class A Common Stock issued and outstanding immediately after the Closing and (ii) a number of warrants to purchase Manager OpCo Units which equaled the number of SPAC Warrants (as defined in the Business Combination Agreement) issued and outstanding immediately after the Closing (the transactions described above in this paragraph, the “ESGEN Contribution”). Immediately following the ESGEN Contribution, (x) the Sellers contributed to OpCo the Sunergy Company Interests and (y) in exchange therefor, OpCo transferred to the Sellers the Seller OpCo Units and the Seller Class V Shares.
Prior to the Closing, Sellers transferred 24.167% of their Sunergy Company Interests (which were thereafter exchanged for Seller OpCo Units and Seller Class V Shares at the Closing, as described above) pro rata to Sun Managers, LLC, a Delaware limited liability company (“Sun Managers”), in exchange for Class A Units (as defined in the Sun Managers limited liability company agreement (the “SM LLCA”) in Sun Managers. In connection with such transfer, Sun Managers executed a joinder to, and became a “Seller” for purposes of, the Business Combination Agreement. Sun Managers intends to grant Class B Units (as defined in the SM LLCA) in Sun Managers through the Sun Managers, LLC Management Incentive Plan (the “Management Incentive Plan”) adopted by Sun Managers to certain eligible employees or service providers of OpCo, Sunergy or their subsidiaries, in the discretion of Timothy Bridgewater, as manager of Sun Managers. Such Class B Units may be subject to a vesting schedule, and once such Class B Units become vested, there may be an exchange opportunity through which the grantees may request (subject to the terms of the Management Incentive Plan and the OpCo A&R LLC Agreement (as defined below)) the exchange of their Class B Units into Seller OpCo Units (together with an equal number of Seller Class V Shares), which may then be converted into Zeo Class A Common Stock (subject to the terms of the Management Incentive Plan and the OpCo A&R LLC Agreement). Grants under the Management Incentive Plan will be made after Closing.
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As of the Closing Date, upon consummation of the Business Combination, the only outstanding shares of capital stock of the registrant were shares of Zeo Class A Common Stock and Zeo Class V Common Stock.
The material terms and conditions of the Business Combination Agreement are described in greater detail in the Company’s definitive proxy statement/prospectus (as amended and supplemented, the “Proxy Statement”) filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b)(3) under the Securities Act of 1933, as amended (the “Securities Act”), on February 13, 2024, in the section entitled “The Business Combination Agreement” beginning on page 146, which information is incorporated herein by reference.
Related Agreements
PIPE Financing
In connection with entering into the Business Combination Agreement, ESGEN and the Sponsor entered into a subscription agreement, dated April 19, 2023, which ESGEN, the Sponsor and OpCo subsequently amended and restated on January 24, 2024 (the “Sponsor Subscription Agreement”), pursuant to which, among other things, the Sponsor agreed to purchase an aggregate of 1,000,000 OpCo preferred units (and be issued an equal number of shares of Zeo Class V Common Stock) (“Convertible OpCo Preferred Units”) concurrently with the Closing at a cash purchase price of $10.00 per unit and up to an additional 500,000 Convertible OpCo Preferred Units (together with the concurrent issuance of an equal number of shares of Zeo Class V Common Stock) during the six months after Closing if called for by Zeo (the “Sponsor PIPE Investment”). Prior to the Closing, ESGEN informed the Sponsor that it wished to call for the additional 500,000 Convertible OpCo Preferred Units at the Closing and, as a result, a total of 1,500,000 Convertible OpCo Preferred Units were issued to Sponsor in return for aggregate consideration of $15,000,000.
Amendments to the Letter Agreement
Concurrently with the execution of the Business Combination Agreement, on April 19, 2023, the Sponsor, ESGEN’s independent directors at the time of its initial public offering (“IPO”) and one or more client accounts of Westwood Group Holdings, Inc. (successor to Salient Capital Advisors, LLC) (the “Westwood Client Accounts” and, together with the Sponsor and certain independent directors of ESGEN, the “Initial Shareholders”), entered into an amendment to that certain Letter Agreement, dated as of October 22, 2021 (the “Letter Agreement”) (and as further amended on January 24, 2024, the “Letter Agreement Amendment”), pursuant to which, among other things, (i) the Initial Shareholders agreed not to transfer his, her or its ESGEN Class B ordinary shares (or the Zeo Class A Common Stock ultimately issuable in exchange for such ESGEN Class B ordinary shares pursuant to the Business Combination Agreement) prior to the earlier of (a) six months after the Closing or (b) subsequent to the Closing (A) if the last sale price of the Zeo Class A Common Stock quoted on Nasdaq is greater than or equal to $12 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-consecutive trading day period commencing at least 90 days after Closing, or (B) the date on which Zeo completes a liquidation, merger, share exchange or other similar transaction that results in all of Zeo’s stockholders having the right to exchange their Zeo Class A Common Stock for cash, securities or other property, (ii) the Initial Shareholders agreed to waive any adjustment to the conversion ratio set forth in the governing documents of ESGEN with respect to the ESGEN Class B ordinary shares prior to the earlier of the ESGEN Share Conversion or the Closing, (iii) the Sponsor agreed to irrevocably surrender and forfeit 2,361,641 ESGEN ordinary shares (the “Sponsor Forfeited Shares”), (iv) the Initial Shareholders other than Sponsor agreed to irrevocably surrender and forfeit 538,359 ESGEN ordinary shares, (v) the Initial Shareholders and Sponsor agreed to forfeit an additional 500,000 shares of Zeo Class A Common Stock if, within two years of Closing, the Convertible OpCo Preferred Units are redeemed or converted (with such shares subject to a lock-up for two years after Closing) and (vi) the Initial Shareholders agreed to forfeit all of their SPAC Private Warrants (as defined in the Business Combination Agreement) in connection with Closing.
Side Letter
In connection with the Closing, ESGEN, the Sponsor, the Initial Shareholders and Sunergy entered into a side letter (the “Side Letter”) pursuant to which 778,381 of the Sponsor Forfeited Shares would be retained in the treasury of Zeo rather than being cancelled and such shares, following conversion into shares of Zeo Class A Common Stock, would then be available to be issued in connection with the Closing. At the Closing these shares were issued to K2 (as defined below), Piper (as defined below) and three other third-party investors.
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NRA Agreement
As previously disclosed, on March 11, 2024, ESGEN entered into a non-redemption agreement (the “NRA”) with The K2 Principal Fund L.P. (“K2”), pursuant to which K2 agreed (i) to purchase at least 174,826 ESGEN Class A Ordinary Shares in the open market from investors who had elected to redeem such shares in connection with ESGEN’s extraordinary general meeting of shareholders held to approve the transactions contemplated by the Business Combination Agreement and (ii) not to redeem and to validly rescind any redemption requests on such purchased ESGEN Class A Ordinary Shares. K2 ultimately purchased 176,786 ESGEN Class A Ordinary Shares in accordance with the foregoing.
In exchange for the foregoing commitments to purchase and not redeem such Class A Ordinary Shares, ESGEN agreed to issue, for no consideration an aggregate of 225,174 shares of Zeo Class A Common Stock at the Closing.
Engagement Letter
As previously disclosed, on April 19, 2023, Piper Sandler & Co. (“Piper”) and Sunergy agreed to the withdrawal of Piper from its role as financial advisor to Sunergy with respect to the Business Combination, and on September 5, 2023, Piper changed its role to providing buy-side and debt advisory services to Sunergy pursuant to an amendment to its engagement letter with Sunergy. On March 8, 2024, Piper and Sunergy agreed to a second amendment to the engagement letter (as so amended, the “Engagement Letter”) which provided that (i) if the Closing occurred, Piper would be issued 50,000 shares of Zeo Class A Common Stock at the Closing (and be added as a party to the A&R Registration Rights Agreement (as defined below)) and be paid six equal installments of $500,000, to be paid every three months starting on July 15, 2024 in full satisfaction of amounts due pursuant to the Engagement Letter and (ii) subject to certain conditions, Piper will be granted a right of first refusal on financial advisory services for a period of eighteen months following Closing. Accordingly, Zeo issued Piper 50,000 shares of Zeo Class A Common Stock at Closing.
A&R Registration Rights Agreement
On March 13, 2024, the Sellers, the Initial Shareholders, Piper (the “New PubCo Holders”) and Zeo entered into the Amended and Restated Registration Rights Agreement (the “A&R Registration Rights Agreement”), pursuant to which, among other things, Zeo will provide the New PubCo Holders certain registration rights with respect to certain shares of Zeo Class A Common Stock held by them or otherwise issuable to them pursuant to the Business Combination Agreement, the OpCo A&R LLC Agreement (as defined below) or Zeo’s certificate of incorporation filed on March 13, 2024 (the “Zeo Charter”).
OpCo A&R LLC Agreement
Following the Business Combination, Zeo has been organized in an “Up-C” structure, such that OpCo and the subsidiaries of OpCo hold and operate substantially all of the assets and business of Zeo, and Zeo is a publicly listed holding company that holds common equity interests in OpCo, which holds all of the equity interests in Sunergy. Until any redemption of Exchangeable OpCo Units (as defined below) has occurred as described below, the Sellers generally hold the remainder of the common equity interests of OpCo through their ownership of the Exchangeable OpCo Units. In addition, as described above, the Sponsor owns all of the Convertible OpCo Preferred Units upon the Closing. Except for the consent rights of Sponsor noted below or as specifically set forth in the OpCo A&R LLC Agreement (as defined below), Zeo has the full, exclusive and complete discretion to manage and control the business and affairs of OpCo.
Accordingly, on March 13, 2024, concurrently with the Closing, OpCo amended and restated its limited liability company agreement in its entirely (the “OpCo A&R LLC Agreement”) to, among other things, provide a holder of corresponding economic, non-voting Class B units of OpCo (the “Exchangeable OpCo Units”) the right to cause OpCo to redeem one or more of such Exchangeable OpCo Units, together with the cancellation of an equal number of shares of such holder’s Zeo Class V Common Stock, for shares of Zeo Class A Common Stock on a one-for-one basis, or, at the election of Zeo (as manager of OpCo), cash, in each case, subject to certain restrictions set forth in the OpCo A&R LLC Agreement and the Charter. The OpCo A&R LLC Agreement also provides for mandatory OpCo Unit Redemptions in certain limited circumstances, including in connection with certain changes of control. Subject to certain conditions, the Convertible OpCo Preferred Units are redeemable by Zeo and following the first anniversary of the Closing may be converted by the Sponsor into Exchangeable OpCo Units (and then would be immediately converted, together with the accompanying shares of Zeo Class V Common Stock, into Zeo Class A Common Stock). The Convertible OpCo Preferred Units have accruing distributions of 10% per annum and the Sponsor has holder thereof has certain consent rights over the taking of certain actions of OpCo and its subsidiaries.
4
The following table summarizes the pro forma number of shares of Zeo Common Stock outstanding following the consummation of the Business Combination and the Domestication, discussed further in the sections below, excluding the potential dilutive effect of the Zeo Public Warrants and the Convertible Preferred Shares.
| Equity Capitalization Summary | Shares | % | ||||||
| Sunergy Stockholders | 33,730,000 | 83.8 | % | |||||
| ESGEN Public Stockholders | 248,579 | 0.6 | % | |||||
| Initial Stockholders | 742,564 | 1.8 | % | |||||
| ESGEN Sponsor Stockholders | 4,757,436 | 11.8 | % | |||||
| Advisor Shares | 553,207 | 1.4 | ||||||
| Backstop Investor Shares | 225,174 | 0.6 | ||||||
| Total common stock | 40,256,960 | 100.0 | % | |||||
The following table shows the per share value of Zeo Common Stock held by non-redeeming holders of Zeo Common Stock:
| Shares | 40,256,960 | |||
| Book equity per share | $ | 0.21 |
Accounting for the Business Combination
The Business Combination was accounted for as a reverse recapitalization with ESGEN being treated as the acquired company since there was no change in control in accordance with the guidance for common control transactions in ASC 805-50. Accordingly, the financial statements of the combined entity will represent a continuation of the financial statements of Sunergy with the business combination treated as the equivalent of Sunergy issuing stock for the net assets of ESGEN, accompanied by a recapitalization. The net assets of ESGEN were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination were those of Sunergy.
Sunergy was determined to be the accounting acquirer based on evaluation of the following facts and circumstances:
Based upon the evaluation of the A&R LLC Agreement, ESGEN OpCo, LLC is considered to be a VIE, and ESGEN Acquisition Corp. is considered to be the primary beneficiary through its membership interest and manager powers conferred to it through the Class A Units. For VIEs, the accounting acquirer is always considered to be the primary beneficiary. As such, ESGEN Acquisition Corp. will consolidate ESGEN OpCo, LLC and will be considered to the accounting acquirer; however, further consideration of whether the entities are under common control is required in order to determine whether there is an ultimate change in control and the acquisition method of accounting is required under ASC 805.
While Sunergy did not control or have common ownership of ESGEN prior to the consummation of the Business Combination, the Company evaluated the ownership of the new entity subsequent to the consummation of the transaction to determine if common control existed. If the business combination is between entities under common control, then the acquisition method of accounting is not applicable and the guidance in ASC 805-50 regarding common control should be applied instead. The FASB ASC does not include a definition of common control. In practice, entities with a common parent entity, as determined under ASC 810, are generally considered to be under common control. EITF Issue 02-5, “Definition of ‘Common Control’ in Relation to FASB Statement No. 141”, which was never finalized or codified, has also been applied in practice to determine when entities are under common control. EITF Issue 02-5 indicates that common control would exist in any of the following situations:
| ● | An individual (including trusts in which the individual is the beneficial owner) or entity holds more than 50 percent of the voting ownership of each entity. |
| ● | Immediate family members hold more than 50 percent of the voting ownership interest of each entity, and there is no evidence that those family members would vote their shares in any way other than in concert. Immediate family members include a married couple and their children, but not the married couple’s grandchildren. Entities might be owned in varying combinations among living siblings and their children. Those situations require careful consideration of the substance of the ownership and voting relationships. |
| ● | A group of shareholders holds more than 50 percent of the voting ownership of each entity, and contemporaneous written evidence of an agreement to vote a majority of the entities’ shares in concert exists. |
5
Prior to the Business Combination, Sunergy was majority owned by 5 entities (the “Primary Sellers”):
| ● | Southern Crown Holdings, LLC (wholly owned by Anton Hruby) – 230,000 Common Units (23%) |
| ● | LAMADD LLC (wholly owned by Gianluca Guy) – 230,000 Common Units (23%) |
| ● | JKae Holdings, LLC (wholly owned by Kalen Larsen) – 215,000 Common Units (21.5%) |
| ● | Clarke Capital, LLC (wholly owned by Brandon Bridgewater) – 215,000 Common Units (21.5%) |
| ● | White Horse Energy, LC (wholly owned by Timothy Bridgewater) – 90,000 Common Units (9%) |
Each of the above parties have entered into a Voting Agreement, dated September 7, 2023. The term of the Voting Agreement is for five years from the date of the Voting Agreement. The consummation of the Business Combination with ESGEN occured within the term of the Voting Agreement.
Prior to the Business Combination and the contributions to Sun Managers, the Primary Sellers had 98% ownership in Sunergy. Immediately following the Business Combination, the Sellers owned 83.8% of the equity of the registrant through their Zeo Class V Common Stock that have voting interests
The Voting Agreement constitutes contemporaneous written evidence of an agreement to vote a majority of the Primary Sellers’ shares of the registrant in concert. Accordingly, the Primary Sellers retain majority control through the voting of their units in conjunction with the Voting Agreement immediately prior to the Business Combination and their shares following the Business Combination and, therefore, there is no change of control before or after the Business Combination. This conclusion is appropriate even though there was no relationship or common ownership or control between Sunergy and ESGEN prior to the Business Combination. Accordingly, the Business Combination should be accounted for in accordance with the guidance for common control transactions in ASC 805-50.
Additional factors that were considered include the following:
| ● | Subsequent to the Business Combination, the registrant’s Board is expected to be comprised of one individual designated by ESGEN and five individuals that are designated by Sunergy; and |
| ● | Subsequent to the Business Combination, management of the registrant will be the existing management at Sunergy. The individual serving as the chief executive officer and chief financial officer of Sunergy’s current management team will continue substantially unchanged upon completion of the Business Combination. |
For common control transactions that include the transfer of a business, the reporting entity is required to account for the transaction in accordance with the procedural guidance in ASC 805-50. The C Corporation (ESGEN) is considered to be a substantive entity, the LLC (OpCo) is a business and VIE, and the C Corporation is considered to be the accounting acquirer since it is the primary beneficiary of the LLC. In a transaction that is a combination of entities under common control, the acquirer (ESGEN) should recognize the acquired entity (OpCo and Sunergy) on the same basis as the entities’ common parent.
The following unaudited pro forma condensed combined balance sheet as of December 31, 2023, and the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2023, are based on the audited financial statements of ESGEN and Sunergy. The unaudited pro forma adjustments are based on information currently available, assumptions, and estimates underlying the pro forma adjustments and are described in the accompanying notes. Actual results may differ materially from the assumptions used to present the accompanying unaudited pro forma condensed combined financial statements.
6
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2023, AS RESTATED(1)
| Sunergy (US GAAP Historical, as restated) | ESGEN (US GAAP Historical) | Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||
| ASSETS | (as restated) | |||||||||||||||||
| Current assets | ||||||||||||||||||
| Cash and cash equivalents | $ | 8,022,306 | $ | 60,518 | $ | 15,000,000 | A | $ | 18,069,401 | |||||||||
| 2,857,872 | B | |||||||||||||||||
| (7,974,949 | ) | C | ||||||||||||||||
| 588,602 | I | |||||||||||||||||
| (484,948 | ) | O | ||||||||||||||||
| Accounts receivable, less reserves | 2,905,205 | - | - | 2,905,205 | ||||||||||||||
| Inventories, net | 350,353 | - | - | 350,353 | ||||||||||||||
| Prepaid installation costs | 4,915,064 | - | - | 4,915,064 | ||||||||||||||
| Prepaid expenses and other assets | 40,403 | 19,279 | - | 59,682 | ||||||||||||||
| Total current assets | 16,233,331 | 79,797 | 9,986,577 | 26,299,705 | ||||||||||||||
| Non-current assets | ||||||||||||||||||
| Property, plant, and equipment | 2,918,320 | - | - | 2,918,320 | ||||||||||||||
| Operating lease ROU assets | 1,135,668 | - | - | 1,135,668 | ||||||||||||||
| Other assets | 62,140 | - | - | 62,140 | ||||||||||||||
| Goodwill | 27,010,745 | - | - | 27,010,745 | ||||||||||||||
| Intangible assets, net | 771,028 | - | - | 771,028 | ||||||||||||||
| Deferred tax asset, net | - | - | 1,486,224 | K | 1,486,224 | |||||||||||||
| Marketable securities held in Trust Account | - | 16,018,732 | (2,857,872 | ) | B | - | ||||||||||||
| (13,336,056 | ) | L | ||||||||||||||||
| 175,196 | H | |||||||||||||||||
| Total non-current assets | 31,897,901 | 16,018,732 | (14,532,508 | ) | 33,384,125 | |||||||||||||
| Total assets | $ | 48,131,232 | $ | 16,098,529 | $ | (4,545,931 | ) | $ | 59,683,830 | |||||||||
| LIABILITIES | ||||||||||||||||||
| Current liabilities | ||||||||||||||||||
| Accounts payable and accrued expenses | 99,346,220 | 5,669,349 | (2,891,346 | ) | C | 12,124,223 | ||||||||||||
| Due to related party | - | 339,193 | 20,000 | I | - | |||||||||||||
| (359,193 | ) | O | ||||||||||||||||
| Promissory note - related party | 1,783,744 | 588,602 | I | - | ||||||||||||||
| 49,299 | H | |||||||||||||||||
| (2,421,645 | ) | O | ||||||||||||||||
| Due to officer’s - related party | - | - | - | - | ||||||||||||||
| Current portion of long-term debt | 404,871 | - | - | 404,871 | ||||||||||||||
| Current portion of lease liabilities | 539,599 | - | - | 539,599 | ||||||||||||||
| Contract liabilities | 5,223,518 | - | - | 5,223,518 | ||||||||||||||
| Total current liabilities | 15,514,208 | 7,792,286 | (5,014,283 | ) | 18,292,211 | |||||||||||||
| Non-current liabilities | ||||||||||||||||||
| Long-term debt | 1,389,545 | - | - | 1,389,545 | ||||||||||||||
| Non-current operating lease liabilities | 636,414 | - | - | 636,414 | ||||||||||||||
| Convertible preferred securities | - | - | 14,550,000 | A | 14,550,000 | |||||||||||||
| Warrant liabilities | - | 1,113,600 | (505,440 | ) | N | 608,160 | ||||||||||||
| Total non-current liabilities | 2,025,959 | 1,113,600 | 14,044,560 | 17,184,119 | ||||||||||||||
| Total liabilities | 17,540,167 | 8,905,886 | 9,030,277 | 35,476,330 | ||||||||||||||
| Class A ordinary shares subject to possible redemption | - | 16,018,732 | (2,857,872 | ) | F | - | ||||||||||||
| 175,196 | H | |||||||||||||||||
| (13,336,056 | ) | L | ||||||||||||||||
| Redeemable noncontrolling interest | - | - | 18,356,550 | J | 18,356,550 | |||||||||||||
| EQUITY | ||||||||||||||||||
| ESGEN preferred stock | - | - | - | |||||||||||||||
| Class V common stock | 3,373 | D | 3,523 | |||||||||||||||
| 150 | A | |||||||||||||||||
| Class A common stock | 503 | R | 503 | |||||||||||||||
| ESGEN Class A ordinary shares | - | 562 | 25 | F | - | |||||||||||||
| (162 | ) | G | ||||||||||||||||
| 55 | P | |||||||||||||||||
| 23 | Q | |||||||||||||||||
| (503 | ) | R | ||||||||||||||||
| ESGEN Class B ordinary shares | - | 128 | (54 | ) | G | - | ||||||||||||
| (74 | ) | G | ||||||||||||||||
| Additional paid-in capital | - | - | (1,808,685 | ) | C | 8,612,959 | ||||||||||||
| 30,587,692 | D | |||||||||||||||||
| (13,349,019 | ) | E | ||||||||||||||||
| 2,857,847 | F | |||||||||||||||||
| 290 | G | |||||||||||||||||
| (18,356,550 | ) | J | ||||||||||||||||
| 1,486,224 | K | |||||||||||||||||
| 114,000 | M | |||||||||||||||||
| 2,295,890 | O | |||||||||||||||||
| 449,850 | A | |||||||||||||||||
| 2,765,980 | P | |||||||||||||||||
| 1,569,440 | Q | |||||||||||||||||
| Members’ Equity | 30,591,065 | (30,591,065 | ) | D | - | |||||||||||||
| Accumulated deficit | - | (8,826,779 | ) | (3,274,918 | ) | C | (2,766,035 | ) | ||||||||||
| 13,349,019 | E | |||||||||||||||||
| (49,299 | ) | H | ||||||||||||||||
| (20,000 | ) | I | ||||||||||||||||
| (114,000 | ) | M | ||||||||||||||||
| 505,440 | N | |||||||||||||||||
| (2,766,035 | ) | P | ||||||||||||||||
| (1,569,463 | ) | Q | ||||||||||||||||
| Equity attributable to shareholders | 30,591,065 | (8,826,089 | ) | (15,914,026 | ) | 5,850,950 | ||||||||||||
| Total equity and liabilities | $ | 48,131,232 | $ | 16,098,529 | $ | (4,545,931 | ) | $ | 59,683,830 | |||||||||
7
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2023(2)
| Sunergy (US GAAP Historical, as restated) | Esgen (US GAAP Historical) | Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||
| (as restated) | ||||||||||||||||||
| Revenue | $ | 94,226,149 | $ | - | $ | - | $ | 94,226,149 | ||||||||||
| Revenue from related parties | 15,464,852 | - | - | 15,464,852 | ||||||||||||||
| Cost of sales | (88,188,291 | ) | - | - | (88,030,259 | ) | ||||||||||||
| Gross profit | 21,502,710 | - | - | 22,036,342 | ||||||||||||||
| Sales and marketing | (1,157,910 | ) | - | - | (1,157,910 | ) | ||||||||||||
| Depreciation and amortization expense | (1,860,188 | ) | - | - | (1,860,188 | ) | ||||||||||||
| General and administrative expenses | (13,363,600 | ) | - | (2,766,035 | ) | HH | (1717,699,098 | ) | ||||||||||
| (1,569,463 | ) | II | ||||||||||||||||
| Formation and operating costs | - | (5,059,125 | ) | 120,000 | BB | (4,939,125 | ) | |||||||||||
| Transaction costs | (2,622,594 | ) | CC | (2,622,594 | ) | |||||||||||||
| Total operating expenses | (16,381,698 | ) | (5,059,125 | ) | (6,838,092 | ) | (27,395,724 | ) | ||||||||||
| Operating income (loss) | 5,121,012 | (5,059,125 | ) | (6,838,092 | ) | (5,359,382 | ) | |||||||||||
| Other income (expense) | ||||||||||||||||||
| Total Other Income (Expense), Net | (183,401 | ) | - | - | (183,401 | ) | ||||||||||||
| Interest expense | (123,996 | ) | - | - | (123,996 | ) | ||||||||||||
| Stock-based compensation expense | - | - | (114,000 | ) | FF | (114,000 | ) | |||||||||||
| Change in fair value of warrant liabilities | - | (317,376 | ) | 160,056 | GG | (157,320 | ) | |||||||||||
| Interest income on marketable securities held in Trust Account | - | 1,950,267 | (1,950,267 | ) | AA | - | ||||||||||||
| Recovery of offering costs allocated to warrants/Transaction costs | 425,040 | - | 425,040 | |||||||||||||||
| Total other non-operating income and expenses | (307,397 | ) | 2,057,931 | (1,904,211 | ) | (153,677 | ) | |||||||||||
| Net income before income tax | 4,813,615 | (3,001,194 | ) | (8,742,303 | ) | (6,929,882 | ) | |||||||||||
| Income tax (expense) benefit | - | - | 721,447 | EE | 721,447 | |||||||||||||
| Net income (loss) | 4,813,615 | (3,001,194 | ) | (8,020,856 | ) | (6,208,435 | ) | |||||||||||
| Net income attributable to non-controlling interest | - | - | 5,428,800 | DD | 5,428,800 | |||||||||||||
| Net income (loss) | $ | 4,813,615 | $ | (3,001,194 | ) | $ | (2,592,056 | ) | $ | (779,635 | ) | |||||||
| Basic and diluted net loss per common unit | 1,000,000 | |||||||||||||||||
| Basic net loss per share, Class A ordinary shares subject to possible redemption | $ | (1.32 | ) | |||||||||||||||
| Basic net income per share, Class A and Class B ordinary shares | $ | 0.29 | ||||||||||||||||
| Pro forma weighted average number of shares outstanding - basic and diluted | 40,256,960 | (1) | ||||||||||||||||
| Pro forma loss per share - basic and diluted | $ | (0.02 | ) | |||||||||||||||
| (1) | Please refer to Note 7 (“Net Loss per Share”) for details. |
8
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1 — Basis of Presentation and Accounting Policies
The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP as Sunergy was determined to be the accounting acquirer, primarily due to the fact that Sunergy stockholders continue to control the Combined Company. Under this method of accounting, although ESGEN acquired all of the outstanding equity interests of Sunergy in the Business Combination, ESGEN was treated as the “acquired” company for financial reporting purposes. Accordingly, the Business Combination was treated as the equivalent of Sunergy issuing equity for the net assets of ESGEN, accompanied by a recapitalization. The net assets of ESGEN were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination were those of Sunergy.
The restated unaudited pro forma condensed combined balance sheet as of December 31, 2023 assumes that the Business Combination and related transactions occurred on December 31, 2023. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2023 presents pro forma effect to the Business Combination as if it had been completed on January 1, 2023.
The unaudited pro forma condensed combined balance sheet as of December 31, 2023 has been prepared using, and should be read in conjunction with, the following:
| ● | ESGEN’s audited balance sheet as of December 31, 2023; and |
| ● | Sunergy’s audited consolidated balance sheet as of December 31, 2023, as restated and included as Exhibit 99.1. |
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023 has been prepared using, and should be read in conjunction with, the following:
| ● | ESGEN’s audited statement of operations for the year ended December 31, 2023; and |
| ● | Sunergy’s audited consolidated statement of operations for the year ended December 31, 2023, as restated and included as Exhibit 99.1. |
As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.
The historical financial statements of Sunergy have been prepared in accordance with U.S. GAAP. The historical financial statements of ESGEN have been prepared in accordance with U.S. GAAP. The unaudited pro forma condensed combined financial information reflects U.S. GAAP, the basis of accounting used by Sunergy.
The pro forma adjustments reflect adjustments to record the tax receivable agreement liability. Upon the completion of the Business Combination, PubCo will be a party to a tax receivable agreement. Under the terms of that agreement 85% of the tax benefit to PubCo represents additional purchase price. The tax impacts of the transaction were estimated based on the applicable law and expected filing jurisdictions in effect on December 31, 2023.
9
The realizability of the deferred tax assets is subject to various estimates and assumptions, including preliminary projections of future taxable income of appropriate character. Therefore, the recognition of deferred tax assets, including any valuation allowances, and the resulting impact on the tax receivable agreement liability is subject to change based on a final analysis upon completion of the transaction. The pro forma reflects adjustments to deferred tax assets to reflect the difference between the financial statement and tax basis in the investment in Sunergy. The realizability of the deferred tax assets is subject to various estimates and assumptions, including preliminary projections of future taxable income of appropriate character. Therefore, the recognition of deferred tax assets, including any valuation allowance, and the resulting impact on the tax receivable agreement liability is subject to change based on a final analysis upon completion of the transaction.
The share amounts and ownership percentages set forth above are not indicative of voting percentages and do not take into account ESGEN Warrants that will remain outstanding immediately following the Business Combination and may be exercised thereafter.
Upon consummation of the Business Combination, management has performed a comprehensive review of the two entities’ accounting policies. As a result of the review, management has not identified differences between the accounting policies of the two entities which have a material impact on the financial statements of the Combined Company. Based on its analysis, management did not identify any differences that would have a material impact on the unaudited pro forma condensed combined financial information. As a result, the unaudited pro forma condensed combined financial information does not assume any differences in accounting policies.
Note 2 — Adjustments to Unaudited Pro Forma Condensed Combined Financial Information
The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the Business Combination and has been prepared for informational purposes only.
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses” to depict the accounting for the transaction (“Transaction Accounting Adjustments”) and present the reasonably estimable synergies and other transaction effects that have occurred or are reasonably expected to occur (“Management’s Adjustments”). EFHAC has elected not to present Management’s Adjustments and is only presenting Transaction Accounting Adjustments in the unaudited pro forma condensed combined financial information. The historical financial statements have been adjusted in the unaudited pro forma condensed combined financial information to include all necessary Transaction Accounting Adjustments pursuant to Article 11 of Regulation S-X, including those that are not expected to have a continuing impact.
The audited historical financial statements have been adjusted in the unaudited pro forma condensed combined financial information to give pro forma effect to transaction accounting adjustments that reflect the accounting for the transaction under GAAP. Sunergy and ESGEN did not have any historical relationship prior to the Business Combination. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.
The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined statement of operations are based upon the number of the Combined Company’s shares outstanding, assuming the Business Combination occurred on January 1, 2023.
Transaction Accounting Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The Transaction Accounting Adjustments to the unaudited pro forma condensed combined balance sheet as of December 31, 2023, are as follows:
| A. | Reflects the proceeds of $15,000,000 received from the initial draw of the Convertible Preferred Equity Security and the issuance of 1,500,000 Class V shares to the Sponsor. |
| B. | Reflects the liquidation and reclassification of $0.3 million of funds held in the Trust Account to cash that became available following the Business Combination. |
| C. | Reflects the payments of $1.0 million of Business Combination related fees and expenses of Sunergy post December 31, 2023 and pre- closing of the Business Combination, the payment of $7.0 million of ESGN Business Combination related fees and expenses at the closing of the Business Combination, and to accrue $0.7 million of ESGEN Business Combination related fees and expenses and $1.8 million of Sunergy Business Combination related fees and expenses to be paid post-closing of the Business Combination. |
10
| D. | Represents the exchange of outstanding Sunergy units into 33,730,000 shares of Class V common stock at a par value of $0.0001 per share at the Business Combination. |
| E. | Represents the elimination of ESGEN’s historical accumulated losses after recording the transaction costs to be incurred by ESGEN as described in (C) above, the recording of interest earned in the Trust and the administrative fee due to related party as described in (I) below, the recording of the accretion of ordinary shares subject to redemption as described in (H) below, recording of the stock based compensation as described in (M) below, the recording of the cancellation of ESGEN private warrants as described in (N) below and the recording of the shares issued to K2 as described in (Q) below. |
| F. | Reflects the reclassification of 248,579 shares of ESGEN ordinary shares subject to possible redemption to permanent equity. |
| G. | Reflects the forfeiture of 2,900,000 shares of ESGEN Class B ordinary shares and the conversion of the remaining ESGEN Class B ordinary shares into Class A ordinary shares on a one-for-one basis. |
| H. | Reflects the extension payments and interest earned in the Trust account subsequent to December 31, 2023 and to record the accretion of the ordinary shares subject to redemption. |
| I. | Reflects the additional draw of $0.1 million on the ESGEN October 2023 promissory note – related party, the $0.5 million draw on the ESGEN January 2024 promissory note – related party, and $0.2 million due to related party subsequent to December 31, 2023. |
| J. | Reflects the recognition of the non-controlling interest as a result of the Up-C structure. In accordance with ASC 480-10-S99 the non-controlling interest is classified as mezzanine equity as the units of the non-controlling interest are exchangeable for Class A Shares at ESGEN Acquisition Corp. (and surrender of the Class V share) or for a cash payment equal to the product of (x) the number of shares of Class A Common Stock that would be delivered to a Member in an Exchange if such Exchange were to be settled in shares of Class A Common Stock, multiplied by (y) the price per share of Class A Common Stock. The cash payment is at the discretion of the Manager (i.e. ESGEN Acquisition Corp.). However, in an Exchange of Class B Units, the price per share of Class A Common Stock shall only be determined by an underwritten offering undertaken by the Manager in anticipation of the Exchange (a “Liquidity Offering”). |
| K. | Reflects the adjustments to deferred tax assets to reflect the difference between the financial statement and tax basis in the investment in Sunergy and includes tax benefit related to future deductibility of ESGEN legal accruals. The adjustment is net of a valuation allowance related to outside basis in the investment of Sunergy that is capital in nature and is not believed to be realized in the foreseeable future. |
| L. | Reflects the redemption of 1,159,976 ESGEN Class A ordinary shares at a redemption price of $11.50 per share for an aggregate amount of approximately $13,336,056 on March 12, 2024. |
| M. | Reflects the recognition of stock-based compensation at the consummation of the Business Combination related to the ESGEN Class B Founders Shares transferred to independent directors. |
| N. | Reflects the cancellation of 14,040,000 ESGEN private placement warrants at the Business Combination. |
| O. | Reflects the forgiveness of $0.3 million of ESGEN due to related party, $1.9 million of ESGN promissory note – related party and the payment of $0.5 million of the ESGEN promissory note issued in January 2024 at the closing of the Business Combination. |
| P. | Reflects the issuance of 553,207 shares of Class A common stock, par value $0.0001, at $5 per share to K2, Piper and three other third party advisors for services rendered in connection with the Business Combination. |
| Q. | Reflects the issuance of 225,174 shares of Class A common stock, par value $0.0001, at $6.97 per share, the closing price of Zeo Class A common stock on the day of the closing of the Business Combination, issued to K2 pursuant to the terms of the Non-Redemption Agreement. |
| R. | Reflects the Domestication by converting each outstanding ESGEN Class A ordinary share into Class A common stock of Zeo, par value $0.0001 per share, on a one-for-one basis. |
11
Transaction Accounting Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations
The Transaction Accounting Adjustments included in the unaudited pro forma condensed combined statement of operations for year ended December 31, 2023 are as follows:
| AA. | Reflects the elimination of interest income generated from the investments held in the Trust Account after giving effect to the Business Combination as if it had occurred on January 1, 2023. |
| BB. | To eliminate the administrative service fees that will be ceased to pay upon closing of the Business Combination. |
| CC. | Reflects the transaction costs of ESGEN. |
| DD. | Reflects the recognition of net income attributable to non-controlling interest as a result of the Up-C structure. |
| EE. | Reflects the pro forma federal and state income tax due at PubCo (consolidated). |
| FF. | Reflects the recognition of stock-based compensation at the consummation of the Business Combination related to the ESGEN Class B Founders Shares that were transferred to independent directors. |
| GG. | Reflects the reversal of the fair value adjustment due to the cancellation of the 14,040,000 ESGEN private placement warrants. |
| HH. | Reflects the expense related to the issuance of 553,207 shares of Class A common stock, par value $0.0001, at $5 per share to K2, Piper and three other third party advisors for services rendered in connection with the Business Combination. |
| II. | Reflects expense related to the issuance of 225,174 shares of Class A common stock, par value $0.0001, at $6.97 per share, the closing price of Zeo Class A common stock on the day of the closing of the Business Combination, issued to K2 pursuant to the terms of the Non-Redemption Agreement. |
Note 3 — Net Loss per Share
Represents the loss per share calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination, assuming the shares were outstanding since January 1, 2023. As the Business Combination is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted loss per share assumes that the shares issued in connection with the Business Combination have been outstanding for the entire period presented.
The unaudited pro forma condensed combined financial information has been prepared with the actual redemptions of Public Shares by ESGEN’s Public Shareholders for the year ended December 31, 2023:
| Year Ended December 31, 2023 | ||||
| Pro forma net loss | $ | (779,635 | ) | |
| Weighted average shares outstanding of common stock – basic and diluted | 40,256,960 | |||
| Net loss per share – basic and diluted | $ | (0.02 | ) | |
| Excluded securities:(1) | ||||
| Convertible Preferred Shares(2) | 1,363,636 | |||
| Public Warrants | 13,800,000 | |||
| (1) | The potentially dilutive outstanding securities were excluded from the computation of pro forma net loss per share, basic and diluted, because their effect would have been anti-dilutive. |
| (2) | Assumes the conversion of $15,000,000 of the Convertible Preferred equity security at a conversion price of $11.00 per share. |
12
Exhibit 99.3
SUNERGY’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(as restated)
Defined terms included below that are not otherwise defined herein have the same meaning as terms defined and included in our final prospectus and definitive proxy statement, dated as of February 13, 2024 (the “Proxy Statement/Prospectus”).
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the “Business” section of the Proxy Statement/Prospectus and Sunergy’s audited consolidated financial statements as of and for the Years Ended December 31, 2023 and 2022, as restated, included in Exhibit 99.1 to the accompanying Amended Current Report on Form 8-K and other information included in the Proxy Statement/Prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Zeo Energy Corp.’s actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” included in the Proxy Statement/Prospectus. Additionally, Sunergy’s historical results are not necessarily indicative of the results that may be expected in any future period. Amounts are presented in U.S. dollars.
Unless the context otherwise requires, all references in this section to “we,” “us,” or “our” refers to Sunergy and its subsidiaries prior to the consummation of the Business Combination and Zeo Energy Corp. following the consummation of the Business Combination.
Overview
Our mission is to expedite the country’s transition to renewable energy by offering our customers an affordable and sustainable means of achieving energy independence. We are a vertically integrated provider of residential solar energy systems, other energy efficient equipment and related services currently serving customers in Florida, Texas, Arkansas and Missouri. Sunergy was created on October 1, 2021 through the contribution of Sun First Energy, LLC, a rapidly growing solar sales management company, and Sunergy Solar, LLC, a large solar installation company based in Florida, to Sunergy Renewables, LLC.
We believe that we have built (and continue to build) the infrastructure and capabilities necessary to rapidly acquire and serve customers in a low-cost and scalable manner. Today, our scalable regional operating platform provides us with a number of advantages, including the marketing of our solar service offerings through multiple channels, including our diverse sales partner network and direct-to-consumer vertically integrated sales and installation operations. We believe that this multi-channel model supports rapid sales and installation growth, allowing us to achieve capital-efficient growth in the regional markets we serve.
Since our founding, we have continued to invest in a platform of services and tools to enable large scale operations for us and our partner network, which includes sales partners, installation partners and other strategic partners. The platform includes processes and software, as well as fulfillment and acquisition of marketing leads. We believe our platform empowers our in-house sales team and external sales dealers to profitably serve our regional and underpenetrated markets and helps us compete effectively against larger, more established industry players without making significant investment in technology and infrastructure.
We have focused to date on a simple, capital light business strategy utilizing, as of December 31, 2023, approximately 270 sales agents and approximately 30 independent sales dealers to produce a growing sales pipeline. We engineer and design projects and process building permit applications on behalf of our customers to timely install their systems and assist their connection to the local utility power grid. Most of the equipment we install is drop-shipped to the installation site by our regional distributors, requiring minimal inventory to be held by the Company during any given period. We depend on our distributors to timely handle logistics and related requirements in moving equipment to the installation sites. In addition to our main offering of residential solar energy systems, we sell and install products such as roofing, insulation, energy efficient appliances and battery storage systems for the residential market.
We believe that continued government policy support of solar and increasing conventional utility costs provide the solar energy market with material headwinds for accelerating adoption in the United States, which currently lags other international markets, including Australia and Europe. We offer our products and services throughout Florida, Texas, Arkansas and Missouri and plan to enter new markets selectively where favorable net metering policies exist and solar penetration is below 7% of the addressable residential market. Most of our sales were generated in Florida through December 31, 2023 and 2022 with the remainder for each period generated in Texas, Arkansas, and Missouri. We have focused on improving our operational efficiency to meet the growing demand for our services and have increased our installation capacity by investing in new equipment and technology. We have also expanded our workforce by hiring more skilled technicians and training them extensively to ensure that they meet our high standards for quality and safety.
Our core solar service offerings are generated by customer purchases and financing through third-party long-term lenders that provide customers with simple, predictable pricing for solar energy that is insulated from rising retail electricity prices. Most of our customers finance their purchases with affordable loans from third-party lenders that require minimal or no upfront capital or down payment. We have also launched a leasing program where a third-party purchases the residential solar energy system that we install on the customer’s property. Our Chief Executive Officer is also the Chief Executive Officer and minority owner of the third-party that provides the lease financing to the customer. For these transactions, the Company’s performance obligation remains the same as if the transaction was financed with a third-party lender. We believe this leasing option may better suit some homeowners in a higher interest rate environment who may not have a need for the investment tax credits associated with investing in renewable energy.
Business Combination
On March 13, 2024 (the “Closing Date”), the registrant consummated its previously announced business combination (the “Closing”), pursuant to that certain Business Combination Agreement, dated as of April 19, 2023 (as amended on January 24, 2024, the “Business Combination Agreement”), by and among Zeo Energy Corp., a Delaware corporation (f/k/a ESGEN Acquisition Corporation, a Cayman Islands exempted company), ESGEN OpCo, LLC, a Delaware limited liability company(“OpCo”), Sunergy Renewables, LLC, a Nevada limited liability company (“Sunergy”), the Sunergy equityholders set forth on the signature pages thereto or joined thereto (collectively, “Sellers” and each, a “Seller”, and collectively with Sunergy, the “Sunergy Parties”), for limited purposes, ESGEN LLC, a Delaware limited liability company (the “Sponsor”), and for limited purposes, Timothy Bridgewater, an individual, in his capacity as the Sellers Representative (collectively, the “Business Combination”). Prior to the Closing, (i) except as otherwise specified in the Business Combination Agreement, each issued and outstanding Class B ordinary share of ESGEN was converted into one Class A ordinary share of ESGEN (the “ESGEN Class A Ordinary Shares” and such conversion, the “ESGEN Share Conversion”); and (ii) ESGEN was domesticated into the State of Delaware so as to become a Delaware corporation (the “Domestication”). In connection with the Closing, the registrant changed its name from “ESGEN Acquisition Corporation” to “Zeo Energy Corp.”
Following, each then-outstanding ESGEN Class A Ordinary Share was converted into one share of Class A common stock of the registrant, par value $0.0001 per share (“Zeo Class A Common Stock”), and each then-outstanding ESGEN Public Warrant converted automatically into a warrant of the registrant, exercisable for one share of Zeo Class A Common Stock. Additionally, each outstanding unit of ESGEN was cancelled and separated into one share of Zeo Class A Common Stock and one-half of one warrant of the registrant.
In accordance with the terms of the Business Combination Agreement, Sunergy caused all holders of any options, warrants or rights to subscribe for or purchase any equity interests of Sunergy or its subsidiaries or securities (including debt securities) convertible into or exchangeable for, or that otherwise confer on the holder any right to acquire, any equity interests of Sunergy or any subsidiary thereof (collectively, the “Sunergy Convertible Interests”) existing immediately prior to the Closing to either exchange or convert all such holder’s Sunergy Convertible Interests into limited liability interests of Sunergy (the “Sunergy Company Interests”) in accordance with the governing documents of Sunergy or the Sunergy Convertible Interests.
At the Closing, ESGEN contributed to OpCo (1) all of its assets (excluding its interests in OpCo, but including the amount of cash in ESGEN’s Trust Account (the “Trust Account”) as of immediately prior to the Closing (after giving effect to the exercise of redemption rights by ESGEN shareholders)), and (2) a number of newly issued shares (the “Seller Class V Shares”) of Class V common stock of the registrant, par value $0.0001 per share (“Zeo Class V Common Stock”), which are non-economic, voting shares of Zeo, equal to the number of Seller OpCo Units (as defined in the Business Combination Agreement) and in exchange, OpCo issued to ESGEN (i) a number of Class A common units of OpCo (the “Manager OpCo Units”) which equaled the total number of shares of the Zeo Class A Common Stock issued and outstanding immediately after the Closing and (ii) a number of warrants to purchase Manager OpCo Units which equaled the number of SPAC Warrants (as defined in the Business Combination Agreement) issued and outstanding immediately after the Closing (the transactions described above in this paragraph, the “ESGEN Contribution”). Immediately following the ESGEN Contribution, (x) the Sellers contributed to OpCo the Sunergy Company Interests and (y) in exchange therefor, OpCo transferred to the Sellers the Seller OpCo Units and the Seller Class V Shares.
2
Prior to the Closing, Sellers transferred 24.167% of their Sunergy Company Interests (which were thereafter exchanged for Seller OpCo Units and Seller Class V Shares at the Closing, as described above) pro rata to Sun Managers, LLC, a Delaware limited liability company (“Sun Managers”), in exchange for Class A Units (as defined in the Sun Managers limited liability company agreement (the “SM LLCA”) in Sun Managers. In connection with such transfer, Sun Managers executed a joinder to, and became a “Seller” for purposes of, the Business Combination Agreement. Sun Managers intends to grant Class B Units (as defined in the SM LLCA) in Sun Managers through the Sun Managers, LLC Management Incentive Plan (the “Management Incentive Plan”) adopted by Sun Managers to certain eligible employees or service providers of OpCo, Sunergy or their subsidiaries, in the discretion of Timothy Bridgewater, as manager of Sun Managers. Such Class B Units may be subject to a vesting schedule, and once such Class B Units become vested, there may be an exchange opportunity through which the grantees may request (subject to the terms of the Management Incentive Plan and the OpCo A&R LLC Agreement (as defined below)) the exchange of their Class B Units into Seller OpCo Units (together with an equal number of Seller Class V Shares), which may then be converted into Zeo Class A Common Stock (subject to the terms of the Management Incentive Plan and the OpCo A&R LLC Agreement). Grants under the Management Incentive Plan will be made after Closing.
As of the Closing Date, upon consummation of the Business Combination, the only outstanding shares of capital stock of the registrant were shares of Zeo Class A Common Stock and Zeo Class V Common Stock.
In connection with entering into the Business Combination Agreement, ESGEN and the Sponsor entered into a subscription agreement, dated April 19, 2023, which ESGEN, the Sponsor and OpCo subsequently amended and restated on January 24, 2024 (the “Sponsor Subscription Agreement”), pursuant to which, among other things, the Sponsor agreed to purchase an aggregate of 1,000,000 preferred units of OpCo (“Convertible OpCo Preferred Units”) convertible into Exchangeable OpCo Units (as defined below) (and be issued an equal number of shares of Zeo Class V Common Stock) concurrently with the Closing at a cash purchase price of $10.00 per unit and up to an additional 500,000 Convertible OpCo Preferred Units (together with the concurrent issuance of an equal number of shares of Zeo Class V Common Stock) during the six months after Closing if called for by Zeo. Prior to the Closing, ESGEN informed the Sponsor that it wished to call for the additional 500,000 Convertible OpCo Preferred Units at the Closing and, as a result, a total of 1,500,000 Convertible OpCo Preferred Units and an equal number of shares of Zeo Class V Common Stock were issued to Sponsor pursuant to the Sponsor Subscription Agreement for aggregate consideration of $15,000,000.
Accounting for the Business Combination
Following the Business Combination, the registrant is organized in an “Up-C” structure, such that Sunergy and the subsidiaries of Sunergy hold and operate substantially all of the assets and businesses of the registrant, and the registrant is a publicly listed holding company that holds a certain amount of equity interests in OpCo, which holds all of the equity interests in Sunergy. Zeo’s Class A Common Stock and public warrants are traded on Nasdaq under the ticker symbols “ZEO” and “ZEOWW,” respectively.
Based upon the evaluation of the A&R LLC Agreement, the Sellers contributed their interests of Sunergy into OpCo. OpCo’s members did not have substantive kickout or participating rights and therefore OpCo is a VIE. Consideration of OpCo as a VIE was necessary to determine the accounting treatment between ESGEN and Sunergy. Upon evaluation, ESGEN was considered to be the primary beneficiary through its membership interest and manager powers conferred to it through the Class A Units. For VIEs, the accounting acquirer is always considered to be the primary beneficiary. As such, ESGEN will consolidate OpCo and is considered to the accounting acquirer; however, further consideration of whether the entities are under common control was required in order to determine whether there is an ultimate change in control and the acquisition method of accounting is required under ASC 805.
3
While Sunergy did not control or have common ownership of ESGEN prior to the consummation of the Business Combination, the Company evaluated the ownership of the new entity subsequent to the consummation of the transaction to determine if a change in control occurred by evaluating whether Sunergy is under common control prior to and subsequent to the consummation of the transaction. If the business combination is between entities under common control, then the acquisition method of accounting is not applicable and the guidance in ASC 805-50 regarding common control should be applied instead. EITF Issue 02-5 “Definition of ‘Common Control’ in Relation to FASB Statement No. 141” indicates that common control would exist if a group of shareholders holds more than 50 percent of the voting ownership of each entity, and contemporaneous written evidence of an agreement to vote a majority of the entities’ shares in concert exists. Prior to the Business Combination, Sunergy was majority owned by five entities (the “Primary Sellers”), who entered into a Voting Agreement, dated September 7, 2023. The term of the Voting Agreement is for five years from the date of the Voting Agreement. The consummation of the Business Combination with ESGEN did occur within the term of the Voting Agreement.
Prior to the Business Combination and the contributions to Sun Managers as described above, the Primary Sellers had 98% ownership in Sunergy. Immediately following the Business Combination, the Sellers now own 83.8% of the equity of the Company.
The Voting Agreement constitutes contemporaneous written evidence of an agreement to vote a majority of the Primary Sellers’ shares of the Company in concert. Accordingly, the Primary Sellers retain majority control through the voting of their units in conjunction with the Voting Agreement immediately prior to the Business Combination and their shares following the Business Combination and, therefore, there was no change of control before or after the Business Combination. This conclusion was appropriate even though there was no relationship or common ownership or control between Sunergy and ESGEN prior to the Business Combination. Accordingly, the Business Combination should be accounted for in accordance with the guidance for common control transactions in ASC 805-50.
Additional factors that were considered include the following:
| ● | Subsequent to the Business Combination, the Company Board is comprised of one individual designated by ESGEN and five individuals that are designated by Sunergy; and |
| ● | Subsequent to the Business Combination, management of the Company is the existing management at Sunergy. The individual serving as the chief executive officer and chief financial officer of Sunergy’s current management team continues substantially unchanged upon completion of the Business Combination. |
For common control transactions that include the transfer of a business, the reporting entity is required to account for the transaction in accordance with the procedural guidance in ASC 805-50. In essence, the Business Combination will be treated as a reverse recapitalization with ESGEN being treated as the acquired company since there was no change in control. Accordingly, the financial statements of the combined entity will represent a continuation of the financial statements of Sunergy with the business combination treated as the equivalent of Sunergy issuing equity for the net assets of ESGEN, accompanied by a recapitalization.
Public Company Costs
Following the Business Combination, we will have ongoing reporting and other compliance requirements relating to our Exchange Act registration and Nasdaq listing. We expect to see an increase in general and administrative costs, compared to historic results, to support the legal and accounting requirements of the combined publicly traded company. We also expect to incur substantial additional expenses for, among other things, directors’ and officers’ liability insurance, director fees, internal control compliance, and additional costs for investor relations, accounting, audit, legal and other functions.
4
Key Operating and Financial Metrics and Outlook
We regularly review a number of metrics, including the following key operating and financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions. We believe the operating and financial metrics presented below are useful in evaluating our operating performance, as they are similar to measures by our public competitors and are regularly used by security analysts, institutional investors and other interested parties in analyzing operating performance and prospects. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures, as they are not financial measures calculated in accordance with GAAP and should not be considered as substitutes for net (loss) income or net (loss) income margin, respectively, calculated in accordance with GAAP. See “—Non-GAAP Financial Measures” for additional information on non-GAAP financial measures and a reconciliation of these non-GAAP measures to the most comparable GAAP measures.
The following table sets forth these metrics for the periods presented:
| Year Ended December 31, | ||||||||
| (In thousands, except percentages) | 2023 | 2022 | ||||||
| Revenue, net | 109,691 | 88,964 | ||||||
| Operating profit | 5,121 | 8,646 | ||||||
| Net income | 4,814 | 8,666 | ||||||
| Adjusted EBITDA | 10,261 | 10,352 | ||||||
| Adjusted EBITDA margin | 9.4 | % | 11.6 | % | ||||
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA, a non-GAAP financial measure, as net income (loss) before interest expense, PPP loan forgiveness, other expenses, net, income tax expense, depreciation and amortization, as adjusted to exclude merger and acquisition expenses (“M&A expenses”). We define Adjusted EBITDA margin, a non-GAAP financial measure, expressed as a percentage, as the ratio of Adjusted EBITDA to revenue, net. See “— Non-GAAP Financial Measures” for a reconciliation of GAAP net loss to Adjusted EBITDA and a ratio of GAAP net loss to revenue, net.
Key Factors that May Influence Future Results of Operations
Our financial results of operations may not be comparable from period to period due to several factors. Key factors affecting the results of our operations are summarized below.
Expansion of Residential Sales into New Markets. Our future revenue growth is, in part, dependent on our ability to expand our product offerings and services in the select residential markets where we operate in Florida, Texas, Arkansas and Missouri. We primarily generate revenue from our sales, product offerings and services in the residential housing market. To continue our growth, we intend to expand our presence in the residential market into additional states based on markets underserved by national sales and installation providers that also have favorable incentives and net metering policies. We believe that our entry into new markets will continue to facilitate revenue growth and customer diversification.
5
Expansion of New Products and Services. In fiscal year 2023 we sold over $6.8 million in roofing replacements to facilitate our solar installations and to repair rooftops on homes in Florida damaged by severe weather. We plan to expand our roofing business in all markets we enter in the future. Roofing facilitates a faster processing time for our solar installations in cases where the customer is in need of a roof replacement prior to installing a solar system. In addition, to provide more financing options for our prospective residential solar energy customers, in fiscal year 2023, we launched a program that allows customers to choose a leasing option to finance their systems from a third party. We expect selling systems utilizing third party leases under this and other similar programs to be a growing portion of our customer finance offerings in the future.
Adding New Customers and Expansion of Sales with Existing Customers. We intend to approximately double our in-house sales force and external sales dealers in 2024 in order to target new customers in the Southern U.S. regional residential markets. We provide competitive compensation packages to our in-house sales teams and external sales dealers, which incentivizes the acquisition of new customers.
Inflation. We are seeing an increase in the costs of labor and components as the result of higher inflation rates. In particular, we are experiencing an increase in raw material costs and supply chain constraints, and trade tariffs imposed on certain products from China, which may continue to put pressure on our operating margins and increase our costs. We do not have information that allows us to quantify the specific amount of cost increases attributable to inflationary pressures.
Interest rates. Interest rate increases for both short-term and long-term debt have increased sharply. Historically, most of our customers have financed the purchase of their solar systems. Higher interest rates have resulted in higher monthly costs to customers, which has the effect of slowing the financing related sales of solar systems in the areas in which we sell and operate. We do not have information that allows us to quantify the adverse effects attributable to increased interest rates.
Managing our Supply Chain. We rely on contract manufacturers and suppliers to produce our components. We have seen supply chain challenges and logistics constraints increase, including component shortages, which have, in certain cases, caused delays in the delivery of critical components and inventory, created longer lead times, and resulted in increased costs on jobs that were impacted by these issues. We experienced material shortages and an increase in pricing for in 2022 and the beginning of 2023. In the second half of 2023 we have seen a correction in the supply chain. Our suppliers are generally meeting our materials needs and we are realizing a decrease in pricing for our solar components. Our ability to grow depends, in part, on the ability of our contract manufacturers and suppliers to provide high quality services and deliver components and finished products on time and at reasonable costs. In the event we are unable to mitigate the impact of delays and/or price increases in raw materials, electronic components and freight, it could delay the manufacturing and installation of our systems, which would adversely impact our cash flows and results of operations, including revenue and gross margin.
Components of Consolidated Statements of Operations
Revenue, net
Our primary source of revenue is the sale of our residential solar systems. Our systems are made fully functional at the time of installation and require an inspection prior to interconnection to the utility power grid. We sell our systems primarily direct to end user customers for use in their residences. Upon installation inspection, we satisfy our performance obligation and recognize revenue. Many of the Company’s customers finance their obligations with third parties. In these situations, the finance company deducts their financing fees and remits the net amount to the Company. Revenue is recorded net of these financing fees (and/or dealer fees). The volume of sales and installations of rooftop solar systems, our primary product, increase from April to September when a majority of our sales teams are most active in our areas of service. In addition to sales of solar systems, “adders” or accessories to a sale may include roofing, energy efficient appliances, upgraded insulation and/or energy storage systems. All adders consisted of less than 10% of the total revenue, net in each of the years ended December 31, 2023 and 2022.
6
Our revenue is affected by changes in the volume and average selling prices of our solutions and related accessories, supply and demand, sales incentives and fluctuating interest rates. Approximately 95% of our sales were financed by the customer in each of the years ended December 31, 2023 and 2022. Our revenue growth is dependent on our ability to compete effectively in the marketplace by remaining cost competitive, developing and introducing new sales teams within existing and new territories, scaling our installation teams to keep up with demand and maintaining a strong internal operations team to process orders while working with building departments and utilities to permit and interconnect our customers to the utility grid.
Cost of Goods Sold
Our cost of goods sold consists primarily of product costs (including solar panels, inverters, metal racking, connectors, shingles, wiring, warranty costs and logistics costs), sales commissions, installation labor and permitting costs.
During 2023 and 2022, supply chain challenges and an increase in demand for our products resulted in increased equipment costs and delays. As a result, our installation and sales growth was less than we had projected. Additionally, in October 2022 our primary market in Florida was hit with Hurricane Ian, which also slowed permitting and installations of our systems in Florida and required some crews to divert to repairing roofs and damaged solar systems.
Revenue, net less cost of goods sold may vary from period-to-period and is primarily affected by our average selling prices, finance dealer fees, fluctuations in equipment costs and our ability to effectively and timely deploy our field installation teams to project sites once the permitting departments have approved the design and engineering of systems on customer sites.
Operating Expenses
Operating expenses consist of sales and marketing and general and administrative expenses. Personnel-related costs are the most significant component of each of these expense categories and include salaries, benefits and payroll taxes. In the future, the Company intends to provide more benefits to its employees, including an employee stock plan, which will increase operating expenses.
Sales and marketing expenses consist primarily of personnel-related expenses, as well as advertising, travel, trade shows, marketing, customer support and other indirect costs. We expect to continue to make the necessary investments to enable us to execute our strategy to increase our market penetration geographically and enter into new markets by expanding our base sales teams, installers and strategic sales dealer and partner network.
General and administrative expenses consist primarily of personnel-related expenses for our executive, finance, human resources, information technology, and software, facilities costs and fees for professional services. Fees for professional services consist primarily of outside legal, accounting and information technology consulting costs.
Depreciation and amortization consist primarily of deprecation of our vehicles, furniture and fixtures, internally developed software and amortization of our acquired intangibles.
Interest and Other Expenses, Net
Interest and other expenses, net primarily consist of interest expense and fees under our equipment and vehicle term loans. Other expense, net also includes interest income on our cash balances, and accrued interest on tariffs previously paid and approved for refund.
7
Results of Operations
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The following table sets forth a summary of our consolidated statements of operations for the periods presented:
| Year ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Revenue, net | $ | 109,691,001 | $ | 88,963,855 | $ | 20,727,146 | 23.3 | % | ||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of goods sold | 88,188,291 | 71,208,982 | 16,979,309 | 23.8 | % | |||||||||||
| Depreciation and amortization | 1,860,188 | 1,706,243 | 153,945 | 8.3 | % | |||||||||||
| Sales and marketing | 1,157,910 | 1,399,452 | (241,542 | ) | (20.9 | )% | ||||||||||
| General and administrative | 13,363,600 | 6,003,412 | 7,360,188 | 55.1 | % | |||||||||||
| Total operating expenses | 104,569,989 | 80,318,089 | 24,251,900 | 23.2 | % | |||||||||||
| Income from operations | 5,121,012 | 8,645,766 | (33,524,754 | ) | (6868,8 | )% | ||||||||||
| Other income (expense), net: | ||||||||||||||||
| Other expense, net | (183,401 | ) | (2,510 | ) | (180,891 | ) | 98.6 | % | ||||||||
| PPP loan forgiveness | - | 73,809 | (73,809 | ) | (100.0 | )% | ||||||||||
| Interest expense | (123,996 | ) | (51,295 | ) | (72,701 | ) | 58.6 | % | ||||||||
| Total other income (expenses), net | (307,397 | ) | 20,004 | (327,401 | ) | 106.5 | % | |||||||||
| Net income | $ | 4,813,615 | $ | 8,665,770 | $ | (33,852,155 | ) | (8080.0 | )% | |||||||
Revenue, net
Revenue, net increased by approximately $2020.7 million as a result of increases in sales volume from our internal sales teams and decreases in sales volume from sales by our dealer network.
Cost of Goods Sold
Cost of goods sold increased $17.0 million as a result of the increase in revenues as noted above. As a percentage of revenue, the cost of goods sold was 80.0% for the year ended December 31, 2023 which was consistent with the year ended December 31, 2022.
Depreciation and amortization
The $0.2 million increase was a result of the increase in our vehicle fleet in 2023 and the associated depreciation of the new vehicles.
General and Administrative expenses
The $77.4 million increase is primarily due to an increase in headcount and infrastructure related expenses to support the increase in revenues in the year and expenses related to the business combination.
Sales and Marketing
The $0.2 million decrease was a result of efforts to focus on sales and marketing spending in our most efficient areas. Therefore, we were able to increase sales in the year without increasing the sales and marketing expenses
Other expense, net
The $0.2 million increase was due primarily to the loss on the disposition of assets of $103,000 in 2023 and the realization of $74,000 of income from the forgiveness of a PPP loan in 2022.
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Liquidity and Capital Resources
Our primary source of funding to support operations have historically been from cash flows from operations. Our primary short-term requirements for liquidity and capital are to fund general working capital and capital expenses. Our principal long-term working capital uses include ensuring revenue growth, expanding our sales and marketing efforts and potential acquisitions.
As of December 31, 2023 and 2022, our approximate cash and cash equivalents balance was $8.0 million and $2.3 million, respectively. The Company maintains its cash in checking and savings accounts.
Our future capital requirements depend on many factors, including our revenue growth rate, the timing and extent of our spending to support further sales and marketing, the degree to which we are successful in launching new business initiatives and the cost associated with these initiatives, and the growth of our business generally.
In order to finance these opportunities and associated costs, it is possible that we will need to raise additional capital through either debt or equity financing if the proceeds realized from the Business Combination are insufficient to support our business needs.
While we believe that the proceeds realized through the Business Combination will be sufficient to meet our currently contemplated business needs for the next twelve months, we cannot assure you that this will be the case. If additional financing is required by us from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital on acceptable terms when needed, our business, results of operations and financial condition would be materially and adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| For the year ended December 31, | ||||||||||||
| 2023 | 2022 | Change | ||||||||||
| Net cash provided by operating activities | $ | 11,963,994 | $ | 10,719,945 | $ | 1,244,049 | ||||||
| Net cash used in investing activities | (1,780,458 | ) | (1,077,628 | ) | (702,830 | ) | ||||||
| Net cash used in financing activities | (4,429,536 | ) | (7,824,857 | ) | 3,395,321 | |||||||
Cash flows from operating activities
Net cash provided by operating activities was approximately $12.0 million during 2023 compared to approximately $10.7 million during 2022. The increase in net cash provided by operating activities was primarily due to an increase in net income excluding depreciation and amortization of approximately $0.9 million as well as an increase in our contract liabilities of approximately $44.1 million offset by an increase in accounts receivable of $33.5 million and an increase in prepaid installation costs of $44.8 million.
Cash flows from investing activities
Net cash used in investing activities was approximately $1.8 million for the year ended December 31, 2023 primarily relating to purchases of property and equipment, primarily vehicles. Net cash provided by investing activities for the year ended December 31, 2022 was approximately $1.1 million primarily relating to purchases of vehicles.
Cash flows used in financing activities
For the year ended December 31, 2023, net cash used in financing activities was approximately $4.4 million, which primarily represented the distribution to members, which was offset by issuance of debt less repayments. This compares to net cash used in financing activities for the year ended December 31, 2022 of approximately $7.8 million, which primarily represented the distributions to members, which was offset by issuance costs.
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Current Indebtedness
The Company has utilized internally generated positive cashflow to grow the business. Other than approximately $0.7 million in trade-credit with solar equipment distributors, Sunergy has only approximately $1.1 million of debt on service trucks and vehicles.
Non-GAAP Financial Measures
The non-GAAP financial measures below have not been calculated in accordance with GAAP and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. In addition, Adjusted EBITDA and Adjusted EBITDA Margin should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Therefore, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies.
Our management uses these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things: (i) monitor and evaluate the performance of our business operations and financial performance; (ii) facilitate internal comparisons of the historical operating performance of our business operations; (iii) facilitate external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels; (iv) review and assess the operating performance of our management team; (v) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (vi) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends, and in comparing our financial results with other companies in our industry, many of which present similar non-GAAP financial measures to investors.
Adjusted EBITDA
We define Adjusted EBITDA, a non-GAAP financial measure, as net income (loss) before interest expense, PPP loan forgiveness and other expenses, net, income tax expense, depreciation and amortization, as adjusted to exclude merger and acquisition expenses (“M&A expenses”). We utilize Adjusted EBITDA as an internal performance measure in the management of our operations because we believe the exclusion of these non-cash and non-recurring charges allow for a more relevant comparison of our results of operations to other companies in our industry. Adjusted EBITDA should not be viewed as a substitute for net loss calculated in accordance with GAAP, and other companies may define Adjusted EBITDA differently.
The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the periods presented:
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income | $ | 4,813,615 | $ | 8,665,770 | ||||
| Adjustment: | ||||||||
| Interest expenses | 307,397 | 51,295 | ||||||
| PPP loan forgiveness | - | (73,809 | ) | |||||
| Other expenses, net | - | 2,510 | ||||||
| Depreciation and amortization | 1,860,188 | 1,706,243 | ||||||
| M&A Expenses | 3,463,180 | - | ||||||
| Adjusted EBITDA | $ | 10,444,380 | $ | 10,352,009 | ||||
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Adjusted EBITDA Margin
We define Adjusted EBITDA margin, a non-GAAP financial measure, expressed as a percentage, as the ratio of Adjusted EBITDA to revenue, net. Adjusted EBITDA margin measures net income (loss) before interest and other income (expenses), net, depreciation and amortization, and M&A expenses. In the table above, Adjusted EBITDA is reconciled to the most comparable GAAP measure, net income (loss). We utilize Adjusted EBITDA margin as an internal performance measure in the management of our operations because we believe the exclusion of these non-cash and non-recurring charges allow for a more relevant comparison of our results of operations to other companies in our industry.
The following table sets forth our calculations of Adjusted EBITDA margin for the periods presented:
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Numerator: Adjusted EBITDA | 10,260,979 | 10,352,009 | ||||||
| Denominator: Revenue, net | 109,691,001 | 88,963,855 | ||||||
| Ratio of Adjusted EBITDA to revenue, net | 9.4 | % | 11.6 | % | ||||
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires us to establish accounting policies and make estimates and assumptions that affect our reported amounts of assets and liabilities at the date of the consolidated financial statements. These financial statements include some estimates and assumptions that are based on informed judgments and estimates of management. We evaluate our policies and estimates on an on-going basis and discuss the development, selection and disclosure of critical accounting policies with those charged with governance. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. Our consolidated financial statements may differ based upon different estimates and assumptions.
We discuss our significant accounting policies in Note 3 (“Summary of Significant Accounting Policies”) to our consolidated financial statements. Our significant accounting policies are subject to judgments and uncertainties that affect the application of such policies. We believe these financial statements include the most likely outcomes with regard to amounts that are based on our judgment and estimates. Our financial position and results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from the actual amounts, adjustments are made in subsequent periods to reflect more current information. We believe the following accounting policies are critical to the preparation of our consolidated financial statements due to the estimation process and business judgment involved in their application:
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Goodwill
Goodwill is recognized and initially measured as any excess of the acquisition-date consideration transferred in a business combination over the acquisition-date amounts recognized for the net identifiable assets acquired.
Goodwill is not amortized but is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not result in an impairment of goodwill. First, the Company assesses qualitative factors to determine whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company conducts a quantitative goodwill impairment test comparing the fair value of the applicable reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the Company recognizes an impairment loss in the consolidated statement of operations for the amount by which the carrying amount exceeds the fair value of the reporting unit. The Company performs its annual goodwill impairment test at December 31 of each year. There was no goodwill impairment recorded for the years ended December 31, 2023 and 2022.
Intangible assets subject to amortization
Intangible assets include tradename, customer lists and non-compete agreements. Amounts are subject to amortization on a straight-line basis over the estimated period of benefit and are subject to annual impairment consideration. Costs incurred to renew or extend the term of a recognized intangible asset, such as the acquired trademark, are capitalized as part of the intangible asset and amortized over its revised estimated useful life.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the intangible assets may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. The Company evaluates the recoverability of intangible assets by comparing their carrying amounts to future net undiscounted cash flows expected to be generated by the intangible assets. If such intangible assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the intangible assets exceeds the fair value of the assets. The Company determines fair value based on discounted cash flows using a discount rate commensurate with the risk inherent in the Company’s current business model for the specific intangible asset being valued. No impairment charges were recorded for the years ended December 31, 2023 and 2022.
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