Company: SUNE
Filing Date: 2025-04-15
Form Type: 10-K
Source: 0000022701-25-000002
Chunk: 4

Company: SUNation Energy, Inc.
Filing Date: 2025-04-15
Form: 10-K
Item: Item 8
Chunk 4
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 reduced APIC and income available to common shareholders in calculating earnings per share (EPS).Deemed contribution on exchange of Series A preferred stock and warrants for Series C convertible preferred stock of $4,075,681 that increased APIC and income available to common shareholders in calculating EPS. The accounting for convertible preferred stock and warrants required analysis under applicable authoritative guidance in Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity”, and ASC 815, “Derivatives and Hedging”.  Furthermore, the amounts recognized for the change in fair value of the warrant liability, deemed dividends, and deemed contribution were based on management’s estimates of fair value for these financial instruments. Management engaged a third-party specialist to assist with the accounting and fair value analysis. 

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 Auditing management’s conclusions related to these transactions required the interpretation of complex accounting literature in the areas of financial instruments and modifications of equity instruments.  In addition, auditing management’s fair value estimates was complex and judgmental because the measurements involved subjective models and unobservable inputs.  There was also management judgment in selecting the comparable publicly traded companies used by the Company to determine the volatility input. How the Critical Audit Matter Was Addressed in Our AuditOur audit procedures to evaluate the reasonableness of management’s accounting for the modifications of the Series A convertible preferred stock and warrants, and the exchange of the Series A convertible preferred stock and warrants for Series C convertible preferred stock included the following:Involved financial instrument accounting subject matter specialists to assess the Company's conclusions on equity vs liability classification of the convertible preferred stock and warrants and the EPS treatment of the modification and exchange transactions. Evaluated management’s accounting memorandums and read the underlying contracts and board resolutions for consistency with the conclusions reached.Involved our valuation specialists to 1) assess management’s fair value methodologies and 2) develop independent estimates of the fair values of the convertible preferred stock and warrants at each modification date and the exchange date.Assessed the appropriateness of the disclosures in the financial statements. Critical Audit Matter - Embedded Derivative LiabilityThe Company’s Decathlon Fixed Loan includes a mandatory prepayment feature upon a contingent event that is considered an embedded derivative requiring separate accounting under ASC 815. Under ASC 815, the embedded derivative is bifurcated and recorded at fair value at inception with subsequent changes in fair value recorded in earnings.  Based on management’s estimates of the likelihood of certain events occurring, the Company recognized an embedded derivative liability