SOLAR INTEGRATED ROOFING CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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SOLAR INTEGRATED ROOFING CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (form 10-Q)


As used in this periodic report, unless the context otherwise requires, the
terms the “Company,” “Registrant,” “registrant,” “we,” “us,” “our,” or “SIRC”
refer to Solar Integrated Roofing Corp., a Nevada corporation.

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6
of the Securities Act of 1934, as amended, that involve substantial risks and
uncertainties. These forward-looking statements are not historical facts, but
rather are based on current expectations, estimates and projections about our
industry, our beliefs and our assumptions. Words such as “anticipates,”
“expects,” “intends,” “plans,” “believes,” “seeks” and “estimates” and
variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, some of
which are beyond our control and difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-Q.
Investors should carefully consider all of such risks, as well as the risks
included in our Registration Statement on Form 10, as amended, before making an
investment decision with respect to the Company’s stock. The following
discussion and analysis should be read in conjunction with our consolidated
financial statements and summary of selected financial data. Such discussion
represents only the best present assessment from our management.

Business Overview

Solar Integrated Roofing Corp. is an alternative energy solution provider in
North America. The Company’s business model consists of the following revenue
producing divisions:

· Roofing
o Residential
o Commercial
o Government
o Roofing Claims Management
· Solar
o Residential
o Commercial
? Microgrids
· Electric Vehicle Charging
· Commercial Solar Finance

Management of these divisions is conducted by a Senior Management Team with a
cumulative 60 years’ experience in the alternative energy space. Further, each
division is managed by an industry expert in that specific market with extensive
division-based experience.

The Company’s previous operations took place primarily in the State of
California, but in 2021, generated revenue in 34 states. Further, over the last
couple of years from 2020-2022, SIRC sourced, onboarded, and trained
approximately 250 sales representatives that sell SIRC products that will allow
it to expand its footprint on a national and even international scale.

SIRC is also heavily involved in finding cutting-edge technologies in the
alternative energy space that creates the best economic solution for the client,
as well as marketing and development of microgrid projects, which will provide
businesses throughout North America an energy solution that is self-sustainable,
reliant and that will not fall victim to grid instability creating compelling
economics for the SIRC client.

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In addition to growth resulting from increased sales efforts, the Company is
expanding its reach and increasing its growth potential by acquiring other
established alternative energy companies. We believe our continued execution of
the Company’s business plan will result in our Company being recognized as a
national leader in the alternative energy and roofing industries.

Our principal executive office is located at 2831 St. Rose Pkwy # 200,
Henderson, NV 89052. The telephone number at our principal executive office is
(702) 589-4651. Our website is www.solarintegratedroofing.com. Our fiscal year
end is December 31.

Management’s Plan of Operation

Management is focused on several avenues of business development, including, but
not limited to, joint ventures, mergers and acquisitions, and licensing
agreements, for the purpose of diversifying corporate assets. While no
assurances are expressed or implied that any agreement will be consummated in
the future, the Company is committed toward executing on opportunities at hand.

We currently are planning to expand our solar installation business. We plan to
continue to execute our marketing and sales strategy in California and, with
additional capital, we plan to continue to expand our business in each region
that we operate. The planned expansion is expected to occur through acquiring
smaller installation companies in targeted regions and/or through the
establishment of subsidiaries in these regions, which we believe will boost our
installation profits. We have also started on new commercial power projects
inside and outside California, which we expect to expand our installation
business revenues significantly.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of
operations are based upon our accompanying financial statements, which have been
prepared in conformity with U.S. generally accepted accounting principles, or
U.S. GAAP, and which requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. Note 2. Significant Accounting
Policies and Recent Accounting Pronouncements, to the financial statements,
describes the significant accounting policies and methods used in the
preparation of the Company’s financial statements. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances. These estimates are the basis for our
judgments about the carrying values of assets and liabilities, which in turn may
impact our reported revenue and expenses. Our actual results could differ
significantly from these estimates under different assumptions or conditions.

Recently Issued Accounting Pronouncements

Please see Note 2 to the consolidated financial statements, Significant
Accounting Policies and Recent Accounting Pronouncements, for a discussion of
recent accounting pronouncements and their effect, if any, on our condensed
consolidated unaudited financial statements.

Results of Operations

We currently anticipate that continuing operations for the next 12 months from
the date of this filing is very much dependent upon our ability to raise equity
from existing or new financing sources. There can be no assurance as to the
availability or terms upon which such financing and capital might be available.

The Company’s ability to continue as a going concern is dependent upon its
ability to repay or settle its current indebtedness, generate positive cash flow
from an operating company, and/or raise capital through equity and debt
financing or other means on desirable terms. If the Company is unable to obtain
additional funds when they are required or if the funds cannot be obtained on
favorable terms, management may be required to restructure the Company or cease
operations.

The Company is aware that its current cash on hand will not be sufficient to
fund its projected operating requirements through the month of December 2022 and
is pursuing alternative opportunities to funding.

The Company intends to raise additional capital through private placements of
debt and equity securities, but there can be no assurance that these funds will
be available on terms acceptable to the Company, or will be sufficient to enable
the Company to fully complete its development activities or sustain operations.
If the Company is unable to raise sufficient additional funds, it will have to
develop and implement a plan to further extend payables, reduce overhead, or
scale back its current business plan until sufficient additional capital is
raised to support further operations. There can be no assurance that such a plan
will be successful.

For the three months ended September 30, 2022 and 2021

Revenue

For the three months ended Change
September 30, 2022 vs. 2021
2022 2021 $ %

Revenue $ 57,267,460 $ 13,224,759 $ 44,042,701 333.0 %
Cost of sales (43,071,432 ) (8,418,340 ) (34,653,092 ) 411.6 %
Gross profit 14,196,028 4,806,419 9,389,609 195.4 %

During the three months ended September 30, 2022, compared to the three months
ended September 30, 2021, revenue increased by $44,042,701, or approximately
333%, due to the Company completing acquisitions, entering into new markets, and
securing new commercial projects. Revenue increased significantly from that of
the prior year in part because the Company was able to secure and recognize
revenue from newly acquired commercial projects, which have significantly
increased the Company’s revenue over that of the prior year as the Company was
able to focus on additional revenue that was not solely from roofing and
residential solar projects, which were previously the Company’s primary focus
and source of revenue. Gross profit increased by $9,389,609, or approximately
195.4% accordingly.

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Operating Expenses

Operating expenses consist mainly of compensation expenses and associated fringe
benefits, as well as management, business development, accounting, information
technology and administration costs, recruiting, consulting and professional
services, travel and meals, sales commissions, facilities, depreciation and
other office expenses.

Below is a summary of our operating expenses:

For the three months ended Change
September 30, 2022 vs. 2021
2022 2021 $ %

Salaries and wages $ 3,989,043 $ 2,863,858 $ 1,125,185 39.3 %
Professional fees 1,400,473 1,585,673 (185,200 ) (11.7 )%
Depreciation expense 69,807 222,613 (152,806 ) (68.6 )%
Marketing 186,093 229,259 (43,166 ) (18.8 )%
General and administrative 1,179,561 1,275,383 (95,822 ) (7.5 )%
Total $ 6,824,977 $ 6,176,786 $ (648,191 ) (10.5 )%

The Company experienced a decrease in expenses during the three months ended
September 30, 2022, compared to the three months ended September 30, 2021, due
to implementing shared services and consolidating and reducing operating
expenses across acquired entities. Salaries and wages increased by $1,125,185,
or approximately 39.3% due primarily to the issuance of approximately $1.3
million in stock options as compensation to executives; marketing and
advertising decreased by $43,166, or approximately 18.8%; depreciation expense
decreased by $152,806, or approximately 68.6%; general and administrative
expenses decreased by $95,822, or approximately 7.5%; and professional fees
decreased by $185,200, or approximately 11.7%.

Other Income (Expense)

Below is a summary of our other income (expense):

For the Three months ended Change
September 30, 2022 vs. 2021
2022 2021 $ %

Interest expense $ (1,077,710 ) (586,638 ) $ (491,072 ) 83.7 %
Other income (expense) – (108,489 ) 108,489 (100.0 )%
PPP loans forgiveness – 20,830 (20,830 ) (100.0 )%
Gain (loss) on change in fair ) )%
value of derivative liability (53,295 ) 359,009 (412,304 (114.8
Other Income (expense), net $ (1,131,005 ) $ (315,288 ) $ (815,717 ) 58.7 %

Interest expense increased by $491,072, or approximately 83.7%, during the three
months ended September 30, 2022, compared to the three months ended September
30, 2021, due to issuances of convertible debt accruing interest and due to
warrant expense. Change in fair value of derivative liability decreased by
$412,304, or approximately 114.8%, during the three months ended September 30,
2022. There was also a decrease in other income of $20,830 during the three
months ended September 30, 2022, due to forgiveness of Paycheck Protection
Program (PPP) loans during the three months ended September 30, 2021.
Miscellaneous other income (expense) increased by $108,489 during the three
months ended September 30, 2022, as other expense of $108,489 consisting of
asset impairment was incurred during the three months ended September 30, 2021
(with no other expense during the three months ended September 30, 2022).

Net Income (Loss)

We generated net income of $6,240,046 and net loss of $1,685,655 for the three
months ended September 30, 2022 and 2021, respectively, primarily as a result of
the above-mentioned factors.

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For the nine months ended September 30, 2022 and 2021

Revenue

For the nine months ended Change
September 30, 2022 vs. 2021
2022 2021 $ %

Revenue $ 150,541,535 $ 24,674,807 $ 125,866,728 510.1 %
Cost of sales (94,558,164 ) (19,484,806 ) (75,073,358 ) 385.3 %
Gross profit $ 55,983,371 $ 5,190,001 $ 50,793,370 978.7 %

During the nine months ended September 30, 2022, compared to the nine months
ended September 30, 2021, revenue increased by $125,866,728, or approximately
510.1%, due to the Company completing acquisitions, entering into new markets,
and securing new commercial projects. Revenue increased significantly from that
of the prior year in part because the Company was able to secure and recognize
revenue from newly acquired commercial projects, which have significantly
increased the Company’s revenue over that of the prior year as the Company was
able to focus on additional revenue that was not solely from roofing and
residential solar projects, which were previously the Company’s primary focus
and source of revenue. Gross profit increased by $50,793,370, or approximately
978.7%, accordingly. The significant increase in gross profit in 2022 as
compared to 2021 was primarily the result of the Company’s acquisitions of
several entities that increased the Company’s operational footprint and the
Company’s focus on transforming from a traditional roofing company into an
alternative energy company, with operations in the residential and commercial
solar industry, including providing services in connection with microgrids and
electric vehicle (“EV”) charging station installation.

Operating Expenses

Operating expenses consist mainly of compensation expenses and associated fringe
benefits, as well as management, business development, accounting, information
technology and administration costs, recruiting, consulting and professional
services, travel and meals, sales commissions, facilities, depreciation and
other office expenses.

Below is a summary of our operating expenses:

For the Nine months ended Change
September 30, 2022 vs. 2021
2022 2021 $ %

Salaries and wages $ 12,437,116 $ 5,488,167 $ 6,948,949 126.6 %
Professional fees 4,499,397 4,474,413 24,984 0.6 %
Depreciation expense 277,601 303,982 (26,381 ) (8.7 )%
Marketing 445,828 575,038 (129,210 ) (22.5 )%
General and administrative 3,768,121 3,136,619 631,502 20.1 %
Total $ 21,428,063 $ 13,978,219 7,449,844 53.3 %

The Company experienced an increase in expenses during the nine months ended
September 30, 2022, compared to the nine months ended September 30, 2021, due to
entering new markets and the addition of additional business units resulting in
an increase in personnel, additional general and administrative expenses, and
increased professional fees. Salaries and wages increased by $6,948,949, or
approximately 126.6% due primarily to stock-based compensation of approximately
$4.5 million; marketing and advertising decreased by $129,210, or approximately
22.5%; depreciation expense decreased by $26,381, or approximately 8.7%; general
and administrative expenses increased by $631,502, or approximately 20.1%; and
professional fees increased by $24,984 or 0.6%.

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Other Income (Expense)

Below is a summary of our other income (expense):

For the Nine months ended Change
September 30, 2022 vs. 2021
2022 2021 $ %

Interest expense $ (2,190,637 ) (949,454 ) $ (1,241,183 ) (130.7 )%
Other income (expense) (253,707 ) 90,793 (344,500 ) (379.4 )%
PPP loans forgiveness – 1,018,130 $ (1,018,130 ) 100.0 %
Loss on debt modification (1,268,933 ) – $ (1,268,933 ) 100.0 %
Gain (loss) on change in fair (1,301,921 103.4 %
value of derivative liability (43,246 ) 1,285,675 $ )
Other Income (Expense), net $ (3,756,523 ) $ 1,445,144 $ (5,201,667 ) (359.9 )%

Interest expense increased by $1,241,183, or approximately 130.7%, during the
nine months ended September 30, 2022, compared to the nine months ended
September 30, 2021, due to issuances of convertible debt accruing interest and
warrant and option expense. Loss on debt modification increased by $1,268,933
during the nine months ended September 30, 2022, due to the consolidation of
various convertible notes with a lender into a single promissory note with
modified terms that included the removal of conversion provisions. No such
transactions occurred during the same period for 2021. Change in fair value of
derivative liability decreased by $1,301,921, or approximately 103.4%, during
the nine months ended September 30, 2022. There was also an increase in other
income of $1,018,130 during the nine months ended September 30, 2022, due to
forgiveness of Paycheck Protection Program (PPP) loans during the nine months
ended September 30, 2021. Miscellaneous other income (expense) decreased by
$344,500, or approximately 379.4%, during the nine months ended September 30,
2022, as compared to the same period for 2021.

Net Income (Loss)

We generated net income of $30,798,785 and a loss of $7,343,074 for the nine
months ended September 30, 2022 and 2021, respectively, primarily as a result of
the above-mentioned factors.

Liquidity and Capital Resources

Projected Future Working Capital Requirements – Next 12 Months

As of September 30, 2022, we had $480,141 in cash compared to $1,124,533 of cash
as of December 31, 2021, and as of the date of this filing, we have
approximately $500,000 in cash. We currently anticipate that future budget
expenditures will be approximately $30 million for the next 12 months.

Our ability to successfully raise sufficient funds through the sale of equity
securities, when needed, is subject to many risks and uncertainties, and even if
we are successful, future equity issuances would result in dilution to our
existing stockholders.

If we are unable to generate enough working capital from our current or future
financing agreements with when needed or secure additional sources of funding,
it may be necessary to significantly reduce our current rate of spending through
reductions in staff and delaying, scaling back or stopping solar programs.
Insufficient liquidity may also require us to relinquish greater rights to
product candidates at an earlier stage of development or on less favorable terms
to us and our stockholders than we would otherwise choose in order to obtain
up-front license fees needed to fund operations. These events could prevent us
from successfully executing our operating plan.

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Cash Flows

The following table provides information regarding our cash position, cash flows
and capital expenditures for the nine months ended September 30, 2022 and 2021:

Nine months Ended Change
September 30, Increase/
2022 2021 (Decrease)
%
Net cash used in operating
activities $ (5,609,232 ) $ (1,322,756 ) 324.1 %
Net cash used in investing
activities (759,560 ) (11,212,644 ) (93.2 )%
Net cash provided by financing
activities 5,724,400 16,084,090 (64.4 )%

Net increase (decrease) in cash $ (644,392 ) $ 3,548,690 (118.2 )%

Net Cash Used in Operating Activities

Net cash used in operating activities for the nine months ended September 30,
2022 and 2021, was $5,669,232 and $1,322,756, respectively.

Net cash used in operating activities for the nine months ended September 30,
2022, was due to net income of $30,798,785, which was increased by stock-based
compensation of $3,260,418, loss on debt modification of $1,268,933,
depreciation of $277,601, warrant expense of $147,500, stock option expense of
$1,259,300, amortization of debt discount of $6,724, change in fair market value
of derivative liability of $43,246, offset by net change in operating assets and
liabilities of $(42,671,738). Comparatively, during the nine months ended
September 30, 2021, net cash used in operating activities was comprised of net
loss of $7,343,074, which was offset by stock-based compensation of $928,650,
amortization of debt discount of $186,146, and depreciation of $303,982, and
decreased by change in fair market value of derivative liability of
$(1,285,675), PPP loan forgiveness of $(1,018,130), and net change in operating
assets and liabilities of $5,887,216.

The increase in net cash used in operating activities from $1,322,756 in the
nine months ended September 30, 2021, to $5,609,232 in the nine months ended
September 30, 2022, was primarily due to (i) an increase in stock-based
compensation from $928,650 in 2021 to $3,260,418 in 2022, (ii) a decrease in the
fair value of derivative liabilities of $1,328,921 in the nine months 2022 as
compared to 2021, (iii) PPP loan forgiveness of $1,018,130 during the nine
months 2021 as compared to $0 in 2022, and (iv) increase in warrant and stock
option expense of $1,406,800, (v) change in accounts receivable and work in
progress receivables increasing by $43,137,020 in 2022 as a result of the
Company starting to recognize revenue in accordance with contractual performance
obligation milestones and accruing receivables based on reaching specific
milestones; partially offset by (i) loss on debt modification in 2022 of
$1,268,933, due to converting convertible notes with accrued interest into a
promissory note, as compared to $0 in loss on debt modification in 2021, (ii)
the change in prepaid expenses and other assets decreasing by $1,080,614 from
2021 to 2022 due to the Company prepaying D&O, worker’s compensation and general
liability insurance, prepaying interest on debt and an interest receivable, and
(iii) the change in accounts payable and accrued liabilities decreasing by
$774,338 during nine months ended September 30, 2022 due to increasing
operations as a result of operational acquisitions during 2021 and related
expenses.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30,
2022 and 2021, was $759,560 and $11,212,644, respectively. This was the result
of cash paid for acquisitions of subsidiaries of $600,000 and $10,100,000 and
the purchase of property and equipment of $159,560 and $1,112,644 during the
nine months ended September 30, 2022 and 2021, respectively.

The decrease in net cash used in investing activities from $11,212,644 in the
nine months ended September 30, 2021, to $759,560 in the nine months ended
September 30, 2022, was primarily due to (i) a decrease in cash paid in
acquisitions of subsidiaries by $9,500,000 as the Company did not complete any
acquisitions in 2022, and (ii) a decrease in purchase of property and equipment
by $953,084 due to acquisition of fewer vehicles during 2022.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months ended September
30, 2022 and 2021, was $5,724,400 and $16,084,090, respectively. This was the
result of proceeds from notes payable of $5,452,105 and $6,813,218, repayments
on notes payable of $2,762,245 and $1,841,218, proceeds from convertible notes
payable of $2,440,000 and $21,055,610, proceeds from exercise of warrants of $0
and $16,480, repurchase of preferred stock class B for $0 and $10,000,00 and
common stock for $0 and $100,000, and proceeds from the sale of common stock of
$594,540 and $140,000 during the nine months ended September 30, 2022 and 2021,
respectively.

The decrease in net cash used in financing activities from $16,084,090 during
the nine months ended September 30, 2021, to $5,724,400 during the nine months
ended September 30, 2022, was primarily due to (i) a decrease in net proceeds
from notes payable in 2022 compared to 2021 by $1,361,113 as the Company
received $56,452,105 in loans and repaid $2,762,245 during the nine months ended
September 30, 2022, and (ii) an increase in proceeds from selling common stock
for $594,540 during 2022, as compared to $140,000 during 2021 and (iii) a
decrease in net proceeds from convertible notes payable in 2022 compared to 2021
by $18,615,610.

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As of September 30, 2022, the Company had $480,141 in cash to fund its
operations. The Company does not believe its current cash balance will be
sufficient to allow the Company to fund its planned operating activities for the
next twelve months. The ability of the Company to continue as a going concern is
dependent on the Company obtaining adequate capital to fund operations via debt
and equity financing.

Commitments and Contingencies

Please see Note 17 Commitments and Contingencies of the Notes to Consolidated
Unaudited Financial Statements included in Part I, Item 1 in this Quarterly
Report on Form 10-Q, for a discussion of recent contractual commitments and
contingent liability.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements, as defined in Item
304(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as
amended.

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