SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period
ended
OR
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(Exact Name of Registrant as Specified in Its Charter)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Indicate by check mark whether the Registrant
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files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check
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Indicate by check mark whether the Registrant
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No
As of August 13, 2024,
COMPLETE SOLARIA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” for purposes of the federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding our and our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
| ● | our ability to recognize the anticipated benefits of the Business Combination (as defined below), which may be affected by, among other things, competition and our ability to grow and manage growth profitably following the closing of the Business Combination; |
| ● | our financial and business performance following the Business Combination, including financial projections and business metrics; |
| ● | changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans; |
| ● | our ability to meet the expectations of new and current customers, and our ability to achieve market acceptance for our products; |
| ● | our expectations and forecasts with respect to market opportunity and market growth; |
| ● | our ability to close the transactions under the “Stalking Horse” asset purchase agreement with SunPower Corporation, including as a result of our bid under such asset purchase agreement not being the winning bid or that the asset purchase agreement and related transactions not approved by the bankruptcy court; | |
| ● | our ability to leverage our acquisitions, including our ability to integrate acquired businesses, to take advantage of growth opportunities and to realize the expected benefits of such acquisitions; |
| ● | the ability of our products and services to meet customers’ compliance and regulatory needs; |
| ● | our ability to attract and retain qualified employees and management; |
| ● | our ability to develop and maintain its brand and reputation; |
| ● | developments and projections relating to our competitors and industry; |
| ● | changes in general economic and financial conditions, inflationary pressures and the resulting impact demand, and our ability to plan for and respond to the impact of those changes; |
| ● | our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others; |
| ● | our future capital requirements and sources and uses of cash; |
| ● | our ability to obtain funding for its operations and future growth; and |
| ● | our business, expansion plans and opportunities. |
Actual events or results may differ from those expressed in forward-looking statements. You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
ii
SUMMARY RISK FACTORS
| ● | Our management has identified conditions that raise substantial doubt about our ability to continue as a going concern. |
| ● | Our business depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or the ability to monetize them could adversely impact the business. |
| ● | Existing regulations and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services. |
| ● | Risks associated with a highly complex global supply chain, including from disruptions, delays, trade tensions, or shortages. |
| ● | We rely on net metering and related policies to offer competitive pricing to customers in many of our current markets and changes to net metering policies may significantly reduce demand for electricity from residential solar energy systems. |
| ● | We utilize a limited number of suppliers of solar panels and other system components to adequately meet anticipated demand for our solar service offerings. Any shortage, delay or component price change from these suppliers or delays and price increases associated with the product transport logistics could result in sales and installation delays, cancellations, and loss of market share. |
| ● | We provide warranties for solar system installations, solar panels, and other system components that may negatively impact overall profitability. |
| ● | We utilize third-party sales and installation partners whose performance could result in sales and installation delays, cancellations, and loss of market share. |
| ● | Risks associated with solar system installation and connection delays, including the potential for recoupment or clawback of payments by financing partners. |
| ● | Due to the general economic environment and any market pressure that would drive down the average selling prices of solar power products, among other factors, we may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund operations and make adequate capital investments as planned. |
| ● | Our business substantially focuses on solar service agreements and transactions with residential customers. |
| ● | We have incurred losses and may be unable to achieve or sustain profitability in the future. |
| ● | We may not close the transactions contemplated by the SunPower Stalking Horse Asset Purchase Agreement; and we may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business. |
| ● | Our business is concentrated in certain markets, including California, putting us at risk of region-specific disruptions. |
| ● | We depend on a limited number of customers and sales contracts for a significant portion of revenues, and the loss of any customer or cancellation of any contract may cause significant fluctuations or declines in revenues. |
| ● | We have identified material weaknesses in our internal controls over financial reporting. If we cannot maintain effective internal controls over financial reporting and disclosure controls and procedures, the accuracy and timeliness of our financial and operating reporting may be adversely affected, and confidence in our operations and disclosures may be lost. |
iii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPLETE SOLARIA, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands except share and per share amounts)
| As of | ||||||||
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Restricted cash | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Notes payable, net | ||||||||
| Deferred revenue, current | ||||||||
| Short-term debt with CS Solis | ||||||||
| SAFE Agreement | ||||||||
| Forward purchase agreement liabilities | ||||||||
| Total current liabilities | ||||||||
| Warranty provision, noncurrent | ||||||||
| Warrant liability | ||||||||
| Deferred revenue, noncurrent | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 17) | ||||||||
| Stockholders’ (deficit) equity: | ||||||||
| Common stock, $ |
||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders’ (deficit) equity | ( |
) | ( |
) | ||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
COMPLETE SOLARIA, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands except share and per share amounts)
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| June 30, | July 2, | June 30, | July 2, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross (loss) profit | ( | ) | ||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales commissions | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Other income, net | ( | ) | ( | ) | ||||||||||||
| Total other (expense) income | ( | ) | ( | ) | ||||||||||||
| Loss from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax (provision) | ( | ) | ( | ) | ||||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from discontinued operations, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss from discontinued operations, net of taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Comprehensive (loss) income: | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ||||||||||||||
| Comprehensive loss (net of tax) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
COMPLETE SOLARIA, INC.
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit
(in thousands except number of shares)
| For the Thirteen-Weeks Ended June 30, 2024 | ||||||||||||||||||||||||||||||||
| Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ (Deficit) | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||||||||
| Balance as of March 31, 2024 | — | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||
| Exercise of common stock options | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock warrants for services | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock upon conversion of SAFEs | ||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
| For the Thirteen Weeks Ended July 2, 2023 | ||||||||||||||||||||||||||||||||
| Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ (Deficit) | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||||||||
| Balance as of April 3, 2023, as previously reported | $ | $ | $ | $ | ( | ) | $ | | $ | ( | ) | |||||||||||||||||||||
| Retroactive application of recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance as of April 3, 2023, as adjusted | ( | ) | ||||||||||||||||||||||||||||||
| Exercise of common stock options | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of July 2, 2023, as adjusted | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
COMPLETE SOLARIA, INC.
Unaudited Condensed Consolidated Statements of Stockholders’ Deficit
(in thousands except number of shares)
| For the Twenty-Six Weeks Ended June 30, 2024 | ||||||||||||||||||||||||||||||||
| Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ (Deficit) | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | | $ | ( | ) | |||||||||||||||||||||
| Exercise of common stock options | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock warrants for services | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock upon conversion of SAFEs | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
| For the Twenty-Six Weeks Ended July 2, 2023 | ||||||||||||||||||||||||||||||||
| Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ (Deficit) | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||||||||
| Balance as of January 1, 2023, as previously reported | $ | $ | $ | $ | ( | ) | $ | | $ | ( | ) | |||||||||||||||||||||
| Retroactive application of recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance as of January 1, 2023, as adjusted | ( | ) | ||||||||||||||||||||||||||||||
| Exercise of common stock options | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance as of July 2, 2023, as adjusted | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
COMPLETE SOLARIA, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands except number of shares)
| Twenty-Six Weeks Ended June 30, 2024 | Twenty-Six- Weeks Ended July 2, 2023 | |||||||
| Cash flows from operating activities from continuing operations | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Loss from discontinued operations, net of income taxes | ( | ) | ( | ) | ||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | ||||||||
| Non-cash interest expense | ||||||||
| Non-cash lease expense | ||||||||
| Loss on conversion of SAFE Agreements to shares of common stock | ||||||||
| Non-cash expense in connection with warrants issued for vendor services | ||||||||
| Depreciation and amortization | ||||||||
| Provision for credit losses | ||||||||
| Change in reserve for excess and obsolete inventory | ( | ) | ||||||
| Change in fair value of forward purchase agreement liabilities | ||||||||
| Change in fair value of warrant liabilities | ( | ) | ( | ) | ||||
| Accretion of debt in CS Solis | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other noncurrent assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Warranty provision, noncurrent | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net cash used in operating activities from continuing operations | ( | ) | ( | ) | ||||
| Net cash provided by operating activities from discontinued operations | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities from continuing operations | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Capitalization of internal-use software costs | ( | ) | ( | ) | ||||
| Proceeds from sale of property and equipment | ||||||||
| Net cash used in investing activities from continuing operations | ( | ) | ( | ) | ||||
| Cash flows from financing activities from continuing operations | ||||||||
| Proceeds from issuance of notes payable, net | ||||||||
| Principal repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from issuance of convertible notes, net of issuance cost | ||||||||
| Proceeds from exercise of common stock options | ||||||||
| Investor financing deposit – related party | ||||||||
| Proceeds from issuance of SAFE agreements | ||||||||
| Net cash provided by financing activities from continuing operations | ||||||||
| Effect of exchange rate changes | ||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents, and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Supplemental disclosure of noncash financing and investing activities: | ||||||||
| Conversion of SAFE Agreements to shares of common stock | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Notes to Unaudited Condensed Consolidated Financial Statements
| (1) | Organization |
(a) Description of Business
Complete Solaria, Inc. (the “Company” or “Complete Solaria”) is a residential solar installer headquartered in Fremont, California, which was formed through Complete Solar Holding Corporation’s acquisition of The Solaria Corporation (“Solaria”).
Complete Solar, Inc. (“Complete Solar”)
was incorporated in Delaware on
In October 2022, the Company entered into a business combination agreement, as amended on December 26, 2022 and January 17, 2023 (“Original Business Combination Agreement”) and as amended on May 26, 2023 (“Amended and Restated Business Combination Agreement”), with Jupiter Merger Sub I Corp., a Delaware corporation and a wholly owned subsidiary of Freedom Acquisition I Corp. (“FACT”) (“First Merger Sub”), Jupiter Merger Sub II LLC, a Delaware limited liability company and a wholly owned subsidiary of FACT (“Second Merger Sub”), Complete Solar Holding Corporation, a Delaware corporation, and Solaria, a Delaware corporation.
The transactions contemplated by the Amended and Restated Business Combination Agreement were consummated on July 18, 2023 (“Closing Date”). Following the consummation of the Merger on the Closing Date, FACT changed its name to “Complete Solaria, Inc.”
As part of the transactions contemplated by the Amended and Restated Business Combination Agreement, FACT effected a deregistration under the Cayman Islands Companies Act and a domestication under Section 388 of the Delaware’s General Corporation Law (the “DGCL” or “Domestication”). On the Closing Date, following the Domestication, First Merger Sub merged with and into Complete Solaria, with Complete Solaria surviving such merger as a wholly owned subsidiary of FACT (the “First Merger”), and immediately following the First Merger, Complete Solaria merged with and into Second Merger Sub, with Second Merger Sub surviving as a wholly owned subsidiary of FACT (the “Second Merger”), and Second Merger Sub changed its name to CS, LLC, and immediately following the Second Merger, Solaria merged with and into a newly formed Delaware limited liability company and wholly-owned subsidiary of FACT and changed its name to The Solaria Corporation LLC (“Third Merger Sub”), with Third Merger Sub surviving as a wholly-owned subsidiary of FACT (the “Additional Merger”, and together with the First Merger and the Second Merger, the “Mergers”).
In connection with the closing of the Mergers:
| ● | Each share of the Company’s capital stock, inclusive of shares converted from the 2022 Convertible Notes, issued and outstanding immediately prior to the Closing (“Legacy Complete Solaria Capital Stock”) were cancelled and exchanged into an aggregate of |
6
| ● | In July 2023, (i) Meteora Special Opportunity Fund I, LP (“MSOF”), Meteora Capital Partners, LP (“MCP”) and Meteora Select Trading Opportunities Master, LP (“MSTO”) (with MSOF, MCP, and MSTO collectively as “Meteora”); (ii) Polar Multi-Strategy Master Fund (“Polar”), and (iii) Diametric True Alpha Market Neutral Master Fund, LP, Diametric True Alpha Enhanced Market Neutral Master Fund, LP, and Pinebridge Partners Master Fund, LP (collectively, “Sandia”) (together, the “FPA Funding PIPE Investors”) entered into separate subscription agreements (the “FPA Funding Amount PIPE Subscription Agreements”) pursuant to which, the FPA Funding PIPE Investors subscribed for on the Closing Date, an aggregate of |
| ● | All certain investors (the “PIPE Investors”) purchased from the Company an aggregate of |
| ● | On or around the Closing Date, pursuant to the New Money PIPE Subscription Agreements, certain investors affiliated with the New Money PIPE Subscription Agreements (“New Money PIPE Investors”) agreed to subscribe for and purchase, and Complete Solaria agreed to issue and sell to the New Money PIPE Investors an aggregate of |
| ● | Subsequent to the Closing, Complete Solaria issued an additional |
| ● | In March 2023, holders of |
| ● | Each issued and outstanding FACT Class B Ordinary Share converted, on a one-for-one basis, into |
In November 2022, Complete Solar Holdings acquired Solaria and changed its name to Complete Solaria, Inc. On August 18, 2023, the Company entered into a Non-Binding Letter of Intent to sell certain of Complete Solaria’s North American solar panel assets to Maxeon, Inc. (“Maxeon”). In October 2023, the Company completed the sale of its solar panel business to Maxeon. Refer to Note 1(b) – Divestiture and Note 7 – Divestiture.
7
(b) Divestiture
In October 2023, the Company completed the sale
of its solar panel business to Maxeon, pursuant to the terms of the Asset Purchase Agreement (the “Disposal Agreement”).
Under the terms of the Disposal Agreement, Maxeon agreed to acquire certain assets and employees of Complete Solaria, for an aggregate
purchase price of approximately $
This divestiture represented a strategic shift in Complete Solaria’s business and qualified as held for sale and as a discontinued operation. Based on the held for sale classification of the assets, the Company reduced the carrying value of the disposal group to its fair value, less its cost to sell and recorded an impairment loss associated with the held for sale intangible assets and goodwill. As a result, the Company classified the results of its solar panel business in discontinued operations in its unaudited condensed consolidated statements of operations and comprehensive loss for all periods presented. The cash flows related to discontinued operations were segregated from continuing operations within the unaudited condensed consolidated statements of cash flows for all periods presented. Unless otherwise noted, discussion within the notes to the unaudited condensed consolidated financial statements relates to continuing operations only and excludes the historical activities of the North American panel business. See Note 7 – Divestiture for additional information.
(c) Liquidity and Going Concern
Since inception, the Company has incurred recurring losses and negative
cash flows from operations. The Company incurred net losses from continuing operations of $
Management plans to obtain additional funding and restructure its current debt, as summarized below under Note 20 – Subsequent Events. Historically, the Company’s activities have been financed through private placements of equity securities, debt and proceeds from the Merger. If the Company is not able to secure adequate additional funding when needed, the Company will need to reevaluate its operating plan and may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs or cease operations entirely. These actions could materially impact the Company’s business, results of operations and future prospects. While the Company has been able to raise multiple rounds of financing, there can be no assurance that in the event the Company requires additional financing, such financing will be available on terms that are favorable, or at all. Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary spending would have a material adverse effect on the Company’s ability to achieve its intended business objectives.
Therefore, there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that these unaudited condensed consolidated financial statements have been issued. The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. They do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern.
8
(d) Notices of Delisting from NASDAQ
On April 16, 2024, the Company received written
notice (“NASDAQ Notice”) from the Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that it was not in
compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5450(a)(1) for continued listing on The Nasdaq Global
Market. Nasdaq Listing Rule 5450(a)(1) requires listed securities to maintain a minimum bid price of $
The NASDAQ Notice does not impact the listing of the Company’s common stock on The Nasdaq Global Market at this time. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s common stock must be at least $
Also on April 16, 2024, the Company received
a letter (“NASDAQ Letter”) from the staff at Nasdaq notifying the Company that, for the 30 consecutive trading days prior
to the date of the NASDAQ Letter, the Company’s common stock had traded at a value below the minimum $
In accordance with Nasdaq listing rule 5810(c)(3)(C),
the Company has 180 calendar days, or until October 14, 2024, to regain compliance. The NASDAQ Letter notes that to regain compliance,
the Company’s common stock must trade at or above a level such that the Company’s MVLS closes at or above $
If the Company does not regain compliance by October 14, 2024, Nasdaq staff will provide written notice to the Company that its securities are subject to delisting. At that time, the Company may appeal any such delisting determination to a hearings panel.
The Company is actively monitoring the Company’s MVLS and may, if appropriate, evaluate available options to resolve the deficiency and regain compliance with the MVLS requirement. While the Company is exercising diligent efforts to maintain the listing of its securities on Nasdaq, there can be no assurance that the Company will be able to regain or maintain compliance with Nasdaq listing standards.
| (2) | Summary of Significant Accounting Policies |
| (a) | Basis of Presentation |
The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the Unites States of America (“GAAP” or “U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
9
| (b) | Use of Estimates |
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, as well as related disclosure of contingent assets and liabilities. Significant estimates and assumptions made by management include, but are not limited to, the determination of:
| ● | The allocation of the transaction price to identified performance obligations; | |
| ● | Fair value of warrant liabilities; | |
| ● | The fair value of the forward purchase agreements; and | |
| ● | The reserve methodology for inventory obsolescence; | |
| ● | The reserve methodology for product warranty; | |
| ● | The reserve methodology for the allowance for credit losses; | |
| ● | The measurement of stock-based compensation. |
To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or operating results will be affected. The Company bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis. The Company has assessed the impact and management is not aware of any specific events or circumstances that required an update to the Company’s estimates and assumptions or materially affected the carrying value of the Company’s assets or liabilities as of the date of issuance of this report. These estimates may change as new events occur and additional information is obtained.
| (c) | Segment Information |
The Company conducts its business in one operating segment that provides custom solar solutions through a standardized platform to its residential solar providers and companies to facilitate the sale and installation of solar energy systems under a single product group. The Company’s Chief Executive Officer (“CEO”) is the Chief Operating Decision Maker (“CODM”). The CODM allocates resources and makes operating decisions based on financial information presented on a consolidated basis. The profitability of the Company’s product group is not a determining factor in allocating resources and the CODM does not evaluate profitability below the level of the consolidated Company. All the Company’s long-lived assets are maintained in the United States of America.
| (d) | Concentration of Risks |
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company’s
cash and cash equivalents are on deposit with major financial institutions. Such deposits may be in excess of insured limits from time
to time. The Company believes that the financial institutions that hold the Company’s cash are financially sound, and accordingly,
minimum credit risk exists with respect to these balances. The Company has not experienced any losses due to institutional failure or
bankruptcy. The Company’s customers consist primarily of residential homeowners. The Company performs credit evaluations of its
customers and generally does not require collateral for sales on credit. Many residential customers finance the transaction through third-party
financing entities from whom the Company collects the receivable. The Company reviews accounts receivable balances to determine if any
receivables will potentially be uncollectible and includes any amounts that are determined to be uncollectible in the allowance for credit
losses. As of June 30, 2024, two entities had an outstanding balance that represented
10
Concentration of customers
No customers represented more than
Concentration of suppliers
For the thirteen-weeks ended June 30, 2024, three suppliers represented
| (e) | Cash and Cash Equivalents |
The Company considers all highly liquid securities that mature within three months or less from the original date of purchase to be cash equivalents. The Company maintains the majority of its cash balances with commercial banks in interest bearing accounts. Cash and cash equivalents include cash held in checking and savings accounts and money market accounts consisting of highly liquid securities with original maturity dates of three months or less from the original date of purchase.
| (f) | Restricted Cash |
The Company classifies all cash for which usage
is limited by contractual provisions as restricted cash. The restricted cash balance was $
| June 30, 2024 | December 31, 2023 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||
| (g) | Revenue Recognition |
Disaggregation of revenue
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| June 30, | July 2 | June 30, | July 2, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Solar energy system installations | $ | $ | $ | $ | ||||||||||||
| Software enhanced services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
All of the Company’s revenue recognized by geography based on the location of the customer for the thirteen week and twenty-six week periods ended June 30, 2024 and July 2, 2023 was in the United States.
11
Remaining performance obligations
The Company has elected the practical expedient
not to disclose remaining performance obligations for contracts that are less than one year in length. As of June 30, 2024, the Company
has deferred $
Incremental costs of obtaining customer contracts
Incremental costs of obtaining customer contracts
consist of sales commissions, which are costs paid to third-party vendors who source residential customer contracts for the sale of solar
energy systems by the Company. The Company defers sales commissions and recognizes expense in accordance with the timing of the related
revenue recognition. Amortization of deferred commissions is recorded as sales commissions in the accompanying unaudited condensed consolidated
statements of operations and comprehensive loss. As of June 30, 2024 and December 31, 2023, deferred commissions were $
Deferred revenue
The Company typically invoices its customers upon completion of set milestones, generally upon installation of the solar energy system with the remaining balance invoiced upon passing final building inspection. Standard payment terms to customers range from 30 to 60 days. When the Company receives consideration, or when such consideration is unconditionally due, from a customer prior to delivering goods or services to the customer under the terms of a customer agreement, the Company records deferred revenue. As installation projects are typically completed within 12-months, the Company’s deferred revenue is reflected in current liabilities in the accompanying unaudited condensed consolidated balance sheets. The amount of revenue recognized during the twenty-six week period ended June 30, 2024 that was included in deferred revenue at the beginning of the period was $
| (h) | Fair Value Measurements |
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market.
When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
| ● | Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
| ● | Level 2 inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| ● | Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
Financial assets and liabilities held by the Company measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023 include the warrant liabilities, SAFE Agreements and FPA liabilities.
12
The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short-term nature (classified as Level 1).
Certain warrant liabilities, SAFE agreements, and FPA liabilities are measured at fair value using Level 3 inputs. The Company records subsequent adjustments to reflect the increase or decrease in estimated fair value at each reporting date within the unaudited condensed consolidated statements of operations and comprehensive loss as a component of other (expense) income, net.
| (i) | Direct Offering Costs |
Direct offering costs represent legal, accounting
and other direct costs related to the Mergers, which was consummated in July 2023. In accounting for the Mergers, direct offering costs
of approximately $
| (j) | Warrant Liabilities |
The Company accounts for its warrant liabilities in accordance with the guidance in ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, under which the warrants that do not meet the criteria for equity classification and must be recorded as liabilities. The warrant liabilities are measured at fair value at inception and at each reporting date in accordance with the guidance in ASC 820, Fair Value Measurement, with any subsequent changes in fair value recognized in other (expense) income, net on the unaudited condensed consolidated statements of operations and comprehensive loss. Refer to Note 3 – Fair Value Measurements and Note 12 – Warrants.
| (k) | Forward Purchase Agreements |
The Company accounts for its FPAs in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity, as the agreements embody an obligation to transfer assets to settle a forward contract. The FPA liabilities are measured at fair value at inception and at each reporting date in accordance with the guidance in ASC 820, Fair Value Measurement, with any subsequent changes in fair value recognized in other (expense) income, net on the unaudited condensed consolidated statements of operations and comprehensive loss. Refer to Note 3 – Fair Value Measurements and Note 5 – Forward Purchase Agreements.
| (l) | Net Loss Per Share |
The Company computes net loss per share following ASC 260, Earnings Per Share. Basic net loss per share is measured as the income or loss available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted net loss per share presents the dilutive effect on a per-share basis from the potential exercise of options, SAFE agreements and/or warrants. The potentially dilutive effect of options, SAFE agreements or warrants are computed using the if-converted method. Securities that potentially have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the diluted loss per share calculation.
| (m) | Accounting Pronouncements Not Yet Adopted |
In November 2023, the FASB issued ASU No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption. The Company is currently evaluating ASU 2023-07.
13
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The objective of ASU 2023-09 is to enhance disclosures related to income taxes, including specific thresholds for inclusion within the tabular disclosure of income tax rate reconciliation and specified information about income taxes paid. ASU 2023-09 is effective for public companies starting in annual periods beginning after December 15, 2024. The Company is currently evaluating ASU 2023-09.
| (3) | Fair Value Measurements |
| As of June 30, 2024 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial Liabilities | ||||||||||||||||
| Carlyle warrants | $ | $ | $ | $ | ||||||||||||
| Public warrants | ||||||||||||||||
| Private placement warrants | ||||||||||||||||
| Working capital warrants | ||||||||||||||||
| Forward purchase agreement liabilities | ||||||||||||||||
| SAFE Agreements | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| As of December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial Liabilities | ||||||||||||||||
| Carlyle warrants | $ | $ | $ | $ | ||||||||||||
| Public warrants | ||||||||||||||||
| Private placement warrants | ||||||||||||||||
| Working capital warrants | ||||||||||||||||
| Replacement warrants | ||||||||||||||||
| Forward purchase agreement liabilities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
14
Carlyle Warrants
As part of the Company’s amended and restated
warrant agreement with CRSEF Solis Holdings, LLC and its affiliates (“Carlyle”), the Company issued Carlyle a warrant to
purchase shares of Complete Solaria Common Stock at a price per share of $
| June 30, 2024 | December 31, 2023 | |||||||
| Expected term | ||||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
Public, Private Placement and Working Capital Warrants
The public, private placement and working capital warrants are measured at fair value on a recurring basis. The public warrants were valued based on the closing price of the publicly traded instrument. The private placement and working capital warrants were valued using observable inputs for similar publicly-traded instruments.
Forward Purchase Agreement Liabilities
The FPA liabilities are measured at fair
value on a recurring basis using a Monte Carlo simulation analysis.
| June 30, 2024 | December 31, 2023 | |||||||
| VWAP stock price | $ | $ | ||||||
| Simulation period | ||||||||
| Risk-free interest rate | % | % | ||||||
| Volatility | % | % | ||||||
SAFE Agreement
The Company concluded that the carrying value of the Third SAFE Agreement approximates the fair value based upon its conversion features and management’s expectation that the Third SAFE Agreement will convert to shares of the Company’s common stock during 2024.
Replacement Warrants
| December 31, 2023 | ||||
| Expected term | ||||
| Expected volatility | % | |||
| Risk-free interest rate | % | |||
| Expected dividend yield | % | |||
15
| (4) | Reverse Recapitalization |
As discussed in Note 1 – Organization, on July 18, 2023, the Company consummated the Mergers pursuant to the Amended and Restated Business Combination Agreement. The Mergers was accounted for as a reverse recapitalization, rather than a business combination, for financial accounting and reporting purposes. Accordingly, Complete Solaria was deemed the accounting acquirer (and legal acquiree) and FACT was treated as the accounting acquiree (and legal acquirer). Complete Solaria was determined to be the accounting acquirer based on an evaluation of the following facts and circumstances:
| ● | Complete Solaria’s pre-combination stockholders have the majority of the voting power in the post- merged company; |
| ● | Legacy Complete Solaria’s stockholders have the ability to appoint a majority of the Complete Solaria Board of Directors; |
| ● | Legacy Complete Solaria’s management team is considered the management team of the post-merged company; |
| ● | Legacy Complete Solaria’s prior operations are comprised of the ongoing operations of the post-merged company; |
| ● | Complete Solaria is the larger entity based on historical revenues and business operations; and |
| ● | the post-merged company has assumed Complete Solaria’s operating name. |
Under this method of accounting, the reverse recapitalization was treated as the equivalent of Complete Solaria issuing stock for the net assets of FACT, accompanied by a recapitalization. The net assets of FACT are stated at historical cost, with no goodwill or other intangible assets recorded. The unaudited condensed consolidated assets, liabilities, and results of operations prior to the Mergers are those of Legacy Complete Solaria. All periods prior to the Mergers have been retrospectively adjusted in accordance with the Amended and Restated Business Combination Agreement for the equivalent number of preferred or common shares outstanding immediately after the Mergers to effect the reverse recapitalization.
Upon the closing of the Mergers and the PIPE
Financing in July 2023, the Company received net cash proceeds of $
Immediately upon closing of the Mergers, the
Company had
| Recapitalization | ||||
| FACT Class A Ordinary Shares, outstanding prior to Mergers | ||||
| FACT Class B Ordinary Shares, outstanding prior to Mergers | ||||
| Bonus shares issued to sponsor | ||||
| Bonus shares issued to PIPE investors | ||||
| Bonus shares issued to FPA investors | ||||
| Shares issued from PIPE financing | ||||
| Shares issued from FPA agreements, net of recycled shares | ||||
| Less: redemption of FACT Class A Ordinary Shares | ( | ) | ||
| Total shares from the Mergers and PIPE Financing | ||||
| Legacy Complete Solaria shares | ||||
| 2022 Convertible Note Shares | ||||
| Shares of Complete Solaria Common stock immediately after Mergers | ||||
16
In connection with the Mergers, the Company incurred
direct and incremental costs of approximately $
| (5) | Forward Purchase Agreements |
In July 2023, FACT and Legacy Complete Solaria, Inc. entered into FPAs with each of (i) Meteora; (ii) Polar, and (iii) Sandia (each individually, a “Seller”, and together, the “FPA Sellers”).
Pursuant to the terms of the FPAs, the FPA Sellers
may (i) purchase through a broker in the open market, from holders of Shares other than the Company or affiliates thereof, FACT’s
ordinary shares, par value of $
The key terms of the forward contracts are as follows:
| ● | The FPA Sellers can terminate the transaction following the Optional Early Termination (“OET”) Date which shall specify the quantity by which the number of shares is to be reduced (such quantity, the “Terminated Shares”). Seller shall terminate the transaction in respect of any shares sold on or prior to the maturity date. The counterparty is entitled to an amount from the Seller equal to the number of terminated shares multiplied by a reset price. The reset price is initially $ |
| ● | The FPA contains multiple settlement outcomes. Per the terms of the agreements, the FPAs will (1) settle in cash in the event the Company is due cash upon settlement from the FPA Sellers or (2) settle in either cash or shares, at the discretion of the Company, should the settlement amount adjustment exceed the settlement amount. Should the Company elect to settle via shares, the equity will be issued in Complete Solaria Common Stock, with a per share price based on the volume-weighted average price (“VWAP”) Price over 15 scheduled trading days. The magnitude of the settlement is based on the Settlement Amount, an amount equal to the product of: (1) Number of shares issued to the FPA Seller pursuant to the FPA, less the number of Terminated Shares multiplied by (2) the VWAP Price over the valuation period. The Settlement amount will be reduced by the Settlement Adjustment, an amount equal to the product of (1) Number of shares in the Pricing Date Notice, less the number of Terminated Shares multiplied by $2.00. |
| ● | The Settlement occurs as of the Valuation Date, which is the earlier to occur of (a) the date that is two years after the date of the Closing Date of the Mergers (b) the date specified by Seller in a written notice to be delivered to the Counterparty at the Seller’s discretion (which Valuation Date shall not be earlier than the day such notice is effective) after the occurrence of certain triggering events; and (c) 90 days after delivery by the Counterparty of a written notice in the event that for any 20 trading days during a 30 consecutive trading day-period (the “Measurement Period”) that occurs at least 6 months after the Closing Date, the VWAP Price is less than the then applicable Reset Price. |
The Company entered into four separate FPAs, three of which, associated
with the obligation to issue
17
Additionally, in accordance with ASC 480, Distinguishing Liabilities from Equity, the Company has determined that the forward contracts are financial instruments other than shares that represent or are indexed to obligations to repurchase the issuer’s equity shares by transferring assets, referred to herein as the “forward purchase liability” on its unaudited condensed consolidated balance sheets. The Company initially measured the forward purchase liabilities at fair value and has subsequently remeasured them at fair value with changes in fair value recognized in earnings.
Through the date of issuance of the Complete Solaria
Common Stock in satisfaction of the Company’s obligation to issue shares around the closing of the Mergers, the Company recorded
$
As of the closing of the Mergers and issuance
of the Complete Solaria Common Stock underlying the FPAs, the fair value of the prepaid FPAs was an asset balance of $
On December 18, 2023, the Company and the FPA
Sellers entered into separate amendments to the FPAs (the “Amendments”). The Amendments lower the reset floor price of each
FPA from $
On May 7 and 8, 2024, respectively, the Company
entered into separate amendments to the FPAs (collectively the “Second Amendments”) with Sandia (the “Sandia Second
Amendment”) and Polar (the “Polar Second Amendment”). The Second Amendments lowered the reset price of each FPA from
$
On June 14, 2024, the Company entered into an amendment
to the FPA with Sandia (the “Sandia Third Amendment”). The Sandia Third Amendment set the reset price of each FPA to $
18
| (6) | Prepaid Expenses and Other Current Assets |
| As of | ||||||||
| June 30, 2024 | December 31, 2023 | |||||||
| Deferred commissions | $ | $ | ||||||
| Inventory deposits | ||||||||
| Other | ||||||||
| Total prepaid expenses and other current assets | $ | $ | ||||||
| (7) | Divestiture |
Discontinued operations
As previously described in Note 1 – Organization, on August 18, 2023, the Company entered into a Non-Binding Letter of Intent to sell certain of Complete Solaria’s North American solar panel assets, inclusive of intellectual property and customer contracts, to Maxeon. Under the terms of the Disposal Agreement, Maxeon agreed to acquire certain assets and employees of Complete Solaria. The Company determined that this divestiture represented a strategic shift in the Company’s business and qualified as a discontinued operation. In October 2023, the Company completed the sale of its solar panel business to Maxeon, pursuant to the terms of the Asset Purchase Agreement Disposal Agreement.
The Company recorded a loss from discontinued operations of $
| Thirteen Weeks Ended | Twenty-Six- Weeks Ended | |||||||
| July 2, 2023 | July 2, 2023 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross loss | ( | ) | ( | ) | ||||
| Operating expenses: | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||
| Other (expense) income, net | ||||||||
| Loss from discontinued operations before income taxes | ( | ) | ( | ) | ||||
| Income tax benefit | ||||||||
| Net loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||
19
| (8) | Property and Equipment, Net |
| Estimated | As of | |||||||||
| Useful Lives (Years) | June 30, 2024 | December 31, 2023 | ||||||||
| Developed software | $ | $ | ||||||||
| Manufacturing equipment | ||||||||||
| Furniture and equipment | ||||||||||
| Leasehold improvements | ||||||||||
| Total property and equipment | ||||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| Total property and equipment, net | $ | $ | ||||||||
Depreciation and amortization expense from continuing operations totaled
$
| (9) | Accrued Expenses and Other Current Liabilities |
| As of | ||||||||
| June 30, 2024 | December 31, 2023 | |||||||
| Accrued compensation and benefits | $ | $ | ||||||
| Customer deposits | ||||||||
| Uninvoiced contract costs | ||||||||
| Accrued term loan and revolving loan amendment and final payment fees | ||||||||
| Accrued legal settlements | ||||||||
| Accrued taxes | ||||||||
| Accrued rebates and credits | ||||||||
| Operating lease liabilities, current | ||||||||
| Accrued warranty, current | ||||||||
| Other accrued liabilities | ||||||||
| Total accrued expenses and other current liabilities | $ | $ | ||||||
20
| (10) | Other Income, Net |
| Thirteen-Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | |||||||||||||
| Change in fair value of redeemable convertible preferred stock warrant liability | $ | $ | $ | $ | ||||||||||||
| Change in fair value of Carlyle warrants | ( | ) | ||||||||||||||
| Change in fair value of FACT public, private placement and working capital warrants | ( | ) | ||||||||||||||
| Change in fair value of forward purchase agreement liabilities(1) | ( | ) | ||||||||||||||
| Loss on conversion of SAFE Agreements to common stock(2) | ( | ) | ( | ) | ||||||||||||
| Other, net | ( | ) | ( | ) | ||||||||||||
| Total other income, net | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| (1) | The Company entered into forward purchase agreements with related parties in July 2023. The change in the fair value of forward purchase agreement liabilities entered into with related parties includes $ |
| (2) | The SAFE Agreements were entered into with a related party, and the loss on the conversion of the SAFE Agreements to shares of the Company’s common stock is a related party transaction. Refer to Note 14 – SAFE Agreements and Note 19 – Related Party Transactions for further information. |
| (11) | Common Stock |
The Company has authorized the issuance of
Common Stock Purchase Agreements
On December 18, 2023, the Company entered into separate common stock purchase agreements (the “Purchase Agreements”) with the Rodgers Massey Freedom and Free Markets Charitable Trust and the Rodgers Massey Revocable Living Trust (each a “Purchaser”, and together, the “Purchasers”). Pursuant to the terms of the Purchase Agreements, each Purchaser purchased
| As of June 30, 2024 | ||||
| Common stock warrants | ||||
| Employee stock purchase plan | ||||
| Stock options and RSUs, issued and outstanding | ||||
| Stock options and RSUs, authorized for future issuance | ||||
| Total shares reserved | ||||
21
| (12) | Warrants |
| As of | ||||||||
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Carlyle warrants | $ | $ | ||||||
| Replacement warrants | ||||||||
| Public warrants | ||||||||
| Private placements warrants | ||||||||
| Working capital warrants | ||||||||
| $ | $ | |||||||
Carlyle Warrants
In February 2022, as part of a debt financing
from Carlyle (Refer to Note 13 – Borrowings), the Company issued a warrant to purchase
At issuance, the relative fair value of the warrant
was determined to be $
In July 2023, and in connection with the closing
of the Mergers, the Carlyle debt and warrants were modified. Based on the exchange ratio included in the Mergers, the
The modification of the warrant resulted in the reclassification of
previously equity-classified warrants to liability classification, which was accounted for in accordance with ASC 815 and ASC 718, Compensation
– Stock Compensation. The Company recorded the fair value of the modified warrants as a warrant liability of $
22
Series D-7 Warrants (Converted to common stock warrants “Replacement Warrants”)
In November 2022, the Company issued warrants to purchase
In October 2023, the Company entered into an Assignment and Acceptance
Agreement (“Assignment Agreement”), (Refer to Note 13 – Borrowings). In connection with the Assignment Agreement, the
Company also entered into the First Amendment to Warrant to Purchase Stock Agreements with the holders of the Series D-7 warrants. Pursuant
to the terms of the agreement, the warrants to purchase
The Replacement Warrants expired in April 2024.
Public, Private Placement, and Working Capital Warrants
In conjunction with the Mergers, Complete Solaria,
as accounting acquirer, was deemed to assume
The Company determined the Public and Private
warrants to be classified as a liability and fair valued the warrants on the issuance date using the publicly available price for the
warrants of $
Additionally, at the closing of the Mergers, the Company issued
23
Equity Classified Warrants
Series B Warrants (Converted to Common Stock Warrants)
In February 2016, the Company issued a warrant to purchase
Series C Warrants (Converted to Common Stock Warrants)
In July 2016, the Company issued a warrant to purchase
Series C-1 Warrants (Converted to Common Stock Warrants)
In January 2020, the Company issued a warrant
to purchase
SVB Common Stock Warrants
In May and August 2021, the Company issued warrants
to purchase
Promissory Note Common Stock Warrants
In October 2021, the Company issued a warrant
to purchase
24
November 2022 Common Stock Warrants
In November 2022, the Company issued a warrant
to a third-party service provider to purchase
July 2023 Common Stock Warrants
In July 2023, the Company issued a warrant to
a third-party service provider to purchase
Warrant Consideration
In July 2023, in connection with the Mergers,
the Company issued
Ayna Warrant
On June 17, 2024, a warrant to purchase shares
of the Company’s common stock (“Ayna Warrant”) was executed which certifies that Ayna.AI LLC (“Ayna”) is
entitled to purchase
On or after the earlier of (i) September 9, 2024;
and (ii) the first trading day after March 12, 2024 with a closing price of the Company’s common stock greater than or equal to
$
In lieu of exercising the Ayna Warrant for cash, Ayna may from time to time convert the Ayna Warrant, in whole or in part, into a number of shares of the Company’s common stock determined by dividing (a) the aggregate fair market value of the shares of the Company’s common stock or other securities otherwise issuable upon exercise of the Ayna Warrant minus the aggregate warrant price of such shares of the Company’s common stock by (b) the fair market value (“Ayna Warrant FMV”) of one share of the Company’s common stock.
If the Company’s shares of common stock are traded regularly in a public market, the Ayna Warrant FMV shall be the weighted average price for the 30 trading days ending on the trading day immediately before Ayna delivers its notice of exercise to the Company. If the Company’s shares of common stock are not regularly traded in a public market, the Company’s Board of Directors shall determine that the Ayna Warrant FMV in its reasonable good faith judgment. The foregoing notwithstanding, if Ayna advises the Company’s Board of Directors in writing that Ayna disagrees with such determination, then the Company and Ayna shall promptly agree upon a reputable investment banking firm or a third party independent appraiser to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fee and expenses shall be paid by Ayna.
At issuance, the fair value of the Ayna Warrant was
determined to be $
25
| (13) | Borrowings |
| As of | ||||||||
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| 2018 Bridge Notes | $ | $ | ||||||
| Revolver Loan | ||||||||
| Secured Credit Facility | ||||||||
| Polar Settlement Agreement | ||||||||
| Total notes payable | ||||||||
| Debt in CS Solis | ||||||||
| Total notes payable and convertible notes, net | ||||||||
| Less current portion | ( |
) | ( |
) | ||||
| Notes payable and convertible notes, net of current portion | $ | $ | ||||||
Notes Payable
2018 Bridge Notes
In December 2018, Solaria Corporation issued
senior subordinated convertible secured notes (“2018 Notes”) totaling approximately $
In December 2022, the Company entered into an
amendment to the 2018 Notes extending the maturity date from
The Company concluded that the amendment represented
a troubled debt restructuring as the Company was experiencing financial difficulty, and the amended terms resulted in a concession to
the Company. As the future undiscounted cash payments under the modified terms exceeded the carrying amount of the 2018 Notes on the
date of modification, the modification was accounted for prospectively. The incremental repayment premium is being amortized to interest
expense using the effective interest rate method. As of June 30, 2024 and December 31, 2023, the carrying value of the 2018 Notes was
$
Revolver Loan
In October 2020, Solaria entered into a loan agreement (“SCI Loan Agreement”) with Structural Capital Investments III, LP (“SCI”).
The SCI Loan Agreement is comprised of two facilities,
a term loan (the “Term Loan”) and a revolving loan (the “Revolving Loan”) (together “Original Agreement”)
for $
The Revolving Loan has a term of thirty-six months,
with the principal due at the end of the term and an annual interest rate of
26
In the years ended December 31, 2022 and December
31, 2021, Solaria entered into several Amended and Restated Loan and Security Agreements with SCI to forbear SCI from exercising any
rights and remedies available to it as a result of the Company not meeting certain Financial Covenants required by the Original Agreement.
As a result of these amendments changes were made to the Financial Covenants, and Solaria recorded a total of $
Solaria had historically issued warrants to purchase shares of Series E-1 redeemable convertible preferred stock of Solaria (“SCI Series E-1 warrants”). The warrants were fully exercisable in whole or in part at any time during the term of the Original agreement. As part of the Business Combination with Complete Solar, all the outstanding SCI Series E-1 warrants were assumed by the parent company, Complete Solaria.
The Revolving Loan outstanding on the date of
the Business Combination was fair valued at $
In October 2023, the Company entered into an
Assignment Agreement whereby Structural Capital Investments III, LP assigned the SCI debt to Kline Hill Partners Fund LP, Kline Hill
Partners IV SPV LLC, Kline Hill Partners Opportunity IV SPV LLC, (collectively “Kline Hill”) and Rodgers Massey Revocable
Living Trust for a total purchase price of $
Interest expense recognized for the thirteen-week
periods ended June 30, 2024 and July 2, 2023 was $
On May 1, 2024, the Company entered into an agreement with Kline Hill that will cancel this obligation upon satisfaction of certain events. Refer to Note 20 - Subsequent Events for further details.
Secured Credit Facility
In December 2022, the Company entered into a
secured credit facility agreement with Kline Hill Partners IV SPV LLC and Kline Hill Partners Opportunity IV SPV LLC (“Secured
Credit Facility”). The Secured Credit Facility agreement allows the Company to borrow up to
At June 30, 2024, the balance outstanding was
$
Entry into an Agreement to Cancel Revolver Loan and Secured Credit Facility
On May 1, 2024, the Company entered into a common
stock purchase agreement (the “Common Stock Purchase Agreement”) with Kline Hill providing for (a) the cancellation of all
indebtedness owed to Kline Hill by the Company, termination of all debt instruments by and between the Company and Kline Hill, and the
satisfaction of all obligations owed to Kline Hill by the Company under the terminated debt instruments, (b) the issuance of
As of June 30, 2024, the amount owed to Carlyle was outstanding. Refer to Note 20 - Subsequent Events for further information regarding details regarding the exchange of the Carlyle debt and cancellation of the Kline Hill indebtedness.
27
Polar Settlement Agreement
In September 2023, in connection with the Mergers,
the Company entered into a settlement and release agreement with Polar Multi-Strategy Master Fund (“Polar”) for the settlement
of a working capital loan that had been made by Polar to the Sponsor, prior to the closing of the Mergers. The settlement agreement required
the Company to pay Polar $
Debt in CS Solis
As part of the Reorganization described in Note
1(a) Organization - Description of Business and Note 12 - Warrants, the Company received cash and recorded debt for an investment by
Carlyle. The investment was made pursuant to a subscription agreement, under which Carlyle contributed $
On July 17 and July 18, 2023, and in connection with obtaining consent for the Mergers, Legacy Complete Solaria, FACT and Carlyle entered into an Amended and Restated Consent to the Business Combination Agreement (“Carlyle Debt Modification Agreement”) and an amended and restated warrant agreement (“Carlyle Warrant Amendment”), which modified the terms of the mandatorily redeemable investment made by Carlyle in Legacy Complete Solaria.
The Carlyle Debt Modification Agreement accelerates the redemption date of the investment, which was previously February 14, 2025 and is now March 31, 2024 subsequent to the modification. The acceleration of the redemption date of the investment, resulted in the total redemption amount to be 1.3 times the principal at December 31, 2023. The redemption amount increased to 1.4 times the original investment as of March 31, 2024. Additionally, as part of the amendment, the parties entered into an amended and restated warrant agreement. As part of the Carlyle Warrant Amendment, Complete Solaria issued Carlyle a warrant to purchase up to
The Company accounted for the modification of
the debt due with CS Solis as a debt extinguishment in accordance with ASC 480 and ASC 470. As a result of the extinguishment, the Company
recorded a loss on extinguishment, of $
The Company has recorded a liability of $
For the thirteen weeks ended June 30, 2024 and
July 2, 2023 the Company recorded amortization of issuance costs as interest expense of
As of June 30, 2024, the total estimated fair value of the Company’s debt with CS Solis was $
28
| (14) | SAFE Agreements |
First SAFE
Second SAFE
Third SAFE
29
| (15) | Stock-Based Compensation |
In July 2023, the Company’s board of directors
adopted and stockholders approved the 2023 Incentive Equity Plan (the “2023 Plan”). The 2023 Plan became effective immediately
upon the closing of the Amended and Restated Business Combination Agreement. Initially, a maximum number of
Historically, awards were granted under the Amended and Restated Complete Solaria Omnibus Incentive Plan (“2022 Plan”), the Complete Solar 2011 Stock Plan (“2011 Plan”), the Solaria Corporation 2016 Stock Plan (“2016 Plan”) and the Solaria Corporation 2006 Stock Plan (“2006 Plan”) (together with the Complete Solaria, Inc. 2023 Incentive Equity Plan (“2023 Plan”), “the Plans”). The 2022 Plan is the successor of the Complete Solar 2021 Stock Plan, which was amended and assumed in connection with the acquisition of Solaria. The 2011 Plan is the Complete Solar 2011 Stock Plan that was assumed by Complete Solaria in the Required Transaction. The 2016 Plan and the 2006 Plan are the Solaria stock plans that were assumed by Complete Solaria in the Required Transaction.
Under the Plans, the Company has granted service and performance-based stock options and restricted stock units (“RSUs”).
| Options Outstanding | ||||||||||||||||
| Number of Shares | Weighted Average Exercise Price per Share | Weighted Average Contractual Term (Years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding—December 31, 2023 | $ | $ | ||||||||||||||
| Options granted | ||||||||||||||||
| Options exercised | ( | ) | ||||||||||||||
| Options canceled | ( | ) | ||||||||||||||
| Outstanding—June 30, 2024 | $ | $ | ||||||||||||||
| Vested and expected to vest—June 30, 2024 | $ | $ | ||||||||||||||
| Vested and exercisable—June 30, 2024 | $ | $ | ||||||||||||||
| Number of RSUs | Weighted Average Grant Date Fair Value | |||||||
| Unvested at December 31, 2023 | $ | |||||||
| Granted | $ | |||||||
| Vested and released | $ | |||||||
| Cancelled or forfeited | $ | |||||||
| Unvested at June 30, 2024 | $ | |||||||
30
Stock-based compensation expense
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | |||||||||||||
| Cost of revenues | $ | $ | $ | $ | ||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total stock-based compensation expense from continuing operations | ||||||||||||||||
| Stock-based compensation from discontinued operations, net of tax | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
As of June 30, 2024, there was a total of $
| (16) | Employee Stock Purchase Plan |
The Company adopted an Employee Stock Purchase Plan (the “ESPP Plan”) in connection with the consummation of the Mergers in July 2023. All qualified employees may voluntarily enroll to purchase shares of the Company’s common stock through payroll deductions at a price equal to
| (17) | Commitments and Contingencies |
Warranty Provision
The Company typically provides a
The Company accrues warranty costs when revenue is recognized for solar energy systems sales and panel sales, based primarily on the volume of new sales that contain warranties, historical experience with and projections of warranty claims, and estimated solar energy system and panel replacement costs. The Company records a provision for estimated warranty expenses in cost of revenues within the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. Warranty costs primarily consist of replacement materials and equipment and labor costs for service personnel.
| Twenty-Six Weeks Ended June 30, 2024 | Year Ended December 31, 2023 | |||||||
| Warranty provision, beginning of period | $ | $ | ||||||
| Accruals for new warranties issued | ||||||||
| Settlements | ( | ) | ( | ) | ||||
| Warranty provision, end of period | $ | $ | ||||||
| Warranty provision, current | $ | $ | ||||||
| Warranty provision, noncurrent | $ | $ | ||||||
31
Indemnification Agreements
From time to time, in its normal course of business, the Company may indemnify other parties, with which it enters into contractual relationships, including customers, lessors, and parties to other transactions with the Company. The Company may agree to hold other parties harmless against specific losses, such as those that could arise from breach of representation, covenant or third-party infringement claims. It may not be possible to determine the maximum potential amount of liability under such indemnification agreements due to the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. Historically, there have been no such indemnification claims. In the opinion of management, any liabilities resulting from these agreements will not have a material adverse effect on the business, financial position, results of operations, or cash flows.
Legal Matters
The Company is a party to various legal proceedings
and claims which arise in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred
and the amount of the loss can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or
range of loss can be reasonably estimated, the Company discloses the reasonably possible loss. The Company adjusts its accruals to reflect
the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular
case. Legal costs are expensed as incurred. Although claims are inherently unpredictable, the Company is not aware of any matters that
may have a material adverse effect on its business, financial position, results of operations, or cash flows. The Company has recorded
$
SolarPark Litigation
In January 2023, SolarPark Korea Co., LTD (“SolarPark”)
demanded approximately $
On March 16, 2023, SolarPark filed a complaint
against Solaria and the Company in the U.S. District Court for the Northern District of California (“the court”). The complaint
alleges a civil conspiracy involving misappropriation of trade secrets, defamation, tortious interference with contractual relations,
inducement to breach of contract, and violation of California’s Unfair Competition Law. The complaint indicates that SolarPark
has suffered in excess of $
On May 11, 2023, SolarPark filed a motion for preliminary injunction to seek an order restraining the Company from using or disclosing SolarPark’s trade secrets, making or selling shingled modules other than those produced by SolarPark, and from soliciting solar module manufacturers to produce shingled modules using Solaria’s shingled patents. On May 18, 2023, the Company responded by filing a motion for partial dismissal and stay. On June 1, 2023, SolarPark filed an opposition to the Company’s motion for dismissal and stay and a reply in support of their motion for preliminary injunction. On June 8, 2023, the Company replied in support of its motion for partial dismissal and stay. On July 11, 2023, the court conducted a hearing to consider SolarPark and the Company’s respective motions. On August 3, 2023, the court issued a ruling, which granted the preliminary injunction motion with respect to any purported misappropriation of SolarPark’s trade secrets. The court’s ruling does not prohibit the Company from producing shingled modules or from utilizing its own patents for the manufacture of shingled modules. The court denied SolarPark’s motion seeking a defamation injunction. The court denied the Company’s motion to dismiss and granted the Company’s motion to stay the entire litigation pending the arbitration in Singapore. On September 1, 2023, the Company filed a Limited Notice of Appeal to appeal the August 2023 order granting SolarPark’s motion for preliminary injunction. On September 26, 2023, the Company filed a Notice of Withdrawal of Appeal and will not appeal the Court’s Preliminary Injunction Order. No liability has been recorded in the Company’s unaudited condensed consolidated financial statements as the likelihood of a loss is not probable at this time.
32
Siemens Litigation
On July 22, 2021, Siemens Government Technologies,
Inc. and Siemens Industry, Inc. (collectively, “Siemens”) filed a lawsuit against Solaria Corporation and SolarCA, LLC, which
are wholly-owned subsidiaries of Complete Solaria, Inc. (collectively, the “Subsidiaries”), in Fairfax Circuit Court (the
“Court”) in Fairfax, Virginia. In the lawsuit, Siemens alleged that the Subsidiaries breached express and implied warranties
under a purchase order that Siemens placed with the Subsidiaries for a solar module system. Siemens claimed damages of approximately
$
On February 22, 2024, the Court issued an order
against the Subsidiaries which awards Siemens approximately $
The Company has recorded $
China Bridge
On August 24, 2023, China Bridge Capital Limited (“China Bridge”) alleged breach of contract and demanded $
Letters of Credit
The Company had $
| (18) | Basic and Diluted Net Loss Per Share |
The Company uses the two-class method to calculate net loss per share. dividends were declared or paid for the thirteen and twenty-six week periods ended June 30, 2024 and July 2, 2023. Undistributed earnings for each period are allocated to participating securities, including the redeemable convertible preferred stock, based on the contractual participation rights of the security to share in the current earnings as if all current period earnings had been distributed. The Company’s basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average shares of common stock outstanding during periods with undistributed losses.
The unaudited basic and diluted shares and net loss per share for the thirteen and twenty-six week periods ended July 2, 2023 have been retroactively restated to give effect to the conversion of shares of legal acquiree’s convertible instruments into shares of legal acquiree common stock as though the conversion had occurred as of the beginning of the period. The retroactive restatement is consistent with the presentation on the accompanying unaudited condensed consolidated statements of stockholders’ deficit.
33
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| June 30, 2024 | July 2, 2023 | June 30, 2024 | July 2, 2023 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Net loss per share: | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The computation of basic and diluted net loss per share attributable to common stockholders is the same for the thirteen and twenty-six week periods ended June 30, 2024 and July 2, 2023 because the inclusion of potential shares of common stock would have been anti-dilutive for the periods presented.
| As of | ||||||||
| June 30, 2024 | July 2, 2023 | |||||||
| Common stock warrants | ||||||||
| Stock options and RSUs issued and outstanding | ||||||||
| Potential common shares excluded from diluted net loss per share | ||||||||
| (19) | Related Party Transactions |
From October 2022 through June 2023, the Company
issued convertible promissory notes (“2022 Convertible Notes”) of approximately $
In June 2023, the Company received $
In July 2023, the Company entered into a series
of FPAs as described in Note 5 – Forward Purchase Agreements. In connection with the FPAs, the Company recognized other expense
of $
34
In September 2023, in connection with the Mergers,
the Company entered into a settlement and release agreement with a related party for the settlement of a working capital loan made to
the Sponsor, prior to the closing of the Mergers. As part of the settlement agreement, the Company agreed to pay the related party $
In October 2023, the Company entered into an
Assignment Agreement whereby Structural Capital Investments III, LP assigned the SCI debt to Kline Hill Partners Fund LP, Kline Hill
Partners IV SPV LLC, Kline Hill Partners Opportunity IV SPV LLC, (collectively “Kline Hill”) and Rodgers Massey Revocable
Living Trust, a related party, for a total purchase price of $
Three SAFEs, as described in Note 14 –SAFE
Agreements, entered into during the twenty-six weeks ended June 30, 2024 were with the Rodgers Massey Freedom and Free Markets Charitable
Trust, a related party. The Company received proceeds from the SAFEs totaling $
In June 2024, Rodgers made a good faith deposit
of $
There were no other material related party transactions during the thirteen and twenty-six week periods ended June 30, 2024 and July 2, 2023.
| (20) | Subsequent Events |
Debt Exchanged for Equity
On July 1, 2024, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Carlyle and Kline Hill providing for:
| (i) | the cancellation of all indebtedness owed to Carlyle by the Company, termination of all debt instruments by and between the Company and Carlyle (through the transfer of Carlyle’s interest in CS Solis, LLC, to the Company), and the satisfaction of all obligations owed to Carlyle by the Company under the terminated debt instruments; |
| (ii) | the issuance of a convertible note in the original principal amount of $ |
| (iii) | the cancellation of all indebtedness owed to Kline Hill by the Company, termination of all debt instruments by and between the Company and Kline Hill, and the satisfaction of all obligations owed to Kline Hill by the Company under the terminated debt instruments; |
| (iv) | the issuance of convertible notes in the aggregate original principal amount of $ |
| (v) | the issuance of |
In addition, in July 2024, the Company entered
into a note purchase agreement and issued a convertible note to an affiliate of Rodgers in the original principal amount of $
The convertible notes bear interest at
35
Acquisition of Select Assets of Core Energy
On July 2, 2024, the Company announced that it had acquired selected assets of Core Energy (“Core Energy”), a Logan Utah solar engineering, procurement and construction firm and its employees.
Investment by StarCharge -
On July 1, 2024, the Company announced that StarCharge
(“StarCharge”), a provider of electric vehicle charging infrastructure and microgrid solutions, completed a $
| ● | Interest rate |
| ● |
| ● | An initial conversion rate of |
| ● | The Company may not redeem the $ |
| ● | The Company has the right to offer up to $ |
Amendments to Forward Purchase Agreements
On July 17, 2024, the Company entered into the
third amendment to the Forward Purchase Agreement with Polar, pursuant to which the Company and Polar agreed that Section 2 (Most Favored
Nation) of the Forward Purchase Agreement is applicable to all
White Lion Stock Purchase Agreement
On July 16, 2024, the Company entered into a common
stock purchase agreement with White Lion Capital, LLC (“White Lion”), as amended on July 24, 2024 (“White Lion SPA”),
and a related registration rights agreement for an equity line financing facility. Pursuant to the White Lion SPA, the Company has the
right, but not the obligation, to require White Lion to purchase, from time to time up to $
Acquisition of Select Assets of SunPower Corporation
On August 5, 2024, the Company entered into a “Stalking Horse”
asset purchase agreement with SunPower Corporation (“SunPower”) and the direct and indirect subsidiaries of SunPower (the
“Debtors”) providing for the sale and purchase of certain assets related to the Debtors’ Blue Raven Solar business,
New Homes business, and non-installing Dealer network (the “Stalking Horse APA”). Under the Stalking Horse APA, the Company
agreed, subject to the terms and conditions of the Stalking Horse APA, to acquire certain assets and assume certain liabilities from the
Debtors for $
The Stalking Horse APA is subject to higher and better offers during the Debtors’ voluntary cases under Chapter 11 of Title 11 of the United States Bankruptcy Code and is subject to approval of the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Stalking Horse APA acts as a baseline for competitive bids for the acquisition of the related acquired assets. If one or more qualified bids (other than the transaction contemplated by the Stalking Horse APA) were to be received by the qualified bid deadline as provided for in bidding procedures approved by the bankruptcy court, then the Debtors will proceed with an auction to determine the successful bid, subject to the terms of the bidding procedures.
36
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2024, and related management’s discussion and analysis in Item 7 of the Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q. Please also see the section titled “Special Note Regarding Forward-Looking Statements.”
Overview
Complete Solaria was formed in November 2022 through the merger of Complete Solar Holding Corporation, a Delaware corporation (“Complete Solar”), and The Solaria Corporation, a Delaware corporation (such entity, “Solaria,” and such transaction, the “Business Combination”). Founded in 2010, Complete Solar created a technology platform to offer clean energy products to homeowners by enabling a national network of sales partners and build partners. Our sales partners generate solar installation contracts with homeowners on our behalf. To facilitate this process, we provide the software tools, sales support and brand identity to its sales partners, making them competitive with national providers. This turnkey solution makes it easy for anyone to sell solar.
We fulfill our customer contracts by engaging with local construction specialists. We manage the customer experience and complete all pre-construction activities prior to delivering build-ready projects including hardware, engineering plans, and building permits to its builder partners. We manage and coordinate this process through our proprietary HelioTrackTM software system.
Our fiscal quarters are thirteen-week periods within a standard calendar year. Each annual reporting period begins on January 1 and ends on December 31.
There is substantial doubt about our ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are issued. The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. They do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern.
Growth Strategy and Outlook
Complete Solaria’s growth strategy contains the following elements:
| ● | Increase revenue by expanding installation capacity and developing new geographic markets - We continue to expand our network of partners who will install systems resulting from sales generated by our sales partners. By leveraging this network of skilled builders, we aim to increase our installation capacity in our traditional markets and expand our offering into new geographies throughout the United States. This will enable greater sales growth in existing markets and create new revenue in expansion markets. |
37
| ● | Increase revenue and margin by engaging national-scale sales partners - We aim to offer a turnkey solar solution to prospective sales partners with a national footprint. These sales partners include electric vehicle manufacturers, national home security providers, and real estate brokerages. We expect to create a consistent offering with a single execution process for such sales partners throughout their geographic territories. These national accounts have unique customer relationships that we believe will facilitate meaningful sales opportunities and low cost of acquisition to both increase revenue and improve margin. |
The Mergers
We entered into an Amended and Restated Business Combination Agreement with Jupiter Merger Sub I Corp., a Delaware corporation and a wholly owned subsidiary of Freedom Acquisition I Corp. (“FACT”) (“First Merger Sub”), Jupiter Merger Sub II LLC, a Delaware limited liability company and a wholly owned subsidiary of FACT (“Second Merger Sub”), and Solaria on October 3, 2022 (“Merger”). The Merger was consummated on July 18, 2023. Upon the terms and subject to the conditions of the Merger, (i) First Merger Sub merged with and into Complete Solaria with Complete Solaria surviving as a wholly-owned subsidiary of FACT (the “First Merger”), (ii) immediately thereafter and as part of the same overall transaction, Complete Solaria merged with and into Second Merger Sub, with Second Merger Sub surviving as a wholly-owned subsidiary of FACT (the “Second Merger”), and FACT changed its name to “Complete Solaria, Inc.” and Second Merger Sub changed its name to “CS, LLC” and (iii) immediately after the consummation of the Second Merger and as part of the same overall transaction, Solaria merged with and into a newly formed Delaware limited liability company and wholly-owned subsidiary of FACT and changed its name to “The SolarCA LLC” (“Third Merger Sub”), with Third Merger Sub surviving as a wholly-owned subsidiary of FACT (the “Additional Merger”, and together with the First Merger and the Second Merger, the “Mergers”).
The Mergers between Complete Solaria and FACT has been accounted for as a reverse recapitalization. Under this method of accounting, FACT is treated as the acquired company for financial statement reporting purposes. This determination was primarily based on us having a majority of the voting power of the post-combination company, our senior management comprising substantially all of the senior management of the post-combination company, and our operations comprising the ongoing operations of the post-combination company. Accordingly, for accounting purposes, the Mergers have been treated as the equivalent of a capital transaction in which Complete Solaria is issuing stock for the net assets of FACT. The net assets of FACT have been stated at historical cost, with no goodwill or other intangible assets recorded.
Disposal Transaction
In October 2023, we completed the sale of our solar panel business (“Disposal Transaction”) to Maxeon, Inc. (“Maxeon”), pursuant to the terms of an asset purchase agreement (“Disposal Agreement”). Under the terms of the Disposal Agreement, Maxeon agreed to acquire certain assets and employees of Complete Solaria, for an aggregate purchase price of approximately $11.0 million consisting of 1,100,000 shares of Maxeon ordinary shares. As of December 31, 2023, we had sold all the shares of Maxeon and recorded a loss of $4.2 million.
As part of the Disposal Transaction, we determined that the criteria were met for the “held for sale” and discontinued operations classifications as of the end of our third fiscal quarter in 2023 as the divestiture represented a strategic shift in our business. We recorded an impairment charge of $147.5 million associated with the recording of the assets as held for sale during the year ended December 31, 2023.
Below we have discussed our historical results of continuing operations which excludes product revenues and related metrics of our solar panel business, as all results of operations associated with the solar panel business have been presented as discontinued operations, unless otherwise noted.
38
Key Financial Definitions/Components of Results of Operations
Revenues
We generate revenue by providing customer solar solutions through a standardized platform to our residential solar providers and companies to facilitate the sale and installation of solar energy systems. Our contracts consist of two performance obligations: solar installation services and post-installation services that are performed prior to inspection by the authority having jurisdiction. The majority of our service revenue is recognized at a point in time upon the completion of the installation and the remainder is recognized upon inspection. Service revenue is recognized net of a reserve for the performance guarantee of solar output.
We enter into three types of customer contracts for solar energy installations. The majority of our service revenue is recognized through contracts where the homeowner enters into a power purchase agreement with our distribution partner. We perform the solar energy installation services on behalf of our distribution partner, who owns the solar energy system upon installation. Additionally, we enter into a Solar Purchase and Installation Agreement directly with homeowners, whereby the homeowner either pays cash or obtains financing through a third-party loan partner. In cash contracts with homeowners, we recognize service revenue based on the price we charge to the homeowner. We record service revenue in the amount received from the financing partner, net of any financing fees charged to the homeowner, which we consider to be a customer incentive.
As part of our service revenue, we also enter into contracts to provide our software enhanced service offerings, including design and proposal services, to customers that include solar installers and solar sales organizations. We perform these leveraging our HelioQuoteTM platform and other software tools to create computer aided drawings, structural letters, and electrical reviews for installers and proposals for installers. We charge a fixed fee per service offering, which we recognize in the period the service is performed.
Operating Expenses
Cost of Revenues
Cost of revenues consists primarily of the cost of solar energy systems, installation and other subcontracting costs. Cost of revenues also includes associated warranty costs, shipping and handling and allocated overhead costs.
Sales Commissions
Sales commissions are direct and incremental costs of obtaining customer contracts. These costs are paid to third-party vendors who source residential customer contracts for the sale of solar energy systems.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel related costs, including salaries and employee benefits, stock-based compensation, and other promotional and advertising expenses. We expense certain sales and marketing, including promotional expenses, as incurred.
General and Administrative
General and administrative expenses consist primarily of personnel and related expenses for our employees, in our finance, research, engineering, and administrative teams including salaries, bonuses, payroll taxes, and stock-based compensation. It also consists of legal, consulting, and professional fees, rent expenses pertaining to our offices, business insurance costs, depreciation and amortization of internally developed software, investor relations and other costs. We expect an increase in audit, tax, accounting, legal and other costs related to compliance with applicable securities and other regulations, as well as additional insurance, investor relations, and other costs associated with being a public company.
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Interest Expense
Interest expense primarily relates to interest expense on the issuance of debt and convertible notes and the amortization of debt issuance costs.
Other (expense) income, Net
Other (expense) income, net consists of changes in the fair value of our convertible notes, the impact of debt extinguishment, changes in the fair value of stock warrant liabilities and forward purchase agreements and other costs.
Income Tax Expense
Income tax expense primarily consists of income taxes in certain foreign and state jurisdictions in which we conduct business.
Supply Chain Constraints and Risk
We rely on a small number of suppliers of solar energy systems and other equipment. If any of our suppliers was unable or unwilling to provide us with contracted quantities in a timely manner at prices, quality levels and volumes acceptable to us, we would have very limited alternatives for supply, and we may not be able find suitable replacements for our customers, or at all. Such an event could materially adversely affect our business, prospects, financial condition and results of operations.
In addition, the global supply chain and our industry have experienced significant disruptions in recent periods. We have seen supply chain challenges and logistics constraints increase, including shortages of panels, inverters, batteries and associated component parts for inverters and solar energy systems available for purchase, which materially impacted our results of operations. In an effort to mitigate unpredictable lead times, we experienced a substantial build up in inventory on hand commencing in early 2022 in response to global supply chain constraints. In certain cases, the global supply chain constraints have caused delays in critical equipment and inventory, longer lead times, and has resulted in cost volatility. These shortages and delays can be attributed in part to the residual effects of the COVID-19 pandemic and resulting government action, as well as broader macroeconomic conditions, and have been exacerbated by the conflicts in Ukraine and Israel. While we believe that a majority our suppliers have secured sufficient supply to permit them to continue delivery and installations through the end of March 2025, if these shortages and delays persist, they could adversely affect the timing of when battery energy storage systems can be delivered and installed, and when (or if) we can begin to generate revenue from those systems. If any of our suppliers of solar modules experienced disruptions in the supply of the modules’ component parts, for example semiconductor solar wafers or inverters, this may decrease production capabilities and restrict our inventory and sales. In addition, we have experienced and are experiencing varying levels of volatility in costs of equipment and labor resulting in part from disruptions caused by general global economic conditions. While inflationary pressures have resulted in higher costs of products, in part due to an increase in the cost of the materials and wage rates, these additional costs have been offset by the related rise in electricity rates.
We cannot predict the full effects the supply chain constraints will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. Given the dynamic nature of these circumstances on our ongoing business, results of operations and overall financial performance, the full impact of macroeconomic factors, including the conflicts in Ukraine and Israel, cannot be reasonably estimated at this time. In the event we are unable to mitigate the impact of delays or price volatility in solar energy systems, raw materials, and freight, it could materially adversely affect our business, prospects, financial condition and results of operations. For additional information on risk factors that could impact our results, please refer to “Risk Factors” located elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances, changes in the accounting estimates are reasonably likely to occur from period-to-period. Actual results could differ significantly from our estimates. Our future financial statements will be affected to the extent that our actual results materially differ from these estimates. For further information on all of our significant accounting policies, see Note 2 - Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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We believe that policies associated with our revenue recognition, product warranties, inventory excess and obsolescence and stock-based compensation have the greatest impact on our unaudited condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Revenue Recognition
We recognize revenue when control of goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
Revenue - Solar Energy System Installations
The majority of our revenue is generated from the installation of solar energy systems. We identify two performance obligations, which include installation services and post-installation services, and we recognize revenue when control transfers to the customer, upon the completion of the installation and upon the solar energy system passing inspection by the authority having jurisdiction, respectively. We apply judgment in allocating the transaction price between the installation and post-installation performance obligations, based on the estimated costs to perform our services. Changes in such estimates could have a material impact on the timing of our revenue recognition.
Our contracts with customers generally contain a performance guarantee of system output, and we will issue payments to customers if output falls below contractually stated thresholds over the performance guarantee period, which is typically 10 years. We apply judgment in estimating the reduction in revenue associated with the performance guarantee, which historically has not been material. However, due to the long-term nature of the guarantee, changes in future estimates could have a material impact on the estimate of our revenue reserve.
Revenue - Software Enhanced Services
We recognize revenue from software enhanced services, which include proposals generated from our HelioQuoteTM platform and design services performed using internally developed and external software applications. We contract with solar installers to generate proposals and we contract with solar sales entities to perform design services for their potential customers. Under each type of customer contract, we generate a fixed number of proposals or designs for the customer in the month the services are contracted. Contracts with customers are enforceable on a month-to-month basis and we recognize revenue each month based on the volume of services performed.
Product Warranties
We typically provide a 10-year warranty on our solar energy system installations, which provides assurance over the workmanship in performing the installation, including roof leaks caused by our performance. For solar panel sales recognized prior to the Disposal Transaction, we provide a 30-year warranty that the products will be free from defects in material and workmanship. We record a liability for estimated future warranty claims based on historical trends and new installations. To the extent that warranty claim behavior differs from historical trends, we may experience a material change in our warranty liability.
Inventory Excess and Obsolescence
Our inventory consists of completed solar energy systems and related components, which we classify as finished costs. We record a reserve for inventory which is considered obsolete or in excess of anticipated demand based on a consideration of marketability and product life cycle stage, component cost trends, demand forecasts, historical revenues, and assumptions about future demand and market conditions. We apply judgment in estimating the excess and obsolete inventory, and changes in demand for our inventory components could have a material impact on our inventory reserve balance.
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Stock-Based Compensation
We recognize stock-based compensation expense over the requisite service period on a straight-line basis for all stock-based payments that are expected to vest to employees, non-employees and directors, including grants of employee stock options and other stock-based awards. Equity-classified awards issued to employees and non-employees, such as consultants and non-employee directors, are measured at the grant-date fair value of the award. Forfeitures are recognized as they occur.
For accounting purposes, prior to the Business Combination, the fair value of the shares of common stock underlying stock options had historically been determined by our board of directors. Because there had been no public market for our common stock, the board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including important developments in our operations, sales of redeemable convertible preferred stock, actual operating results and financial performance, the conditions in the renewable solar energy industry and the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of our common stock, among other factors. Following the Business Combination, the fair value of common stock is based on the closing stock price on the date of grant as reported on the Nasdaq Global Select Market.
We estimate the grant-date fair value of stock options using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock prior to the Mergers, the expected term of the option, the expected volatility of the price of our common stock and expected dividend yield. We determine these inputs as follows:
| ● | Expected Term-Expected term represents the period that our stock-based awards are expected to be outstanding and is determined using the simplified method. |
| ● | Expected Volatility-Expected volatility is estimated by studying the volatility of comparable public companies for similar terms. |
| ● | Expected Dividend-The Black-Scholes valuation model calls for a single expected dividend yield as an input. We have never paid dividends and have no plans to pay dividends. |
| ● | Risk-Free Interest Rate - We derive the risk-free interest rate assumption from the U.S. Treasury’s rates for the U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the awards being valued. |
If any assumptions used in the Black-Scholes option pricing model change significantly, stock-based compensation for future awards may differ materially compared to the awards granted previously. For the thirteen-week periods ended June 30, 2024 and July 2, 2023, stock-based compensation expense was $1.2 million and $1.0 million, respectively, of which zero and $0.5 million, respectively, related to discontinued operations. For the twenty-six-week periods ended June 30, 2024 and July 2, 2023, stock-based compensation expense was $2.6 million and $2.0 million, respectively, of which zero and $1.3 million, respectively, related to discontinued operations. As of June 30, 2024, we had approximately $13.8 million of total unrecognized stock-based compensation expense related to stock options.
Recent Accounting Pronouncements
A discussion of recently issued accounting standards applicable to Complete Solaria is described in Note 2 - Summary of Significant Accounting Policies, in the accompanying notes to the unaudited condensed consolidated financial statements.
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Results of Operations
Thirteen weeks ended June 30, 2024 compared to the thirteen weeks ended July 2, 2023
The following table sets forth our unaudited statements of operations data for the thirteen weeks ended June 30, 2024 and the thirteen weeks ended July 2, 2023. We have derived this data from our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The results of historical periods are not necessarily indicative of the results of operations for any future period.
| (in thousands) | Thirteen Weeks June 30, | Thirteen Weeks July 2, | $ Change | % Change | ||||||||||||
| Revenues | $ | 4,492 | $ | 25,620 | $ | (21,128 | ) | (82 | )% | |||||||
| Cost of revenues(1) | 5,384 | 19,607 | (14,223 | ) | (73 | )% | ||||||||||
| Gross (loss) profit | (892 | ) | 6,013 | (6,905 | ) | (115 | )% | |||||||||
| Gross margin % | (20 | )% | 23 | % | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales commissions | 1,305 | 8,789 | (7,484 | ) | (85 | )% | ||||||||||
| Sales and marketing(1) | 1,051 | 2,319 | (1,268 | ) | (55 | )% | ||||||||||
| General and administrative(1) | 6,246 | 7,707 | (1,461 | ) | (19 | )% | ||||||||||
| Total operating expenses | 8,602 | 18,815 | (10,213 | ) | (54 | )% | ||||||||||
| Loss from continuing operations | (9,494 | ) | (12,802 | ) | 3,308 | (26 | )% | |||||||||
| Interest expense(2) | (2,324 | ) | (3,357 | ) | 1,033 | (31 | )% | |||||||||
| Interest income | 10 | 9 | 1 | 11 | % | |||||||||||
| Other (expense) income, net(3) | (2,069 | ) | 9,384 | (11,453 | ) | (122 | )% | |||||||||
| Loss from continuing operations before taxes | (13,877 | ) | (6,766 | ) | (7,111 | ) | 105 | % | ||||||||
| Income tax benefit (provision) | (10 | ) | ⸺ | (10 | ) | ⸺ | ||||||||||
| Net loss from continuing operations | $ | (13,887 | ) | $ | (6,766 | ) | $ | (7,121 | ) | 105 | % | |||||
| (1) | Includes stock-based compensation expense as follows (in thousands): |
| Thirteen Weeks Ended June 30, 2024 | Thirteen Weeks Ended July 2, 2023 | |||||||
| Cost of revenues | $ | 29 | $ | 20 | ||||
| Sales and marketing | 214 | 100 | ||||||
| General and administrative | 986 | 352 | ||||||
| Stock-based compensation from continuing operations | 1,229 | 472 | ||||||
| Stock-based compensation expense included in discontinued operations | ⸺ | 548 | ||||||
| Total stock-based compensation expense | $ | 1,229 | $ | 1,020 | ||||
| (2) | Includes interest expense to related party of $0.2 million and $0.2 million during the thirteen weeks ended June 30, 2024 and July 2, 2023, respectively. |
| (3) | Includes income from related parties of $2.3 million and zero for the thirteen weeks ended June 30, 2024 and July 2, 2023, respectively. |
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Revenues
We disaggregate our revenues based on the following types of services (in thousands):
| Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
| June 30, 2024 | July 2, 2023 | $ Change | % Change | |||||||||||||
| Solar energy system installations | $ | 4,474 | $ | 24,753 | $ | (20,279 | ) | (82 | )% | |||||||
| Software enhanced services | 18 | 867 | (849 | ) | (98 | )% | ||||||||||
| Total revenue | $ | 4,492 | $ | 25,620 | $ | (21,128 | ) | (82 | )% | |||||||
Revenues from solar energy system installations for the thirteen weeks ended June 30, 2024 was $4.5 million compared to $24.8 million for the thirteen weeks ended July 2, 2023. The decrease in solar energy system installation revenues of $20.3 million was primarily due to a decrease in the volume of solar energy system installations.
Revenues from software enhanced services for the thirteen weeks ended June 30, 2024 was $0.02 million compared to $0.9 million for the thirteen weeks ended July 2, 2023. The decrease was the result of a shift in focus towards solar energy installations.
Cost of Revenues
Cost of revenues for the thirteen weeks ended June 30, 2024 was $5.4 million compared to $19.6 million for the thirteen weeks ended July 2, 2023. The decrease in cost of revenues of $14.2 million, or 73%, was primarily due to the decrease in revenue of 82% and emphasis on managing costs.
Gross Margin
Gross margin for the thirteen weeks ended June 30, 2024 was negative 20% compared to 23% for the thirteen weeks ended July 2, 2023. The decline in the gross margin was principally attributable to the decrease in revenues, certain fixed costs included within cost of revenues, and write-offs of inventory.
Sales Commissions
Sales commissions for the thirteen weeks ended June 30, 2024 was $1.3 million compared to $8.8 million for the thirteen weeks ended July 2, 2023. The decrease of $7.5 million, or 85%, was primarily due to the decrease in revenues.
Sales and Marketing
Sales and marketing expense for the thirteen weeks ended June 30, 2024 was $1.1 million compared to $2.3 million for the thirteen weeks ended July 2, 2023. The decrease is attributable to a reduction in workforce.
General and Administrative
General and administrative costs for the thirteen weeks ended June 30, 2024 was $6.2 million compared to $7.7 million for the thirteen weeks ended July 2, 2023. The decrease was primarily attributed to a decrease in workforce and reductions in legal expenses previously incurred through negotiations of final payments with various law firms.
Interest Expense
Interest expense was $2.3 million for the thirteen weeks ended June 30, 2024 compared to $3.4 million for the thirteen weeks ended July 2, 2023. The decrease is principally due to a decrease in interest expense arising from our Secured Credit Facility.
Other Income, Net
Other income, net for the thirteen weeks ended June 30, 2024, decreased by $11.5 million compared to the thirteen weeks ended July 2, 2023. Other income, net in the thirteen weeks ended June 30, 2024 was expense of $2.1 million and was comprised of $3.3 million of expense arising from changes in the fair value of warrants issued for our common stock, $1.3 million loss incurred on the conversion of two SAFE Agreements to shares of our common stock and $0.3 million of other costs, partially offset by $2.8 million of expense relating to changes in the fair value of our forward purchase agreements.
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Other income, net for the thirteen weeks ended July 2, 2023 was income of $9.4 million and was principally comprised of $9.2 million change in the fair value of liability-classified warrants and $0.2 million of net other income.
Net Loss from Continuing Operations
As a result of the factors discussed above, our net loss from continuing operations for the thirteen-weeks ended June 30, 2024 was $13.9 million, an increase in loss by $7.1 million, as compared to a net loss from continuing operations of $6.8 million for the thirteen-weeks ended July 2, 2023.
Loss from discontinued operations
We recognized a loss of $2.0 million and $4.7 million in the thirteen weeks ended June 30, 2024 and July 2, 2023, respectively, relating to the divestiture of our solar panel business.
Twenty-six weeks ended June 30, 2024 compared to the twenty-six weeks ended July 2, 2023
The following table sets forth our unaudited statements of operations data for the twenty-six weeks ended June 30, 2024 and the twenty-six weeks ended July 2, 2023. We have derived this data from our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The results of historical periods are not necessarily indicative of the results of operations for any future period.
| (in thousands) | Twenty-Six Weeks Ended June 30, 2024 | Twenty-Six Weeks Ended July 2, 2023 | $ Change | % Change | ||||||||||||
| Revenues | $ | 14,532 | $ | 42,297 | $ | (27,765 | ) | (66 | )% | |||||||
| Cost of revenues(1) | 13,141 | 33,434 | (20,293 | ) | (61 | )% | ||||||||||
| Gross profit | 1,391 | 8,863 | (7,472 | ) | (84 | )% | ||||||||||
| Gross margin % | 10 | % | 21 | % | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales commissions | 4,421 | 14,466 | (10,045 | ) | (69 | )% | ||||||||||
| Sales and marketing(1) | 2,669 | 3,002 | (333 | ) | (11 | )% | ||||||||||
| General and administrative(1) | 11,339 | 16,620 | (5,281 | ) | (32 | )% | ||||||||||
| Total operating expenses | 18,429 | 34,088 | (15,659 | ) | (46 | )% | ||||||||||
| Loss from continuing operations | (17,038 | ) | (25,225 | ) | 8,187 | (32 | )% | |||||||||
| Interest expense(2) | (5,892 | ) | (6,968 | ) | 1,076 | (15 | )% | |||||||||
| Interest income | 16 | 17 | (1 | ) | (6 | )% | ||||||||||
| Other (expense) income, net(3) | (550 | ) | 9,701 | (10,251 | ) | (106 | )% | |||||||||
| Loss from continuing operations before taxes | (23,464 | ) | (22,475 | ) | (989 | ) | 4 | % | ||||||||
| Income tax benefit (provision) | (11 | ) | — | (11 | ) | * | ||||||||||
| Net loss from continuing operations | $ | (23,475 | ) | $ | (22,475 | ) | $ | (1,000 | ) | 4 | % | |||||
| * | Percentage not meaningful. |
| (1) | Includes stock-based compensation expense as follows (in thousands): |
| Twenty-six Weeks Ended June 30, 2024 | Twenty-six Weeks Ended July 2, 2023 | |||||||
| Cost of revenues | $ | 56 | $ | 31 | ||||
| Sales and marketing | 430 | 194 | ||||||
| General and administrative | 2,084 | 517 | ||||||
| Stock-based compensation from continuing operations | 2,570 | 742 | ||||||
| Stock-based compensation expense included in discontinued operations | ⸺ | 1,300 | ||||||
| Total stock-based compensation expense | $ | 2,570 | $ | 2,042 | ||||
| (2) | Includes interest expense to related party of $0.4 million and $0.4 million during the twenty-six weeks ended June 30, 2024 and July 2, 2023, respectively. |
| (3) | Includes expense from related parties of $2.4 million and zero for the twenty-six weeks ended June 30, 2024 and July 2, 2023, respectively. |
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Revenues
We disaggregate our revenues based on the following types of services (in thousands):
| Twenty-Six Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| June 30, 2024 | July 2, 2023 | $ Change | % Change | |||||||||||||
| Solar energy system installations | $ | 14,396 | $ | 40,596 | $ | (26,200 | ) | (65 | )% | |||||||
| Software enhanced services | 136 | 1,701 | (1,565 | ) | (92 | )% | ||||||||||
| Total revenue | $ | 14,532 | $ | 42,297 | $ | (27,765 | ) | (66 | )% | |||||||
Revenues from solar energy system installations for the twenty-six weeks ended June 30, 2024 was $14.4 million compared to $40.6 million for the twenty-six weeks ended July 2, 2023. The decrease in solar energy system installation revenues of $26.2 million was primarily due to a decrease in the volume of solar energy system installations.
Revenues from software enhanced services for the twenty-six weeks ended June 30, 2024 was $0.1 million compared to $1.7 million for the twenty-six weeks ended July 2, 2023. The decrease was the result of a shift in focus towards solar energy installations.
Cost of Revenues
Cost of revenues for the twenty-six weeks ended June 30, 2024 was $13.1 million compared to $33.4 million for the twenty-six weeks ended July 2, 2023. The decrease in cost of revenues of $20.3 million, or 61%, was primarily due to the decrease in revenue of 66% and emphasis on managing costs.
Gross Margin
Gross margin for the twenty-six weeks ended June 30, 2024 was 10% compared to 21% for the twenty-six weeks ended July 2, 2023. The decrease in gross margin was principally attributable to a decrease in revenues.
Sales Commissions
Sales commissions for the twenty-six weeks ended June 30, 2024 was $4.4 million compared to $14.5 million for the twenty-six weeks ended July 2, 2023. The decrease of $10.0 million, or 69%, was primarily due to the decrease in revenues.
Sales and Marketing
Sales and marketing expense for the twenty-six weeks ended June 30, 2024 was $2.7 million compared to $3.0 million for the twenty-six weeks ended July 2, 2023. The decrease is attributable to a decrease in the workforce.
General and Administrative
General and administrative costs for the twenty-six weeks ended June 30, 2024 was $11.3 million compared to $16.6 million for the twenty-six weeks ended July 2, 2023. The decrease was primarily attributed to a decrease in workforce and reductions in legal expenses incurred through negotiations of final payments with law firms.
Interest Expense
Interest expense was $5.9 million for the twenty-six weeks ended June 30, 2024 compared to $7.0 million for the twenty-six weeks ended July 2, 2023. Interest expense attributable to our Secured Credit Facility decreased $2.1 million and interest on convertible notes decreased $0.7 million. These decreases were partially offset by a $1.7 increase in interest expense attributable to the debt in CS Solis.
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Other Income, Net
Other income, net for the twenty-six weeks ended June 30, 2024 decreased by 10.3 million compared to the twenty-six weeks ended July 2, 2023. Other income, net in the twenty-six weeks ended June 30, 2024 was expense of $0.6 million. We incurred expenses of $2.8 million relating to changes in the fair value of our forward purchase agreement and $1.3 million loss incurred on the conversion of two SAFE Agreements to shares of our common stock and $0.4 million of other expenses. These expenses were partially offset by $3.9 million of income arising from changes in the fair value of warrants issued for our common stock.
Other income, net for the twenty-six weeks ended July 2, 2023 was income of $9.7 million and was comprised of a $9.4 million change in the fair value of liability-classified warrants and $0.3 million of net other income.
Net Loss from Continuing Operations
As a result of the factors discussed above, our net loss from continuing operations for the twenty-six-weeks ended June 30, 2024 was $23.5 million, an increase of $1.0 million, as compared to a net loss from continuing operations of $22.5 million for the twenty-six-weeks ended July 2, 2023.
Loss from Discontinued Operations
We recognized a loss of $2.0 million and $12.5 million in the twenty-six weeks ended June 30, 2024 and July 2, 2023, respectively, relating to the divestiture of our solar panel business.
Liquidity and Capital Resources
Since our inception, we have incurred losses and negative cash flows from operations. We incurred a net loss from continuing operations of $13.9 million and $23.5 million during the thirteen and twenty-six weeks ended June 30, 2024, respectively, and had an accumulated deficit of $380.4 million and current debt of $67.5 million as of June 30, 2024. We had cash and cash equivalents of $1.8 million as of June 30, 2024, which were held for working capital expenditures. We believe our operating losses and negative operating cash flows will continue into the foreseeable future. We have financed our operations primarily through sales of equity securities, issuances of convertible notes and other convertible securities and cash generated from operations. Our cash equivalents are on deposit with major financial institutions. Our cash position raises substantial doubt regarding our ability to continue as a going concern for 12 months following the issuance of these unaudited condensed consolidated financial statements.
We will receive the proceeds from any cash exercise of warrants for shares of our common stock. The aggregate amount of proceeds could be up to $252.2 million if all the warrants are exercised for cash. However, to the extent the warrants are exercised on a “cashless basis,” the amount of cash we would receive from the exercise of those warrants will decrease. The Private Warrants and Working Capital Warrants, as so identified in our unaudited condensed consolidated financial statements, may be exercised for cash or on a “cashless basis.” The Public Warrants and the Mergers Warrants may only be exercised for cash provided there is then an effective registration statement registering the shares of common stock issuable upon the exercise of such warrants. If there is not a then-effective registration statement, then such warrants may be exercised on a “cashless basis,” pursuant to an available exemption from registration under the Securities Act. We expect to use any such proceeds for general corporate and working capital purposes, which would increase our liquidity. As of August 13, 2024, the price of our common stock was $1.60 per share. The weighted average exercise price of the warrants was $7.80 as of June 30, 2024. We believe the likelihood that warrant holders will exercise their warrants, and therefore the amount of cash proceeds that we would receive, is dependent upon the market price of our common stock. If the market price for our common stock remains less than the exercise price, we believe warrant holders will be unlikely to exercise.
Debt Financings
2018 Bridge Notes
In December 2018, The Solaria Corporation issued senior subordinated convertible secured notes (“2018 Notes”) totaling approximately $3.4 million in exchange for cash. The 2018 Notes bear interest at the rate of 8% per annum and the investors are entitled to receive twice the face value of the 2018 Notes at maturity. In 2021, the 2018 Notes were amended extending the maturity date to December 13, 2022. In connection with the 2021 amendment, Solaria issued warrants to purchase shares of Series E-1 redeemable convertible preferred stock of Solaria. The warrants were exercisable immediately in whole or in part at and expire on December 13, 2031. As part of the Business Combination with Complete Solar, all the outstanding warrants issued to the lenders were assumed by the parent company, Complete Solaria. The 2018 Notes are secured by substantially all of the assets of Complete Solaria.
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In December 2022, we entered into an amendment to the 2018 Notes extending the maturity date from December 13, 2022 to December 13, 2023, and the 2018 Notes remain outstanding as of June 30, 2024. In connection with the amendment, the 2018 Notes will continue to bear interest at 8% per annum and are entitled to an increased repayment premium from 110% to 120% of the principal and accrued interest at the time of repayment.
We concluded that the amendment represented was a troubled debt restructuring as we were experiencing financial difficulty, and the amended terms resulted in a concession to us. As the future undiscounted cash payments under the modified terms exceeded the carrying amount of the 2018 Notes on the date of modification, the modification was accounted for prospectively. The incremental repayment premium is being amortized to interest expense using the effective interest rate method. As of June 30, 2024 and December 31, 2023, the carrying value of the 2018 Notes was $11.7 million and $11.0 million, respectively. Interest expense recognized for the thirteen and twenty-six weeks ended June 30, 2024 was $0.4 million and $0.7 million, respectively. The terms of the 2018 Notes are currently being renegotiated.
Revolver Loan
In October 2020, Solaria entered into a loan agreement (“Loan Agreement”) with Structural Capital Investments III, LP (“SCI”). The Loan Agreement with SCI is comprised of two facilities, a term loan (the “Term Loan”) and a revolving loan (the “Revolving Loan”) for $5.0 million each with a maturity date of October 31, 2023. Both the Term Loan and the Revolving Loan were fully drawn upon closing. The Term Loan was repaid prior to the acquisition of Solaria by Complete Solar and was not included in the business combination.
The Revolving Loan has a term of thirty-six months, with the principal due at the end of the term and an annual interest rate of 7.75% or Prime rate plus 4.5%, whichever is higher. Interest expense recognized for the thirteen and twenty-six weeks ended June 30, 2024 was $0.2 million and $0.4 million, respectively. In October 2023, the Company entered into an Assignment and Acceptance Agreement whereby Structural Capital Investments III, LP assigned the SCI debt to Kline Hill Partners Fund LP, Kline Hill Partners IV SPV LLC, Kline Hill Partners Opportunity IV SPV LLC, and Rodgers Massey Revocable Living Trust for a total purchase price of $5.0 million. The SCI Revolving Loan was outstanding as of June 30, 2024 and was subsequently exchanged for equity securities and other consideration on July 1, 2024 as described in Note 20 – Subsequent Events of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Secured Credit Facility
In December 2022, we entered into a secured credit facility agreement with Kline Hill Partners IV SPV LLC and Kline Hill Partners Opportunity IV SPV LLC (“Secured Credit Facility”). The Secured Credit Facility agreement allows us to borrow up to 70% of the net amount of our eligible vendor purchase orders with a maximum amount of $10.0 million at any point in time. The purchase orders are backed by relevant customer sales orders which serve as collateral. The amounts drawn under the Secured Credit Facility may be reborrowed provided that the aggregate borrowing does not exceed $20.0 million. The repayment under the Secured Credit Facility is the borrowed amount multiplied by 1.15x if repaid within 75 days and borrowed amount multiplied by 1.175x if repaid after 75 days. We may prepay any borrowed amount without premium or penalty. Under the original terms, the Secured Credit Facility agreement was due to mature in April 2023. We are in the process of amending the secured credit facility agreement to extend its maturity date.
As of June 30, 2024, the outstanding net debt amounted to $13.1 million, including accrued financing cost of $5.5 million, and as of December 31, 2023, the balance outstanding was $12.2 million, including accrued financing cost of $4.5 million. We recognized interest expense of $0.4 million and $1.0 million related to the Secured Credit Facility during the thirteen weeks and twenty-six weeks ended June 30, 2024, respectively.
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Revolver Loan and Secured Credit Facility Cancellation Agreement
On May 1, 2024, we entered into a common stock purchase agreement (the “Common Stock Purchase Agreement”) with Kline Hill providing for (a) the cancellation of all indebtedness owed to Kline Hill by us, termination of all debt instruments by and between us and Kline Hill, and the satisfaction of all obligations owed to Kline Hill by us under the terminated debt instruments, (b) the issuance of 9,800,000 shares of our common stock to Kline Hill, (c) the issuance of warrants (the “Kline Hill Warrants” and the shares issuable therefrom, the “Warrant Shares”) to Kline Hill to purchase up to 3,700,000 shares of the our common stock, with an exercise price per share of $0.62 (the closing price per share of the our common stock as reported on the Nasdaq Capital Market of the date of the Agreement), and (d) a one-time $3,750,000 cash payment to Kline Hill upon the earlier of (i) us achieving $100,000,000 of trailing twelve month revenue, or (ii) us achieving $10,000,000 of trailing twelve month EBITDA. The Kline Hill Warrants will be sold to Kline Hill at a price of $0.125 per Warrant Share. The closing of the foregoing transactions will occur when the following conditions are met: Carlyle executes an agreement to cancel all debt owed to Carlyle by us, and all debt owed to Carlyle and its affiliates by the Company is no longer outstanding. As of June 30, 2024, the Carlyle debt remained outstanding.
CS Solis Debt
In February 2022, we received cash and recorded a liability for an investment by Carlyle into the Company. The investment was made pursuant to a subscription agreement, under which Carlyle contributed $25.6 million in exchange for 100 Class B Membership Units of CS Solis. The Class B Membership Units are mandatorily redeemable by us on the three-year anniversary of the effective date of the CS Solis amended and restated LLC agreement. The Class B Membership Units accrue interest that is payable upon redemption at a rate of 10.5% which is accrued as an unpaid dividend, compounded annually, and subject to increases in the event we declare any dividends. In July 2023, we amended the debt of with Carlyle as part of the closing of the Mergers. The modification did not change the interest rate. The modification accelerated the redemption date of the investment from February 15, 2025 to March 31, 2024.
As of June 30, 2024 and December 31, 2023, we have recorded a liability of $37.2 million and $33.3 million, respectively, included in short-term debt in CS Solis on our unaudited condensed consolidated balance sheets. For the thirteen and twenty-six weeks ended June 30, 2024, we have recorded accretion of the liability as interest expense of $1.3 million and $3.9 million, respectively.
Forward Purchase Agreements
In July 2023, FACT and Legacy Complete Solaria, Inc. entered into FPAs with each of (i) Meteora; (ii) Polar, and (iii) Sandia (each individually, a “Seller”, and together, the “FPA Sellers”).
Pursuant to the terms of the FPAs, the FPA Sellers may (i) purchase through a broker in the open market, from holders of Shares other than the Company or affiliates thereof, FACT’s ordinary shares, par value of $0.0001 per share, (the “Shares”). While the FPA Sellers have no obligation to purchase any Shares under the FPAs, the aggregate total Shares that may be purchased under the FPAs shall be no more than 6,720,000 in aggregate. The FPA Sellers may not beneficially own greater than 9.9% of issued and outstanding Shares following the Mergers as per the Amended and Restated Business Combination Agreement.
The key terms of the forward contracts are as follows:
| ● | The FPA Sellers can terminate the transaction following the Optional Early Termination (“OET”) Date which shall specify the quantity by which the number of shares is to be reduced (such quantity, the “Terminated Shares”). Seller shall terminate the transaction in respect of any shares sold on or prior to the maturity date. The counterparty is entitled to an amount from the seller equal to the number of terminated shares multiplied by a reset price. The reset price is initially $10.56 (the “Initial Price”) and is subject to a $5.00 floor. |
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| ● | The FPA contains multiple settlement outcomes. Per the terms of the agreements, the FPAs will (1) settle in cash in the event the Company is due cash upon settlement from the FPA Sellers or (2) settle in either cash or shares, at the discretion of the Company, should the settlement amount adjustment exceed the settlement amount. Should the Company elect to settle via shares, the equity will be issued in Complete Solaria Common Stock, with a per share price based on the volume-weighted average price (“VWAP”) over 15 scheduled trading days. The magnitude of the settlement is based on the Settlement Amount, an amount equal to the product of: (1) Number of shares issued to the FPA Seller pursuant to the FPA, less the number of Terminated Shares multiplied by (2) the VWAP over the valuation period. The Settlement amount will be reduced by the Settlement Adjustment, an amount equal to the product of (1) Number of shares in the Pricing Date Notice, less the number of Terminated Shares multiplied by $2.00. |
| ● | The Settlement occurs as of the Valuation Date, which is the earlier to occur of (a) the date that is two years after the date of the Closing Date of the Mergers (b) the date specified by Seller in a written notice to be delivered to Counterparty at Seller’s discretion (which Valuation Date shall not be earlier than the day such notice is effective) after the occurrence of certain triggering events; and (c) 90 days after delivery by the Counterparty of a written notice in the event that for any 20 trading days during a 30 consecutive trading day-period (the “Measurement Period”) that occurs at least 6 months after the Closing Date, the VWAP is less than the then applicable Reset Price. |
We entered into four separate FPAs, three of which, associated with the obligation to issue 6,300,000 Shares, were entered into prior to the closing of the Mergers. Upon signing the FPAs, we incurred an obligation to issue a fixed number of shares to the FPA Sellers contingent upon the closing of the Mergers in addition to the terms and conditions associated with the settlement of the FPAs. We accounted for the contingent obligation to issue shares in accordance with ASC 815, Derivatives and Hedging, and recorded a liability and other (expense) income, net based on the fair value upon of the obligation upon the signing of the FPAs. The liability was extinguished in July 2023 upon the issuance of Complete Solaria Common Stock to the FPA sellers.
Additionally, in accordance with ASC 480, Distinguishing Liabilities from Equity, we have has determined that the forward contracts are financial instruments other than shares that represent or are indexed to obligations to repurchase the issuer’s equity shares by transferring assets, referred to herein as the “forward purchase liability” on its consolidated balance sheets. We initially measured the forward purchase liability at fair value and have subsequently remeasured it at fair value with changes in fair value recognized in earnings.
Through the date of issuance of the Complete Solaria Common Stock in satisfaction of our obligation to issue shares around the closing of the Mergers, we recorded $35.5 million to other (expense) income, net associated with the issuance of 6,720,000 shares of Complete Solaria Common Stock.
As of the closing of the Mergers and issuance of the Complete Solaria Common Stock underlying the FPAs, the fair value of the prepaid FPAs was an asset balance of $0.1 million and was recorded on our unaudited condensed consolidated balance sheets and within other (expense) income, net on the unaudited condensed consolidated statements of operations and comprehensive loss. Subsequently, the change of fair value of the forward purchase liabilities amounted to income of $2.8 million for the thirteen weeks ended June 30, 2024, and expense of $2.8 million for the twenty-six weeks ended June 30, 2024, respectively. As of June 30, 2024, and December 31, 2023, the forward purchase liabilities amounted to $6.7 million and $3.8 million, respectively. Of the balances as of June 30, 2024 and December 31, 2023, $5.6 million and $3.2 million, respectively, are due to related parties. Refer to Note 19 – Related Party Transactions in our unaudited condensed consolidated financial statements for further details.
On December 18, 2023, we and the FPA Sellers entered into separate amendments to the FPAs (the “Amendments”). The Amendments lower the reset floor price of each FPA from $5.00 to $3.00 and allow us to raise up to $10.0 million of equity from existing stockholders without triggering certain anti-dilution provisions contained in the FPAs; provided, the insiders pay a price per share for their initial investment equal to the closing price per share as quoted on the Nasdaq on the day of purchase; provided, further, that any subsequent investments are made at a price per share equal to the greater of (a) the closing price per share as quoted by Nasdaq on the day of the purchase or (b) the amount paid in connection with the initial investment.
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On May 7 and 8, 2024, respectively, we entered into separate amendments to the FPAs (collectively the “Second Amendments”) with Sandia (the “Sandia Second Amendment”) and Polar (the “Polar Second Amendment”). The Second Amendments lowered the reset price of each FPA from $3.00 to $1.00 per share and amended the VWAP Trigger Event provision to read as “After December 31, 2024, an event that occurs if the VWAP Price, for any 20 trading days during a 30 consecutive trading day-period, is below $1.00 per Share”. The Sandia Second Amendment is not effective until we execute similar amendments with both Polar and Meteora.
On June 14, 2024, we entered into an amendment to the FPA with Sandia (the “Sandia Third Amendment”). The Sandia Third Amendment set the reset price of each FPA to $1.00 per share and amended the VWAP Trigger Event provision to read as “After December 31, 2024, an event that occurs if the VWAP Price, for any 20 trading days during a 30 consecutive trading day-period, is below $1.00 per Share.” Execution of the Sandia Third Amendment was conditioned on both Carlyle and Kline Hill consummating the terms of the Debt-Equity Swap as discussed in Note 20 – Subsequent Events of the notes to our unaudited condensed consolidated financial statements. In the event either Polar or Meteora amend their FPAs to include different terms from the $1.00 per share reset price and VWAP trigger adjustment, or file a notice of a VWAP trigger event, the Sandia FPA will be retroactively amended to reflect those improved terms and liquidity on their entire FPA, including any of the 1,050,000 shares that are sold upon execution of Sandia Third Amendment. For further details relating to certain amendments to the FPAs subsequent to June 30, 2024, refer to Note 20 – Subsequent Events of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
SAFE Agreements
On January 31, 2024, we entered into a simple agreement for future equity (the “First SAFE”) with the Rodgers Massey Freedom and Free Markets Charitable Trust (the “Purchaser”) in connection with the Purchaser investing $1.5 million in the Company. The First SAFE was initially convertible into shares of our common stock, par value $0.0001 per share, upon the initial closing of a bona fide transaction or series of transactions with the principal purpose of raising capital, pursuant to which we have issued and sold common stock at a fixed valuation (an “Equity Financing”), at a per share conversion price which was equal to the lower of (i)(a) $53.54 million divided by (b) our capitalization immediately prior to such Equity Financing (such conversion price, the “SAFE Price”), and (ii) 80% of the price per share of our common stock sold in the Equity Financing. If we consummated a change of control prior to the termination of the First SAFE, the Purchaser will would have been automatically entitled to receive a portion of the proceeds of such liquidity event equal to the greater of (i) $1.5 million and (ii) the amount payable on the number of shares of our common stock equal to (a) $1.5 million divided by (b)(1) $53.54 million divided by (2) our capitalization immediately prior to such liquidity event (the “Liquidity Price”), subject to certain adjustments as set forth in the First SAFE. The First SAFE was convertible into a maximum of 1,431,297 shares of our common stock, assuming a per share conversion price of $1.05, which is the product of (i) $1.31, the closing price of our common stock on January 31, 2024, multiplied by (ii) 80%.
On February 15, 2024, we entered into a simple agreement for future equity (the “Second SAFE” and together with the First SAFE, the “SAFEs”) with the Purchaser in connection with the Purchaser investing $3.5 million in the Company. The Second SAFE was initially convertible into shares of our common stock upon the initial closing of an Equity Financing at a per share conversion price which was equal to the lower of (i) the SAFE Price, and (ii) 80% of the price per share of our common stock sold in the Equity Financing. If we consummated a change of control prior to the termination of the Second SAFE, the Purchaser would have been automatically entitled to receive an amount equal to the greater of (i) $3.5 million and (ii) the amount payable on the number of shares of our common stock equal to $3.5 million divided by the Liquidity Price, subject to certain adjustments as set forth in the Second SAFE. The Second SAFE was convertible into a maximum of 3,707,627 shares of our common stock, assuming a per share conversion price of $0.94, which is the product of (i) $1.18, the closing price of the Common Stock on February 15, 2024, multiplied by (ii) 80%.
On April 21, 2024, we entered into an amendment for each of our First SAFE and Second SAFE to convert the invested amounts into shares of our common stock. The conversion share price was $0.36, calculated as the product of (i) $0.45, the closing price of our common stock on April 19, 2024, multiplied by (ii) 80%. The First SAFE and Second SAFE converted into 4,166,667 and 9,722,222 shares of our common stock, respectively.
Cash Flows for the Twenty-Six Weeks Ended June 30, 2024 and July 2, 2023
The following table summarizes Complete Solaria’s cash flows from operating, investing, and financing activities for the twenty-six weeks ended June 30, 2024 and July 2, 2023 (in thousands):
| Twenty-Six Weeks Ended | ||||||||
| June 30, 2024 | July 2, 2023 | |||||||
| Net cash used in operating activities from continuing operations | $ | (7,637 | ) | $ | (27,783 | ) | ||
| Net cash provided by operating activities from discontinued operations | — | 963 | ||||||
| Net cash used in investing activities from continuing operations | (883 | ) | (1,004 | ) | ||||
| Net cash provided by financing activities from continuing operations | 7,760 | 25,806 | ||||||
| Net decrease in cash, cash equivalents and restricted cash | (739 | ) | (2,004 | ) | ||||
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Cash Flows from Operating Activities
Net cash used in operating activities from continuing operations of $7.6 million for the twenty-six weeks ended June 30, 2024 was primarily due to the net loss from continuing operations, net of tax of $23.5 million partially offset by non-cash charges of $12.3 million and net cash inflows of $3.6 million from changes in our operating assets and liabilities. Non-cash charges in our operating results consisted of $1.6 million of non-cash expense in connection with warrants issued for vendor services, a $2.8 million adjustment to our forward purchase agreement liabilities, $2.6 million stock-based compensation expense, $3.9 in million accretion of interest attributable to the CS Solis Debt, $2.0 million of other non-cash interest, $1.3 million loss arising from the loss on conversion of two SAFE Agreements to shares of our common stock, $0.7 million of depreciation and amortization, $0.3 million of non-cash lease costs, and $0.9 million of provision for credit losses, partially offset by $2.6 million of income from the change in the fair value of our warrant liabilities and a $1.2 million decrease in our reserve for excess and obsolete inventory. The main drivers of net cash inflows derived from the changes in operating assets and liabilities were related to a decrease in accounts receivable, net of $12.4 million and a decrease in inventories of $2.3 million, partially offset by an increase in prepaid and other current assets of $1.4 million, a decrease in accounts payable of $2.1 million, a decrease in accrued expenses and other liabilities of $6.1 million, a decrease in operating lease liabilities of $0.3 million and a decrease in deferred revenue of $1.2 million.
Net cash used in operating activities from continuing operations of $27.8 million for the twenty-six weeks ended July 2, 2023 was primarily due to the net loss from continuing operations, net of tax of $22.5 million and net cash outflows of $5.3 million arising from $8.8 million in changes in operating assets and liabilities adjusted for non-cash charges of $3.5 million. The main drivers of net cash outflows derived from the changes in operating assets and liabilities were related to an increase in accounts receivable, net of $8.0 million, an increase in prepaid and other current assets of $2.7 million, an increase in inventories of $1.9 million, an increase in other noncurrent assets of $4.0 million and net other increase of $0.3 million. These cash outflows were partially offset by a $4.8 million increase in accounts payable and a $3.3 million increase in accrued expenses and other current liabilities. Non-cash adjustments of $3.5 million consisted of a provision for credit losses of $4.7 million, non-cash interest expense of $3.7 million, a change in reserve for obsolete inventory of $1.4 million, accretion of long-term debt in CS Solis of $1.5 million, stock-based compensation of $0.7 million, and other changes, depreciation and amortization of $0.4 million and non-cash lease expense of $0.5 million, partially offset by a $9.4 million decrease in the fair value of warrant liabilities.
The net increase in cash, cash equivalents and restricted cash from discontinued operations of $1.0 million for the twenty-six weeks ended July 2, 2023 was entirely attributable to net cash provided by operating activities from discontinued operations. This decrease was primarily due to the net loss from discontinued operations, net of tax of $12.5 million, adjusted for non-cash charges of $3.6 million and net cash inflows of $9.9 million from changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization expense of $1.6 million, stock-based compensation expense of $1.3 million and a $0.7 million change in allowance for credit losses. The main drivers of net cash inflows derived from the $9.9 million change in operating assets and liabilities were related to a decrease in accounts receivable of $6.1 million, a decrease in inventories of $5.6 million and an increase in accrued expenses and other current liabilities of $5.2 million partially offset by a decrease in accounts payable of $4.2 million, an increase in prepaid expenses and other current assets of $2.3 million and a decrease in other liabilities of $0.5 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $0.9 million and $1.0 million for the twenty-six weeks ended June 30, 2024, and July 2, 2023, respectively, and attributable to additions to internal-use-software.
Cash Flows from Financing Activities
Net cash provided by financing activities of $7.8 million for the twenty-six weeks ended June 30, 2024 was primarily due to $6.0 million in net proceeds from the issuance of SAFE agreements to a related party, $2.0 million deposit received from a related party in connection with a financing transaction, and $0.1 million in net proceeds from the exercise of stock options, partially offset by a $0.3 million final payment on the settlement of the amount due to Polar Multi-Strategy Master Fund.
Net cash provided by financing activities of $25.8 million for the twenty-six weeks ended July 2, 2023 was due to proceeds of $21.3 million in from the issuance of convertible notes, $14.1 million from the issuance of notes payable and $0.1 million from the issuance of shares of our common stock from the exercise of common stock options, partially offset by repayments of notes payable of $9.7 million.
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Off Balance Sheet Arrangements
As of the date of this Quarterly Report on Form 10-Q, Complete Solaria does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with Complete Solaria is a party, under which it has any obligation arising under a guaranteed contract, derivative instrument, or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity, or market risk support for such assets.
Currently, Complete Solaria does not engage in off-balance sheet financing arrangements.
Emerging Growth Company Status
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.
Complete Solaria is an “emerging growth company” as defined in Section 2(a) of the Securities Act, and has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. Following the closing of the Mergers, our Post-Combination Company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of common stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which we has total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1.0 billion in non-convertible debt in the prior three-year period, or (iv) December 31, 2025. Complete Solaria expects to continue to take advantage of the benefits of the extended transition period, although it may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks in the ordinary course of our business. The Company monitors and manages these financial exposures as an integral part of its overall risk management program.
Interest Rate Risk
We do not have significant exposure to interest rate risk that could affect the balance sheet, statement of operations, and the statement of cash flows, as we do not have any outstanding variable rate debt as of June 30, 2024.
Concentrations of Credit Risk and Major Customers
Our customer base consists primarily of residential homeowners. We do not require collateral on our accounts receivable. Further, our accounts receivable amounts are with individual homeowners who finance their purchase through a few third-party financing entities through whom we collect the receivable, and we are exposed to normal industry credit risks. We continually evaluate our reserves for potential credit losses and establish reserves for such losses.
As of June 30, 2024 and December 31, 2023, two financing entities accounted for 10% or more of the total accounts receivable, net balance.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (Disclosure Controls) within the meaning of Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Our Disclosure Controls are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our Disclosure Controls, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily applied its judgment in evaluating and implementing possible controls and procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated the effectiveness of the design and operation of our Disclosure Controls, which was done under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based on the evaluation of our Disclosure Controls, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2024, our Disclosure Controls were not effective due to a material weakness in our internal control over financial reporting as disclosed below.
Material Weaknesses in Internal Control Over Financial Reporting
Prior to the Business Combination, we were a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more operating businesses. As a result, previously existing internal controls are no longer applicable or comprehensive enough as of the assessment date as our operations prior to the Business Combination were insignificant compared to those of the consolidated entity post-Business Combination. In addition, the design of internal controls over financial reporting for the Company following the Business Combination has required and will continue to require significant time and resources from our management and other personnel.
In connection with the preparation and audit of our financial statements for the year ended December 31, 2023, our management identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses are as follows:
We do not have sufficient full-time accounting personnel, (i) to enable appropriate reviews over the financial close and reporting process, (ii) to allow for an appropriate segregation of duties, and (iii) with the requisite experience and technical accounting knowledge to identify, review and resolve complex accounting issues under generally accepted accounting principles in the United States (“GAAP”). Additionally, we did not adequately design and/or implement controls related to conducting a formal risk assessment process.
Inventory controls related to the completeness, existence, and cut-off of inventories held at third parties, and controls related to the calculation of adjustments to inventory for items considered excessive and obsolete.
We were not required to perform an evaluation of internal control over financial reporting as of December 31, 2023 in accordance with Section 215.02 of the SEC’s Division of Corporation Finance’s Regulation S-K Compliance and Disclosure Interpretations. Had such an evaluation been performed, additional control deficiencies may have been identified by our management, and those control deficiencies could have also represented one or more material weaknesses.
Plan to Remediate Material Weaknesses in Internal Control Over Financial Reporting
We have taken certain steps, such as recruiting additional personnel, in addition to utilizing third-party consultants and specialists, to supplement our internal resources, to enhance our internal control environment and plans to take additional steps to remediate the material weaknesses. Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take. We cannot assure you that the measures we have taken to date and may take in the future, will be sufficient to remediate the control deficiencies that led to our material weakness in internal control over financial reporting or that it will prevent or avoid potential future material weaknesses.
If we are not able to maintain effective internal control over financial reporting and Disclosure Controls, or if material weaknesses are discovered in future periods, a risk that is significantly increased in light of the complexity of our business, we may be unable to accurately and timely report our financial position, results of operations, cash flows or key operating metrics, which could result in late filings of the annual and quarterly reports under the Exchange Act, restatements of financial statements or other corrective disclosures, an inability to access commercial lending markets, defaults under our secured revolving credit facility and other agreements, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity.
Changes in Internal Control over Financial Reporting
Other than the material weakness and remediation efforts described above, there were no changes in our internal control over financial reporting that occurred during the quarter to which this report relates, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information with respect to legal proceedings is set forth under [Note 17 - Commitments and Contingencies], in the accompanying unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Investing in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and related notes appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our securities. If any of the events or developments described below were to occur, our business, prospects, operating results and financial condition could suffer materially, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. The risks facing our business have not changed substantively from those discussed in our Annual Report on Form 10-K, except for those risks marked with an asterisk (*).
Risks Related to our Businesses and Industry
Our business depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or the ability to monetize them could adversely impact our business.
U.S. federal, state and local government bodies provide incentives to end users, distributors, system integrators and manufacturers of solar energy systems to promote solar electricity in the form of rebates, tax credits and other financial incentives such as system performance payments, payments for renewable energy credits associated with renewable energy generation and the exclusion of solar energy systems from property tax assessments. These incentives enable us to lower the price charged to customers for energy and for solar energy systems. However, these incentives may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption rates increase. These reductions or terminations often occur without warning.
The Inflation Reduction Act (“IRA”) extended and modified prior law applicable to tax credits that are available with respect to solar energy systems. Under the IRA, the following credits are available: (i) a production tax credit under Code Section 44 (for facilities that begin construction before January 1, 2025) and Code Section 45Y (for facilities that begin construction between January 1, 2025 and the year that is four calendar years after the year in which certain U.S. greenhouse gas emissions percentages are met) (the “PTC”) in connection with the installation of certain solar facilities and energy storage technology, (ii) an investment tax credit under Code Section 48 (for facilities that begin construction before January 1, 2025) and Code Section 48E (for facilities that begin construction between January 1, 2025 and the year that is four calendar years after the year in which certain U.S. greenhouse gas emissions percentages are met) (the “ITC”) in connection with the installation of certain solar facilities and energy storage technology, and (iii) a residential clean energy credit (the “Section 25D Credit”) in connection with the installation of property that uses solar energy to generate electricity for residential use.
Prior to the IRA, the PTC for solar facilities had phased out and was no longer available. The IRA reinstated the PTC for solar facilities. The PTC available to a taxpayer in a taxable year is equal to a certain rate multiplied by the kilowatt hours of electricity produced by the taxpayer from solar energy at a facility owned by it and sold to an unrelated party during that taxable year. The base rates for the PTC is 0.3 cents. This rate is increased to 1.5 cents for projects that (i) have a maximum net output of less than one MW AC, (ii) begin construction before January 29, 2023, or (iii) meet certain prevailing wage and apprenticeship requirements. It also may be increased for projects that include a certain percentage of components that were produced in the U.S., projects that are located in certain energy communities, and projects that are located in low-income communities.
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The ITC available to a taxpayer in a taxable year is equal to the “energy percentage” of the basis of “energy property” placed in service by the taxpayer during that taxable year. “Energy property” includes equipment that uses solar energy to generate electricity (including structural components that are necessary to the functioning of a solar facility as a whole) and certain energy storage systems (including batteries included as part of or adjacent to a solar facility). The base “energy percentage” for the ITC is 6%. This energy percentage is increased to 30% for projects that (i) have a maximum net output of less than one MW AC, (ii) begin construction before January 29, 2023, or (iii) meet certain prevailing wage and apprenticeship requirements. It also may be increased for projects that include a certain percentage of components that were produced in the U.S., projects that are located in certain energy communities, and projects that are located in low-income communities. ITCs are subject to recapture if, during the five-year period after a facility is placed in service, the facility is sold, exchanged, involuntarily converted, or ceases its business usage. If the event that causes such recapture occurs within the first year after a project is placed in service, 100% of the ITCs will be recaptured. The recapture percentage is reduced 20% for each subsequent year. Historically, we have utilized the ITC when available for both residential and commercial leases and power purchase agreements, based on ownership of the solar energy system.
The Section 25D Credit available to a taxpayer is equal to the “applicable percentage” of expenditures for property that uses solar energy to generate electricity for use in a dwelling unit used as a residence by the taxpayer. The applicable percentage is 26% for such systems that are placed in service before January 1, 2022, 30% for such systems that are placed in service after December 31, 2021 and before January 1, 2033, 26% for such systems that are placed in service in 2033, and 22% for such systems that are placed in service in 2034. The Section 25D Credit is scheduled to expire effective January 1, 2035. Although it is unlikely that Complete Solaria would qualify for the Section 25D Credit, the availability of the Section 25D Credit may impact the prices of its solar energy systems.
Reductions in, eliminations of, or expirations of, governmental incentives could adversely impact results of operations and ability to compete in this industry by increasing the cost of capital, causing us to increase the prices of our energy and solar energy systems and reduce the size of our addressable market.
We are an “emerging growth company” and a “smaller reporting company” and we cannot be certain if the reduced reporting requirements applicable to these companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). For as long as we continue to be an emerging growth company, we intend to take advantage of exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies, including:
| ● | being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in our periodic reports; |
| ● | not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”); |
| ● | not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (the “PCAOB”)regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; |
| ● | reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and |
| ● | exemptions from the requirements of holding nonbinding advisory stockholder votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. |
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial statements may be different from companies that comply with the new or revised accounting pronouncements as of public company effective dates.
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We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have at least $1.235 billion in total annual gross revenues; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our IPO.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would allow us to continue to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation our periodic reports and proxy statements.
We cannot predict if investors will find our securities less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our securities and the trading price of our securities may be more volatile.
Existing regulations and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services.
The market for electric generation products is heavily influenced by federal, state and local government laws, regulations and policies concerning the electric utility industry in the U.S. and abroad, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation, and changes that make solar power less competitive with other power sources could deter investment in the research and development of alternative energy sources as well as customer purchases of solar power technology, which could in turn result in a significant reduction in the demand for our solar power products. The market for electric generation equipment is also influenced by trade and local content laws, regulations and policies that can discourage growth and competition in the solar industry and create economic barriers to the purchase of solar power products, thus reducing demand for our solar products. In addition, on-grid applications depend on access to the grid, which is also regulated by government entities. We anticipate that our solar power products and our installation will continue to be subject to oversight and regulation in accordance with federal, state, local and foreign regulations relating to construction, safety, environmental protection, utility interconnection and metering, trade, and related matters. It is difficult to track the requirements of individual states or local jurisdictions and design equipment to comply with the varying standards. In addition, the U.S. and European Union, among others, have imposed tariffs or are in the process of evaluating the imposition of tariffs on solar panels, solar cells, polysilicon, and potentially other components. These and any other tariffs or similar taxes or duties may increase the price of our solar products and adversely affect our cost reduction roadmap, which could harm our results of operations and financial condition. Any new regulations or policies pertaining our solar power products may result in significant additional expenses for our customers, which could cause a significant reduction in demand for our solar power products.
We rely on net metering and related policies to offer competitive pricing to customers in many of our current markets and changes to net metering policies may significantly reduce demand for electricity from residential solar energy systems.
Net metering is one of several key policies that have enabled the growth of distributed generation solar energy systems in the U.S., providing significant value to customers for electricity generated by their residential solar energy systems but not directly consumed on-site. Net metering allows a homeowner to pay his or her local electric utility for power usage net of production from the solar energy system or other distributed generation source. Homeowners receive a credit for the energy an interconnected solar energy system generates in excess of that needed by the home to offset energy purchases from the centralized utility made at times when the solar energy system is not generating sufficient energy to meet the customer’s demand. In many markets, this credit is equal to the residential retail rate for electricity and in other markets, such as Hawaii and Nevada, the rate is less than the retail rate and may be set, for example, as a percentage of the retail rate or based upon a valuation of the excess electricity. In some states and utility territories, customers are also reimbursed by the centralized electric utility for net excess generation on a periodic basis.
Net metering programs have been subject to legislative and regulatory scrutiny in some states and territories including, but not limited to, California, New Jersey, Arizona, Nevada, Connecticut, Florida, Maine, Kentucky, Puerto Rico and Guam. These jurisdictions, by statute, regulation, administrative order or a combination thereof, have recently adopted or are considering new restrictions and additional changes to net metering programs either on a state-wide basis or within specific utility territories. Many of these measures were introduced and supported by centralized electric utilities. These measures vary by jurisdiction and may include a reduction in the rates or value of the credits customers are paid or receive for the power they deliver back to the electrical grid, caps or limits on the aggregate installed capacity of generation in a state or utility territory eligible for net metering, expiration dates for and phasing out of net metering programs, replacement of net metering programs with alternative programs that may provide less compensation and limits on the capacity size of individual distributed generation systems that can qualify for net metering. Net metering and related policies concerning distributed generation also received attention from federal legislators and regulators.
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In California, the California Public Utilities Commission (“CPUC”) issued an order in 2016 retaining retail-based net metering credits for residential customers of California’s major utilities as part of Net Energy Metering 2.0 (“NEM 2.0”). Under NEM 2.0, new distributed generation customers receive the retail rate for electricity exported to the grid, less certain non-bypassable fees. Customers under NEM 2.0 also are subject to interconnection charges and time-of-use rates. Existing customers who receive service under the prior net metering program, as well as new customers under the NEM 2.0 program, currently are permitted to remain covered by them on a legacy basis for a period of 20 years. On September 3, 2020, the CPUC opened a new proceeding to review its current net metering policies and to develop Net Energy Metering 3.0 (“NEM 3.0”), also referred to by the CPUC as the NEM 2.0 successor tariff. NEM 3.0 was finalized on December 15, 2022 and will include several changes from previous net metering plans. There will be changes that impact the amount that homeowners with solar power will be able to recuperate when selling excess energy back to the utility grid. With NEM 3.0, the value of the credits for net exports will be tied to the state’s 2022 Distributed Energy Resources Avoided Cost Calculator Documentation (“ACC”). Another significant change with NEM 3.0 will be applied to the netting period: the time period over which the utilities measure the clean energy being imported or exported. In general, longer netting periods have typically been advantageous for solar power customers because production can offset any consumption. NEM 3.0 will instead measure energy using instantaneous netting, which means interval netting approximately every 15 minutes. This will lead to more NEM customers’ electricity registering as exports, now valued at the new, lower ACC value.
We utilize a limited number of suppliers of solar panels and other system components to adequately meet anticipated demand for our solar service offerings. Any shortage, delay or component price change from these suppliers or delays and price increases associated with the product transport logistics could result in sales and installation delays, cancellations and loss of market share.
We purchase solar panels, inverters and other system components from a limited number of suppliers, which makes us susceptible to quality issues, shortages and price changes. If we fail to develop, maintain and expand relationships with existing or new suppliers, we may be unable to adequately meet anticipated demand for our solar energy systems or may only be able to offer our systems at higher costs or after delays. If one or more of the suppliers that we rely upon to meet anticipated demand ceases or reduces production, we may be unable to satisfy this demand due to an inability to quickly identify alternate suppliers or to qualify alternative products on commercially reasonable terms.
In particular, there are a limited number of inverter suppliers. Once we design a system for use with a particular inverter, if that type of inverter is not readily available at an anticipated price, we may incur additional delay and expense to redesign the system.
In addition, production of solar panels involves the use of numerous raw materials and components. Several of these have experienced periods of limited availability, particularly polysilicon, as well as indium, cadmium telluride, aluminum and copper. The manufacturing infrastructure for some of these raw materials and components has a long lead time, requires significant capital investment and relies on the continued availability of key commodity materials, potentially resulting in an inability to meet demand for these components. The prices for these raw materials and components fluctuate depending on global market conditions and demand and we may experience rapid increases in costs or sustained periods of limited supplies.
Despite efforts to obtain components from multiple sources whenever possible, many suppliers may be single-source suppliers of certain components. If we cannot maintain long-term supply agreements or identify and qualify multiple sources for components, access to supplies at satisfactory prices, volumes and quality levels may be harmed. We may also experience delivery delays of components from suppliers in various global locations. In addition, while there are alternative suppliers and service providers that we could enter into agreements with to replace its suppliers on commercially reasonable terms, we may be unable to establish alternate supply relationships or obtain or engineer replacement components in the short term, or at all, at favorable prices or costs. Qualifying alternate suppliers or developing our own replacements for certain components may be time-consuming and costly and may force us to make modifications to our product designs.
Our need to purchase supplies globally and our continued international expansion further subjects us to risks relating to currency fluctuations. Any decline in the exchange rate of the U.S. dollar compared to the functional currency of component suppliers could increase component prices. In addition, the state of the financial markets could limit suppliers’ ability to raise capital if they are required to expand their production to meet our needs or satisfy our operating capital requirements. Changes in economic and business conditions, wars, governmental changes and other factors beyond our control or which we do not presently anticipate, could also affect suppliers’ solvency and ability to deliver components on a timely basis. Any of these shortages, delays or price changes could limit our growth, cause cancellations or adversely affect profitability and the ability to compete in the markets in which we operate effectively.
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Our business substantially focuses on solar service agreements and transactions with residential customers.
Our business substantially focuses on solar service agreements and transactions with residential customers. Our energy system sales to homeowners utilize power purchase agreements (“PPAs”), leases, loans and other products and services. We currently offer PPAs and leases through, EverBright, LLC, and other financial institutions. If we were unable to arrange new or alternative financing methods for PPAs and leases on favorable terms, our business, financial condition, results of operations, and prospects could be materially and adversely affected.
Changes in international trade policies, tariffs, or trade disputes could significantly and adversely affect our business, revenues, margins, results of operations, and cash flows.
On February 7, 2018, safeguard tariffs on imported solar cells and modules went into effect pursuant to Proclamation 9693, which approved recommendations to provide relief to U.S. manufacturers and impose safeguard tariffs on imported solar cells and modules, based on the investigations, findings, and recommendations of the U.S. International Trade Commission (the “International Trade Commission”). Since 2021, modules are subject to a tariff rate of 15%. Cells are subjected to a tariff-rate quota, under which the first 2.5 GW of cell imports each year will be exempt from tariffs, and cells imported after the 2.5 GW quota has been reached will be subject to the same 30% tariff as modules in the first year, with the same 5% decline in each of the three subsequent years. The tariff-free cell quota applies globally, without any allocation by country or region.
The tariffs could materially and adversely affect our business and results of operations. While solar cells and modules based on interdigitated back contact technology were granted exclusion from these safeguard tariffs on September 19, 2018, our solar products based on other technologies continue to be subject to the safeguard tariffs. Although we are actively engaged in efforts to mitigate the effect of these tariffs, there is no guarantee that these efforts will be successful.