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REPORT OF R. TODD NEILSON
Chief Restructuring Officer
March 21, 2012
2049 Century Park East, Suite 2525
Los Angeles, CA 90067 310.499.4750
brg-expert.com
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TABLE OF CONTENTS
I. INTRODUCTION .................................................................................................................................... 1
II. SCOPE OF ANALYSIS .......................................................................................................................... 2
III. SUMMARY OF CONCLUSIONS ........................................................................................................ 3
IV. REPORT SUMMARY .......................................................................................................................... 4
A. General Overview .............................................................................................................. 4
B. Solyndra’s Product and Technology .................................................................................. 6
C. Financing and Construction of Solyndra Manufacturing Facilities ................................... 8
D. The Impact of the Sudden Downturn in the Solar Market and the Global Financial Crisis ................................................................................................................ 10
E. The DOE Loan Guarantee and Construction of Fab 2 ..................................................... 13
F. Solyndra’s Financial Performance ................................................................................... 18
G. Solyndra’s Restructuring and Capital Raising Efforts in 2010 ........................................ 20
H. Events Leading to and Summary of February 2011 Restructuring .................................. 28
1. Tranche A Debt ................................................................................................... 29
I. Events Leading to Bankruptcy Filing .............................................................................. 32
V. SOLAR TECHNOLOGY AND PRODUCTS ...................................................................................... 36
A. History ............................................................................................................................. 36
B. Design .............................................................................................................................. 36
C. Comparative Advantage .................................................................................................. 38
D. New Products ................................................................................................................... 40
VI. EXTERNAL ENVIRONMENT AND MARKET CONDITIONS ..................................................... 41
A. Impact of the Recession of 2008 ...................................................................................... 42
B. Incentive Programs .......................................................................................................... 44
1. Germany ............................................................................................................. 46
2. Spain ................................................................................................................... 46
3. Italy ..................................................................................................................... 47
C. Competition ..................................................................................................................... 47
1. Polysilicon (P-Si) Based Competitors ................................................................ 48
a. Polysilicon (P-Si) Supply....................................................................... 49
2. China Enters Market ........................................................................................... 50
D. Private Investment in the Solar Industry .......................................................................... 53
VII. CORPORATE STRUCTURE ............................................................................................................ 54
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VIII. FAB 1 MANUFACTURING FACILITY ......................................................................................... 56
IX. CUSTOMER AGREEMENTS ............................................................................................................ 59
A. Overview of Customer Agreements ................................................................................. 59
B. Key Terms........................................................................................................................ 60
C. Customer Agreements ...................................................................................................... 61
1. Phoenix Solar AG ............................................................................................... 61
2. Solar Power, Inc. ................................................................................................. 62
3. GeckoLogic GmbH ............................................................................................. 64
4. Carlisle Syntec, Incorporated .............................................................................. 65
5. SunConnex B.V. ................................................................................................. 66
6. EBITSCHenergietechnik GmbH ........................................................................ 67
7. USE Umwelt Sonne Energie GmbH ................................................................... 68
8. Alwitra, GmbH ................................................................................................... 69
9. SunSystem, S.p.A. .............................................................................................. 70
X. $535 MILLION DOE LOAN GUARANTEE ...................................................................................... 72
A. Brief History of the DOE Loan Guarantee Program........................................................ 73
1. Title XVII of the Energy Policy Act of 2005 ..................................................... 74
2. 2006 Advanced Energy Initiative ....................................................................... 75
3. The American Recovery and Reinvestment Act of 2009 ................................... 75
4. Department of Energy Loan Guarantee Office ................................................... 76
B. DOE Loan Guarantee Process ......................................................................................... 79
1. Application Submission ...................................................................................... 79
2. Initial Due Diligence and Term Sheet Negotiation ............................................. 80
3. Credit Analysis and Review ............................................................................... 80
4. Deal Approval ..................................................................................................... 80
5. Final Due Diligence and Negotiation of Financing Documents ......................... 81
6. Closing ................................................................................................................ 81
C. The “$535 Million” DOE Loan Guarantee ...................................................................... 81
1. DOE Loan Guarantee Solicitation ...................................................................... 82
2. Solyndra’s Pre-Application ................................................................................. 82
3. Invitation to Submit Full Application ................................................................. 83
4. Submission of Full Application .......................................................................... 84
a. Summary of Full Application ................................................................ 85
5. Revisions to Full Application ............................................................................. 86
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a. Solyndra’s Key Consultants and Advisors for DOE Loan Guarantee ............................................................................................... 87
6. DOE Due Diligence Activities and Term Sheet Negotiations. ........................... 88
7. Finalized Term Sheet and DOE Conditional Commitment ................................ 94
8. Loan Closing and Agreements ............................................................................ 95
a. Key Terms of Loan as Executed in Loan Documents ........................... 96
b. Key Agreements and Documentation .................................................... 96
D. Loan Funding and Reporting Requirements .................................................................... 98
1. Loan Funding Requirement ................................................................................ 98
2. Financial Reporting Requirements ................................................................... 100
a. Quarterly Reporting ............................................................................. 100
b. Annual Financial Statements and Reports ........................................... 101
c. Periodic and Other Reporting .............................................................. 101
E. Construction and Loan Funding (Fab 2 Phase I) ........................................................... 101
1. Fab 2 Phase I Construction ............................................................................... 103
a. Equipment Supply Agreement ............................................................. 106
b. Operations and Maintenance Agreement ............................................. 107
F. Second DOE Loan Guarantee Application (Fab 2 Phase II) ......................................... 108
1. Fab 2 – Phase II Loan Application Details ....................................................... 108
2. Construction Plans ............................................................................................ 109
3. Solyndra IPO .................................................................................................... 111
4. Third Party Consultants .................................................................................... 112
a. Status of Application ........................................................................... 114
G. February 2011 Loan Restructuring ................................................................................ 114
1. Activities Leading up to Restructuring ............................................................. 115
2. Summary of Restructuring ................................................................................ 127
a. Tranche A Debt .................................................................................... 128
b. Tranche B Debt .................................................................................... 130
c. Tranche C Debt .................................................................................... 130
d. Tranche D Debt .................................................................................... 130
e. Tranche E Debt .................................................................................... 131
3. Summary of February 2011 Loan Restructuring Documentation ..................... 132
a. Key Agreements and Documentation .................................................. 133
4. Modified Financial Reporting Requirements .................................................... 134
a. Weekly Reporting ................................................................................ 134
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b. Monthly Reporting ............................................................................... 135
c. Quarterly Reporting ............................................................................. 135
d. Annual Reporting ................................................................................. 136
XI. HISTORICAL FINANCIAL STATEMENT ANALYSIS ................................................................ 138
A. Financial Analysis Recap ............................................................................................... 138
1. Fiscal Years 2005 through 2008 – Prior to DOE Loan Guarantee Facility ...... 139
a. Recap of Operations for Fiscal Year 2005 ........................................... 139
b. Recap of Operations for Fiscal Year 2006 ........................................... 139
c. Recap of Operations for Fiscal Year 2007 ........................................... 139
d. Recap of Operations for Fiscal Year 2008 ........................................... 140
2. Fiscal Years 2009 through 2011 - Following DOE Loan Guarantee Facility .............................................................................................................. 141
a. Recap of Operations for Fiscal Year 2009 ........................................... 141
b. Recap of Operations for Fiscal Year 2010 ........................................... 142
c. Recap of Operations for Fiscal Years 2005 - 2011 .............................. 143
B. Summary of Quarterly Reports Provided to the DOE ................................................... 146
1. Quarterly Financial Results Reported to the DOE ............................................ 146
XII. FINANCIAL FORECASTS & PROJECTIONS .............................................................................. 148
A. Key Metrics in Forecasts & Plans .................................................................................. 148
B. Risks Facing Solyndra ................................................................................................... 149
C. Impact of Risks on Solyndra’s Forecasts and Plans ...................................................... 152
D. Comparison of Forecast and Historical Financial Results ............................................. 154
1. Forecast #1 - December 2006 - Pre Application to the D.O.E filed on December 28, 2006 ........................................................................................... 155
2. Forecast #2 - Comparison of Actual Financial Results to the July 31, 2009 Solyndra Sponsor Company Plan ............................................................ 157
a. Revenue Results ................................................................................... 159
b. ASP Results ......................................................................................... 160
c. Average Watt Per Panel Results .......................................................... 161
d. Panels Produced Results ...................................................................... 162
e. Summary of Sponsor Forecast Results ................................................ 163
3. Forecast #3 - Consolidation Plan – October 2010 (“Consolidation Plan”) ....... 165
4. Forecast #4 - Restructuring Plan – February 2011 ........................................... 169
XIII. SOURCES AND USES OF CASH................................................................................................. 175
A. Sources ........................................................................................................................... 175
1. Collections of Accounts Receivable ................................................................. 176
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2. Sale of Preferred Stock ..................................................................................... 177
3. DOE Loan Guarantee ........................................................................................ 177
4. Convertible Secured Promissory Notes (Tranche E) ........................................ 177
5. Tranche A Debt ................................................................................................. 177
B. Uses: .............................................................................................................................. 177
1. Property, Plant & Equipment Fab 2 Phase I ..................................................... 178
2. Property, Plant & Equipment Fab 1 .................................................................. 179
3. Payroll ............................................................................................................... 179
4. Direct Materials ................................................................................................ 179
5. Professional Services ........................................................................................ 179
6. Other Uses ........................................................................................................ 181
XIV. COMPENSATION ......................................................................................................................... 181
A. Annual Payroll ............................................................................................................... 181
B. Compensation to Senior Managers ................................................................................ 181
C. Solyndra Headcount and Average Compensation by Year. ........................................... 182
D. Labor Statistics of California and Local Counties ......................................................... 183
E. Staffing Companies and Temporary Labor .................................................................... 184
F. Executive Incentive Plan (“EIP”) & Key Contributor Incentive Plan (“KCIP”) ........... 185
G. CIGS / System Tech Incentive Program ........................................................................ 186
H. Cash Bonus Program ..................................................................................................... 187
I. Core Retention Bonus Program ..................................................................................... 190
J. Bonus Summary ............................................................................................................. 191
XV. EVENTS LEADING TO BANKRUPTCY FILING ....................................................................... 192
EXHIBITS
Exhibit #1 Resume of R. Todd Neilson
Exhibit #2 Glossary of Defined Terms
Exhibit #3 Timeline of Key Events
Exhibit #4 Private Investment in the Solar Industry Reporting – Thomson Reuters
Exhibit #5 Timeline of Key DOE Loan Guarantee Events
Exhibit #6 Schedule of Identified Financial Projections Sent to the DOE
Exhibit #7 Summary of Key Terms of Finalized Term Sheet (March 2009)
Exhibit #8 Summary of Key Terms of Loan as Executed in Loan Documents (September 2009)
Exhibit #9 Summary of Key Loan Fund Requirements and Procedures (September 2009)
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Exhibit #10 Summary of Key Financial Reporting Requirements (September 2009)
Exhibit #11 Summary of Key Terms Relating to the Tranche A Debt
Exhibit #12 Summary of Key Terms Relating to the Tranche B Debt
Exhibit #13 Summary of Key Terms Relating to the Tranche D Debt
Exhibit #14 Summary of Key Terms Relating to the Tranche E Debt
Exhibit #15 Summary of Solyndra, Inc. Quarterly Financial Information (3rd Qtr 2009 – 2nd Qtr 2011)
Exhibit #16 Solyndra – Executive Management Charts (Top Level Mgmt. Organizational Chart)
Exhibit #17 Solyndra 2008 Executive Incentive Plan (EIP) and Key Contributor Incentive Plan (KCIP) Overview.
APPENDICES1
Appendix A - List of Appendices
Appendix B - Solyndra Technology
Appendix C - External Market Information
Appendix D - Various Board Minutes & Presentations
Appendix E - Customer Agreements
Appendix F - Solyndra’s Form S-1 Documentation filed with Securities and Exchange Commission
Appendix G - DOE Loan Guarantee Program Background Documentation
Appendix H - Solyndra Pre-Application for DOE Loan Guarantee
Appendix I - Various DOE Related Correspondence and Communications
Appendix J - Various Solyndra Presentations Sent to the DOE
Appendix K - Solyndra DOE Loan Guarantee Application (2008) (Solicitation No: PS01-06LG00001 – Invitation No: 1013)
Appendix L - Certain DOE Loan Guarantee Term Sheets
Appendix M – Sponsor Payment Letters (DOE Loan Guarantee)
Appendix N - Goldman Sachs, DOE Credit Review Board - Draft Credit Memo Submitted to the DOE, December 17, 2008.
Appendix O - DOE Independent Consultant Reports
Appendix P - DOE Loan Guarantee Closing Documentation (September 2009)
Appendix Q - DOE Quarterly Reporting Packages
Appendix R - DOE Annual Reporting Packages
Appendix S - Construction Progress Reports (RW Beck)
Appendix T - DOE Loan Guarantee Draws
Appendix U - Second DOE Loan Guarantee Application (Fab 2 Phase II)
1 Appendices are not attached hereto because they are voluminous and contain confidential information. Appendices may be provided to parties in interest subject to appropriate confidentiality restrictions.
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Appendix V - DOE Loan Guarantee Waivers
Appendix W - Restructuring of $535 Million DOE Loan Guarantee Closing Documentation (February 2011)
Appendix X - DOE Monthly Reporting Packages
Appendix Y - DOE Weekly Reporting Packages
Appendix Z - Audited Financial Statements
Appendix AA – Other Private Equity and Secured Debt Documentation
Appendix AB - Accounts Receivable & Inventory Purchase and Sale Agreement
Appendix AC – Compensation Related Documentation
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I. INTRODUCTION
On October 6, 2011, the Debtors2 retained R. Todd Neilson as Chief Restructuring
Officer (“CRO”) pursuant to an order of the United States Bankruptcy Court for the District of
Delaware (the “Court”). The CRO’s engagement was approved jointly by the Holdings’ Board
of Directors and Solyndra LLC’s Board of Managers (together, the “Board”). The CRO was
selected by a subcommittee of the Board composed of independent directors and managers
(“Subcommittee”). By order dated November 1, 2011, the Court authorized the employment of
the CRO, along with his firm, Berkeley Research Group, LLC (“BRG”).
The engagement of the CRO by the Board and his subsequent appointment by the Court
was the result of a unique sequence of events that began with the Debtors’ Chapter 11
bankruptcy filings on September 6, 2011. Two days later, on September 8, 2011, the Federal
Bureau of Investigation (“FBI”), acting in concert with the Department of Energy Office of
Inspector General (“OIG”), executed search warrants at the Debtors’ headquarters in Fremont,
California and the United States Attorney commenced a criminal investigation. In addition to
the Federal criminal investigation, pre-petition, Solyndra was also subject to a Congressional
investigation that escalated upon the commencement of these cases.
Shortly after the commencement of the cases, the Board determined that a Chief
Restructuring Officer was needed to manage the Debtors’ bankruptcy cases, particularly in light
of the anticipated resignation of the Debtors’ Chief Executive Officer and as other top
management was expected to leave to find other employment. In light of the Federal criminal
investigation and ongoing Congressional investigation, in addition to the customary roles for a
CRO, the CRO and the Subcommittee agreed that the CRO would act in an independent capacity
in determining if any improprieties had occurred with respect to the Debtors’ finances. Further,
the CRO was to submit a report to the full Board detailing his findings. The Board felt that the
CRO was particularly well-suited to conduct such investigation in light of his unique background
and experience. Among other things, the CRO is a former FBI agent (See Resume attached as
Exhibit #1) who has acted as Chapter 11 Trustee in a number of high profile bankruptcy cases.
2 Solyndra LLC and 360 Degree Solar Holdings, Inc. (“Holdings”) are hereinafter referred to as the “Debtors.”
2
This report was prepared with the assistance of BRG. The CRO is a Director at BRG.
The CRO has utilized BRG’s services extensively in the preparation of this report. References in
this report to the CRO may reflect the collective analysis and conclusions of both the CRO and
BRG.
The CRO has prepared this report pursuant to his engagement by the Board. A
description of the principal issues addressed by this report is set forth in the section below
entitled “Report Summary.”
The CRO is hopeful that this report will provide an independent analysis for parties in
interest regarding various issues surrounding Solyndra,3 substantiate the use of investor and
government funds, and describe the circumstances that led to Solyndra’s chapter 11 bankruptcy
filing.
The CRO is appreciative of the personnel at Solyndra who provided assistance in the
preparation of this report. The CRO relied on Solyndra employees for much of the financial and
background information contained in this report, both in documentary form and based on
informal interviews. The CRO attempted to conduct informal interviews of Solyndra’s former
Chief Executive Officers, Dr. Chris Gronet (“Gronet”) and Brian Harrison (“Harrison”). Both
Gronet and Harrison declined, through their legal counsel, to speak directly to the CRO.
The CRO also thanks the Board for its cooperation and assistance. The CRO met with
both the Board and the Subcommittee on a number of occasions. At no time did the CRO feel
any pressure to provide the Board with anything but an unvarnished report of the results of his
analysis and conclusions. Hence, this report reflects the CRO’s independent views based on
access to Solyndra’s records and personnel and other third-party documentation.
II. SCOPE OF ANALYSIS
The CRO has performed an extensive analysis of the company’s accounting records,
electronic files, internal and external communications, conducted informal interviews of key
3 For purposes of this report, unless otherwise noted, the term “Solyndra” refers collectively to Solyndra LLC, Holdings, and each of their current and former affiliates.
3
personnel, and researched third party documentation regarding certain areas discussed in further
detail throughout this report. The CRO’s work has included, among other things, the analysis of
the Debtors’: (a) solar technology and products; (b) external environment and market conditions;
(c) corporate structure; (d) Fab 1 manufacturing facility; (e) customer agreements; (f) $535
million loan guarantee from the U.S. Department of Energy (“DOE”) for the Fab 2
manufacturing facility; (g) historical financial statements; (h) financial forecasts and projections;
(i) sources and uses of cash; and (j) employee compensation. The report includes a substantial
number of industry specific terms, which are routinely defined within the report. However, due
to the voluminous amount of the defined terms, a glossary is attached herewith as “Exhibit 2 –
Glossary of Defined Terms.”
The work performed by the CRO and his firm BRG involved financial and investigative
accounting services. The CRO has not performed an audit of the financial statements in
accordance with Generally Accepted Auditing Standards (“GAAS”) to determine whether the
financial statements were prepared in accordance with General Accepted Accounting Principles
(“GAAP”), nor has the CRO performed a review or compilation of the financial statements in
accordance with the standards promulgated by the American Institute of Certified Public
Accountants.
III. SUMMARY OF CONCLUSIONS
As a result of his analysis, the CRO has reached the following independent conclusions,
which are summarized below:
• The CRO has reviewed the accounting records of Solyndra and found that the construction costs were correctly recorded in the accounting records and no material funds were diverted from their original intended use.
• The CRO has reviewed the vast level of communications and the underlying records between the DOE and Solyndra. It is the opinion of the CRO that the DOE had sufficient information to understand the risks and challenges associated with the guarantee obtained from DOE and make an informed decision as to the ongoing financial condition of Solyndra throughout the loan guarantee time frame based upon the level of documentation and information provided.
4
• The CRO undertook a review of the loan draw packages submitted and approved by the DOE’s independent engineer assigned to the project, RW Beck, Inc. (“RW Beck”), along with the loan agreements underlying the $535 million Loan Guarantee between Solyndra and the DOE. It is his opinion that all of the funds drawn under the DOE Loan Guarantee were spent in accordance with the relevant loan documents.
• The CRO has reviewed the unaudited financial information provided to the DOE by Solyndra and compared that information to the final audited financial statements issued by PricewaterhouseCoopers (“PWC”) for the same period to determine whether the financial information provided by Solyndra in the quarterly reports was materially correct. It is the opinion of the CRO that the information provided to the DOE, as certified, was materially correct when compared to the audited financial statements of PWC.4
• The CRO has reviewed the actual results and underlying metrics which should have been utilized under the parameters of the Cash Bonus Program and concludes that the actual calculations used by the company to compute and pay the cash bonuses are within materially acceptable limits.
The conclusions and bases for these independent conclusions are discussed in further
detail within the Report Summary below and in the various detailed sections of this report. The
conclusions expressed herein are based on the information provided and obtained as of the date
of this report and upon the pattern of facts that the CRO has observed during his review and
analysis of such information. The CRO reserves the right to supplement, update or otherwise
modify this report at a later date based on additional documentation and information he may
receive.
IV. REPORT SUMMARY
A. General Overview
Founded in 2005 as Gronet Technologies, Inc.,5 Solyndra is a U.S. manufacturer of thin
film solar photovoltaic power systems specifically designed for large commercial and industrial
4 It should be noted that there are non-cash differences between the audited financial statements of the company and the financial information provided to the DOE related to the accelerated depreciation of equipment caused by the consolidation of equipment in Fab 1facility and Fab 2 facility (Phase I). Such discrepancies were not surprising given that the financial effects of such amalgamation were not fully known until the consolidation was fully completed. 5 Founder Dr. Chris Gronet holds a B.S. in materials science and a Ph.D. in semiconductor processing, both from Stanford University. He acted as Solyndra’s CEO until July 2010. He retained the title of Chairman until June 2011, but his involvement with the operations of the company was limited after July 2010.
5
rooftops and for certain shaded agricultural applications. Solyndra developed a new technology
for solar panels, as outlined within this report, which offered the promise of clean solar power for
low-slope commercial and industrial white rooftops.
Solyndra received substantial private funding (over $1.2 billion) for this promising
technology and was also the first recipient of a loan guarantee from the DOE. Specifically, in
July 2005, President George W. Bush (“President Bush”) signed into law Title XVII of the
Energy Policy Act of 2005 (“EPAct2005”) authorizing the DOE to issue and administer a loan
guarantee program to provide federal support to alternative energy companies in an effort to spur
commercial investment for “clean” energy. As a result of the tight credit markets created by the
2008 financial crisis, President Barack Obama (“President Obama”) signed into law the
American Recovery and Reinvestment Act of 2009 (“ARRA”) in January 2009, which, among
other things, temporarily expanded the Loan Guarantee Program (“LGP”) to support clean
energy projects facing difficulties in securing financing.6 According to the Loan Guarantee
Programs Office (“LGPO”) website, the LGP has guaranteed over $35 billion of loans as of
January 31, 2012.
On September 3, 2009, Solyndra, and one of its subsidiaries Solyndra Fab 2, LLC (“Fab
2, LLC”), entered into financing agreements with the Federal Financing Bank (the “FFB”)7 that
provided for a $535 million loan guaranteed by the DOE8 to construct a state of the art
manufacturing facility. Unfortunately, like many new start-up companies, Solyndra did not
survive the rigors and uncertainty of the marketplace and, just two years later, filed bankruptcy.
The U.S. government’s involvement in Solyndra and likely loss of over one half billion
dollars has been well publicized. However, there were also a number of private investors who
believed in the promise of Solyndra’s technology to the point of investing over $1.2 billion of
6 See Appendix G.17, Written Statement for the Record of Jonathan Silver, Executive Director of the Loan Programs Office, U.S. Department of Energy, United States Senate Committee on Energy & Natural Resources, September 23, 2010. 7 The FFB is a government corporation created by Congress in 1973 under the general supervision of the U.S. Treasury. The FFB was established to centralize and reduce the cost of federal borrowing and federally-assisted borrowing from the public. 8 In actuality, the DOE only funded $528 million of the originally agreed sum of $535 million. However, for purposes of this report we will generally refer to the Solyndra’s loan guarantee as having $535 million in availability.
6
private venture funds, the vast majority of which will be lost, including $195.2 million as a
participatory share for the construction of the manufacturing facility.9
Exhibit #3 provides an illustration of the key events that are summarized within this
section of the report and further analyzed within the report’s body.
B. Solyndra’s Product and Technology
The solar energy industry has long been dominated by crystalline silicon based modules
(referred to as “conventional panels”). In 2008, roughly 80% of the photovoltaic (“PV”) solar
panel modules sold used this crystalline based silicon process. The process of using semi-
conductor grade polysilicon was adopted due to the availability of polysilicon feedstock from the
semi-conductor industry and the efficiency of the technology to produce electricity. However, as
the global demand for solar modules outpaced the capacity for polysilicon (“P-Si”) production,
many researchers began to explore usable alternatives to the polysilicon based solar modules.
Thin film photovoltaic technology (as utilized in the Solyndra process) is the dominant
alternative to polysilicon based modules. Within the thin film group, amorphous silicon,
cadmium telluride (“CdTe”), and copper, indium, gallium, diselenide (“CIGS”), are the most
common alternative materials used for energy generation. Solyndra believed that CIGS
technology, as adapted to its manufacturing process, could best compete in the global solar
market. Utilizing this unique technology, Solyndra adopted a cylindrical tube design to protect
the CIGS thin film material from degradation and damage caused by moisture, and set forth on a
path to produce large volumes of panels for low-slope commercial and industrial white rooftop
applications.
After extensive analysis on strength, panel weight, cost, and other factors, Solyndra
decided to use a 15mm diameter CIGS coated glass inner tube encapsulated inside of a 22mm
diameter outer tube. Design of the coating equipment set the length of each tube at about 1
meter. This assembly would be called a module and the Solyndra technology was born.
9 The $1.2 billion referenced above includes $75 million from Tranche A, as further outlined in the report, which will receive a priority distribution from the proceeds of the sale of Solyndra’s assets.
7
This design not only protected the CIGS material from degradation, it also allowed the
panel to collect light from more than just direct sunlight making it naturally more efficient at
producing wattage power. The diagram below from a Solyndra marketing presentation shows
how the panels receive direct, diffuse, and reflected sunlight from every angle of the panel.
The ends of the tubes are hermetically sealed with metal caps, eliminating the risk of
exposure and increasing the lifespan of the product. Finally, the tubes were connected using a
“wiring harness” and attached to a mounting system.
At the time of its entry into the market, Solyndra’s leading competitive advantage was its
low Balance of System (“BOS”) cost, which means the aggregate cost associated with installing
and maintaining solar panels. Due to the unique slatted design of the modules, along with their
8
ability to be installed with zero degrees of tilt, Solyndra’s panels allowed wind to pass through
with minimal resistance. Unlike traditional crystalline based panels, which require significant
support systems to handle moderate to high wind gusts, Solyndra’s panels could be installed
relatively easily and at a fraction of the cost of traditional systems.
The cost of installation for the end user was a major pricing factor that set Solyndra apart
from its competitors as the ease of installation and the lack of mounting equipment needed to
support wind resistance made the BOS cost for Solyndra panels almost half that of traditional P-
Si modules. In addition, traditional solar systems occasionally required additional supporting
systems to allow the roof to sustain their increased weight while the lightweight Solyndra panel
systems required no such modification.
With thousands of flat roofs throughout the world awaiting the comparatively
uncomplicated installation of efficient Solyndra solar panels, and the active participation of
government subsidies including ample European feed-in tariffs, the future looked bright for
Solyndra and its unique technology.
C. Financing and Construction of Solyndra Manufacturing Facilities
In 2007, Solyndra leased its first fabrication facility (“Fab 1”) and began to focus its
efforts on commercializing its technology and designing and deploying the custom equipment
needed to produce its panels on a large scale. In July, 2008, Solyndra began its first commercial
shipments from Fab 1.
Solyndra’s business plan required scale. Accordingly, Solyndra planned additional
manufacturing facilities. The complex path to the construction of Solyndra’s second
manufacturing facility, hereinafter after referred to as Fab 2 Phase I (“Fab 2 Phase I”) started in
2006, during the Bush administration, when the company learned of a new program that allowed
the DOE to provide federally backed loan guarantees to emerging alternative energy companies.
The program was dedicated to the public policy objectives of pursuing initiatives for energy
independence and clean energy. As a result of this new federal program, Solyndra embarked on
an unexpectedly long and costly road to obtain funding from the DOE to support its vision to
9
commercially scale its solar panel technology to be a competitive force in the emerging solar
industry.
The process began in December 2006 with an initial application filed with the DOE and
ended with a $535 million loan in September 2009 from the FFB, which was guaranteed by the
DOE (the “DOE Loan Guarantee”). Solyndra’s efforts to obtain the DOE Loan Guarantee were
costly and time-consuming, and a significant portion of these efforts occurred during the Bush
administration. The process took place over a period of 2 ½ years, during which numerous
meetings and discussions were held with the DOE. In addition, thousands of pages of documents
were provided to the DOE, including financial projections, historical financial performance
analyses, market studies, sensitivity analyses, legal and engineering services documentation, and
numerous meetings were held before the DOE finally approved the application.
During 2007, while Solyndra waited for the DOE to respond to its original pre-
application of December 2006, the company, through investor funds and loans, started to
assemble its first manufacturing facility, which became Fab 1. During that formative period, the
primary issue facing Solyndra was how to ramp up manufacturing quickly in order to fill orders
to satisfy what appeared to be an escalating demand for solar panels. In fact, from the period of
2007 through 2009, Solyndra entered into nine customer agreements, described in Section IX
below, (the “Customer Agreements”) which contemplated, in some form, sales of up to 529
Megawatts10 (“MW”) and a revenue stream, of up to $1.5 billion11 through 2014.
Notwithstanding that the Customer Agreements did not create a contractual obligation for all
contemplated future sales, they were, at a minimum, a reflection of measurable interest in
Solyndra’s technology at a time when the company had not yet shipped a single solar module.12
10 A watt is the primary measure of solar panel sales that will be utilized throughout this report. For instance, 529 MWs is 529 million watts. At a price of $1 per watt for illustrative purposes, 529 MWs will translate into $529 million in sales. 11 These agreements were not wholly binding contracts to acquire $1.5 billion of product, but in many instances, options on the part of buyers. 12 In actuality, for a variety of reasons, including a worldwide reduction in the cost of solar panels, as outlined in the Customer Agreements section of the Report, the final sales based on these agreements were a fraction of what was originally anticipated.
10
D. The Impact of the Sudden Downturn in the Solar Market and the Global Financial Crisis
Between the buoyant optimism infused in the filing of the original DOE loan pre-
application in 2006 and Solyndra’s ultimate bankruptcy filing in 2011, the worldwide solar
industry experienced a dramatic shift in market conditions. That shift had a particularly drastic
effect upon Solyndra and its business model.
In 2008, during the period in which Solyndra first started to produce modules, the price
of polysilicon (a critical component of P-Si modules used by competitors) fluctuated between
$250/kg and $500/kg depending on the data source, due to a shortage in capacity to refine the
element to solar grade quality. Consequently, the high price of production materials for
crystalline silicon producers led to a higher average sales price per watt (“ASP”) for all solar
products throughout the market. As previously stated, one of the competitive advantages that
Solyndra’s cylindrical, thin-film solar cells offered, when compared to conventional panel
producers, was the low BOS cost of installation. However, as the price of polysilicon steadfastly
dropped, primarily due to the aggressive entry of Chinese manufacturers into the P-Si market,
panel manufacturers using polysilicon were able to reduce the cost and price of their panels
substantially, and that single component was no longer sufficient to compensate for the disparity
between the prices for Solyndra cylindrical modules and the standard costs of the typical
polysilicon panels of flat panel producers. Due to these circumstances Solyndra was compelled
to reduce its prices in order to remain competitive. Unfortunately, Solyndra’s total costs of
production, including materials, did not experience a commensurate reduction, which was
devastating.
The entry of Chinese manufacturers into the P-Si market between 2009 and 2011, often
with subsidized funds from the Chinese government, resulted in a steep drop in production costs
for solar manufacturers utilizing P-Si in their products.13 Because Solyndra did not rely on P-Si
in its thin-film solar technology, the company did not benefit from the price declines associated
with P-Si products. Solyndra’s cost structure remained unaffected while its competitors, who
were producing 80% of the world’s solar panels, experienced the beneficial results of the steep
13 In 2005, China produced less than 10% of the global PV market. By 2010, that amount had increased to over 50%. See Appendix C.5, EPIA -- Global Market Outlook for Photovoltaic’s until 2015, pg. 36.
11
P-Si price declines. In addition, Chinese producers had access to capital from the China
Development Bank, which allowed such producers to move their products to market at a much
lower cost than their U.S. or European counterparts.14
At the time of Solyndra’s entry into the market place, the ASP at which the company
could sell its modules was approximately $3.30.15 Had the price stabilized at approximately
$3.30 per watt and the government subsidies remained in place, it is possible that Solyndra might
have continued its operations and ultimately, may have become a successful company. Given its
unique technology, the company may have had a significant impact on the solar industry.
However, Solyndra simply could not survive under the market conditions imposed by the
precipitous drop in the ASP at which Solyndra could sell its product. At present, the ASP for
solar panels hovers at approximately $1.00 per watt.16 This rapid drop in ASP was probably the
single greatest contributor to Solyndra’s failure.
The drop in the ASP was accentuated by the fixed costs embedded in the manufacturing
process Solyndra utilized. These static costs intensified Solyndra’s inability to rapidly adapt to
changing market conditions. Nonetheless, Solyndra tried to compensate for the falling sales
prices by boosting other elements, such as manufacturing output and the increase of average
watts per panel (“Wp”),17 as well as implementing various cost reduction initiatives. While
Solyndra’s technology was certainly capable of being modified and, in certain instances, was
actually improved, it was somewhat resistant to the rapid time demand which was needed to
respond to changing market conditions.
Another problem that beset the solar industry during this period was the European debt
crisis, a spillover from the global recession triggered in 2008, which weighed down the European
economy and led to much slower growth in the overall demand for solar installations between
2009 and 2011. There were two primary reasons for such reduced growth in demand. First, the
global recession caused many businesses to either cancel or delay capital spending projects in
14 See Appendix C.6, European Commission Joint Research Centre Institute for Energy, “PV Status Report 2011,” July 2011, pg. 83. 15 The price during that period would occasionally rise to the level of $3.75 per watt. 16 See Appendix C.1, PVinsights.com, Solar PV Module Weekly Spot Price, February 22, 2012. 17 The Wp was the primary measurement of wattage output – the higher the wattage, the greater the efficiency and higher the price that could be charged. (See Section XII. Financial Forecasts and Projections).
12
exchange for near term cash savings. Second, reduced tax revenue caused many countries to
substantially reduce or eliminate subsidies previously allocated to the solar industry. The
primary government subsidy program utilized in Europe consisted of feed-in-tariffs (“FiT”),
which are long-term contracts offered to purchase energy generated from a renewable source.
The countries with the most generous FiTs, Germany, Italy and Spain, are the European leaders
in global solar PV demand. Together with the United States, these countries accounted for
almost 70% of the world’s installed PV production capacity at the end of 2010. The reduction or
cessation of European FiTs had a serious effect on Solyndra. The European market accounted
for approximately 60% of Solyndra sales between 2009 and 2011.
The convergence of these two components ((a) the drop in the price for solar panels; and
(b) the withdrawal of many of government subsidies) permanently altered the financial landscape
for Solyndra.
Solyndra had many competitors in different stages of growth with different panel
technologies, none of which were immune to the frenetic changes that the market faced between
2007 and 2011. Examining the value of those companies that are publically traded provides a
clear picture of the dire circumstances faced by the solar market. The most notable company to
fall victim to the external market conditions is Massachusetts-based Evergreen Solar, which filed
for Chapter 11 bankruptcy in August 2011. Executives from that company blamed Evergreen
Solar’s demise on government subsidized competition from China and the failure of the U.S.
government to fully invest in clean energy policies.18
For those companies that are still operating, market conditions have also taken a
significant toll on the value of their shares. Fellow thin film producer First Solar, Inc saw its
shares fall 70%, from a high of over $300 per share in mid 2008 to under $90 per share at the
time of Solyndra’s bankruptcy filing. Shares of San Jose-based Sunpower Corp. have fallen over
90% from their high of almost $150 per share in November 2007. Finally, China-based Suntech
Power and Yingli Solar both saw reductions in share value of between 88%-95% between
November 2007 and September 2011.
18 See Bloomberg, “Evergreen Solar Seeks Bankruptcy With Plans to Sell Itself,” Steven Church, August 15, 2011.
13
Solyndra spent its first several years developing the technology, designing the tools to
manufacture, building the initial infrastructure, and obtaining certification to sell its unique
cylindrical modules. By the end of 2008, Solyndra had incurred a total cumulative net loss of
$385.1 million, and yet the company was eager to introduce its technology to the market and
anticipated its future operations would yield a return. By the end of 2008, Fab 1 had acquired
approximately $247.4 million in property, plant and equipment, primarily purchased with funds
obtained from private investors. Commercial shipments from Fab 1 began in July 2008, yielding
total sales of just over $6 million for that year.
E. The DOE Loan Guarantee and Construction of Fab 2
In 2008, Solyndra received notification from the LGPO that the company had been
selected, based upon Solyndra’s pre-application submitted in December 2006, to submit a full
application to the DOE. Following meetings with the LGPO in Washington, D.C. to address the
requirements and expectations of a full application, Solyndra filed a full application beginning
with a partial submission on May 6, 2008 that was completed by August 27, 2008 (the “Full
Application”). Since the Fab 1 facility was already close to becoming operational, the Full
Application entailed the construction of a new facility, which was referred to as Fab 2 (“Fab 2”).
This partial application was more expansive (including a facility capable of manufacturing up to
420 MW per year) than the application ultimately finalized and was initially deemed too large
for the DOE. As a result of the DOE’s reluctance to fund the larger project originally submitted,
the planned Fab 2 facility was split into two phases, the first phase consisted of a 210 MW
facility with a projected cost of $713 million,19 which would double the projected operational
capability of Fab 1.20 The Full Application contained over 1,500 pages of documentation and
information including, but not limited to, a project description, technical information, a business
plan, a financing plan, preliminary cash flow and detailed and extensive spread sheets outlining
basic financial projections, estimated project costs, constructions risks and a mitigation strategy,
federal and state approval documents, environmental reports, credit history and audited financial
statements for 2005, 2006, and 2007.
19 The total project costs were ultimately budgeted at $733 million. 20 For a variety of operational reasons associated with the manufacturing process, the total annual output for Fab 1 never exceeded 67 MW, considerably less than the projected annual output of 120 MW.
14
In January 2009, President Obama signed into law the ARRA. A component of the
ARRA amended the EPAct2005 by adding Section 1705 which temporarily expanded the loan
guarantee program (the “1705 Program”) in an effort to set in motion the country’s clean energy
sector by supporting projects that faced difficulties in securing financing as a result of the tight
credit markets created by the 2008 financial crisis.21
In March 2009, 28 months after filing the first pre-application with the DOE, a term sheet
was executed which provided for a $535 million loan from the FFB, guaranteed by the DOE with
Fab 2 LCC as the borrower, and Solyndra, Inc. as the Sponsor. Some of the major terms
included: (a) total project costs of $733 million; (b) loan guarantee by the DOE of $535 million
(73%); (c) equity contribution of $198 million by Solyndra, Inc. (27%); (d) a seven year term;
(e) a low interest rate based on Treasury bill rates; (f) fees to be paid by Solyndra totaling over
$4 million; and (g) a $30 million cost overrun reserve to be funded solely by Solyndra, Inc.22
Solyndra was the first company to secure a guaranteed loan facility under the LGP. On
September 3, 2009, the company and Fab 2, LLC entered into financing agreements with the
DOE and FFB that provided for a $535 million loan guaranteed by the DOE. The loan to Fab 2,
LLC was for the construction of a new state-of-the-art manufacturing facility in Fremont,
California. The Fab 2 Phase I facility was projected to have approximately 210 MW of annual
manufactured output, over twice the amount of the previous output capability of Fab 1. The Fab
2 Phase I facility was constructed ahead of schedule and under budget.
The aerial overhead below is a reflection of the area surrounding the existing Solyndra
manufacturing facility, Fab 2 Phase I, as well as the original facility, Fab 1.
21 See Appendix G.17, Written Statement for the Record of Jonathan Silver, Executive Director of the Loan Programs Office, U.S. Department of Energy, United States Senate Committee on Energy & Natural Resources, September 23, 2010. 22 The term sheet also outlined the significant documentation to be negotiated and executed, conditions precedent to loan closing, conditions precedent to each periodic approved budget, conditions precedent to each disbursement date, bank accounts to be opened and maintained, representations and warranties, covenants, events of default, reporting requirements, reaffirmation that Solyndra agrees to pay all DOE’s independent consultants and outside legal counsel fees, and various other provisions.
16
Funds drawn on the DOE Loan Guarantee were either sent to Solyndra directly, as
reimbursement for invoices paid or pursuant to provisions in the project agreements executed at
loan closing. Solyndra would in turn incur obligations for the benefit of Fab 2 in hiring
employees, contracting with vendors, and constructing the tooling that went into Fab 2. In
certain instances, loan funds were wired directly to the vendor. Each invoice was included in a
packet sent along with the draw request for review by RW Beck. For funds wired directly to
vendors, a confirmation email was required to ensure that the funds were received. Of the $733
million budgeted, $723 million was ultimately drawn by over 100 separate vendors, including
Solyndra, as of the bankruptcy petition date.
The unique cylindrical form factor of the Solyndra module, as well as the proprietary
CIGS manufacturing process, meant that there were no commercially available production tools
for the Fab 2 Phase I project to purchase; Solyndra necessarily would provide the equipment and
personnel. Solyndra, either directly or through its affiliate, Solyndra Operator, LLC (“Operator
LLC”) received almost 50% of the total loan proceeds. The basis for these draws were laid out
within, and such payments were in accordance with, various project related agreements including
the Equipment Supply Agreement (“ESA”) and the Operations and Maintenance Agreement
(“O&M Agreement”).
The ESA was developed to allow Solyndra to “supply and sell” to Fab 2, LLC (the entity
that held title to Fab 2 Phase I) equipment needed to operate Fab 2 Phase I. The ESA was
necessary as the equipment was unique and had to be developed solely for the Solyndra
manufacturing process utilizing the Solyndra technology, and the completed tools of production
were proprietary to Solyndra. In addition, it was a logical conclusion that Solyndra personnel
would, by and large, replicate the machines presently being used in the Fab 1 manufacturing
process, which was already producing Solyndra panels. The agreed-upon contract price for the
ESA was $318.9 million. Solyndra, as the Sponsor, was responsible for any cost overruns. The
actual amount drawn towards the ESA was $312.9 million.
The O&M Agreement was created to designate the operational, management and
maintenance duties of the Fab 2 facility to a new operating entity, Operator LLC. These duties
were designated as either pre-operational services or management services. Pre-operation
17
services included material procurement, engineering, and other administrative activities leading
up to the facilities operational period, while management services focused on the ongoing
monitoring and management of the Fab 2 facility. In total, Operator LLC drew $43.5 million
from the DOE loan for providing such services.
As Solyndra moved into fiscal year 2011, Fab 2 Phase I became operational and
commenced shipping product in January 2011. The total projected cost of the Fab 2 Phase I
facility was projected to be $733 million, of which $535 million23 would be funded by the DOE
Loan Guarantee and the remaining $198 million by private investors.
The CRO has reviewed the accounting records of Solyndra and has found that the
construction costs were correctly recorded upon the books. No material funds were diverted
from their original intended use.
As part of his engagement, the CRO undertook a review of the loan draw packages
submitted to RW Beck, along with the loan agreements entered into by Solyndra and the DOE.
It is his opinion that the funds drawn under the DOE Loan Guarantee were spent in accordance
with the loan documents.
Concurrent with the funding of the DOE Loan Guarantee, Solyndra was obligated to
provide internal unaudited financial information directly to the DOE on a quarterly basis,
pending issuance of audited financial statements by PWC. Solyndra’s quarterly statements and
certifications were signed by Solyndra’s Chief Financial Officer.24
The CRO has reviewed the unaudited financial information provided to the DOE by
Solyndra and compared that information to the final audited financial statements issued by PWC
for the related annual period to determine whether the financial information provided by
Solyndra in the quarterly reports was materially correct. Following that analysis, described in
greater detail in this report, it is the opinion of the CRO that the information provided to the
23 The DOE Loan Guarantee actually only funded $528 million of the $535 million original loan amount. 24 All of the quarterly statements and certifications in the possession of the CRO have been attached as Appendix Q.
18
DOE, as certified, was materially correct when compared to the audited financial statements of
PWC.25
F. Solyndra’s Financial Performance
During 2009, when the DOE approved the loan guarantee and construction commenced
on Fab 2, Phase I, signals of impending financial deterioration were starting to appear. Although
Solyndra’s sales would briskly move from $6 million in 2008 to over $100.5 million in 2009,
and the ASP was still in the range of $3.30 per watt, there were two troubling developments.
First, while sales increased, they were not as robust as originally envisioned in the pre-
application in 2006. In fact, sales were less than half of forecast levels in the pre-application.26
In addition, while sales were only half of the projected amount, manufacturing and operating
costs were almost twice as much as originally projected therein. Solyndra ended 2009 with a net
loss of $172.5 million and a total net loss since 2005 of $557.7 million.
Solydnra continued to search for capital sources in order to fund its expansion of
production capacity and scaling of manufacturing costs. In December 2009, Solyndra filed a
Form S-1 Registration Statement (“S-1”) with the United States Securities and Exchange
Commission (“SEC”) for an initial public offering (“IPO”) to raise additional capital to fund
operations and a portion of the cost for the construction of the second phase of the Fab 2
facility.27 This public document included a substantial amount of information which was vetted
through an extensive review by the company and its financial advisors, accountants and legal
counsel. The S-1 contained approximately 200 pages of detailed information regarding the
company’s historical operations and performance, technology, customer base and marketing
strategy, capital structure, significant risk associated with projects, and other related information
about the company. The S-1 reflected a frank assessment of the operational changes required for
Solyndra to move into profitability. The S-1 was ultimately withdrawn in the summer of 2010 as
25 It should be noted that there are non-cash differences between the audited financial statements of the company and the financial information provided to the DOE related to the accelerated depreciation of equipment caused by the consolidation of equipment in Fab 1 and Fab 2 Phase I. Such discrepancies were not surprising given that the financial effects of such amalgamation were not fully known until the consolidation was completed. 26 When compared to the original forecast included in the Pre-Application filed with the DOE in December 2006. 27 The Fab 2 Phase II project was originally included in the partial application submitted by Solyndra to the DOE in May 2008. At the time, the DOE was reluctant to include the second phase due to the size of the combined project.
19
the company pursued additional private capital based on the recommendation of investment
advisors.
With the benefit of hindsight, Solyndra’s decision to move forward with the construction
of Fab 2 Phase I in September 2009 was an extremely pivotal decision for the future of the
company. It was the company’s best hope for success, but ultimately, along with other factors,
led to its demise. During the construction of Fab 2 Phase I, the structural changes in the solar
industry resulted in a dramatic reduction of Solyndra’s panel pricing and cash flow from product
sales. The only possible avenue of survival for Solyndra, other than substantial infusions of
capital, lay in massively increased volume. This required Solyndra’s projections and business
plans for the foreseeable future to continue to assume production at full capacity and to sell all
manufactured products and it was critically necessary to reach those levels as quickly as
possible. If that volume was not quickly realized, Solyndra would be overwhelmed by losses
attendant to its fixed operating costs. Solyndra’s investors and lenders were well advised of
these risks facing the company.
These underlying financial problems, which became evident in 2009, became further
aggravated in fiscal year 2010, as evidenced by the circumstances listed below.
• Sales increased from 30.48 MW in 2009 to 57.02 MW in 2010, for an increase of 87%. However, while panel sales increased by 87%, the resulting revenue from those sales increased only 45%, due in large part to the ASP charged by Solyndra, which slipped from $3.30 in January to $2.39 at the end of 2010, for a yearly decrease of approximately 28%.28
• Concurrently, the price for polysilicon, the primary component in the manufacturing process of P-Si flat panels, was priced in 2008 ranging from $250 to $500 per kg, depending on the data source, and started a rapid descent throughout 2009 to approximately $60 per kilogram at the end of 2010.29 This precipitous drop in polysilicon prices of approximately 80% portended serious problems for the future of Solyndra’s CIGS cylindrical technology.
• During this tumultuous period, Solyndra continued to lose money on each panel sold while trying to compete. For instance, in June 2010, during the massive construction process for Fab 2, Solyndra was selling its panels for $3.24 per watt while production
28 This steady decrease in the ASP continued to approximately $2.12 at the time of the Solyndra’s bankruptcy filing and presently stands at less than $1.00. 29 The weekly spot price for PV grade P-Si ranged between $30.50 to $35.00 per kg as of February 22, 2012 according to PVinsights.com. See Appendix C.1.
20
costs exceeded $4.00 per watt.30 In fact, due to these competing factors and its high operational burden, Solyndra sold every panel at a loss.
• Employee headcount was over 1,100 at the end of the year and, by and large, the operational costs were fixed at a high level.31
• As this inexorable drive to compete intensified, other solar panel factories were moving toward production costs of $1.00 per watt. Solyndra, however, could only operate its existing Fab 2 Phase I facility at $2.00 per watt if it reached full production capacity and met certain technical milestones.
• The Chinese government aggressively moved into the market with substantial low cost capital and additionally allowed Chinese manufacturers to extend favorable credit terms. The cash demands pressing upon Solyndra did not allow it to compete in that manner.
• The expansion of China into the solar market, concurrent with the withdrawal of many government subsidies, especially in Germany, Italy, and Spain, caused a worldwide oversupply of photovoltaic panels and severely impacted Solyndra’s capital requirements and the anticipated time to reach positive cash flow from operations.
G. Solyndra’s Restructuring and Capital Raising Efforts in 2010
In February 2010, after approximately 19 months of operations in the Fab 1 facility and
five months of construction on the Fab 2 facility, Solyndra management concluded a “ground
up” review of the company’s internal and external operating environments was necessary as a
result of the recent performance and current operating environment. Pursuant to its review, two
revised draft plans32 were created utilizing various scenarios and alternative assumptions to
address the significant increase in future capital needs. The estimated future funding
requirements were calculated by company management and ranged between $316 million and
$719 million depending on the scenario and assumptions in the revised plans.
A two day meeting with the Board was held in April 2010 to describe the current
financial condition of the company due to the competitive factors referenced herein as well as the
30 See Appendix F.2, Solyndra Amended Form S-1 Registration Statement. 31 The manufacturing costs inherent in Fab 2, were largely fixed costs of operation regardless of actual output in a given period. 32 The revised draft plans included a “Stretch Plan” and a “Base Plan.” The Stretch Plan was characterized by company management as an aggressive “target,” a plan the company could strive to accomplish. The Base Plan was considered by company management to be a high confidence plan. It still had dependencies and risks; however, the intent was to portray a “base result” that would be achieved absent an unlikely turn of events.
21
shortfalls in the prior plan and projections.33 Solyndra management provided a detailed 143
page presentation describing the company’s current status, sales and marketing efforts,
operations, research and development, cash flow, and finance related areas, which included a
sobering assessment of future business operations as outlined above.34
Based on the information presented, the company continued to pursue an IPO and
considered alternative paths for financing. The possibility of not completing the construction of
Fab 2 Phase I was considered as an option, but was not pursued.35 The Board also decided to
conduct a search for a new president and/or CEO. Within a week of the Board meeting,
Solyndra provided the DOE with preliminary insights into the review of the Fab 2, Phase I
financial forecasts including revisions to future ASP based on recent declines in the market.36
The Board met again on April 21, 2010, a day after Solyndra’s discussion with the DOE,
to better understand the company’s cash requirements, IPO timeline, and the ramifications of
missing the first quarter 2010 estimates. In that meeting, Stover described the need to raise
additional capital by June 2010 should an IPO not be feasible by then.
In an effort to solve the pressing capital needs by June 2010, Steve Mitchell (“Mitchell”),
from Argonaut Ventures I, LLC (“Argonaut”), presented a term sheet37 to the Board on May 18,
2010 to raise additional capital from insider investors and described the circumstances that led to
formation of the term sheet, including the need to fund substantial additional capital up to $350
million, the immediate need for short-term funding by the middle of June 2010, and the lack of
other viable alternatives within the limited timeframe. Mitchell proposed using a convertible
debt instrument to provide the company with flexibility and additional time to seek additional
capital from outside investors. Mitchell acknowledged the extreme dilution that would occur if
the additional financing from outside investors was not raised by October 2010 and the proposed 33 See Appendix D.1, Solyndra Board Minutes, April 12-13, 2010. 34 See Appendix D.1, Solyndra Board Presentations, April 12-13, 2010. 35 In fact, in the February 2011 agreement between the DOE and Solyndra, the DOE inserted a provision which would allow the government to assume responsibility for the construction of Fab 2 should Solyndra not be able to continue in that role. The position of the DOE is understandable in light of a final credit rating letter issued by Fitch in August 2009 indicating a probability of default rating of “BB-” (considered Speculative under Fitch’s rating definitions) and an estimated recovery of 89%. (See Appendix P.75, Final Fitch Credit Rating). 36 See Appendix I.100, Email from John Scott (“Scott”), Vice President of Global Project Finance and Business Development for the company, to DOE dated April 20, 2010. 37 The term sheet was prepared by two of the company’s lead investors, Argonaut and Argonaut and Madrone Partners, LP (“Madrone”).
22
note holders converted into equity; however, if the company did not have a fully funded plan by
October, its long-term viability would be significantly impacted. Mitchell stated to the Board the
importance of having all the inside investors participate in the proposed minimum internal round
of $200 million to be funded by mid-June so the company could continue operations.
Additionally, Stover indicated to the Board that any remaining amounts on the existing $50
million line of credit from Argonaut could not be accessed at this point because the company was
currently unable to meet its commercial shipments covenant. Pursuant to the proposals and
information provided, the Board discussed the proposal in detail, the company’s efforts in
accessing other sources of funds, and any additional cost cutting measures that could be taken.38
On June 3, 2010, Solyndra provided the DOE with a revised “base case” plan for Fab 2
Phase I, that, among other things: (a) started Fab 2 Phase I production two months earlier than
anticipated; (b) included higher yields and panel power; (c) included lower ASP forecast due to
external pricing pressures; and (d) included the installation of three new CIGS tools to counter
lower-than-expected line speeds.
The higher yields and panel power as outlined in the “base case” plan for Fab 2 Phase I
was based on increasing the Wp (watts per panel), which was a key metric in Solyndra’s
attempts to ameliorate the financial effects of a lower ASP. To a great extent, demand for
Solyndra’s product and the price at which it could be sold were both dependent upon the Wp
which could be achieved in the manufacturing process. The Wp provided the primary
measurement of wattage output – the higher the wattage, the greater the efficiency and the higher
the price that could be charged. Solyndra’s manufacturing process was structurally limited to a
fixed number of tubes and/or solar panels which they could produce. In other words, the
manufacturing facility could only produce a finite number of panels even under optimum
conditions with throughput and yield39 at their maximum levels. However, Wp was a factor that
the company hoped to improve to maintain an increasing level of watts sold and thereby
38 See Appendix D.4, Solyndra Board Minutes dated May 18, 2010. 39 The forecasts define “output” as a calculation based on three specifications for each tool in the production process: baseline throughput, utilization percentage, and yield percentage. Baseline throughput is the highest throughput possible with the facility running at the maximum level of twenty four hours a day and seven days a week. Utilization percentage is the percentage of time in a given period that a tool is running (i.e., not down for maintenance and repair). Yield percentage is the percentage of material processed by a tool that goes on to the next step and meets minimum specifications.
23
maintain or increase revenues even with the ASP (averages sales price per watt) declining over
time. Solyndra was successful in improving average Wp over the limited period of time when
Fab 2 Phase I was operational; however, in most projections this remained well below the
forecast levels.40
On June 9, 2010, the Board was informed the company would not be in a position to
continue operations without an infusion of capital in the next two weeks. As a result, the
company entered into a short-term note purchase agreement with certain investors allowing for
the issuance of convertible secured promissory notes (not to exceed $200 million) to address the
immediate capital needs and bridge the funding gap. Solyndra issued $175 million of
convertible notes (“Convertible Notes”) through September 2010 with a maturity date in
December 2010 in order to continue operations.
In July 2010, the DOE began requesting additional information concerning the
company’s cost cutting measures, current sales, pricing, and average product costs. On July 29,
2010, pursuant to a sizable document and financial information request from the White House
Office of Management and Budget (“OMB”), including the terms of the $175 million
Convertible Notes, information concerning the “going concern” audit opinions,41 and the reasons
for withdrawing the S-1,42 Solyndra promptly provided a detailed response on August 4, 2010.
Also in July 2010, Harrison joined Solyndra as its new CEO and President. Following
Harrison’s arrival, he undertook an extensive analysis of the company’s operations, business
models, and sales and marketing strategies. The company and Navigant Consulting, Inc.
(“Navigant”) (as the DOE’s independent market consultant for the Fab 2 Phase II application)
had also analyzed the existing distribution and marketing plans prior to Harrison’s arrival. As a
result of these analyses, the company came to the conclusion that the current distribution model
40 Solyndra introduced the 200 series panel in July 2010. The 200 series panel was averaging almost 210 watts per panel. This panel was to replace the 150 series panel. Customer demand for the 150 series continued longer thereby delaying further panel power improvements. Accordingly, actual watts per panel continued to lag forecast amounts. 41 The “going concern” audit opinions were issued routinely in the Solyndra financial statements beginning in 2007. The term “going concern” assumes that a business will continue in operation for the “foreseeable future” and accordingly will be able to realize the benefit of its assets and discharge its liabilities in the normal course of operations. The term “foreseeable future” takes into consideration all known factors for at least, but not limited to, twelve months from the balance sheet date. 42 See Appendix I.103, DOE email to Scott dated July 29, 2010 and the OMB request for information.
24
developed under Dr. Gronet involving the sales to limited integrators and installers was not
conducive to expanding sales opportunities and was problematic for the future of the company.
Harrison believed a new distribution model focusing more on the ultimate end-users provided
much more promise. The new distribution model being developed would pursue direct strategic
accounts (including larger retailers such as Walmart and Target), real estate owners (such as
REITs), utilities, agricultural applications, and government agencies.
The DOE contacted Solyndra on September 7, 2010 regarding Solyndra’s request for
approvals of various cost cutting measures being implemented by the company which required
the execution of additional agreements with the DOE. Solyndra also informed the DOE that it
would report in November that the company would fall below the 70% Fab 1 performance
targets, set forth in the loan agreements. The DOE acknowledged that Solyndra was bringing the
issue to the DOE’s attention several weeks in advance of required disclosure in the spirit of
managing the loan relationship. Solyndra requested an in-person meeting to introduce Harrison
and discuss various topics and issues. The meeting was scheduled for September 15-16, 2010 in
Washington, D.C. with the LGPO.43 A day after the initial discussion, the DOE sent Solyndra a
list of detailed questions and requests for Solyndra Inc’s financial information which included,
amount other things: (a) monthly historical data since 2007; (b) projected monthly forecast
through 2016; (c) monthly cash flow forecasts for next 12 months; (d) detailed historical monthly
cash burn for last twelve months; (e) annual and quarterly financial statements for 2009 and
2010; (f) an updated matrix of executed framework agreements; (g) a cost-reduction roadmap;
(h) the offering memorandum and closing documents for Convertible Notes; (i) an accounting
for the Equipment Supply Agreement; (j) a consolidated financial model through 2016; and (k)
details relating to raising additional capital.44 Solyndra promptly provided its responses to the
DOE questions on September 13, 2010.45
Solyndra attended two days of meetings with the various DOE representatives in
Washington, D.C. on September 15-16, 2010. The stated purpose of the initial meeting was to
introduce Harrison to the DOE and to discuss the company’s current performance and loan
monitoring issues. During this meeting, Jonathan Silver (“Silver”), the Executive Director of the 43 See Appendix I.105, Scott email to Schwartz dated September 7, 2010. 44 See Appendix I.108, DOE email to Scott and Schwartz dated September 8, 2010 in email chain. 45 See Appendix I.108, Scott email to DOE team dated September 13, 2010.
25
LGP, expressed concern regarding Solyndra’s liquidity and its ability to sell out all production.
There were also discussions concerning how Solyndra would manage competition from Chinese
manufacturers given the Chinese government’s policy to support renewable manufacturing. The
majority of the remaining meetings were with Nwachuku, LGPO Director of Portfolio
Management and the LGPO staff to discuss various financial and loan monitoring issues. During
these meetings, the LGPO team46 questioned Harrison on a variety of issues including cash
balances, financial plans, Fab 1 production, sales forecasts for third and fourth quarters of 2010,
and certain questions regarding the materials recently sent to the DOE. Solyndra also discussed
its continued requests for an agreement to address certain cost cutting measures, including the
use of existing excess capacity at the Fab 2 facility. The DOE acknowledged they understood
the merits of the requests and that Solyndra was currently using the Fab 2 Phase I tools.
Solyndra also reiterated that it would be seeking a waiver with respect to the issue of Fab 1
production falling below the required 70% target metric. Nwachuku was concerned about
Solyndra’s ability to raise additional capital and to compete effectively in an industry challenged
by depressed ASP. Based on her concerns, Nwachuku indicated that the DOE would withhold
approvals of all open requests unless Solyndra agreed to improve the DOE’s security position by
providing a guarantee of Solyndra, Inc. on the entire term of the DOE Loan Guarantee, and an
extension of intellectual property rights to permit the DOE to build-out Fab 2 Phase I in the event
of default.47 As a result of the meeting, Nwachuku requested another meeting, to follow-up on
the issues discussed.48
The Board conducted another meeting on September 30, 2010 to obtain a current update
of the company. Harrison discussed the continuing challenges facing the company including
insufficient end-user demand, lower than expected manufacturing execution in the third quarter,
and continued cash burn49 that would accelerate in the future. The $175 million recently raised
would be depleted by January 1, 2011. The Board was provided an update of recent DOE
meetings, requests by the DOE for additional security and a request for a waiver on the DOE
which could present a problem for future draws on the loan.
46 The DOE team included Nwachuku, Program Manager, Ove Westerheim (“Westerheim”), Ken Cestari, Emilio Ghersi, Chris Tsai, Daniel Lee, Scott Stevens, Steve Shulman, and Brian Oakley. 47 See Appendix I.109, Scott email to Solyndra management team dated September 17, 2010. 48 See Appendix I.111, Nwachuku email to Scott dated September 27, 2010. 49 Cash was being depleted at $15 to $20 million per month.
26
Pursuant to the September 2010 Board meeting, the Board held a conference call on
October 6, 2010 to follow-up on the issues previously discussed. company management
provided the Board with a recommended course of action which included, amount other things;
(a) trimming spending by reducing production and deferring capital expenditures; (b) securing
DOE cooperation for an adjusted plan that demonstrated debt service capability; (c) obtaining
interim financing of $150 million to build demand, achieve positive cash flow, and assure the
DOE of a fully funded plan; and (d) completing the Fab 2 facility by consolidating and utilizing
certain Fab 1 tools and Fab 1 operations (the “Consolidation Plan”). A number of proposed
modifications of the DOE Loan Guarantee were discussed and analyzed by the Board.50
Harrison contacted the DOE on October 8, 2010 to describe the recent quarterly financial
results which made it impractical to obtain additional capital in the short-term based on the
current financial environment. The DOE, through Silver, questioned the ability of the company
to continue operations into the future. Harrison indicated the company could continue under
various scenarios until either December 31, 2010 or toward the end of March or April 2011
under the company’s new Consolidation Plan, which included redeploying existing Fab 1 tools
and equipment to the Fab 2 facility in hopes of increasing operational efficiency and reducing the
labor force by approximately 200 people. Harrison informed the DOE that under the proposed
Consolidation Plan the company would need to raise an additional $150 million to fund the plan,
and requested flexibility and time from the DOE to develop the plan and marketing revision and
complete the Fab 2 facility.
In response to the call with the DOE, Stover provided a detailed email to Nwachuku on
October 11, 2010 which provided additional materials and details regarding Harrison’s previous
discussions and also requested, among other things, various loan modifications including
maturity extensions, forbearance of further interest payments for a period, removal of an
obligation to fund the $30 million cost overrun account, and consolidation of Fab 1 equipment to
the Fab 2 facility.
Solyndra officials personally met with the DOE in Washington, D.C. on October 15,
2010 to discuss in detail the current situation and the information provided in Stover’s e-mail.
50 See Appendix D.8, Solyndra Board Presentation dated October 6, 2010.
27
They discussed the company’s ongoing financial performance, considered various options, the
Consolidation Plan, proposed DOE loan modifications, sales and market information, and
operational issues.51 Within days of the October 15th meeting, representatives of the DOE
travelled to Solyndra on October 19, 2010 for two days of further detailed meetings and
discussions regarding the company’s sales pipeline, demand forecasts, operational and technical
issues, and the proposed Consolidation Plan.52
In November 2010, Solyndra provided the DOE with “weekly performance dashboard
reports” to track ongoing weekly performance. Solyndra also provided additional information
concerning projected cash flows and revised projections concerning costs and sales. Solyndra
also held additional meetings with the DOE throughout the month.
Another Board meeting was held on December 2, 2010 wherein an update was provided
concerning ongoing efforts to raise additional capital and obtain DOE loan modifications. As a
result of these discussions, the Board reviewed the company’s alternatives, including a
standalone Fab 1 facility, a sale of all or part of the business and a potential bankruptcy filing.53
Solyndra contacted the DOE to schedule a meeting on December 6, 2010 to negotiate the
restructuring of the DOE Loan Guarantee and provide proposed modifications to the DOE loan.
The DOE, in turn, provided a proposed term sheet. The company and the DOE continued to
negotiate an acceptable term sheet in December 2010 which resulted in final documents in
February 2011 for restructuring of the existing debt, which ultimately included a senior
liquidation preference for a new infusion of $75 million from a group of investors including
Argonaut and Madrone.
Chart #1 below provides the actual results of Operations from March 1, 2009 until
November 30, 2010.
51 See Appendix J.6, Solyndra Presentation to DOE dated October 15, 2010. 52 See Appendix J.7, Solyndra Presentation to DOE dated October 19, 2010 and Appendix J.8, Solyndra Presentation to DOE dated October 20, 2010. 53 See Appendix D.9, Solyndra Board Minutes and Board Presentation dated December 2, 2010.
28
H. Events Leading to and Summary of February 2011 Restructuring
Through the end of fiscal year 2010, Solyndra had received over $961.3 million in
funding from the sale of redeemable convertible preferred stock, including certain bridge loans
converted to preferred stock. Solyndra had also issued an additional $175 million in convertible
notes. The company had acquired property and equipment of $850.3 million in the construction
of Fab 1 and Fab 2 Phase I. The total cumulative losses incurred by Solyndra from inception to
2010 totaled $886.4 million.
As a result of continuing losses, Solyndra consumed the additional infusion of $175
million within six months, and again found itself in need of additional capital. The company
approached both existing and new potential investors, as well as the DOE. Efforts to secure new
investor capital, even with the assistance of investment bankers, proved unsuccessful.
Ultimately, the company’s existing investors came forward with a proposal for a new $75
million loan on terms that were more favorable to the company and its creditors than any other
financing options available to the company at the time. As is customary in cases where
distressed companies seek new debt financing, the lenders required, as a condition to providing
the new capital, that the new financing had priority, in the event of liquidation, over the
29
company’s existing debt, including the DOE Loan Guarantee. The parties ultimately finalized a
global restructuring on February 23, 2011 (the “Restructuring”), which included liquidation
priority for the new $75 million loan in the event of a liquidation prior to March 2013. The
agreements and documents were heavily negotiated between the parties and contained over 2,100
pages.54
The restructuring was intended to consolidate operations, thereby reducing costs, and
obtain additional funding to operate the company while the company repositioned itself to
compete in the deteriorating and challenging solar market. The principal amount of the
restructured secured debt and relative priority by Tranche is as follows:
Table #1
Summary of Restructured Secured Debt Secured Debt
Principal Amount
Committed55
Tranche A $75 Million Tranche B $150 Million Tranche C56 Not Funded Tranche D $385 Million Tranche E57 $186 Million TOTAL $796 Million
1. Tranche A Debt
The DOE and the company’s investors, lead by Argonaut and Madrone (the “Lead
Investors”) agreed to restructure the company’s existing indebtedness, whereby the new $75
million loan (“Tranche A Debt”) from existing investors that agreed to participate would have a
liquidation priority over the DOE Tranche B debt. The funds were to be used in the
implementation of the Consolidation Plan.
54 See Appendix W, February 2011 Restructuring Agreements and Documentation. 55 Principal amount for Tranche A and Tranche B represent the commitments of the credit parties and not the actual amounts drawn. 56 Tranche C was not funded pursuant to the February 2011 Restructuring. It was established as a result of near-term anticipated future capital requirements and allows for funding of an additional $75 million. 57 Tranche E was composed of $175 million in outstanding principal obligations under the Convertible Notes, plus accrued interest of $11 million through the date of the Restructuring.
30
All of the existing Convertible Note holders and preferred stockholders were offered the
right to participate as lenders in the Tranche A Debt.58 Approximately 23 of the company’s
existing investors accepted the offer and became a lender in the restructured Tranche A Debt.
On February 23, 2011 Solyndra entered into a restructuring whereby all of the assets of
Solyndra, Inc. (including all of Solyndra, Inc.’s equity interests in subsidiaries and intellectual
property) were conveyed to Solyndra LLC and all of the liabilities of Solyndra, Inc. were
assumed by Solyndra LLC. Fab 2, LLC changed its name to Solyndra LLC (included in the
collective Solyndra) to reflect the fact that Solyndra LLC would become the primary operating
entity going forward.
Following the February 2011 Restructuring, Solyndra adhered to even more extensive
reporting requirements, including weekly, monthly and quarterly reporting of financial and
operational performance, sales and marketing updates, production metrics, cash balances,
working capital requirements, loan advance reporting, head counts, inventory balances, and
budget to actual comparisons. The DOE representatives also attended all Board meetings as
observers and received various Board materials beginning in February 2011.
Having reviewed communications and the underlying records between the DOE and
Solyndra, it is the opinion of the CRO that, based upon the level of documentation and
information as cited above, the DOE had sufficient information to understand the risks and
challenges associated with the DOE Loan Guarantee and make an informed decision as to the
ongoing financial condition of Solyndra in advance of granting the original loan guarantee and
thereafter, including in connection with the February Restructuring and through the
commencement of the bankruptcy case.
Even though Fab 2 Phase I was operational at the beginning of 2011, the financial losses
continued to mount. In fact, the three largest quarterly net operating losses reported by Solyndra
occurred during the fourth quarter of 2010 and the first and second quarters of 2011, which were
58 On February 16, 2011, Solyndra, Inc. sent a Tranche A – Rights Offering Information letter to the holders of the existing Convertible Notes and preferred stock. The rights offering expired on March 16, 2011 and participants were required to be accredited investors under applicable federal securities laws. See Appendix W.146, Tranche A – Rights Offering Information Letter.
31
$77.7 million, $114 million and $91.1 million respectively for a nine-month total of $282.8
million.
The weekly report provided to the DOE noted that sales and cash continued to decline
during the first seven weeks of the third quarter of 2011. By August 20, 2011, the reported cash
balance was just $5.0 million and sales for the same seven week period were only $5.3 million,
$13.8 million below the February 2011 forecast for the same seven week period.
By July 2, 2011, a little more than a month prior to the bankruptcy filing, Solyndra had
reported losses totaling almost $1.1 billion. Long-term debt exceeded $787 million and cash had
dwindled to just over $18 million.
Solyndra was never able to operate at a profit. The schedule below provides a graphic
representation of total revenue from 2005 through 2011 and the corresponding net operating loss
during that same period.
In fact, as detailed below, from 2009 through 2011 Solyndra had a net operating loss per
watt of $3.92.
32
Table #2
SOLYNDRA, INC
Revenues and Expenses on a per Watt Basis For Fiscal Year 2009 Through July 2, 2011 Revenue per Watt $ 2.56 Manufacturing Costs (4.28) Operating Expenses (2.20) Total Costs per Watt (6.48) Net Operating Loss per Watt $ (3.92)
I. Events Leading to Bankruptcy Filing
At the time of the Restructuring, Solyndra and its existing investors and creditors
understood that the company required further incremental capital beyond the $75 million of
Tranche A Debt59 to fund the Consolidation Plan. Thus, the Restructuring documents provided
for further Tranche C Debt funding of up to an additional $75 million.
Beginning in the second quarter of 2011, Solyndra pursued various funding alternatives,
including multiple strategic and financial investors, in an attempt to attract the required capital
under the terms provided for in the Tranche C Debt. On May 5, 2011, Solyndra management
reported to the Board that the company would need incremental financing by early June to
continue operations.60
In an effort to address the immediate and pressing cash requirements, Solyndra
approached certain of its Tranche A Debt holders and the DOE to explore alternative debt
financing arrangements, including the sale of accounts receivable and inventory. As a result, a
draft term sheet was presented to the Board regarding a proposed accounts receivable purchase
facility (“A/R Facility”) whereby Solyndra LLC could sell up to $75 million of qualifying
accounts receivable to a special purpose entity established by certain investors led by Argonaut,
Madrone and Rockport to fund short-term cash requirements.61
59 As a result of the Restructuring provided the commitment of the Tranche A Debt left the company with more than $783 million in senior secured debt. 60 See Appendix D.14, Solyndra Board Minutes and Board Presentation dated May 5, 2011. 61 See Appendix D.15, Solyndra Board Minutes and Board Presentation dated May 20, 2011.
33
Under the terms of the Restructuring, the consent of the DOE was required to implement
the A/R Facility, and as a result the DOE was extensively involved in the negotiation of the
transaction. Solyndra obtained the written consent of the DOE and executed agreements on June
3, 2011, and began to receive proceeds from the A/R facility.62 By July 7, 2011, the A/R Facility
had provided Solyndra with a cash infusion of approximately $29.2 million. However, the
company still required additional capital, and worked with its existing investors and the DOE on
a second facility whereby certain inventory of Solyndra would be sold to a special purpose
vehicle formed by certain existing investors (“the “Inventory Facility”). Management apprised
the Board of the need for the Inventory Facility, and indicated to the Board that Solyndra was
continuing with its necessary cost cutting and vendor management measures in order to
minimize the immediate cash requirements and that the A/R Facility and Inventory Facility only
provided short-term liquidity and did not replace the need for long-term capital. As a result,
Tranche C Debt financing would still be required by August 2011.63 Solyndra obtained the
written consent of the DOE and executed the agreements relating to the Inventory Facility on
July 29, 2011 allowing for the sale of inventory and funding under the agreed-upon terms.64
In early August, Solyndra, certain holders of Tranche A Debt, and representatives of the
DOE began negotiations on a financing structure that would allow Solyndra to attract new long-
term investment. Argonaut presented a proposal to Solyndra and the DOE involving the
significant restructuring of Solyndra’s balance sheet, which would have included the write-off of
a significant portion of the Tranche B Debt, all of the Tranche D Debt and all of the Tranche E
Debt, and indicated that it would be willing to underwrite the additional investment on these
terms (“Argonaut Proposal”). The DOE engaged Lazard, Freres & company (“Lazard”) to assist
it with these negotiations and to help identify potential sources of capital for the company. The
DOE initially responded that the Argonaut Proposal was unacceptable, and made a
counterproposal to Argonaut that sought to preserve most of the DOE’s debt. After Argonaut
indicated that it would not be willing to move forward with a transaction based on those terms,
the DOE indicated that it would attempt to obtain the approvals necessary to move forward with
a transaction based on the original terms of the Argonaut Proposal. However, by this time
62 See Appendix AB, AR Facility discussion and documentation. 63 See Appendix D.17, Solyndra Board Minutes and Board Presentation dated July 7, 2011. 64 See Appendix AB, Inventory Facility discussion and documentation.
34
Argonaut had lost the necessary internal support to move forward with such a transaction, and it
indicated it was no longer willing to underwrite any transaction without significant participation
from a new investor. Nonetheless, the parties continued to discuss a long-term restructuring
deal.
These negotiations over the terms of the incremental capital continued throughout August
2011, and during this time, the parties to the Inventory Facility continued to purchase Solyndra
inventory to provide needed liquidity to Solyndra. After it was clear that a transaction could not
be accomplished under the terms set forth in the Argonaut Proposal, the DOE and certain
existing investors began negotiations for bridge financing to allow Solyndra additional time to
find a new source of capital and complete an overall restructuring. Under the proposed terms of
the bridge financing, both the DOE, as the loan servicer of the Tranche B debt, and the holders of
the Tranche A Debt would have released additional funds to Solyndra.
On August 26, 2011, the DOE indicated it was unable to provide additional funds under
the Tranche B facility; however, the parties continued to work on interim financing alternatives.
In light of the DOE’s stated position, Mitchell indicated to the Board that Argonaut was not
willing to be the sole source of the required additional long-term capital and based on the status
of discussions among Argonaut, other potential investors and the DOE, he had severe
reservations in making a recommendation to Argonaut to provide additional long-term capital at
that time. At the Board meeting, Nwachuku updated the Board on the DOE’s continued
commitment to the company and stressed the continued work the DOE and its financial advisors
were doing in an attempt to find a solution to the company’s capital requirements.65
Two days later, the Board met again to address the pressing financing and capital issues.
The Board was informed that an understanding had been reached between the representatives of
the Tranche A lenders and the DOE. Subject to the DOE obtaining necessary governmental
approvals, the lenders agreed to provide additional “bridge” funding to the company to afford
additional time to secure long term capital. The contemplated “bridge” funding involved the
release of approximately $8 million of the remaining DOE Loan Guarantee funds, approximately
$6 million of remaining Tranche A Debt proceeds, and the DOE’s permission for the company to
65 See Appendix D.21, Solyndra Board Minutes dated August 26, 2011.
35
access an additional $3 million of funds (proceeds of equity infusions) held in a restricted
account. A commitment was also made by the parties to the Inventory Facility to purchase
approximately $3 million of additional inventory pursuant to the Inventory Facility to allow the
DOE sufficient time to obtain the necessary approvals for the interim funding arrangement.
Immediately prior to an August 30, 2011 Board meeting, the DOE informed the company
that it was unable to obtain the necessary consents from the other agencies to allow for the
interim funding of the remaining Tranche B proceeds unless the funding was part of a fully
funded business plan. company management updated the Board of the DOE’s position at the
August 30th Board meeting. At the same meeting, Mitchell also informed the Board that the
Tranche A lenders were not prepared to release the remaining funds without the release of the
Tranche B funds, and they could not commit to fully funding the company. Solyndra was left
with no other option but to immediately suspend operations and begin the process of filing its
Chapter 11 petitions. 66
As a result, on August 31, 2011, Solyndra immediately suspended its manufacturing
operations and terminated the vast majority of its workforce. Inasmuch as the company’s assets
include complex equipment and intellectual property, the company retained key employees to
maintain its assets with the ability to re-start operations while restructuring options were
explored, to assist with sales of assets and, as necessary, to wind-down the business following a
sale or liquidation of assets. A week later, on September 6, 2011, Solyndra commenced its
Chapter 11 bankruptcy cases.
The summarized report above contains an overview of the significant events that
Solyndra faced as it navigated the highly competitive renewable energy market. The
complexities of the company’s operations and the numerous details examined by the CRO
required the analysis of thousands of documents and interviews with certain key individuals. A
more detailed analysis of the findings and conclusions of the CRO are presented within the body
of the full report as detailed below.
66 See Appendix D.23, Solyndra Board Minutes dated August 30, 2011.
36
V. SOLAR TECHNOLOGY AND PRODUCTS
A. History
The solar energy industry has long been dominated by crystalline silicon based modules
(referred to as “conventional panels”). The process of using semi-conductor grade polysilicon
was adopted due to the availability of polysilicon feedstock from the semi-conductor industry
and the efficiency of the technology to produce electricity. However, as the global demand for
solar modules outpaced the capacity for polysilicon production, many researchers began to
explore usable alternatives to polysilicon based solar modules.
Thin film photovoltaic technology (utilized in the Solyndra process) is the dominant
alternative to polysilicon based modules. Within the thin film group, amorphous silicon, CdTe,
and CIGS, are the most common alternative materials used for energy generation. While
amorphous silicon and CdTe either lack the energy yield capacity or cost savings to compete
with polysilicon, Solyndra believed that CIGS technology could compete in the global solar
market. Utilizing this technology, Solyndra adopted a cylindrical tube design to protect the
CIGS thin film material from degradation and damage caused by moisture, and set forth on a
path to produce large volumes of panels for low-slope commercial and industrial white rooftop
applications.
B. Design
After extensive analysis on strength, panel weight, cost, and other factors, Solyndra
decided to use a 15mm diameter CIGS coated inner tube encapsulated inside of a 22mm
diameter outer tube. This design not only protected the CIGS material from degradation, it also
allowed the panel to collect light from more than just direct sunlight, making it naturally more
efficient at producing wattage power. The diagram below from a Solyndra marketing
presentation shows how the panels receive direct, diffuse, and reflected sunlight from every
angle of the panel.67
67 Solyndra’s products have been designed and developed to be used on flat white commercial roofs for optimum results.
37
Design of the coating equipment set the length of each tube at about 1 meter. This
assembly would be called a module. The next challenge was to determine the best number of
modules to place in a panel, and to optimize the spacing between the modules. Based on the
maximum weight for a two-person lift, and the need to have the number of modules easily
factored to support automation, the decision was made to include 40 modules in each panel.
Wider spacing between the modules would allow more sunlight to strike each module, resulting
in higher power and lower cost per watt. Tighter spacing would result in more watts per square
meter of panel, and also increase the snow load capacity of the panel.
The inside of the glass tubes contain an “optical
coupling agent”, which is a fluid that has an index of
refraction matched with the glass.68 The fluid concentrates
the sunlight entering the tube, increasing the efficiency and
reducing the relative amount of PV material required.69
The ends of the tubes are hermetically sealed with metal
caps, eliminating the risk of exposure and increasing the
lifespan of the product. Finally, the tubes were connected
using a “wiring harness” and attached to a mounting
system.
The first prototypes of this panel, later called the
“100 Series” were produced in September of 2007. By
January 2008, samples were ready for certification.
68 Based on information provided by Ben Bierman. 69 See Appendix B.1, Solyndra Product and Sales Introduction dated December 1, 2009.
38
Certification was achieved in April of 2008 and shipments to customer sites began. Initial
shipments had an average watt per panel between 135 and 150 watts.70
C. Comparative Advantage
At the time of its entry into the market, Solyndra’s leading competitive advantage was its
low BOS (balance of system) cost, which means the aggregate cost associated with installing and
maintaining solar panels. Due to the unique slatted design of the modules, along with their
ability to be installed with zero degrees of tilt, Solyndra’s panels allowed wind to pass through
with minimal resistance. Conventional PV panels, such as the one displayed below, generate a
significant amount of lift and/or load on the roof structure due to the angle of installation and
lack of an outlet for the incoming wind gusts. Unlike traditional crystalline based panels, which
require significant support systems to handle moderate to high wind gusts, Solyndra’s panels
could be installed relatively easily and at a fraction of the cost of traditional systems.
The cost of installation for the end user was the major pricing factor that set Solyndra
apart from its competitors. Due to a reduction in the cost of polysilicon (as discussed in Section
VI. External Environment and Market Conditions), the cost per watt of traditional silicon panels
fell below a price point that Solyndra could match. However, the ease of installation and the
lack of mounting equipment needed to support wind resistance made the BOS cost for Solyndra
panels almost half that of traditional models. Below, in a chart provided to Solyndra employees
as part of the State of the Business update on November 3, 2010,71 the cost breakdown is
illustrated for the upcoming quarter and for the projected following year. Solyndra believed that
it could make up its roughly $1.00 higher per watt panel price with a corresponding advantage in
70 See Footnote 68. 71 See Appendix B.2, Solyndra Q3 State of Business Presentation dated November 3, 2010.
Conventional PV Solyndra PV
39
the BOS cost of the system. The challenge for the company was educating prospective
customers on the total project cost instead of a narrow focus on the ASP of the modules
themselves.
In July 2010, Solyndra began shipping its new “200 Series” panel. The aluminum frame
had been eliminated, as had all other exposed metal surfaces. The panels and mounts now linked
together without the use of screws. As there were no exposed conductive surfaces, it was now
possible to eliminate the need to ground the panels and array. Ground wiring was eliminated.
Installation labor was cut in half compared to the 100 series. The spacing between the tubes
increased from 22 to 35 mm, boosting power by about 9%. The new high-voltage modules
added an additional 2%, for a total power boost of 11%. As a result of these improvements,
Solyndra was able to produce panels of up to 220 average Wp. Since the panels no longer
included a metal frame, and self stacked for crating without the need for separators, they were
much easier to build and ship.
By February 2011, Solyndra had ceased production of the 100 series product. Demand
was shifting to the 200 series. When customers wanted the higher watt density of the 100 series,
they were offered the new “150 Series”, a 100 series frame with the new, higher voltage, 200
series modules.
41
The 20X panel was primarily a cost reduction program. By making a frame that required
more supports to handle heavy snow loads, and by making a lower specification mount, a $15-20
per panel cost reduction would be realized. Implementation, including tooling and certification
testing, would cost approximately $10M, resulting in a six to nine month payback time at
planned run rates of one million panels per year. Solyndra was unable to realize the full benefit
of its innovations as financial problems intervened.
VI. EXTERNAL ENVIRONMENT AND MARKET CONDITIONS
Solyndra was formed May 2005 and filed its original DOE loan application in 2006.
Between 2006 and Solyndra’s bankruptcy filing, there was a dramatic shift in the overall global
solar market. Since the company’s inception, one of Solyndra’s projected competitive
advantages was the cost savings that its cylindrical, thin-film solar cells offered compared to
traditional polysilicon (P-Si) solar panels. In 2008, the price of P-Si had peaked between
$250/kg and $500/kg depending on the data source,72 due to a shortage in capacity to refine the
element into solar grade quality. The high price of production materials for P-Si solar cell
manufacturers (referred to as “conventional panel producers”) led to a higher ASP for all solar
products throughout the market.
However, the solar market conditions that existed in 2008 began to shift dramatically
downward in terms of pricing in 2009 and continued on a steady decline through 2011. Chinese
manufacturers, often with subsidized funds from the Chinese government, began to significantly
increase their capacity for producing P-Si. The net result was a steep drop in production costs
for solar manufacturers utilizing P-Si in their products. Because Solyndra did not rely on P-Si in
its thin-film solar technology, the company did not benefit from the price declines associated
with P-Si products. Solyndra’s cost structure remained unaffected. Yet, the company had to
withstand downward pricing pressure resulting from declining ASPs across the market for solar
manufacturers caused by reductions in costs associated with producing P-Si.
72 The weekly spot price for PV grade P-Si ranged between $30.50 to $35.00 per kg as of February 22, 2012 according to PVinsights.com. See Appendix C.1.
42
In addition to the fall in ASPs in the solar market, the European debt crisis, a spillover
from the global recession triggered in 2008, led to slower growth in the overall demand for solar
installations between 2009 and 2011. There were two primary reasons for such slower growth in
demand. First, the global recession caused many businesses to either cancel or delay capital
spending projects in exchange for near term cash savings. Second, reduced tax revenue caused
many countries to substantially reduce or eliminate solar subsidies.
Although it is uncertain whether a favorable market would have allowed Solyndra to
meet its projections and remain economically viable, the economic obstacles described in more
detail below, certainly made the company’s progress more challenging.
A. Impact of the Recession of 2008
Solyndra began its progression from startup to commercial manufacturer at a time when
the world was experiencing the effects of an economic recession that began in 2008. In August
2008, Solyndra finalized its application for the DOE Loan Guarantee intended to finance the
construction of the company’s Fab 2 Phase I facility which would triple the company’s then-
current manufacturing capacity. During the following month, Lehman Brothers filed for Chapter
11 bankruptcy protection.73 The fall of Lehman triggered a collapse in global markets and shed
light on the dangerously fragile balance sheets of the world’s largest financial institutions. The
turmoil that followed, as has been well-documented, reached every sector of the global economy.
One of the major policy actions taken by the Obama administration in the wake of the
financial crisis was the ARRA, which was signed by the President on February 17, 2009.74
ARRA had a large impact on Solyndra’s quest to obtain financing through the DOE Loan
Guarantee program. ARRA appropriated an additional $6 billion dollars to the EPAct2005, to
“pay the costs of guarantees made under” that section75 and contained a provision for the DOE to
be allocated funds for the payment of the credit subsidy cost (“CSC”) on behalf of loan
applicants. The CSC was a measurement of the Borrower’s risk of default. Payment of the CSC
by the borrower was a condition precedent to the closing of a loan guarantee. In December
2008, Solyndra learned that the CSC for the Fab 2 DOE Loan Guarantee was estimated to be 73 See Appendix C.2, Lehman Brothers press release dated September 15, 2008. 74 See Appendix G.11, American Recovery and Reinvestment Act of 2009. 75 Id.
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between 6% and 14% of the total loan amount.76 Having those funds paid under ARRA on
Solyndra’s behalf allowed the company to save between $32.1 and $74.9 million in up-front
costs.
Notwithstanding the payment of the CSC, the overall effect of the global economic
downturn was overwhelmingly negative for Solyndra. Following conditional approval of the
DOE Loan Guarantee for the Fab 2 Phase I facility in March 2009, the global recession began to
have a significant negative effect on Solyndra’s business. First, Solyndra’s efforts to raise
additional capital, either through an IPO or additional private funding, were hampered by global
economic conditions. Second, Solyndra’s customers had difficulty obtaining financing for their
projects due to the credit freeze. Finally, the amount of government assistance provided to the
solar industry was reduced as countries facing large budget deficits began reducing the amount
of subsidies offered under their incentive programs.
To illustrate the scale of the credit freeze caused by the recession, the chart below from
the St. Louis Federal Reserve Bank’s database shows the decline in the Commercial and
Industrial (“C&I”) lending market since the economic downturn.77 According to these statistics,
the global C&I market dropped by close to 25% between December 2008 and December 2010, a
critical time period for Solyndra’s operations.
76 See Appendix I.35, Bill Miller (DOE) email to John Scott dated December 9, 2008. 77 See Appendix C.3, Federal Reserve Bank of St. Louis, Commercial and Industrial Loans at All Commercial Banks (January 1, 2009 to January 1, 2012).
44
The combination of reduced access to the funding sources that purchasers of solar panels
typically relied upon and a more challenging sales environment were heavy burdens on Solyndra
while it attempted to ramp-up production. To match sales with the company’s expanded
capacity, Solyndra required a market that was both receptive to the company’s new technology
offerings and could find ways to finance the purchase of solar panels. Unfortunately for
Solyndra, the market was mired by what many consider to be the worst financial conditions since
the Great Depression.
B. Incentive Programs
The demand for Solyndra’s products was driven by various external factors over which
the company had little control. Perhaps the most significant factor that influenced demand in the
solar industry was the amount of government assistance dedicated to growing the industry.
Many countries have set national standards for renewable energy production in an attempt to
reduce their dependence on traditional fossil fuels. In order to meet these objectives, countries
often use public policy tools to increase demand for renewable energy by making solar power
more competitive with carbon-based fuel. Absent such government intervention, many of
Solyndra’s end users would be unable to justify the cost of using renewable energy sources when
compared to traditional carbon based sources.
45
Examples of the policy tools commonly used by governments to encourage renewable
energy generation are FiTs, renewable energy certificates (“REC”), and renewable portfolio
standards (“RPS”).78 A FiT is a long-term contract offered to purchase energy generated from a
renewable source. An REC is a certificate awarded to renewable energy producers based on the
amount of energy produced. An REC can be used as a revenue generating tool when it is sold to
non-renewable energy producers/consumers that need to meet the requirements of RPS (most
often referred to as the “cap-and-trade system”).
While the foregoing policy tools are used throughout the world in varying degrees, FiTs
are the most widely utilized in Europe, which has had the most generous subsidies benefitting
solar manufacturers. From 2000 to 2009, FiTs accounted for more than 15 gigawatts79 (“GW”)
of solar PV production in the European Union.80 The countries with the most generous FiTs
tend to be the leaders in global solar PV demand. Germany, due to the success of the FiT
program passed in 2000 as part of the Renewable Energy Sources Act, is estimated to account
for over 40% of the global demand for PV products.81 The next two largest consumers, Italy and
Spain, each have similar FiTs in place in order to spur demand for PV installations. Together
with the United States, these three European countries accounted for almost 70% of the world’s
installed capacity at the end of 2010.82
Government tools to increase renewable energy production have played a large role in
establishing the current market conditions for solar power demand. Since the establishment of
FiT programs in the early 2000’s, countries like Germany, Spain, and Italy have demonstrated
the effect these policy tools can have on global market sales. In total, it is estimated that 75% of
global PV installations are a direct result of a FiT policy.83
Recent economic conditions have caused worldwide reductions in the economic
incentives available for investment in renewable energy production. However, this reduction in
78 See Appendix C.4, National Renewable Energy Laboratory (“NREL”), “Policymaker’s Guide to Feed-in Tariff Policy Design,” June 2010, pg. 14. 79 One gigawatt equals one billion watts or one thousand megawatts. 80 See Footnote 78, pg. v. 81 See Appendix C.5, European Photovoltaic Industry Association (“EPIA”), “Global Market Outlook for Photovoltaics until 2015”, pg. 28. 82 Id. 83 See Footnote 78, pg. v.
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FiT rates has occasionally caused temporary spikes in demand. In Germany for example, the
country saw growth of over 90% in 2010 for total MW installed. This growth was a direct result
of installers attempting to get out ahead of planned reductions in FiTs that were scheduled to
occur in July and October of 2010.84 Similar growth occurred in many of the other European
markets as incentives for future installations were scheduled to be reduced in order to meet
budget constraints caused by the European debt crisis. Although these spikes in demand have a
temporary positive impact on the industry, the effect of the reductions in incentives will have a
negative impact on long term demand. The direct correlation between the availability of
governmental incentives and the continued viability of solar based PV companies highlights the
interdependency of nascent solar companies with government sponsored programs.
1. Germany
As noted above, in 2000, Germany passed a law which introduced a FiT for electricity
produced from solar PV systems. The FiT was designed to pay a guaranteed rate over a 20-year
period with built-in annual reductions.85 In a presentation to Solyndra’s board dated April 13,
2010, Germany was identified as the “largest and (most) predictable PV market.”86 This board
presentation also predicted that Germany’s share of the global commercial and industrial (C&I)
market will grow from 1,172 MW in 2010 to 1,756 MW in 2013. This estimated demand is over
twice the annual demand of any other country, with the exception of the United States, which
was estimated to grow from 460 MW in 2010 to 2,674 MW in 2013.
2. Spain
Spain is the second largest consumer of PV with almost 4 GW of cumulative installed
capacity to date. The country saw a dramatic spike in demand in 2008, ahead of a planned
decrease in the FiT payment rates. Approximately 2.7 GW of PV capacity was installed in Spain
in 2008, more than double the projected capacity for that year.87 Since the “bubble” effect of the
FiT decrease in 2008, Spain’s annual projected MW demand for 2011 through 2015 was between
84 Solar Buzz, “European PV Markets”, June 2011, pg. 76. 85 See Appendix C.6, European Commission Joint Research Centre Institute for Energy, “PV Status Report 2011”, July 2011, pg. 19. 86 See Appendix D.1, Solyndra Board Presentation dated April 13, 2010. 87 See Footnote 85, pg. 19.
47
500 MW to 1,000 MW per year pursuant to the European PV Industry Association (“EPIA”),
placing Spain below other countries with faster growing demand.88 According to J.P. Morgan’s
market research report issued in January 2012, approximately eight months later, Spain’s actual
PV demand for 2009 was 180 MW and 200 MW for 2010. J.P. Morgan also projected PV
demand of 250 MW for 2011 and 300 MW for 2012. J.P. Morgan’s referenced PV demand was
significantly lower than the projections made by the EPIA in April 2011.89
3. Italy
Whereas Spain is second in cumulative MW installed, Italy was the second largest in
newly installed capacity for 2010.90 Italy saw a spike in 2010 installations that far exceeded
expectations, at 2.3 GW. The EPIA speculated that the spike was due to increased uncertainty
over changes in FiT regulations set to go into effect in May 2011. Unlike Spain, which saw a
bubble grow then burst with a change in FiT rules, 2011 market predictions for Italy remain high
for the next two years.91
C. Competition
A substantial portion of solar industry demand is driven by the overall cost of PV systems
in comparison to traditional energy sources. While incentives such as FiTs positively influenced
global demand for PV installations, Solyndra’s ability to compete was adversely impacted by
reductions in the price of P-Si. As noted above, in the period between 2009 and 2011, the price
of silicon-based modules dropped significantly, making Solyndra’s products less desirable from
a cost standpoint.
An example of the sudden change in the P-Si market can be seen by examining the two
independent market study reports prepared as a requirement of Solyndra’s DOE loan application.
In the DOE’s market study dated April 2009, RW Beck noted that “silicon modules are more
expensive to produce compared to thin-filmed modules, as this technology relies on silicon
feedstock, which has historically been more expensive than respective feedstock of competing
88 See Footnote 81, pg. 19. 89 J.P. Morgan, “Alternative Energy: 2012 Solar Industry Outlook – Its Going To Be Another Tough Year, Look Elsewhere For Outperformance”, January 9, 2012. 90 See Footnote 85, pg. 19. 91 See Footnote 81, pg. 15.
48
technologies.”92 Just over a year later, the market study prepared by Navigant in September
2010 stated that “low cost crystalline silicon modules continue to be the biggest threat to
Solyndra’s success in the marketplace.”93
1. Polysilicon (P-Si) Based Competitors
Historically, the market for solar panels was dominated by crystalline silicon based
modules. In 2008, roughly 80% of the PV market used crystalline based silicon.94 The chart
below from the DOE’s 2008 Solar Technology Report, illustrates the dominance of P-Si based
solar modules historically and in future forecasted time periods. The report however notes a
difference in expert opinion on the degree that thin film will gain market share in future periods.
Some experts believed that thin film solar modules could gain over 30% of the market share by
2012.
Due to lower efficiency yields that thin film offers as compared to P-Si panels, Solyndra
was faced with the need to decrease the cost per watt in order to make its products more 92 See Appendix O.2, RW Beck Final Market Study Report, pg. 17 93 See Appendix O.3, Navigant Final Market Study Report. pg. 78 94 See Appendix C.7, U.S. Department of Energy – Energy Efficiency and Renewable Energy, “2008 Solar Technologies Market Report, January 2010, pg. 30.
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competitive with P-Si. Between 2004 and 2008, the prices for P-Si were moving towards a
record high, making competitors (like Solyndra) that were not dependent on P-Si optimistic
about their ability to overtake the solar market. That condition changed in 2008 when the price
for P-Si turned sharply downward, making the cost per watt of P-Si panels much more
competitive when compared to thin film producers. The reduction in cost of silicon based PV
modules is related to (1) the increased global supply of P-Si, and (2) the entrance of Chinese
manufacturers into the production market.
a. Polysilicon (P-Si) Supply
In a report issued in October of 2005, PiperJaffray estimated the global supply of P-Si
capacity to be 34,200 metric tons (“MT”) for 2006 and almost 37,000 MT for 2007.95 The
following year, CIBC World Markets (“CIBC”) estimated that the global demand for P-Si during
that same time period would be closer to 40,000 MT. Further, CIBC forecasted that in 2010
global P-Si demand would be greater than 70,000 MT.96
The impact of these market projections caused a spike in price from approximately
$75/kg in 2005 to between $250 to $500/kg in 2008, depending on the data source, and a
subsequent flurry of new P-Si production facilities to meet the future supply needs. By 2008, a
production forecast issued by the National Renewable Energy Laboratory (“NREL”), forecasted
P-Si production to be 90,000 MT in 2009 and over 120,000 MT in 2010, far exceeding
forecasted demand for that same time period.97 The increased production capacity for P-Si
caused the bubble to burst, and prices for P-Si began to fall dramatically in the 4th quarter of
2008 and the 1st quarter of 2009.98
The ASP per watt that drives the solar industry is closely correlated to the global price of
P-Si. In a market study published in November 2010, Credit Suisse provides a chart that
illustrates the relationship between $/kg for P-Si and the $/watt for panels in the market.
95 PipperJaffrey, “Solar Powered: an Emerging Growth Industry Facing Severe Supply Constraints”, October 2005, pg 27. 96 CIBC World Markets, “Alternative Energy – Balance a Bright Future with Near-Term Risk, July 2006, pg. 25. 97 See Footnote 94, pg. 33. 98 See Footnote 72.
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During that same time period, the ASP that Solyndra was able to achieve with its
customers followed a similar trend line, falling from an average of $3.39 in 2009 to $2.31 in
2011.
2. China Enters Market
Although Chinese manufacturers are now the dominant producers within the PV market,
their presence within the solar industry is still relatively new compared to the U.S. and European
producers. In 2005, China produced less than 10% of the global PV market. By 2010, that
amount had increased to over 50%.99 The majority of panels produced during this time period
were exported to countries with heavy demand for PV products, while Chinese consumption of
PV during that same time period remained at under 10% of global market demand.100
China’s growth in capacity for production had a significant impact on the global supply
of solar products. The chart below shows the rapid growth in annual PV production that began
99 See Footnote 81, pg 36. 100 Id.
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in 2007. Between 2007 and 2010, PV production capacity increased from 5 GW to almost 25
GW.101
During that same time period, The European Commission Joint Research Centre
estimated that demand only rose to slightly above 17 GW in 2010.102 The outpacing of supply
compared to demand had a negative impact on the ASP that producers could realize for their
product.
101 See Footnote 85, pg. 9. 102 See Footnote 85, pg. 13.
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The growth of the Chinese solar manufacturing industry was driven in large part by
investments made by the China Development Bank. In their prepared remarks before the
Subcommittee on Oversight and Investigations Committee on Energy and Commerce in 2011,
the Executive Director of the Loan Program Office and the Secretary of Energy, both referenced
investments made by the Chinese government in the Chinese solar industry as having a
significant impact on Solyndra’s ability to compete.103 The access to capital, along with China’s
lower wage rates and lax regulatory conditions, allowed these Chinese manufacturers to move
their products to market at a much lower cost than their U.S. or European counterparts.
In late 2011, members of the solar community, led by the German based SolarWorld AG,
accused Chinese manufacturers of “illegally dumping” P-Si based solar panels into the market.
The petitioners argued that the subsidies provided to the Chinese solar industry by government-
controlled banks has given those producers an unfair competitive advantage. The issue is
presently under investigation by the Commerce Department and the U.S. International Trade
Commission.104
103 See Appendix G.22 for prepared statement of Secretary of Energy Steven Chu and Appendix G.21 for prepared statement of Jonathan Silver (DOE Loan Program Director) before U.S. House of Representatives Subcommittee on Energy and Commerce. 104See Appendix C.8, Bloomberg Article, “U.S. Commerce Department Opens Dumping Investigation of China Solar Cells”, November 9, 2011.
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D. Private Investment in the Solar Industry
Since its filing for bankruptcy protection in September 2011, public statements regarding
Solyndra focus on the fact that the company received a $535 million loan guarantee from the
DOE. While true, this focus may overlook the substantial private equity investment of over $1.2
billion that the company received before and after the DOE Loan Guarantee, the vast majority of
which will be lost.
To put that into perspective, according to Thomson Reuters’ private equity database,
reporting companies in the US solar energy field each received an average of approximately
$300 million in private equity during the time period that Solyndra was operating. While this
data is limited to those equity firms that choose to report their investment with Thomson Reuters,
the analysis indicates that private investors considered Solyndra to be worthy of substantially
more investment than the typical US solar company. Below is a chart of Solyndra as compared
to other companies that received at least $150 million between the years 2005 and 2011. A
complete list of the investment deals identified by Thomson Reuters can be found in Exhibit #4.
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VII. CORPORATE STRUCTURE
As originally named, Gronet Technologies, Inc. was incorporated in the state of Delaware
on May 10, 2005. On January 26, 2006, the entity name was changed to Solyndra, Inc., and
through February 23, 2011, it served as the primary operating entity of the company. During this
period, numerous subsidiaries of Solyndra, Inc. were incorporated, both domestically and
internationally, to serve various purposes and functions. Some of the key subsidiaries include:
(i) Fab 2, LLC, which served as a project company to hold all of the assets of Fab 2 as required
under the terms of the DOE Loan Guarantee; 105 (ii) Solyndra GmbH, which served as the
marketing entity for Europe, the Middle East and Africa; 106 and (iii) Solyndra International
A.G., which was established as Solyndra’s European headquarters and sales entity.107 Other
subsidiaries incorporated during this period include the following (in order by date of
incorporation):
• Solyndra Fab 1 LLC - A Delaware limited liability company incorporated on March 2, 2007 to hold the Fab 1 assets. However, the asset transfer to Fab 1 was not consummated and this entity was dormant until dissolution on January 28, 2011.
• Solyndra Services LLC - A Delaware limited liability company incorporated on June 27, 2008 to operate as a holding company for foreign subsidiaries until its dissolution on March 7, 2011.
• Solyndra (Cayman) Ltd - Created for tax structuring purposes, was an exempted company incorporated in the Cayman Islands with limited liability on October 8, 2008. Assets were never transferred and the company was dormant until its dissolution on March 31, 2011.
• Solyndra Operator, LLC - A Delaware limited liability company incorporated on July 10, 2009 pursuant to the DOE Loan Guarantee to operate Fab 2. The company was dissolved on March 7, 2011 subsequent to the restructuring of the DOE Loan Guarantee in February 2011.
105 A Delaware limited liability company incorporated on June 27, 2008. 106 Solyndra GmbH was a corporation organized under the laws of Germany and registered on February 16, 2009. The company established the following branch offices in Europe for marketing Solyndra’s products in various jurisdictions: (a) France, originally established in Paris on July 28, 2010; (b) Italy, established on December 23, 2010; and (c) Czech Republic, established on October 19, 2010. 107 Solyndra International AG was a corporation organized under the laws of Switzerland and registered on December 23, 2010. The company established a branch office in the Netherlands for logistics relating to the international shipment of product on March 21, 2011.
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• Solyndra (Korea) Limited - A limited company incorporated in South Korea on June 16, 2009 (currently dormant) and established as a sales and marketing entity for potential sales in Korea.
• Solyndra Services Ltd. - Incorporated under the laws of the United Arab Emirates on March 15, 2010 (currently dormant) and established as a sales and marketing entity for potential sales in the Middle East.
• Solyndra International LLC - A Delaware limited liability company incorporated on November 10, 2010 for tax structuring purposes. No assets were transferred to the company and remained dormant until its dissolution on March 16, 2011.
• New Shape Solar LLC - A Delaware limited liability company incorporated on March 8, 2010 (currently dormant) to hold the equity interests of Photon Solar LLC.
• Solyndra California Development LLC - A Delaware limited liability company incorporated on April 6, 2010 (currently dormant) to hold the equity interests of multiple project subsidiaries that would develop solar projects.
• Photon Solar LLC - A Delaware limited liability company incorporated on April 6, 2010 to own the assets related to a solar project development with Southern California Edison. All of the equity interests in Photon Solar LLC were conveyed to ProLogis, Inc. on July 7, 2011.
On February 23, 2011, Solyndra, Inc. entered into a restructuring whereby all of the
assets of Solyndra, Inc. (including its equity interests in its subsidiaries) were conveyed to, and
all of its liabilities assumed by, Fab 2, LLC. In conjunction with the restructuring, Fab 2, LLC
changed its name to Solyndra LLC and became the primary operating entity from that point
forward. Furthermore, as part of the restructuring, Solyndra GmbH became a wholly owned
subsidiary of Solyndra International AG, which became the primary European operating entity of
Solyndra with its European headquarters located in Switzerland. Subsequently, on June 28,
2011, Solyndra, Inc. changed its name to 360 Degree Solar Holdings, Inc.
Following the restructuring, Solyndra LLC entered into financing arrangements whereby
it sold certain of its accounts receivable and inventory to two special purpose vehicles
established by certain existing investors. In order to avoid collateral issues in connection with
the sale of the accounts receivable and inventory to the special purpose vehicles, Solyndra LLC
incorporated Solyndra Financing LLC as a Delaware limited liability company on May 25, 2011.
The corporate structure as of February 22, 2011, and September 6, 2011, is depicted below in
Charts #10 and #11, respectfully.
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the product to the next stage. In order to reach a production cost level that would allow the
company to bring its product to market, Solyndra recognized the need to achieve economies of
scale. Solyndra’s first milestone towards the goal of manufacturing its cylindrical panels en
masse was achieved through Fab 1.
In late 2005 and early 2006, Solyndra leased space and acquired manufacturing
equipment. By July 2006, Solyndra commenced production of “mini-panels” utilizing the
company’s thin film solar technology. Although these mini-panels were only 9% of a full sized
panel and were capable of producing only 10-14 watts of power, the mini-panels allowed for
panel performance to be measured in actual tests. These tests included, but were not limited to,
photovoltaic performance, wind resistance, mechanical strength, and sensitivity to roof
reflectivity. By October 2006, Solyndra was producing ten mini panels a week pending
completion of the Fab 1 facility which would allow for the production of full-size modules.
The DOE pre-application filed in December 2006 contemplated three phases to the Fab 1
manufacturing facility. The first phase was an initial mini-production line capable of 12 MW of
annual production which was to be completed in 2007. The second phase contemplated an
additional 60 MW production line which would be completed in 2008. The final phase would be
another 60 MW production line which would be completed in the first quarter of 2009.
Solyndra’s DOE pre-application identified two properties under lease for purposes of the
company’s manufacturing operations. As stated in the DOE pre-application:
“First, Solyndra has leased an 183,000 square foot hard disk drive manufacturing facility that will be reconfigured for solar panel manufacturing. Within this building, both a Mini Production Line capable of producing up to 12 megawatts per year of solar panels and the full scale 60 megawatt line will be constructed, installed and commissioned…”
“The facility is ideal for Solyndra’s needs, as it is already equipped with all of the key utilities required to support the company’s manufacturing equipment. This includes 15 megawatts of electrical service, 1000 gallons per minute of process cooling water, 750 gallons per minute of de-ionized water and over 1000 gallons per minute of waste water treatment. Furthermore, the building is already zoned and rated for Solyndra’s
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future manufacturing operations. The presence of these services and characteristics reduces both the estimated building preparation costs and duration of the project build-out and, combined with ICOM’s [general construction contractor for Fab 1] familiarity with the facility, is expected to both reduce the overall capital costs and increase the speed of construction of the overall project.”
On February 7, 2007, Solyndra executed the original lease for the Fab 1 facilities located
at 47700 Kato Road and 1055 Page Road in Fremont, California. The company initially
intended the building at 47700 Kato Road to house Fab 1’s front-end manufacturing equipment
and the building at 1055 Page Road to serve as the location of the processing equipment for Fab
1’s back-end facilities and company administrative offices. However, during April 2008,
Solyndra signed a new lease for a facility at 1210 California Circle in Fremont, California which
was intended to house the back-end manufacturing for Fab 1. With adequate funding from sales
of preferred stock, Solyndra was on track to complete Fab 1 and to commence commercial
shipments.
Solyndra anticipated construction costs of approximately $130.8 million for completion
of the mini production line and the first 60 MW production line. Subsequent to the DOE pre-
application in December 2006, Solyndra was engaged in the process of constructing the mini
production line and both phases of 60 MW lines for Fab 1. By the end of fiscal year 2007
(December 29, 2007), Solyndra had acquired a total of $113.9 million in property and equipment
funded entirely from the proceeds of preferred stock. By the end of fiscal year 2008 (January 3,
2009), Solyndra had acquired $247.4 million in property and equipment. As noted above, the
construction plans for Fab 1 required various modifications.
The first prototypes of the Solyndra solar panels, referred to as the “100 Series” were
produced at Fab 1 in September 2007. By January 2008, samples were ready for the certification
process. Certification was finalized in April 2008 and shipments to various customer sites
began. Initial shipments were in the 135 to 150 Wp range. Commercial shipments by Solyndra
and initial revenues began in July 2008. By the end of the fiscal year 2008, total sales were just
over $6 million. As production in Fab 1 continued to ramp up, revenues increased to $100.5
million for fiscal year 2009.
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During fiscal year 2010 production continued at Fab 1 and revenues increased to $141.9
million. However, by the fall of 2010, Solyndra’s financial condition had worsened and with
Fab 2 Phase I facility nearing completion, the company decided to close Fab 1 and consolidate
certain equipment into Fab 2 Phase I, which was to be accomplished at the end of 2010 or the
first quarter of 2011.
During the course of Fab 1’s operations from 2008 through its closure in December 2010,
Fab 1 produced approximately 99.6 MW and sold approximately 89.1 MW of solar panels. Total
revenues generated by Fab 1 were approximately $248.4 million. Solyndra’s net operating
losses from July 2008 through December 2010, exceeded $500 million.
IX. CUSTOMER AGREEMENTS
A. Overview of Customer Agreements
Between 2007 and 2009, Solyndra entered into the Customer Agreements with the
following nine (9) prospective customers: (1) Phoenix Solar AG (“Phoenix Solar”), (2) Solar
Power Inc. (“Solar Power”), (3) GeckoLogic GmbH (“GeckoLogic”), (4) Carlisle Syntec
Incorporated (“Carlisle Syntec”), (5) SunConnex B.V. (“SunConnex”),
(6) EBITSCHenergietechnik GmbH (“EBITSCH”), (7) USE Umwelt Sonne Energie GmbH
(“USE Umwelt”), (8) Alwitra GmbH & Co. Klaus Göbel (“Alwitra”), and (9) SunSystems S.p.A.
(“SunSystems”).
The terms of the Customer Agreements vary. Many of these agreements were negotiated
during a period of high demand and generally, each of the Customer Agreements contemplated
that Solyndra would deliver certain product to the customer over a defined timetable and, in
certain instances, at a specified price. The firmness of the contractual commitment to purchase
product in any particular period as well as the penalties for failure to purchase product, if any,
varied widely between agreements and from actual deliveries of product by Solyndra to
customers. Revenues generated from such customers were significantly below the maximum
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possible amounts projected in the Customer Agreements. A summary of each of the Customer
Agreements is set forth below.108
In early December 2008, Solyndra provided four (4) of the Customer Agreements to the
DOE as well as the summary information included in Table #3 below. The foregoing
information was provided as part of Solyndra’s loan application process. The four Customer
Agreements produced to the DOE consisted of those related to Phoenix Solar, Solar Power,
GeckoLogic, and Carlisle Syntec.
Table #3
2008 2009 2010 2011 2012
Total Annual Revenue, $M $3.4 $111.7 $251.8 $453.7 $625.8 Cumulative Revenue, $M $3.4 $115.1 $366.9 $820.6 $1,446.4 Total Annual Volume, MWp 0.9 32.0 78.0 154.0 233.0 Total Cumulative Volume, MWp 0.9 32.9 110.9 264.9 497.9
At the time the Customer Agreements were executed, there was a shortage of solar panel
supply and it was important for customers to obtain a supply commitment. However, from 2009
on, as the effects of the global financial crisis took hold and global production capacity
increased,109 the market shifted and customers moved away from long term supply agreements
and instead began to place orders on a purchase order basis as needed. Solyndra noted this trend
in the “Risk Factor” section of its S-1, filed with the SEC.110
B. Key Terms
The following key terms are utilized in certain of the Customer Agreements:
Minimum Contracted Volume (“MCV”): This is the specific number of MW of PV
panels that Solyndra committed to manufacture in each year of the agreement and, with some
exceptions, each customer committed to purchase in the same calendar year.
108 Please refer to Appendix E for copies of the Customer Agreements. 109 See Appendix C.9, “First Solar Guidance” dated December 14, 2011 prepared by First Solar, Inc. at pg. 5. 110 “[Solyndra’s] existing framework agreements set forth volume and price expectations over a number of years, but they generally do not result in a firm purchase commitment until a purchase order is issued.” See Appendix F.2, Amended Solyndra S-1, pg. 20.
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Additional Contracted Volume (“ACV”): This is the maximum number of additional
MW (above the Minimum Contracted Volume) that Solyndra could offer to a customer during a
calendar year and that the customer, in some instances, had the option to purchase and, in other
instances, was obligated to purchase.
Optional Volume (“OV”): This is the mutually agreed number of MW above the sum
total of Minimum Contracted Volume and Additional Contracted Volume that Solyndra and the
customer could negotiate to add to the total annual volume.
Take-or-Pay: A customer’s failure to order product, in certain instances, did not reduce
the customer’s obligation to pay for the Minimum Contracted Volume. If the customer failed to
order the Minimum Contracted Volume in any calendar year, and failed to remedy such default
within a certain time period following notice, Solyndra had the right to demand, and the
customer was obligated to pay, the balance of the price for that year’s Minimum Contracted
Volume. Most of the Customer Agreements did not contain Take-or-Pay Provisions.
C. Customer Agreements
1. Phoenix Solar AG
Phoenix Solar, headquartered in Sulzemoos, Germany, entered into a Customer
Agreement with Solyndra dated July 24, 2008. The term of the agreement extended through
December 31, 2012. The agreement called for a total MCV of 216 MW or approximately $522
million111 in sales over the term of the agreement. In the event that Phoenix Solar failed to order
quantities of product in projected amounts, the agreement provided no penalty for the calendar
year 2008, a penalty of 5% of the deficit volume in calendar year 2009, and a penalty of 10% of
the deficit volume in calendar years 2010 to 2012. To the extent Solyndra failed to deliver
quantities of product in projected amounts, Solyndra was required to pay penalties to Phoenix
Solar. The agreement also was subject to renegotiation in the events of substantial market
changes.
On September 7, 2009, Phoenix Solar sent a notice of termination to Solyndra based on
the failure to have executed certain required schedules to the agreement. On October 7, 2009, 111 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.
62
Phoenix Solar and Solyndra entered into an amended framework agreement that superseded the
original agreement. Under the terms of the amended agreement, the parties would work in good
faith to agree on a volume for each quarter six weeks in advance and Phoenix Solar was only
obligated to purchase and Solyndra was only obligated to deliver the quantity of product that was
agreed to for that particular quarter.112
The projected contracted volumes as outlined under the original agreement are set forth
below:
Table #4
Phoenix Solar, Inc.
Year Price
(per Wp) MCV (MW) ACV (MW) OV (MW) Total Pur. Vol. (€ in millions)
2008 € 2.75 0.40 - - € 1.10 2009 2.57 10.00 - - 25.71 2010 2.15 28.00 - - 60.20 2011 1.97 68.00 - - 133.77 2012 1.79 110.00 - - 196.92 Total 216.00 - - € 417.71 In US Dollars $ 522.13
Had Phoenix Solar purchased all the volume under its original agreement with Solyndra,
it would have purchased approximately 78 MW for a total amount of $203 million113 from 2008
through August 2011. As it turned out, Phoenix Solar purchased 4.5 MW in the amount of $12.2
million114 from 2008 through 2011.
2. Solar Power, Inc.
Solar Power, an entity headquartered in Roseville, CA entered into a Customer
Agreement with Solyndra dated February 19, 2007. The agreement was amended on July 24,
112 “To the extent that the Parties agree on volumes and pricing [for the quarter], the Buyer shall then be obligated to purchase the agreed volume of Panels from Manufacturer in quarterly numbers defined as “Contractual Volume” at the agreed specified prices for the quarter and manufacturer shall be obliged to deliver based on the agreed delivery timing requirements. The resulting agreed volumes and prices will be fixed in a new Appendix B (“Price/Volume Table”). In case such negotiation fails, both Parties are freed of any sales or purchase obligations, but should still try to find a consensus for the quarter in questions nevertheless.” See Appendix E.1, Customer Agreement, October 7, 2009, Section 2.2.1, p. 3. 113 Id. 114 The sale amount includes product/shipping costs and other miscellaneous adjustments.
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2008 and June 8, 2009. The agreement as amended provided for a term through December 31,
2012.
The original agreement contemplated a purchase of approximately 10 MW, with the
option to purchase an additional 6 MW, in years 2008 and 2009. The first amended agreement
called for a total MCV of 101 MW or approximately $327 million in sales from 2008 through
2012. Approximately 28.25 additional MW was included as Optional Volume.
The second amendment to the agreement gave Solar Power the option to make purchases
from Solyndra and eliminated the contractual obligation to purchase any particular amount of
product. Specifically, the definition of MCV was revised as follows: “Buyer may purchase, but
is not obligated to purchase, this volume during the same calendar year.” Similarly, the
definition of ACV was revised as follows: “If Additional Contracted Volume is offered to
BUYER during the calendar year, BUYER may purchase additional panels.”
The second amendment to the agreement also revised the description of Price to add the
following: “In the event there has been a substantial and unexpected change in the photovoltaic
market, the Parties will negotiate in good faith for amendments to the Price and/or Contracted
Volumes. Relevant market changes might be caused for example by a repeal or expiration of
key national photovoltaic tariffs or incentives, or by a significant sustained change in the market
or competitive landscape.” Since there was no obligation to purchase any contractual amount,
there were no penalties in the event Solar Power elected not to purchase the volumes set forth in
the agreement.
Based on the second amendment, the projected volumes that Solar Power had the option
to purchase under the agreement are set forth below:
64
Table #5
Solar Power, Inc.
Year Price
(per Wp) MCV (MW) ACV (MW) OV (MW) Total Pur. Vol. (€ in millions)
2008 $ 3.85 0.75 - 0.25 $ 2.89 2009 3.70 10.00 - 4.00 37.00 2010 3.50 20.00 - 5.00 70.00 2011 3.25 30.00 - 10.00 97.50 2012 3.00 40.00 - 15.00 120.00 Total 101.00 - 34.00 $ 327.39
Under the second amendment, Solar Power had the right to purchase up to approximately
50.1 MW for a total amount of $174 million from 2008 through August 2011. As it turned out,
Solar Power purchased 0.6 MW in the amount of $2.2 million115 from 2008 through 2011.
3. GeckoLogic GmbH
GeckoLogic, headquartered in Wetzlar, Germany, entered into a Customer Agreement
with Solyndra dated September 15, 2008. The term of the agreement covered a period of five (5)
years through September 15, 2013. The agreement called for a total MCV of 81 MW or
approximately $227 million116 in sales over the term of the agreement, plus ACV of 20 MW that
GeckoLogic was obligated to purchase if offered by Solyndra.
GeckoLogic sent a termination letter to Solyndra on December 9, 2009 based on a
purported failure to deliver required quantities and quality issues. Solyndra attempted to
negotiate an agreement with GeckoLogic eliminating volume commitments, but in March 2010,
GeckoLogic withdrew from such negotiations.
The agreement with GeckoLogic contained a Take-or-Pay provision that required
GeckoLogic to pay Solyndra for the balance of any contracted volume not purchased by
GeckoLogic in any calendar year covered by the agreement. Solyndra disputes the termination
of the GeckoLogic contract, and as a result, Solyndra has scheduled a potential breach of
contract claim against GeckoLogic for the breach of the Take-or-Pay provision.
The projected contracted volumes under the agreement are set forth below: 115 The sale amount includes product/shipping costs and other miscellaneous adjustments. 116 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.
65
Table #6
GeckoLogic, GmbH
Year Price
(per Wp) MCV (MW) ACV (MW) OV (MW) Total Pur. Vol. (€ in millions)
2008 € 2.99 0.20 0.40 - € 0.60 2009 2.72 5.00 2.00 - 13.60 2010 2.48 15.00 4.00 - 37.20 2011 2.25 25.00 6.00 - 56.25 2012 2.05 36.00 8.00 - 73.80 Total 81.00 20.00 - € 181.45 In US Dollars $ 226.81
In summary, GeckoLogic was to purchase approximately 36.7 MW for a total amount of
$111 million117 from 2008 through August 2011. As it turned out, GeckoLogic purchased 1.8
MW in the amount of $6.1 million118 from 2008 through December 2009.
4. Carlisle Syntec, Incorporated
Carlisle Syntec, an entity headquartered in Carlisle, Pennsylvania, entered into a
Customer Agreement with Solyndra dated November 11, 2008. The term of the agreement
covered a period of five (5) years through November 11, 2013. The agreement called for a total
MCV of up to 97 MW or approximately $309 million in sales over the term of the agreement,
plus ACV of up to 3.5 MW, provided that the agreement stated that the MCV was “firm” only
for year 2009 and that the MCV for year 2010 and thereafter was subject to further negotiation
between the parties. In the event that the parties failed to offer or purchase quantities of product
in projected amounts for calendar year 2009, the agreement provided a penalty of 10% of the
deficit volume for that year. Subsequent to year 2009, Solyndra and Carlisle Syntec were to
confer at least 60 days prior to calendar year end to determine MCV and any penalties associated
with failure to offer or purchase such MCV. The projected volumes (including the volumes
which were not firm) under the agreement are set forth below:
117 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 118 The sale amount includes product/shipping costs and other miscellaneous adjustments.
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Table #7
Carlisle Syntec, Inc.
Year Price
(per Wp) MCV (MW) ACV (MW) OV (MW) Total Pur. Vol. (€ in millions)
2008 $ 3.80 0.06 - - $ 0.23 2009 3.69 3.50 3.50 - 12.92 2010 3.50 15.00 - - 52.50 * 2011 3.25 31.00 - - 100.75 * 2012 3.04 47.00 - - 142.88 * Total 96.60 3.50 - $ 309.27
* Minimum contract volume not firm. Starting with year 2010, at least 60 days prior to the start of each calendar year, Solyndra and Carlisle Syntec were to determine Minimum Contract Volume for the following year.
Carlisle Syntec was contractually committed to purchase approximately 4.1MW during
2008 and 2009 for a total amount of $13 million and had projected additional purchase volumes
of up to approximately 35MW through August 2011 for a total amount of $119 million from
2010 through August 2011 based on the assumption that the volume projections for 2010 and
2011 were reduced to firm commitments. As it turned out, Carlisle Syntec purchased 7.1 MW in
the amount of $21.1 million119 from 2008 through August 2011.
5. SunConnex B.V.
SunConnex, located in Amsterdam, Netherlands, entered into a Customer Agreement
with Solyndra dated April 23, 2009. The term of the agreement covered a period of five (5)
years through April 23, 2014. The agreement called for a total MCV of 34 MW or
approximately $90 million120 in sales over the term of the agreement, plus ACV of 33 MW that
SunConnex was not obligated to purchase if offered by Solyndra. The agreement with
SunConnex contained a Take-or-Pay provision that required SunConnex to pay Solyndra for the
balance of any contracted volume not purchased by SunConnex in calendar year 2009. For each
subsequent year after 2009, Solyndra and SunConnex were to confer in good faith by meeting six
months in advance of the subsequent calendar year regarding MCV and pricing based on
material market changes. Unless the parties met and agreed in writing to a revised MCV and
pricing five months in advance of each subsequent calendar year, the volume and pricing set
119 The sale amount includes product/shipping costs and other miscellaneous adjustments. 120 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.
67
forth in the original agreement became firm. Solyndra never agreed in writing to a revised
MCV, and as a result, Solyndra has scheduled a potential breach of contract claim against
SunConnex for the breach of the Take-or-Pay provision.
The projected contracted volumes under the agreement are set forth below:
Table #8
SunConnex, BV
Year Price
(per Wp) MCV (MW) ACV (MW) OV (MW) Total Pur. Vol. (€ in millions)
2009 € 2.60 1.00 1.00 - € 2.60 2010 2.43 3.00 2.00 - 7.29 2011 2.27 5.00 5.00 - 11.35 2012 2.12 10.00 10.00 - 21.20 2013 1.98 15.00 15.00 - 29.70 Total 34.00 33.00 - € 72.14 In US Dollars $ 90.18
In summary, SunConnex was to purchase approximately 7.3 MW for a total amount of
$21.7 million121 from 2009 through August 2011. As it turned out, SunConnex purchased 3.7
MW in the amount of $11.1 million122 from 2009 through August 2011.
6. EBITSCHenergietechnik GmbH
EBITSCH, an entity is headquartered in Zapendorf, Germany, entered into a Customer
Agreement with Solyndra dated April 17, 2009. The term of the agreement covered a period of
five (5) years through April 17, 2014. The agreement called for a total MCV of 25 MW or
approximately $62 million123 in sales, over the term of the agreement, plus ACV of 17 MW that
EBITSCH had the option to purchase if offered by Solyndra. The agreement with EBITSCH
contained a Take-or-Pay provision that required EBITSCH to pay Solyndra for the balance of
any contracted volume not purchased by EBITSCH in any calendar year covered by the
agreement. As a result, Solyndra has scheduled a potential breach of contract claim against
EBITSCH for the breach of the Take-or-Pay provision.
121 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 122 The sale amount includes product/shipping costs and other miscellaneous adjustments. 123 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.
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The projected contracted volumes under the agreement are set forth below:
Table #9
EBITSCH, GmbH
Year Price
(per Wp) MCV (MW) ACV (MW) OV (MW) Total Pur. Vol. (€ in millions)
2009 € 2.60 0.50
1.00 - € 1.30 2010 2.39 2.00 2.00 - 4.78 2011 2.20 5.00 3.00 - 11.00 2012 2.02 7.00 5.00 - 14.14 2013 1.86 10.00 6.00 - 18.60 Total 25.00 17.00 - € 49.82 In US Dollars $ 62.28
To summarize, EBITSCH was to purchase approximately 5.8 MW for a total amount of
$16.7 million124 from 2009 through August 2011. As it turned out, EBITSCH purchased 1.3
MW in the amount of $4.1 million125 from 2009 through August 2011.
7. USE Umwelt Sonne Energie GmbH
USE Umwelt, an entity located in Holzgerlingen, Germany, entered into a Customer
Agreement with Solyndra dated July 2, 2009. The term of the agreement covered a period of
five (5) years through July 2, 2014. The agreement called for a total MCV of 66 MW or
approximately $167 million126 in sales over the term of the agreement, plus ACV of 18.1 MW
that USE Umwelt was obligated to purchase if offered by Solyndra. There were no specific
penalty provisions in the agreement in the event USE Umwelt failed to make the purchases
contemplated there under, but the obligation to purchase was a firm commitment unless the
parties met and agreed in writing to a revised MCV. Solyndra never agreed in writing to a
revised MCV, and as a result, Solyndra has scheduled a potential breach of contract claim
against USE Umwelt for the breach of its obligation to purchase the agreed upon MCV.
The projected contracted volumes under the agreement are set forth below:
124 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 125 The sale amount includes product/shipping costs and other miscellaneous adjustments. 126 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.
69
Table #10
USE Umwelt
Year Price
(per Wp) MCV (MW) ACV (MW) OV (MW) Total Pur. Vol. (€ in millions)
2009 € 2.43 3.40 1.10 - € 8.26 2010 2.25 7.00 3.00 - 15.75 2011 2.09 12.00 4.00 - 25.08 2012 1.96 19.00 5.00 - 37.24 2013 1.89 25.00 5.00 - 47.25 Total 66.40 18.10 - € 133.58 In US Dollars $ 166.98
USE Umwelt was to purchase approximately 18.3 MW for a total amount of $50.7
million127 from 2009 through August 2011. As it turned out, USE Umwelt purchased 9.7 MW in
the amount of $29.2 million128 from 2009 through August 2011.
8. Alwitra, GmbH
Alwitra, an entity headquartered in Trier, Germany, entered into a Customer Agreement
with Solyndra dated November 4, 2009. The term of the Agreement extended through December
31, 2010. The agreement called for a total committed volume of 4 MW or approximately $10
million129 in sales over the term of the agreement. The parties also set out additional planned
volume of 17 MW which was subject to further negotiation and agreement on price. In the event
that the parties failed to offer or purchase quantities of product in projected amounts for 2009
and any subsequent calendar year in which the parties agreed on a firm volume and price, the
agreement provided a penalty of 5% of the deficit volume for that year.
The projected contracted volumes under the agreement are set forth below:
127 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement 128 The sale amount includes product/shipping costs and other miscellaneous adjustments. 129 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.
70
Table #11
Alwitra, GmbH
Year Price
(per Wp) MCV (MW) ACV (MW) OV (MW) Total Pur. Vol. (€ in millions)
2009 € 2.04 1.00 - - € 2.04 2010 Q1 2.04 3.00 - - 6.12
2010 Q2 – Q4* 2.04 17.00 - - 34.68 Total 21.00 - - € 42.84
In US Dollars $ 53.55
*Includes planned volume that is subject to further negotiation on price and volume. Price and volume included herein are for illustrative purposes only.
In summary, Alwitra committed to purchase 4 MW for a total amount of $10 million130 in
the fourth quarter of 2009 and first quarter of 2010. In addition, Alwitra had planned volume,
subject to further negotiation, of 17 MW in the remainder of 2010. As it turned out, Alwitra
purchased 13.7 MW in the amount of $35.8 million131 from 2009 through August 2011.
9. SunSystem, S.p.A.
SunSystems, based in Milan, Italy, entered into a Customer Agreement with Solyndra
dated on October 26, 2010. The term of the agreement covered a period of five (5) years through
October 26, 2015. The agreement called for a total MCV of 19 MW or approximately $44
million132 in sales over the term of the agreement, plus ACV of 19 MW that SunSystems had the
option to purchase if offered by Solyndra, provided that the MCV and pricing for years 2011
through 2013 were subject to negotiation at a later date. The agreement required SunSystems to
pay Solyndra for the balance of any contracted volume not purchased by SunConnex in calendar
year 2010. For each subsequent year after 2010, Solyndra and SunSystems were to confer in
good faith by meeting six months in advance of the subsequent calendar year regarding MCV
and pricing based on material market changes. Unless the parties met and agreed in writing to a
revised MCV and pricing five months in advance of each subsequent calendar year, the volume
and pricing set forth in the original agreement became firm. Solyndra did not agree in writing to
any revised MCV and as a result, Solyndra has scheduled a potential breach of contract claim
against SunSystems for the breach of its commitment to purchase the MCV. 130 Id. 131 The sale amount includes product/shipping costs and other miscellaneous adjustments. 132 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.
71
The projected contracted volumes under the agreement are set forth below:
Table #12
SunSystem, SpA
Year Price
(per Wp) MCV (MW) ACV (MW) OV (MW) Total Pur. Vol. (€ in millions)
2010 € 2.15 2.00 3.00 - € 4.30 2011* 2.02 4.00 3.50 - 8.08 2012* 1.89 5.00 5.00 - 9.45 2013* 1.77 7.50 7.50 - 13.28 2014 TBD TBD TBD - TBD 2015 TBD TBD TBD - TBD Total 19.00 19.00 - € 35.11 In US Dollars $ 43.88
* Minimum Contract Volume subject to possible additional negotiation.
SunSystem was to purchase approximately 4.6 MW for a total amount of $12 million133
from 2010 through August 2011. As it turned out, SunSystems purchased 2.9 MW in the amount
of $8.1 million134 from 2009 through August 2011.
During the period of 2008 through August 2011, Solyndra’s nine (9) Customer
Agreements indicate projected and possible sales of up to approximately 266 MW totaling $791
million assuming that Solyndra was able to reduce volume expectations to firm commitments
with all of its customers. Solyndra actually sold to these nine (9) customers 45.4 MW totaling
$129.9 million during 2008 through August 2011. See Table #13 below:
133 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 134 The sale amount includes product/shipping costs and other miscellaneous adjustments.
72
Table #13
($’s in thousands)
Name
MW Sold
Amount Solar Power Inc.
0.64
$ 2,220
Phoenix Solar AG
4.54
12,191 GeckoLogic Group AG
1.78
6,067
Carlisle Syntec, Inc.
7.14
21,098 Sunconnex BV
3.69
11,161
EBITSCH GmbH
1.29
4,075 USE GmbH
9.68
29,203
Alwitra GmbH
13.74
35,788 Sun System SpA
2.94
8,123
Total
45.44
$129,926
The four (4) Customer Agreements that were sent to the DOE in early December 2008,
indicate projected and committed sales of up to approximately 210 MW totaling $636 million to
be sold during 2008 through August 2011 assuming that Solyndra was able to reduce all volume
expectations to firm commitments. Solyndra actually sold to these four (4) customers
approximately 14.1 MW in the amount of $41.6 million during 2008 through August 2011. See
Table #14 below:
Table #14
($’s in thousands)
Name
MW Sold
Amount Solar Power Inc.
0.64
$ 2,220
Phoenix Solar AG
4.54
12,191 GeckoLogic Group AG
1.78
6,067
Carlisle Syntec, Inc.
7.14
21,098 Total
14.10
$ 41,576
X. $535 MILLION DOE LOAN GUARANTEE
Since its inception in 2005, Solyndra was an early stage development company that
pursued available avenues to obtain capital to fund the development of its unique thin-film
73
cylindrical solar panel technology. These efforts included individual founder loans, private
equity investments, traditional financing, government-guaranteed loans, and an IPO.
In 2006, the company learned about a new federal program that allowed the DOE to
provide federally-backed loan guarantees to emerging alternative energy companies. The
program was dedicated to the public policy objectives of pursuing initiatives for energy
independence and clean energy. Solyndra embarked on an effort to obtain funding from the
DOE under this program to support the company’s vision to commercially scale its solar panel
technology. The process began in December 2006 with an initial application filed with the DOE
and ultimately resulted in the availability of the DOE Loan Guarantee.135 Solyndra ultimately
was permitted to borrow $528 million under the DOE Loan Guarantee.
This portion of the CRO report, together with the exhibits and appendices hereto,
provides the underlying facts and details surrounding the DOE Loan Guarantee in the following
topic areas:
• Brief History of the DOE Loan Guarantee Program
• DOE Loan Guarantee Process
• $535 Million DOE Loan Guarantee
• Loan Funding and Reporting Requirements
• Fab 2 Construction and Loan Funding
• Second DOE Loan Guarantee Application
• February 2011 Debt Restructuring
A. Brief History of the DOE Loan Guarantee Program
A brief history of the LGP is necessary to understand the program and the substantial
procedural, financial, and time requirements that must be met before a loan guarantee is
approved and awarded.
135 The FFB is a government corporation, created by Congress in 1973 under the general supervision of the Treasury. The FFB was established to centralize and reduce the cost of federal borrowing and federally-assisted borrowing from the public.
74
1. Title XVII of the Energy Policy Act of 2005
On July 29, 2005, Congress passed the EPAct2005 which was signed into law by
President Bush on August 8, 2005. Under the EPAct2005, the DOE was authorized to issue and
administer a loan guarantee program to provide federal financial support to alternative energy
companies in an effort to spur commercial investment for “clean” energy projects.
The EPAct2005 authorizes the DOE to issue loan guarantees for projects that “avoid,
reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases” and “employ
new or significantly improved technologies as compared to commercial technologies in service
in the United States at the time of the guarantee.”136 Section 1703(b) of the EPAct2005 defines
the various general categories of projects eligible for loan guarantees, including: (a) renewable
energy systems, (b) advanced fossil energy technology, (c) Hydrogen fuel cell technologies for
residential, industrial, or transportation application, (d) advanced nuclear energy facilities,
(e) carbon capture and sequestration practices and technologies, (f) efficient electrical
generation, transmission, and distribution technologies, (g) efficient end-use energy
technologies, (h) production facilities for fuel efficient vehicles, (i) pollution control equipment,
and (j) refineries, meaning facilities at which crude oil is refined into gasoline.137 The LGP
initially authorized by the EPAct2005 is commonly referred to as the 1703 program (“1703
Program”).
The LGP involved loans made by the FFB or through private lenders that are backed by
the full faith and credit of the United States allowing the borrower to obtain debt financing at
close to the U.S. Government’s much lower cost of capital and on more favorable terms. Since
these loans are not risk free loans, the government assumes the risk of default if the borrower is
unable to repay the loan. To take into account the risk of default, Section 1702 of the
EPAct2005 required credit subsidy costs138 to be calculated and paid for each loan guarantee.
Credit subsidy costs would be paid by the borrower (the “borrower pays” option) or by an
136 See Appendix G.1, EPAct2005, Section 1703(a). 137 See Appendix G.1, EPAct2005, Section 1703(b). 138 Section 502(5)(C) of the Federal Credit Report Act of 1990 (“FCRA”) defines credit subsidy costs as the net present value (at the time the guaranteed loan is disbursed) of the estimated payments by the federal government to cover defaults and delinquencies, interest subsidies, or other payments, and payments to the federal government including origination and other fees, penalties and recoveries. In essence, the credit subsidy cost is the estimated liability to the federal government if the borrower does not perform on its loan or obligation.
75
appropriation from the federal government. In 2007, Congress instructed the DOE to proceed
under the borrower pays option requiring the borrower to pay credit subsidy costs.139 The 1703
Program was contemplated to be a “self pay” program, meaning the applicant would pay the
credit subsidy costs associated with loans under the LGP.
2. 2006 Advanced Energy Initiative
In February 2006, President Bush outlined his Advanced Energy Initiative (“AEI”) to the
American public.140 The AEI focused on taking steps to increase the supply of energy, including
alternative and renewable sources, and to address the country’s energy challenges by attempting
to reduce its dependence on foreign sources of energy. The AEI indicated that President Bush
and his administration had spent nearly $10 billion since 2001 to develop cleaner, cheaper, and
more reliable alternative energy sources. To build on these efforts, the AEI provided for a 22-
percent increase in funding for clean-energy technology research at the DOE. The goal of these
efforts was to change the way Americans fuel their vehicles by improving efficiency and
expanding alternative fuels, and the way they power their homes and businesses by developing
clean coal, advanced nuclear power, and renewable sources such as solar and wind.
3. The American Recovery and Reinvestment Act of 2009
In February 2009, President Obama signed into law the ARRA. A component of the
ARRA amended the EPAct2005 by adding Section 1705 which temporarily expanded the loan
guarantee program in an effort to stimulate the country’s clean energy sector by supporting
projects that faced difficulties in securing financing as a result of tight credit markets created by
the 2008 financial crisis.141 This 1705 Program authorized loan guarantees for certain renewable
energy systems, electric power transmission systems, and leading biofuels projects that
commenced construction by September 30, 2011. Another significant amendment to the
EPAct2005 related to the applicants’ required payment of credit subsidy costs. The 1705
139 See Appendix G.10, United States Government Accountability Office (“GAO”) Report to Congressional Committees, Department of Energy – New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management, July 2008, Page 2. 140 See Appendix G.2, 2006 Advanced Energy Initiative of George W. Bush. 141 See Appendix G.17, Written Statement for the Record of Jonathan Silver, Executive Director of the Loan Programs Office, U.S. Department of Energy, United States Senate Committee on Energy & Natural Resources, September 23, 2010.
76
Program no longer required applicants to pay the credit subsidy costs associated with the loan
guarantees that were previously required under the 1703 Program. The credit subsidy costs were
paid by the DOE using funds appropriated by Congress pursuant to ARRA.
4. Department of Energy Loan Guarantee Office
The DOE began to create and develop the new loan guarantee program under Secretary
of Energy Samuel W. Bodman (“Secretary Bodman”) after EPAct2005 was signed into law in
2005. Initially, a small office was established utilizing three employees from other DOE
organizations under the Chief Financial Officer of the DOE.142 The DOE issued the first
solicitation inviting interested parties to submit a pre-application for federal loan guarantees
relating to projects that employ innovative technologies in August 2006.143 The solicitation
period for pre-applications closed in December 2006. The DOE received pre-applications for
143 projects, including Solyndra’s.
In February 2007, Congress initially appropriated funds of $7 million from borrower fees
to fund the operation of the LGP and provided initial loan guarantee authority for up to $4 billion
of guaranteed loans.144 The Credit Review Board (“CRB”) was established in March 2007 and
chaired by the Deputy Secretary of Energy. The CRB was created to approve major policy
decisions of the LGPO, review LGPO recommendations to the Secretary of Energy regarding the
issuance of loan guarantees for specific projects, and to advise the Secretary of Energy on loan
guarantee matters.
In April 2007, the LGPO was funded, CRB met for the first time, and the technical
review of the pre-application began. The DOE issued a Notice of Proposed Rulemaking for the
LGP in May 2007 to begin the rule making process and allow for public comment on its
proposed regulations. In June 2007, the DOE held a meeting allowing the public to comment on
its proposed regulations for the LGP and began the financial review of the pre-applications
submitted.145 The DOE announced that it named David Frantz (“Frantz”) as Director of the LGP
142 See Appendix G.5, United States Government Accountability Office, April 20, 2007 Letter to House of Representatives Subcommittee on Energy and Water Development (B-308715). 143 See Appendix G.3, DOE Loan Guarantee Solicitation Announcement (DE-PS01-06LG00001), August 8, 2006. 144 See Appendix G.4, DOE News Release, “Loan Guarantee Provisions from Public Law No. 110-5, the Revised Continuing Appropriations Resolution”, February 26, 2007. 145 See Appendix G.6, DOE News Release, “DOE Reports Progress on Loan Guarantee Program”, June 20, 2007.
77
to manage the LGPO, and that Frantz would report directly to the DOE’s Chief Financial
Officer.146 The LGP also conducted technical and financial review meetings to develop final
recommendations to the CRB for the pre-applications received.147
In October 2007, the DOE’s final rules for the LGP were issued148 and 16 of the initial
143 pre-applicants were selected and invited to submit full applications to the LGPO for further
consideration.149 As a result of the invitations sent, the DOE began to receive and analyze full
applications in April 2008.150 Solyndra submitted its Full Application to the LGPO in parts
beginning in May 2008 through August 2008 with an initial expectation of closing the
transaction in September 2008.
In January 2009, Dr. Steven Chu was appointed as Secretary of Energy (“Secretary Chu”)
and replaced Secretary Bodman, a month prior to the enactment of ARRA. As of January 2009,
the LGPO had 16 federal employees.151
Solyndra received its conditional commitment for its DOE Loan Guarantee in March
2009152 and was the first loan guarantee closed by the DOE in September 2009.153 In November
2009, the DOE announced Silver as the new Executive Director of the LGP to oversee the LGP
and report directly to Secretary Chu. Silver was responsible for staffing the program, leading
origination, analysis, and negotiations of the loan guarantees, and managing the full range of the
DOE’s alternative energy investments.154 In July 2010, Nwachuku joined the LGPO as the
Director of Portfolio Management responsible for monitoring and risk management for the DOE
loan and guarantee portfolio. As of September 23, 2010, the LGPO had over 80 federal
146 See Appendix G.7, DOE News Release, “Energy Department Names Director of its Loan Guarantee Office”, August 3, 2007. 147 See Appendix G.10, GAO Report to Congressional Committees, “Department of Energy – New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management”, July 2008. 148 See Appendix G.8, Department of Energy 10 CFR Part 609, Loan Guarantees for Projects that Employ Innovative Technologies; Final Rule, October 23, 2007. 149 See Footnote 147. 150 Id. 151 See Footnote 141. 152 See Appendix G.13, DOE News Release, “Obama Administration Offers $535 Million Loan Guarantee to Solyndra, Inc.”, March 20, 2009. 153 See Appendix G.14, DOE News Release, “Vice President Biden Announces Finalized $535 Million Loan Guarantee for Solyndra”, September 4, 2009. 154 See Appendix G.15, DOE News Release, “DOE Announces New Executive Director of Loan Guarantee Program”, November 10, 2009.
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employees supported by a number of subject-matter experts engaged on a contract basis.155
According to the LGPO website, the LPG has guaranteed over $35 billion of loans as of January
31, 2012.
Since the LGP was established, the LGP was audited by the GAO and the DOE Office of
Inspector General (“IG”) on several occasions, which identified various issues relating to the
LGP. As a result, delays were incurred with the processing of the existing loan guarantee
applications, including Solyndra’s application, while the LGPO addressed issues identified.
These reports identified a number of positive and negative findings of the LPG and are
summarized below:
• IG Special Report (September 2007)156 – This report concluded that there were a number of steps that should have been taken to foster the success of the LGP, including finalizing a staff plan, developing risk mitigation strategies, implementing and executing a monitoring system, and promulgating procedures relating to loan defaults.
• GAO Report (July 2008)157 – This report concluded that the DOE was not well positioned to manage the LGP effectively and maintain accountability because it had not completed a number of key management and internal control activities. The report noted that the LGP had not sufficiently determined the resources it would need or completed detailed policies, criteria, and procedures for evaluating applications, identifying eligible lenders, monitoring loans and lenders, estimating program costs, or accounting for the program.
• IG Audit Report (February 2009)158 – This report found that while the Program had developed and implemented some key programmatic safeguards, the Program had not completed a control structure necessary to award loan guarantees and to monitor associated projects. Specifically, the Program had not finalized policies and procedures, formally documented portions of its applicant reviews, or formalized procedures for disbursing loan proceeds.
• GAO Report (July 2010)159 – This report found that performance measures developed for the LGP did not reflect the full scope of program activities. In addition, the report
155 See Footnote 141. 156 See Appendix G.9, IG Special Report (DOE/IG-0777), “Loan Guarantees for Innovative Energy Technologies”, September 2007. 157 See Footnote 147. 158 See Appendix G.12, IG Audit Report (DOE/IG-0812), “The Department of Energy’s Loan Guarantee Program for Innovative Energy Technologies”, February 2009. 159 See Appendix G.16, GAO Report to Congressional Committees, “Department of Energy – Further Actions are Needed to Improve DOE’s Ability to Evaluate and Implement the Loan Guarantee Program”, July 2010.
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noted that the LGP had treated applicants inconsistently and lacked mechanisms to identify and address their concerns.
• IG Audit Report (March 2011)160 – This report found that the LGP could not always readily demonstrate, through systematically organized records, including contemporaneous notes, how it resolved or mitigated relevant risks prior to granting loan guarantees. The report noted other areas of needed improvement where the LGP had not updated its policies and procedures to include improvements in its loan processing to provide for consistent use of lessons learned and provided financial oversight of its independent advisors to ensure the allowability and reasonableness of costs.
B. DOE Loan Guarantee Process
In order for Solyndra and other applicants to obtain a DOE Loan Guarantee, they were
required to follow a comprehensive application and loan underwriting process that adhered to the
substantial requirements and procedures ultimately finalized by the LGP in its Final Rule on
October 23, 2007.161 The Final Rule set forth the general scope of the program, evaluation
processes, and other requirements necessary for the approval and issuance of a loan guarantee.
In Silver’s testimony to the United States Senate Committee on Energy & Natural Resources in
September 2010, he explained the process of the LGP to review and approve loan guarantee
applications.162 A general description of the loan guarantee process is provided below pursuant
to the Final Rule and Silver’s testimony:
1. Application Submission
Applications for loan guarantees were submitted to the LGPO in two parts. The first
submission was a summary application, which the LGPO would review to determine if the
proposed project was eligible for the LGP. If the LGPO determined the project was eligible, the
applicant would be selected to submit a more comprehensive application, which the LGPO
would analyze to determine if the project warranted additional review and due diligence.
160 See Appendix G.18, IG Audit Report (DOE/IG-0849), “The Department of Energy’s Loan Guarantee Program for Clean Energy Technologies”, March 2011. 161 The DOE published its Final Rule 10 CFR Part 609 for Loan Guarantees for Projects that Employ Innovative Technologies (“Final Rule”) in the Federal Register on October 23, 2007 after a public comment process, see Appendix G.8. 162 See Appendix G.17, Written Statement for the Record of Jonathan Silver, Executive Director of the Loan Programs Office, U.S. Department of Energy, United States Senate Committee on Energy & Natural Resources dated September 23, 2010.
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2. Initial Due Diligence and Term Sheet Negotiation
After the LGPO received the more comprehensive application from the applicant, it
began to conduct due diligence, including: (a) a close examination of the technology;
(b) analysis of the financial model and plan for the project; (c) detailed legal, market, and
environmental reviews; and (d) engagement of outside consultants and advisors with specialized
expertise relevant to the project to assist the DOE with the transaction. After due diligence
proceeded to a point where the substantive business points made sense, the LGPO would begin
to negotiate with the applicant on the terms and conditions of the potential loan guarantee.
3. Credit Analysis and Review
The LGPO credit staff would undertake a comprehensive credit analysis of the proposed
transaction. The credit team calculated an estimated credit subsidy score based on the agreed
term sheet between the applicant and the DOE and other factors. The credit subsidy score was
calculated using a methodology approved by the OMB. The LGPO would review and score
every aspect of the transaction, including the pledge of collateral, market risk, technology risk,
regulatory risk, contractual foundation, operational risk, and recovery profile. The result was a
preliminary credit subsidy range that incorporated all available information regarding the project
and financing at the time.
4. Deal Approval
Once the term sheet was agreed upon between the applicant and the LGPO, the
transaction would be submitted for the necessary approvals. The first step was submission to the
Credit Review Committee (“CRC”) which consisted of DOE officials with financial and
technical expertise. If the CRC recommended the project for approval, the transaction was then
presented to the CRB, also consisting of top-level DOE officials. Prior to submission to the
CRB, the LGPO would present the project to the OMB and U.S. Department of Treasury
(“Treasury”) for review, consistent with statutory requirements. If the CRB recommended
approval of the deal, it was presented to the Secretary of Energy, who had the ultimate authority
to approve loan guarantees. If the Secretary of Energy approved the transaction, a conditional
commitment for a loan guarantee was provided to the applicant upon execution and payment of
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the required fee. The commitment was “conditional” because it was subject to the satisfactory
negotiation of definitive documentation and Secretary of Energy’s final decision at the time of
the close.
5. Final Due Diligence and Negotiation of Financing Documents
After the conditional commitment was issued, the LGPO would complete any remaining
due diligence and final loan documentation would be drafted and negotiated.
6. Closing
Once all due diligence was completed, necessary financing documents negotiated, and all
other statutory, regulatory, and other requirements had been satisfied, the LGPO credit staff
would conduct a comprehensive credit analysis based on the final terms and conditions of the
loan. The analysis results in the calculation of the project’s estimated credit subsidy cost. The
estimated credit subsidy cost was sent to the OMB for final approval. Once the credit subsidy
cost was finalized, the project could close and the loan guarantee obligating the DOE would be
put into place. Upon closing, the applicant could immediately draw upon the loan in accordance
with the contemplated draw schedule if all conditions and requirements referenced in the
financing documents were met.
C. The “$535 Million” DOE Loan Guarantee
Solyndra was the first company to secure a guaranteed loan facility under the LGP. On
September 3, 2009, the company, and one of its subsidiaries, Fab 2, LLC, entered into financing
agreements with the DOE and FFB163 that provided for a $535 million loan guaranteed by the
DOE. The loan to Fab 2, LLC was for the construction of a new state-of-the-art manufacturing
facility in Fremont, California (referred to as the Fab 2 Phase I facility). The company’s pursuit
of a DOE Loan Guarantee was not without its challenges. The LGP was a new program
established by the EPAct2005 that required multi-agency approvals and ultimately resulted in
numerous delays that proved to consume significant financial resources of the company over the
2 ½ year approval process. Exhibit #5 provides a timeline detailing the key events relating to
the DOE Loan Guarantee. 163 Fab 2 LLC was the “Borrower” and Solyndra, Inc. was the “Sponsor” in the DOE financing agreements.
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The lengthy approval process and attendant costs for Solyndra to proceed it are discussed
in further detail in the section below:
1. DOE Loan Guarantee Solicitation
As a result of the EPAct2005, the DOE issued a solicitation on August 8, 2006 inviting
submission of pre-applications for eligible projects that promoted President Bush’s AEI (the
“2006 Solicitation”).164 The DOE pre-application (the “Pre-Application”) required information
and documentation to be provided including: (a) the complete Pre-Application form; (b) a
business plan for the project;165 (c) a financing plan overview;166 (d) an explanation of the impact
that the loan guarantee would have on financing terms and structure; (e) a commitment letter
from an eligible lender;167 (f) an equity commitment letter from the project sponsor; (g) an
overview on the project eligibility under section 1703 of the EPAct2005; (h) an outline of
potential environmental impacts of the project and how they would be mitigated; (i) a description
of the anticipated air pollution and greenhouse gas reduction benefits; (j) a description of how
the project advances the AEI; and (k) an executive summary describing the key project features
and attributes. These items were required to be organized and submitted in three volumes which
would be reviewed by the CRB to determine if an invitation would be extended to submit a full
application to further the process.
2. Solyndra’s Pre-Application
In response to the 2006 Solicitation, Solyndra prepared and submitted its Pre-Application
on December 28, 2006.168 The Pre-Application was signed by Gronet and identified Solyndra,
164 See Appendix G.3, DOE Loan Solicitation Announcement (PS01-06LG00001) dated August 8, 2006. The 2006 Solicitation was issued in conjunction with the issuance of the “Loan Guarantees for Projects that Employ Innovative Technologies; Guidelines for Proposals Submitted in Response to the First Solicitation under Title XVII of the Energy Policy Act of 2005.” 165 The business plan was to include an overview of the proposed project, a description of the project sponsor, a description of the technology to be utilized, an estimate of the total project costs, the time frame required for construction and commissioning of the facility, and a description of the primary revenue-generating agreement(s) that would primarily provide financial support for the project. 166 The financing plan overview was to include an overview describing the amount of equity to be invested and the sources of such equity, the amount of the total debt obligations to be incurred and the funding sources of all such debt, and a financial model detailing the investments and the cash flows generated from the project over the life of the project. 167 The commitment letter was to be from an eligible lender expressing its commitment to provide the required debt financing necessary to construct and fully commission the project. 168 See Appendix H, Solyndra DOE Loan Guarantee Application (Volumes 1-3) dated December 28, 2006.
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Inc. as the project sponsor (“Sponsor”). The Pre-Application described the project to be built as
a 183,000 square foot manufacturing facility in Fremont, California, referred to as the Fab 1
facility, capable of manufacturing up to 132 MW of the company’s unique cylindrical thin-film
photovoltaic solar panels utilizing one mini production line (used for development) and two full
scale production lines. The project was estimated to cost approximately $130.8 million.
Solyndra applied for a loan guarantee of $80 million, or 80% of a proposed $100 million
construction loan from HSH Nordbank, over an 8 year term. At the time, Solyndra had 120
employees, including a management team experienced in high-tech manufacturing,169 and had
already raised over $100 million of capital.170 Solyndra’s Pre-Application was submitted in
three volumes as required by the 2006 Solicitation containing approximately 67 pages of detailed
narrative, various figures and tables, and other related materials.
Months after the Pre-Application was submitted, Solyndra received no indication from
the DOE that its project would be selected for the program and moved forward with the
development of its Fab 1 facility utilizing bank financing from HSH Nordbank and equity capital
from its investors.
3. Invitation to Submit Full Application
Solyndra eventually received notification from the LGPO that it had been selected to
submit a full application on October 4, 2007,171 over 10 months after the submission of its Pre-
Application. Solyndra notified the LGPO it was accepting the invitation on October 5, 2007.172
169 The management team included Gronet as Chief Executive Officer (former Vice President at Applied Materials), Dr. Kelly Truman (“Truman”) as Vice President of Marketing and Business Development (former Vice President of Marketing at ReVera), Ben Bierman (“Bierman”) as Vice President of Operations (former Vice President of Business Management at Coherent’s Laser Systems group), Jonathan Michael (“Michael”) as Chief Financial Officer (former Vice President of Finance at Fairchild Semiconductor), Ratson Morad (“Morad”) as Vice President of Engineering, Front-End Manufacturing (former Chief Executive Officer of Blue 29), and Benny Buller (“Buller”) as Vice President of Engineering, Back-End Manufacturing (former program manager at Applied Materials). 170 The shareholders included Rockport Capital Partners, U.S. Venture Partners, Argonaut Private Equity, CMEA Ventures, KKR Financial Corp, Madrone Capital Partners, Pinnacle Ventures, and Redpoint Ventures. 171 See Appendix I.1, DOE Invitation to Submit Full Proposal from Loan Guarantee Program dated October 4, 2007. 172 See Appendix I.2, Solyndra Acceptance of DOE Invitation dated October 5, 2007.
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4. Submission of Full Application
In preparation to submit the Full Application in response the LGPO invitation, Solyndra
personnel attended a meeting with the LGPO in Washington, D.C. on December 19, 2007 to
“kickoff” the process, address the requirements and expectations for the Full Application, and to
provide the LGPO with information regarding its contemplated Fab 2 facility to be constructed,
since the Fab 1 facility discussed in the Pre-Application was already underway. In this meeting,
Solyndra provided a detailed presentation to the DOE which included: (a) a snapshot of the
company; (b) a description of the technology; (c) a description of the status of the Fab 1 facility;
(d) a description of the contemplated four phase 1.2 GW Fab 2 facility; (e) a description of the
challenges in reducing costs and growing capacity; (f) a description of the company’s market
focus; (g) a description of the benefit of a loan guarantee; (h) a description of Solyndra’s existing
debt and equity financing; and (i) a description of the management team and board of
directors.173 The DOE also provided Solyndra with written instructions and guidance materials
outlining the requirements for the submission of the Full Application.
company personnel had numerous other meetings and telephone conversations with the
LGPO174 leading up to the submission of Solyndra’s Full Application, between December 2007
and the submission of its Full Application beginning in May 2008.175 Scott was the company’s
point-of-contact with the LGPO and would report back to the Solyndra management team and its
Board regarding the progress of the application and issues that needed to be addressed. These
meetings and discussions covered various topics, including the DOE’s continued support for the
project, Solyndra’s required equity contributions, eligible project costs, program procedures and
documentation requirements, calculation of credit subsidy costs, and obtaining a credit rating by
a reputable rating agency. The DOE strongly encouraged Solyndra to evaluate third-party
lenders as an alternative to a loan with the FFB and estimated that the process would take six
months from the completion of the Full Application to funding. The DOE acknowledged prior to
the submission of the Full Application that Solyndra had moved forward with the Fab 1 facility
173 See Appendix J.1, Solyndra Presentation to DOE dated December 19, 2007. 174 The initial LGPO team included various DOE personnel and contractors such as: David C. Schmitzer (“Schmitzer”), LGP Director of Loan Origination; William Miller (“Miller”), Origination Program Manager; Douglas Schultz, Program Manager; Ove Westerheim, Director of Project and Portfolio Management; Dan Tobin, Senior Investment Manager; and Richard Corrigan, DOE Contractor. 175 See Appendix I, Various DOE Related Correspondence and Communications.
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and that submission of the Full Application would include a new Fab 2 facility. The DOE
supported the new project, but indicated Solyndra would face a higher level of scrutiny on the
increased size and dollar amount of the project.
Solyndra submitted part of its Full Application on May 6, 2008 and completed the
remainder of the required submissions by August 27, 2008.176 The Full Application was
voluminous, containing over 1,500 pages of documentation and information, including the
application form, changes from the original Pre-Application, company background, project
description, technical information, business plan, financing plan, applicant information, applicant
certifications, preliminary construction milestone schedule, preliminary cash flow, financial
projections,177 equipment and capacity assumptions, preliminary front-end construction budget,
articles of incorporation, estimated project costs, construction risks and mitigation strategy,
status of federal, state, and local approvals, engineering report from Solyndra’s engineer,
environmental report, Sponsor involvement, contractual arrangements, operational risks and
mitigation strategies, preliminary credit assessment,178 credit history, and audited financial
statements of Solyndra, Inc. for 2005, 2006 and 2007. The LGPO indicated in its letter to
Solyndra dated May 13, 2008 that the LGPO could begin its informal analysis of the project
based on the information submitted in the initial partial application upon receipt of an
acknowledgment by Solyndra, which was provided by Stover, the company’s current Chief
Financial Officer.
a. Summary of Full Application
The Full Application submitted by Solyndra was signed by Gronet and identified
Solyndra, Inc. as the Sponsor. The Full Application sought a DOE Loan Guarantee to construct 176 See Appendix K, Full Application submitted between May 6, 2008 and August 27, 2008. 177 The model created by Solyndra for the financial projections included in the Full Application was very detailed and extensive. The model was developed in Microsoft Excel and included 20 different worksheets or tabs with detailed inputs for various financial data and assumptions. The model included thousands of rows and/or columns of data. The model included worksheets for key assumptions, projected financial statements and financial performance, metrics summary, capital budget, power and average sale prices, corporate expense allocations, yields and utilizations, direct materials, Fab output, contractor estimates, equipment assumptions, direct labor assumptions, overhead assumptions, cost of goods sold assumptions, capital expenditures, and other various calculations. 178 Solyndra solicited preliminary credit assessments from FitchRatings, part of the Fitch Group (“Fitch”), and Standard and Poor’s (“S&P”), two of the “Big Three” credit agencies. Solyndra chose to submit the preliminary Fitch credit assessment which included a B+ rating with a 63% estimated recovery percentage to the DOE as part of its Full Application. This document was the last document to complete the Full Application. The S&P preliminary assessment included an estimated recovery percentage through a liquidation of assets of approximately 25%.
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and operate the company’s proposed Fab 2 Phases I & II facility capable of manufacturing up to
420 megawatts per year of its photovoltaic solar panels with an estimated total project cost of
approximately $1.03 billion. The proposed funding for the project consisted of a loan from the
FFB in the amount of $822 million with a 7 year term, guaranteed by the DOE, and an equity
contribution by Solyndra, Inc. of $205 million, or 20% of the total estimate project costs. The
proposed site for the Fab 2 Phases I & II front-end facility was a 30-acre parcel located at 47488
Kato Road in Fremont, California, approximately one quarter mile from the company’s existing
Fab 1 facility. The project contemplated the construction of an approximately 600,000 square
foot facility with six production lines that would be utilized to manufacture cylindrical modules
during the deposition manufacturing phase. Solyndra also intended to lease one or more
buildings aggregating approximately 300,000 square feet for the back-end manufacturing facility
including encapsulation, finishing, and packaging processes.
5. Revisions to Full Application
Prior to the complete submission of the Full Application, the scope of the project was
reduced to what is commonly referred to as Fab 2 Phase I. As a result, many aspects of the Fab 2
project changed, such as a reduction of the total estimated project costs, funding requirement,
financial projections, and expected capacity. The revised project had a reduced expected
production capacity of 210 megawatts per year utilizing three production lines (instead of six)
and a reduction in total estimated project costs of $713 million. The financing request was also
modified to include a $535 million loan from the FFB, guaranteed by the DOE, and required an
equity participation of $178 million representing a 25% percent equity contribution percentage
compared to the original 20% requested. In support of Solyndra’s Full Application, there were
several financial models prepared and provided to the DOE as additional adjustments based on
changing assumptions prior to the completion of the application in August 2008 (See Exhibit #6
for a list of all identified financial models sent to the DOE). The finalized financial model
included in the loan closing documentation was submitted by Solyndra to the DOE on August
18, 2009.
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a. Solyndra’s Key Consultants and Advisors for DOE Loan Guarantee
Pursuant to Solyndra’s pursuit of the DOE Loan Guarantee, the company evaluated and
retained several reputable and well qualified companies and firms with large scale construction
experience to provide key advice and services relating to the construction of the Fab 2 facility,
including:
• Studios Architecture – Solyndra retained San Francisco based Studios Architecture, a West Coast architecture firm that has substantial experience with designing commercial buildings in the San Francisco Bay Area and knowledge of local building codes and requirements, to provide master planning and architecture services.179
• Hathaway Dinwiddie Construction company – Solyndra engaged Hathaway Dinwiddie Construction company for pre-construction services, including identifying key material requirements that might cause schedule delays and developing initial construction cost estimates based on project specifications.
• CH2M Hill – Solyndra contracted with CH2M Hill to provide detailed engineering and architectural services for the project.180 CH2M Hill had significant experience and an international reputation in designing semiconductor fabrication facilities. CH2M Hill had been working on the initial engineering plans since 2007 and provided a detailed engineering report that was included in the Full Application.
• Rudolph and Sletten General Engineering Contractors (“Rudolph”) – Rudolph was selected as the general contractor for the construction of the Fab 2 facility. Solyndra believed Rudolph had extensive high-tech manufacturing experience, large-scale construction and project management expertise, project finance management wherewithal and corporate financial stability.
• Environmental Management and Planning Solutions, Inc. – Solyndra retained Environmental Management and Planning Solutions, Inc. to conduct its required National Environmental Policy Act (“NEPA”) assessment and analysis for the Fab 2 facility.
In addition to the engagement of consultants, contractors, and engineers regarding the
construction and design of the Fab 2 facility, Solyndra also retained legal counsel, investment
bankers, and financial advisors, and utilized lobby consultants to address the legal, financial, and
governmental affair issues surrounding the DOE Loan Guarantee and raising additional required
capital. Some of the key professionals include:
179 Solyndra required CH2M Hill, the engineering and architectural firm engaged by Solyndra, to subcontract the architecture services of Fab 2 to Studio Architecture. 180 Id.
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• Wilson Sonsini Goodrich & Rosati, PC – Wilson Sonsini Goodrich & Rosati, PC is an international law firm with expertise in energy and clean technologies. Solyndra engaged this firm to provide legal counsel regarding the DOE Loan Guarantee, including the negotiation of a term sheet and legal documents executed at closing.
• Goldman, Sachs & Co. (“Goldman Sachs”) – Goldman Sachs is an international investment banker and financial advisor that provides services to corporations, financial institutions, governments, and high-net-worth individuals throughout the world. Solyndra engaged Goldman Sachs to provide various investment banking and financial advisory services. Goldman Sachs was engaged in various capacities including providing assistance with the DOE Loan Guarantee (including certain governmental affairs consulting), raising of additional capital through private debt or equity offerings, an initial public offering, and other financial advisory services.
• McBee Strategic Consulting, LLC – McBee Strategic Consulting, LLC is a consulting firm that specializes in government affairs and lobby services in Washington, D.C. Solyndra engaged this firm to provide general and governmental consulting, monitor federal legislative and regulatory activity, coordinate and attend meeting between Solyndra and federal officials, and furnish logistical support during Washington, D.C. visits by Solyndra representatives.181
• Dutko Worldwide – Dutko Worldwide is a consulting firm that specializes in government affairs, lobby, and strategic business consulting services in Washington, D.C. Solyndra engaged this firm to provide services relating to the DOE Loan Guarantee in 2008.182
• Holland and Knight – Holland and Knight is an international law firm that provides legal services in a variety of practice areas and industries. Solyndra retained this firm to provide lobby related services relating to the DOE Loan Guarantee in 2008.
The amounts paid by Solyndra to the foregoing companies for their services are
addressed in a separate section of the CRO report. Please see Section XIII. – Sources and Uses
of Cash for additional information.
6. DOE Due Diligence Activities and Term Sheet Negotiations.
After the submission of the partial application in May 2008, there were numerous
meetings and telephone conversations that took place between Solyndra personnel and DOE
representatives, in Washington, D.C. and at the Solyndra facilities, involving the status and
181 Solyndra also engaged other government consultants and lobbying firms in conjunction with the DOE Loan Guarantee. 182 Id.
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progress of Solyndra’s application.183 The DOE began an informal review of the application
upon receiving the partial submission in May 2008. Solyndra maintained consistent
communications with the DOE throughout the process to keep the project and application
process moving forward. In June 2008, Scott met with the LGPO in Washington, D.C. and
provided training on the detailed financial model provided in the Full Application so the DOE
could run its own sensitivity and negative scenario analyses on the model. In the same meeting,
Scott addressed the anticipated timeline to complete due diligence and submit the application for
CRB review and approval. The LGPO also indicated that they were close to completing the
drafting of terms to be included in the term sheet which would be the basis of the agreement
between the DOE and Solyndra.184 The DOE indicated that a September 2008 credit approval
was on track although the schedule was tight, a credit subsidy debate between the LGPO and the
OMB was close to being resolved, and the Solyndra project continued to enjoy significant
attention inside the LGPO.185 In early July 2008, Schmitzer indicated to Scott that the LGPO
office was extremely frustrated by the delays caused by several rounds of legal review of its
Requests for Proposal and expected them to go out shortly.186 Schmitzer also encouraged Scott
to lock-down a commitment for delivery of a credit assessment.187 Solyndra began providing
documentation to Fitch for its credit assessment on July 1, 2008. At approximately the same
time, the GAO issued its July 2008 report which concluded the DOE was not well positioned to
manage the LGP effectively and maintain accountability because it had not completed a number
of key management and internal control activities. In mid-July 2008, Gronet and Scott met with
the LGPO where they were informed the retention of the DOE’s due diligence consultants was
delayed until at least September 2008 which would push back the CRB review to at least
November 2008.
Solyndra continued to coordinate its efforts with the DOE to avoid further delays. In an
effort to accelerate the process, Solyndra, with its counsel and financial advisor, drafted a term
sheet in August 2008 which was sent to the DOE.188 Sometime before September 2008, the
timetable for CRB approval was delayed again to January 2009. Gronet had become frustrated 183 See Appendix I, Various DOE Related Correspondence and Communications. 184 See Appendix I.9, Scott email to Solyndra management team dated June 19, 2008 185 See Appendix I.11, Scott email to Solyndra management team dated June 27, 2008. 186 The third party consultants were required to go through a lengthy full federal procurement process. 187 See Appendix I.13, Scott email to Solyndra management team dated July 7, 2008. 188 See Appendix L.1, Preliminary Draft Term Sheet dated August 27, 2008.
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with the delays and exchanged a number of emails with Frantz regarding the timetable of
selecting due diligence consultants. Frantz indicated that the DOE, in spite of its best efforts,
was still experiencing delays due to “growing pains and circumvented road bumps along the
way”. Gronet stated in one of his emails to Frantz: “We continue to spend on this project at a
very high rate to ensure that we have all of the prerequisites in place for a successful and timely
project. I know the intent of the DOE program is to support the expansion of companies like
Solyndra that have game-changing technologies that can have a real impact on our energy and
global warming issues. But please realize that these delays are now in danger of having the
OPPOSITE effect. We are a relatively small company with a small balance sheet and simply
cannot afford such delays.”189 Shortly after these email exchanges, Frantz informed Solyndra
that its application was substantially complete and that the LGPO could initiate its due
diligence.190 After the acknowledgement by Frantz that the Solyndra application was
substantially complete, Solyndra continued to work aggressively with the LGPO to move the
process along and minimize further delays, due to Solyndra’s continued and substantial financial
commitments to the project.
Another point of considerable concern for Solyndra was the calculation of the required
credit subsidy costs. Depending on the size calculated by the LGPO, and approved by the OMB,
the company could be required to pay additional amounts which might total tens of millions of
dollars. At this point, the DOE was still working on the credit subsidy model with the OMB and
was unable to provide Solyndra with a projected cost. In addition, the DOE was attempting to
determine the recovery value of production assets in various liquidation scenarios with the OMB.
According to the LGPO, the OMB (as well as S&P and Fitch) were characterizing the assets as
“scrap” in default scenarios, and they were arguing that positive cash flow assets have a higher
market value.191 The DOE indicated that the credit subsidy cost calculation and approval by
OMB should be completed by October 2008. Solyndra’s Board was anxious to obtain the credit
subsidy cost estimate in order to be certain that it would not adversely affect the economics of
the project.
189 See Appendix I.16, Gronet email to Frantz dated September 8, 2008 and corresponding email chain. 190 The DOE had been informally reviewing the Solyndra application since its partial submission in May 2008. 191 See Appendix I.20, Email chains between Scott and DOE dated September 17-19, 2009 and Appendix I.21, Scott email to Solyndra management team dated September 22, 2008.
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Solyndra continued to work with the LGPO to address various questions and issues rising
from the review of the extensive documentation provided by Solyndra. The company continued
to provide additional documentation and information including updated financial models,
customer agreements, financial statements, and other items requested by the LGPO.192
After months of delay, the DOE’s consultants, RW Beck193 and Morrison & Foerster
LLP (“MoFo”),194 were selected and engaged in December 2008 after a lengthy procurement
process. RW Beck was engaged to perform and prepare an independent engineering report for
the Fab 2 project, and MoFo to provide legal services in regard to the negotiation and
documentation of the agreements. Solyndra was told by the DOE that it would be responsible
for payment of all fees and costs incurred by the DOE consultants and executed Sponsor
Payment Letters195 with each consultant. The RW Beck fees were initially capped at
approximately $525,000;196 however, Solyndra was informed by the DOE that there would not
be any caps on the MoFo fees and costs. Shortly after their engagement, Solyndra started
providing RW Beck with documentation and information for its analysis.
The timeline for various milestones continued to be pushed back based on delays from
the LGPO. In early December 2008, the DOE indicated its frustration with the need to inform
Solyndra that it would need another two weeks before a preliminary credit subsidy cost range
could be provided. The DOE stated it was running scenarios with Solyndra’s financials and
other projects to test the calculations. The DOE provided a preliminary credit subsidy cost range
on December 9, 2008 which ranged from 6% to 14% of the $535 million DOE Loan Guarantee,
or approximately $32.1 million to $74.9 million. The LGPO office was also concerned that the
procurement of a market consultant for due diligence would not occur in time for a January CRB
approval, and decided it would perform the market analysis in-house.197 In an effort to move the
192 See Exhibit #6 for list of financial models provided to DOE. 193 RW Beck was an internationally recognized management consulting and engineering firm providing services to public and private sector clients in the areas of energy, water, wastewater, solid waste, and telecommunications. RW Beck was acquired in 2009 by Science Applications International Corporation. 194 MoFo is a well recognized and experienced international law firm with over 1,000 lawyers throughout the world with experience in renewable and alternative energy projects. 195 See Appendix M, Sponsor Payment Letters. 196 Fees were eventually increased. 197 See Appendix I.34, Scott email to Solyndra management team dated December 8, 2008.
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process forward, Solyndra also had Goldman Sachs prepare a preliminary credit memo which
could be used by the DOE.198
Concerned about the credit subsidy cost range, Scott spoke with Miller regarding the
possibility of extending the term of the loan guarantee from 7 to 10 years in an effort to reduce
the credit subsidy costs. Miller indicated that the LGPO analysts indicated that a 10 year term
reduced the credit subsidy costs and Solyndra prepared and sent to the LGPO several revised
financial plans with a 10 year term for further evaluation in January 2009. The DOE did not
respond with a credit subsidy range for a 10 year project, and given the then-present timetable
and possibilities of further delay, Solyndra determined not to further these discussions with the
DOE.
Upon the engagement of MoFo in December 2008, significant progress was made
discussing and negotiating deal terms in preparation of a draft term sheet.199 The LGPO
indicated a need to have as many deal terms finalized before submission to the CRB for
approval. On January 8, 2009, the DOE provided a draft term sheet (39 pages) to Solyndra.200
The next day, the DOE informed Solyndra that the CRC met and concluded that the government
must have rigorous adherence to internal policy and procedures, particularly on the first loan of
the LGP, and would not proceed without a third party consultant market report. Additionally, the
CRC indicated a need to have all LGPO materials submitted with sufficient time for review and
deliberation including a fully negotiated term sheet, which was not provided.
Solyndra and the DOE continued to move forward with the negotiation of the term sheet
and Solyndra provided additional financial models, including “down case scenarios,”201 to the
DOE. The equity contribution percentage was discussed. The company strenuously requested
and fought for a 20% equity contribution, while the DOE wanted a much higher equity factor.
Ultimately, a 27% equity contribution percentage was agreed upon. Additionally, another
significant condition was the provision requiring an incremental cost overrun reserve to be
funded by the company, which the DOE believed should be around $30 million.
198 See Appendix N, Goldman Sachs Draft Credit Review Board Credit Memo submitted to the DOE dated December 17, 2008. 199 Solyndra presented its draft term sheet to the LGPO in August 2008. See Appendix L.1. 200 See Appendix L.2, Initial Draft DOE Term Sheet dated January 8, 2009. 201 Down case scenarios were basically financial sensitivity models utilizing ranges of varying assumptions.
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Secretary Chu was appointed in January 2009 and was briefed by Frantz on the Solyndra
project, which was identified as one of the first projects likely to get through the process.
Secretary Chu confirmed that a quorum of CRB members was in place and would be ready to
meet within a month.202 In the following month, ARRA was passed and signed into law by
President Obama, which among other things, amended the EPAct2005 and temporarily expanded
the LGP by adding the 1705 Program. A significant change to the credit subsidy cost in the
ARRA provided a mechanism for the DOE, rather than the borrower or sponsor, to pay the
significant credit subsidy costs through appropriations. The DOE ultimately agreed that the
credit subsidy costs for Solyndra (filed under the 1703 Program) would be assumed by the
federal government and receive the treatment described under the new 1705 Program.
In February 2009, RW Beck concluded its 47 page independent engineering report203 and
concluded, among other things:
• Solyndra had previously demonstrated the capability to construct and operate facilities of similar size and technology as the Fab 2 facility;
• Proposed manufacturing technology was technically viable and the facility had been designed to provide the required infrastructure for the technology;
• Fab 2 facility should have a useful life beyond 20 years;
• Construction cost estimates were developed in accordance with generally accepted engineering practices and methods of estimation;
• Provided that Solyndra’s responsibilities were completed on schedule, the 35-month overall duration from start of engineering on November 2008 through the 210MW run rate in September 2011, was “somewhat aggressive, but achievable” using generally accepted project, engineering and construction management practices; and
• Certain performance assumptions used in the financial projections provided were achievable based on the information reviewed and Solyndra’s contingency plans to mitigate the risks of scale-up and yield improvements.
RW Beck was also selected as the DOE’s independent market consultant in February
2009 and issued a draft Independent Market Consultant Report in March 2009, with its final
report in April 2009.204 The final report concluded, among other things, that:
202 See Appendix I.59, Scott email to Solyndra management team dated January 26, 2009. 203 See Appendix O.1, RW Beck DOE Independent Engineer’s Reports.
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• The target market was many times Solyndra’s overall 210MW annual production from the Fab 2 facility;
• Solyndra’s marketing staff appeared to have appropriate background and was adequately sized to implement its marketing plan;
• In low-slope, cool roof applications, the average system delivered price per kilowatt hour to the end user produced from Solyndra’s technology was projected to be competitive with that of wafer-silicon technology;
• In low-slope, cool roof applications, integrators should be able to offer a retail system price per watt to the financing companies using Solyndra’s technology competitive with that realized when using wafer-silicon technology.
• The average selling prices assumed in Solyndra’s projections and pro forma would allow project financiers to offer energy prices that were competitive with peak retail commercial rates in Solyndra’s primary U.S. market and lower than FiTs in Solyndra’s primary European markets.
7. Finalized Term Sheet and DOE Conditional Commitment
After the DOE Loan Guarantee was reviewed and approved by the CRC and submitted to
the CRB, the CRB approved the conditional guarantee in March 2009. A term sheet (38 pages)
was finalized and executed on March 20, 2009 (the “March 2009 Term Sheet”).205 The March
2009 Term Sheet provided for a $535 million loan from the FFB, guaranteed by the DOE with
Fab 2 LCC as the borrower, and Solyndra, Inc. as the Sponsor. Some of the major terms
included: (a) total project costs of $733 million; (b) equity contribution of $198 million by
Solyndra, Inc. (27%); (c) a 7 year term; (d) a low interest rate based on Treasury bill rates;
(e) fees paid to the DOE by Solyndra totaling over $4 million; and (f) a $30 million cost overrun
reserve to be funded by Solyndra, Inc.206 See Exhibit #7 for a summary of the key terms.
On the same day, the DOE issued a press release announcing the loan and its “conditional
commitment”207 in support of the company’s construction of its commercial-scale Fab 2
204 See Appendix O.2, RW Beck DOE Independent Market Reports. 205 See Appendix L.3, Final Executed Term Sheet (Fab 2 Phase I) dated March 19, 2009. 206 The term sheet also outlined the anticipated and significant documentation to be negotiated and executed, conditions precedent to loan closing, conditions precedent to each periodic approved budget, conditions precedent to each disbursement date, bank accounts to be setup and maintained, representations and warranties, covenants, events of default, reporting requirements, reaffirmation that Solyndra agrees to pay all DOE’s independent consultants and outside legal counsel fees, and various other provisions. 207 The “conditional commitment” was subject to the Secretary’s decision at the time of closing.
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manufacturing facility. According to the press release, Secretary Chu was offering the loan
guarantee by signing a “conditional commitment” following approval by the CRB that week.
The conditional commitment signaled the DOE’s intent to move forward with Solyndra’s
application for a $535 million loan guarantee provided the company met its obligations and the
parties agreed upon mutually acceptable definitive documentation. The press release indicated
“Before offering a conditional commitment, the DOE takes significant steps to ensure risks are
properly mitigated for each project prior to approval for closing a loan guarantee. The
Department performs due diligence on all projects, including a thorough investigation and
analysis of each project’s financial, technical and legal strengths and weaknesses. In addition to
the underwriting and due diligence process, each project is reviewed in consultation with
independent consultants.”208
Solyndra and the DOE continued to prepare for a closing of the DOE Loan Guarantee. In
the months leading up to the closing, the company concluded its NEPA209 environmental study,
prepared and provided various financial models to the DOE based on adjustments to various
assumptions,210 addressed the conditions precedent to closing, and worked with the DOE to
negotiate final agreements and documents. To fund the required equity contribution, the
company raised $286 million ($198 million earmarked for the DOE Loan Guarantee) through a
Series F preferred stock offering in July 2009. To complete some of the final requirements prior
to closing, Fitch issued a final credit rating letter in August 2009 indicating a probability of
default rating of “BB-”211 and an estimated recovery of 89%,212 and the LGPO submitted its
credit subsidy recommendation to the OMB for final approval.213
8. Loan Closing and Agreements
Solyndra closed the $535 million DOE Loan Guarantee on September 3, 2009. There
were numerous delays and substantial negotiations with the DOE, and extensive legal analysis
208 See Appendix G.13, DOE Press Release, “Obama Administration Offers $535 Million Loan Guarantee to Solyndra, Inc.”, dated March 20, 2009. 209 The National Environmental Policy Act. 210 See Exhibit #6 for listing of identified financial models provided to the DOE. 211 The “BB” category ratings are considered Speculative under Fitch’s rating definitions. 212 See Appendix P.75, Fitch Credit Rating Report dated August 7, 2009. 213 The credit subsidy cost was approved by the OMB and the CRB which was paid by the DOE through its appropriations. Solyndra was not provided the final number.
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and internally generated services performed by Solyndra’s and the DOE’s counsel214 to prepare
and document the transaction in detail.
The closing of the DOE Loan Guarantee included the execution of numerous loan and
project related agreements and documentation (“DOE Loan Closing Documentation”). This
documentation was extensive due to the complexity and size of the transaction and included over
30 different agreements and a substantial amount of supporting documentation including, but not
limited, to, contracts, deeds, certificates, schedules, financial analyses, and exhibits totaling over
2,500 pages.215 The documentation included the following categories:
• Loan Documentation – The loan documentation included the Common Agreement, credit facility documents, sponsor loan documents, security documents, equity pledge documents, direct agreements, and the Environmental Indemnity Agreement.
• Project Documentation – The project documentation included land documents, construction documents, and operating documents.
a. Key Terms of Loan as Executed in Loan Documents
The parties agreed to the final terms, conditions, and requirements for the DOE Loan
Guarantee consistent with the provisions of the March 2009 Term Sheet. The key terms of the
loan as executed in the loan documents are summarized in Exhibit #8.
b. Key Agreements and Documentation
The agreements and documentation executed at closing for the DOE Loan Guarantee
were extensive and provided exhaustive requirements and obligations for each party. Some of
the key agreements and documentation of the loan are highlighted below:216
• Common Agreement – The Common Agreement is between Fab 2, LLC, as Borrower, the DOE, as Credit Party and Loan Servicer, and U.S. Bank National Association (“US Bank”), as Collateral Agent. This main agreement encompassed and embodied the numerous other agreements utilized to complete and close the DOE Loan Guarantee. The Common Agreement provided for certain common representations, warranties, and covenants of the Borrower, certain uniform conditions of
214 Solyndra was also required to pay all fees for DOE’s legal counsel totaling $3.1 million for all services rendered through the bankruptcy petition in September 2011. 215 See Appendix P, September 2009 DOE Loan Closing Documentation. 216 Id.
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disbursement for the loan, and certain events of default. The key elements of the Common Agreement included: (a) definitions and rules of interpretation; (b) requirements for funding of loan proceeds, requirements for payments and prepayments; (c) conditions precedent to advances; (d) representations and warranties; (e) affirmative covenants; (f) negative covenants; (g) events of default and remedies; (h) agents and advisors; (i) reimbursement agreement; and (j) various miscellaneous items.
• Future Advance Promissory Note – The Future Advance Promissory Note (“FFB Note”) was between Fab 2 LLC and the FFB as the holder of the FFB Note. The FFB Note established the $535 million loan obligation with the FFB and provided the terms and conditions for the advancement of loan proceeds.
• Secretary’s Guarantee – Guarantee from the DOE to the FFB for all payments due in accordance with the terms of the FFB Note.
• Security Agreement – The Security Agreement was between Fab 2, LLC, as Borrower, and US Bank, as the Collateral Agent. The Security Agreement defined the security interest granted in all of Fab 2, LLC’s rights, title, and interest in its personal property.
• Deed of Trust – The Deed of Trust provided the DOE and FFB with a security interest in the land where the Fab 2 front-end facility was to be built at 47488 Kato Road, Fremont, California.
• Equity Funding Agreement – The Equity Funding Agreement was between Solyndra, Inc., Fab 2, LLC, DOE, and US Bank. The agreement provided the terms and procedures to fund the required equity commitments of Solyndra, Inc.
• Project Sales Agreement – The Project Sales Agreement was between Solyndra, Inc. and Fab 2, LLC. The agreement provided for an arrangement whereby Fab 2, LLC would sell, exclusively, the entire capacity of products manufactured to Solyndra, Inc., to be marketed and sold to third parties.
• Equipment Supply Agreement – The Equipment Supply Agreement was between Solyndra, Inc. and Fab 2, LLC. The agreement provided for the purchase, supply and installation of Solyndra, Inc.’s proprietary tools and equipment to Fab 2, LLC to be used in the manufacturing of solar panels in the Fab 2 facility. The agreement provided a fixed price listing for each of the work cells and tool, addressed construction schedules or milestones, included provisions for the purchase and sale of spare parts and consumables to maintain the tools, and described applicable warranties offered.
• Intellectual Property License Agreement – The Intellectual Property License Agreement was between Solyndra, Inc. and Fab 2, LLC. The agreement granted Fab 2, LLC a license to operate and maintain a facility that utilized Solyndra, Inc.’s proprietary technologies to manufacture and sell its solar panels.
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• Operation and Maintenance Agreement – The Operation and Maintenance Agreement was between Fab 2, LLC, as owner, and Operator LLC, as operator. Operator LLC is a wholly owned subsidiary of Solyndra, Inc. and contracted to provide pre and post operational, maintenance, management, and additional services.
• Material Supply Agreement – The Material Supply Agreement was between Solyndra, Inc. and Fab 2, LLC. The agreement provided for the purchase, by Solyndra, Inc. at its costs, of raw materials, commodities, and other supplies used or necessary to manufacture solar panels from third parties to resale to Fab 2. The agreement described the mechanics and procedures required for the purchase of materials.
D. Loan Funding and Reporting Requirements
Once the DOE Loan Guarantee was closed, the DOE Loan Closing Documentation
contained substantial requirements that Solyndra was required to follow in order to obtain loan
advances and to comply with the various agreements.
1. Loan Funding Requirement
To receive LGP funds, Fab 2, LLC was required to meet certain criteria included within
the Common Agreement. The criteria included stringent reporting requirements, adherence to
certain performance metrics, and detailed periodic certifications by both internal and external
parties as to the progress of the Fab 2 project including RW Beck, the DOE’s independent
consultant (See Exhibit #9 for additional details). These loan funding requirements included,
but were not limited to:217
• Master advance notice submitted to both DOE, US Bank, as Collateral Agent, and RW Beck indicating amount of request, date of request, and the project costs being financed;
• Updated advance schedule submitted to the DOE with certifications from Fab 2, LLC and RW Beck that: (a) the updated advance schedule was consistent with the construction budget and the project milestone schedule; (b) the funds spent since the Common Agreement date had been spent in a previously approved manner; (c) proceeds from the advances for the upcoming three-month period were needed for eligible project costs;
217 The term “certification” has the same meaning as defined in the DOE Loan Closing Documentation.
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• Fab 2, LLC was required to provide RW Beck with documentation and information necessary to prepare a monthly construction progress report (“Monthly Construction Progress Report”);
• Certification from Fab 2, LLC and RW Beck that the Monthly Construction Progress Report was a good faith estimate with respect to: (a) the construction process remaining in-line with the project milestone schedule and the construction budget; (b) total funding was sufficient to pay all remaining total project costs; (c) there were no liens outstanding; (d) and that nothing had occurred during the most recent site visit to materially impact the construction of the project;
• DOE should receive confirmation that all DOE credit facility fees and periodic expenses had been paid or were to be paid with the proceeds of the requested advance or by other satisfactory arrangements;
• DOE should receive certification from Fab 2, LLC that all consents and approvals that were required in connection with the proposed loan draw had been received with no pending appeals or unsatisfactory conditions that could result in a material modification or cancellation of the approval;
• DOE should receive certification from Fab 2, LLC and its insurance advisor that all relevant insurance policies had been provided, were up-to-date, and in good standing;
• DOE should receive certification from Fab 2, LLC that all corporate proceedings were in general order and available upon request of the DOE and US Bank;
• DOE should receive certification from RW Beck that preparation for the Fab 2 back-end facility was underway and in accordance with the project plans;
• DOE should receive certification from Fab 2, LLC that no event of default or potential default had occurred and was continuing;
• DOE should receive certification from Fab 2, LLC and RW Beck that no changes to the technical requirements of the existing governmental approvals had occurred that could reasonably be expected to have a material adverse effect on the project;
• DOE should receive certification from Solyndra, Inc. and RW Beck that the Fab 1 facility had achieved at least 70% of its projected shippable megawatts produced;
• DOE should receive certification from Fab 2, LLC and RW Beck that there had been no change to the construction budget since the previous periodic approval date and the aggregate amount expended for each type of project costs did not exceed the aggregate amount budgeted for such cost, except for approved changes;
• DOE should receive certification from Solyndra, Inc. and US Bank that the amount of base equity required with respect to the advances made had been funded through
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allocation of the approved pre-closing equity credit or amounts transferred from the equity funding account.
2. Financial Reporting Requirements
The DOE Loan Closing Documentation required extensive financial and operational
reporting to the DOE. Some of the key reporting requirements under the loan documentation
closed in September 2009 are as follows: (See Exhibit #10 for additional details).
a. Quarterly Reporting
Fab 2, LLC was required to provide quarterly financial reporting to the DOE within 45
days after the end of each fiscal quarter (referred to as “Quarterly Reporting Packages”). The
Quarterly Reporting Packages were executed by Stover and included:218
• Quarterly Reporting Certificate indicating the required documentation and information was included in the Quarterly Reporting Package provided to the DOE.
• Discussion and Analysis by a financial officer of Fab 2, LLC identifying any transactions occurring between Fab 2 LLC and Solyndra, Inc. (other than transactions pursuant to the intercompany project documents) and a certification of the calculation to show compliance with the debt-to-equity contribution ratio of Fab 2, LLC.
• Unaudited Quarterly Financial Statement of Fab 2, LLC and certification signed by the financial officer.
• Unaudited Quarterly Financial Statement of Solyndra, Inc. and certification signed by the financial officer.
• Summary Construction Report and certification signed by the financial officer providing a detailed assessment of the Fab 2 project in comparison with the construction budget and project milestone schedule, basic data relating to construction of the facility, description and an explanation of any material casualty losses, material disputes, and/or any material non-compliance with any governmental approvals.
• Updated Project Construction Budget and certification signed by the financial officer.
• Summary of information delivered to the DOE during the quarter.
218 See Appendix Q, DOE Quarterly Reporting Packages.
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b. Annual Financial Statements and Reports
Fab 2, LLC was required to provide annual financial statements and other reports to the
DOE as soon as available, but not more than 180 days after the fiscal year-end. The
requirements included:219
• Financial statements of Fab 2, LLC for each fiscal year certified by its accountant and accompanied by any management letter.
• A discussion and analysis by the management of Fab 2, LLC of the company’s business and operations at the end of such fiscal year;
• A report certified by Fab 2, LLC and Solyndra, Inc. addressing the extent to which the Fab 1 facility performance targets have been achieved during the construction period;
• A report from Fab 2, LLC’s accountant including: (a) certification of no knowledge of events of defaults or potential events of default having occurred and are continuing; (b) a comparison between the actual Debt-to-Equity Contribution Ratio and the Debt-to-Equity Contribution Ratio for the construction period; and (c) a comparison between the annual financial statements and the projections contained in the operating forecast for the operating period; (d) and a certification that it has no knowledge that Fab 2, LLC was not, and is not, in compliance with Section 7.14 (Debt Service Coverage Ratio) or, if such non-compliance has occurred a statement as to the nature of non-compliance.
c. Periodic and Other Reporting
The Common Agreement requires a variety of additional items to be reported to the DOE
on a periodic basis.220 For purposes of brevity, this report does not include the other voluminous
required documents and reports under Section 6 of the Common Agreement.221
E. Construction and Loan Funding (Fab 2 Phase I)
Shortly after the closing of the DOE Loan Guarantee, Solyndra broke ground on the
construction of the Fab 2 front-end facility222 on September 4, 2009 (with an original scheduled
219 See Appendix R, DOE Annual Reporting Packages. 220 See Appendix P.3, Common Agreement, Sections 6(h). 221 See Appendix P.3, Common Agreement, Section 6. 222 A ground breaking ceremony was held on September 4, 2009 at the Fab 2 Front-End Facility site and was attended by Secretary Chu, former California Governor, Arnold Schwarzenegger, and Vice President Joe Biden, via satellite.
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plan was ultimately deemed too large for the DOE and in the final application filing in August of
2008, the planned facility was split into two phases, with Phase I consisting of a 230 MW facility
with a total construction cost of $733 million. That construction was to be funded by the DOE
loan ($535 million) and private investor funds ($198 million). After a year of due diligence and
further review by third party consultants, approval for a $535 million loan was granted in
September 2009 and the construction of Fab 2 Phase I was under way.
1. Fab 2 Phase I Construction
As discussed above, the total cost for the Fab 2 Phase I project was $733 million.226 The
table below shows how those funds were allocated in the original construction budget. In order
to ensure that Solyndra remained within the original budget parameters, RW Beck provided
monthly reviews to the DOE on the progress of construction. Over the lifetime of the project,
Fab 2 Phase I was constructed ahead of schedule and under budget.
226 See Appendix P.60, Construction Budget in the DOE Loan Closing Documentation.
Table #15
Fab 2 Phase I
Construction Budget (in thousands)
Task
Budget
Equipment Line 1
$113,490
Equipment Line 1 Overrun Contingency1,3
6,242
Equipment Line 2
82,377
Equipment Line 2 Overrun Contingency1,3
4,531
Equipment Line 3
82,124
Equipment Line 3 Overrun Contingency1,3
4,517
Labs & Other Equipment
24,238
Labs & Other Equipment Overrun Contingency1,3
1,333
Front End: Foundation Complete
78,448
Front End: Shell Enclosure Complete
107,658
Front End: Line 3 Installation Complete
66,714
Front End: Overrun Contingency2,3
42,979
Back End: Line 3 Installation Complete
34,205
Back End: Line 3 Installation Complete Overrun Contingency
5,815
Other Project Costs: Cash Flow Positive
45,648
Real Estate Purchase
32,681
Total Project Budget
$733,000
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RW Beck provided a tracking chart of the construction budget in its CPRs.227 These
reports, generally submitted to the DOE on a monthly basis, each covered a specific time period
based on a review of construction materials, visits to the site, and interviews of Solyndra
employees. The table below shows the various CPRs that were issued and the time period
covered:
The CPRs provided the DOE with a snapshot of the current progress of construction and
the amount of funds that had been spent through the reporting period. Within each CPR, RW
Beck provided an update on the amount drawn as of the report date, and the amount remaining of
the $733 million construction budget. Below is a chart of the CPR reported spending figures,
including the percent of the total $733 million budget that had been used through each of the
reporting periods. This figure includes both the 73% funding from the DOE and the 27%
released from the restricted cash account representing the Sponsor’s equity contribution.
227 See Appendix S, Construction Progress Reports.
Table #16 Construction Progress Report Time Periods
CPR # 1: 9/2/09 to 9/18/09 CPR# 12: 7/21/10 to 8/19/10 CPR # 2: 9/19/09 to 10/19/09 CPR# 13: 8/20/10 to 9/19/10 CPR# 3: 10/21/09 to 11/17/09 CPR# 14: 9/20/10 to 10/20/10 CPR# 4: 11/18/09 to 12/15/09 CPR# 15: 10/21/10 to 11/16/10 CPR# 5: 12/16/09 to 1/20/10 CPR# 16: 11/17/10 to 12/15/10 CPR# 6: 1/21/10 to 2/17/10 CPR# 17: 12/16/10 to 1/15/11 CPR# 7: 2/18/10 to 3/19/10 CPR# 18: 1/16/11 to 2/15/11 CPR# 8: 3/20/10 to 4/19/10 CPR# 19: 2/16/11 to 3/15/11 CPR# 9: 4/20/10 to 5/19/10 CPR# 20: 3/16/11 to 5/7/11 CPR# 10: 5/20/10 to 6/17/10 CPR# 21: 5/8/11 to 6/8/11 CPR# 11: 6/18/10 to 7/20/10 CPR# 22: 6/9/11 to 7/6/11
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The funding shown in the chart above was drawn from the DOE loan facility and the
equity contributions in 28 separate draws ranging from $1.3 to $69.7 million. The first draw,
called the “pre-development” draw, was taken on September 2, 2009, and covered $37.9 million
in expenses incurred prior to the loan closing, including $32.7 million for the purchase of the
land for the FE facility. The draws occurred on a monthly basis, and were subject to the
borrower meeting the conditions precedent to funding discussed previously in Section X.E –
Construction and Loan Funding of this report.
Funds drawn were either sent to Solyndra, as reimbursement for invoices paid, or in
certain instances wired directly to the vendor. Each invoice was included in a packet sent along
with the draw request for review by RW Beck. For funds wired directly to vendors, a
confirmation email was required to ensure that the funds were received. Of the $733 million
budgeted, $723 million was ultimately drawn by over 100 separate vendors, including Solyndra,
as of the petition date. Below is a table of the ten largest vendors that received funds from the
Fab 2 construction budget.228
228 See Appendix T for a summary and detailed schedule of DOE Loan Guarantee draw amounts with supporting documentation.
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Table #17
Solyndra, Inc Loan Draw Funding -- Top 10 Vendors
% of Total
Vendor
Amount
Amount
Rank
Name
Paid
Drawn
1
Solyndra, Inc.
$314,155,510
43.45% 2
Rudolph & Sletten, Inc.
284,012,000
39.28%
3
Solyndra Operator, LLC
43,460,000
6.01% 4
Chicago Title company
32,719,179
4.53%
5
CH2M Hill Engineers
11,888,670
1.64% 6
U.S. Treasury Department
7,541,103
1.04%
7
PG&E
5,136,525
0.71% 8
Morrison & Foerster, LLP
3,128,995
0.43%
9
Wilson Sonsini Goodrich & Rosati
2,965,391
0.41% 10
City of Fremont
2,851,114
0.39%
Remaining Vendors
15,166,913
2.10%
Total
$723,025,400
100.00%
As shown above, Solyndra, either directly or through its affiliate, Operator LLC, received
almost 50% of the total loan proceeds. The basis for these draws were laid out within the ESA
(Equipment Supply Agreement) and the O&M (Operations and Maintenance Agreement). The
effect of these agreements and further information about the uses of these funds can be found
below.
a. Equipment Supply Agreement
Pursuant to the ESA dated as of September 2, 2009, Solyndra agreed to “supply and sell”
and Fab 2, LLC, the entity that held title to Fab 2, agreed to purchase the equipment needed to
run Fab 2. The ESA was necessary because the tooling needed to operate the plant was
developed by Solyndra and Solyndra had the equipment manufacturing expertise to build the
unique tooling necessary to manufacture Solyndra’s proprietary panels. The ESA provided the
means for Solyndra to be reimbursed or advanced funds to build, install, and deploy the
equipment required to operate Fab 2.229 The ESA included a table that provided a detailed
listing of the equipment that was sold to Fab 2, LLC and the fixed price associated with each
229 The equipment was unique and specialized for use in the manufacturing of Solyndra’s panels and had limited value outside of that process.
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“work cell” as approved by the DOE. The total contract price for the ESA was $318.9
million.230 The actual amount drawn towards the ESA was $312.9 million.231
b. Operations and Maintenance Agreement
The O&M Agreement between Operator LLC and Fab 2, LLC was created to designate
the operational, management, and maintenance duties of the Fab 2, construction project to
Operator LLC. These duties were designated as either pre-operational services or management
services. Pre-operational services included material procurement, engineering, and other
administration activities leading up to the facilities operational period, while management
services focused on the ongoing monitoring and management of the Fab 2 Phase I facility.232 In
total, Operator LLC drew $43.5 million from the DOE loan for providing those services.
The agreement initially called for an annual fee to be paid to Operator LLC in quarterly
installments which totaled $12.9 million in the first year. The annual fee in subsequent years
was to be calculated based on the percent change in a GDP-based inflation rate and “any
incremental increase or decrease in the actual costs incurred by Operator LLC over the most
recent fiscal quarter and Operator LLC’s good faith estimate of the actual reasonable costs likely
to be incurred over the next year.”233 Calculating fees based on more recent operating costs
allowed for a most accurate estimate of the annual fee.
Following the end of the initial year, the amount paid to Operator LLC increased over
275%, growing from $3.2 million per quarter in the first year to $12.5 million in the first quarter
of the second year. This dramatic change in fees mirrored the shift from pre-operational services
to management services. The increase in costs was projected in the base case financial
projections provided to the DOE at loan closing and all increases in fees charged by Operator
LLC were disclosed and approved by RW Beck.
As part of his engagement, the CRO undertook a review of the loan draw packages
submitted to RW Beck, along with the loan agreements entered into by Solyndra and the DOE.
230 See Appendix P.46, ESA Agreement, pgs A-2-1to A-2-3. 231 Total amount paid to Solyndra, Inc. was $314.2 million, with $312.9 million as payment towards the ESA, and the other $1.3 million going towards the Construction Management Fee and other miscellaneous expenses . 232 See Appendix P.54, O&M Agreement, pgs. E-1-1and E-2-1. 233 See Appendix P.54, O&M Agreement, pg. 18.
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It is his opinion that the funds drawn under the DOE loan guarantee were spent in accordance
with the loan documents.
The CRO has reviewed the accounting records of Solyndra and found that the
construction costs were correctly recorded in the accounting records and no material funds were
diverted from their original intended use.
F. Second DOE Loan Guarantee Application (Fab 2 Phase II)
As previously discussed within this section, Solyndra’s partial application, filed with the
DOE in May of 2008, outlined a new production facility with the capability of producing over
420 MWs per year, with an estimated construction cost of over $1 billion. The project was split
into two phases to better suit the project for loan approval from the DOE. On September 4,
2009, the financing for Fab 2 Phase I closed, and one week later, on September 11, 2009,
Solyndra submitted the first part of its application for Fab 2 Phase II. For the next year, the Fab
2 Phase II application participated in the same due diligence vetting process as the previous
application. However, in late 2010, when Solyndra’s financial condition became the most
imminent concern, the application for Fab 2 Phase II was shelved. Below is a further analysis of
the Fab 2 Phase II application.
1. Fab 2 – Phase II Loan Application Details
The total construction cost for Fab 2 Phase II, was originally estimated to be $632
million, of which 73% ($461.4) originated with funds from FFB and 27% ($170.6) from
Solyndra’s private investors. On November 19, 2009, Solyndra increased the requested
construction amount to $642 million, with the same 73/27 funding ratio. That changed the total
amount requested from the DOE for Fab 2 Phase II to $468.7 million and the amount required
from sponsor equity to $173.3 million. In the amended application, Solyndra explains that the
majority of the $10 million increase in the overall project cost was due to an increase in sales
taxes on manufacturing equipment from 8.8% to 9.8%.234
Solyndra submitted the Phase II loan application in order to take advantage of the
anticipated cost savings that could be achieved from additional manufacturing capacity. As 234 See Appendix U.20, Fab 2 Phase II Application. Section A: Part II, pg. 2.
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detailed within the application, “Solyndra believes the combined scale of Phase I and Phase II
are required to achieve the economies of scale that would result in a cost of goods sold that
would support long-term competitiveness.”235 Increasing capacity, while maintaining
administrative costs near existing levels, would greatly reduce the per panel cost of Solyndra’s
product. The company described the importance of the second phase of the Fab 2 project: “the
Sponsor may not be profitable unless it is able to spread the overhead cost for management,
R&D and its equipment fabrication group across a large scale of production output.”236
2. Construction Plans
The Fab 2 Phase II project was an expansion of the Fab 2 Phase I project which
commenced construction in September 2009. Fab 2 Phase I funds were allocated to the
construction and upgrading of two separate facilities. The FE required the construction of
300,000 square feet of a new manufacturing plant. The other facility, the BE, required the build-
out of approximately 200,000 square feet of leased space east of the Solyndra’s Fab 1 facility.
Fab 2 Phase II proposed to double the capacity of the Phase I facility by proposing an additional
300,000 of FE space to be added onto the Phase I building. Additional tools and minor upgrades
to the BE facility would be required to handle the increased FE capacity.
The project budget, shown in Table #18 below, provided the allocation between costs for
construction and new equipment. The FE facility dominates the facilities portion of the budget
because the BE facility requires minimal structural upgrades due to the work that will have been
completed during the Fab 2 Phase I process. FE, on the other hand, was a ground-up
construction project that would receive no pass-through benefit from the Phase I project.
Table #18 Fab 2 Phase II – Project Costs
(in thousands)
Equipment
Equipment: Line 4 $115,122
Equipment: Line 5 83,561
Equipment: Line 6 83,305
Labs & Other Equipment 9,336
235 See Appendix U.2, Fab 2 Phase II Application. Section B: Part I. Project Description, pg. 2. 236 See Appendix U.2, Fab 2 Phase II Application. Section B: Part I. Project Description 2, pg. 23.
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$291,324 Facilities
Front End
$182,717
Back End
34,205
$216,922 Contingency
Front End
$31,062
Back End
5,815
Equipment
16,023
$52,900
Other Project Costs
$80,854
Total Project Costs $642,000
As with the Fab 2 Phase I project, the equipment costs for the Phase II project are
outlined within the ESA between the Borrower (Phase 2, LLC) and the Sponsor (Solyndra, Inc).
Instead of creating a new ESA to match these project costs, the ESA from Phase I was included
in the application as a model during the application negotiations. That is similar for other
agreements between the Borrower and Solyndra, including the O&M Agreement which allocates
the majority of funds flowing into the Other Project Costs budget line. As stated in the
application, “The Applicant believes that the Solyndra Phase 2 application substantially benefits
from the due diligence that the DOE performed for Phase 1 as well as from the fully-documented
project agreements negotiated by DOE and the Applicant for the Phase 1 project which are
suitable for reuse with modification to acknowledge Phase 2 in relation to Phase 1.”237
The application called for construction to begin in the second quarter of 2010.
Solyndra’s stated goal was to seamlessly allocate resources from Phase I into Phase II once the
construction of Phase I was complete. The Phase II project timeline from the application is
included below.
237 See Appendix U.2, Fab 2 Phase II Application. Section B: Part I. Project Description, pg. 2.
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Although the capacity listed on the project timeline showed an increase of 77 MW for
each line install, the projected capacity from the application was more conservative. Solyndra
projected the annual capacity shipped from Fab 2 Phase II to be 9 MW in 2011, 152 MW in
2012, 230 MW in 2013, and 231 MW each year thereafter.238
3. Solyndra IPO
As part of the Fab 2 Phase II application and plan, Solyndra filed its S-1 with the SEC in
December 2009 for an IPO to raise additional capital to fund operations with a portion of the
238 See Appendix U.5, Fab 2 Phase II Application. Section D: Part I. Business Plan, pg. 9.
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funds allocated to the construction of the second phase of the Fab 2 facility. This public
document included a substantial amount of information which was vetted through an extensive
review by the company and its financial advisors, accountants and legal counsel. The S-1
contained approximately 200 pages of detailed information regarding the company’s historical
operations and performance, technology, customer base and marketing strategy, capital structure,
significant risks associated with projects, and other related information about the company that
was available to the public, including the DOE and other creditors.239 The S-1 was amended and
filed with the SEC on March 16, 2010.240 As required under the terms of the DOE Loan
Guarantee, Solyndra delivered to the DOE a copy of the initial S-1 and the subsequent
amendment.
4. Third Party Consultants
As was the case in the first DOE loan application, the procedures for the Fab 2 Phase II
application required a third party market analysis, legal opinion, and engineering study. MoFo
and RW Beck were selected by the DOE to continue their engagement for the services which
they provided for the Phase I project as legal and engineering consultants. RW Beck had
provided the market analysis for the initial loan application. However, for the second
application, the DOE selected Navigant to provide the report. On May 18, 2010, Solyndra
executed a payment letter with Navigant. On May 27, 2010, a team from Navigant traveled to
Solyndra to begin its analysis.
Navigant’s final report was delivered to the DOE on September 22, 2010. The report
contained a review of Solyndra’s business plan, financial model, and the external market forces
in which the company operated. The business plan review examined the company’s
management team experience, sales pipeline, and production expectations. Navigant concluded
that there was a significant risk that the sales marketing plan was not sufficiently robust to meet
the company’s projections to sell all of the output from Fab 2 Phase II.241
239 See Appendix F.1, Solyndra, Inc. Form S-1 Registration Statement filed with the SEC on December 18, 2009. 240 See Appendix F.2, Solyndra, Inc. Amendment No. 1 to Form S-1 Registration Statement filed with the SEC on March 16, 2010. 241 See Appendix O.3, Navigant DOE Independent Market Study.
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Navigant reviewed Solyndra’s financial model and examined whether the forecasts and
projections given to the DOE were reasonable expectations. The chart below was included
within the Navigant report wherein Solyndra estimated yearly revenue from the Fab 2 Phase II
facility, along with Navigant’s pessimistic, most likely, and optimistic projections. Navigant
recommended that Solyndra mitigate the potential risks by increasing the sales and marketing
staff to include individuals with experience working in the company’s targeted market
segments.242
It is noteworthy that both Solyndra and Navigant each projected annual sales within the
first year of the facility’s production of $300 to $500 million, notwithstanding the significant
risks outlined in the Navigant report, including Navigant’s recognition that “if channels to
market take longer to develop, bankability/customer acceptance is delayed, or prices are not
reduced low enough to induce customers to take all of Solyndra’s Fab 1 + Fab 2 Phase I + Fab 2
Phase II output, Solyndra will sell [sic] undersell its capacity.”243
Having provided an analysis of the considerable challenges that Solyndra may face, the
report concluded that the project may be a good investment for the DOE if the company
addressed the following two items. First, “Solyndra can offer modules at competitive ASPs that
translate to system level LCOE’s that meet or beat market prices (set by crystalline silicon 242 See Appendix O.3, Navigant DOE Independent Market Study. pg. 43. 243 See Appendix O.3, Navigant DOE Independent Market Study. pg. 52.
Chart #14
Source: Solyndra Market Study prepared by Navigant.
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systems).” Second, “Solyndra can demonstrate that most of Phase I capacity has been sold out
which in turn indicates significant market pull for the product. This will also confirm the fact
that the partnerships forged are the right ones to access the commercial and industrial
markets.”244
a. Status of Application
At the time of the application filing, Solyndra may have had understandable reasons to be
optimistic about its business prospects. The Fab 1 facility had begun to produce and ship
product and construction of the Fab 2 facility was well under way, having finally cleared the
hurdles of due diligence. The company stated in its Fab 2 Phase II DOE loan application dated
September 11, 2009: “The Sponsor is financially strong. The Sponsor’s cash balance as of
September 4, 2009 was $55.5 million, exclusive of $160.0 million of restricted cash which is
irrevocably pledged as Sponsor’s Equity for Solyndra Fab 2 - Phase 1. The Sponsor’s total
assets are over $250 million. The Sponsor enjoys the support of several large venture capital and
institutional investors and private foundations which in aggregate manage billions of dollars of
capital.”245
Nevertheless, Solyndra was to face many challenges between 2009 and 2010. By mid-
2010, cash management became paramount to the company’s continued operation. The
company successfully obtained an infusion of $175 million in convertible notes in order to
maintain a positive cash balance. Through Solyndra’s periodic reporting, the DOE was
continually apprised of the company’s cash situation. By late 2010, the company was again
facing a cash shortage that was brought to the attention of the DOE. Solyndra proposed a
restructuring of the obligations under the original loan. Once the company and the loan
participants from the Fab 2 Phase I project began discussing a restructuring of the original loan,
the application for Fab 2 Phase II was put on hold indefinitely.
G. February 2011 Loan Restructuring
A dramatic decline in the cost of competing silicon-based photovoltaic products and a
worldwide oversupply of photovoltaic panels resulted in continuing price declines and softening 244 See Appendix O.3, Navigant DOE Independent Market Study. pg. 92. 245 See Appendix U.2, Fab 2 Phase II Application. Section B: Part I. Project Description 2, pg. 23.
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demand for Solyndra’s PV solar panels. These significant pricing declines along with
competition from Chinese solar manufacturers, reductions in solar subsidies, and other industry
pressures, severely impacted the company’s ongoing capital requirements and its efforts to
achieve positive cash flow from operations. As a result, Solyndra was in need of additional
capital. The company contacted both existing and new potential investors as well as the DOE in
late 2010 in an effort to raise additional capital and restructure the company’s secured debt. The
parties ultimately finalized a global restructuring on February 23, 2011 (the “Restructuring”).
The agreements and documents were heavily negotiated between the parties and contained over
2,100 pages.246
1. Activities Leading up to Restructuring
After approximately 19 months of operations in the Fab 1 Facility and six months of
construction on the Fab 2 facility, Solyndra management met with the Board in April 2010 for
two days to describe the current financial condition of the company due to the competitive
factors referenced herein as well as the shortfalls in the prior plan and projections.247 Solyndra
management provided a detailed 143 page presentation describing the company’s current status,
sales and marketing efforts, operations, research and development, cash flow, and finance related
areas.248 Below are some of the highlights of the presentation:249
• Revenues of $46.6 million fell short of the first quarter 2010 plan by $5.8 million or 12%;
• Actual ASP was 6% lower than projected for first quarter 2010 plan ($2.88 per watt vs. plan of $3.05 per watt);
• Chinese P-Si panel price reductions, Euro currency fluctuations, and reductions of FiT incentives substantially reduced ASP forecasts;
• Second quarter 2010 orders were less than 50% of plan, but momentum was improving in the U.S. and Canada;250
• COGS were likely 10% higher in first quarter 2010;
246 See Appendix W, February 2011 Restructuring Agreements and Documentation. 247 See Appendix D.1, Solyndra Board Minutes, April 12-13, 2010. 248 See Appendix D.1, Solyndra Board Presentations, April 12-13, 2010. 249 Actual results were compared to the November 2009 POR (Plan of Record). 250 Historically, a substantial amount of sales occurred during the last three weeks of the quarter.
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• Solyndra was creating new sales and business development initiatives to address the pricing and volume challenges;
• Company was experiencing challenges with module uniformity when increasing line speed from 30cm to 36cm centimeters per minute;
• Fab 2 facility construction was two months ahead of schedule;
• 200 Series panels timetable was proceeding slower than original management plan.
Solyndra management reported to the Board that in February 2010 they had initiated a
“ground up” review of the competitive landscape and the company’s business model. Pursuant
to its review, two revised draft plans251 were created utilizing various scenarios and alternative
assumptions to address the significant increase in future capital needs. The estimated future
funding requirements were calculated by company management to range between $316 million
and $719 million depending on the scenario and assumptions in the revised plans.252 Based on
the information presented, the company continued to pursue an IPO and considered alternative
paths for financing. The Board also decided to conduct a search for a new president and/or CEO.
Within a week of the Board meeting, Solyndra provided the DOE with some preliminary insights
into the review of the Fab 2 financial forecasts, including revisions on future ASP based on
recent declines in the market.253
The Board met again on April 21, 2010, a day after Solyndra’s discussion with the DOE,
to better understand the company’s cash requirements, IPO timeline, and the ramifications of
missing the first quarter 2010 estimates. In that meeting, Stover described the need to raise
additional capital by June 2010 and reviewed the requirements to complete an IPO within that
time frame. The Board discussed engaging Goldman Sachs and Morgan Stanley to solicit advice
on the timing of an IPO. Alternatively, contingency plans were discussed for raising the required
251 The revised draft plans included a “Stretch Plan” and a “Base Plan”. The Stretch Plan was characterized by company management as an aggressive “target”, a plan the company could strive to accomplish. The Base Plan was considered by company management to be high confidence plan. It still had dependencies and risks; however, the intent was to portray a “base result” that would be achieved absent an unlikely turn of events. 252 Including certain scenarios utilizing results from Fab 2 Phase II and some utilizing results from Fab 2 Phase I only. 253 See Appendix I.100, Scott email to DOE dated April 20, 2010.
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additional private capital if the bankers concluded that an IPO was not feasible by the end of
June.254
As a result of the previous Board meeting, Goldman Sachs and Morgan Stanley
conducted a detailed analysis of the company and existing market conditions and presented their
findings to the Board on May 4, 2010. The investment bankers concluded that the market would
not be receptive to a Solyndra IPO and urged the company to consider alternative sources of
capital.255
In an effort to solve Solyndra’s pressing capital needs by June 2010, Steve Mitchell of
Argonaut presented a term sheet256 to the Board on May 18, 2010 to raise additional capital from
insider investors based on the need to fund substantial additional capital up to $350 million, the
immediate need for short-term funding by the middle of June 2010, and the lack of other viable
alternatives within the limited timeframe. Mitchell proposed using a convertible debt instrument
to provide the company with flexibility and additional time to seek additional capital from
outside investors. Mitchell acknowledged the extreme dilution that would occur if the additional
financing from outside investors was not raised by October 2010 and the proposed note holders
converted into equity; however, if the company did not have a fully funded plan by October, its
long-term viability would be significantly impacted. Mitchell stated to the Board the importance
of having all the inside investors participate in the proposed minimum internal round of $200
million to be funded by mid-June so the company could continue operations. Additionally,
Stover indicated to the Board that any remaining amounts on the existing $50 million line of
credit from Argonaut could not be accessed at this point because the company was currently
unable to meet its commercial shipments covenant.257 Pursuant to the proposals and information
provided, the Board discussed the proposal in detail, the company’s efforts in accessing other
sources of funds, and any additional cost cutting measures that could be taken.258
254 See Appendix D.2, Solyndra Board Minutes and Board Presentation dated April 21, 2010. 255 S See Appendix D.3, Solyndra Board Minutes and Board Presentation dated May 4, 2010. 256 The term sheet was prepared two of the company’s lead investors, Argonaut and Madrone. 257 The Argonaut Line of Credit was executed in July 2009 providing a $50 million revolving loan facility. Solyndra received a total of $40 million from the Argonaut Line of Credit, which was repaid in early September 2009 from the proceeds of the Series F preferred stock. 258 See Appendix D.4, Solyndra Board Minutes dated May 18, 2010.
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The Board conducted another meeting on June 3, 2010 to get an update on the debt
financing and cash position. Stover presented the Board with a comparison of plans without Fab
2 Phase II to review a possible scenario where the Fab 2 Phase II plan would be scrapped to
reduce future requirement capital needs.259 On the same day, Solyndra provided the DOE with a
revised “base case” plan for Fab 2, LLC that, among other things: (a) started Fab 2 Phase I
production two months earlier than anticipated; (b) included higher yields and panel power; (c)
included lower ASP forecast due to external pricing pressures from Chinese manufactures; and
(d) included installation of three new CIGS tools to counter lower-than-expected line speeds.260
The Board met again on June 9, 2010 at which time Stover explained that the company
had less than $30 million in cash available and without an additional capital infusion within the
next two weeks, the company would not be in a position to continue operations. The Board
reviewed the final terms of the note purchase agreement for the convertible notes, status of
investor commitments, and approved the transaction.261 As a result, the company entered into a
short-term note purchase agreement with certain investors on June 17, 2010 allowing for the
issuance of convertible secured promissory notes (not to exceed $200 million) to address the
immediate capital needs and bridge the funding gap.262 Solyndra issued $175 million of
Convertible Notes through September 2010 with a maturity date in December 2010 to continue
operations. As a result of the existing circumstances and existing market conditions, the
company decided to postpone an IPO and withdrew its S-1 to provide additional flexibility to
seek other private capital in June 2010.
In July 2010, the DOE began requesting additional information regarding the company’s
cost cutting measures, current sales and pricing, and average product costs in conjunction with
the timing of Nwachuku joining the DOE as the Director of Portfolio Management for the
LPGO. At this same time, Harrison joined Solyndra as its new CEO and President. As a result
of the executive changes and press speculation, the LGPO requested additional information on
July 29, 2010 pursuant to a sizeable document and information request received from the OMB
which included, among other things, monthly variance reports, current market prices, cost data, 259 See Appendix D.5, Solyndra Board Minutes and Board Presentation dated June 3, 2010. 260 See Appendix I.101, Scott email to Westerheim dated June 3, 2010 and Exhibit #6, list of identified financial models provided to DOE. 261 See Appendix D.6, Solyndra Board Minutes dated June 9, 2010. 262 See Appendix AA.9, Convertible Notes, Note Purchase Agreement dated June 17, 2010.
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sales contract update, terms regarding the $175 million Convertible Notes, information regarding
“going-concern” audit opinions,263 and reasons for withdrawing the S-1.264 Solyndra promptly
provided a detailed response to the various inquires by the OMB on August 4, 2010.265
Upon his arrival, Harrison undertook an extensive analysis of the company’s operations,
business models, and sales and marketing strategies. Prior to Harrison’s arrival, Solyndra had
been analyzing available sales distribution channels in an effort to increase sales volumes. As a
result of the prior analyses performed by Solyndra, Harrison’s review, and independent due
diligence conducted by Navigant (pursuant to its Fab 2 Phase II market study), the company
determined that the current distribution model developed under Gronet involving sales to limited
integrators and installers was creating challenges in meeting projected sales volumes. Harrison
concluded a new distribution model focusing more on end-user projects provided much more
promise. The new distribution model being developed would pursue strategic accounts
(including larger retailers such as Walmart and Target), real estate owners (such as REITs),
utilities, agricultural applications, and government agencies. Given the company’s lagging
financial performance, Solyndra began pursuing this new distribution and marketing strategy to
boost sales.
The DOE contacted Solyndra on September 7, 2010 regarding certain requested
approvals for various cost cutting measures being implemented by the company, which required
the execution of additional agreements with the DOE. Solyndra also informed the DOE it would
report in November that the company would fall below the 70% Fab 1 performance targets, set
forth in the loan agreements. The DOE acknowledged that Solyndra was bringing the issues to
the DOE’s attention several weeks in advance of required disclosure in the spirit of managing the
loan relationship. Solyndra requested an in-person meeting to introduce Harrison and discuss
various topics and issues. The meeting was scheduled for September 15-16, 2010 in
Washington, D.C. with the LGPO.266 A day after the initial discussion, the DOE sent Solyndra a
263 The “going-concern” audit opinions were included in the S-1 filed in December 2009. According to the company, PricewaterhouseCoopers was aware of Solyndra’s plans to raise additional capital; however, they were compelled by auditing standard AU Section 341 to include a “going-concern” opinion regarding the company’s financial statements. 264 See Appendix I.103, DOE email to Scott dated July 29, 2010 and the OMB request for information. 265 See Appendix I.104, Scott email to DOE dated August 4, 2010. 266 See Appendix I.105, Scott email to Schwartz dated September 7, 2010.
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list of detailed questions and requests for Solyndra, Inc.’s financial information which included,
amount other things: (a) monthly historical data since 2007; (b) projected monthly forecast
through 2016; (c) monthly cash flow forecasts for next 12 months; (d) detailed historical monthly
cash burn for last twelve months; (e) annual and quarterly financial statements for 2009 and
2010; (f) an updated matrix of executed framework agreements; (g) a cost-reduction roadmap;
(h) the offering memorandum and closing documents for the Convertible Notes; (i) an
accounting for the Equipment Supply Agreement; (j) a consolidated financial model through
2016; and (k) details relating to raising additional capital.267 Solyndra promptly provided its
responses to the DOE questions on September 13, 2010.268
Solyndra attended two days of meetings with the various DOE representatives in
Washington, D.C. on September 15-16, 2010. The stated purpose of the initial meeting was to
introduce Harrison to the DOE and to discuss the company’s current performance and loan
monitoring issues. During this meeting, Silver expressed concern regarding Solyndra’s liquidity
and its ability to sell the company’s product. There were also discussions concerning how
Solyndra would manage competition from Chinese manufacturers. The majority of the
remaining meetings were with Nwachuku and the LGPO staff to discuss various financial and
loan monitoring issues. During these meetings, the LGPO team269 questioned Harrison on a
variety of issues including cash balances, financial plans, Fab 1 production, sales forecasts for
third and fourth quarters of 2010, and certain questions regarding the materials recently sent to
the DOE. Solyndra also discussed its ongoing requests to address certain cost cutting measures,
including the use of existing excess capacity at the Fab 2 facility. The DOE acknowledged the
merits of such requests and that Solyndra was currently using the Fab 2 tools. Solyndra also
reiterated that it would be seeking a waiver with respect to the issue of Fab 1 production falling
below the required 70% target metric. Nwachuku was concerned about Solyndra’s ability to
raise additional capital and to compete effectively in an industry challenged by declining ASPs.
Based on her concerns, Nwachuku indicated that the DOE would withhold approvals of all open
requests unless Solyndra agreed to improve the DOE’s security position by providing a
guarantee of Solyndra, Inc. to the entire balance of the DOE Loan Guarantee, including a grant 267 See Appendix I.108, DOE email to Scott and Schwartz dated September 8, 2010 in email chain. 268 See Appendix I.108, Scott email to DOE team dated September 13, 2010. 269 The DOE team included Nwachuku, Westerheim, Ken Cestari, Emilio Ghersi, Chris Tsai, Daniel Lee, Scott Stevens, Steve Shulman, and Brian Oakley.
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of a security interest in intellectual property rights.270 As a result of the meeting, Nwachuku
requested another meeting, to follow-up on the issues discussed.271
The Board conducted another meeting on September 30, 2010 to obtain a current status
update on the company. During this meeting, Harrison described the continuing challenges
facing the company including insufficient end-user demand, lower than estimated manufacturing
execution in the third quarter, and continued cash burn272 that would accelerate. The $175
million recently raised from the Convertible Notes would be depleted by January 1, 2011. The
company was taking action and developing plans to create additional demand, fix manufacturing
output problems, conserve cash, and moderate capital spending. In this meeting, Stover
described various alternatives the company had explored to address the present condition of the
company and described the challenge associated with each scenario presented. The Board was
provided with an update from the recent DOE meetings, requests by the DOE for additional
security, and the request for waiver on the DOE which could be problematic for future draws on
the loan. Additionally, Goldman Sachs discussed with the Board the alternative paths for
funding including insider funding, pursuing other financial investors, targeting strategic
investors, or engaging in loan modification discussion with the DOE. The Board authorized
Goldman Sachs to engage with a select group of strategic investors to gauge interest.273
Pursuant to the September 2010 Board meeting, the Board held a conference call on
October 6, 2010 to follow-up on the issues previously discussed. company management
provided the Board with a recommended course of action which included, amount other things;
(a) trimming spending by reducing production and deferring capital expenditures; (b) securing
DOE cooperation for an adjusted plan that demonstrated debt service capability; (c) obtaining
interim financing of $150 million to build demand, achieve positive cash flow, and assure the
DOE of a fully funded plan; and (d) completing the Fab 2 facility by consolidating and utilizing
certain Fab 1 tools and Fab 1 operations (the “Consolidation Plan”). A number of proposed
modifications of the DOE Loan Guarantee were discussed and analyzed by the Board.274
270 See Appendix I.109, Scott email to Solyndra management team dated September 17, 2010. 271 See Appendix I.111, Nwachuku email to Scott dated September 27, 2010. 272 Cash was being depleted at $15 to $20 million per month. 273 See Appendix D.7, Board Minutes and Board Presentation dated September 30, 2010. 274 See Appendix D.8, Board Presentation dated October 6, 2010.
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As a result of the significant challenges facing Solyndra and the discussion with the
Board, Harrison contacted the DOE on October 8, 2010 to describe the recent quarterly financial
results which made it impractical to obtain additional capital in the short-term based on the
current financial environment. Silver questioned the ability of the company to continue
operations into the future. Harrison indicated the company could continue under various
scenarios until either December 31, 2010 under the existing plan and toward the end of March or
April 2011 under the company’s new Consolidation Plan depending on accessibility to existing
investors and/or external sources of cash. Harrison informed the DOE that under the proposed
Consolidation Plan, the company needed to raise an additional $150 million to fund the plan and
that the company needed some flexibility and time from the DOE to develop its product
marketing revision, execute the plan, complete the Fab 2 facility, and repay the DOE Loan
Guarantee. Silver indicated that the DOE was there to work with them and looked forward to
getting the details.275
In response to the call with the DOE, Stover provided a detailed email to Nwachuku on
October 11, 2010 which provided additional materials and details regarding Harrison’s previous
discussions. Stover described the company’s current situation, the Consolidation Plan developed
by the company to confront the existing financial distress, and proposed DOE Loan Guarantee
accommodations and modifications the company believed were essential for the Consolidation
Plan to work. Stover sent Nwachuku the detailed Consolidation Plan the following day. Below
are some key details included in Stover’s email:276
Current Situation
• The company undertook a comprehensive review of all elements of operations, industry conditions, and status of market development upon the arrival of Harrison in July 2010.
• Industry competition was severe and demand creation for the company’s solar panels was “proceeding noticeably behind” the projections in the plan.
• Management determined during the last three weeks of the third quarter (ending October 2, 2010) that sales were likely going to fall short of the forecast and that
275 See Appendix I.112, Harrison email to Solyndra management team dated October 8, 2010. 276 See Appendix I.113, Stover email to Nwachuku on October 11, 2010.
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finished goods inventory would accumulate. The implications were significant in regard to the company’s liquidity and ability to raise additional private capital.
• The company was projected to deplete cash necessary to sustain operations in the first quarter of 2011. The company would deplete cash in November 2010 if it did not have access to the remaining DOE Loan Guarantee funds in October, November, and December for the previously completed work.277
• The company’s last business plan projected a very rapid build out of the Fab 2 facility, which essentially would have tripled capacity in a year. Without assurance of customer demand for the rapid scaling of production capacity and firm commitments for an additional $300 million of capital, the company was forced to consider alternative business plans.
Consolidation Plan
• The Consolidation Plan fundamentally changed the course of completing the Fab 2 Phase I capacity by redeploying existing Fab 1 tools and equipment278 to the Fab 2 facility. Instead of Solyndra spending incremental capital to finish building certain tools for lines 2 and 3 in the Fab 2 facility, Solyndra would terminate manufacturing in the Fab 1 facility over a period of several months and move the production tools into the Fab 2 facility. The company believed that a consolidation of operations would enable it to operate more efficiently by lowering production to better match near term production with existing market demand, reduce cash requirements for labor and materials, and reduce the labor force by approximately 200 people.
• The company believed the Consolidation Plan would allow it to optimize operations, raise additional capital, service debt, and successfully build its business at a more moderate scale.
Proposed Loan Modifications
• The proposed DOE Loan Guarantee modifications essential to successfully implement the Consolidation Plan included: (a) loan maturity to be extended three years to December 15, 2019,279 (b) first principal payment date to be extended one year to May 15, 2013, (c) forbearance on further interest payments from November 2010 to May 2013, (d) removal of obligation to pre-fund $30 million cost overrun account, (e) consolidation of Fab 1 operations to Fab 2 facility, (f) adjustment of Fab 1 performance target to allow for ramp of Fab 2 factory and CIGS line speed of 30 cm/minute, (g) DOE payment of any incremental credit subsidy costs resulting from restructuring, (h) complete and unconditional guarantee by Solyndra, Inc. of all Fab 2 obligations, (i) first priority security interest in all assets of Solyndra, Inc. (including
277 Remaining funds available on the FFB loan were approximately $133.2 million. 278 Tools and equipment were owned by Solyndra, Inc. and were not subject to the liens under the DOE Loan Guarantee. 279 The existing term of the DOE Loan Guarantee was seven years.
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intellectual property and Fab 1 assets), and (j) deferral of any decision on the Fab 2 Phase II application.
• The company briefed its Board, key shareholders, and key noteholders regarding concessions that may be required by DOE to secure its commitment to support the Consolidated Plan including: (a) commitment to a fully-funded plan ($150 million), (b) first priority security interest in all Solyndra, Inc. assets, and (c) Solyndra, Inc.’s guarantee of Fab 2 indebtedness.
Solyndra officials personally met with the DOE in Washington, D.C. on October 15,
2010 to discuss in detail the current situation and the information provided in Stover’s e-mail.
They discussed the company’s ongoing financial performance and Consolidation Plan,
considered options, and Solyndra’s proposed DOE loan modifications.280 Within days of the
October 15th meeting, DOE representatives traveled to Solyndra on October 19, 2010 for two
days of further detailed meetings and discussions regarding the company’s sales pipeline,
demand forecasts, operational and technical issues, and the proposed Consolidation Plan.281
According to Solyndra, the DOE appeared supportive and constructive as a result of these
meetings.
Later in the month, Goldman Sachs provided a report to the Board and the DOE
regarding its effort to locate additional funding. Goldman Sachs indicated that efforts had not
been well received in the market due to a number of factors including: (a) concerns about long-
term competitiveness; (b) the amount of capital invested historically; (c) preference for other
technologies; and (d) the difficult price environment including fierce competition from public
solar companies and low-priced Chinese panels. An employee meeting was conducted on
November 3, 2010 to review the plan and address personnel concerns282 and communications to
customers, vendors, and third parties regarding its plan.
In November 2010, Solyndra provided the DOE with “weekly performance dashboard
reports” to track ongoing weekly performance beginning on November 4, 2010. Solyndra also
provided additional documentation and information per the DOE’s request and conducted
additional meetings and discussions with DOE personnel throughout the month. As part of the
280 See Appendix J.6, Solyndra Presentation to DOE dated October 15, 2010. 281 See Appendix J.7, Solyndra Presentation to DOE dated October 19, 2010 and Appendix J.8, Solyndra Presentation to DOE dated October 20, 2010. 282 See Appendix B.2, Solyndra “Q3 State of the Business” Presentation dated November 3, 2010.
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DOE’s examination, it wanted to determine the drivers impacting the projected cash flows and
revised projections to conclude the reasonableness of the projections from both a cost reduction
and sales standpoint. The DOE also wanted to understand the decision making process relating
to production output and sales. Solyndra explained that its costs were primarily fixed based on
the production processes and the true variable production costs were small making it challenging
to base production runs based solely on actual sales.
A Board meeting was held on December 2, 2010 where Solyndra management provided
an update regarding the ongoing efforts to raise additional funding and obtain FFB Loan
modifications. Stover indicated that the outreach to strategic investors had not resulted in any
interested parties coming forth, although several financial investors continued with due
diligence, although it was extremely unlikely that the financial investors would be in a position
to commit capital in the timeframe required by the company. Stover indicated that the DOE
continued to express a willingness to work with the company and suggested there was a high
degree of flexibility around the terms of the loan, but was unwilling to convert any of its existing
debt to equity as a previously proposed option. As a result of the discussions, the Board
reviewed the company’s alternatives, including a standalone Fab 1 facility, a sale of all or part of
the business, and a potential bankruptcy filing.283
As a result of the December 2nd Board meeting, Solyndra contacted the DOE to schedule
a meeting on December 6, 2010 in an effort to negotiate a common ground solution to restructure
the DOE Loan Guarantee and sent them a presentation including Solyndra’s proposed
modifications which included the following key terms:284
• $100 million increase to FFB loan;
• $50 million in new convertible debt by existing investors (with optional additional $50 million under same terms);
• New capital would have priority over existing debt;
• Security interest would expand to include all assets of Solyndra, Inc.;
• Complete and unconditional guarantee by Solyndra, Inc.; 283 See Appendix D.9, Solyndra Board Minutes and Board Presentation dated December 2, 2010. 284 See Appendix L.4, Solyndra Presentation sent to DOE dated December 6, 2010.
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• Loan maturity would extend to December 15, 2020;
• $535 million FFB loan and $175 million Convertible Notes would have pari passu rights after new capital is paid;
• Removal of $30 million cost overrun reserve; and
• Continued loan advances on existing FFB loan.
In preparation for the schedule meeting, Nwachuku sent a draft proposed term sheet
representing the DOE’s proposal for a loan restructuring. The DOE’s proposed key terms
included:285
• $200 million DOE Senior Tranche ($95 million remaining under original facility and no additional increase);286
• $75 million new investment by existing investors to be funded “pro-rata” with remaining DOE commitment;
• Subordinated Secured - $260 million of FFB Loan and $175 million Convertible Notes;
• $75 million of existing FFB Loan to be converted to new convertible notes;
• $75 million of additional investment in the form of a convertible note to be funded pro-rata with remaining $95 million FFB Loan;
• Security interest would expand to include all assets of Solyndra, Inc.;
• Complete and unconditional guarantee by Solyndra, Inc.; and
• Senior Debt would mature in December 2015 and subordinated debt would mature in December 2019.
The company and the DOE continued to negotiate a term sheet in December 2010 and
final documents in February 2011 for a restructuring of its existing debt which ultimately
included a senior liquidation preference for the new funds committed by the existing investors
underwritten by Argonaut and Madrone.
285 See Appendix L.5, DOE Proposed Term Sheet for Restructuring sent on December 5, 2010. 286 According to the DOE, program statutory restrictions made any additional commitment infeasible.
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2. Summary of Restructuring
As a result of the negotiations with Solyndra’s investors, the DOE, and other creditors,
the Restructuring of the company’s outstanding secured debt and raise of additional capital was
finalized on February 23, 2011. The Restructuring was an effort to consolidate operations,
reduce operating costs, obtain additional funding, and position the company to compete in the
deteriorating and challenging solar market. The effects of the Restructuring are summarized as
follows:
• The Fab 2, LLC entity was originally established for the specific purpose of constructing and operating the Fab 2 facility. As a result of the Restructuring, the parties required the name of the company to be changed to Solyndra LLC to facilitate the consolidation of Fab 1 and Fab 2 operations and assets.
• The Restructuring required Solyndra, Inc. to change its name as a result of the intellectual property being transferred to Solyndra LLC.287
• The company received a new $75 million loan from private investors with a liquidation priority over other secured debt through March 2013;
• The assets of Solyndra, Inc. (including the Fab 1 assets and intellectual property) were transferred to Solyndra LLC (resulting in the consolidation of Fab 1 and Fab 2 operations and assets) to secure the new Tranche A debt as well as the DOE Loan Guarantee which was previously only secured by assets of Fab 2, LLC and did not include liens on the intellectual property owned by Solyndra, Inc.;
• The existing DOE Loan Guarantee was split into two tranches: Tranche B debt and Tranche D debt with Tranche B debt having a priority security interest in the assets of the combined company;
• The Convertible Notes were exchanged for Tranche E debt,
• All preferred stock was converted to common equity;
• The DOE obtained the right to have an observer attend all board meetings of the company and to receive all board materials;
• Existing intercompany project agreements under the original DOE Loan Guarantee were terminated.
287 Pursuant to the Restructuring Solyndra, Inc. changed its name to 360 Degree Solar Holdings, Inc. on June 28, 2011.
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The executed agreements between the parties called for a modification of the secured
debt structure to address, among other things, the additional funding requirements and revisions
to the security interests and collateral of the lenders. The principal amount committed of the
restructured secured debt by Tranche is as follows:
Table #1
Summary of Restructured Secured Debt Secured Debt
Principal Amount
Committed288
Tranche A $75 Million Tranche B $150 Million Tranche C289 Not Funded Tranche D $385 Million Tranche E290 $186 Million TOTAL $796 Million
a. Tranche A Debt
The DOE and Solyndra’s investors, lead by Argonaut and Madrone, agreed to restructure
the company’s existing indebtedness whereby the DOE would subordinate its recovery rights
upon liquidation (for a portion of its loan) to a new $75 million loan (the Tranche A Debt) from
existing investors that agreed to participate. The funds were to be used in the implementation of
the Consolidation Plan. See Exhibit #11 for a summary of key terms relating to the Tranche A
Debt.
All of the existing Convertible Note holders and preferred stockholders were offered the
right to participate as lenders in the Tranche A Debt.291 Approximately 23 of Solyndra’s existing
288 Principal amount for Tranche A and Tranche B represent the commitments of the credit parties and not the actual amounts drawn. 289 Tranche C was not funded pursuant to the February 2011 Restructuring. It was established as a result of near-term anticipated future capital requirements and allows for funding of an additional $75 million. 290 Tranche E was composed of $175 million in outstanding principal obligations under the Convertible Notes, plus accrued interest of $11 million through the date of the Restructuring. 291 On February 16, 2011, Solyndra, Inc. sent a Tranche A – Rights Offering Information letter to the holders of the existing Convertible Notes and preferred stock. The rights offering expired on March 16, 2011 and participants were required to be accredited investors under applicable federal securities laws. See Appendix W.146.
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investors accepted the offer and became lenders in the restructured Tranche A Debt. A summary
of the top participating lenders is provided below in Table #19:
Table #19 Summary of Top Lenders in Tranche A Debt
Lender Name Amount % Owned
Argonaut Ventures I, LLC $35,311,321 47.08% Madrone Partners, L.P. 24,235,608 32.31% Rockport Capital Partners III, LP 6,000,000 8.00% Masdar Clean Tech Fund, LP 2,000,000 2.67% Beltest Shipping Company Limited 1,631,840 2.18% Other Remaining Lenders 5,821,231 7.76% TOTAL $75,000,000 100.00%
Pursuant to the Restructuring, the participants in the Tranche A Debt received warrants
(“Tranche A Warrants”) to purchase shares of common stock of Solyndra, Inc. that would
represent approximately 99.99% of the fully diluted equity ownership of Solyndra, Inc.292 As
consideration for the Lead Investors underwriting of the Tranche A Debt and placing significant
funds in escrow since January 2011, each of the participating lenders entered into a letter
agreement with the Lead Investors on April 6, 2011 that would transfer all Tranche A Warrants
to the Lead Investors upon a bankruptcy filing or liquidating event.293 Solyndra, Inc. was not a
party to the side letter regarding the potential transfer of warrants. The side letter was executed,
among other things, to preserve the substantial net operating loss (“NOL”) attributes of Solyndra,
Inc.
A separate side letter was executed between the DOE and the Lead Investors regarding
the NOL on February 23, 2011. The parties agreed that the Lead Investors would not take any
actions that would permit the NOL to be transferred or used for any purpose other than to offset
the income tax liability of Solyndra, Inc. unless a bankruptcy or insolvency proceeding was filed
and or the DOE restructured debt was paid in full. The obligations by the Lead Lenders under 292 See Appendix W.147, Restructuring and Warrant Issuance Agreement dated February 23, 2011. 293 See Appendix W.149, Side Letter Agreement Regarding Solyndra, Inc. Warrants between Lead Investors and the other participating lenders dated April 6, 2011.
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this agreement regarding the NOL ceased 60 days after the bankruptcy filing in September
2011.294
b. Tranche B Debt
As part of the Restructuring, the DOE agreed to perform under its guarantee and
Solyndra LLC was obligated to reimburse the DOE for all guarantee payments made by the
DOE. The original $535 million DOE Loan Guarantee was split into two separate tranches:
Tranche B and Tranche D. The Tranche B portion included a loan up to $150 million, which
incorporated the remaining $48.8 million not yet drawn on the original loan as of the
Restructuring date (“Tranche B Debt”). See Exhibit #12 for a summary of key terms relating to
the Tranche B Debt.
c. Tranche C Debt
In addition to the Tranche A Debt and Tranche B Debt, the Restructuring contemplated a
future Tranche of debt to fund the Consolidation Plan (“Tranche C Debt”). The future Tranche
C Debt was anticipated to raise an additional $75 million of capital to be used for general
corporate purposes and required working capital, subordinate to the Tranche A Debt and pari
passu with the Tranche B Debt. The Consolidation Plan forecasted that the Tranche C Debt
funding was required by June 2011. The funding from the anticipated Tranche C Debt was never
raised. As a result, the company structured an agreement with certain investors to factor/sell its
accounts receivable and inventory to manage its cash flow until other funding sources could be
obtained or another debt restructuring consummated.295
d. Tranche D Debt
As a result of the Restructuring, the DOE agreed, among other things, to modify the
terms and conditions of the DOE Loan Guarantee including its security interest and collateral.
As mentioned above, the DOE Loan Guarantee was split into two parts: Tranche B and Tranche
D. The Tranche D portion of the restructured DOE Loan Guarantee included the remaining $385 294 See Appendix W.144, Side letter between the DOE and the Lead Investors regarding NOL dated February 23, 2011. 295 See Appendix AB.1 for discussion regarding the accounts receivable and inventory purchase and sales agreements for additional details.
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million of the original $535 million DOE Loan Guarantee (“Tranche D Debt”) that already had
been disbursed for the construction of the Fab 2 facility. See Exhibit #13 for a summary of key
terms relating to the Tranche D Debt.
e. Tranche E Debt
A component of the Restructuring involved the exchange of the existing $175 million
Convertible Notes originally purchased between June 2010 and October 2010 and held by
approximately 40 investors. On February 9, 2011, Solyndra, Inc. sent the holders of the existing
Convertible Notes an Offer to Exchange and Consent Solicitation (“Exchange Offer”)296 to
garner approval of the proposed Restructuring. Pursuant to this Exchange Offer, existing holders
of the Convertible Notes were offered the right to exchange their existing notes for new Secured
Promissory Notes (“Tranche E Debt”). Each holder who desired to participate in the exchange
offer were required to tender their existing notes and consent to the amendment of certain terms
and conditions of the existing Convertible Notes by March 10, 2011. The proposed amendments
would extend the maturity date, release the security interest in all collateral, terminate the
existing related collateral documents, eliminate certain covenants and events of default, and
eliminate the convertibility of the existing Convertible Notes. If the holder did not agree to
tender any portion of their existing Convertible Notes in the exchange offer, the holder’s existing
Convertible Notes would have substantially fewer rights and benefits than they were previously
provided pursuant to the Restructuring. See Exhibit #14 for a summary of key terms relating to
the Tranche E Debt.
All of the existing Convertible Note holders were offered to convert their existing notes
to Tranche E Debt. All of the Convertible Note holders (40 holders) exchanged their existing
notes and executed the new notes included in the Tranche E Debt pursuant to the Restructuring.
Argonaut and Madrone together held approximately $125.8 million of the Tranche E Debt alone.
A summary of the top participating lenders is provided below in Table #20:
296 See Appendix W.64, Solyndra Offer to Exchange and Consent Solicitation (Tranche E) dated February 9, 2011.
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3. Summary of February 2011 Loan Restructuring Documentation
The closing of the Restructuring involved the execution of numerous agreements and
documentation executed between Solyndra LLC, Solyndra, Inc., DOE, Convertible Note holders,
Argonaut,298 and US Bank299 (the “Restructuring Documentation”). This documentation was
extensive due to the complexity and size of the Restructuring and included over 30 different
agreements and a substantial amount of supporting documentation including, but not limited to,
deeds of trust, side letters, assignments, UCC-1 filings, certificates, schedules, financial analyses,
and exhibits totaling over 2,100 pages.300
The Restructuring Documentation included the following categories of documentation:
• Loan Documentation – The loan documentation included the First Amended and Reinstated Common Agreement, credit facility agreements, note purchase agreement, secured promissory notes, intercreditor agreement, equity funding agreement, and other related documentation.
• Security Documentation – The security documentation included amendments to the deeds of trust, First Amended and Restated Security Agreement, trademark and patent security agreements, UCC-1 filings, equity pledge agreements, bank account control agreements and other related documentation.
297 Includes USVP Entrepreneur Partners VII-A, L.P., USVP Entrepreneur Partners VII-B, L.P., U.S. Venture Partners VII, L.P., U.S. Venture Partners IX, L.P., U.S. Venture Partners X, L.P., USVP X Affiliates Fund, L.P., and 2180 Associates Fund VII, L.P. 298 As the Tranche A Credit Facility Agent, Tranche C Credit Facility Agent, and Tranche E Credit Facility Agent. 299 As the Master Collateral Agent. 300 See Appendix W, February 2011 Restructuring Agreements and Documentation.
Table #20
Summary of Top Lenders in Tranche E Debt
Lender Name Amount % Owned Argonaut Ventures I, LLC $89,108,788 50.92% Madrone Partners, L.P. 36,688,833 20.97% Rockport Capital Partners III, LP 7,300,000 4.17% US Venture Partners (Various)297 6,000,000 3.43% Howard Hughes Medical Institute 4,401,432 2.52% Other Remaining Lenders 31,500,947 17.99% TOTAL $175,000,000 100.00%
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• Asset Transfer Documentation – The asset transfer documentation included an asset transfer agreement, bill of sale and assignment agreement, capital contribution agreement, intercompany project termination agreement, assignments, and related documentation.
• Equity Documentation – The equity documentation included a warrant issuance agreement, a disclosure letter, individual warrant, a side letter, and related documentation.
a. Key Agreements and Documentation
The agreements and documentation executed at closing for the Restructuring was
extensive and provided the requirements and obligations of each party. Some of the key
agreements and documentation of the Restructuring are highlighted below:
• First Amended and Restated Common Agreement - Solyndra LLC and each representative of the Tranche A Debt, Tranche B Debt, Tranche C Debt (if any), Tranche D Debt and Tranche E Debt (collectively, the “Tranche Representatives”) entered into a First Amended and Restated Common Agreement (“Amended Common Agreement”) pursuant to the Restructuring. The Amended Common Agreement provided for common representations and warranties, affirmative and negative covenants, and events of default. Under the Amended Common Agreement, certain covenants were included that limited and restricted the company’s ability to pay dividends and distributions, use its intellectual property outside of its current business, modify its annual budget or plan without prior consent, make investments, incur additional indebtedness, and enter into a transaction creating a change of control of the business or company. The Amended Common Agreement also included provisions and terms for loan funding, principal and interest payments and various conditions precedent prior to advances being made.
• Intercreditor Agreement – Argonaut, the DOE, and US Bank entered into Intercreditor Agreement relating to the various secured debt tranches. The agreement defined the rights and obligations of the holders of the various Tranches with regards to the sharing of collateral pursuant to the distribution priority of each Tranche and other specified matters. The agreement also granted the DOE substantial rights with respect to the timing and control over any involuntary bankruptcy filing by a holder of the other non-DOE Tranches and imposed significant restrictions and limitations on the non-DOE Tranches relating to any restructuring of their indebtedness or to accelerate their indebtedness due to an event of default under the Amended Common Agreement.
• Tranche A Credit Facility Agreement – Solyndra LLC and Argonaut entered into a Tranche A Credit Facility Agreement. The agreement provided for the terms and conditions of the Tranche A Credit Facility.
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• Payment and Reimbursement Agreement (Tranches B and D) – Solyndra LLC and the DOE entered into a Payment and Reimbursement Agreement that obligated Solyndra LLC to pay make certain payments and reimbursements to the DOE with respect to DOE’s payments under the DOE guarantee.
• Note Purchase Agreement (Tranche E) and Secured Promissory Notes – Solyndra, Inc., Solyndra LLC, and the Convertible Note holders entered into a Note Purchase Agreement (Tranche E) and Secured Promissory Notes whereby the existing Convertible Notes are converted to new Tranche E notes.
• First Amended and Restated Equity Funding Agreement – Solyndra, Inc., Solyndra LLC, the DOE, and US Bank entered into a First Amended and Restated Equity Funding Agreement. The agreement provided the revised terms and procedures to fund the required equity commitments of Solyndra, Inc. pursuant to the Restructuring.
• Asset Transfer Agreement – Solyndra, Inc. and Solyndra LLC entered into an Asset Transfer Agreement. The agreement transferred substantially all of the assets of Solyndra, Inc. to Solyndra LLC. Solyndra LLC also assumed substantially all of the liabilities of Solyndra, Inc.
• Security Agreements – Each Tranche executed Security Agreements regarding the collateral owned and transferred to Solyndra LLC. The Intercreditor Agreement addresses how the Collateral is shared between the various Tranches.
4. Modified Financial Reporting Requirements
As a result of the Restructuring, the agreements required more stringent reporting
including weekly, monthly, quarterly and annual reporting to the credit parties. Some of the key
reporting requirements under the Restructuring are as follows: 301
a. Weekly Reporting
Solyndra LLC was required to provide weekly reporting on the Wednesday following the
prior week’s activity (“Weekly Reporting Packages”). The Weekly Reporting Packages were
executed by Stover and included:302
• Sales and shipment information;
• Updated sales pipeline, projections and average sale prices;
301 See Appendix W.2, First Amended and Restated Common Agreement, Section 6. 302 See Appendix Y, DOE Weekly Reporting Packages
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• Financial information including cash balance, accounts payable, and accounts receivable data;
• Production information including panels and megawatts produced, average watts/panel produced and production yield;
• Current head counts; and
• Inventory balances of finished goods.
b. Monthly Reporting
Solyndra LLC was required to provide monthly reporting within 25 days after the end of
each fiscal month (“Monthly Reporting Packages”). The Monthly Reporting Packages were
executed by Stover and included:303
• Consolidated monthly unaudited financial statements of Solyndra LLC including a budget to actual comparison;
• Calculation of Debt-to-Equity Contribution Ratio during construction period;
• Report of the advances made during the month;
• Operating metrics achieved during the month including actual uptime, run-rate, and yields for the production process, module production by model, panel efficiency, panel costs, and average selling price; and
• Material warranty or product liability claims.
c. Quarterly Reporting
Solyndra LLC was required to provide quarterly reporting (including certifications by an
authorized official of Solyndra LLC) within 25, 35, or 45 days after the end of fiscal quarter
depending on the specific requirement (“Quarterly Reporting Packages”). The Quarterly
Reporting Packages were executed by Stover and included:304
• Consolidated quarterly unaudited financial statements of Solyndra LLC (within 45 days) including management discussion and analysis of results;
• Discussion and analysis by a financial officer of Solyndra LLC of the business and operations (within 45 days);
303 See Appendix X, DOE Monthly Reporting Packages 304 See Appendix Q, DOE Quarterly Reporting Packages
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• Calculation of Debt-to-Equity Contribution Ratio during construction period;
• Summary operating report including a budget to actual comparison;
• Updated Restructuring construction budget (within 35 days);
• Updated annual budget, base case projections, and technology milestone schedule;
• Various operating metrics achieved during the quarter;
• Report detailing the working capital available at the end of the quarter;
• Copy of risk assessment report; and
• Updated sales and marketing plan.
d. Annual Reporting
Solyndra LLC was required to provide annual reporting (including certifications by an
authorized official of Solyndra LLC) within 25, 60, or 180 days after the end of fiscal year
depending on the specific requirement (“Annual Reporting Packages”). The Annual Reporting
Packages were executed by Stover and included:305
• Consolidated unaudited financial statement of Solyndra LLC (within 60 days);
• Audited annual financial statements of Solyndra LLC (within 180 days);
• Discussion and analysis of Solyndra’s business and operations prepared by management (within 180 days);
• Annual budget for the year (prior to January 1);
• Budget to actual comparison with explanation of variances (no later than January 31); and
• Various operating metrics achieved during the year.
As part of the Restructuring, Solyndra agreed to allow DOE representatives to attend
each of its periodic Board meetings and obtain the related Board materials. As a result, one or
more DOE representatives attended all Board meetings (as an observer) conducted between
February 2011 and the date of filing of the bankruptcy petition in September 2011. Pursuant to
305 Solyndra LLC did not prepare and submit an Annual Reporting Package prior to bankruptcy filing in September 2011.
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the required reporting and attendance of the various Board meetings, the DOE was provided
detailed information about company’s finances, operations, and prospects.
From the initial Pre-Application in 2006 though the bankruptcy filing in September 2011,
Solyndra provided the DOE with thousands upon thousands of pages of documentation and
information, had numerous face-to-face meetings and telephone discussions (including tours and
meetings at the Solyndra facilities), provided numerous detailed financial models prepared by the
company as the economic environment and assumptions changed, trained the DOE on various of
the financial models to run its own sensitivity analyses, worked with and provided
documentation and information to the DOE’s own independent engineer and market consultants
for review, complied with various regulatory requirements, provided the DOE with advanced
notice of potential waiver requests in late 2010, provided actual financial results indicating
hundreds of millions of operating losses, and expended significant resources during the DOE
Loan Guarantee approval, monitoring, and restructuring phases.
Solyndra complied with the extensive reporting requirements of the DOE which included
annual and quarterly information including actual financial and operational results of both
Solyndra, Inc. and Fab 2, LLC, construction progress reports for the Fab 2 facility, and all other
information requested by the DOE prior to the Restructuring.
Following the Restructuring Plan of February 2011, Solyndra adhered to even more
stringent reporting requirements including, among other things, weekly, monthly, and quarterly
reporting of financial and operational performance, sales and marketing updates, production
metrics, cash balances, working capital requirements, loan advance reporting, head counts,
inventory balances, and budget to actual comparisons. The DOE representatives also attended
all Board meetings and received various Board materials beginning in February 2011.
Having reviewed communications and the underlying records between the DOE and
Solyndra, it is the opinion of the CRO that based upon the level of documentation and
information as cited above, the DOE had sufficient information to understand the risks and
challenges associated with the DOE Loan Guarantee and make an informed decision as to the
ongoing financial condition of Solyndra in advance of granting the original loan guarantee and
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thereafter, including in connection with the February Restructuring and through the
commencement of the bankruptcy case.
XI. HISTORICAL FINANCIAL STATEMENT ANALYSIS
A. Financial Analysis Recap
PWC issued audited financial statements for Solyndra for the fiscal years from inception
in 2005 through January 1, 2011 (Fiscal year 2010).306 In addition to the audited financial
statements, Solyndra provided weekly, monthly, and quarterly financial reports to the DOE
prepared by the company. In accordance with the DOE financing documents, a number of
Solyndra’s financial reports required certification.307 Thus, certain monthly, quarterly and
annual reports were signed and certified by Solyndra’s Chief Financial Officer. These reports
began with the closing of the DOE Loan Guarantee for Fab 2 Phase I, with the first such
quarterly report covering the third quarter of 2009. Quarterly reports continued through the
second quarter of 2011. Solyndra also provided certain weekly and monthly information to the
DOE which has been used to supplement the quarterly information for the periods following the
second quarter of 2011 through the petition date.308
306 See Appendix Z, Solyndra Audited Financial Statements. 307 Common Agreement Section 6.1(d) states, “…such Financial Statements shall be certified by a Financial Officer of the Borrower as having been prepared in accordance with GAAP on a consistent basis and as fairly presenting in all material respects the financial condition of the Borrower as of the date thereof and the results of operations and cash flows of the Borrower for the periods presented. Such certification shall also include a certification that the Person has made or caused to be made a review of the transactions and financial condition of the Borrower during the relevant fiscal period and (i) that other than as set out in such Financial Statements, there are no liabilities or obligations of the Borrower that are required to be presented in such Financial Statements in accordance with GAAP, and (ii) that no Event of Default or Potential Default exists, or of such certification cannot be made, the nature and period of such Event of Default or Potential Default and what corrective action the borrower has taken or proposes to take with respect thereto:” See Appendix P.3. 308 See Appendix X and Appendix Y, Certain Portions of Weekly and Monthly Reports.
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1. Fiscal Years 2005 through 2008 – Prior to DOE Loan Guarantee Facility
a. Recap of Operations for Fiscal Year 2005
Solyndra’s operations during fiscal year 2005 were limited. During 2005, there were no
revenues and the net loss for fiscal 2005 was $1.3 million, which was funded primarily from
funds loaned directly to the company by Mr. Gronet.
b. Recap of Operations for Fiscal Year 2006
During fiscal year 2006, Solyndra received its first funding from the sale of redeemable
convertible preferred stock (“Preferred Stock”) in the amount of $97.7 million. An initial $19.9
million was raised from the sale of Series A-1 and A-2 Preferred Stock.309 Later that year, an
additional $77.8 million was raised from the sale from the sale of Series B Preferred Stock.310
Solyndra also received a net inflow of $7.2 million in the form of loans and notes payable.311 As
a result of these cash infusions, the company ended the year with approximately $71.1 million in
cash, short-term investments and restricted cash. During 2006, Solyndra added $5.1 million to
property, plant and equipment. Solyndra had no operating revenues and the yearly net loss was
approximately $27.2 million. Also, in December 2006, Solyndra filed its initial application with
the DOE seeking funds to begin construction of its first manufacturing facility.
c. Recap of Operations for Fiscal Year 2007
During fiscal year 2007, Solyndra continued to receive funding in the form of preferred
stock and short-term notes payable. For the year 2007, Solyndra raised approximately $213.9
million from the sale of redeemable convertible preferred stock and received a net of $66.6
million as a result of various loans and notes payable. It concluded the year with over $158.1
million in cash and restricted cash. During that year, Solyndra was well into the construction of
its first manufacturing facility which came to be known as Fab 1. During 2007, Solyndra added
$108.7 million to property, plant and equipment. Solyndra had no operating revenues and
incurred a net loss of $114.1 million. In the course of its audit of the 2007 financial statements,
309 See Appendix AA.1 for discussion of equity funding. 310 Id. 311 The term “net” is reflective of the total funds received from loans minus payments made on such loans.
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PWC issued an opinion including an emphasis of a matter paragraph; that emphasis being the
question concerning Solyndra’s ability to continue as a “going concern.”312 The auditors going
concern opinion may have been required but was not particularly determinative as to the
likelihood of success or failure. The same going concern issue was raised by PWC in every
subsequent financial audit through 2010. Through the first two and one half years of its
operations, Solyndra received over $311.6 million in funding from the sale of redeemable
convertible preferred stock and a net of $74.7 million from short-term notes payable and other
loans. Additionally, the company had acquired property, plant and equipment for $113.9 million
in the construction of Fab 1. During the same period, Solyndra had incurred a total net loss of
$142.6 million. Through the end of fiscal year 2007, Solyndra was identified as a development
stage company.313
d. Recap of Operations for Fiscal Year 2008
During fiscal year 2008, Solyndra continued to receive additional funding in the form of
both preferred stock and short-term notes payable. In total, during 2008, Solyndra raised
approximately $309.8 million from the sale of redeemable convertible preferred stock314 and
incurred a net outflow of $79.5 million in the form of payments on loans and notes. The
company ended the year with over $82.2 million in cash and cash equivalents. During the same
period, Solyndra was nearing completion of the Fab 1 building and certain equipment. In 2008,
Solyndra acquired $133.9 million in property, plant and equipment. As with fiscal year 2007,
PWC again raised the issue as to whether Solyndra would be able to continue as a going concern.
In the first half of 2008, the company’s photovoltaic panels were first certified for
commercial sale and in July 2008, Fab 1 produced a saleable product. Total revenues were $6
312 The term “going concern” assumes that a business will continue in operation for the “foreseeable future” and accordingly will be able to realize the benefit of its assets and discharge its liabilities in the normal course of operations. The term “foreseeable future” takes into consideration all known factors for at least, but not limited to, twelve months from the balance sheet date. 313 A “development stage company” devotes most of its activities to establishing a new business. It is further defined as a business for which principal operations have not commenced or principal operations have generated an insignificant amount of revenue. The financial statements of such companies are to be identified as those of a development stage company. 314 This sum also included $119.1 million in the form of bridge loans which were subsequently converted to preferred stock.
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million for the year. The net loss for the year of 2008 was $242.5 million315, bringing total
losses for all years of operation to $385.1 million.
From 2005 through the end of fiscal year 2008, Solyndra had received over $620.4
million in funding from the sale of redeemable convertible preferred stock316 and ended fiscal
year 2008 with no long-term or short-term notes payable. The company had acquired property,
plant and equipment totaling $247.4 million.317 Solyndra had also incurred a total net loss from
inception of $385.1 million over that four year period. At the end of fiscal year 2008, Solyndra
was no longer considered a development stage company.
2. Fiscal Years 2009 through 2011 - Following DOE Loan Guarantee Facility
a. Recap of Operations for Fiscal Year 2009
In March of 2009 the company received conditional commitment for the financing of the
Fab 2 Phase I project, and in September 2009 the $535 million DOE Loan Guarantee closed.
Solyndra withdrew $140.9 million in proceeds from the DOE Loan Guarantee during the year.
Additionally, Solyndra raised approximately $335.7 million from the sale of redeemable
convertible preferred stock and ended the year with $50.3 million in cash and cash equivalents.
The ramp up of Fab 1 production continued and construction of Fab 2 Phase I was commenced
in September 2009. During 2009, Solyndra added approximately $209.3 million to property,
plant and equipment.
For the five year period ending in 2009, Solyndra had received over $961.3 million in
funding from the sale of redeemable convertible preferred stock.318 All existing notes payable
and long-term loans were paid, with the exception of the $140.9 million DOE Loan Guarantee.
The company had also acquired property, plant and equipment in the amount of $457.1 million
in the construction of Fab 1 and Fab 2 Phase I. Through the end of fiscal year 2009, Solyndra
315 Total net loss attributable to common stockholders was $242.5 million which included a deemed dividend on preferred stock of $10.4 million. 316 This sum also included $119.1 million in the form of bridge loans which were subsequently converted to preferred stock. 317 During the year, property, plant and equipment was reduced by $20.8 million of impairment charges related to pre-production tools that were abandoned prior to the end of their estimated useful lives. 318 Including the bridge loans ultimately converted to preferred stock.
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had also spent over $316.7 million in research and development expenses and had incurred a
total net loss from inception of $557.7 million.
As production in Fab 1 continued to ramp up, revenues increased to $100.5 million for
2009 and the net loss for the year was $172.5 million, reduced from the $242.5 million net loss
in 2008.
b. Recap of Operations for Fiscal Year 2010
During fiscal year 2010, Solyndra neared completion of the Fab 2 Phase I building. Tool
installation was continuing and plans to move certain tools and manufacturing equipment from
Fab 1 into Fab 2 Phase I were initiated, including the shut-down of Fab 1. Property, plant and
equipment added during that period were $393.2 million. The DOE loan facility increased by
$317.3 million. Overall market conditions negated the company’s attempts at accessing public
capital markets and Solyndra instead obtained an additional $175.0 million of convertible debt
financing. Revenues increased to $141.9 million in 2010, but the net loss also increased from the
prior year to $328.6 million.319
Through the end of fiscal year 2010, Solyndra had received over $961.3 million in
funding from the sale of redeemable convertible preferred stock, including certain bridge loans
converted to preferred stock. Cumulative losses from inception to 2010 totaled $886.4 million.
Solyndra had drawn $458.2 million on the DOE Loan Guarantee and had issued an additional
$175 million in convertible notes. It had also acquired property, plant and equipment of $850.3
million in the construction of Fab 1 and Fab 2 Phase I.
During late 2010, Solyndra began restructuring talks with the DOE and other creditors
(see Section X.G February 2011 Loan Restructuring). As noted in Note 1 to the financial
statements:
“In February 2011, the Company reached agreements with the DOE and other existing creditors to restructure the terms of the existing indebtedness whereby the DOE would subordinate its recovery rights on liquidation with respect to a portion of its indebtedness to the new
319 Approximately $65.3 million of this increased operating loss resulted from accelerated depreciation resulting from the closure of Fab 1 equipment as the manufacturing facilities for Fab 1 were incorporated into Fab 2 Phase I.
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promissory notes to be issued (See Note 16). In addition to restructuring the liquidation rights, the DOE and other existing creditors also agreed to modify other terms of loans such as interest rates and amortization periods of principal and interest due under the existing indebtedness. As a result of restructuring, the Company will not have any principal or interest payments due for the existing indebtedness until March 2013.”
“The Company’s future capital requirements will depend on many factors, including the rate of revenue growth, the selling price of the Company’s photovoltaic systems, the expansion of sales and marketing activities, the timing and extent of spending on research and development efforts and the continuing market acceptance of the Company’s systems. There can be no assurance that, in the event the Company requires additional financing, such financing will be available. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending or to remain in compliance with the covenants contained in the DOE guaranteed loan facility, could have a material adverse effect on the Company’s ability to achieve its intended business objectives and continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.”
PWC issued the same qualified opinion regarding Solyndra’s ability to continue as a
going concern.
c. Recap of Operations for Fiscal Years 2005 - 2011
The charts as detailed below provide a year by year comparative analysis of Solyndra’s
consolidated Operating Results, Financing Sources, Cash and Cash Equivalents, and Equipment
Purchases for fiscal years 2005 through 2011.
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* Reflects the full payment of prior year loans and notes payable. ** Includes convertible notes of $175 million ultimately designated as Tranche E. *** Includes $75 million cash infusion during restructuring designated as Tranche A.
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Solyndra’s three largest quarterly operating losses occurred during the fourth quarter of
2010 and the first and second quarters of 2011. The net operating losses reported for the fourth
quarter 2010 and first and second quarters of 2011 were approximately $77.7 million, $114.0
million and $91.1 million, respectively, for a nine-month total of $282.8 million.
By July 2, 2011, a little more than a month prior to bankruptcy, Solyndra had reported
losses totaling almost $1.1 billion. Long-term debt exceeded $787.8 million and cash had
dwindled to just over $18.3 million.
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Cash continued to decline during the first seven weeks of the third quarter of 2011 and
sales were behind plan. By August 20, 2011, the reported cash balance was just $5.0 million and
sales for the same seven week period were only $5.3 million, $13.8 million below the third
quarter 2011 weekly dashboard forecast for the same seven week period.
B. Summary of Quarterly Reports Provided to the DOE
1. Quarterly Financial Results Reported to the DOE
Concurrent with the funding of the DOE Loan Guarantee, Solyndra was obligated to
provide internal unaudited financial information directly to the DOE on a quarterly basis. All the
quarterly statements and certifications were certified320 by Solyndra’s Chief Financial Officer.321
The CRO has reviewed the unaudited financial information provided to the DOE by
Solyndra and compared that information to the final audited financial statements issued by PWC
for the related annual period to determine whether the financial information provided by
Solyndra in the quarterly reports was materially correct. It is the opinion of the CRO that the
information provided to the DOE, as certified, was materially correct when compared to the
audited financial statements of PWC.322
As of October 3, 2009, Solyndra was reporting an Accumulated Deficit (or total net
losses) of $504.3 million. The first quarterly financial reports submitted to the DOE by Solyndra
showed revenues for the nine months ended October 3, 2009, of just under $58.8 million and a
net loss of just over $119.1 million for the same period. Construction of Fab 2 Phase I had just
begun. The unrestricted cash balance was approximately $45.3 million.
The next unaudited quarterly financial statements were submitted by Solyndra to the
DOE on or about February 16, 2010, for the three months and twelve months ended January 2,
2010. During the fourth quarter of 2009, Solyndra reported revenues of nearly $41.7 million and
a quarterly net loss of over $51.3 million. The net loss for the year had decreased by 320 See Footnote 307. 321 All of the quarterly statements and certifications in the possession of the CRO are included as Appendix Q. 322 It should be noted that there are non-cash differences between the audited financial statements of the company and the financial information provided to the DOE related to the accelerated depreciation of equipment caused by the consolidation of equipment in Fab 1 and Fab 2 Phase I. Such discrepancies were not surprising given that the financial effects of such amalgamation were not fully known until the consolidation was fully completed.
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approximately $61.0 million from the prior year, due in large part to a decrease in research and
development expenses.
The financial information reported to the DOE for the 2009 fiscal year closely
approximates the financial results reported in Solynra’s audited financial statements for the
applicable period.323 Selected information from the unaudited quarterly reports for fiscal year
2009 and the audited financial statements for the same year are compared in the table below:
Table #21
SOLYNDRA, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION For the year ended January 2, 2010
(in thousands)
Per Reports
Per Audited
Submitted to
Financial
the DOE
Statements
Cash and cash equivalents
$ 50,265
$ 50,265 Property, plant and equipment, net
375,873
375,873
Redeemable convertible preferred stock
961,270
961,270 Accumulated deficit
(556,319)
(557,744)
Revenues
100,464
100,465
Cost of Revenues
(162,165)
(162,166) Net Loss
(171,070)
(172,495)
Similar to the last two quarters of 2009, Solyndra reported quarterly operating losses for
the next six successive quarters. A summary of the quarterly financial information reported to
the DOE is included as Exhibit #15.
For fiscal year 2010, Solyndra reported a combined net loss of just under $261 million to
the DOE in its quarterly reports. Solyndra’s audited financial statements for fiscal year 2010
reported a net loss of over $328 million. The increased net loss as compared to the preliminary
information submitted to the DOE was primarily the result of an adjustment for accelerated
depreciation of Fab 1 assets. A plan of consolidation of Fab 1 manufacturing equipment was
323 The unaudited preliminary financial information submitted to the DOE was required to be submitted prior to the final closing of the books and examination by the independent public accountants.
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established at the end of 2010, which was ultimately consummated in early 2011.
Approximately $65.3 million of accelerated depreciation was recorded in the audited financial
statements for 2010, which was not unusual under the circumstances. The closure of Fab 1,
including the consolidation of certain equipment into Fab 2 Phase I, was not anticipated by the
company until late 2010. As such, final determination as to the amount of the write-down could
not be determined until the closure/consolidation plan was executed.
Selected financial information from Solyndra’s unaudited quarterly reports for fiscal year
2010 and audited financial information for the same year are compared in Table #22 below:
Table #22
SOLYNDRA, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION For the year ended January 1, 2011
(in thousands)
Per Reports
Per Audited
Submitted to
Financial
the DOE
Statements
Cash and cash equivalents
$ 31,816
$ 31,816 Property, plant and equipment, net
726,594
660,179
Redeemable convertible preferred stock
961,270
961,270 Accumulated deficit
(818,595)
(886,389)
Revenues
147,782
141,947
Cost of Revenues
(224,206)
(283,997) Net Loss
(260,685)
(328,645)
XII. FINANCIAL FORECASTS & PROJECTIONS
A. Key Metrics in Forecasts & Plans
At varying times and in accordance with certain commitments, Solyndra was obligated to
provide financial forecasts and plans to the DOE, the Board, and investors. Solyndra also
provided the DOE with access to the company’s financial models and trained DOE
representatives to allow them to change assumptions and observe the impacts flowing therefrom.
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Solyndra management devoted significant time to explaining its financial forecasts and plans and
sensitivities therein to the DOE, the Board and investors. The company also relied on its
financial forecasts and plans internally as operational benchmarks for management.
The preparation of virtually any financial forecast, especially those looking years into the
future, can be tenuous, even for well established businesses with a prior history of operations.
Solyndra’s circumstances were aggravated by a number of factors, many of which were beyond
the control of management. It was made more problematic by the fact that Solyndra was
venturing forth with a new and unproven technology. While Solyndra was understandably
optimistic, this new technology amplified the uncertainties inherent in providing a business
forecast based on manufacturing and production efforts that had not been fully formulated and
were very much a work in process.
Solyndra was also operating in an extremely competitive international marketplace where
circumstances totally beyond its control could dramatically alter the underlying assumptions
upon which the forecasts were predicated. It is therefore not surprising that in this rapidly
changing environment, the company was, in most instances, not particularly successful in
predicting its future operational capabilities. Therefore, any reader of this section should be
mindful of those facts, prior to drawing any conclusions.
B. Risks Facing Solyndra
Solyndra was well aware of the risks noted above and routinely disclosed such risks to
the readers of its audited financial statements. For instance, Note 1 to Solyndra’s audited
financial statements for fiscal year 2009 stated as follows:324
“The Company has a limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by companies in this stage of development. These risks include, but are not limited to, the Company’s ability to increase its production capacity by completing the expansion of the Company’s first manufacturing facility (“Fab 1”), developing additional manufacturing facilities, including the
324 See Appendix Z.4, Solyndra, Inc. Consolidated Financial Statements as of January 2, 2010 as audited by PWC with notes thereon.
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Company’s second manufacturing facility (“Fab 2 Phase I”), and increasing its production, throughput and yield;”
The underlying risks outlined within this note discuss the important points of Solyndra’s
need to increase production by completing both Fab 1 and Fab 2 Phase I and increasing
throughput and yield in the manufacturing process.
Note 1 further discussed the company’s ability to generate sales sufficient to support
operations:
“…the fact that the Company’s business is based on a new technology, and if the Company’s photovoltaic systems or manufacturing processes fail to achieve the performance and cost metrics that the Company expects, the Company may be unable to develop demand for the systems and generate sufficient revenue to support operations;”
The foregoing notes recognized that Solyndra’s business was susceptible to a wide
variety of risks, including production risks associated with manufacturing and supplying
Solyndra’s product and demand risks associated with finding willing buyers for Solyndra’s new
technology at prices that will sustain operations.
The estimation of sales is one of the problems which challenged Solyndra due to the
changing market place. As the notes to the financial statements point out, given that Solyndra
was in the process of constructing a new manufacturing facility (Fab 2 Phase I) which would
more than double the company’s production capacity, the ability to sell out, and collect cash on
all this expanded production would prove essential to the viability of the company.
The key assumption underlying every Solyndra forecast and business plan during this
period was that the company’s manufacturing facilities would be operating at maximum
available output and that Solyndra’s product would be sold promptly. As Fab 2 Phase I drew
nearer to completion, given the market conditions and performance of the company, there was no
flexibility to change this key assumption.
In the years between Solyndra’s DOE Pre-Application of 2006 and the construction of
Fab 1, the economic landscape of the solar industry was markedly different from what it is
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today.325 At that time, the primary concern was for Solyndra to swiftly get its technology to
market in order to fill the burgeoning demand for solar panels spurred by generous subsidies,
especially in Europe. This buoyant atmosphere supported Solyndra’s ability to raise private
capital and move forward with the construction of its manufacturing facilities.
Unfortunately, as Solyndra moved closer to breaking ground on Fab 2 Phase I, which
would vastly increase its manufacturing capability, the solar market experienced significant
change. Chinese manufacturers aggressively added capacity at unprecedented rates which had
the effect of pushing prices of conventional flat panels downward, which also negatively
impacted the prices at which Solyndra could competitively sell its product. At the same time,
governments throughout the world were limiting subsidies that had previously spurred demand.
With the benefit of hindsight, Solyndra’s decision to move forward with the construction
of Fab 2 Phase I in late 2009, which was funded with $195.2 million of private investor funds
and the DOE loan of $527.8 million,326 was an extremely pivotal decision for the future of the
company. It was the company’s best hope for success, but ultimately, along with other factors,
led to its demise. During the construction of Fab 2 Phase I, the structural changes in the solar
industry resulted in a dramatic reduction of Solyndra’s panel pricing and cash flow from product
sales. The only possible avenue of survival for Solyndra, other than substantial infusions of
capital, lay in massively increased volumes. This required Solyndra’s projections and business
plans for the foreseeable future to continue to assume production at full capacity and to sell all of
its manufactured products. It was critically necessary to reach those levels as quickly as possible
as increasing production levels would, by its very nature, reduce the cost per watt, an important
determinant of profitability. Ultimately, the combination of the increased manufacturing
capacity in the solar industry worldwide, an unprecedented drop in the price of polysilicon, and
expiring subsidies and a global recession had the effect of significantly reducing demand for
Solyndra’s product. Solyndra’s investors and lenders were well advised of these risks facing the
company.
325 See discussions in Section VI. External Environment and Market Condition. 326 The DOE loan was originally $535 million, but was ultimately funded in the amount of $528 million.
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C. Impact of Risks on Solyndra’s Forecasts and Plans
Solyndra’s forecasts and business plans assumed that the company would meet certain
timetables in terms of its manufacturing and sales targets. Some of the company’s targets proved
to be aggressive, particularly in years 2010 through 2011 when the solar market was
experiencing a dramatic decline.
In order to move briskly into production and yield the benefits from the sale of its
product, almost every plan Solyndra submitted to the Board of Directors and the DOE
subsequent to 2009, anticipated the elapsed time from start up to full production from eighteen to
twenty-four months. The company anticipated that any delay in effectuating such ramp-up of
Fab 2 Phase I could have a significant impact on the company’s liquidity needs given that the
costs of production were primarily composed of fixed costs and any reduction in the timing of
future sales would only put additional strain on cash flows and capital requirements.327
One key metric in Solyndra’s forecasts and financial plans presented to both the Board
and the DOE is Wp (watts per panel). To a great extent, demand for Solyndra’s product and the
price at which it could be sold were both dependent upon the Wp that could be achieved in the
manufacturing process. The Wp provided the primary measurement of wattage output – the
higher the wattage, the greater the efficiency and the higher the price that could be charged.
Solyndra’s manufacturing process was structurally limited to a fixed number of tubes and/or
solar panels which the company could produce. In other words, the manufacturing facility could
only produce a finite number of panels even under optimum conditions with throughput and
yield328 at their maximum levels. However, Wp was a factor that the company hoped to improve
to maintain an increasing level of watts sold and thereby maintain or increase revenues even with
the ASP (averages sales price per watt) declining over time. As demonstrated below, Solyndra
327 Perhaps for this reason, inter-office communications between Solyndra personnel characterize slower ramp-up times as “unworkable.” 328 The forecasts define “output” as a calculation based on three specifications for each tool in the production process: baseline throughput, utilization percentage, and yield percentage. Baseline throughput is the highest throughput possible with the facility running at the maximum level of twenty four hours a day and seven days a week. Utilization percentage is the percentage of time in a given period that a tool is running (i.e., not down for maintenance and repair). Yield percentage is the percentage of material processed by a tool that goes on to the next step and meets minimum specifications.
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was successful in improving average Wp over the limited period of time when Fab 2 Phase I was
operational; however, in most projections this remained well below the forecast levels.329
Chart #18 reflects the estimated Wp based on three separate forecasts provided by
Solyndra to the DOE. The first in August 2009, the second in October 2010 and the last forecast
was prepared as part of the restructuring agreement in February of 2011. Each of these forecasts
included the estimated Wp for Fab 2 Phase I. The actual Wp achieved by Fab 2 Phase I for the
first eight months of 2011 is included as well, though Fab 2 Phase I was still in the process of
ramping up production during 2011.
ASP (average sales prices per watt) – Solyndra’s forecasts and business plans appear, to
some extent, to take into account downward market pressures on price in years 2009 through
2011, as evidenced by a gradual reduction of the ASP. This downward pressure continued to
manifest reductions from 2009 through 2011. Because of market pressures and other factors, the
329 Solyndra introduced the 200 series panel in July 2010. The 200 series panel was averaging almost 210 watts per panel. This panel was to replace the 150 series panel. Customer demand for the 150 series continued longer than anticipated thereby delaying further panel power improvements. Accordingly, actual watts per panel continued to lag forecast amounts.
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ASP was not independently established by the company. Almost without exception, the
forecasts included reductions in the ASP. This is illustrated in Chart #19 below:
The foregoing continual decline of ASP had a material negative impact on Solyndra’s
operating results.
D. Comparison of Forecast and Historical Financial Results
Solyndra utilized complex financial modeling in preparing the forecasts. The forecasts
included detailed production metrics including analysis by specific processes, operational costs,
receipts analyses, and other key financial data as well as the effect of utilizing various types of
equipment in the production process. The forecasts relied on the validity of a critical group of
business assumptions and metrics which are discussed in further detail. The forecasts were
incorporated in complex electronic financial models that allowed the company to run multiple
iterations of its forecasts and business plans. The DOE had access to Solyndra’s financial
models and could adjust the assumptions in the model to analyze sensitivities contained therein.
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The CRO reviewed a significant number of forecasts prepared by Solyndra. The
following are four examples of important forecasts which were issued at critical junctures for
Solyndra. The forecasts are also reflective of the difficulties inherent in preparing a forecast
when, for a variety of reasons, the possibility that one or more of these underlying assumptions
may prove to be incorrect.
The forecasts are discussed in chronological order beginning with the limited financial
information included in Solyndra’s original Pre-Application filed with the DOE in December
2006, and follow sequentially to the forecast prepared a few months preceding Solyndra’s
bankruptcy filing.
• Forecast #1 - December 2006 - Pre Application to the DOE filed on December 28, 2006 - Forecast #1 was submitted to the DOE in December 2006 in hopes of securing a loan guarantee from the government to fund the initial manufacturing facility (Fab 1). Solyndra ultimately attained funds for the construction of Fab 1 from private investors.
• Forecast #2 - Sponsor company Plan dated July 31, 2009 through December 2013 - In September 2009, Solyndra closed on its loan guarantee from the DOE which was to be utilized for the construction of Fab 2 Phase I. This forecast represented the company’s best effort to project operations for the Sponsor company which, at the time, included only the operations of Fab 1
• Forecast #3 - October 2010 - Consolidation Plan - By Fall 2010, Fab 1 had been in production for almost two years and Fab 2 Phase I was under construction with the first scheduled shipments to begin in January 2011. The gap between forecast and actual performance had widened as the market experienced significant structural changes and significant changes were needed which resulted in the development of the Consolidation Plan.
• Forecast #4 - Restructuring Plan - February 2011 - In February 2011, Solyndra consummated a restructuring based on a new forecast (the “Restructuring Plan”) and operations limited to Fab 2 Phase I.
1. Forecast #1 - December 2006 - Pre Application to the D.O.E filed on December 28, 2006
On December 28, 2006, Solyndra filed a Pre-Application with the DOE, which included
the following optimistic statements regarding sales, revenues and demand for its product:
“Solyndra’s opportunities for sales will be constrained by production capacity rather than customer demand. The Company is in discussions
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with six of the world’s largest solar power installers and has received extremely positive responses to our technology. In many cases, these future customers have provided Letters of Intent to purchase Solyndra’s panels when they become available. Although it would be possible to pre-sell the entire plant capacity through 2009, the Company plans to reserve some production capacity for new customers.” (Volume 1, pg 31);
“These estimates are based on discussions with a limited number of select customers, every one of which has expressed strong interest in purchasing panels. In some cases, the figures reflect signed letters of intent. Management expects that revenue generation will be constrained by capacity rather than demand.” (Volume 1, pg 42);
“These estimates are based on discussions with a limited number of select customers, every one of which has expressed strong interest in purchasing panels. In some cases, the figures reflect signed letters of intent.” (Volume 1, pg 44).
Solyndra states in the Pre-Application that it believes that the combined production
capacity of 72 megawatts a year will be fully completed and in place by July 2008. Meaningful
sales were to begin in May 2008. Table 15 in the Pre-Application shows that Solyndra intended
to be at a run rate of 52 megawatts a year by the 4th quarter of 2008.
In addition to the sales and marketing detail, Solyndra also indicated that it believed that
its cost structure was very favorable. In the Pre-Application Solyndra stated:
“Solyndra’s module architecture facilitates low cost of manufacturing and rapid scale up, eventually reaching a manufacturing cost of less than $1/Wp. Together with the low BOS cost enabled by Solyndra’s panels, we have the potential to provide electricity at 50% of the cost of conventional silicon modules” (Volume 1, pg 25)
As detailed in the above comments, Solyndra was optimistic regarding revenues,
production volumes and costs, sales and profitability in the initial Pre-Application filed with the
DOE in late 2006, and continued to be optimistic in subsequent plans and forecasts up to and
including the Restructuring Plan.
Unfortunately, Solyndra faced market changes that were unforeseen in 2006 (See
discussion in Section VI. External Environment and Market Conditions).
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These changing market conditions severely transformed many the initial assumptions
under which Solyndra filed these optimistic projections. To demonstrate the effect these market
forces imposed upon Solyndra, Table #23 below reflects the forecasted numbers included in the
original DOE application and the actual results from 2008 through 2010.330
Table #23
Comparison of 2006 DOE Pre-Application Forecast* and Actual** Results ($’s in millions)
2008 2008 2009 2009 2010 2010 Totals Totals
Forecast* Actual** Forecast* Actual** Forecast* Actual** Forecast* Actual**
MW Shipped 19.2 1.6 61.7 30.5 115.0 57.0 195.9 89.1
ASP $ 3.49 $ 3.75 $ 3.34 $ 3.30 $ 3.12 $ 2.49 $ 3.23 $ 2.79
(numbers in millions)
Revenues $ 67.0 $ 6.0 $ 205.9 $ 100.5 $ 358.8 $ 141.9 $ 631.7 $ 248.4
Cost of Goods Sold (45.5) (44.4) (99.3) (162.2) (177.1) (284.0) (321.9) (490.6)
Gross Margin 21.5 (38.4) 106.7 (61.7) 181.7 (142.1) 309.9 (242.2)
Operating Expenses (46.6) (182.1) (47.9) (108.0) (42.5) (128.9) (137.0) (419.0)
Operating Profit/(Loss) $ (25.1) $ (220.5) $ 58.8 $ (169.7) $ 139.2 $ (271.0) $ 172.9 $ (661.2)
* Forecast data from December 2006 DOE Pre- Application for Fab 1.
** Actual results for Fab 1 - Solyndra, Inc results less any operating results for Fab 2 LLC.
As detailed in Table #23, Solyndra projected a profit of $172.9 million for the three-year
period from 2008 through 2010. Solyndra actually incurred operating losses of $661.2 million.
2. Forecast #2 - Comparison of Actual Financial Results to the July 31, 2009 Solyndra Sponsor Company Plan
In September 2009, Solyndra closed on its loan guaranteed by the DOE. A forecast dated
as of July 2009 (the “Sponsor Forecast”) for Solyndra, Inc. (as the Sponsor) was attached to the
common agreement between the parties331 and submitted to the DOE. This forecast represented
Solyndra’s best effort to project operations for the Sponsor which, at the time, included only the
operations of Fab 1. At the time the Sponsor Forecast was prepared, Fab 1 production was in an
330 Although the initial DOE Application included limited forecast results for Fab 1, we have included selected information for comparative purposes along with actual results available for Fab 1. 331 The common agreement is the form of loan agreement utilized by the DOE.
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early stage and actual manufacturing and operating results were therefore limited. Also, at this
time Solyndra had substantial reasons to be optimistic in its forecast, even though ASPs were
declining. Among other things, in 2009, Solyndra appeared to be well-positioned in the solar
marketplace since its thin-film, solar cells avoided both the costs of installation of flat panels and
the high price of polysilicon – the principal component in conventional solar panels. The
Sponsor Forecast anticipated a modest ramp-up to full production over the following two years
and assumed that Solyndra would be cash flow positive by the 3rd quarter of 2010. Subsequent
forecasts for Fab 1 and Fab 2 Phase I reduced the ramp-up schedule to approximately eighteen
months.
The Sponsor Forecast contained a projection for the six quarters starting with third
quarter 2009 and ending with fourth quarter 2010. A comparative analysis between the
forecasted and actual financial results for these quarters is set forth in the table below:
TABLE #24
Comparison of Forecast and Actual Results For the Six Quarters From July 2009 through December 2010
(in thousands)
%
Projected Actual Variance Variance
Total Revenue $ 363,005 $ 223,731 $ (139,274) -38.37% Cost of Sales
Direct Materials 110,349 112,362 2,013 1.82%
Direct Labor & Related Costs 77,882 65,290 (12,592) -16.17%
Direct Overhead 43,314 86,373 43,059 99.41%
Depreciation 56,946 52,572 (4,374) -7.68%
Warranty, other Cost of Sales 5,445 13,633 8,188 150.38% Total Cost of Sales 293,936 330,230 36,294 12.35% Gross Margin 69,069 (106,499) (175,568) -254.19% Operating Expenses
Research & Development 80,367 118,850 38,483 47.88%
Sales & Marketing 19,567 27,241 7,674 39.22%
General & Administrative 29,987 49,477 19,490 64.99%
Pre-Production Start-up 837 32,236 31,399 3,751.37%
Total Operating Expenses 130,758 227,804 97,046 74.22% Operating Margin $ (61,689) $ (334,303) $ (272,614) -441.92%
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As set forth above, actual sales for the six highlighted above quarters fell short of
forecasted amounts by $139.3 million or 38% ($363 million versus $223.7 million). Actual costs
of sale were higher than projected by 12% ($330.2 million compared to forecast costs of sale of
$293.9 million.
For the same six quarters, operating expenses were estimated to be $130.8 million, but
actual operating expenses totaled $227.8 million, or 74% higher than originally estimated. Costs
were particularly underestimated in the areas of “Research and Development” and “Pre-
Production Start-up” costs. As a result, Solyndra incurred a negative operating margin between
third quarter 2009 and fourth quarter 2010 of $334.3 million, as compared to the forecasted
negative operating margin of $61.7 million. These financial results required Solyndra to obtain
additional capital.
For the last two quarters of 2009 and continuing into the first quarter 2010, Solyndra’s
actual results were generally consistent with the Sponsor Forecast. Beginning in the second
quarter 2010, due to a variety of reasons including a global financial crisis and declining
government subsidies, Solyndra’s financial performance began to take a downward turn and
significant differences appear. The following four charts graphically compare actual versus
forecasted results during the six quarters reflected in the Sponsor Plan in terms of certain key
metrics: (a) revenues, (b) ASPs, (c) watts per panel and (d) panels produced.
a. Revenue Results
As illustrated in the chart below entitled “Fab 1 Revenue – Projected vs. Actual,” during
the last two quarters of 2009, Solyndra’s actual revenues exceeded forecast revenues by a small
margin. However, beginning in the first quarter 2010 and continuing thereafter, actual sales
started to fall significantly below the Sponsor Forecast and this disparity continued to grow for
the duration of 2010.
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b. ASP Results
As illustrated in the chart entitled “Fab 1 ASP per Watt – Sponsor Forecast: Projected vs.
Actual,” Solyndra’s results with reference to ASP per watt mirror the results in the prior chart
for revenues.
There is a direct correlation between ASP per watt and the revenues derived from those
sales. For instance, if the market provides an ASP per watt of $3.20 and a panel containing 200
watts is sold, the resulting revenue from that sale is $640 ($3.20 X 200). However, if the ASP per
watt decreases to $2.20, the sales generated for a similar transaction is only $440.
As with projected revenues, Solyndra’s actual ASP exceeded the Sponsor Forecast in
third quarter 2009, but worsened in the first quarter of 2010 and continued downward
throughout that year. Many of the factors causing this falling off were beyond the control of
Solyndra as the declining ASP prices were largely a result of conditions within the marketplace.
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Although Solyndra sought to distinguish itself from other solar energy manufacturers, it could
not escape worldwide pricing trends.
c. Average Watt Per Panel Results
Average watts per panel is an essential component of both sales and ASP. As illustrated
in the chart below entitled “Sponsor Forecast: Fab 1 Average Watts Per Panel Projected vs.
Actual,” Solyndra’s actual results for Wp fell below the Sponsor Forecast for third quarter of
2009 and remained substantially below forecasted levels for all six quarters covered by the
Forecast.332
332 This was due in part to the slower transition to the 200 series panel.
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d. Panels Produced Results
In the chart below entitled “Fab 1 Panels Produced,” the number of solar panels produced
by Solyndra tracked the Sponsor Forecast through second quarter 2010. During the last two
quarters of 2010, however, production slipped below forecasted results. As a result of such
production shortfalls and also taking into account that Wp did not increase as forecasted during
that time period (see preceding chart), the total watts actually produced and available for sale
were significantly under forecast. The effect of Wp and production differences resulted in
projections which were 43.5% less than projected in the Sponsor Forecast by fourth quarter
2010.
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In connection with the DOE loan, the Sponsor was required to meet goals embodied in
the Sponsor Forecast and report those results to the DOE. By way of example, the Sponsor was
required to achieve 70% of its estimated forecast production of MW’s. By the third quarter of
2010, it became apparent, based on actual results, that Solyndra would fall short of this
requirement. Following discussions between RW Beck, the independent engineer retained by the
DOE, and Bierman, Executive Vice President of Operations, Solyndra sought and received a
waiver333 from the DOE with respect to this requirement.334
e. Summary of Sponsor Forecast Results
Table #25 below illustrates the overall impact of the differences between the Sponsor
Forecasts and actual results in the first three quarters to the Sponsor Forecast and the actual
results of the last three quarters of 2010. As shown below, the difference between the forecasted
and actual negative net operating margin for the first three quarters ended April 3, 2010 was
333 See Appendix V for DOE Loan Guarantee waivers obtained from DOE beginning in October 28, 2010 through the bankruptcy petition. 334 Bierman cited the primary causes as lower line speed and recent mfg excursion which resulted in shorter CIGS runs and lower yield. Bierman assured RW Beck that corrective actions were under way and he expected recovery in the first quarter of 2011.
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$71.9 million. This difference almost tripled to $210.7 million for the last three quarters ending
January 1, 2011.
TABLE #25
Comparison of Forecast and Actual Results For the Three Quarters Ended April 3, 2010 and January 1, 2011
(In thousands)
For the 3 Quarters Ended April 3, 2010
For the 3 Quarters Ended January 1, 2011
Projected Actual Projected Actual Total Revenue $ 126,244 $ 120,965 $ 236,761 $ 102,766 Cost of Sales Direct Materials 43,107 49,317 67,243 63,045 Direct Labor & Related Costs 38,791 27,959 39,092 37,331 Direct Overhead 20,133 47,461 23,181 38,912 Depreciation 25,585 24,423 21,361 28,149 Warranty, other Cost of Sales 1,894 15,852 3,551 (2,219) Total Cost of Sales 129,510 165,012 154,428 165,218 Gross Margin (3,266) (44,047) 82,333 (62,452) Operating Expenses Research & Development 48,937 67,134 31,430 51,726 Sales & Marketing 9,780 10,579 9,787 16,662 General & Administrative 14,576 20,836 15,411 28,641 Pre-Production Start-up 837 6,730 - 25,506 Total Operating Expenses 74,130 105,279 56,628 122,535 Operating Margin $ (77,396) $(149,326) $ 25,705 $(184,987)
As previously stated, by the end of the three quarters ending April 3, 2010, the actual
operating margin was $71.9 million less than forecast in the Sponsor Forecast. Notwithstanding
the magnitude of this loss, it is not uncommon for start-up companies in the early stages of
operation to underestimate future losses and to make accommodation for those circumstances
through the infusion of capital.
However, the underestimation of projected losses by $210 million just precedent to the
finalization of Fab 2 Phase I and the starting of production raised significant liquidity concerns
for the company and required immediate action to raise new capital.
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3. Forecast #3 - Consolidation Plan – October 2010 (“Consolidation Plan”)
By Fall 2010, Fab 1 had been in production for almost two years and Fab 2 Phase I was
under construction with the first scheduled shipments to begin in January 2011. The gap
between forecast and actual performance had widened as the market experienced significant
structural changes and significant changes were needed which resulted in the development of the
Consolidation Plan (the “Consolidation Plan”).
The Consolidation Plan is the first forecast which contemplated the closure of Fab 1. A
number of Chinese competitors that sold conventional solar panels and were the beneficiaries of
a drop in their material cost components put increased pressure on solar panel pricing worldwide.
These market conditions made Solyndra’s business more challenging and caused Solyndra to
revisit the Sponsor Forecasts.
Recognizing a need to make adjustments in its business structure in October 2010,
Solyndra developed the Consolidation Plan which contemplated the phase out and closure of Fab
1 and transfer of certain equipment from Fab 1 to Fab 2 Phase I with future operations focused
on Fab 2 Phase I only. The Consolidation Plan also served as the basis for negotiations to
restructure Solyndra’s debt and seek new capital.
The Consolidation Plan was submitted to the DOE on or about October 12, 2010, and
subsequently presented to the Board on October 26, 2010. One of the most pressing elements of
the Consolidation Plan was Solyndra’s cash position, which was projected to be reduced to
below $0 in March 2011 and remain negative through August 2014. Without an incremental
capital infusion, the lowest negative balance of $142 million was projected to occur in February
2012.
The negative cash balances as forecast in this projection reflected the need for new
capital contributions. Two additional tranches of debt were incorporated into a later
restructuring plan in February 2011 - Tranche A for $75 million and Tranche C for $75 million.
With these additional infusions it was assumed that the ending cash balance for the restructured
company would remain positive.
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Solyndra approached the DOE in late 2010 and requested an increase in its loan
commitment. The DOE declined. However, the company recognized the need to raise
additional capital given there was very little margin of error in the Consolidation Plan. If any of
the key metrics of production, Wp or ASP failed to meet forecast levels by even a few
percentage points, the new capital infusion would be insufficient to stem the corresponding
negative cash flow.
The Consolidation Plan recognized decreasing ASPs in the marketplace and included the
assumption that there would be further erosion in price during the forecast period which
extended through December 2020. Chart #24 reflects a substantial reduction in actual ASP
from 2009 through 2010 and a further reduction in forecasted ASP from late 2010 through the
end of 2012. However, the accurate forecasting of future price reductions beyond 2012 is, at
best, speculative.
The actual results for Wp through October 2010 and the forecast for Wp in the
Consolidation Plan are set forth in Chart #25 below.
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Chart #26 below shows the actual production levels achieved by Fab 1 and the
substantially increased production forecast for Fab 2 Phase I in the Consolidation Plan.
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The company’s inability to reach production targets is as much, if not more, a reflection
of an inability to secure sales equal to the production capabilities of the facilities than a limitation
of its ability to reach production targets. Given that the ramp of Fab 2 Phase I would more than
double the company’s production capacity, the capability to sell this considerably higher
production output was critical. The Consolidation Plan reflected the stark economic facts that
market forces had imposed upon Solyndra. During 2010, prices for solar panels had decreased
significantly thereby increasing Solyndra’s losses, while at the same time government subsidies
of solar installations began to decline substantially further reducing demand for Solyndra’s
products. Faced with these downward trends, Solyndra’s only path to survival, other than further
infusions of capital, was to increase wattage output per panel, maximize sales, and operate its
manufacturing facilities at full capacity in order to minimize the relative effect of Solyndra’s
fixed costs.
Solyndra did not achieve the level of sales needed to deplete the maximum output as
envisioned under these production scenarios. In retrospect, it was a challenging task to cope
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with these inescapable modifications of the market conditions. With the benefit of hindsight,
Solyndra’s projections appear to be optimistic, but that is no different than the typical venture
investment in a new technology or industry. Although Solyndra failed to achieve its projections
on various levels, Solyndra also was the victim of outside market pressures that no one could
have accurately predicted. In Solyndra’s early stages, when the market price for solar products
was at a sustainable level and demand actually exceeded supply, the possibility of success
seemed well within reach. However, as market forces continued to deteriorate Solyndra was
unable to overcome the limits of its technology and cost structure. By early 2011, Solyndra
needed to move to a new restructuring strategy.
4. Forecast #4 - Restructuring Plan – February 2011
In February 2011, Solyndra consummated a restructuring based on a new forecast (the
“Restructuring Plan”) and operations limited to Fab 2 Phase I.
By this time, Solyndra had a total net loss of approximately $501.1 million for years 2009
and 2010. Sales for the same two-year time period were approximately $242.4 million.
The existence of a net operating loss is not unusual for development stage companies
such as Solyndra. It is also not unusual for revenues to increase dramatically as time progresses.
Solyndra’s revenues for the first quarter of 2009 started slowly at approximately $8.2 million.
Revenues for the fourth quarter 2010 were approximately $41.0 million, a five-fold increase over
the first quarter 2009. However, even with a five-fold increase in revenues, Solyndra’s quarterly
net loss of approximately $46.4 million during the first quarter of 2009 widened to a quarterly
net loss of $77.7 million by the fourth quarter 2010.
Chart #1 below illustrates the actual results of operations for the months of March 2009
through November 2010. As can be seen in the chart below, revenues are sporadic while net
operating lossed are relatively consistent.
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As illustrated in the table below, for the period fiscal year 2009 through July 2, 2011,
Solyndra ultimately lost $3.92 for every watt of solar energy it produced and sold. The average
revenue per watt for this period was $2.56, while the combined manufacturing and operating
costs were approximately $6.48 per watt. This is illustrated in Table #2 below:
Table #2
SOLYNDRA, INC
Revenues and Expenses on a per Watt Basis For Fiscal Year 2009 Through July 2, 2011 Revenue per Watt $ 2.56 Manufacturing Costs (4.28) Operating Expenses (2.20) Total Costs per Watt (6.48) Net Operating Loss per Watt $ (3.92)
The results included herein are a reflection of the fact that Solyndra needed to produce
and sell at full capacity to minimize the impact of its relative fixed costs and to do so in a more
attractive pricing environment for solar cells.
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The need to achieve full capacity and the controlling element of fixed costs is illustrated
by the break-even analysis below which provides the amount of revenue required to break even
on a cost revenue basis for the fourth quarter of 2010. During the fourth quarter 2010, Solyndra
produced approximately 89,704 solar panels or approximately 16.5 million watts and sold 88,154
solar panels, or 16.2 million watts at an average sales price of $2.43 per watt.
In order to break-even during the fourth quarter 2010, Solyndra would need to increase
sales by 212% to approximately 274,826 solar panels in order for the operating margin to break-
even. By way of comparison, the Restructuring Plan projects that Solyndra achieves this level of
production during the first quarter of 2013.335
335 Management was clearly aware of actual results and what was needed to achieve improved results. These improvements included (1) higher panel power, (2) higher yields, (3) adjusting warranty and other costs of sales, and (4) reductions to R&D expense. As such, many of these were included in the Restructuring Plan.
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Table #26
Break-even Analysis - Fourth Quarter 2010
(In thousands)
4th Quarter 4th Quarter
2010 2010
%
Actual Break-even Variance Variance
Total Revenue $ 41,014 $ 127,864 $ 86,850 211.76% Cost of Sales
Direct materials 18,618 57,040 38,422 206.37%
Direct Labor & Related Costs 16,184 16,184 - 0.00%
Direct Overhead 9,427 9,427 - 0.00%
Depreciation 9,807 9,807 - 0.00%
Warranty and Other COGS* 11,647 3,836 (7,811) -67.07% Total Cost of Sales 65,683 96,294 30,611 Gross Margin (24,669) 31,570 56,239 Operating Expenses
Research & Development 15,498 15,498 - 0.00%
Sales & Marketing 6,178 6,178 - 0.00%
General & Administrative 9,894 9,894 - 0.00%
Total Pre-production Start-up 10,654 - (10,654) 100.00%
Total Operating Expenses 42,224 31,570 (10,654)
Operating Margin $ (66,893) $ 0 $ 66,893 100.00%
Wp 184 184
ASP $ 2.53 $ 2.53
Direct material Cost per Watt $ 1.13 $ 1.13
Panels Shipped 88,154 274,826 186,672 211.76%
* Assumed to be 3% of total revenues for purposes of the breakeven analysis
The data supporting Chart #27 and Chart #28 detailed below was included in
Restructuring Plan and contain four or five months of additional data based on actual
performance. Given external market pressures, ASP’s (average sales price per watt) were in a
state of decline. Solyndra also was limited in the changes that could be effectuated in the
company’s production process. One component that could be improved with appreciable effect
was watts per panel. Solyndra was continually striving to increase its watts per panel and was
successful in doing so to a limited degree. If the Wp could be increased, there would be a
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corresponding increase in sales without having to adjust the ASP of the panels or the production
output. As detailed below in Chart #27, from the fourth quarter 2010 to the fourth quarter 2012,
the Restructuring Plan envisioned that the average Wp would increase from 184 to 244, a 33%
increase.
The Restructuring Plan recognized that ASPs would continue to decrease and included
further erosion of prices throughout the restructuring forecast as detailed in Chart #28 below:
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Portions of the revenue stream included in the Restructuring Plan were based on sales and
marketing changes implemented by Harrison, who assumed the role of Chief Executive Officer
of Solyndra on July 29, 2010. Prior to Harrison’s arrival, Solyndra had been in the process of
analyzing the effectiveness of the sales program instituted during Gronet’s tenure as CEO, which
was somewhat loosely based on the assumed superiority of the Solyndra product and its
capability to “sell itself” when placed into the hands of knowledgeable middlemen, such as
integrators and installers. However, those middlemen were most often driven by price, in which
area Solyndra consistently did not excel. Further, integrators and installers did not have
sufficient capital to pay for the panels without securing an end-buyer for the sale. Accordingly,
there was not a great deal of loyalty to the Solyndra product, which had a detrimental effect on
sales. Harrison and management undertook an extensive analysis of the company’s operations,
business models and sales and marketing strategies at the same time Navigant was preparing the
market study for the Fab 2 Phase II application. As a result of these analyses, Harrison
redirected the marketing and sales structure of Solyndra to focus more directly on the end users
such as Wal-Mart, Target, Coca-Cola and other flat roof customers. The availability of
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thousands of large flat roofs and the creation of a dedicated sales staff committed to extolling the
singular virtues of the Solyndra product was the genesis for new sales projections as outlined in
the Restructuring Plan. Unfortunately, the change in strategy came too late to overcome the
market pressures. As a result, the liquidity issues faced by Solyndra forced the company to file
for bankruptcy on September 6, 2011.
XIII. SOURCES AND USES OF CASH
The CRO has analyzed the disposition of the various loan and investment funds obtained
by Solyndra, focusing on the period December 30, 2007 (first day of the 2008 fiscal year)
through September 6, 2011 (bankruptcy petition). The period between December 30, 2007 and
September 6, 2011, covers the funding of the DOE Loan Guarantee, construction of Fab 2 Phase
I, closure of Fab 1, and all commercial production and related sales activities of the company.
As part of his analysis, the CRO has prepared a summary of Solyndra’s sources and uses
of cash based on available financial records. Actual sources and uses may vary slightly from the
amounts included below due to various accruals and payables and other non-cash items. To the
extent any such variations exist, they are considered immaterial for purposes of this analysis.
A. Sources
As outlined in Table #27 below, Solyndra’s funding was limited to a defined set of
sources. The most significant funding and consumption of cash incurred subsequent to fiscal
year 2007. Solyndra began fiscal year 2008 with approximately $158.1 million in cash,
including restricted cash, and ended September 6, 2011, with $23.4 million. This net change in
cash of $134.7 million represents a source of funds for the company.336 Cash-on-hand as of
January 1, 2008 was primarily the result of prior preferred stock sales. Collection of revenues
from product sales accounted for $316.2 million or 16.5% of total sources for the period. Sales
of preferred stock generated $649.7 million during the period. Issuances of convertible notes and
borrowings under Solyndra’s Tranche A facility generated $244.3 million in the aggregate. By
336 Between February 2006 and December 2007, Solyndra raised approximately $311.6 from the sale of preferred stock through Series A-1, A-2, B, C-1 and C-2. See Appendix AA.1 for additional detail regarding preferred stock sales.
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September 6, 2011, the company had drawn $527.8 million on the DOE Loan Guarantee (See
Section X.E. Construction and Loan Funding). Including miscellaneous receipts, the total
sources for the period were approximately $1.9 billion.
Table #27
Estimated Sources of Cash
(in millions)
Dec. 30, 2007 to Sept. 6, 2011
Amount % of Total
Net Cash on Hand*
$ 134.7 7.0%
Product Sales & Collections (1)**
316.2 16.5% Capital Funding Sources:
Preferred Stock (net proceeds) (2)
649.7 34.0% DOE Loan (3)
527.8 27.6%
Tranche E Debt/Convertible Notes (4)
175.0 9.1% Tranche A Debt (5)
69.3 3.6%
Other Long-term Debt
- 0.0% Other Miscellaneous Sources
39.9 2.1%
Total Sources
$ 1,912.6 100.0%
* Reflects change in cash balance, including restricted cash.
** Includes $17.5 million received pursuant to Inventory Sales Agreement.
1. Collections of Accounts Receivable
The $316.2 million of collections of accounts receivable generated from product sales
include payments received from the sale of accounts receivable pursuant to the Accounts
Receivable Sales Agreement.337 This amount also includes $17.5 million received pursuant to
the Inventory Sales Agreement.338
337 See Appendix AB.1, Accounts Receivable Purchase and Sales Agreement and Appendix AB.6, Amended and Restated Receivable Purchase Sale Agreement. 338 See Appendix AB.5, Inventory Purchase and Sales Agreement
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2. Sale of Preferred Stock
From July 2008 through August 2009, Solyndra raised approximately $649.7 million
from the sale of preferred stock in Series D-2, D-3 E and F. The largest of these was Series E
which raised approximately $281.7 million. These Series E funds provided the source of
Solyndra, Inc’s equity funding for Fab 2 Phase I.339
3. DOE Loan Guarantee
From September 2009 through September 6, 2011, Solyndra received $527.8 million in
draws on the DOE credit facility. These loan proceeds were used in accordance with the DOE
loan documentation for the construction and operation of Fab 2 Phase I.
4. Convertible Secured Promissory Notes (Tranche E)
From June 17, 2010 through October 1, 2010, Solyndra sold $175 million of convertible
secured promissory notes. On February 23, 2011, as part of the restructuring, the $175 million
convertible secured promissory notes were converted into Solyndra LLC - Tranche E secured
promissory notes, which included $11 million of accrued interest on the original notes as of the
restructuring date..340
5. Tranche A Debt
As part of the restructuring process, twenty-three (23) investors from other preferred
stock offerings loaned $69.3 million to Solyndra LLC between February 23 and March 23, 2011
in the form of Tranche A debt.341
B. Uses:
Solyndra’s uses of cash for the period December 30, 2007 through September 6, 2011 can
be divided into three general categories: (1) Property, Plant & Equipment (“PP&E”), (2)
Operating Expenses, and (3) Other Uses, as set forth in Table #28 below:
339 See Appendix AA.1 for a discussion of preferred stock equity funding. 340 See Appendix W.16 and Appendix W.64 for additional details regarding the conversion of the Convertible Notes to Tranche E Debt. 341 See Appendix W.12 for additional details regarding Tranche A Debt.
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Table #28
Estimated Uses of Cash (in millions)
Dec. 30, 2007 to Sept 6, 2011
Amount % of Total
Fixed Assets:
Property, Plant & Equip. - Fab 2 Phase I* (1)
$ 684.2 35.8%
Property, Plant & Equip. - Fab 1 & Other Fac.* (2)
143.8 7.5% Operating Expenses:
Salary, Wages & Benefits
Payroll & Benefits (3)
309.6 16.2%
Bonuses
17.3 0.9%
Temporary Labor
50.0 2.6%
Capitalized Labor**
- 0.0% Direct Materials*** (4)
261.0 13.6%
Professional Services (5)
27.9 1.5% Rent (6)
21.5 1.1%
Interest on the DOE Loan (6)
7.5 0.4% Other Manufacturing & Operating Expenses**** (6) 276.7 14.5% Other Uses:
Long-term Debt Payments
78.6 4.1% Other Assets
34.5 1.8%
Total Uses
$ 1,912.6 100.0%
* Amount assumes all Property, Plant & Equipment in 2011 related to Fab 2 ** Capitalized labor of $41.5 million is included in Property, Plant & Equipment *** Includes 31 largest vendors
**** Includes all remaining operating expenses
1. Property, Plant & Equipment Fab 2 Phase I
For the period December 30, 2007 through September 6, 2011, Solyndra paid $684.2
million for PP&E related to Fab 2 Phase I. Included in this amount is a significant portion of the
$41.5 million of capitalized labor. This amount also includes all expenditures for PP&E incurred
by the company after January 2011 as well as PP&E transferred/sold from Fab 1 as part of the
restructuring. A complete discussion regarding the construction of Fab 2 Phase I can be found in
Section X.E. Construction and Loan Funding of this report.
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2. Property, Plant & Equipment Fab 1
For the period December 30, 2007 through September 6, Solyndra paid $143.8 million
for PP&E related to Fab 1. Included in this amount is a smaller amount of the $41.5 million of
capitalized labor. This amount also includes any PP&E transferred/sold from Fab 1 to Fab 2
Phase I as part of the restructuring. Fab 1 PP&E that was not transferred or sold to Fab 2 Phase I
was either fully depreciated or written down to zero.
3. Payroll
For the period December 30, 2007 through September 6, 2011, Solyndra paid $418.4
million for payroll, benefits and temporary staffing services and capitalized labor (See discussion
of payroll in the Section XIII. Compensation of this report for more detail). Outside of PP&E,
payroll and related costs was the single largest expense category for the company. Of this
amount, approximately $41.5 million was capitalized into PP&E for Fab 2 Phase I and PP&E for
Fab 1.
Bonuses of $17.3 million and temporary labor of $50.0 million are included in the payroll
category. Bonuses are discussed in more detail in Section XIII. Compensation of this report.
4. Direct Materials
Direct material costs were incurred for production of the company’s solar panels and
research and development.
For the period December 30, 2007 through September 6, 2011, the company paid
approximately $261.0 million to its 31 largest vendors for direct materials, including direct
materials used in research and development.
5. Professional Services
For the period December 30, 2007 through September 6, 2011, Solyndra paid
approximately $27.9 million for professional services, including legal, investment banking,
accounting, consulting and lobbying charges.
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Legal fees paid totaled $17.6 million. These amounts were paid to nineteen different
firms. The five largest of these firms received $15.6 million, as identified below:
Table #29
Summary of Legal Fees
Amount Wilson Sonsini Goodrich & Rosati $ 6,629,994 Morrison & Foerster, LLP342 3,128,995 Jones, Day 2,398,363 Gibson, Dunn & Crutcher LLP343 2,404,483 Cravath, Swaine & Moore LLP 1,069,874 Total $ 15,631,709
These legal fees do not appear excessive given that they cover over three years of
operations and considering the size and complexity of Solyndra’s operations and capital
structure.
Solyndra paid $4.3 million to Goldman Sachs for investment banking services including
preparation and filing of an S-1 with the intent of making a public offering of stock. Other
services included assisting the company in locating and securing funding in its various capital
raising efforts.
Solyndra paid approximately $2.7 million in the form of professional fees for accounting
services. The bulk of this amount, $2.4 million, was paid to PWC for financial auditing services.
The remainder was paid to three other firms for various tax services both in the United States and
internationally.
Solyndra paid consulting fees of $2.4 million to various entities for services relating to
the DOE loan facility, common stock valuations and public relations. The largest of these was
RW Beck which was paid $0.9 million for services provided directly related to the DOE loan and
Fab 2 Phase I project review.
342 Morrison & Foerster, LLP represented the DOE. Solyndra was contractually obligated to pay the DOE’s fees with regard to the DOE Loan Guarantee. 343 Gibson, Dunn & Crutcher LLP represented Argonaut and other investors/lenders. Solyndra was contractually obligated to pay the fees incurred by such investors/lenders.
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Finally, Solyndra paid $1.0 million to six different firms for lobbying and strategic
consulting related to the DOE loan facility. Considering Solyndra’s international business and
its involvement in the DOE loan program, the amount paid for these services does not appear to
be excessive and is consistent with the company’s requirements.
6. Other Uses
For the period December 30, 2007 through September 6, 2011, Solyndra paid
approximately $21.5 million for rent of various manufacturing and office facilities. Solyndra
also paid $7.5 million in interest to the Treasury on the DOE loan. All other manufacturing and
operating expenses not specifically discussed above totaled $276.7 million.
XIV. COMPENSATION
A. Annual Payroll
Table #30 below provides the annual amount of payroll paid by Solyndra from 2008
through 2011, including wages, salaries, taxes and all other fringe benefits, plus capitalized labor
and temporary labor costs.
Table #30
Annual Payroll
Year 2008 2009 2010 2011 Total
Wages $ 63,956,880 $ 74,671,636 $114,080,736 $74,211,197 $326,920,449 Capitalized Labor 12,591,728 12,936,182 8,518,878 7,431,957 41,478,745 Temporary 14,483,227 15,152,722 13,942,321 6,382,750 49,961,020 $ 91,031,835 $ 102,760,540 $136,541,934 $88,025,904 $418,360,214
B. Compensation to Senior Managers
According to a management organization chart dated July 28, 2011, there were
approximately forty positions included within the definition of “Top Level” management at
Solyndra. The CRO has included compensation information for the thirty-four of Solyndra’s
domestic managers, which include the following positions: Chief Executive Officer, Chief
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Financial Officer, Vice President of North American Sales, Vice President of Research &
Development, and Vice President of Engineering. See Exhibit #16 (Top Level Mgmt Chart) for
additional positions.
From January 2009 through September 30, 2011, the individuals in thirty-four of the
forty “Top Level” senior positions at Solyndra received approximately $19.5 million in gross
payroll compensation, bonus awards and “other” compensation. “Other” compensation is
defined as payments for corporate housing, vehicle expense, relocation bonus/expenses, etc. The
payments identified as “other” compensation items are considered taxable income by the Internal
Revenue Service and included in the gross wages for each employee.
In 2009, individuals in the thirty-four “Top Level” senior positions received
approximately $4.4 million. During 2010, individuals in the same thirty-four “Top Level” senior
positions received an additional $6.1 million dollars in compensation, including bonus awards
and “other” compensation. Of the $6.1 million paid, $4.9 million represented compensation for
annual base salary. The remaining $1.2 million related to bonus plans, sales commission and
other compensation.
In 2011, the individuals in the thirty-four “Top Level” senior positions of Solyndra’s
management received approximately $8.9 million dollars in compensation, including bonus
awards and “other” compensation. Of the $8.9 million paid, $5.1 million was compensation for
annual base salary. The remaining $3.8 million consisted of $3.6 million in bonus-related
payments and $200,000 related to other compensation.
C. Solyndra Headcount and Average Compensation by Year.
The total number of employees as of December 31, 2007 was 307,344 with total 2007
annual compensation of approximately $22 million.
During 2008, Solyndra had a total of 646 employees, of which 553 were active on
December 31, 2008345. The total gross payroll346 was approximately $51 million, or
344 According to 2007 year-end payroll statements. 345 According to 2008 year-end payroll statements. 346 Represents gross salaries before deductions for employee payroll taxes and employee benefits.
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approximately $79,000 average annual base gross salary per employee (including part-time
employees).
As of December 31, 2009, Solyndra had 725 active employees.347 In total, approximately
857 employees worked for Solyndra during the calendar year of 2009. The total gross payroll348
paid for compensation during that year was $62 million. On average, the annual base salary of
each employee was $72,000 during 2009 (including part-time employees).
During 2010, Solyndra had a total of 1,462 employees, of which 927 were active on
December 31, 2010.349 The total gross payroll350 was approximately $91 million, or
approximately $62,000 annual base gross salary per employee (including part-time employees).
As of September 30, 2011,351 Solyndra had approximately 81 active employees. In total,
approximately 1,400 employees worked for Solyndra during calendar year 2011.352 The total
gross payroll353 during 2011 was $74 million. On average, the annual base salary of each
employee was $53,000 through the month of September 2011 (including part-time employees).
D. Labor Statistics of California and Local Counties
According to the U.S. Department of Labor – Bureau of Labor Statistics as of May
2010,354 the State of California had an estimated mean annual income of $50,370 for all
occupations.
Also according to the U.S. Census Bureau, American Community Survey of 2010, the
average annual salary per household was $95,331 with a median of $76,794 within the county of
Santa Clara, CA.355
347 According to 2009 year-end payroll statements. 348 See Footnote 346. 349 According to 2010 year-end payroll statements. 350 See Footnote 346. 351 The September 30, 2011 payroll statement used because it included the most recent quarter-end payroll information prior to the bankruptcy filing. 352 According to 2011 year-end payroll statements. 353 See Footnote 346. 354 See Appendix AC.1, California May 2010 OES State Occupational Employment and Wage Estimates. 355 See Appendix AC.2, City of San Jose Fact Sheet: History & Geography.
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The U.S. Bureau of Labor Statistics indicates that the average annual salary in the San
Jose-Sunnyvale-Santa Clara Metropolitan area was $67,850 for the year 2010, which is the most
recent figure available.356
The California Employment Development Department states that the average wages by
major industry in Santa Clara County area for 2010 were as follows: Information - $178,118;
Manufacturing - $139,295; Professional/Technical - $115,966; Utilities - $97,779; Wholesale
Trade - $95,427; Management $94,247; Finance & Insurance - $93,329. This information is
summarized below in Chart #29.357
E. Staffing Companies and Temporary Labor
Solyndra also used staffing companies to fulfill its labor needs. Solyndra engaged West
Valley Staffing and Aerotek Staffing to assist in retaining temporary employees. On average,
these staffing agencies typically had 150 – 200 employees working at Solyndra. From 2008
through the filing of Solyndra’s bankruptcy case, Solyndra’s two staffing agencies received over
356 See Occupational Employment Statistics (OES) Survey, May 2010 OES Estimates at http://www.bls.gov/oes/oes dl.htm. 357 See Footnote 355.
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$50 million. See Table #31 below for additional information on payments to Temporary Labor
payments.
Table #31
Company 2008 2009 2010 2011 Total
W. Valley Staffing $13,258,347 $11,938,731 $9,925,566 $4,250,667 $39,373,311 Aerotek Staffing Agy. 1,224,880 3,213,992 4,016,754 2,132,083 10,587,709 $14,483,227 $15,152,723 $13,942,320 $6,382,750 $49,961,020
Skilled employees are a valuable asset of any new company. Solyndra, like most early
stage companies, sought to retain those employees deemed crucial to its success through various
incentive plans based on measurable goals.
F. Executive Incentive Plan (“EIP”) & Key Contributor Incentive Plan (“KCIP”)
Solyndra’s EIP & KCIP commenced in the second half of 2006 and continued until
December 31, 2008. According to Solyndra, “the purpose of the EIP & KCIP [was] to
incentivize executives, managerial employees and individual contributors to achieve challenging
tactical and/or strategic objectives that extend beyond the participant’s basic job requirements by
providing the opportunity for additional cash compensation in addition to base salary.”358 Those
employees deemed eligible for the EIP or KCIP included executives, senior level managers, and
select key individual contributors who had been with company for a minimum of six months and
who otherwise met the participation criteria. Non-exempt employees were not eligible to
participate in the plan.
The 2008 EIP & KCIP company overview states, that “each participant must have written
measurable objectives, including three to five key strategic objectives that should be weighted
(maximum 100% total) and scaled. If not indicated differently, each objective will be weighted
equally. These objectives should be “stretch” objectives, quantifiable (where possible), and
outside the basic attainable parameters of the participant's job.”359
358 See Exhibit #17 Solyndra 2008 Executive Incentive Plan & Key Contributor Plan Overview. 359 Id.
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The EIP & KCIP maximum target incentive payment for 2008 through 2009 was 20% of
annual base salary for all employees participating in the plan, calculated semi-annually. The
incentive payment pool was calculated as a total of 20% of each participant’s annual salary
divided by 50% for each half of the year. The participants in the incentive pool for each period
would be nominated by the group Vice President and approved by the CEO, CFO and
Compensation Committee every 6 months (January and July). For example, an employee
making $100,000 annual base salary, would be eligible for either an EIP or KCIP bonus for the
first half of the year in the amount of $10,000 (100,000*20%, divided by 2). If the employee is
nominated again during the second half of the year, that employee can receive an additional
$10,000. From the second half of 2006 through the end of 2008, the EIP bonus program
distributed approximately $1 million to eligible employees and the KCIP distributed
approximately $2.7 million. Table #32 below provides an annual summary:
Table #32
Year
KCIP
EIP
Total
2006
$ 139,953
$ 225,450
$ 365,403
2007
383,739
187,524
571,262 2008
2,202,419
666,742
2,869,161
$ 2,726,110
$ 1,079,716
$ 3,805,826
G. CIGS / System Tech Incentive Program
During 2007 and 2008, Solyndra initiated an additional incentive program for the
individuals who worked with and operated the CIGS machines.360 The CIGS machines not only
had the most significant impact on Wp, but became the bottle neck of the production process and
were therefore extremely important. It became apparent to Solyndra that in order to improve the
output of the Fab 1 & Fab 2 facilities, the CIGS machines had to produce at a much higher level.
In order to incentivize CIGS operators from the Research & Development (“R&D”) Department
to achieve a greater CIGS production, Solyndra introduced the CIGS/System Tech Incentive
Program. The Senior Vice President of R&D determined the bonuses. The CIGS bonuses were
360 Solyndra tools that utilized the CIGS (Copper, Indium, Gallium, and Selenide) process to evaporate and apply the metals in a thin film to cylindrical glass tubes.
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calculated and paid on a quarterly basis. The quarterly bonus amount was determined by a bonus
percentage factor for each employee computed on a quarterly basis. For example, an individual
with an annual salary of $100,000 and an approved $10% factor, would earn a $2,500 CIGS
bonus ((100,000/4)*.10). In total, approximately $0.5 million was paid to Solyndra employees
under the CIGS/System Tech incentive program during 2007 and 2008.
H. Cash Bonus Program
The Cash Bonus Plan (“CBP”) was a multi-faceted bonus structure instituted in 2010, the
first and only year that it was utilized. The CBP was created to compensate individuals for their
contribution to the success of Solyndra361 based on company-wide performance objectives at
year end 2010. Distributions under the CBP were made during the first week of February 2011.
The CBP was computed based upon three factors. An employee’s annual base salary, a
target bonus percentage, which was set by management and varied by individual and
participatory group, and a company factor percentage score, which was determined through a
number of metrics, including multipliers for certain achievements, the threshold (multiplier of
0.5), achievement of Plan of Record (“POR”) components (multiplier of 1.0) and the Stretch
Plan (multiplier of 1.5).362 If all the stretch factors were achieved, the company’s factor score
could have exceeded 100%. The following metrics and their associated payout weight allocation
for the CBP are as follows:363
• Cumulative Panels Sold -- Second Quarter to Fourth Quarter 2010 – 10% Weighting Factor - If the cumulative panels sold is less than 340,000 there is no payout for this metric. If the panels sold are between 340,000 and 345,000, there would be a multiplier between 0.5 and 1.0 payout. The POR or target sales was 345,000 panels, if panels sold was between 345,000 and 356,000, the multiplier would be between 1.0 and 1.5. If the panels sold surpassed 356,000, the multiplier would be 1.5. Depending on the panels produced, the payout would shift from 0 to 15%;
• Module Efficiency – Fourth Quarter 2010 – 20% Weighting Factor - The module efficiency was calculated by dividing the Wp by 40 tubes. The metric carries a 20% weight and for the fourth quarter 2010 the threshold was 4.525. If Solyndra does not achieve a module efficiency of 4.525, the payout was zero. If efficiency was between
361 See Appendix AC.3, Letter to Solyndra employee who received CBP dated January 31, 2011. 362 The multipliers increase from each level of accomplishment on a given/calculated slope and are not fixed at 0.5, 1.0, and 1.5. 363 See Appendix AC.4, 2010 Cash Bonus Program worksheet.
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4.526 and 4.625, the multiplier was between 0.5 and 1.0, if between 4.626 and 4.774, the multiplier was between 1.0 and 1.5 and efficiency equal or greater than 4.775, the multiplier would be 1.5. Depending on the module efficiency, the payout would shift from 0 to 20%.
• Cost per Wp; Manufacturing Cost – Fourth Quarter 2010 – 20% Weighting Factor - The Cost per Wp was a 20% weight and a ceiling of $3.30. If the average cost per watt was greater than $3.30 in the given quarter, there would be no payout for this specific metric. If the cost per watt was between $3.25 and $3.29, the multiplier would be between 0.5 and 1.0. A multiplier between 1.0 and 1.5 occurred when the cost per watt was between $3.25 and $2.96. Finally, if the cost per watt was equal to or below $2.95, the multiplier would be 1.5. Depending on the cost per Wp, the payout would shift from 0 to 20%.
• Key Channel Sales – Fourth Quarter 2010 – 15% Weighting Factor – The key channel sales metric had a weight of 15% and a threshold of 3 MW. If the key channel sales were less than 3 MW, there would be no payout for this metric. A key channel sales amount equal to 3, but less than 4, would achieve a multiplier between 0.5 and 1.0. If 4 and 5 MW’s were achieved, the multiplier would be between 1.0 and 1.5. If more than 5 MW’s were achieved, the multiplier would be 1.5. Depending on the MW’s sold through key channels, the payout could shift from 0 to 15%.
• 200 Series Panel Deployment – Fourth Quarter 2010 - 20% Weighting Factor – The 200 series panel deployment metric had a weight of 20% within the total cash bonus equation. The deployment metric had a threshold of 25%. If the actual percentage of shipped 200 Wp panels was less than 25% of the total panels shipped, no payout would be available. If the percentage of panels shipped was between 26% and 34%, the multiplier would be between 0.5 and 1.0. If the percentage was between 35% and 56%, the multiplier would be between 1.0 and 1.5. If Solyndra could achieve a deployment of over 57% of 200 Wp panels, the multiplier would be 1.5. Depending on the number of 200 Wp panels, the payout could shift from 0 to 20%.
• Cumulative Commercial Shipments $’s – Second Quarter to Fourth Quarter 2010 –15% Weighting Factor - The cumulative commercial shipment in dollars for the second quarter through the fourth quarter had to be above $120 million or no payout would be applied in the cash bonus equation. The commercial shipment’s percentage weight within the bonus calculation was 15%. The commercial shipment metric had a threshold of 120 million. If the dollar value of shipments totaled $120 - $151 million, a multiplier between 0.5 and 1.0 was used. If the total amount of shipments totaled $152 - $178 million, the multiplier would be between 1.0 and 1.5. Finally, if the shipments totaled $179 million or more, a multiplier of 1.5 would be used in the calculation. Depending on the dollar value of cumulative shipments, the payout could shift from 0 to 15%.
Table #33 below provides a breakout of the CBP cumulative calculations:
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Table #33
Cash Bonus Program Fiscal Year 2010
Threshold POR Stretch
Plan
Metric Category Weight No
Payout 0.5 1.0 1.5 Cumulative Panels Sold (Q2 - Q4) 10% < 340 340 345 356 Module Efficiency (Q4) 20% < 4.525 4.525 4.625 4.775 Cost per Wp (Q4 Manufacturing Cost) 20% > $3.30 $ 3.30 $ 3.25 $ 2.95 Key Channel sales (Q4) 15% < 3 MW 3 4 5 200 Series Panel deployment (Q4) 20% < 25% 25% 35% 57% Cum. Commercial Shipment ($M Q2 - Q4) 15% <$120M $ 120.00 $152.00 $179.00 100%
In total, approximately 810 U.S. and European employees received approximately $3.1
million in February 2011 under the provisions of the CBP. As detailed in Table #34 below, the
2010 aggregate factor was calculated to be 55.31%. For example, if an employee had an annual
base salary of $100,000, his or her target bonus percentage was set at 4% and the company factor
percentage was 55.3%, which would result in a CBP bonus of $2,212.
Table #34
Cash Bonus Program - Actual Results Fiscal Year 2010
Threshold POR Stretch
Plan
Probable
Metric Category Weight 0.5 1.0 1.5 Actual Weighted
Cumulative Panels Sold (Q2 - Q4) 10% 340 345 356 280.53 0.00% Module Efficiency (Q4) 20% 4.525 4.625 4.775 4.4 0.00% Cost per Wp (Q4 Manufacturing Cost) 20% $ 3.30 $ 3.25 $ 2.95 $ 3.25 20.00% Key Channel sales (Q4) 15% 3 4 5 5 22.50% 200 Series Panel deployment (Q4) 20% 25.00% 35.00% 57.00% 27.81% 12.81%
Cum Commercial Shipment ($M Q2 - Q4) 15% $ 120.00 $ 152.00 $ 179.00 $ 110.00 0.00%
100%
Resulting Aggregate Factor 55.31%
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The CRO has reviewed the actual results and underlying metrics which should have been
utilized under the parameters of the CBP and concludes that the actual calculations used by the
company to compute and pay the cash bonuses are within materially acceptable limits.364
The 2010 CBP was replaced in 2011 with a bonus program that contained a similar
structure for bonus payments. Throughout 2011, Solyndra continued to accrue the potential
bonus payout on its books, accruing $2.5 million for future bonuses to be paid once Solyndra met
its financial/productivity goals for 2011. However, no bonuses were paid in 2011 due to
Solyndra’s bankruptcy filing.
I. Core Retention Bonus Program
The Core Retention Bonus Program (“CRP”) was established in the fourth quarter of
2010. Following Board approval of the CRP, a letter was distributed to each employee included
in the program. Such employees were advised that “they are being recognized as part of a group
of employees who are essential and valuable to the success of Solyndra.” The letter further
clarifies the purpose of the CRP stating: “This letter confirms Solyndra’s commitment to
provide additional compensation as you continue to stay with Solyndra, especially during the
upcoming year.” Approximately 114 employees received a distribution under the CRP as
follows:
• Payout 1: 10% of annual base salary, to be paid before Thanksgiving 2010.
• Payout 2: 20% of annual base salary, paid on or around April 1, 2011.
• Payout 3: 20% of annual base salary, paid on or around July 1, 2011.
Thus, an employee with an annual base salary of $100,000 would have received $10,000
on November 25, 2010, $20,000 on April 1, 2011 and $20,000 on July 1, 2011. In total, the
eligible employee would receive $50,000 or 50% of their annual base salary in bonuses from
Thanksgiving 2010 to July 2011.
One of the essential elements for participating in the CRP was absolute confidentiality. If
any participating party were to breach that confidentiality, he or she could be subjected to 364 The company used $3.25 cost per Wp, however the actual cost per Wp was $3.20, the differential did not result in a material deviation.
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immediate disqualification.365 The rationale behind the CRP was explained to Solyndra’s Board
by Harrison, Solyndra CEO. The following is an excerpt of the minutes of the December 2, 2010
Board meeting:
“He reiterated his earlier comments with respect to the challenges of employee retention. He explained that the Company had implemented a retention program for approximately 100 key employees within the Company. Under this retention program, each of these employees had received an initial cash payment and the Company had communicated that each employee that was still employed in April of 2011 would receive an additional payment as well as a final retention payment to be made in July of 2011 for those key employees that remained with the Company through that time. Mr. Harrison explained the timing of the payments was designed to get the Company through the challenging months ahead so the employees could make decision on whether they wanted to remain with the Company after the plan had been de-risked”
A total of 114 employees agreed to the terms outlined and received an aggregate sum of
$6.6 million under the CRP with final payments made in July 2011.
J. Bonus Summary
In sum, during the period from July 2006 through July 2011, Solyndra expended
approximately $18.4 million in bonuses to its executives and employees. Approximately $9.7
million or 52% of the total amount paid in bonuses was paid to executives and employees within
the 10 month period prior to Solyndra’s bankruptcy.
Table #35 below is a summary reflecting the full amount of bonuses paid to Solyndra
employees through 2011:
365 See Appendix AC.5, Letter to Solyndra employee who received CRB dated November 9, 2010.
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Table #35
Solyndra Incentive / Bonus Programs Time Period 2006 through 2011
CIGS/Sys
Year KCIP EIP Tech Cash Core Ret. Other Total 2006 $ 139,953 $ 225,450 $ - $ - $ - $ - $ 365,403 2007 383,739 187,524 144,000 - - - 715,262 2008 934,797 275,742 245,087 - - 1,628,864 3,084,490 2009 1,267,622 391,000 138,458 - - 606,443 2,403,523 2010 - - - - 1,454,006 1,190,035 2,644,041 2011 - - - 3,119,519 5,172,824 912,880 9,205,223 $ 2,726,110 $ 1,079,716 $ 527,545 $3,119,519 $6,626,830 $ 4,338,222 $ 18,417,942
Solyndra paid approximately $18.4 million in bonuses, since mid 2006, of which
approximately $14.1 million was paid in accordance with the established programs; EIP, KCIP,
CIGS, CBP and the CRP. See Table #35 above. The remaining $4.3 million paid in bonuses
was paid as Hiring Bonuses, Service Awards and under other miscellaneous bonus programs.
The CRO has not received documentation concerning these programs.
As previously stated,366 the CRO reviewed the draw packages submitted to RW Beck, the
project engineer, as well as the loan agreements entered into between Solyndra and the DOE.
The CRO believes all funds drawn were spent in accordance with the loan documents and
consistent with the agreements. Further, there was no specific documentation in the draw
requests, which were ultimately paid by the DOE, which related to bonuses.
XV. EVENTS LEADING TO BANKRUPTCY FILING
At the time of the Restructuring, Solyndra and its existing investors and creditors
understood that the company required further incremental capital beyond the $75 million of
Tranche A Debt367 to fund the Consolidation Plan. Thus, the Restructuring documents provided
for further Tranche C Debt funding of up to an additional $75 million.
366 See Section X.E Construction and Loan Funding. 367 As a result of the Restructuring provided the commitment of the Tranche A Debt left the company with more than $783 million in senior secured debt.
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Beginning in the second quarter of 2011, Solyndra pursued various funding alternatives
including multiple strategic and financial investors in an attempt to attract the required capital
under the terms provided for in the Tranche C Debt. On May 5, 2011, Solyndra management
reported to the Board that the company would need incremental financing by early June to
continue operations.368
In an effort to address the immediate and pressing cash requirements, Solyndra
approached certain of its Tranche A Debt holders and the DOE to explore alternative debt
financing arrangements, including the sale of accounts receivable and inventory. As a result, a
draft term sheet was presented to the Board regarding the proposed A/R Facility, whereby
Solyndra LLC could sell up to $75 million of qualifying accounts receivable to a special purpose
entity established by certain investors led by Argonaut, Madrone and Rockport to fund short-
term cash requirements.369
Under the terms of the Restructuring, the consent of the DOE was required to implement
the A/R Facility, and as a result the DOE was extensively involved in the negotiation of the
transaction. Solyndra obtained the written consent of the DOE and executed agreements on June
3, 2011, and began to receive proceeds from the A/R facility.370 By July 7, 2011, the A/R
Facility had provided Solyndra with a cash infusion of approximately $29.2 million. However,
the company still required additional capital, and worked with its existing investors and the DOE
on the Inventory Facility, whereby certain inventory of Solyndra would be sold to a special
purpose vehicle formed by certain existing investors. Management apprised the Board of the
need for the Inventory Facility and indicated to the Board that Solyndra was continuing with its
necessary cost cutting and vendor management measures in order to minimize the immediate
cash requirements and that the A/R Facility and Inventory Facility only provided short-term
liquidity and did not replace the need for long-term capital. As a result, Tranche C Debt
financing would still be required by August 2011.371 Solyndra obtained the written consent of
368 See Appendix D.14, Solyndra Board Minutes and Board Presentation dated May 5, 2011. 369 See Appendix D.15, Solyndra Board Minutes and Board Presentation dated May 20, 2011. 370 See Appendix AB, AR Facility discussion and documentation. 371 See Appendix D.17, Solyndra Board Minutes and Board Presentation dated July 7, 2011.
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the DOE and executed the agreements relating to the Inventory Facility on July 29, 2011
allowing for the sale of inventory and funding under the agreed upon terms.372
In early August, Solyndra, certain holders of Tranche A Debt, and representatives of the
DOE began negotiations on a financing structure that would allow Solyndra to attract new long-
term investment. Argonaut presented a proposal to Solyndra and the DOE involving the
significant restructuring of Solyndra’s balance sheet, which would have included the write-off of
a significant portion of the Tranche B Debt, all of the Tranche D Debt and all of the Tranche E
Debt and indicated that it would be willing to underwrite the additional investment on these
terms. The DOE engaged Lazard to assist it with these negotiations and to help identify potential
sources of capital for the company. The DOE initially responded that the Argonaut Proposal was
unacceptable, and made a counterproposal to Argonaut that sought to preserve most of the
DOE’s debt. After Argonaut indicated that it would not be willing to move forward with a
transaction based on those terms, the DOE indicated that it would attempt to obtain the approvals
necessary to move forward with a transaction based on the original terms of the Argonaut
Proposal. However, by this time, Argonaut had lost the necessary internal support to move
forward with such a transaction, and indicated it was no longer willing to underwrite any
transaction without significant participation from a new investor. Nonetheless, the parties
continued to discuss a long-term restructuring deal.
These negotiations over the terms of the incremental capital continued throughout August
2011, and during this time, the parties to the Inventory Facility continued to purchase Solyndra
inventory to provide needed liquidity to Solyndra. After it was clear that a transaction could not
be accomplished under the terms set forth in the Argonaut Proposal, the DOE and certain
existing investors began negotiations for bridge financing to allow Solyndra additional time to
find a new source of capital and complete an overall restructuring. Under the proposed terms of
the bridge financing, both the DOE, as the loan servicer of the Tranche B debt, and the holders of
the Tranche A Debt would have released additional funds to Solyndra.
On August 26, 2011, the DOE indicated it was unable to provide additional funds under
the Tranche B facility; however, the parties continued to work on interim financing alternatives.
372 See Appendix AB, Inventory Facility discussion and documentation.
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In light of the DOE’s stated position, Mitchell indicated to the Board that Argonaut was not
willing to be the sole source of the required additional long-term capital and based on the status
of discussions among Argonaut, other potential investors and the DOE, he had severe
reservations in making a recommendation to Argonaut to provide additional long-term capital at
that time. At the Board meeting, Nwachuku updated the Board on the DOE’s continued
commitment to the company and stressed the continued work the DOE and its financial advisors
were doing in an attempt to find a solution to the company’s capital requirements.373
Two days later, the Board met again to address the pressing financing and capital issues.
The Board was informed that an understanding had been reached between the representatives of
the Tranche A lenders and the DOE. Subject to the DOE obtaining necessary governmental
approvals, the lenders agreed to provide additional “bridge” funding to the company to afford
additional time to secure long term capital. The contemplated “bridge” funding involved the
release of approximately $8 million of the remaining DOE Loan Guarantee funds, approximately
$6 million of remaining Tranche A Debt proceeds, and the DOE’s permission for the company to
access an additional $3 million of funds (proceeds of equity infusions) held in a restricted
account. A commitment was also made by the parties to the Inventory Facility to purchase
approximately $3 million of additional inventory pursuant to the Inventory Facility to allow the
DOE sufficient time to obtain the necessary approvals for the interim funding arrangement.
Immediately prior to an August 30, 2011 Board meeting, the DOE informed the company
that it was unable to obtain the necessary consents from the other agencies to allow for the
interim funding of the remaining Tranche B proceeds unless the funding was part of a fully
funded business plan. company management updated the Board of the DOE’s position at the
August 30th Board meeting. At the same meeting, Mitchell also informed the Board that the
Tranche A lenders were not prepared to release the remaining funds without the release of the
Tranche B funds, and they could not commit to fully funding the company. Solyndra was left
with no other option but to immediately suspend operations and begin the process of filing its
Chapter 11 petitions.374
373 See Appendix D.21, Solyndra Board Minutes dated August 26, 2011. 374 See Appendix D.23, Solyndra Board Minutes dated August 30, 2011.
196
As a result, on August 31, 2011, Solyndra immediately suspended its manufacturing
operations and terminated the vast majority of its workforce. Inasmuch as the company’s assets
include complex equipment and intellectual property, the company retained key employees to
maintain its assets with the ability to re-start operations while restructuring options were
explored, to assist with sales of assets and, as necessary, to wind-down the business following a
sale or liquidation of assets. A week later, on September 5, 2011, Solyndra commenced its
Chapter 11 bankruptcy cases.