SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-40117
COMPLETE SOLARIA, INC.
(Exact Name of Registrant as Specified in Its
Charter)
Delaware | | 93-2279786 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
45700 Northport Loop East, Fremont, CA 94538
(Address of Principal Executive Offices) (Zip
Code)
(510) 270-2507
(Registrant’s telephone number, including
area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report)
Securities registered pursuant to Section 12(b)
of the Act:
Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Common stock, par value $0.0001 per share | | CSLR | | Nasdaq |
| | | | |
Redeemable warrants, each whole warrant exercisable for one common stock | | CSLRW | | Nasdaq |
Securities registered pursuant to Section 12(g)
of the Act:
None
Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes ☒ No ☐
Indicate by check mark whether the Registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark whether the Registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| | Emerging growth company | ☒ |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
No ☒
As of May 13, 2024, 49,096,537 shares of common stock, par value
$0.0001 per share, were issued and outstanding.
COMPLETE SOLARIA,
INC. AND SUBSIDIARIES
TABLE OF CONTENTS
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Certain
statements in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” for purposes of the federal
securities laws. Our forward-looking statements include, but are not limited to, statements regarding our and our management team’s
expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts
or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The
words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,”
“intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,”
“project,” “should,” “will,” “would” and similar expressions may identify forward-looking
statements, but the absence of these words does not mean that a statement is not forward-looking.
| ● | our ability to recognize the
anticipated benefits of the Business Combination (as defined below), which may be affected by, among other things, competition and our
ability to grow and manage growth profitably following the closing of the Business Combination; |
| ● | our financial and business performance
following the Business Combination, including financial projections and business metrics; |
| ● | changes in our strategy, future
operations, financial position, estimated revenues and losses, projected costs, prospects and plans; |
| ● | our ability to meet the expectations
of new and current customers, and our ability to achieve market acceptance for our products; |
| ● | our expectations and forecasts
with respect to market opportunity and market growth; |
| ● | the ability of our products
and services to meet customers’ compliance and regulatory needs; |
| ● | our ability to attract and retain
qualified employees and management; |
| ● | our ability to develop and maintain
its brand and reputation; |
| ● | developments and projections
relating to our competitors and industry; |
| ● | changes in general economic
and financial conditions, inflationary pressures and the resulting impact demand, and our ability to plan for and respond to the impact
of those changes; |
| ● | our expectations regarding our
ability to obtain and maintain intellectual property protection and not infringe on the rights of others; |
| ● | our future capital requirements
and sources and uses of cash; |
| ● | our ability to obtain funding
for its operations and future growth; and |
| ● | our business, expansion plans
and opportunities. |
Actual
events or results may differ from those expressed in forward-looking statements. You should not rely on forward-looking statements as
predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily
on our current expectations and projections about future events and trends that we believe may affect our business, financial condition
and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and
other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover,
we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not
possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this
Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved
or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In
addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These
statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that information
provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to
indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain,
and investors are cautioned not to unduly rely on these statements.
The
forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are
made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events
or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated
events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking
statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect
the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
SUMMARY RISK FACTORS
| ● | Our management has identified
conditions that raise substantial doubt about our ability to continue as a going concern. |
| ● | Our business depends in part
on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates,
credits or incentives or the ability to monetize them could adversely impact the business. |
| ● | Existing regulations and policies
and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and use of solar
power products, which may significantly reduce demand for our products and services. |
| ● | Risks associated with a highly
complex global supply chain, including from disruptions, delays, trade tensions, or shortages. |
| ● | We rely on net metering and
related policies to offer competitive pricing to customers in many of our current markets and changes to net metering policies may significantly
reduce demand for electricity from residential solar energy systems. |
| ● | We utilize a limited number
of suppliers of solar panels and other system components to adequately meet anticipated demand for our solar service offerings. Any shortage,
delay or component price change from these suppliers or delays and price increases associated with the product transport logistics could
result in sales and installation delays, cancellations, and loss of market share. |
| ● | We provide warranties for solar
system installations, solar panels, and other system components that may negatively impact overall profitability. |
| ● | We utilize third-party sales
and installation partners whose performance could result in sales and installation delays, cancellations, and loss of market share. |
| ● | Risks associated with solar
system installation and connection delays, including the potential for recoupment or clawback of payments by financing partners. |
| ● | Due to the general economic
environment and any market pressure that would drive down the average selling prices of solar power products, among other factors, we
may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund operations and make adequate
capital investments as planned. |
| ● | Our business substantially focuses
on solar service agreements and transactions with residential customers. |
| ● | We have incurred losses and
may be unable to achieve or sustain profitability in the future. |
| ● | Our business is concentrated
in certain markets, including California, putting us at risk of region-specific disruptions. |
| ● | We depend on a limited number
of customers and sales contracts for a significant portion of revenues, and the loss of any customer or cancellation of any contract
may cause significant fluctuations or declines in revenues. |
|
● |
We have identified material weaknesses in our internal controls over financial reporting. If we cannot maintain effective internal controls over financial reporting and disclosure controls and procedures, the accuracy and timeliness of our financial and operating reporting may be adversely affected, and confidence in our operations and disclosures may be lost. |
PART I. FINANCIAL INFORMATION
Item 1. Financial
Statements
COMPLETE SOLARIA, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands except share and per share
amounts)
| |
As of | |
| |
March 31, | | |
December 31, | |
| |
2024 | | |
2023 | |
ASSETS | |
| | |
| |
Current assets: | |
| | |
| |
Cash and cash equivalents | |
$ | 1,786 | | |
$ | 2,593 | |
Accounts receivable, net | |
| 20,939 | | |
| 26,281 | |
Inventories | |
| 2,773 | | |
| 3,058 | |
Prepaid expenses and other current assets | |
| 5,776 | | |
| 5,817 | |
Total current assets | |
| 31,274 | | |
| 37,749 | |
Restricted cash | |
| 3,829 | | |
| 3,823 | |
Property and equipment, net | |
| 4,495 | | |
| 4,317 | |
Operating lease right-of-use assets | |
| 1,054 | | |
| 1,235 | |
Other noncurrent assets | |
| 198 | | |
| 198 | |
Total assets | |
$ | 40,850 | | |
$ | 47,322 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 10,521 | | |
$ | 13,122 | |
Accrued expenses and other current liabilities | |
| 24,893 | | |
| 27,870 | |
Notes
payable, net | |
| 29,365 | | |
| 28,657 | |
Deferred revenue, current | |
| 2,010 | | |
| 2,423 | |
Short-term debt with CS Solis | |
| 35,840 | | |
| 33,280 | |
SAFE Agreements | |
| 5,000 | | |
| - | |
Forward
purchase agreement liabilities | |
| 9,409 | | |
| 3,831 | |
Total current liabilities | |
| 117,038 | | |
| 109,183 | |
Warranty provision, noncurrent | |
| 3,416 | | |
| 3,416 | |
Warrant liability | |
| 3,877 | | |
| 9,817 | |
Deferred revenue, noncurrent | |
| 1,055 | | |
| 1,055 | |
Operating lease liabilities, net of current portion | |
| 543 | | |
| 664 | |
Total liabilities | |
| 125,929 | | |
| 124,135 | |
| |
| | | |
| | |
Commitments and contingencies (Note 16) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ (deficit) equity: | |
| | | |
| | |
Common stock, $0.0001 par value; Authorized 1,000,000,000 and 1,000,000,000 shares as of March 31, 2024 and December 31, 2023, respectively; issued and outstanding 49,096,537 and 49,065,361 shares as of March 31, 2024 and December 31, 2023, respectively | |
| 7 | | |
| 7 | |
Additional paid-in capital | |
| 279,332 | | |
| 277, 965 | |
Accumulated other comprehensive loss | |
| 98 | | |
| 143 | |
Accumulated deficit | |
| (364,516 | ) | |
| (354,928 | ) |
Total stockholders’ (deficit) equity | |
| (85,079 | ) | |
| (76,813 | ) |
Total liabilities and stockholders’ equity | |
$ | 40,850 | | |
$ | 47,322 | |
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
COMPLETE SOLARIA, INC.
Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Income (Loss)
(in thousands except share and per share
amounts)
| |
Thirteen-Weeks Ended | |
| |
March 31, | | |
April 2, | |
| |
2024 | | |
2023 | |
Revenues | |
$ | 10,040 | | |
$ | 16,677 | |
Cost of revenues | |
| 7,757 | | |
| 13,827 | |
Gross profit | |
| 2,283 | | |
| 2,850 | |
Operating expenses: | |
| | | |
| | |
Sales commissions | |
| 3,116 | | |
| 5,677 | |
Sales and marketing | |
| 1,618 | | |
| 683 | |
General and administrative | |
| 5,093 | | |
| 8,913 | |
Total operating expenses | |
| 9,827 | | |
| 15,273 | |
Loss from continuing operations | |
| (7,544 | ) | |
| (12,423 | ) |
Interest expense | |
| (3,568 | ) | |
| (3,611 | ) |
Interest income | |
| 6 | | |
| 8 | |
Other income, net | |
| 1,519 | | |
| 317 | |
Total Other expense | |
| (2,043 | ) | |
| (3,286 | ) |
Loss from continuing operations before income taxes | |
| (9,587 | ) | |
| (15,709 | ) |
Income tax benefit (provision) | |
| (1 | ) | |
| — | |
Net loss from continuing operations | |
| (9,588 | ) | |
| (15,709 | ) |
Loss from discontinued operations, net of tax | |
| — | | |
| (7,805 | ) |
Net loss from discontinued operations, net of taxes | |
| — | | |
| (7,805 | ) |
Net loss | |
| (9,588 | ) | |
| (23,514 | ) |
Other Comprehensive (loss) income: | |
| | | |
| | |
Foreign currency translation adjustment | |
| (45 | ) | |
| 1 | |
Comprehensive loss (net of tax) | |
$ | (9,633 | ) | |
$ | (23,513 | ) |
Net loss from continuing operations per share attributable to common stockholders, basic and diluted | |
$ | (0.20 | ) | |
$ | (0.62 | ) |
Net loss from discontinued operations per share attributable to common stockholders, basic and diluted | |
$ | — | | |
$ | (0.31 | ) |
Net loss per share attributable to common stockholders, basic and diluted | |
$ | (0.20 | ) | |
$ | (0.93 | ) |
Weighted-average shares used to compute net loss per share attributable to common stockholders’, basic and diluted | |
| 49,077,330 | | |
| 25,200,347 | |
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
COMPLETE SOLARIA, INC.
Unaudited Condensed Consolidated Statements
of Stockholders’ Deficit
(in thousands except number of shares)
| |
Thirteen-Weeks Ended March 31, 2024 | |
| |
Redeemable Convertible Preferred Stock | | |
Common Stock | | |
Additional Paid-in | | |
Accumulated | | |
Accumulated Other Comprehensive | | |
Total Stockholders’ (Deficit) | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Income | | |
Equity | |
Balance as of December 31, 2023 | |
| — | | |
$ | — | | |
| 49,065,361 | | |
$ | 7 | | |
$ | 277,965 | | |
$ | (354,928 | ) | |
$ | 143 | | |
$ | (76,813 | ) |
Exercise of common stock options | |
| — | | |
| — | | |
| 31,176 | | |
| — | | |
| 26 | | |
| — | | |
| — | | |
| 26 | ) |
Stock-based compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,341 | | |
| — | | |
| — | | |
| 1,341 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (9,588 | ) | |
| — | | |
| (9,588 | ) |
Foreign currency translation adjustment | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (45 | ) | |
| (45 | ) |
Balance as of March 31, 2024 | |
| — | | |
$ | — | | |
| 49,096,537 | | |
$ | 7 | | |
$ | 279,332 | | |
$ | (364,516 | ) | |
$ | 98 | | |
$ | (85,079 | ) |
| |
Redeemable Convertible Preferred Stock | | |
Common Stock | | |
Additional Paid-in | | |
Accumulated | | |
Accumulated Other Comprehensive | | |
Total Stockholders’ (Deficit) | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Income | | |
Equity | |
Balance as of December 31, 2022 | |
| 34,311,133 | | |
$ | 155,630 | | |
| 6,959,618 | | |
$ | — | | |
$ | 34,997 | | |
$ | (85,373 | ) | |
$ | 27 | | |
$ | (50,349 | ) |
Retroactive application of recapitalization | |
| (34,311,133 | ) | |
| (155,630 | ) | |
| 12,972,811 | | |
| 3 | | |
| 155,627 | | |
| — | | |
| — | | |
| 155,630 | |
Balance as of December 31, 2022, as adjusted | |
| — | | |
| — | | |
| 19,932,429 | | |
| 3 | | |
| 190,624 | | |
| (85,373 | ) | |
| 27 | | |
| (105,281 | ) |
Exercise of common stock options | |
| — | | |
| — | | |
| 137,452 | | |
| — | | |
| 55 | | |
| — | | |
| — | | |
| 55 | |
Stock-based compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,022 | | |
| — | | |
| — | | |
| 1,022 | |
Foreign currency translation | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1 | | |
| 1 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (23,514 | ) | |
| — | | |
| (23,514 | ) |
Balance as of April 2, 2023, as adjusted | |
| — | | |
$ | — | | |
| 20,069,881 | | |
$ | 3 | | |
$ | 191,701 | | |
$ | (108,887 | ) | |
$ | 28 | | |
$ | 82,845 | |
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
COMPLETE SOLARIA, INC.
Unaudited Condensed Consolidated Statements
of Cash Flows
(in thousands except number of shares)
| |
Thirteen- Weeks Ended March 31, 2024 | | |
Thirteen- Weeks Ended April 2, 2023 | |
Cash flows from operating activities from continuing operations | |
| | |
| |
Net loss | |
$ | (9,588 | ) | |
$ | (23,514 | ) |
Loss from discontinued operations, net of income taxes | |
| — | | |
| (7,805 | ) |
Net loss from continuing operations, net of tax | |
| (9,588 | ) | |
| (15,709 | ) |
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | |
| | | |
| | |
Stock-based compensation expense | |
| 1,341 | | |
| 270 | |
Non-cash
interest expense | |
| 1,008 | | |
| 1,248 | |
Non-cash lease expense | |
| 181 | | |
| 248 | |
Depreciation and amortization | |
| 357 | | |
| 189 | |
Provision for credit losses | |
| 62 | | |
| 2,117 | |
Change in reserve for excess and obsolete inventory | |
| (344 | ) | |
| 791 | |
Change
in fair value of forward purchase agreement liabilities | |
| 5,578 | | |
| — | |
Change in fair value of warrant liabilities | |
| (7,246 | ) | |
| (209 | ) |
Accretion of debt in CS Solis | |
| 2,560 | | |
| 752 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable, net | |
| 5,280 | | |
| (3,197 | ) |
Inventories | |
| 629 | | |
| (570 | ) |
Prepaid expenses and other current assets | |
| 41 | | |
| (1,857 | ) |
Other noncurrent assets | |
| — | | |
| (848 | ) |
Accounts payable | |
| (2,599 | ) | |
| 2,132 | |
Accrued expenses and other current liabilities | |
| (1,613 | ) | |
| (581 | ) |
Operating lease liabilities | |
| (180 | ) | |
| (86 | ) |
Warranty provision, noncurrent | |
| — | | |
| 100 | ) |
Deferred revenue | |
| (413 | ) | |
| (906 | ) |
Net cash used in operating activities from continuing operations | |
| (4,946 | ) | |
| (16,116 | ) |
Net cash used in operating activities from discontinued operations | |
| — | | |
| (162 | ) |
Net cash used in operating activities | |
| (4,946 | ) | |
| (16,278 | ) |
Cash flows from investing activities from continuing operations | |
| | | |
| | |
Purchase of property and equipment | |
| — | | |
| (30 | ) |
Capitalization of internal-use software costs | |
| (536 | ) | |
| (457 | ) |
Proceeds from sale of property and equipment | |
| — | | |
| 1 | |
Net cash used in investing activities from continuing operations | |
| (536 | ) | |
| (486 | ) |
Cash flows from financing activities from continuing operations | |
| | | |
| | |
Proceeds from issuance of notes payable, net | |
| — | | |
| 14,102 | |
Principal repayment of notes payable | |
| (300 | ) | |
| (9,603 | ) |
Proceeds from issuance of convertible notes, net of issuance cost | |
| — | | |
| 11,000 | |
Proceeds from exercise of common stock options | |
| 26 | | |
| 55 | |
Proceeds from issuance of SAFE agreements | |
| 5,000 | | |
| — | |
Net cash provided by financing activities from continuing operations | |
| 4,726 | | |
| 15,554 | |
Effect of exchange rate changes | |
| (45 | ) | |
| 1 | |
Net decrease in cash, cash equivalents and restricted cash | |
| (801 | ) | |
| (1,209 | ) |
Cash, cash equivalents, and restricted cash at beginning of period | |
| 6,416 | | |
| 8,316 | |
Cash, cash equivalents, and restricted cash at end of period | |
$ | 5,615 | | |
$ | 7,107 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid during the period for interest | |
$ | — | | |
$ | 1,608 | |
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
(a) Description of Business
Complete Solaria, Inc. (the “Company”
or “Complete Solaria”) is a residential solar installer headquartered in Fremont, California, which was formed through Complete
Solar Holding Corporation’s acquisition of The Solaria Corporation (“Solaria”).
Complete Solar, Inc. (“Complete Solar”)
was incorporated in Delaware on February 22, 2010. Through February 2022, the Company operated as a single legal entity as Complete Solar,
Inc. In February 2022, the Company implemented a holding company reorganization (the “Reorganization”) in which the Company
created and incorporated Complete Solar Holding Corporation (“Complete Solar Holdings”). As a result of the Reorganization,
Complete Solar Holdings became the successor entity to Complete Solar, Inc. The capitalization structure was not changed because of the
Reorganization as all shares of Complete Solar, Inc common stock and preferred stock were exchanged on a one for one basis with shares
of Complete Solar Holdings common stock and preferred stock. The Reorganization was accounted for as a change in reporting entity for
entities under common control. The historical assets and liabilities of Complete Solar, Inc. were transferred to Complete Solar Holdings
at their carrying value, and there were no changes to net income, other comprehensive income (loss), or any related per share amounts
reported in the unaudited condensed consolidated financial statements requiring retrospective application.
In October 2022, the Company entered into a business
combination agreement, as amended on December 26, 2022 and January 17, 2023 (“Original Business Combination Agreement”) and
as amended on May 26, 2023 (“Amended and Restated Business Combination Agreement”), with Jupiter Merger Sub I Corp., a Delaware
corporation and a wholly owned subsidiary of Freedom Acquisition I Corp. (“FACT”) (“First Merger Sub”), Jupiter
Merger Sub II LLC, a Delaware limited liability company and a wholly owned subsidiary of FACT (“Second Merger Sub”), Complete
Solar Holding Corporation, a Delaware corporation, and Solaria, a Delaware corporation.
The transactions contemplated by the Amended
and Restated Business Combination Agreement were consummated on July 18, 2023 (“Closing Date”). Following the consummation
of the Merger on the Closing Date, FACT changed its name to “Complete Solaria, Inc.”
As part of the transactions contemplated by the
Amended and Restated Business Combination Agreement, FACT effected a deregistration under the Cayman Islands Companies Act and a domestication
under Section 388 of the Delaware’s General Corporation Law (the “DGCL” or “Domestication”). On the Closing
Date, following the Domestication, First Merger Sub merged with and into Complete Solaria, with Complete Solaria surviving such merger
as a wholly owned subsidiary of FACT (the “First Merger”), and immediately following the First Merger, Complete Solaria merged
with and into Second Merger Sub, with Second Merger Sub surviving as a wholly owned subsidiary of FACT (the “Second Merger”),
and Second Merger Sub changed its name to CS, LLC, and immediately following the Second Merger, Solaria merged with and into a newly
formed Delaware limited liability company and wholly-owned subsidiary of FACT and changed its name to The Solaria Corporation LLC (“Third
Merger Sub”), with Third Merger Sub surviving as a wholly-owned subsidiary of FACT (the “Additional Merger”, and together
with the First Merger and the Second Merger, the “Mergers”).
In connection with the closing of the Mergers:
| ● | Each share of the Company’s capital stock, inclusive
of shares converted from the 2022 Convertible Notes, issued and outstanding immediately prior to the Closing (“Legacy Complete
Solaria Capital Stock”) were cancelled and exchanged into an aggregate of 25,494,332 shares of Complete Solaria Common Stock. |
| ● | In July 2023, (i) Meteora Special Opportunity Fund I, LP (“MSOF”),
Meteora Capital Partners, LP (“MCP”) and Meteora Select Trading Opportunities Master, LP (“MSTO”) (with MSOF,
MCP, and MSTO collectively as “Meteora”); (ii) Polar Multi-Strategy Master Fund (“Polar”), and (iii) Diametric
True Alpha Market Neutral Master Fund, LP, Diametric True Alpha Enhanced Market Neutral Master Fund, LP, and Pinebridge Partners Master
Fund, LP (collectively, “Sandia”) (together, the “FPA Funding PIPE Investors”) entered into separate subscription
agreements (the “FPA Funding Amount PIPE Subscription Agreements”) pursuant to which, the FPA Funding PIPE Investors subscribed
for on the Closing Date, an aggregate of 6,300,000 shares of FACT Class A Ordinary Shares, less, in the case of Meteora, 1,161,512 FACT
Class A Ordinary Shares purchased by Meteora separately from third parties through a broker in the open market (“Recycled Shares”)
in connection with the Forward Purchase Agreements (“FPAs”). Subsequent to the Closing Date, Complete Solaria entered into
an additional FPA Funding PIPE Subscription Agreement with Meteora, to subscribe for and purchase, and Complete Solaria agreed to issue
and sell, an aggregate of 420,000 shares of Complete Solaria Common Stock. The Company issued shares of Complete Solaria Common Stock
underlying the FPAs as of the latter of the closing of the Mergers or execution of the FPAs. |
| ● | All certain investors (the “PIPE Investors”) purchased
from the Company an aggregate of 1,570,000 shares of Complete Solaria Common Stock (the “PIPE Shares”) for a purchase price
of $10.00 per share, for aggregate gross proceeds of $15.7 million (the “PIPE Financing”), including $3.5 million that was
funded prior to the Closing Date, pursuant to subscription agreements (the “Subscription Agreements”). At the time of the
PIPE Financing, Complete Solaria issued an additional 60,000 shares to certain investors as an incentive to participate in the PIPE Financing. |
| ● | On or around the Closing Date, pursuant to the New Money PIPE
Subscription Agreements, certain investors affiliated with the New Money PIPE Subscription Agreements (“New Money PIPE Investors”)
agreed to subscribe for and purchase, and Complete Solaria agreed to issue and sell to the New Money PIPE Investors an aggregate of 120,000
shares of Complete Solaria Common Stock for a purchase price of $5.00 per share, for aggregate gross proceeds of $0.6 million. Pursuant
to its New Money PIPE Subscription Agreement, Complete Solaria issued an additional 60,000 shares of Complete Solaria Common Stock in
consideration of certain services provided by it in the structuring of its FPA and the transactions described therein. |
| ● | Subsequent to the Closing, Complete Solaria issued an additional
193,976 shares of Complete Solaria Common Stock to the sponsors for reimbursing sponsors’ transfer to certain counterparties and
issued an additional 150,000 shares of Complete Solaria Common Stock to an FPA investor for services provided in connection with the
Mergers. |
| ● | In March 2023, holders of 23,256,504 of the originally issued
34,500,000 FACT Class A Ordinary shares exercised their rights to redeem those shares for cash, and immediately prior to the Closing
there were 11,243,496 FACT Class A Ordinary Shares that remained outstanding. At the Closing, holders of 7,784,739 shares of Class A
common stock of FACT exercised their rights to redeem those shares for cash, for an aggregate of approximately $82.2 million which was
paid to such holders at Closing. The remaining FACT Class A Ordinary Share converted, on a one-for-one basis, into one share of Complete
Solaria Common Stock. |
| ● | Each issued and outstanding FACT Class B Ordinary Share converted,
on a one-for-one basis, into one share of Complete Solaria Common Stock. |
In November 2022, Complete Solar Holdings acquired
Solaria and changed its name to Complete Solaria, Inc. On August 18, 2023, the Company entered into a Non-Binding Letter of Intent to
sell certain of Complete Solaria’s North American solar panel assets to Maxeon, Inc. (“Maxeon”). In October 2023, the
Company completed the sale of its solar panel business to Maxeon. Refer to Note 1(b) – Divestiture and Note 7 – Divestiture.
(b) Divestiture
In October 2023, the Company completed the sale
of its solar panel business to Maxeon, pursuant to the terms of the Asset Purchase Agreement (the “Disposal Agreement”).
Under the terms of the Disposal Agreement, Maxeon agreed to acquire certain assets and employees of Complete Solaria, for an aggregate
purchase price of approximately $11.0 million consisting of 1,100,000 shares of Maxeon ordinary shares. As of December 31, 2023, the
Company sold all its Maxeon shares and recorded a loss of $4.2 million in its unaudited condensed consolidated statements of operations
and comprehensive loss within loss from continuing operations.
This divestiture represented a strategic shift in Complete Solaria’s
business and qualified as held for sale and as a discontinued operation. Based on the held for sale classification of the assets, the
Company reduced the carrying value of the disposal group to its fair value, less its cost to sell and recorded an impairment loss associated
with the held for sale intangible assets and goodwill. As a result, the Company classified the results of its solar panel business in
discontinued operations in its unaudited condensed consolidated statements of operations and comprehensive loss for all periods presented.
The cash flows related to discontinued operations were segregated from continuing operations within the unaudited condensed consolidated
statements of cash flows for all periods presented. Unless otherwise noted, discussion within the notes to the unaudited condensed consolidated
financial statements relates to continuing operations only and excludes the historical activities of the North American panel business.
See Note 7 – Divestiture for additional information.
(c) Liquidity and Going Concern
Since inception, the Company has incurred recurring losses and negative
cash flows from operations. The Company incurred net losses of $9.6 million and $23.5 million, during the thirteen-weeks ended March 31,
2024 and April 2, 2023, respectively, and had an accumulated deficit of $364.5 million and current debt of $65.2 million as of March 31,
2024. The Company had cash and cash equivalents of $1.8 million as of March 31, 2024. The Company believes that its operating losses and
negative operating cash flows will continue into the foreseeable future. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
Management plans to obtain additional funding
and restructure its current debt. Historically, the Company’s activities have been financed through private placements of equity
securities, debt and proceeds from the Merger. If the Company is not able to secure adequate additional funding when needed, the Company
will need to reevaluate its operating plan and may be forced to make reductions in spending, extend payment terms with suppliers, liquidate
assets where possible, or suspend or curtail planned programs or cease operations entirely. These actions could materially impact the
Company’s business, results of operations and future prospects. While the Company has been able to raise multiple rounds of financing,
there can be no assurance that in the event the Company requires additional financing, such financing will be available on terms that
are favorable, or at all. Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary
spending would have a material adverse effect on the Company’s ability to achieve its intended business objectives.
Therefore, there is substantial doubt about the
entity’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial
statements are issued. The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company
will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal
course of business. They do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a
going concern.
| (2) | Summary of Significant Accounting Policies |
The unaudited condensed consolidated financial
statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the Unites States
of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)
and reflect all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results
for the interim periods presented. The unaudited condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The preparation of the Company’s unaudited
condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, expenses, as well as related disclosure of contingent assets and liabilities. Significant
estimates and assumptions made by management include, but are not limited to, the determination of:
| ● | The allocation of the transaction price to identified performance
obligations; |
| ● | Fair value of warrant liabilities; |
| ● | The reserve methodology for inventory obsolescence; |
| ● | The reserve methodology for product warranty; |
| ● | The reserve methodology for the allowance for credit losses; |
| ● | The fair value of the forward purchase agreements; and |
| ● | The measurement of stock-based compensation. |
To the extent that there are material differences
between these estimates and actual results, the Company’s financial condition or operating results will be affected. The Company
bases its estimates on past experience and other assumptions that the Company believes are reasonable under the circumstances, and the
Company evaluates these estimates on an ongoing basis. The Company has assessed the impact and management is not aware of any specific
events or circumstances that required an update to the Company’s estimates and assumptions or materially affected the carrying
value of the Company’s assets or liabilities as of the date of issuance of this report. These estimates may change as new events
occur and additional information is obtained.
The Company conducts its business in one operating
segment that provides custom solar solutions through a standardized platform to its residential solar providers and companies to facilitate
the sale and installation of solar energy systems under a single product group. The Company’s Chief Executive Officer (“CEO”)
is the Chief Operating Decision Maker (“CODM”). The CODM allocates resources and makes operating decisions based on financial
information presented on a consolidated basis. The profitability of the Company’s product group is not a determining factor in
allocating resources and the CODM does not evaluate profitability below the level of the consolidated Company. All the Company’s
long-lived assets are maintained in the United States of America.
| (d) | Concentration of Risks |
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company’s
cash and cash equivalents are on deposit with major financial institutions. Such deposits may be in excess of insured limits from time
to time. The Company believes that the financial institutions that hold the Company’s cash are financially sound, and accordingly,
minimum credit risk exists with respect to these balances. The Company has not experienced any losses due to institutional failure or
bankruptcy. The Company performs credit evaluations of its customers and generally does not require collateral for sales on credit. The
Company reviews accounts receivable balances to determine if any receivables will potentially be uncollectible and includes any amounts
that are determined to be uncollectible in the allowance for credit losses. As of March 31, 2024, two customers had an outstanding balance
that represented 36% and 19% of the total accounts receivable balance. As of December 31, 2023, two customers had an outstanding balance
that represented 38% and 16% of the total accounts receivable balance.
Concentration of customers
For the thirteen-weeks ended March 31, 2024, one customer represented
76% of gross revenues. For the thirteen-weeks ended and April 2, 2023, three customers represented 29%, 23% and 12% of gross revenues.
Concentration of suppliers
For the thirteen-weeks ended March 31, 2024,
and December 31, 2023, one supplier represented 34% and 40% of the Company’s inventory purchases, respectively.
| (e) | Cash and Cash Equivalents |
The Company considers all highly liquid securities
that mature within three months or less from the original date of purchase to be cash equivalents. The Company maintains the majority
of its cash balances with commercial banks in interest bearing accounts. Cash and cash equivalents include cash held in checking and
savings accounts and money market accounts consisting of highly liquid securities with original maturity dates of three months or less
from the original date of purchase.
The Company classifies all cash for which usage
is limited by contractual provisions as restricted cash. The restricted cash balance was $3.8 million at each of March 31, 2024 and December
31, 2023. Restricted cash consists of deposits in money market accounts, which is used as cash collateral backing letters of credit related
to customs duty authorities’ requirements. The Company has presented these balances under restricted cash, as a long-term asset,
in its unaudited condensed consolidated balance sheets. The Company reconciles cash, cash equivalents, and restricted cash reported in
the unaudited condensed consolidated balance sheets that aggregate to the beginning and ending balances shown in the unaudited condensed
consolidated statements of cash flows as follows (in thousands):
| |
March 31, 2024 | | |
December 31, 2023 | |
Cash and cash equivalents | |
$ | 1,786 | | |
$ | 2,593 | |
Restricted cash | |
| 3,829 | | |
| 3,823 | |
Total cash, cash equivalents and restricted cash | |
$ | 5,615 | | |
$ | 6,416 | |
Disaggregation of revenue
Refer to the table below for the Company’s
revenue recognized by product and service type (in thousands):
| |
Thirteen-weeks Ended | |
| |
March 31, | | |
April 2, | |
| |
2024 | | |
2023 | |
Solar energy system installations | |
$ | 9,922 | | |
$ | 15,843 | |
Software enhanced services | |
| 118 | | |
| 834 | |
Total revenue | |
$ | 10,040 | | |
$ | 16,677 | |
All of the Company’s revenue recognized
by geography based on the location of the customer for the thirteen-week periods ended March 31, 2024 and April 2, 2023 was in the United
States.
Remaining performance obligations
The Company has elected the practical expedient
not to disclose remaining performance obligations for contracts that are less than one year in length. As of March 31, 2024, the Company
has deferred $1.1 million associated with a long-term service contract. As of December 31, 2023, the Company has deferred $1.2 million
associated with a long-term service contract, which will be recognized evenly through 2028.
Incremental costs of obtaining customer contracts
Incremental costs of obtaining customer contracts
consist of sales commissions, which are costs paid to third-party vendors who source residential customer contracts for the sale of solar
energy systems by the Company. The Company defers sales commissions and recognizes expense in accordance with the timing of the related
revenue recognition. Amortization of deferred commissions is recorded as sales commissions in the accompanying unaudited condensed consolidated
statements of operations and comprehensive loss. As of March 31, 2024 and December 31, 2023, deferred commissions were $5.1 million and
$4.2 million, respectively, which were included in prepaid expenses and other current assets in the accompanying unaudited condensed
consolidated balance sheets.
Deferred revenue
The Company typically invoices its customers upon completion of set
milestones, generally upon installation of the solar energy system with the remaining balance invoiced upon passing final building inspection.
Standard payment terms to customers range from 30 to 60 days. When the Company receives consideration, or when such consideration is
unconditionally due, from a customer prior to delivering goods or services to the customer under the terms of a customer agreement, the
Company records deferred revenue. As installation projects are typically completed within 12-months, the Company’s deferred revenue
is reflected in current liabilities in the accompanying unaudited condensed consolidated balance sheets. The amount of revenue recognized
during the thirteen-week periods ended March 31, 2024 and April 2, 2023 that was included in deferred revenue at the beginning of each
period was $1.3 million and $1.9 million, respectively.
| (h) | Fair Value Measurements |
The Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions
that market participants would use in pricing an asset or liability in the principal or most advantageous market.
When considering market participant assumptions in fair value measurements,
the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following
levels:
| ● | Level 1 inputs: Unadjusted quoted prices in active markets
for identical assets or liabilities accessible to the reporting entity at the measurement date. |
| ● | Level 2 inputs: Other than quoted prices included in Level
1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset
or liability. |
| ● | Level 3 inputs: Unobservable inputs for the asset or liability
used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is
little, if any, market activity for the asset or liability at the measurement date. |
Financial assets and liabilities held by the Company
measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 include cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses, the warrant liabilities, SAFE Agreements and FPA liabilities.
The carrying amounts of cash, accounts receivable, accounts payable
and accrued expenses approximate their fair value because of their short-term nature (classified as Level 1).
The warrant liabilities and FPA liabilities are measured at fair value
using Level 3 inputs. The Company records subsequent adjustments to reflect the increase or decrease in estimated fair value at each
reporting date within the unaudited condensed consolidated statements of operations and comprehensive income (loss) as a component of
other income (expense), net.
Direct offering costs represent legal, accounting and other direct
costs related to the Mergers, which was consummated in July 2023. In accounting for the Mergers, direct offering costs of approximately
$5.7 million were reclassified to additional paid-in capital and netted against the Mergers proceeds received upon close. As of March
31, 2024 and December 31, 2023, the Company had no deferred offering costs included within prepaid expenses and other current assets
in its unaudited condensed consolidated balance sheets.
The Company accounts for its warrant liabilities in accordance with
the guidance in ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, under which the warrants that do
not meet the criteria for equity classification and must be recorded as liabilities. The warrant liabilities are measured at fair value
at inception and at each reporting date in accordance with the guidance in ASC 820, Fair Value Measurement, with any subsequent changes
in fair value recognized in other income (expense), net on the unaudited condensed consolidated statements of operations and comprehensive
income (loss). Refer to Note 3 – Fair Value Measurements and Note 12 – Warrants.
| (k) | Forward Purchase Agreements |
The Company accounts for its FPAs in accordance with the guidance in
ASC 480, Distinguishing Liabilities from Equity, as the agreements embody an obligation to transfer assets to settle a forward contract.
The warrant liabilities are measured at fair value at inception and at each reporting date in accordance with the guidance in ASC 820,
Fair Value Measurement, with any subsequent changes in fair value recognized in other income (expense), net on the unaudited condensed
consolidated statements of operations and comprehensive income (loss). Refer to Note 3 – Fair Value Measurements and Note 5 –
Forward Purchase Agreements.
The Company computes net loss per share following
ASC 260, Earnings Per Share. Basic net loss per share is measured as the income or loss available to common stockholders divided by the
weighted average common shares outstanding for the period. Diluted net loss per share presents the dilutive effect on a per-share basis
from the potential exercise of options and/or warrants. The potentially dilutive effect of options or warrants are computed using the
treasury stock method. Securities that potentially have an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the diluted loss per share calculation.
| (m) | Accounting Pronouncements Not Yet Adopted |
In November 2023, the FASB issued ASU No. 2023-07
“Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). The ASU expands
public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the
CODM and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment
items, and interim disclosures of a reportable segment’s profit or loss and assets. This guidance is effective for fiscal years
beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective
adoption. The Company is currently evaluating ASU 2023-07,but expects the impact of the disclosures to be immaterial to the Company’s
unaudited condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic
740): Improvements to Income Tax Disclosures. The objective of ASU 2023-09 is to enhance disclosures related to income taxes, including
specific thresholds for inclusion within the tabular disclosure of income tax rate reconciliation and specified information about income
taxes paid. ASU 2023-09 is effective for public companies starting in annual periods beginning after December 15, 2024. The Company is
currently evaluating ASU 2023-09 but expects the impact of the disclosures to be immaterial to the Company’s unaudited condensed
consolidated financial statements.
| (3) | Fair Value Measurements |
The following table sets forth the Company’s
financial assets and liabilities that are measured at fair value, on a recurring basis (in thousands):
| |
As
of March 31, 2024 | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Financial Liabilities | |
| | |
| | |
| | |
| |
Carlyle warrants | |
$ | — | | |
$ | — | | |
$ | 3,086 | | |
$ | 3,086 | |
Public warrants | |
| 437 | | |
| — | | |
| — | | |
| 437 | |
Private placement warrants | |
| — | | |
| 318 | | |
| — | | |
| 318 | |
Working capital warrants | |
| — | | |
| 36 | | |
| — | | |
| 36 | |
Replacement warrants | |
| — | | |
| — | | |
| 5 | | |
| 5 | |
Forward purchase agreement
liabilities | |
| — | | |
| — | | |
| 9,409 | | |
| 9,409 | |
SAFE
Agreements | |
| — | | |
| — | | |
| 5,000 | | |
| 5,000 | |
Total | |
$ | 437 | | |
$ | 354 | | |
$ | 17,500 | | |
$ | 18,291 | |
| |
As of December 31, 2023 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Financial Liabilities | |
| | | |
| | | |
| | | |
| | |
Carlyle warrants | |
$ | — | | |
$ | — | | |
$ | 9,515 | | |
$ | 9,515 | |
Public warrants | |
| 167 | | |
| — | | |
| — | | |
| 167 | |
Private placement warrants | |
| — | | |
| 122 | | |
| — | | |
| 122 | |
Working capital warrants | |
| — | | |
| 14 | | |
| — | | |
| 14 | |
Replacement warrants | |
| – | | |
| – | | |
| 1,310 | | |
| 1,310 | |
Forward purchase agreement liabilities | |
| — | | |
| — | | |
| 3,831 | | |
| 3,831 | |
Total | |
$ | 167 | | |
$ | 136 | | |
$ | 14,656 | | |
$ | 14,959 | |
Carlyle Warrants
As part of the Company’s amended and restated warrant agreement
with CRSEF Solis Holdings, LLC and its affiliates (“Carlyle”), the Company issued Carlyle a warrant to purchase shares of
Complete Solaria Common Stock at a price per share of $0.01. Refer to Note 12 – Warrants for further details. The Company valued
the warrants based on a Black-Scholes Option Pricing Method, which included the following inputs:
| |
March
31, 2024 | | |
December
31, 2023 | |
Expected term | |
| 7.0 years | | |
| 7.0 years | |
Expected volatility | |
| 77.0 | % | |
| 77.0 | % |
Risk-free interest rate | |
| 3.92 | % | |
| 3.92 | % |
Expected dividend yield | |
| 0.0 | % | |
| 0.0 | % |
Public, Private Placement and Working Capital Warrants
The public, private placement and working capital
warrants are measured at fair value on a recurring basis. The public warrants were valued based on the closing price of the publicly
traded instrument. The private placement and working capital warrants were valued using observable inputs for similar publicly-traded
instruments.
Forward Purchase Agreement Liabilities
The FPA liabilities are measured at fair
value on a recurring basis using a Monte Carlo simulation analysis. The expected volatility is determined based on the historical equity
volatility of comparable companies over a period that matches the simulation period, which included the following inputs:
| |
March 31, 2024 | | |
December 31, 2023 | |
Common stock trading price | |
$ | 0.59 | | |
$ | 1.66 | |
Simulation period | |
| 1.30 years | | |
| 1.55 years | |
Risk-free interest rate | |
| 4.90 | % | |
| 4.48 | % |
Volatility | |
| 112.0 | % | |
| 95.0 | % |
Replacement Warrants
| |
March 31, 2024 | | |
December 31, 2023 | |
Expected term | |
| 0.8 years | | |
| 0.3 years | |
Expected volatility | |
| 78.5 | % | |
| 78.5 | % |
Risk-free interest rate | |
| 5.49 | % | |
| 5.4 | % |
Volatility | |
| 0.0 | % | |
| 0.0 | % |
The Series D-7 redeemable convertible
preferred stock warrants were initially accounted for as liabilities and measured at fair value at the issuance date and as of each subsequent
reporting period with changes in the fair value recorded within other income (expense), net in the accompanying unaudited condensed consolidated
statements of operations and comprehensive income (loss). As described in Note 12 – Warrants, the redeemable convertible preferred
stock warrants were reclassified to additional paid-in capital upon the closing of the Mergers. In October 2023, in connection with the
Assignment and Acceptance Agreement as further described in Note 12 – Warrants, these warrants were replaced (“Replacement
Warrants”), and the Replacement Warrants are classified as liabilities. Refer to Note 13 – Borrowings and SAFE Agreements.
(4) | Reverse Recapitalization |
As discussed in Note 1 – Organization,
on July 18, 2023, the Company consummated the Mergers pursuant to the Amended and Restated Business Combination Agreement. The Mergers
was accounted for as a reverse recapitalization, rather than a business combination, for financial accounting and reporting purposes.
Accordingly, Complete Solaria was deemed the accounting acquirer (and legal acquiree) and FACT was treated as the accounting acquiree
(and legal acquirer). Complete Solaria was determined to be the accounting acquirer based on an evaluation of the following facts and
circumstances:
| ● | Complete Solaria’s pre-combination stockholders have
the majority of the voting power in the post- merged company; |
| ● | Legacy Complete Solaria’s stockholders have the ability
to appoint a majority of the Complete Solaria Board of Directors; |
| ● | Legacy Complete Solaria’s management team is considered
the management team of the post-merged company; |
| ● | Legacy Complete Solaria’s prior operations are comprised
of the ongoing operations of the post-merged company; |
| ● | Complete Solaria is the larger entity based on historical
revenues and business operations; and |
| ● | the post-merged company has assumed Complete Solaria’s
operating name. |
Under this method of accounting, the reverse
recapitalization was treated as the equivalent of Complete Solaria issuing stock for the net assets of FACT, accompanied by a recapitalization.
The net assets of FACT are stated at historical cost, with no goodwill or other intangible assets recorded. The unaudited condensed consolidated
assets, liabilities, and results of operations prior to the Mergers are those of Legacy Complete Solaria. All periods prior to the Mergers
have been retrospectively adjusted in accordance with the Amended and Restated Business Combination Agreement for the equivalent number
of preferred or common shares outstanding immediately after the Mergers to effect the reverse recapitalization.
Upon the closing of the Mergers and the PIPE Financing in July 2023,
the Company received net cash proceeds of $19.7 million less non-cash net liabilities assumed from FACT of $10.1 million.
Immediately upon closing of the Mergers, the
Company had 45,290,553 shares issued and outstanding of Class A Common Stock. The following table presents the number of shares of Complete
Solaria Common Stock outstanding immediately following the consummation of the Mergers:
| |
Recapitalization | |
FACT Class A Ordinary Shares, outstanding prior to Mergers | |
| 34,500,000 | |
FACT Class B Ordinary Shares, outstanding prior to Mergers | |
| 8,625,000 | |
Bonus shares issued to sponsor | |
| 193,976 | |
Bonus shares issued to PIPE investors | |
| 120,000 | |
Bonus shares issued to FPA investors | |
| 150,000 | |
Shares issued from PIPE financing | |
| 1,690,000 | |
Shares issued from FPA agreements, net of recycled shares | |
| 5,558,488 | |
Less: redemption of FACT Class A Ordinary Shares | |
| (31,041,243 | ) |
Total shares from the Mergers and PIPE Financing | |
| 19,796,221 | |
Legacy Complete Solaria shares | |
| 20,034,257 | |
2022 Convertible Note Shares | |
| 5,460,075 | |
Shares of Complete Solaria Common stock immediately after Mergers | |
| 45,290,553 | |
In connection with the Mergers, the Company incurred
direct and incremental costs of approximately $15.8 million related to legal, accounting, and other professional fees, which were offset
against the Company’s additional paid-in capital. Of the $15.8 million, $5.2 million was incurred by Legacy Complete Solaria and
$10.6 million was incurred by FACT. The Company did not make any cash payments to settle transaction costs in the thirteen-weeks ended
March 31, 2024. As of December 31, 2023, the Company made cash payments totaling $5.4 million to settle transaction costs. As a result
of the Closing, outstanding 2022 Convertible Notes were converted into shares of Complete Solaria Common Stock.
(5) | Forward Purchase Agreements |
In July 2023, FACT and Legacy Complete Solaria,
Inc. entered into FPAs with each of (i) Meteora; (ii) Polar, and (iii) Sandia (each individually, a “Seller”, and together,
the “FPA Sellers”).
Pursuant to the terms of the FPAs, the FPA Sellers
may (i) purchase through a broker in the open market, from holders of Shares other than the Company or affiliates thereof, FACT’s
ordinary shares, par value of $0.0001 per share, (the “Shares”). While the FPA Sellers have no obligation to purchase any
Shares under the FPAs, the aggregate total Shares that may be purchased under the FPAs shall be no more than 6,720,000 in aggregate.
The FPA Sellers may not beneficially own greater than 9.9% of issued and outstanding Shares following the Mergers as per the Amended
and Restated Business Combination Agreement.
The key terms of the forward contracts are as follows:
| ● | The FPA Sellers can terminate the transaction following the
Optional Early Termination (“OET”) Date which shall specify the quantity by which the number of shares is to be reduced (such
quantity, the “Terminated Shares”). Seller shall terminate the transaction in respect of any shares sold on or prior to the
maturity date. The counterparty is entitled to an amount from the Seller equal to the number of terminated shares multiplied by a reset
price. The reset price is initially $10.56 (the “Initial Price”) and is subject to a $5.00 floor. |
| ● | The FPA contains multiple settlement outcomes. Per the terms of the agreements, the FPAs will (1) settle in cash in the event the Company is due cash upon settlement from the FPA Sellers or (2) settle in either cash or shares, at the discretion of the Company, should the settlement amount adjustment exceed the settlement amount. Should the Company elect to settle via shares, the equity will be issued in Complete Solaria Common Stock, with a per share price based on the volume-weighted average price (“VWAP”) Price over 15 scheduled trading days. The magnitude of the settlement is based on the Settlement Amount, an amount equal to the product of: (1) Number of shares issued to the FPA Seller pursuant to the FPA, less the number of Terminated Shares multiplied by (2) the VWAP Price over the valuation period. The Settlement amount will be reduced by the Settlement Adjustment, an amount equal to the product of (1) Number of shares in the Pricing Date Notice, less the number of Terminated Shares multiplied by $2.00. |
| ● | The Settlement occurs as of the
Valuation Date, which is the earlier to occur of (a) the date that is two years after the
date of the Closing Date of the Mergers (b) the date specified by Seller in a written notice
to be delivered to the Counterparty at the Seller’s discretion (which Valuation Date
shall not be earlier than the day such notice is effective) after the occurrence of certain
triggering events; and (c) 90 days after delivery by the Counterparty of a written notice
in the event that for any 20 trading days during a 30 consecutive trading day-period (the
“Measurement Period”) that occurs at least 6 months after the Closing Date, the
VWAP Price is less than the then applicable Reset Price. |
The Company entered into four separate FPAs,
three of which, associated with the obligation to issue 6,300,000 Shares, were entered into prior to the closing of the Mergers. Upon
signing the FPAs, the Company incurred an obligation to issue a fixed number of shares to the FPA Sellers contingent upon the closing
of the Mergers in addition to the terms and conditions associated with the settlement of the FPAs. The Company accounted for the contingent
obligation to issue shares in accordance with ASC 815, Derivatives and Hedging, and recorded a liability and other income (expense),
net based on the fair value upon of the obligation upon the signing of the FPAs. The liability was extinguished in July 2023 upon the
issuance of Complete Solaria Common Stock to the FPA sellers.
Additionally, in accordance with ASC 480, Distinguishing
Liabilities from Equity, the Company has determined that the forward contracts are financial instruments other than shares that represent
or are indexed to obligations to repurchase the issuer’s equity shares by transferring assets, referred to herein as the “forward
purchase liability” on its unaudited condensed consolidated balance sheets. The Company initially measured the forward purchase
liabilities at fair value and has subsequently remeasured them at fair value with changes in fair value recognized in earnings.
Through the date of issuance of the Complete
Solaria Common Stock in satisfaction of the Company’s obligation to issue shares around the closing of the Mergers, the Company
recorded $35.5 million to other income (expense), net associated with the issuance of 6,720,000 shares of Complete Solaria Common Stock
in association with the FPAs.
As of the closing of the Mergers and issuance
of the Complete Solaria Common Stock underlying the FPAs, the fair value of the prepaid FPAs was an asset balance of $0.1 million and
was recorded on the Company’s unaudited condensed consolidated balance sheets and within other income (expense), net on the unaudited
condensed consolidated statements of operations and comprehensive loss. Subsequently, the change of fair value of the forward purchase
liabilities amounted to an expense of $5.6 million for the thirteen-weeks ended March 31, 2024. As of March 31, 2024, and December 31,
2023, the forward purchase liabilities amounted to $9.4 million and $3.8 million, respectively. Of the balances as of March 31, 2024 and
December 31, 2023, $7.9 million and $3.2 million, respectively, are due to related parties Refer to Note 19 – Related Party Transactions
for further details.
On December 18, 2023, the Company and the FPA
Sellers entered into separate amendments to the FPAs (the “Amendments”). The Amendments lower the reset floor price of each
FPA from $5.00 to $3.00 and allow the Company to raise up to $10.0 million of equity from existing stockholders without triggering certain
anti-dilution provisions contained in the FPAs; provided, the insiders pay a price per share for their initial investment equal to the
closing price per share as quoted on the Nasdaq on the day of purchase; provided, further, that any subsequent investments are made at
a price per share equal to the greater of (a) the closing price per share as quoted by Nasdaq on the day of the purchase or (b) the amount
paid in connection with the initial investment.
(6) | Prepaid Expenses and Other Current
Assets |
Prepaid expenses and other current assets consist
of the following (in thousands):
| |
As of | |
| |
March 31,
2024 | | |
December 31,
2023 | |
Deferred commissions | |
$ | 5,098 | | |
$ | 4,185 | |
Inventory deposits | |
| - | | |
| 616 | |
Other | |
| 678 | | |
| 1,016 | |
Total prepaid expenses and other current assets | |
$ | 5,776 | | |
$ | 5,817 | |
Discontinued operations
As previously described in Note 1 – Organization,
on August 18, 2023, the Company entered into a Non-Binding Letter of Intent to sell certain of Complete Solaria’s North American
solar panel assets, inclusive of intellectual property and customer contracts, to Maxeon. Under the terms of the Disposal Agreement,
Maxeon agreed to acquire certain assets and employees of Complete Solaria. The Company determined that this divestiture represented a
strategic shift in the Company’s business and qualified as a discontinued operation. In October 2023, the Company completed the
sale of its solar panel business to Maxeon, pursuant to the terms of the Asset Purchase Agreement Disposal Agreement.
The components of amounts reflected in the unaudited condensed consolidated
statements of operations and comprehensive loss related to discontinued operations are presented in the table, as follows (in thousands):
| |
Thirteen-Weeks | |
| |
Ended
April 2, 2023 | |
Revenues | |
$ | 18,721 | |
Cost of revenues | |
| 19,479 | |
Gross loss | |
| (758 | ) |
Operating expenses: | |
| | |
Sales and marketing | |
| 2,866 | |
General and administrative | |
| 4,185 | |
Total operating expenses | |
| 7,051 | |
Loss from discontinued operations | |
| (7,809 | ) |
Other income (expense), net | |
| — | |
Loss from discontinued operations before income taxes | |
| (7,809 | ) |
Income tax benefit | |
| 4 | |
Net loss from discontinued operations | |
$ | (7,805 | ) |
(8) | Property and Equipment, Net |
Property and equipment, net consists of the following
(in thousands, except year data):
| |
Estimated | | |
As of | |
| |
Useful Lives (Years) | | |
March 31, 2024 | | |
December 31,
2023 | |
Developed software | |
5 | | |
$ | 7,529 | | |
$ | 6,993 | |
Manufacturing equipment | |
3 | | |
| 131 | | |
| 131 | |
Furniture and equipment | |
3 | | |
| 90 | | |
| 96 | |
Leasehold improvements | |
5 | | |
| 708 | | |
| 708 | |
Total property and equipment | |
| | |
| 8,464 | | |
| 7,928 | |
Less: accumulated depreciation and amortization | |
| | |
| (3,969 | ) | |
| (3,611 | ) |
Total property and equipment, net | |
| | |
$ | 4,495 | | |
$ | 4,317 | |
Depreciation and amortization expense from continuing operations totaled
$0.4 million and $0.2 million for the thirteen-week periods ended March 31, 2024 and April 2, 2023.
(9) | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current
liabilities consist of the following (in thousands):
| |
As of | |
| |
March 31,
2024 | | |
December 31,
2023 | |
Accrued compensation and benefits | |
$ | 3,715 | | |
$ | 3,969 | |
Customer deposits | |
| 296 | | |
| 544 | |
Uninvoiced contract costs | |
| 80 | | |
| 671 | |
| |
| | | |
| | |
Accrued term loan and revolving loan amendment and final payment fees | |
| 2,400 | | |
| 2,400 | |
Accrued legal settlements | |
| 7,700 | | |
| 7,700 | |
Accrued taxes | |
| 930 | | |
| 931 | |
Accrued rebates and credits | |
| 32 | | |
| 677 | |
Operating lease liabilities, current | |
| 548 | | |
| 607 | |
Accrued warranty, current | |
| 1,449 | | |
| 1,433 | |
Other accrued liabilities | |
| 7,743 | | |
| 8,938 | |
Total accrued expenses and other current liabilities | |
$ | 24,893 | | |
$ | 27,870 | |
Other expense, net consists of the following (in thousands):
| |
Thirteen-Weeks
Ended | |
| |
March 31, 2024 | | |
April 2, 2023 | |
Change in fair value of redeemable convertible preferred stock warrant liability | |
$ | 1,305 | | |
$ | 209 | |
Change in fair value of Carlyle warrants | |
| 6,429 | | |
| — | |
Change in fair value of FACT public, private placement and working capital warrants | |
| (489 | ) | |
| — | |
Change in fair value of forward purchase agreement liabilities(1) | |
| (5,578 | ) | |
| — | |
Loss on discontinued Solaria business and other, net | |
| (148 | ) | |
| 108 | |
Total other income (expense), net | |
$ | 1,519 | | |
$ | 317 | |
The Company has authorized the issuance of 1,000,000,000 shares of
common stock and 10,000,000 shares of preferred stock as of March 31, 2024. No preferred stock has been issued.
Common Stock Purchase Agreements
On December 18, 2023, the Company entered into separate common stock
purchase agreements (the “Purchase Agreements”) with the Rodgers Massey Freedom and Free Markets Charitable Trust and the
Rodgers Massey Revocable Living Trust (each a “Purchaser”, and together, the “Purchasers”). Pursuant to the terms
of the Purchase Agreements, each Purchaser purchased 1,838,235 shares of common stock of the Company, par value $0.0001, (the “Shares”),
at a price per share of $1.36, representing an aggregate purchase price of $4,999,999.20. The Purchasers paid for the Shares in cash.
Thurman J. Rodgers is a trustee of each Purchaser and is the Executive Chairman of the board of directors of the Company.
The Company has reserved shares of common stock for issuance related
to the following:
| |
As of March 31, 2024 | |
Common stock warrants | |
| 27,637,266 | |
Employee stock purchase plan | |
| 2,628,996 | |
Stock options and RSUs, issued and outstanding | |
| 11,436,369 | |
Stock options and RSUs, authorized for future issuance | |
| 3,850,462 | |
Total shares reserved | |
| 45,553,093 | |
Liability-classified warrants
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2024 |
|
|
2023 |
|
Carlyle warrants |
|
$ |
3,086 |
|
|
$ |
9,515 |
|
Replacement warrants |
|
|
5 |
|
|
|
1,310 |
|
Public warrants |
|
|
437 |
|
|
|
167 |
|
Private placements warrants |
|
|
318 |
|
|
|
122 |
|
Working capital warrants |
|
|
36 |
|
|
|
13 |
|
|
|
$ |
3,882 |
|
|
$ |
11,127 |
|
Carlyle Warrants
In February 2022, as part of a debt financing from Carlyle (Refer to
Note 13 – Borrowing Arrangements), the Company issued a warrant to purchase 2,886,952 shares of common stock in conjunction with
long-term debt issued to Carlyle (“CS Solis Debt”). The warrant contained two tranches, the first of which is immediately
exercisable for 1,995,879 shares. The second tranche, which was determined to be a separate unit of account, expired on December 31, 2022
prior to becoming exercisable. In December 2023, Carlyle was issued an additional warrant to purchase an additional 2,190,604 shares of
the Company’s common stock related to an anti-dilution provision within the CS Solis Debt that provides for such additional warrants
under such circumstances as provided within the CS Solis Debt.
At issuance, the relative fair value of the warrant
was determined to be $3.4 million using the Black-Scholes model with the following weighted average assumptions: expected term of 7 years;
expected volatility of 73.0%; risk-free interest rate of 1.9%; and no dividend yield. The fair value of the warrant was initially recorded
within additional paid-in capital as it met the conditions for equity classification.
In July 2023, and in connection with the closing
of the Mergers, the Carlyle debt and warrants were modified. Based on the exchange ratio included in the Mergers, the 1,995,879 outstanding
warrants to purchase Legacy Complete Solaria Common Stock prior to modification were exchanged into warrants to purchase 1,995,879 shares
of Complete Solaria Common Stock. As part of the modification, the warrant, which expires on July 18, 2030, provides Carlyle with the
right to purchase shares of Complete Solaria Common Stock based on (a) the greater of (i) 1,995,879 shares and (ii) the number of shares
equal to 2.795% of Complete Solaria’s issued and outstanding shares of common stock, on a fully-diluted basis; plus (b) on and
after the date that is ten (10) days after the date of the agreement, an additional 350,000 shares; plus (c) on and after the date that
is thirty (30) days after the date of the agreement, if the original investment amount has not been repaid, an additional 150,000 shares;
plus (d) on and after the date that is ninety (90) days after the date of the agreement, if the original investment amount has not been
repaid, an additional 250,000 shares, in each case, of Complete Solaria Common Stock at a price of $0.01 per share. Of the additional
warrants that become exercisable after the modification, the tranches of 350,000 warrants vesting ten days after the date of the agreement
and 150,000 warrants vesting thirty days after the date of the agreement are exercisable as of December 31, 2023.
The modification of the warrant resulted in the
reclassification of previously equity-classified warrants to liability classification, which was accounted for in accordance with ASC
815 and ASC 718, Compensation – Stock Compensation. The Company recorded the fair value of the modified warrants as a warrant
liability of $20.4 million, the pre-modification fair value of the warrants as a reduction to additional paid-in capital of $10.9 million
and an expense of $9.5 million to other income (expense), net equal to the incremental value of the warrants upon the modification. The
fair value of the warrant was determined based on its intrinsic value, given a nominal exercise price. At issuance, the relative fair
value of the warrant was determined to be $20.4 million using the Black-Scholes model with the following weighted average assumptions:
expected term of 7 years; expected volatility of 77.0%; risk-free interest rate of 3.9%; and no dividend yield. As of March 31, 2024,
the fair value of the warrant was $3.1 million, and the Company recorded an income of $6.4 million as other income (expense), net on the
unaudited condensed consolidated statements of operations and comprehensive loss.
Series D-7 Warrants (Converted to common stock warrants “Replacement
Warrants”)
In November 2022, the Company issued warrants
to purchase 656,630 shares of Series D-7 preferred stock (the “Series D-7 warrants”) in conjunction with the Business Combination.
The warrant contains two tranches. The first tranche of 518,752 shares of Series D-7 preferred stock is exercisable at an exercise price
of $2.50 per share upon consummation of a merger transaction, or at an exercise price of $2.04 per share upon remaining private and has
an expiration date of April 2024. The second tranche of 137,878 shares of Series D-7 preferred stock is exercisable at an exercise price
of $5.00 per share upon consummation of a merger transaction, or at an exercise price of $4.09 per share upon remaining private and has
an expiration date of April 2024. The fair value of the Series D-7 warrants was $7.8 million as of December 31, 2022 and $2.4 million
as of July 18, 2023 when the warrants were reclassified from redeemable convertible preferred stock warrant liability to additional paid-in
capital, as the exercise price of the warrants is fixed at $2.50 per share of Complete Solaria Common Stock for the first tranche and
$5.00 per share of Complete Solaria Common Stock for the second tranche upon the closing of the Mergers.
In October 2023, the Company entered into an Assignment
and Acceptance Agreement (“Assignment Agreement”), (Refer to Note 13 – Borrowings and SAFE Agreements). In connection
with the Assignment Agreement, the Company also entered into the First Amendment to Warrant to Purchase Stock Agreements with the holders
of the Series D-7 warrants. Pursuant to the terms of the agreement, the warrants to purchase 1,376,414 shares of Series D-7 preferred
stock converted into warrants to purchase 656,630 shares of common stock, the Replacement Warrants. As a result of the warrant amendment,
the Company reclassified the Replacement Warrants from equity to liability. The Replacement Warrants were remeasured to their fair value
on the amendment effective date, and the Company has recorded subsequent changes in fair value in other income (expense), net on its unaudited
condensed consolidated statements of operations and comprehensive loss. The Replacement Warrants remain outstanding as of March 31, 2024.
Public, Private Placement, and Working Capital Warrants
In conjunction with the Mergers, Complete Solaria,
as accounting acquirer, was deemed to assume 6,266,667 warrants to purchase FACT Class A Ordinary Shares that were held by the sponsor
at an exercise price of $11.50 (“Private Placement Warrants”) and 8,625,000 warrants to purchase FACT’s shareholders
FACT Class A Ordinary Shares at an exercise price of $11.50 (“Public Warrants”). Subsequent to the Mergers, the Private Placement
Warrants and Public Warrants are exercisable for shares of Complete Solaria Common Stock and meet liability classification requirements
since the warrants may be required to be settled in cash under a tender offer. In addition, the Private Placement Warrants are potentially
subject to a different settlement amount as a result of being held by the Sponsor which precludes the Private Placement Warrants from
being considered indexed to the entity’s own stock. Therefore, these warrants are classified as liabilities on the Company’s
unaudited condensed consolidated balance sheets.
The Company determined the Public and Private
warrants to be classified as a liability and fair valued the warrants on the issuance date using the publicly available price for the
warrants of $6.7 million. The fair value of these warrants was $0.8 million as of March 31, 2024, and the Company recorded the change
in fair value of $0.5 million in other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive
loss for the thirteen-weeks ended March 31, 2024.
Additionally, at the closing of the Mergers, the
Company issued 716,668 Working Capital warrants, which have identical terms as the Private Placement Warrants to the sponsor in satisfaction
of certain liabilities of FACT. The warrants were fair valued at $0.3 million upon the closing of the Mergers, which was recorded in warrant
liability on the unaudited condensed consolidated balance sheets. As of March 31, 2024, the Working Capital warrants had a fair value
of $0.03 million, and the Company recorded the change in fair value of $0.02 million as other income (expense), net on the unaudited condensed
consolidated statements of operations and comprehensive loss.
Equity Classified Warrants
Series B Warrants (Converted to Common Stock Warrants)
In February 2016, the Company issued a warrant to purchase 5,054 shares
of Series B preferred stock (the “Series B warrant”) in connection with a 2016 credit facility. The Series B warrant is immediately
exercisable at an exercise price of $4.30 per share and has an expiration date of February 2026. The relative fair value of the Series
B warrant at issuance was recorded as a debt issuance cost within other non-current liabilities upon issuance. The fair value of the
Series B warrant was less than $0.1 million as of December 31, 2022 and as of July 18, 2023, when the Series B warrant was reclassified
from warrant liability to additional paid-in capital, upon the warrant becoming exercisable into shares of Complete Solaria Common Stock
upon the close of the Mergers. Prior to its reclassification from equity to a liability during 2023, the changes in fair value were recorded
in other income (expense), net on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for
the thirteen-weeks ended April 2, 2023.
Series C Warrants (Converted to Common Stock Warrants)
In July 2016, the Company issued a warrant to purchase 148,477 shares
of Series C preferred stock (the “Series C warrant”) in connection with the Series C financing. The Series C warrant agreement
also provided for an additional number of Series C shares calculated on a monthly basis commencing on June 2016 based on the principal
balance outstanding of the notes payable outstanding. The maximum number of shares exercisable under the Series C warrant agreement is
482,969 shares of Series C preferred stock. The Series C warrant was immediately exercisable at an exercise price of $1.00 per share
and has an expiration date of July 2026. The relative fair value of the Series C warrant at issuance was recorded as Series C preferred
stock issuance costs and redeemable convertible preferred stock warrant liability and changes in the fair value of the warrant were recorded
in other income (expense), net on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for
the thirteen-weeks ended April 2, 2023. The fair value of the Series C warrant was $2.3 million as of July 18, 2023, when the Series
B warrant was reclassified from redeemable convertible preferred stock warrant liability to additional paid-in capital, upon the warrant
becoming exercisable into shares of Complete Solaria Common Stock.
Series C-1 Warrants (Converted to Common Stock Warrants)
In January 2020, the Company issued a warrant
to purchase 173,067 shares of common stock in conjunction with the Series C-1 preferred stock financing. The warrant is immediately exercisable
at an exercise price of $0.01 per share and has an expiration date of January 2030. The warrant remains outstanding as of March 31, 2024.
At issuance, the relative fair value of the warrant was determined to be $0.1 million using the Black-Scholes model with the following
weighted average assumptions: expected term of 10 years; expected volatility of 62.5%; risk-free interest rate of 1.5%; and no dividend
yield. The fair value of the warrant was recorded within additional paid-in capital on the unaudited condensed consolidated balance sheets.
The warrant is not remeasured in future periods as it meets the conditions for equity classification.
SVB Common Stock Warrants
In May and August 2021, the Company issued warrants
to purchase 2,473 and 2,525 shares of common stock, respectively, in conjunction with the Fifth and Sixth Amendments to the Loan and
Security Agreement (“Loan Agreement”) with Silicon Valley Bank (“SVB”). The warrants are immediately exercisable
at exercise prices of $0.38 and $0.62 per share, respectively, and have expiration dates in 2033. The warrants remain outstanding as
of March 31, 2024. At issuance, the relative fair value of the warrants was determined to be less than $0.1 million in aggregate using
the Black-Scholes model with the following weighted average assumptions: expected term of 12 years; expected volatility of 73.0%; risk-free
interest rate of 1.7% and 1.3% for the May and August 2021 warrants, respectively; and no dividend yield. The fair value of the warrant
was recorded within additional paid-in-capital on the accompanying unaudited condensed consolidated balance sheets. The warrants are
not remeasured in future periods as they meet the conditions for equity classification.
Promissory Note Common Stock Warrants
In October 2021, the Company issued a warrant
to purchase 24,148 shares of common stock in conjunction with the issuance of a short-term promissory note. The warrant is immediately
exercisable at an exercise price of $0.01 per share and has an expiration date of October 2031. The warrant remains outstanding as of
March 31, 2024. At issuance, the relative fair value of the warrant was determined to be less than $0.1 million using the Black-Scholes
model with the following weighted average assumptions: expected term of 10 years; expected volatility of 73.0%; risk-free interest rate
of 1.5%; and no dividend yield. The fair value of the warrant was recorded within additional paid-in capital on the unaudited condensed
consolidated balance sheets. The warrant is not remeasured in future periods as it meets the conditions for equity classification.
November 2022 Common Stock Warrants
In November 2022, the Company issued a warrant
to a third-party service provider to purchase 78,962 shares of common stock in conjunction with the Business Combination. The warrant
was immediately exercisable at an exercise price of $8.00 per share and had an expiration date of April 2024. In May 2023, the Company
amended the warrant, modifying (i) the shares of common stock to be purchased to 31,680, (ii) the exercise price to $0.01, and (iii)
the expiration date to the earlier of October 2026 or the closing of an IPO. The impact of the modification was not material to the unaudited
condensed consolidated financial statements. At issuance and upon the modification, the relative fair value of the warrant was determined
to be $0.1 million using the Black-Scholes model with the following weighted average assumptions: expected term of 1.5 years; expected
volatility of 78.5%; risk-free interest rate of 4.7%; and no dividend yield. The fair value of the warrant was recorded within additional
paid-in capital on the unaudited condensed consolidated balance sheets. The warrant is not remeasured in future periods as it meets the
conditions for equity classification. Upon the Closing of the Mergers, the warrant was net exercised into 31,680 shares of Complete Solaria
Common Stock.
July 2023 Common Stock Warrants
In July 2023, the Company issued a warrant to
a third-party service provider to purchase 38,981 shares of the Company’s common stock in exchange for services provided in obtaining
financing at the Closing of the Mergers. The warrant is immediately exercisable at a price of $0.01 per share and has an expiration date
of July 2028. At issuance, the fair value of the warrant was determined to be $0.2 million, based on the intrinsic value of the warrant
and the $0.01 per share exercise price. As the warrant is accounted for as an equity issuance cost, the warrant is recorded within additional
paid-in capital on the unaudited condensed consolidated balance sheets. The warrant is not remeasured in future periods as it meets the
conditions for equity classification.
Warrant Consideration
In July 2023, in connection with the Mergers,
the Company issued 6,266,572 warrants to purchase Complete Solaria Common Stock to holders of Legacy Complete Solaria Redeemable Convertible
Preferred Stock, Legacy Complete Solaria Common Stock. The exercise price of the common stock warrants is $11.50 per share and the warrants
expire 10 years from the date of the Mergers. The warrant consideration was issued as part of the close of the Mergers and was recorded
within additional paid-in capital, net of the issuance costs of the Mergers. As of March 31, 2024, all warrants issued as warrant consideration
remain outstanding.
(13) | Borrowings and SAFE Agreements |
The Company’s borrowings consisted of the following (in thousands):
| |
As of | |
| |
March 31, | | |
December 31, | |
| |
2024 | | |
2023 | |
2018 Bridge Notes | |
$ | 11,376 | | |
$ | 11,031 | |
Revolver Loan | |
| 5,290 | | |
| 5,168 | |
Secured Credit Facility | |
| 12,699 | | |
| 12,158 | |
Polar Settlement Agreement | |
| — | | |
| 300 | |
Total Notes payable | |
| 29,365 | | |
| 28,657 | |
Debt in CS Solis | |
| 35,840 | | |
| 33,280 | |
Total notes payable and convertible notes, net | |
| 65,205 | | |
| 61,937 | |
Less current portion | |
| (65,205 | ) | |
| (61,937 | ) |
Notes payable and convertible notes, net of current portion | |
$ | — | | |
$ | — | |
Notes Payable
2018 Bridge Notes
In December 2018, Solaria Corporation issued senior
subordinated convertible secured notes (“2018 Notes”) totaling approximately $3.4 million in exchange for cash. The notes
bear interest at the rate of 8% per annum and the investors are entitled to receive twice the face value of the 2018 Notes at maturity.
The 2018 Notes are secured by substantially all of the assets of Solaria Corporation. In 2021, the 2018 Notes were amended extending the
maturity date to December 13, 2022. In connection with the 2021 amendment, Solaria had issued warrants to purchase shares of Series E-1
redeemable convertible preferred stock of Solaria. The warrants were exercisable immediately in whole or in part at and expire on December
13, 2031. As part of the Business Combination with Complete Solar, all the outstanding warrants issued to the lenders were assumed by
the parent company, Complete Solaria. The 2018 Notes are secured by substantially all of the assets of Complete Solaria.
In December 2022, the Company entered into an amendment to the 2018
Bridge Notes extending the maturity date from December 13, 2022 to December 13, 2023, and the 2018 Notes remain outstanding as of March
31, 2024. In connection with the amendment, the 2018 Notes will continue to bear interest at 8% per annum and are entitled to an increased
repayment premium from 110% to 120% of the principal and accrued interest at the time of repayment.
The Company concluded that the amendment represented a troubled debt
restructuring as the Company was experiencing financial difficulty, and the amended terms resulted in a concession to the Company. As
the future undiscounted cash payments under the modified terms exceeded the carrying amount of the 2018 Notes on the date of modification,
the modification was accounted for prospectively. The incremental repayment premium is being amortized to interest expense using the
effective interest rate method. As of March 31, 2024 and December 31, 2023, the carrying value of the 2018 Notes was $11.4 million and
$11.0 million, respectively. Interest expense recognized for the thirteen-week periods ended March 31, 2024 and April 2, 2023 was $0.3
million and $0.3 million, respectively. As of March 31, 2024, the carrying value of the 2018 Notes approximates their fair value.
Revolver Loan
In October 2020, Solaria entered into a loan agreement (“SCI
Loan Agreement”) with Structural Capital Investments III, LP (“SCI”).
The SCI Loan Agreement is comprised of two facilities,
a term loan (the “Term Loan”) and a revolving loan (the “Revolving Loan”) (together “Original Agreement”)
for $5.0 million each with a maturity date of October 31, 2023. Both the Term Loan and the Revolving Loan were fully drawn upon closing.
The Term Loan was repaid prior to the acquisition of Solaria by Complete Solar and was not included in the Business Combination.
The Revolving Loan has a term of thirty-six months,
with the principal due at the end of the term and an annual interest rate of 7.75% or Prime rate plus 4.5%, whichever is higher. The
SCI Loan Agreement requires the Company to meet certain financial covenants relating to the maintenance of specified restricted cash
balance, achieve specified revenue targets and maintain specified contribution margins (“Financial Covenants”) over the term
of the Revolving Loan. The Revolving Loan is collateralized by substantially all assets and property of the Company.
In the years ended December 31, 2022 and December
31, 2021, Solaria entered into several Amended and Restated Loan and Security Agreements with SCI to forbear SCI from exercising any
rights and remedies available to it as a result of the Company not meeting certain Financial Covenants required by the Original Agreement.
As a result of these amendments changes were made to the Financial Covenants, and Solaria recorded a total of $1.9 million in amendment
fees which amount was recorded in Other Liabilities, and this liability was included in the assumed liabilities for purchase price accounting.
Solaria had historically issued warrants to purchase
shares of Series E-1 redeemable convertible preferred stock of Solaria (“SCI Series E-1 warrants”). The warrants were fully
exercisable in whole or in part at any time during the term of the Original agreement. As part of the Business Combination with Complete
Solar, all the outstanding SCI Series E-1 warrants were assumed by the parent company, Complete Solaria.
The Revolving Loan outstanding on the date of
the Business Combination was fair valued at $5.0 million for the purpose of purchase price accounting. The Revolving Loan principal balance
at March 31, 2024 and December 31, 2023 amounted to $5.3 million and $5.1 million, respectively. Interest expense recognized for the thirteen-week
periods ended March 31, 2024 and April 2, 2023 was $0.1 million and $0.1 million, respectively. The Company was in compliance with all
the Financial Covenants as of March 31, 2024.
In October 2023, the Company entered into an
Assignment Agreement whereby Structural Capital Investments III, LP assigned the SCI debt to Kline Hill Partners Fund LP, Kline Hill
Partners IV SPV LLC, Kline Hill Partners Opportunity IV SPV LLC, (collectively “Kline Hill”) and Rodgers Massey Revocable
Living Trust for a total purchase price of $5.0 million. The Company has identified this arrangement as a related party transaction,
as discussed in Note 18 – Related Party Transactions. The SCI Revolving Loan continued to remain outstanding as of March 31, 2024
and is currently being renegotiated. On May 1, 2024, the Company entered into an agreement with Kline Hill that will cancel this obligation
upon satisfaction of certain events. Refer to Note 1 - Subsequent Events for further details.
Secured Credit Facility
In December 2022, the Company entered into a
secured credit facility agreement with Kline Hill Partners IV SPV LLC and Kline Hill Partners Opportunity IV SPV LLC (“Secured
Credit Facility”). The Secured Credit Facility agreement allows the Company to borrow up to 70% of the net amount of its
eligible vendor purchase orders with a maximum amount of $10.0 million at any point in time. The purchase orders are backed by
relevant customer sales orders which serves as collateral. The amounts drawn under the Secured Credit Facility may be reborrowed
provided that the aggregate borrowing does not exceed $20.0 million. The repayment under the Secured Credit Facility is the borrowed
amount multiplied by 1.15x if repaid within 75 days and borrowed amount multiplied by 1.175x if repaid after 75 days. The Company
may prepay any borrowed amount without premium or penalty. Under the original terms, the Secured Credit Facility agreement was due
to mature in April 2023. The Company is in the process of amending the Secured Credit Facility agreement to extend its maturity
date.
At March 31, 2024, the balance outstanding was
$12.7 million, including accrued financing cost of $5.0 million, and as of December 31, 2023, the balance outstanding was $12.2 million,
including accrued financing cost of $4.5 million. The Company recognized interest expense of $0.5 million and $1.7 million related to
the Secured Credit Facility during the thirteen-weeks ended March 31, 2024 and April 2, 2023, respectively. As of March 31, 2024, the
total estimated fair value of the Secured Credit Facility approximated its carrying value. On May 1, 2024, the Company entered into an
agreement with Kline Hill that will cancel this obligation upon satisfaction of certain events. Refer to Note 19 - Subsequent Events for
further details.
Polar Settlement Agreement
In September 2023, in connection with the Mergers,
the Company entered into a settlement and release agreement with Polar Multi-Strategy Master Fund (“Polar”) for the settlement
of a working capital loan that had been made by Polar to the Sponsor, prior to the closing of the Mergers. The settlement agreement required
the Company to pay Polar $0.5 million in ten equal monthly installments and did not accrue interest. As of December 31, 2023, the balance
owed to Polar was $0.3 million all of which was paid in the period ended March 31, 2024.
Debt in CS Solis
As part of the Reorganization described in Note 1(a) Organization -
Description of Business and Note 12 - Warrants, the Company received cash and recorded debt for an investment by Carlyle. The investment
was made pursuant to a subscription agreement, under which Carlyle contributed $25.6 million in exchange for 100 Class B Membership Units
of CS Solis and the Company contributed the net assets of Complete Solar, Inc. in exchange for 100 Class A Membership Units. The Class
B Membership Units are mandatorily redeemable by the Company on the three-year anniversary of the effective date of the CS Solis amended
and restated LLC agreement (February 14, 2025). The Class B Membership Units accrue interest that is payable upon redemption at a rate
of 10.5% (which is structured as a dividend payable based on 25% of the investment amount measured quarterly), compounded annually, and
subject to increases in the event the Company declares any dividends. In connection with the investment by Carlyle, the Company issued
Carlyle a warrant to purchase 5,978,960 shares of the Company’s common stock at a price of $0.01 per share, of which, the purchase
of 4,132,513 shares of the Company’s common stock is immediately exercisable. The Company has accounted for the mandatorily redeemable
investment from Carlyle in accordance with ASC 480, Distinguishing Liabilities from Equity, and has recorded the investment as a liability,
which was accreted to its redemption value under the effective interest method. The Company has recorded the warrants as a discount to
the liability. Refer to Note 11 – Common Stock, for further discussion of the warrants issued in connection with the Class B Membership
Units.
On July 17 and July 18, 2023, and in connection
with obtaining consent for the Mergers, Legacy Complete Solaria, FACT and Carlyle entered into an Amended and Restated Consent to the
Business Combination Agreement (“Carlyle Debt Modification Agreement”) and an amended and restated warrant agreement (“Carlyle
Warrant Amendment”), which modified the terms of the mandatorily redeemable investment made by Carlyle in Legacy Complete Solaria.
The Carlyle Debt Modification Agreement accelerates
the redemption date of the investment, which was previously February 14, 2025 and is now March 31, 2024 subsequent to the modification.
The acceleration of the redemption date of the investment, resulted in the total redemption amount to be 1.3 times the principal at December
31, 2023. The redemption amount will increase to 1.4 times the original investment at March 31, 2024. Additionally, as part of the amendment,
the parties entered into an amended and restated warrant agreement. As part of the Carlyle Warrant Amendment, Complete Solaria issued
Carlyle a warrant to purchase up to 2,745,879 shares of Complete Solaria Common Stock at a price per share of $0.01, which is inclusive
of the outstanding warrant to purchase 1,995,879 shares at the time of modification. The warrant, which expires on July 18, 2030, provides
Carlyle with the right to purchase shares of Complete Solaria Common Stock based on (a) the greater of (i) 1,995,879 shares and (ii)
the number of shares equal to 2.795% of Complete Solaria’s issued and outstanding shares of common stock, on a fully-diluted basis;
plus (b) on and after the date that is ten (10) days after the date of the agreement, an additional 350,000 shares; plus (c) on
and after the date that is thirty (30) days after the date of the agreement, if the original investment amount has not been repaid, an
additional 150,000 shares; plus (d) on and after the date that is ninety (90) days after the date of the agreement, if the original
investment amount has not been repaid, an additional 250,000 shares, in each case, of Complete Solaria Common Stock at a price of $0.01
per share. The warrants are classified as liabilities under ASC 815 and are recorded within warrant liability on the Company’s
unaudited condensed consolidated statements of operations and comprehensive loss.
The Company accounted for the modification of
the debt due with CS Solis as a debt extinguishment in accordance with ASC 480 and ASC 470. As a result of the extinguishment, the Company
recorded a loss on extinguishment, of $10.3 million in the thirteen-week period ended October 1, 2023. As of the modification date, the
Company recorded the fair value of the new debt of $28.4 million as short-term debt with CS Solis. As of March 31, 2024, the debt has
a redemption obligation of $35.8 million under the Carlyle Debt Modification Agreement. The debt in CS Solis is currently under negotiation.
The Company has recorded a liability of $35.8
million and $33.3 million included in short-term debt with CS Solis on its unaudited condensed consolidated balance sheets as of March
31, 2024 and December 31, 2023, respectively. For the thirteen-week periods ended March 31, 2024 and April 2, 2023, the Company has recorded
accretion of the liability as interest expense of $2.5 million and $0.8 million, respectively, and made no payments of interest expense.
For the thirteen-week periods ended March 31, 2024 and April 2, 2023 the Company recorded amortization of issuance costs as interest expense
of zero and $0.3 million, respectively. As of March 31, 2024, the total estimated fair value of the Company’s debt with CS Solis
was $35.8 million, which was estimated based on Level 3 inputs.
SAFE Agreements
First SAFE
On January 31, 2024, the Company entered into a simple agreement for
future equity (the “First SAFE”) with the Rodgers Massey Freedom and Free Markets Charitable Trust (the “Purchaser”),
a related party, in connection with the Purchaser investing $1.5 million in the Company. The First SAFE does not accrued interest. The
First SAFE was initially convertible into shares of the Company’s common stock, par value $0.0001 per share, upon the initial closing
of a bona fide transaction or series of transactions with the principal purpose of raising capital, pursuant to which the Company would
have issued and sold shares of its common stock at a fixed valuation (an “Equity Financing”), at a per share conversion price
which was equal to the lower of (i)(a) $53.54 million divided by (b) the Company’s capitalization immediately prior to such Equity
Financing (such conversion price, the “SAFE Price”), and (ii) 80% of the price per share of its common stock sold in the Equity
Financing. If the Company consummated a change of control prior to the termination of the First SAFE, the Purchaser would have been automatically
entitled to receive a portion of the proceeds of such liquidity event equal to the greater of (i) $1.5 million and (ii) the amount payable
on the number of shares of common stock equal to (a) $1.5 million divided by (b)(1) $53.54 million divided by (2) the Company’s
capitalization immediately prior to such liquidity event (the “Liquidity Price”), subject to certain adjustments as set forth
in the First SAFE. The First SAFE was convertible into a maximum of 1,431,297 shares of the Company’s common stock, assuming a per
share conversion price of $1.05, which is the product of (i) $1.31, the closing price per share of the Company’s common stock on
January 31, 2024, multiplied by (ii) 80%. On April 21, 2024, the Company entered into an amendment of the First SAFE which resulted in
the First SAFE into shares of the Company’s common stock. Refer to Note 19 – Subsequent Events for further details.
Second SAFE
On February 15, 2024, the Company entered into a simple agreement for
future equity (the “Second SAFE” and together with the First SAFE, the “SAFEs”) with the Purchaser, a related
party, in connection with the Purchaser investing $3.5 million in the Company. The First SAFE does not accrued interest. The Second SAFE
was initially convertible into shares of the Company’s common stock upon the initial closing of an Equity Financing at a per share
conversion price which was equal to the lower of (i) the SAFE Price, and (ii) 80% of the price per share of Common Stock sold in the Equity
Financing. If the Company consummated a change of control prior to the termination of the Second SAFE, the Purchaser would have been automatically
entitled to receive an amount equal to the greater of (i) $3.5 million and (ii) the amount payable on the number of shares of Common Stock
equal to $3.5 million divided by the Liquidity Price, subject to certain adjustments as set forth in the Second SAFE. The Second SAFE
was convertible into a maximum of 3,707,627 shares of the Company’s common stock, assuming a per share conversion price of $0.94,
which is the product of (i) $1.18, the closing per share price of its common stock on February 15, 2024, multiplied by (ii) 80%. On April
21, 2024, the Company entered into an amendment of the Second SAFE which resulted in the conversion of the Second SAFE into shares of
the Company’s common stock. Refer to Note 19 – Subsequent Events for further details.
(14) | Stock-Based Compensation |
In July 2023, the Company’s board of directors adopted and stockholders
approved the 2023 Incentive Equity Plan (the “2023 Plan”). The 2023 Plan became effective immediately upon the closing of
the Amended and Restated Business Combination Agreement. Initially, a maximum number of 8,763,322 shares of Complete Solaria common stock
may be issued under the 2023 Plan. In addition, the number of shares of Complete Solaria common stock reserved for issuance under the
2023 Plan will automatically increase on January 1 of each year, starting on January 1, 2024 and ending on January 1, 2033, in an amount
equal to the lesser of (1) 4% of the total number of shares of Complete Solaria’s common stock outstanding on December 31 of the
preceding year, or (2) a lesser number of shares of Complete Solaria Common Stock determined by Complete Solaria’s board of directors
prior to the date of the increase. The maximum number of shares of Complete Solaria common stock that may be issued on the exercise of
incentive stock options (“ISOs”) under the 2023 Plan is three times the number of shares available for issuance upon the 2023
Plan becoming effective (or 26,289,966 shares).
Historically, awards were granted under the Amended
and Restated Complete Solaria Omnibus Incentive Plan (“2022 Plan”), the Complete Solar 2011 Stock Plan (“2011 Plan”),
the Solaria Corporation 2016 Stock Plan (“2016 Plan”) and the Solaria Corporation 2006 Stock Plan (“2006 Plan”)
(together with the Complete Solaria, Inc. 2023 Incentive Equity Plan (“2023 Plan”), “the Plans”). The 2022 Plan
is the successor of the Complete Solar 2021 Stock Plan, which was amended and assumed in connection with the acquisition of Solaria.
The 2011 Plan is the Complete Solar 2011 Stock Plan that was assumed by Complete Solaria in the Required Transaction. The 2016 Plan and
the 2006 Plan are the Solaria stock plans that were assumed by Complete Solaria in the Required Transaction.
Under the Plans, the Company has granted service and performance-based
stock options and restricted stock units (“RSUs”).
A summary of stock option activity for the thirteen-week period ended
March 31, 2024 under the Plans is as follows:
|
|
Options Outstanding |
|
|
|
Number of Shares |
|
|
Weighted Average Exercise Price per Share |
|
|
Weighted Average Contractual Term (Years) |
|
|
Aggregate Intrinsic Value
(in thousands) |
|
Outstanding—December 31, 2023 |
|
|
11,716,646 |
|
|
$ |
3.48 |
|
|
|
8.53 |
|
|
$ |
2,756 |
|
Options granted |
|
|
–– |
|
|
|
–– |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(31,176 |
) |
|
|
0.83 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
(307,198 |
) |
|
|
2.86 |
|
|
|
|
|
|
|
|
|
Outstanding—March 31, 2024 |
|
|
11,378,272 |
|
|
$ |
3.50 |
|
|
|
8.25 |
|
|
$ |
215 |
|
Vested and expected to vest—March 31, 2024 |
|
|
11,378,272 |
|
|
$ |
3.50 |
|
|
|
8.25 |
|
|
$ |
215 |
|
Vested and exercisable—March 31, 2024 |
|
|
4,536,233 |
|
|
$ |
4.38 |
|
|
|
4.78 |
|
|
$ |
139 |
|
A summary of RSU activity for the thirteen-week period ended March
31, 2024 under the Plan is as follows:
| |
Number of RSUs | | |
Weighted Average Grant Date Fair Value | |
Unvested at December 31, 2023 | |
| 58,097 | | |
$ | 2.07 | |
Granted | |
| –– | | |
$ | –– | |
Vested and released | |
| –– | | |
$ | –– | |
Cancelled or forfeited | |
| –– | | |
$ | –– | |
Unvested at March 31, 2024 | |
| 58,097 | | |
$ | 2.07 | |
Stock-based compensation expense
The following table summarizes stock-based compensation expense and
its allocation within the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss) (in
thousands):
| |
Thirteen-
Weeks Ended | | |
Thirteen-
Weeks Ended | |
| |
March 31, 2024 | | |
April 2, 2023 | |
Cost of revenues | |
$ | 27 | | |
$ | 11 | |
Sales and marketing | |
| 216 | | |
| 94 | |
General and administrative | |
| 1,098 | | |
| 165 | |
Total stock-based compensation expense from continuing operations | |
$ | 1,341 | | |
$ | 270 | |
As of March 31, 2024, there was a total of $18.8 million and zero
unrecognized stock-based compensation costs related to service-based options and RSUs, respectively. Such compensation cost is expected
to be recognized over a weighted-average period of approximately 2.16 years for service-based options.
(15) | Employee Stock Purchase Plan |
The Company adopted an Employee Stock Purchase Plan (the “ESPP
Plan”) in connection with the consummation of the Mergers in July 2023. All qualified employees may voluntarily enroll to purchase
shares of the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values
of the stock of the offering periods or the applicable purchase date. As of March 31, 2024, 2,628,996 shares were reserved for future
issuance under the ESPP Plan.
(16) | Commitments and Contingencies |
Warranty Provision
The Company typically provides a 10-year warranty on its solar energy
system installations, which provides assurance over the workmanship in performing the installation, including roof leaks caused by the
Company’s performance. For solar panel sales, the Company provides a 30-year warranty that the products will be free from defects
in material and workmanship. The Company will retain its warranty obligation associated with its panel sales, subsequent to the disposal
of its panel business.
The Company accrues warranty costs when revenue is recognized for
solar energy systems sales and panel sales, based primarily on the volume of new sales that contain warranties, historical experience
with and projections of warranty claims, and estimated solar energy system and panel replacement costs. The Company records a provision
for estimated warranty expenses in cost of revenues within the accompanying unaudited condensed consolidated statements of operations
and comprehensive loss. Warranty costs primarily consist of replacement materials and equipment and labor costs for service personnel.
Activity
by period relating to the Company’s warranty provision was as follows (in thousands):
| |
Thirteen-
Weeks Ended March 31,
2024 | | |
Year Ended December 31, 2023 | |
Warranty provision, beginning of period | |
$ | 4,849 | | |
$ | 3,981 | |
Accruals for new warranties issued | |
| 265 | | |
| 2,968 | |
Settlements | |
| (250 | ) | |
| (2,100 | ) |
Warranty provision, end of period | |
$ | 4,864 | | |
$ | 4,849 | |
Warranty provision, current | |
$ | 1,448 | | |
$ | 1,433 | |
Warranty provision, noncurrent | |
$ | 3,416 | | |
$ | 3,416 | |
Indemnification Agreements
From time to time, in its normal course of business, the Company may
indemnify other parties, with which it enters into contractual relationships, including customers, lessors, and parties to other transactions
with the Company. The Company may agree to hold other parties harmless against specific losses, such as those that could arise from breach
of representation, covenant or third-party infringement claims. It may not be possible to determine the maximum potential amount of liability
under such indemnification agreements due to the unique facts and circumstances that are likely to be involved in each particular claim
and indemnification provision. Historically, there have been no such indemnification claims. In the opinion of management, any liabilities
resulting from these agreements will not have a material adverse effect on the business, financial position, results of operations, or
cash flows.
Legal Matters
The Company is a party to various legal proceedings
and claims which arise in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred
and the amount of the loss can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or range
of loss can be reasonably estimated, the Company discloses the reasonably possible loss. The Company adjusts its accruals to reflect the
impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.
Legal costs are expensed as incurred. Although claims are inherently unpredictable, the Company is not aware of any matters that may have
a material adverse effect on its business, financial position, results of operations, or cash flows. The Company has recorded zero and
$7.9 million as a loss contingency in accrued expenses and other current liabilities on its unaudited condensed consolidated balance sheets
as of March 31, 2024 and December 31, 2023, respectively, primarily associated with the pending settlement of the following legal matters.
SolarPark Litigation
In January 2023, SolarPark Korea Co., LTD (“SolarPark”)
demanded approximately $80.0 million during discussions between the Company and SolarPark. In February 2023, the Company submitted its
statement of claim seeking approximately $26.4 million in damages against SolarPark. The ultimate outcome of this arbitration is currently
unknown and could result in a material liability to the Company. However, the Company believes that the allegations lack merit and intends
to vigorously defend all claims asserted. No liability has been recorded in the Company’s unaudited condensed consolidated financial
statements as the likelihood of a loss is not probable at this time.
On March 16, 2023, SolarPark filed a complaint against Solaria and
the Company in the U.S. District Court for the Northern District of California (“the court”). The complaint alleges a civil
conspiracy involving misappropriation of trade secrets, defamation, tortious interference with contractual relations, inducement to breach
of contract, and violation of California’s Unfair Competition Law. The complaint indicates that SolarPark has suffered in excess
of $220.0 million in damages.
On May 11, 2023, SolarPark filed a motion for
preliminary injunction to seek an order restraining the Company from using or disclosing SolarPark’s trade secrets, making or selling
shingled modules other than those produced by SolarPark, and from soliciting solar module manufacturers to produce shingled modules using
Solaria’s shingled patents. On May 18, 2023, the Company responded by filing a motion for partial dismissal and stay. On June 1,
2023, SolarPark filed an opposition to the Company’s motion for dismissal and stay and a reply in support of their motion for preliminary
injunction. On June 8, 2023, the Company replied in support of its motion for partial dismissal and stay. On July 11, 2023, the court
conducted a hearing to consider SolarPark and the Company’s respective motions. On August 3, 2023, the court issued a ruling, which
granted the preliminary injunction motion with respect to any purported misappropriation of SolarPark’s trade secrets. The court’s
ruling does not prohibit the Company from producing shingled modules or from utilizing its own patents for the manufacture of shingled
modules. The court denied SolarPark’s motion seeking a defamation injunction. The court denied the Company’s motion to dismiss
and granted the Company’s motion to stay the entire litigation pending the arbitration in Singapore. On September 1, 2023, the Company
filed a Limited Notice of Appeal to appeal the August 2023 order granting SolarPark’s motion for preliminary injunction. On September
26, 2023, the Company filed a Notice of Withdrawal of Appeal and will not appeal the Court’s Preliminary Injunction Order. No liability
has been recorded in the Company’s unaudited condensed consolidated financial statements as the likelihood of a loss is not probable
at this time.
Siemens Litigation
On July 22, 2021, Siemens filed a lawsuit in which Siemens alleged
that the Company breached express and implied warranties under a purchase order that Siemens placed with the Company for a solar module
system. Siemens claimed damages of approximately $6.9 million, inclusive of amounts of the Company’s indemnity obligations to Siemens,
plus legal fees.
On February 22, 2024, the Court issued an order
against the Company which awarded Siemens approximately $6.9 million, inclusive of the Company’s indemnity obligations to Siemens,
plus legal fees, the amount of which will be determined at a later hearing. On March 15, 2024, Siemens filed a motion seeking to recover
$2.67 million for attorneys’ fees, expenses, and pre-judgment interest. The Court will conduct a hearing on Siemens’ motion
in late May 2024. Pending entry of a final judgment by the Court, the Company intends to appeal such judgment. The Company has recorded
$6.9 million as a legal loss related to this litigation, excluding the $2.67 million for attorneys’ fees, expenses, and pre-judgment
interest, in accrued expenses and other current liabilities on its unaudited condensed consolidated balance sheets as of March 31, 2024
and December 31, 2023.
China Bridge Litigation
On August 24 2023, China Bridge Capital Limited (“China Bridge”)
alleged breach of contract and demanded $6.0 million. The complaint names FACT as the defendant. The complaint alleges China Bridge and
FACT entered into a financial advisory agreement in October 2022 whereby FACT engaged China Bridge to advise and assist FACT in identifying
a company for FACT to acquire. As part of the agreement, China Bridge claims that FACT agreed to pay China Bridge a $6.0 million advisory
fee if FACT completed such an acquisition. China Bridge claims it introduced Complete Solaria to FACT and is therefore owed the $6.0
million advisory fee. The Company believes that the allegations lack merit and intends to vigorously defend all claims asserted. No liability
has been recorded in the Company’s unaudited condensed consolidated financial statements as the likelihood of a loss is not probable
at this time.
Letters of Credit
The Company had $3.5 million of outstanding letters of credit related
to normal business transactions as of March 31, 2024. These agreements require the Company to maintain specified amounts of cash as collateral
in segregated accounts to support the letters of credit issued thereunder. As discussed in Note 2 – Summary of Significant Accounting
Policies, the cash collateral in these restricted cash accounts was $3.8 million and $3.8 million as of March 31, 2024 and December 31,
2023, respectively.
| (17) | Basic and Diluted Net Loss Per Share |
The Company uses the two-class method to calculate net loss per share.
No dividends were declared or paid for the thirteen-week periods ended March 31, 2024 and April 2, 2023. Undistributed earnings for each
period are allocated to participating securities, including the redeemable convertible preferred stock, based on the contractual participation
rights of the security to share in the current earnings as if all current period earnings had been distributed. The Company’s basic
net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average shares of common
stock outstanding during periods with undistributed losses.
The unaudited basic and diluted shares and net loss per share for
the thirteen-week period ended April 2, 2023 has been retroactively restated to give effect to the conversion of shares of legal acquiree’s
convertible instruments into shares of legal acquiree common stock as though the conversion had occurred as of the beginning of the period.
The retroactive restatement is consistent with the presentation on the accompanying unaudited condensed consolidated statements of stockholders’
deficit.
The following table sets forth the computation of the Company’s
basic and diluted net loss per share attributable to common stockholders for the thirteen-week periods ended March 31, 2024 and April
2, 2023 (in thousands, except share and per share amounts):
| |
Thirteen-
Weeks Ended
March 31, 2024 | | |
Thirteen- Weeks Ended
April 2, 2023 | |
Numerator: | |
| | |
| |
Net loss from continuing operations | |
$ | (9,588 | ) | |
$ | (15,709 | ) |
Net loss from discontinued operations | |
| –– | | |
| (7,805 | ) |
Net loss | |
$ | (9,588 | ) | |
$ | (23,514 | ) |
Denominator: | |
| | | |
| | |
Weighted average common shares outstanding, basic and diluted | |
| 49,077,330 | | |
| 25,200,347 | |
Net loss per share: | |
| | | |
| | |
Continuing operations – basic and diluted | |
$ | (0.20 | ) | |
$ | (0.62 | ) |
Discontinued operations – basic and diluted | |
$ | –– | | |
$ | (0.31 | ) |
Net loss per share – basic and diluted | |
$ | (0.20 | ) | |
$ | (0.93 | ) |
The computation of basic and diluted net loss per share attributable
to common stockholders is the same for the thirteen-week periods ended March 31, 2024 and April 2, 2023 because the inclusion of potential
shares of common stock would have been anti-dilutive for the periods presented.
The following table presents the potential common shares outstanding
that were excluded from the computation of diluted net loss per share of common stock as of the periods presented because including them
would have been anti-dilutive:
| |
As of | |
| |
March 31, 2024 | | |
April 2, 2023 | |
Common stock warrants | |
| 23,024,556 | | |
| 89,313 | |
Preferred stock warrants | |
| — | | |
| 2,386,879 | |
Stock options and RSUs issued and outstanding | |
| 11,436,369 | | |
| 9,714,894 | |
Potential common shares excluded from diluted net loss per share | |
| 34,460,924 | | |
| 12,191,086 | |
(18) | Related Party Transactions |
From October 2022 through June 2023, the Company
issued convertible promissory notes (“2022 Convertible Notes”) of approximately $33.3 million to various investors, out of
which $12.1 million was issued to five related parties. Additionally, the Company acquired a related party convertible note, on the same
terms as the 2022 Convertible Notes as part of the acquisition of Solaria, with a fair value of $6.7 million at the time of the acquisition.
The related party debt is presented as convertible notes, net, due to related parties, noncurrent in the accompanying unaudited condensed
consolidated balance sheets. The principal amount of the outstanding balance on the 2022 Convertible Notes accrues at 5.0%, compounded
annually. For the thirteen-week periods ended March 31, 2024 and April 2, 2023, the Company has recognized zero and $0.4 million, respectively,
in interest expense related to the related party 2022 Convertible Notes.
In June 2023, the Company received $3.5 million
of prefunded PIPE proceeds from a related party investor in conjunction with the Company’s merger with Freedom Acquisition I Corp.
In July 2023, in connection with the Mergers, in addition to the $3.5 million of related party PIPE proceeds noted above, the Company
received additional PIPE proceeds from related parties of $12.1 million. In July 2023, in connection with the Mergers, the Company issued
120,000 shares to a related party as a transaction bonus. Refer to Note 1(a) – Description of Business and Note 4 – Reverse
Recapitalization for further discussion.
In July 2023, the Company entered into a series
of FPAs as described in Note 5 – Forward Purchase Agreements. In connection with the FPAs, the Company recognized other expense
of $30.7 million for the fiscal year ended December 31, 2023 in connection with the issuance of 5,670,000 shares of Complete Solaria Common
Stock to the related party FPA Sellers. The Company also recognized other income of $0.3 million in connection with the issuance of the
FPAs with related parties. As of March 31, 2024, the Company has recognized a liability associated with the FPAs of $7.9 million due to
related parties in its unaudited condensed consolidated balance sheets, and the Company has recognized other expense associated with the
change in fair value of the FPA liability due to related parties of $4.7 million in its unaudited condensed consolidated statements of
operations and comprehensive loss for the thirteen-weeks ended March 31, 2024.
In September 2023, in connection with the Mergers, the Company entered
into a settlement and release agreement with a related party for the settlement of a working capital loan made to the Sponsor, prior
to the closing of the Mergers. As part of the settlement agreement, the Company agreed to pay the related party $0.5 million as a return
of capital, which is paid in ten equal monthly installments and does not accrue interest. The Company paid $0.2 million in 2023 and the
remaining balance of $0.3 million was paid in the thirteen-week period ended March 31, 2024.
The SAFEs, as described in Note 13 – Borrowing Arrangements,
entered into in January 2024 and February 2024 were with the Rodgers Massey Freedom and Free Markets Charitable Trust, a related party.
The Company received proceeds from the SAFEs totaling $5.0 million in exchange for debt that was subsequently converted into shares of
the Company’s common stock as discussed in Note 19 – Subsequent Events.
There were no other material related party transactions during the
thirteen-week periods ended March 31, 2024 and April 2, 2023.
Amendment to SAFEs Agreements
As described in Note 13 – Borrowing Arrangements, the Company’s
SAFEs were convertible into shares of the Company’s common stock upon the initial closing of an Equity Financing. On April 21, 2024,
the Company entered into an amendment for each of its First SAFE and Second SAFE to convert the invested amounts into shares of the Company’s
common stock.
The conversion share price was $0.36, calculated as the product of
(i) $0.45, the closing price of the Common Stock on April 19, 2024, multiplied by (ii) 80%. The First SAFE and Second SAFE converted
into 4,166,667 and 9,722,222 shares of the Company’s common stock, respectively.
Notice of Delisting or Failure to Satisfy a Continued Listing
Rule; Minimum Bid Price Requirement
On April 16, 2024, the Company received written notice (the “Notice”)
from the Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that it is not in compliance with the minimum bid price
requirement set forth in Nasdaq Listing Rule 5450(a)(1) for continued listing on The Nasdaq Global Market. Nasdaq Listing Rule 5450(a)(1)
requires listed securities to maintain a minimum bid price of $1.00 per share, and Listing Rule 5810(c)(3)(A) provides that a failure
to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days.
The Notice does not impact the listing of the Company’s common
stock on The Nasdaq Global Market at this time. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days
to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of the Company’s common
stock must be at least $1.00 per share for a minimum of ten consecutive business days before October 14, 2024. In the event that the
Company does not regain compliance within this 180-day period, the Company may be eligible to seek an additional compliance period of
180 calendar days if it meets the continued listing requirement for the market value of publicly held shares and all other initial listing
standards for The Nasdaq Capital Market, with the exception of the minimum bid price requirement, and provides written notice to Nasdaq
of its intent to cure the deficiency during this second compliance period by effecting a reverse stock split if necessary. However, if
it appears to the Nasdaq staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible,
Nasdaq will provide notice to the Company that its common stock will be subject to delisting.
The Company intends to actively monitor the closing bid price of its
common stock and will evaluate available options to regain compliance with the minimum bid price requirement.
Amendments to Forward Purchase Agreements
On May 7 and 8, 2024, respectively, the Company
entered into separate amendments to the Forward Purchase Agreements (the collectively the “Second Amendments”) with Sandia
(the “Sandia Second Amendment”) and Polar (the “Polar Second Amendment”). The Second Amendments lower the reset
price of each Forward Purchase Agreement from $3.00 to $1.00 per share and amend the VWAP Trigger Event provision to read as “After
December 31, 2024, an event that occurs if the VWAP Price, for any 20 trading days during a 30 consecutive trading day-period, is below
$1.00 per Share.”. The Sandia Second Amendment is not effective until the Company executes similar amendments with both Polar and
Meteora.
Notice of Delisting or Failure to Satisfy a Continued Listing
Rule; Minimum Market Value of Listed Securities
On April 16, 2024, the Company received a letter (the “Letter”)
from the staff at Nasdaq notifying the Company that, for the 30 consecutive trading days prior to the date of the Letter, the Company’s
common stock had traded at a value below the minimum $50,000,000 “Market Value of Listed Securities” (“MVLS”)
requirement set forth in Nasdaq Listing Rule 5450(b)(2)(A), which is required for continued listing of the Company’s common stock
on The Nasdaq Global Market. The Letter is only a notification of deficiency, not of imminent delisting, and has no current effect on
the listing or trading of the Company’s securities on Nasdaq.
In accordance with Nasdaq listing rule 5810(c)(3)(C), the Company
has 180 calendar days, or until October 14, 2024, to regain compliance. The Letter notes that to regain compliance, the Company’s
common stock must trade at or above a level such that the Company’s MVLS closes at or above $50,000,000 for a minimum of ten consecutive
business days during the compliance period, which ends October 14, 2024. The Letter further notes that if the Company is unable to satisfy
the MVLS requirement prior to such date, the Company may be eligible to transfer the listing of its securities to The Nasdaq Capital
Market (provided that the Company then satisfies the requirements for continued listing on that market).
If the Company does not regain compliance by October 14, 2024, Nasdaq
staff will provide written notice to the Company that its securities are subject to delisting. At that time, the Company may appeal any
such delisting determination to a hearings panel.
The Company intends to actively monitor the Company’s MVLS between
now and October 14, 2024, and may, if appropriate, evaluate available options to resolve the deficiency and regain compliance with the
MVLS requirement. While the Company is exercising diligent efforts to maintain the listing of its securities on Nasdaq, there can be
no assurance that the Company will be able to regain or maintain compliance with Nasdaq listing standards.
Entry into a Definitive Agreement to Cancel Debt in Exchange
for Equity and Other Consideration
On May 1, 2024, the Company entered into a common stock purchase agreement
(the “Common Stock Purchase Agreement”) with Kline Hill providing for (a) the cancellation of all indebtedness owed to Kline
Hill by the Company, termination of all debt instruments by and between the Company and Kline Hill, and the satisfaction of all obligations
owed to Kline Hill by the Company under the terminated debt instruments, (b) the issuance of 9,800,000 shares of the Company’s
common stock to Kline Hill, (c) the issuance of warrants (the “Kline Hill Warrants” and the shares issuable therefrom, the
“Warrant Shares”) to Kline Hill to purchase up to 3,700,000 shares of the Company’s common stock, with an exercise
price per share of $0.62 (the closing price per share of the Company’s common stock as reported on the Nasdaq Capital Market of
the date of the Agreement), and (d) a one-time $3,750,000 cash payment to Kline Hill upon the earlier of (i) the Company achieving $100,000,000
of trailing twelve month revenue, or (ii) the Company achieving $10,000,000 of trailing twelve month EBITDA. The Kline Hill Warrants
will be sold to Kline Hill at a price of $0.125 per Warrant Share. The closing of the foregoing transactions will occur when the following
conditions are met: Carlyle executes an agreement to cancel all debt owed to Carlyle by the Company, and all debt owed to Carlyle and
its affiliates by the Company is no longer outstanding.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following
discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our unaudited condensed consolidated financial
statements and related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31,
2024, and related management’s discussion and analysis in Item 7 of the Annual Report on Form 10-K. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that
could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors”
included elsewhere in this Quarterly Report on Form 10-Q. Please also see the section titled “Special Note Regarding Forward-Looking
Statements.”
Overview
Complete Solaria was formed
in November 2022 through the merger of Complete Solar Holding Corporation, a Delaware corporation (“Complete Solar”), and
The Solaria Corporation, a Delaware corporation (such entity, “Solaria,” and such transaction, the “Business Combination”).
Founded in 2010, Complete Solar created a technology platform to offer clean energy products to homeowners by enabling a national network
of sales partners and build partners. Our sales partners generate solar installation contracts with homeowners on our behalf. To facilitate
this process, we provide the software tools, sales support and brand identity to its sales partners, making them competitive with national
providers. This turnkey solution makes it easy for anyone to sell solar.
We fulfill our customer contracts
by engaging with local construction specialists. We manage the customer experience and complete all pre-construction activities prior
to delivering build-ready projects including hardware, engineering plans, and building permits to its builder partners. We manage and
coordinate this process through our proprietary HelioTrackTM software system.
Effective January 1, 2023,
we changed our fiscal quarters to four, thirteen-week periods within a standard calendar year. Each annual reporting period begins on
January 1 and ends on December 31.
There is substantial doubt
about our ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements
are issued. The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue to operate
as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. They
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern.
Growth Strategy and Outlook
Complete Solaria’s growth strategy
contains the following elements:
| ● | Increase revenue by expanding
installation capacity and developing new geographic markets - We continue to expand our network of partners who will install systems
resulting from sales generated by our sales partners. By leveraging this network of skilled builders, we aim to increase our installation
capacity in our traditional markets and expand our offering into new geographies throughout the United States. This will enable greater
sales growth in existing markets and create new revenue in expansion markets. |
| ● | Increase revenue and margin
by engaging national-scale sales partners - We aim to offer a turnkey solar solution to prospective sales partners with a national
footprint. These sales partners include electric vehicle manufacturers, national home security providers, and real estate brokerages.
We expect to create a consistent offering with a single execution process for such sales partners throughout their geographic territories.
These national accounts have unique customer relationships that we believe will facilitate meaningful sales opportunities and low cost
of acquisition to both increase revenue and improve margin. |
The Mergers
We entered into an Amended
and Restated Business Combination Agreement with Jupiter Merger Sub I Corp., a Delaware corporation and a wholly owned subsidiary of
Freedom Acquisition I Corp. (“FACT”) (“First Merger Sub”), Jupiter Merger Sub II LLC, a Delaware limited liability
company and a wholly owned subsidiary of FACT (“Second Merger Sub”), and Solaria on October 3, 2022 (“Merger”).
The Merger was consummated on July 18, 2023. Upon the terms and subject to the conditions of the Merger, (i) First Merger Sub merged
with and into Complete Solaria with Complete Solaria surviving as a wholly-owned subsidiary of FACT (the “First Merger”),
(ii) immediately thereafter and as part of the same overall transaction, Complete Solaria merged with and into Second Merger Sub, with
Second Merger Sub surviving as a wholly-owned subsidiary of FACT (the “Second Merger”), and FACT changed its name to “Complete
Solaria, Inc.” and Second Merger Sub changed its name to “CS, LLC” and (iii) immediately after the consummation of
the Second Merger and as part of the same overall transaction, Solaria merged with and into a newly formed Delaware limited liability
company and wholly-owned subsidiary of FACT and changed its name to “The SolarCA LLC” (“Third Merger Sub”), with
Third Merger Sub surviving as a wholly-owned subsidiary of FACT (the “Additional Merger”, and together with the First Merger
and the Second Merger, the “Mergers”).
The Mergers between Complete
Solaria and FACT has been accounted for as a reverse recapitalization. Under this method of accounting, FACT is treated as the acquired
company for financial statement reporting purposes. This determination was primarily based on us having a majority of the voting power
of the post-combination company, our senior management comprising substantially all of the senior management of the post-combination
company, and our operations comprising the ongoing operations of the post-combination company. Accordingly, for accounting purposes,
the Mergers have been treated as the equivalent of a capital transaction in which Complete Solaria is issuing stock for the net assets
of FACT. The net assets of FACT have been stated at historical cost, with no goodwill or other intangible assets recorded.
Disposal Transaction
In October 2023, we completed
the sale of our solar panel business (“Disposal Transaction”) to Maxeon, Inc. (“Maxeon”), pursuant to the terms
of an asset purchase agreement (“Disposal Agreement”). Under the terms of the Disposal Agreement, Maxeon agreed to acquire
certain assets and employees of Complete Solaria, for an aggregate purchase price of approximately $11.0 million consisting of 1,100,000
shares of Maxeon ordinary shares. As of December 31, 2023, we had sold all the shares of Maxeon and recorded a loss of $4.2 million.
As part of the Disposal Transaction,
we determined that the criteria were met for the “held for sale” and discontinued operations classifications as of the end
of our third fiscal quarter in 2023 as the divestiture represented a strategic shift in our business. We recorded an impairment charge
of $147.5 million associated with the recording of the assets as held for sale during the year ended December 31, 2023.
Below we have discussed our
historical results of continuing operations which excludes product revenues and related metrics of our solar panel business, as all results
of operations associated with the solar panel business have been presented as discontinued operations, unless otherwise noted.
Key Financial Definitions/Components of Results
of Operations
Revenues
We
generate revenue by providing customer solar solutions through a standardized platform to our residential solar providers and companies
to facilitate the sale and installation of solar energy systems. Our contracts consist of two performance obligations; solar installation
services and post-installation services that are performed prior to inspection by the authority having jurisdiction. The majority of
our service revenue is recognized at a point in time upon the completion of the installation, and the remainder is recognized upon inspection.
Service revenue is recognized net of a reserve for the performance guarantee of solar output.
We
enter into three types of customer contracts for solar energy installations. The majority of our service revenue is recognized through
contracts where the homeowner enters into a power purchase agreement with our distribution partner. We perform the solar energy installation
services on behalf of our distribution partner, who owns the solar energy system upon installation. Additionally, we enter into a Solar
Purchase and Installation Agreement directly with homeowners, whereby the homeowner either pays cash or obtains financing through a third-party
loan partner. In cash contracts with homeowners, we recognize service revenue based on the price we charge to the homeowner. We record
service revenue in the amount received from the financing partner, net of any financing fees charged to the homeowner, which we consider
to be a customer incentive.
As
part of our service revenue, we also enter into contracts to provide our software enhanced service offerings, including design and proposal
services to customers that include solar installers and solar sales organizations. We perform these leveraging our HelioQuoteTM
platform and other software tools to create computer aided drawings, structural letters, and electrical reviews for installers
and proposals for installers. We charge a fixed fee per service offering, which we recognize in the period the service is performed.
Operating Expenses
Cost of Revenues
Cost of revenues consists
primarily of the cost of solar energy systems, installation and other subcontracting costs. Cost of revenues also includes associated
warranty costs, shipping and handling, allocated overhead costs, depreciation, and amortization of internally developed software.
Sales Commissions
Sales commissions are direct
and incremental costs of obtaining customer contracts. These costs are paid to third-party vendors who source residential customer contracts
for the sale of solar energy systems.
Sales and Marketing
Sales and marketing expenses
primarily consist of personnel related costs, including salaries and employee benefits, stock-based compensation, and other promotional
and advertising expenses. We expense certain sales and marketing, including promotional expenses, as incurred.
General and Administrative
General and administrative
expenses consist primarily of personnel and related expenses for our employees, in our finance, research, engineering, and administrative
teams including salaries, bonuses, payroll taxes, and stock-based compensation. It also consists of legal, consulting, and professional
fees, rent expenses pertaining to our offices, business insurance costs and other costs. We expect an increase in audit, tax, accounting,
legal and other costs related to compliance with applicable securities and other regulations, as well as additional insurance, investor
relations, and other costs associated with being a public company.
Interest Expense
Interest expense primarily
relates to interest expense on the issuance of debt and convertible notes and the amortization of debt issuance costs.
Other Income (Expense), Net
Other income (expense), net
consists of changes in the fair value of our convertible notes, the impact of debt extinguishment, changes in the fair value of stock
warrant liabilities and forward purchase agreements and other costs.
Income Tax Expense
Income tax expense primarily
consists of income taxes in certain foreign and state jurisdictions in which we conduct business.
Supply Chain Constraints
and Risk
We
rely on a small number of suppliers of solar energy systems and other equipment. If any of our suppliers was unable or unwilling to provide
us with contracted quantities in a timely manner at prices, quality levels and volumes acceptable to us, we would have very limited alternatives
for supply, and we may not be able find suitable replacements for our customers, or at all. Such an event could materially adversely
affect our business, prospects, financial condition and results of operations.
In
addition, the global supply chain and our industry have experienced significant disruptions in recent periods. We have seen supply chain
challenges and logistics constraints increase, including shortages of panels, inverters, batteries and associated component parts for
inverters and solar energy systems available for purchase, which materially impacted our results of operations. In an effort to mitigate
unpredictable lead times, we experienced a substantial build up in inventory on hand commencing in early 2022 in response to global supply
chain constraints. In certain cases, the global supply chain constraints have caused delays in critical equipment and inventory, longer
lead times, and has resulted in cost volatility. These shortages and delays can be attributed in part to the residual effects of the
COVID-19 pandemic and resulting government action, as well as broader macroeconomic conditions, and have been exacerbated by the conflicts
in Ukraine and Israel. While we believe that a majority our suppliers have secured sufficient supply to permit them to continue delivery
and installations through the end of March 2025, if these shortages and delays persist, they could adversely affect the timing of when
battery energy storage systems can be delivered and installed, and when (or if) we can begin to generate revenue from those systems.
If any of our suppliers of solar modules experienced disruptions in the supply of the modules’ component parts, for example semiconductor
solar wafers or inverters, this may decrease production capabilities and restrict our inventory and sales. In addition, we have experienced
and are experiencing varying levels of volatility in costs of equipment and labor resulting in part from disruptions caused by general
global economic conditions. While inflationary pressures have resulted in higher costs of products, in part due to an increase in the
cost of the materials and wage rates, these additional costs have been offset by the related rise in electricity rates.
We
cannot predict the full effects the supply chain constraints will have on our business, cash flows, liquidity, financial condition and
results of operations at this time due to numerous uncertainties. Given the dynamic nature of these circumstances on our ongoing business,
results of operations and overall financial performance, the full impact of macroeconomic factors, including the conflicts in Ukraine
and Israel, cannot be reasonably estimated at this time. In the event we are unable to mitigate the impact of delays or price volatility
in solar energy systems, raw materials, and freight, it could materially adversely affect our business, prospects, financial condition
and results of operations. For additional information on risk factors that could impact our results, please refer to “Risk Factors”
located elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting
Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been
prepared in accordance with GAAP. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe
to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other
instances, changes in the accounting estimates are reasonably likely to occur from period-to-period. Actual results could differ significantly
from our estimates. Our future financial statements will be affected to the extent that our actual results materially differ from these
estimates. For further information on all of our significant accounting policies, see Note 2 - Summary of Significant Accounting Policies,
to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
We
believe that policies associated with our revenue recognition, product warranties, inventory excess and obsolescence and stock-based
compensation have the greatest impact on our unaudited condensed consolidated financial statements. Therefore, we consider these to be
our critical accounting policies and estimates.
Revenue Recognition
We
recognize revenue when control of goods or services is transferred to customers, in an amount that reflects the consideration we expect
to be entitled to in exchange for those services.
Revenue - Solar Energy
System Installations
The
majority of our revenue is generated from the installation of solar energy systems. We identify two performance obligations, which include
installation services and post-installation services, and we recognize revenue when control transfers to the customer, upon the completion
of the installation and upon the solar energy system passing inspection by the authority having jurisdiction, respectively. We apply
judgment in allocating the transaction price between the installation and post-installation performance obligations, based on the estimated
costs to perform our services. Changes in such estimates could have a material impact on the timing of our revenue recognition.
Our
contracts with customers generally contain a performance guarantee of system output, and we will issue payments to customers if output
falls below contractually stated thresholds over the performance guarantee period, which is typically 10 years. We apply judgment in
estimating the reduction in revenue associated with the performance guarantee, which historically has not been material. However, due
to the long-term nature of the guarantee, changes in future estimates could have a material impact on the estimate of our revenue reserve.
Revenue - Software
Enhanced Services
We
recognize revenue from software enhanced services, which include proposals generated from our HelioQuoteTM platform and design
services performed using internally developed and external software applications. We contract with solar installers to generate proposals,
and we contract with solar sales entities to perform design services for their potential customers. Under each type of customer contract,
we generate a fixed number of proposals or designs for the customer in the month the services are contracted. Contracts with customers
are enforceable on a month-to-month basis and we recognize revenue each month based on the volume of services performed.
Product Warranties
We
typically provide a 10-year warranty on our solar energy system installations, which provides assurance over the workmanship in performing
the installation, including roof leaks caused by our performance. For solar panel sales recognized prior to the Disposal Transaction,
we provide a 30-year warranty that the products will be free from defects in material and workmanship. We record a liability for estimated
future warranty claims based on historical trends and new installations. To the extent that warranty claim behavior differs from historical
trends, we may experience a material change in our warranty liability.
Inventory Excess
and Obsolescence
Our
inventory consists of completed solar energy systems and related components, which we classify as finished costs. We record a reserve
for inventory which is considered obsolete or in excess of anticipated demand based on a consideration of marketability and product life
cycle stage, component cost trends, demand forecasts, historical revenues, and assumptions about future demand and market conditions.
We apply judgment in estimating the excess and obsolete inventory, and changes in demand for our inventory components could have a material
impact on our inventory reserve balance.
Stock-Based Compensation
We recognize stock-based
compensation expense over the requisite service period on a straight-line basis for all stock-based payments that are expected to vest
to employees, non-employees and directors, including grants of employee stock options and other stock-based awards. Equity-classified
awards issued to employees and non-employees, such as consultants and non-employee directors, are measured at the grant-date fair value
of the award. Forfeitures are recognized as they occur.
For accounting purposes,
prior to the Business Combination, the fair value of the shares of common stock underlying stock options had historically been determined
by our board of directors. Because there had been no public market for our common stock, the board of directors exercised reasonable
judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock,
including important developments in our operations, sales of redeemable convertible preferred stock, actual operating results and financial
performance, the conditions in the renewable solar energy industry and the economy in general, the stock price performance and volatility
of comparable public companies, and the lack of liquidity of our common stock, among other factors. Following the Business Combination,
the fair value of common stock is based on the closing stock price on the date of grant as reported on the Nasdaq Global Select Market.
We estimate the grant-date
fair value of stock options using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of
highly subjective assumptions, including the fair value of the underlying common stock prior to the Mergers, the expected term of the
option, the expected volatility of the price of our common stock and expected dividend yield. We determine these inputs as follows:
| ● | Expected Term-Expected term
represents the period that our stock-based awards are expected to be outstanding and is determined using the simplified method. |
| ● | Expected Volatility-Expected
volatility is estimated by studying the volatility of comparable public companies for similar terms. |
| ● | Expected Dividend-The Black-Scholes
valuation model calls for a single expected dividend yield as an input. We have never paid dividends and have no plans to pay dividends. |
| ● | Risk-Free Interest Rate - We
derive the risk-free interest rate assumption from the U.S. Treasury’s rates for the U.S. Treasury zero-coupon bonds with maturities
similar to those of the expected term of the awards being valued. |
If any assumptions used in
the Black-Scholes option pricing model change significantly, stock-based compensation for future awards may differ materially compared
to the awards granted previously. For the thirteen-week periods ended March 31, 2024 and April 2, 2023, stock-based compensation expense
was $1.3 million and $1.0 million, respectively, of which zero and $0.7 million, respectively, related to discontinued operations. As
of March 31, 2024, we had approximately $18.8 million of total unrecognized stock-based compensation expense related to stock options.
Recent Accounting
Pronouncements
A
discussion of recently issued accounting standards applicable to Complete Solaria is described in Note 2 - Summary of Significant Accounting
Policies, in the accompanying notes to the unaudited condensed consolidated financial statements.
Results of Operations
Thirteen-weeks
ended March 31, 2024 compared to the thirteen-weeks ended April 2, 2023
The following table sets forth
our unaudited statements of operations data for the thirteen-weeks ended March 31, 2024 and the thirteen-weeks ended April 1, 2023. We
have derived this data from our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form
10-Q. This information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes
included elsewhere in this Quarterly Report on Form 10-Q. The results of historical periods are not necessarily indicative of the results
of operations for any future period.
(in thousands) | |
Thirteen-
Weeks Ended March 31, 2024 | | |
Thirteen-
Weeks Ended April 2, 2023 | | |
$ Change | | |
% Change | |
Revenues | |
$ | 10,040 | | |
$ | 16,677 | | |
$ | (6,637 | ) | |
| (40 | )% |
Cost of revenues(1) | |
| 7,757 | | |
| 13,827 | | |
| (6,070 | ) | |
| (44 | )% |
Gross profit | |
| 2,283 | | |
| 2,850 | | |
| (567 | ) | |
| (20 | )% |
Gross margin % | |
| 23 | % | |
| 17 | % | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Sales commissions | |
| 3,116 | | |
| 5,677 | | |
| (2,561 | ) | |
| (45 | )% |
Sales and marketing(1) | |
| 1,618 | | |
| 683 | | |
| 935 | | |
| 137 | % |
General and administrative(1) | |
| 5,093 | | |
| 8,913 | | |
| (3,820 | ) | |
| (43 | )% |
Total operating expenses | |
| 9,827 | | |
| 15,273 | | |
| (5,446 | ) | |
| (36 | )% |
Loss from continuing operations | |
| (7,544 | ) | |
| (12,423 | ) | |
| 4,879 | | |
| (39 | )% |
Interest expense(2) | |
| (3,568 | ) | |
| (3,611 | ) | |
| 43 | | |
| (1 | )% |
Interest income | |
| 6 | | |
| 8 | | |
| (2 | ) | |
| (25 | )% |
Other income, net(3) | |
| 1,519 | | |
| 317 | | |
| 1,202 | | |
| 379 | % |
Loss from continuing operations before taxes | |
| (9,587 | ) | |
| (15,709 | ) | |
| 6,122 | | |
| (39 | )% |
Income tax provision | |
| (1 | ) | |
| — | | |
| (1 | ) | |
| * | % |
Net loss from continuing operations | |
$ | (9,588 | ) | |
$ | (15,709 | ) | |
$ | 6,121 | | |
| (39 | )% |
* | Percentage change not meaningful |
(1) | Includes stock-based compensation
expense as follows (in thousands): |
| |
Thirteen-
Weeks Ended March 31, 2024 | | |
Thirteen-
Weeks Ended April 2, 2023 | |
Cost of revenues | |
$ | 27 | | |
$ | 11 | |
Sales and marketing | |
| 216 | | |
| 94 | |
General and administrative | |
| 1,098 | | |
| 165 | |
Total stock-based compensation expense from continuing operations | |
$ | 1,341 | | |
$ | 270 | |
(2) |
Includes
interest expense to related party of zero and $0.2 million during the thirteen-weeks ended March 31, 2024 and April 1, 2023, respectively. |
(3) |
Includes
other income (expense), net from related parties of $4.7 million and zero during the thirteen-weeks ended March 31, 2024 and April 2,
2023, respectively. |
Revenues
We disaggregate our revenues
based on the following types of services (in thousands):
| |
Thirteen-Weeks Ended | | |
Thirteen-Weeks Ended | | |
| | |
| |
| |
March 31, 2024 | | |
April 2, 2023 | | |
$ Change | | |
% Change | |
Solar energy system installations | |
$ | 9,922 | | |
$ | 15,843 | | |
$ | (5,921 | ) | |
| (37 | %) |
Software enhanced services | |
| 118 | | |
| 834 | | |
| (716 | ) | |
| (86 | )% |
Total revenue | |
$ | 10,040 | | |
$ | 16,677 | | |
$ | (6,637 | ) | |
| (40 | )% |
Revenues from solar energy
system installations for the thirteen-weeks ended March 31, 2024 was $9.9 million compared to $15.8 million for the thirteen-weeks ended
April 2, 2023. The decrease in solar energy system installation revenues of $5.9 million was primarily due to a decrease in the volume
of solar energy system installations.
Revenues from software enhanced
services for the thirteen-weeks ended March 31, 2024 was $0.1 million compared to $0.8 million for the thirteen-weeks ended April 2, 2023.
The decrease was the result of a shift in focus towards solar energy installations.
Cost of Revenues
Cost
of revenues for the thirteen-weeks ended March 31, 2024 was $7.8 million compared to $13.8 million for the thirteen-weeks ended April
2, 2023. The decrease in cost of revenues of $6.0 million, or 44%, was primarily due to the decrease in revenue of 40% and emphasis on
managing costs.
Gross Margin
Gross margin for the thirteen-weeks
ended March 31, 2024 was 23% compared to 17% for the thirteen-weeks ended April 2, 2023. The improvement in gross margin was principally
attributable to managing costs.
Sales Commissions
Sales commissions for the
thirteen-weeks ended March 31, 2024 was $3.1 million compared to $5.7 million for the thirteen-weeks ended April 2, 2023. The decrease
of $2.6 million, or 45%, was primarily due to the decrease in revenues.
Sales and Marketing
Sales and marketing expense
for the thirteen-weeks ended March 31, 2024 was $1.6 million compared to $0.7 million for the thirteen-weeks ended April 2, 2023. The
increase is attributable to an increase of $0.6 million in payroll, an increase of $0.2 million in travel related expenses.
General and Administrative
General
and administrative costs for the thirteen-weeks ended March 31, 2024 was $5.1 million compared to $8.9 million for the thirteen-weeks
ended April 2, 2023. The decrease was primarily attributed to decrease in bad debt expense of $2.4 million, decrease of $2.1 million in
Outside Services, and an increase in stock-based compensation costs of $0.6 million.
Interest Expense
Interest
expense remained unchanged in the amount of $3.6 million for the thirteen-weeks ended March 31, 2024 and April 2, 2023.
Other Income, Net
Other
income, net for the thirteen-weeks ended March 31, 2024 increased by $1.2 million compared to the thirteen-weeks ended April 2, 2023.
Other income, net in the thirteen-weeks ended March 31, 2024 was income of $1.5 million and was comprised of $7.2 million of income arising
partially offset by $5.6 million of expense relating to changes in the fair value of our forward purchase agreements and $0.1 million
relating to the residual costs of the disposed Solaria business.
Other
income, net for the thirteen-weeks ended April 2, 2023 was income of $0.3 million and was comprised of $0.2 million change in the fair
value of liability-classified warrants and $.1 million related to the Solaria discontinued operations.
Net Loss from Continuing Operations
As
a result of the factors discussed above, our net loss from continuing operations for the thirteen-weeks ended March 31, 2024 was $9.6
million, a decrease of $6.1 million, as compared to a net loss from continuing operations of $15.7 million for the thirteen-weeks ended
April 2, 2023.
Liquidity and Capital Resources
Since our inception, we have
incurred losses and negative cash flows from operations. We incurred a net loss of $9.6 million during the thirteen-weeks ended March
31, 2024, and had an accumulated deficit of $364.5 million and current debt of $65.2 million as of March 31, 2024. We had cash and cash
equivalents of $1.8 million as of March 31, 2024, which were held for working capital expenditures. We believe our operating losses and
negative operating cash flows will continue into the foreseeable future. We have financed our operations primarily through sales of equity
securities, issuance of convertible notes and cash generated from operations. Our cash equivalents are on deposit with major financial
institutions. Our cash position raises substantial doubt regarding our ability to continue as a going concern for 12 months following
the issuance of the unaudited condensed consolidated financial statements.
We will receive the proceeds
from any cash exercise of warrants for shares of our common stock. The aggregate amount of proceeds could be up to $254.1 million if all
the warrants are exercised for cash. However, to the extent the warrants are exercised on a “cashless basis,” the amount of
cash we would receive from the exercise of those warrants will decrease. The Private Warrants and Working Capital Warrants, as so identified
in our unaudited condensed consolidated financial statements, may be exercised for cash or on a “cashless basis.” The Public
Warrants and the Mergers Warrants may only be exercised for cash provided there is then an effective registration statement registering
the shares of common stock issuable upon the exercise of such warrants. If there is not a then-effective registration statement, then
such warrants may be exercised on a “cashless basis,” pursuant to an available exemption from registration under the Securities
Act. We expect to use any such proceeds for general corporate and working capital purposes, which would increase our liquidity. As of
May 13, 2024, the price of our common stock was $0.55 per share. The weighted average exercise price of the warrants was $8.70 as of March
31, 2024. We believe the likelihood that warrant holders will exercise their warrants, and therefore the amount of cash proceeds that
we would receive, is dependent upon the market price of our common stock. If the market price for our common stock remains less than the
exercise price, we believe warrant holders will be unlikely to exercise.
Debt Financings
2018 Bridge Notes
In December 2018, The Solaria
Corporation issued senior subordinated convertible secured notes (“2018 Notes”) totaling approximately $3.4 million in exchange
for cash. The 2018 Notes bear interest at the rate of 8% per annum and the investors are entitled to receive twice the face value of the
2018 Notes at maturity. In 2021, the 2018 Notes were amended extending the maturity date to December 13, 2022. In connection with the
2021 amendment, Solaria issued warrants to purchase shares of Series E-1 redeemable convertible preferred stock of Solaria. The warrants
were exercisable immediately in whole or in part at and expire on December 13, 2031. As part of the Business Combination with Complete
Solar, all the outstanding warrants issued to the lenders were assumed by the parent company, Complete Solaria. The 2018 Notes are secured
by substantially all of the assets of Complete Solaria.
In December 2022, we entered
into an amendment to the 2018 Notes extending the maturity date from December 13, 2022 to December 13, 2023, and the 2018 Notes remain
outstanding as of March 31, 2024. In connection with the amendment, the 2018 Notes will continue to bear interest at 8% per annum and
are entitled to an increased repayment premium from 110% to 120% of the principal and accrued interest at the time of repayment.
We concluded that the amendment
represented was a troubled debt restructuring as we were experiencing financial difficulty, and the amended terms resulted in a concession
to us. As the future undiscounted cash payments under the modified terms exceeded the carrying amount of the 2018 Notes on the date of
modification, the modification was accounted for prospectively. The incremental repayment premium is being amortized to interest expense
using the effective interest rate method. As of March 31, 2024 and December 31, 2023, the carrying value of the 2018 Notes was $11.4 million
and $11.0 million, respectively. Interest expense recognized for the thirteen-weeks ended March 31, 2024 was $0.3 million. The terms of
the 2018 Notes are currently being renegotiated.
Revolver Loan
In October 2020, Solaria
entered into a loan agreement (“Loan Agreement”) with Structural Capital Investments III, LP (“SCI”). The Loan
Agreement with SCI is comprised of two facilities, a term loan (the “Term Loan”) and a revolving loan (the “Revolving
Loan”) for $5.0 million each with a maturity date of October 31, 2023. Both the Term Loan and the Revolving Loan were fully drawn
upon closing. The Term Loan was repaid prior to the acquisition of Solaria by Complete Solar and was not included in the business combination.
The Revolving Loan has a term
of thirty-six months, with the principal due at the end of the term and an annual interest rate of 7.75% or Prime rate plus 4.5%, whichever
is higher. Interest expense recognized for the thirteen-weeks ended March 31, 2024 was $0.1 million. In October 2023, the Company entered
into an Assignment and Acceptance Agreement whereby Structural Capital Investments III, LP assigned the SCI debt to Kline Hill Partners
Fund LP, Kline Hill Partners IV SPV LLC, Kline Hill Partners Opportunity IV SPV LLC, and Rodgers Massey Revocable Living Trust for a total
purchase price of $5.0 million. The SCI Revolving Loan continued to remain outstanding as of March 31, 2024 and is currently being renegotiated.
Secured Credit Facility
In December 2022, we entered
into a secured credit facility agreement with Kline Hill Partners IV SPV LLC and Kline Hill Partners Opportunity IV SPV LLC (“Secured
Credit Facility”). The Secured Credit Facility agreement allows us to borrow up to 70% of the net amount of our eligible vendor
purchase orders with a maximum amount of $10.0 million at any point in time. The purchase orders are backed by relevant customer sales
orders which serve as collateral. The amounts drawn under the Secured Credit Facility may be reborrowed provided that the aggregate borrowing
does not exceed $20.0 million. The repayment under the Secured Credit Facility is the borrowed amount multiplied by 1.15x if repaid within
75 days and borrowed amount multiplied by 1.175x if repaid after 75 days. We may prepay any borrowed amount without premium or penalty.
Under the original terms, the Secured Credit Facility agreement was due to mature in April 2023. We are in the process of amending the
secured credit facility agreement to extend its maturity date.
At March 31, 2024, the outstanding
net debt amounted to $12.7 million, including accrued financing cost of $5.0 million compared to December 31, 2023, the balance outstanding
was $12.2 million, including accrued financing cost of $4.5 million. We recognized interest expense of $0.5 million related to the Secured
Credit Facility during the thirteen-weeks ended March 31, 2024.
Revolver Loan and Secured Credit Facility
Cancellation Agreement
On May 1, 2024, we entered into a common stock
purchase agreement (the “Common Stock Purchase Agreement”) with Kline Hill providing for (a) the cancellation of all indebtedness
owed to Kline Hill by us, termination of all debt instruments by and between us and Kline Hill, and the satisfaction of all obligations
owed to Kline Hill by us under the terminated debt instruments, (b) the issuance of 9,800,000 shares of our common stock to Kline Hill,
(c) the issuance of warrants (the “Kline Hill Warrants” and the shares issuable therefrom, the “Warrant Shares”)
to Kline Hill to purchase up to 3,700,000 shares of the our common stock, with an exercise price per share of $0.62 (the closing price
per share of the our common stock as reported on the Nasdaq Capital Market of the date of the Agreement), and (d) a one-time $3,750,000
cash payment to Kline Hill upon the earlier of (i) us achieving $100,000,000 of trailing twelve month revenue, or (ii) us achieving $10,000,000
of trailing twelve month EBITDA. The Kline Hill Warrants will be sold to Kline Hill at a price of $0.125 per Warrant Share. The closing
of the foregoing transactions will occur when the following conditions are met: Carlyle executes an agreement to cancel all debt owed
to Carlyle by us, and all debt owed to Carlyle and its affiliates by the Company is no longer outstanding.
CS Solis Debt
In
February 2022, we received cash and recorded a liability for an investment by Carlyle into the Company. The investment was made pursuant
to a subscription agreement, under which Carlyle contributed $25.6 million in exchange for 100 Class B Membership Units of CS Solis.
The Class B Membership Units are mandatorily redeemable by us on the three-year anniversary of the effective date of the CS Solis amended
and restated LLC agreement. The Class B Membership Units accrue interest that is payable upon redemption at a rate of 10.5% which is
accrued as an unpaid dividend, compounded annually, and subject to increases in the event we declare any dividends. In July 2023, we
amended the debt of with Carlyle as part of the closing of the Mergers. The modification did not change the interest rate. The modification
accelerated the redemption date of the investment from February 15, 2025 to March 31, 2024.
As
of March 31, 2024 and December 31, 2023, we have recorded a liability of $35.8 million and $33.3 million, respectively, included in short-term
debt in CS Solis on our unaudited condensed consolidated balance sheets. For the thirteen-weeks ended March 31, 2024, we have recorded
accretion of the liability as interest expense of $2.5 million.
Forward Purchase
Agreements
In
July 2023, FACT and Legacy Complete Solaria, Inc. entered into FPAs with each of (i) Meteora; (ii) Polar, and (iii) Sandia (each
individually, a “Seller”, and together, the “FPA Sellers”).
Pursuant
to the terms of the FPAs, the FPA Sellers may (i) purchase through a broker in the open market, from holders of Shares other than the
Company or affiliates thereof, FACT’s ordinary shares, par value of $0.0001 per share, (the “Shares”). While the FPA
Sellers have no obligation to purchase any Shares under the FPAs, the aggregate total Shares that may be purchased under the FPAs shall
be no more than 6,720,000 in aggregate. The FPA Sellers may not beneficially own greater than 9.9% of issued and outstanding Shares following
the Mergers as per the Amended and Restated Business Combination Agreement.
The
key terms of the forward contracts are as follows:
| ● | The FPA Sellers can terminate the transaction following the
Optional Early Termination (“OET”) Date which shall specify the quantity by which the number of shares is to be reduced (such
quantity, the “Terminated Shares”). Seller shall terminate the transaction in respect of any shares sold on or prior to the
maturity date. The counterparty is entitled to an amount from the seller equal to the number of terminated shares multiplied by a reset
price. The reset price is initially $10.56 (the “Initial Price”) and is subject to a $5.00 floor. |
| ● | The FPA contains multiple settlement outcomes. Per the terms
of the agreements, the FPAs will (1) settle in cash in the event the Company is due cash upon settlement from the FPA Sellers or (2)
settle in either cash or shares, at the discretion of the Company, should the settlement amount adjustment exceed the settlement amount.
Should the Company elect to settle via shares, the equity will be issued in Complete Solaria Common Stock, with a per share price based
on the volume-weighted average price (“VWAP”) over 15 scheduled trading days. The magnitude of the settlement is based on
the Settlement Amount, an amount equal to the product of: (1) Number of shares issued to the FPA Seller pursuant to the FPA, less the
number of Terminated Shares multiplied by (2) the VWAP over the valuation period. The Settlement amount will be reduced by the Settlement
Adjustment, an amount equal to the product of (1) Number of shares in the Pricing Date Notice, less the number of Terminated Shares multiplied
by $2.00. |
| ● | The Settlement occurs as of the Valuation Date, which is the
earlier to occur of (a) the date that is two years after the date of the Closing Date of the Mergers (b) the date specified by Seller
in a written notice to be delivered to Counterparty at Seller’s discretion (which Valuation Date shall not be earlier than the
day such notice is effective) after the occurrence of certain triggering events; and (c) 90 days after delivery by the Counterparty of
a written notice in the event that for any 20 trading days during a 30 consecutive trading day-period (the “Measurement Period”)
that occurs at least 6 months after the Closing Date, the VWAP is less than the then applicable Reset Price. |
We
entered into four separate FPAs, three of which, associated with the obligation to issue 6,300,000 Shares, were entered into prior to
the closing of the Mergers. Upon signing the FPAs, we incurred an obligation to issue a fixed number of shares to the FPA Sellers contingent
upon the closing of the Mergers in addition to the terms and conditions associated with the settlement of the FPAs. We accounted for the
contingent obligation to issue shares in accordance with ASC 815, Derivatives and Hedging, and recorded a liability and other income (expense),
net based on the fair value upon of the obligation upon the signing of the FPAs. The liability was extinguished in July 2023 upon the
issuance of Complete Solaria Common Stock to the FPA sellers.
Additionally,
in accordance with ASC 480, Distinguishing Liabilities from Equity, we have has determined that the forward contracts are financial instruments
other than shares that represent or are indexed to obligations to repurchase the issuer’s equity shares by transferring assets,
referred to herein as the “forward purchase liability” on its consolidated balance sheets. We initially measured the forward
purchase liability at fair value and have subsequently remeasured it at fair value with changes in fair value recognized in earnings.
Through
the date of issuance of the Complete Solaria Common Stock in satisfaction of our obligation to issue shares around the closing of the
Mergers, we recorded $35.5 million to other income (expense), net associated with the issuance of 6,720,000 shares of Complete Solaria
Common Stock.
As
of the closing of the Mergers and issuance of the Complete Solaria Common Stock underlying the FPAs, the fair value of the prepaid FPAs
was an asset balance of $0.1 million and was recorded on the Company’s consolidated balance sheets and within other income (expense),
net on the unaudited condensed consolidated statements of operations and comprehensive loss. Subsequently, the change of fair value of
the forward purchase liability amounted to an expense of $3.9 million for the fiscal year ended December 31, 2023. As of December 31,
2023, the forward purchase liabilities amounted to $3.8 million.
On
December 18, 2023, the Company and the FPA Sellers entered into separate amendments to the FPAs (the “Amendments”). The Amendments
lower the reset floor price of each FPA from $5.00 to $3.00 and allow the Company to raise up to $10.0 million of equity from existing
stockholders without triggering certain anti-dilution provisions contained in the FPAs; provided, the insiders pay a price per share for
their initial investment equal to the closing price per share as quoted on the Nasdaq on the day of purchase; provided, further, that
any subsequent investments are made at a price per share equal to the greater of (a) the closing price per share as quoted by Nasdaq on
the day of the purchase or (b) the amount paid in connection with the initial investment.
SAFE Agreements
On
January 31, 2024, we entered into a simple agreement for future equity (the “First SAFE”) with the Rodgers Massey Freedom
and Free Markets Charitable Trust (the “Purchaser”) in connection with the Purchaser investing $1.5 million in the Company.
The First SAFE was initially convertible into shares of our common stock, par value $0.0001 per share, upon the initial closing of a bona
fide transaction or series of transactions with the principal purpose of raising capital, pursuant to which we have issued and sold common
stock at a fixed valuation (an “Equity Financing”), at a per share conversion price which was equal to the lower of (i)(a)
$53.54 million divided by (b) our capitalization immediately prior to such Equity Financing (such conversion price, the “SAFE Price”),
and (ii) 80% of the price per share of our common stock sold in the Equity Financing. If we consummated a change of control prior to the
termination of the First SAFE, the Purchaser will would have been automatically entitled to receive a portion of the proceeds of such
liquidity event equal to the greater of (i) $1.5 million and (ii) the amount payable on the number of shares of our common stock equal
to (a) $1.5 million divided by (b)(1) $53.54 million divided by (2) our capitalization immediately prior to such liquidity event (the
“Liquidity Price”), subject to certain adjustments as set forth in the First SAFE. The First SAFE was convertible into a maximum
of 1,431,297 shares of our common stock, assuming a per share conversion price of $1.05, which is the product of (i) $1.31, the closing
price of our common stock on January 31, 2024, multiplied by (ii) 80%.
On
February 15, 2024, we entered into a simple agreement for future equity (the “Second SAFE” and together with the First SAFE,
the “SAFEs”) with the Purchaser in connection with the Purchaser investing $3.5 million in the Company. The Second SAFE was
initially convertible into shares of our common stock upon the initial closing of an Equity Financing at a per share conversion price
which was equal to the lower of (i) the SAFE Price, and (ii) 80% of the price per share of our common stock sold in the Equity Financing.
If we consummated a change of control prior to the termination of the Second SAFE, the Purchaser would have been automatically entitled
to receive an amount equal to the greater of (i) $3.5 million and (ii) the amount payable on the number of shares of our common stock
equal to $3.5 million divided by the Liquidity Price, subject to certain adjustments as set forth in the Second SAFE. The Second SAFE
was convertible into a maximum of 3,707,627 shares of our common stock, assuming a per share conversion price of $0.94, which is the product
of (i) $1.18, the closing price of the Common Stock on February 15, 2024, multiplied by (ii) 80%.
On
April 21, 2024, we entered into an amendment for each of our First SAFE and Second SAFE to convert the invested amounts into shares of
the our common stock. The conversion share price was $0.36, calculated as the product of (i) $0.45, the closing price of our common stock
on April 19, 2024, multiplied by (ii) 80%. The First SAFE and Second SAFE converted into 4,166,667 and 9,722,222 shares of our common
stock, respectively.
Cash Flows for the -Thirteen-Weeks Ended March
31, 2024 and April 2, 2023
The following table summarizes
Complete Solaria’s cash flows from operating, investing, and financing activities for the thirteen-weeks ended March 31, 2024 and
April 2, 2023 (in thousands):
| |
Thirteen-Weeks Ended March 31, 2024 | | |
Thirteen-Weeks Ended April 2, 2023 | |
Net cash used in operating activities from continuing operations | |
$ | (4,946 | ) | |
$ | (16,116 | ) |
Net cash used in operating activities from discontinued operations | |
| — | | |
| (162 | ) |
Net cash used in investing activities from continuing operations | |
| (536 | ) | |
| (486 | ) |
Net cash provided by financing activities from continuing operations | |
| 4,726 | | |
| 15,554 | |
Net decrease in cash, cash equivalents and restricted cash | |
| (801 | ) | |
| (1,209 | ) |
Cash Flows from Operating Activities
Net cash used in operating
activities from continuing operations of $4.9 million for the thirteen-weeks ended March 31, 2024 was primarily due to the net loss from
continuing operations, net of tax of $9.6 million partially offset by non-cash charges of $3.5 million and net cash inflows of $1.1 million
from changes in our operating assets and liabilities. Non-cash charges in our operating results consisted of a $5.6 million adjustment
to our forward purchase agreement liabilities, $1.3 million stock-based compensation expense, $2.5 in million accretion of interest attributable
to the CS Solis Debt, $1.0 million of other non-cash interest, $0.4 million of depreciation and amortization and $0.2 million of non-cash
lease costs, partially offset by $7.2 million of income from the change in the fair value of our warrant liabilities and a $0.3 million
decrease in our reserve for excess and obsolete inventory. The main drivers of net cash inflows derived from the changes in operating
assets and liabilities were related to a decrease in accounts receivable, net of $5.3 million and a decrease in inventories of $0.6 million,
partially offset by a decrease in accounts payable of $2.6 million, a decrease in accrued expenses and other liabilities of $1.6 million,
a decrease in operating lease liabilities of $0.2 million and a decrease in deferred revenue of $0.4 million.
Net cash used in operating
activities from continuing operations of $16.1 million for the thirteen-weeks ended April 2, 2023 was primarily due to the net loss from
continuing operations, net of tax of $15.7 million and net cash outflows of $5.8 million from changes in operating assets and liabilities,
adjusted for non-cash charges of $5.4 million. The main drivers of net cash outflows derived from the changes in operating assets and
liabilities were related to an increase in accounts receivable, net of $3.2 million, an increase in prepaid and other current assets
of $1.9 million, a decrease in deferred revenue of $0.9 million, an increase in other noncurrent assets of $0.8 million, a decrease in
accrued expenses and other current liabilities of $0.6 million and an increase in inventories of $0.6 million, partially offset by an
increase in accounts payable of $2.1 million and other of $0.1 million. Non-cash charges primarily consisted of a provision for credit
losses of $2.1 million, non-cash interest expense of $1.2 million, a change in reserve for obsolete inventory of $0.8 million, accretion
of long-term debt in CS Solis of $0.8 million, stock-based compensation of $0.3 million, and other changes, net of $0.2 million.
The net decrease in cash,
cash equivalents and restricted cash from discontinued operations of $0.2 million for the thirteen-weeks ended April 2, 2023 was entirely
attributable to net cash provided by operating activities from discontinued operations. This decrease was primarily due to the net loss
from discontinued operations, net of tax of $7.8 million, adjusted for non-cash charges of $2.2 million and net cash inflows of $5.4 million
from changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization expense of
$0.8 million, stock-based compensation expense of $0.7 million and a $0.7 million change in allowance for credit losses. The main drivers
of net cash inflows derived from the changes in operating assets and liabilities were related to a decrease in inventories of $5.9 million
and an increase in accounts payable of $0.6 million, partially offset by a decrease in accrued expenses of $0.6 million, a decrease in
deferred revenue of $0.2 million and changes in other operating assets and liabilities, net of $0.3 million.
Cash Flows from Investing Activities
Net cash used in investing
activities was $0.5 million and $0.5 million for the thirteen-weeks ended March 31, 2024, and April 2, 2023, respectively, and attributable
to additions to internal-use-software.
Cash Flows from Financing Activities
Net cash provided by financing
activities of $5.0 million for the thirteen-weeks ended March 31, 2024 was primarily due to $5.0 million in net proceeds from the issuance
of SAFE agreements to a related party and $0.3 million final payment on the settlement of the amount due to Polar Multi-Strategy Master
Fund.
Net cash provided by
financing activities of $15.6 million for the thirteen-weeks ended April 2, 2023 was due to proceeds of $11.0 million in from the
issuance of convertible notes and draws of $14.1 million, net of $9.6 million in repayments on our Secured Credit Facility and $0.1
million of proceeds from the issuance of shares of our common stock from the exercise of common stock options.
Off Balance Sheet
Arrangements
As
of the date of this Quarterly Report on Form 10-Q, Complete Solaria does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources that are material to investors. The term “off-balance
sheet arrangement” generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated
with Complete Solaria is a party, under which it has any obligation arising under a guaranteed contract, derivative instrument, or variable
interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity,
or market risk support for such assets.
Currently,
Complete Solaria does not engage in off-balance sheet financing arrangements.
Emerging Growth Company
Status
Section 102(b)(1) of the
Jumpstart Our Business Startups Act of 2012, or the JOBS Act, exempts emerging growth companies from being required to comply with new
or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting
standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the
requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period
is irrevocable.
Complete Solaria is an “emerging
growth company” as defined in Section 2(a) of the Securities Act, and has elected to take advantage of the benefits of the extended
transition period for new or revised financial accounting standards. Following the closing of the Mergers, our Post-Combination Company
will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of common
stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day
of the fiscal year in which we has total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation),
(iii) the date on which we have issued more than $1.0 billion in non-convertible debt in the prior three-year period, or (iv) December
31, 2025. Complete Solaria expects to continue to take advantage of the benefits of the extended transition period, although it may decide
to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible
to compare our financial results with the financial results of another public company that is either not an emerging growth company or
is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential
differences in accounting standards used.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are exposed to certain market risks in the ordinary course of our business. The Company monitors and manages these financial exposures
as an integral part of its overall risk management program.
Interest Rate
Risk
We
do not have significant exposure to interest rate risk that could affect the balance sheet, statement of operations, and the statement
of cash flows, as we do not have any outstanding variable rate debt as of March 31, 2024.
Concentrations
of Credit Risk and Major Customers
Our
customer base consists primarily of residential homeowners. We do not require collateral on our accounts receivable. Further, our accounts
receivable amounts are with individual homeowners, and we are exposed to normal industry credit risks. We continually evaluate our reserves
for potential credit losses and establish reserves for such losses.
As
of March 31, 2024 and April 2, 2023, two customers accounted for 10% or more of the total accounts receivable, net balance.
For the thirteen-weeks ended March 31, 2024 and April 1, 2023, one
and three customer accounted for 10% or more of the total revenues.
ITEM 4. CONTROLS
AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (Disclosure Controls) within the meaning of Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended, (the “Exchange Act”). Our Disclosure Controls are designed to ensure that information required
to be disclosed by us in the reports we file or submit under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Our Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our Disclosure Controls, management recognized that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily applied its
judgment in evaluating and implementing possible controls and procedures.
As
of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated the effectiveness of the design and operation of
our Disclosure Controls, which was done under the supervision and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer. Based on the evaluation of our Disclosure Controls, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of March 31, 2024, our Disclosure Controls were not effective due to a material weakness in our internal
control over financial reporting as disclosed below.
Material Weaknesses
in Internal Control Over Financial Reporting
Prior
to the Business Combination, we were a special purpose acquisition company formed for the purpose of effecting a merger, capital stock
exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more operating businesses.
As a result, previously existing internal controls are no longer applicable or comprehensive enough as of the assessment date as our
operations prior to the Business Combination were insignificant compared to those of the consolidated entity post-Business Combination.
In addition, the design of internal controls over financial reporting for the Company following the Business Combination has required
and will continue to require significant time and resources from our management and other personnel.
In connection with the preparation and audit of our financial statements
for the year ended December 31, 2023, our management identified material weaknesses in our internal control over financial reporting.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or
detected on a timely basis. The material weaknesses are as follows:
We do not have sufficient full-time accounting personnel, (i) to enable appropriate reviews over the financial close and reporting
process, (ii) to allow for an appropriate segregation of duties, and (iii) with the requisite experience and technical accounting
knowledge to identify, review and resolve complex accounting issues under generally accepted accounting principles in the United
States (“GAAP”). Additionally, we did not adequately design and/or implement controls related to conducting a formal
risk assessment process.
Inventory
controls related to the completeness, existence, and cut-off of inventories held at third parties, and controls related to the calculation
of adjustments to inventory for items considered excessive and obsolete.
The
Company was not required to perform an evaluation of internal control over financial reporting as of December 31, 2023 in accordance with
the provisions of the Sarbanes-Oxley Act. Had such an evaluation been performed, additional control deficiencies may have been identified
by the Company’s management, and those control deficiencies could have also represented one or more material weaknesses.
Plan to Remediate
Material Weaknesses in Internal Control Over Financial Reporting
We have taken certain steps,
such as recruiting additional personnel, in addition to utilizing third-party consultants and specialists, to supplement our internal
resources, to enhance our internal control environment and plans to take additional steps to remediate the material weaknesses. Although
we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take. We cannot
assure you that the measures we have taken to date and may take in the future, will be sufficient to remediate the control deficiencies
that led to our material weakness in internal control over financial reporting or that it will prevent or avoid potential future material
weaknesses.
If we are not able to maintain
effective internal control over financial reporting and Disclosure Controls, or if material weaknesses are discovered in future periods,
a risk that is significantly increased in light of the complexity of our business, we may be unable to accurately and timely report our
financial position, results of operations, cash flows or key operating metrics, which could result in late filings of the annual and
quarterly reports under the Exchange Act, restatements of financial statements or other corrective disclosures, an inability to access
commercial lending markets, defaults under its secured revolving credit facility and other agreements, or other material adverse effects
on our business, reputation, results of operations, financial condition or liquidity.
Changes in Internal
Control over Financial Reporting
Other than the material weakness and remediation efforts described
above, there were no changes in our internal control over financial reporting that occurred during the thirteen-weeks ended March 31,
2024, to which this report relates, that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information with respect
to legal proceedings is set forth under Note 16 - Commitments and Contingencies, in the accompanying unaudited condensed consolidated
financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Investing in our securities
involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other
information contained in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and
related notes appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the section titled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our securities. If any of the events
or developments described below were to occur, our business, prospects, operating results and financial condition could suffer materially,
the trading price of our common stock could decline, and you could lose all or part of your investment. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be
immaterial may also adversely affect our business.
Risks Related to our Businesses and Industry
Our business depends
in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these
rebates, credits or incentives or the ability to monetize them could adversely impact our business.
U.S. federal, state and local
government bodies provide incentives to end users, distributors, system integrators and manufacturers of solar energy systems to promote
solar electricity in the form of rebates, tax credits and other financial incentives such as system performance payments, payments for
renewable energy credits associated with renewable energy generation and the exclusion of solar energy systems from property tax assessments.
These incentives enable us to lower the price charged to customers for energy and for solar energy systems. However, these incentives
may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption rates
increase. These reductions or terminations often occur without warning.
The Inflation Reduction Act
(“IRA”) extended and modified prior law applicable to tax credits that are available with respect to solar energy systems.
Under the IRA, the following credits are available: (i) a production tax credit under Code Section 44 (for facilities that begin construction
before January 1, 2025) and Code Section 45Y (for facilities that begin construction between January 1, 2025 and the year that is four
calendar years after the year in which certain U.S. greenhouse gas emissions percentages are met) (the “PTC”) in connection
with the installation of certain solar facilities and energy storage technology, (ii) an investment tax credit under Code Section 48
(for facilities that begin construction before January 1, 2025) and Code Section 48E (for facilities that begin construction between
January 1, 2025 and the year that is four calendar years after the year in which certain U.S. greenhouse gas emissions percentages are
met) (the “ITC”) in connection with the installation of certain solar facilities and energy storage technology, and (iii)
a residential clean energy credit (the “Section 25D Credit”) in connection with the installation of property that uses solar
energy to generate electricity for residential use.
Prior to the IRA, the PTC
for solar facilities had phased out and was no longer available. The IRA reinstated the PTC for solar facilities. The PTC available to
a taxpayer in a taxable year is equal to a certain rate multiplied by the kilowatt hours of electricity produced by the taxpayer from
solar energy at a facility owned by it and sold to an unrelated party during that taxable year. The base rates for the PTC is 0.3 cents.
This rate is increased to 1.5 cents for projects that (i) have a maximum net output of less than one MW AC, (ii) begin construction before
January 29, 2023, or (iii) meet certain prevailing wage and apprenticeship requirements. It also may be increased for projects that include
a certain percentage of components that were produced in the U.S., projects that are located in certain energy communities, and projects
that are located in low-income communities.
The ITC available to a taxpayer
in a taxable year is equal to the “energy percentage” of the basis of “energy property” placed in service by
the taxpayer during that taxable year. “Energy property” includes equipment that uses solar energy to generate electricity
(including structural components that are necessary to the functioning of a solar facility as a whole) and certain energy storage systems
(including batteries included as part of or adjacent to a solar facility). The base “energy percentage” for the ITC is 6%.
This energy percentage is increased to 30% for projects that (i) have a maximum net output of less than one MW AC, (ii) begin construction
before January 29, 2023, or (iii) meet certain prevailing wage and apprenticeship requirements. It also may be increased for projects
that include a certain percentage of components that were produced in the U.S., projects that are located in certain energy communities,
and projects that are located in low-income communities. ITCs are subject to recapture if, during the five-year period after a facility
is placed in service, the facility is sold, exchanged, involuntarily converted, or ceases its business usage. If the event that causes
such recapture occurs within the first year after a project is placed in service, 100% of the ITCs will be recaptured. The recapture
percentage is reduced 20% for each subsequent year. Historically, we have utilized the ITC when available for both residential and commercial
leases and power purchase agreements, based on ownership of the solar energy system.
The Section 25D Credit available
to a taxpayer is equal to the “applicable percentage” of expenditures for property that uses solar energy to generate electricity
for use in a dwelling unit used as a residence by the taxpayer. The applicable percentage is 26% for such systems that are placed in
service before January 1, 2022, 30% for such systems that are placed in service after December 31, 2021 and before January 1, 2033, 26%
for such systems that are placed in service in 2033, and 22% for such systems that are placed in service in 2034. The Section 25D Credit
is scheduled to expire effective January 1, 2035. Although it is unlikely that Complete Solaria would qualify for the Section 25D Credit,
the availability of the Section 25D Credit may impact the prices of its solar energy systems.
Reductions in, eliminations
of, or expirations of, governmental incentives could adversely impact results of operations and ability to compete in this industry by
increasing the cost of capital, causing us to increase the prices of our energy and solar energy systems and reduce the size of our addressable
market.
We are an “emerging growth company” and a “smaller
reporting company” and we cannot be certain if the reduced reporting requirements applicable to these companies will make our common
stock less attractive to investors.
We are an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). For as long as we continue to be an
emerging growth company, we intend to take advantage of exemptions from various reporting requirements that apply to other public companies
that are not emerging growth companies, including:
| ● | being permitted to provide only
two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in our periodic
reports; |
| ● | not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”); |
| ● | not being required to comply with any requirement that may be adopted
by the Public Company Accounting Oversight Board (the “PCAOB”) regarding mandatory audit firm rotation or a supplement to
the auditor’s report providing additional information about the audit and the financial statements; |
| ● | reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements; and |
| ● | exemptions from the requirements
of holding nonbinding advisory stockholder votes on executive compensation and stockholder approval of any golden parachute payments
not previously approved. |
Under the JOBS Act, emerging
growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies.
We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, will not be subject to the
same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial
statements may be different from companies that comply with the new or revised accounting pronouncements as of public company effective
dates.
We will remain an emerging
growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have at least $1.235 billion in total annual
gross revenues; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities
held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior
three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our IPO.
Even after we no longer qualify
as an emerging growth company, we may still qualify as a “smaller reporting company,” as defined in the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), which would allow us to continue to take advantage of many of the same exemptions
from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act and reduced disclosure obligations regarding executive compensation our periodic reports and proxy statements.
We cannot predict if investors
will find our securities less attractive because we may rely on these exemptions. If some investors find our common stock less attractive
as a result, there may be a less active trading market for our securities and the trading price of our securities may be more volatile.
Existing regulations
and policies and changes to these regulations and policies may present technical, regulatory, and economic barriers to the purchase and
use of solar power products, which may significantly reduce demand for our products and services.
The market for electric generation
products is heavily influenced by federal, state and local government laws, regulations and policies concerning the electric utility industry
in the U.S. and abroad, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity
pricing and technical interconnection of customer-owned electricity generation, and changes that make solar power less competitive with
other power sources could deter investment in the research and development of alternative energy sources as well as customer purchases
of solar power technology, which could in turn result in a significant reduction in the demand for our solar power products. The market
for electric generation equipment is also influenced by trade and local content laws, regulations and policies that can discourage growth
and competition in the solar industry and create economic barriers to the purchase of solar power products, thus reducing demand for our
solar products. In addition, on-grid applications depend on access to the grid, which is also regulated by government entities. We anticipate
that our solar power products and our installation will continue to be subject to oversight and regulation in accordance with federal,
state, local and foreign regulations relating to construction, safety, environmental protection, utility interconnection and metering,
trade, and related matters. It is difficult to track the requirements of individual states or local jurisdictions and design equipment
to comply with the varying standards. In addition, the U.S. and European Union, among others, have imposed tariffs or are in the process
of evaluating the imposition of tariffs on solar panels, solar cells, polysilicon, and potentially other components. These and any other
tariffs or similar taxes or duties may increase the price of our solar products and adversely affect our cost reduction roadmap, which
could harm our results of operations and financial condition. Any new regulations or policies pertaining our solar power products may
result in significant additional expenses for our customers, which could cause a significant reduction in demand for our solar power products.
We rely on net metering
and related policies to offer competitive pricing to customers in many of our current markets and changes to net metering policies may
significantly reduce demand for electricity from residential solar energy systems.
Net metering is one of several
key policies that have enabled the growth of distributed generation solar energy systems in the U.S., providing significant value to customers
for electricity generated by their residential solar energy systems but not directly consumed on-site. Net metering allows a homeowner
to pay his or her local electric utility for power usage net of production from the solar energy system or other distributed generation
source. Homeowners receive a credit for the energy an interconnected solar energy system generates in excess of that needed by the home
to offset energy purchases from the centralized utility made at times when the solar energy system is not generating sufficient energy
to meet the customer’s demand. In many markets, this credit is equal to the residential retail rate for electricity and in other
markets, such as Hawaii and Nevada, the rate is less than the retail rate and may be set, for example, as a percentage of the retail rate
or based upon a valuation of the excess electricity. In some states and utility territories, customers are also reimbursed by the centralized
electric utility for net excess generation on a periodic basis.
Net metering programs have
been subject to legislative and regulatory scrutiny in some states and territories including, but not limited to, California, New Jersey,
Arizona, Nevada, Connecticut, Florida, Maine, Kentucky, Puerto Rico and Guam. These jurisdictions, by statute, regulation, administrative
order or a combination thereof, have recently adopted or are considering new restrictions and additional changes to net metering programs
either on a state-wide basis or within specific utility territories. Many of these measures were introduced and supported by centralized
electric utilities. These measures vary by jurisdiction and may include a reduction in the rates or value of the credits customers are
paid or receive for the power they deliver back to the electrical grid, caps or limits on the aggregate installed capacity of generation
in a state or utility territory eligible for net metering, expiration dates for and phasing out of net metering programs, replacement
of net metering programs with alternative programs that may provide less compensation and limits on the capacity size of individual distributed
generation systems that can qualify for net metering. Net metering and related policies concerning distributed generation also received
attention from federal legislators and regulators.
In California, the California
Public Utilities Commission (“CPUC”) issued an order in 2016 retaining retail-based net metering credits for residential
customers of California’s major utilities as part of Net Energy Metering 2.0 (“NEM 2.0”). Under NEM 2.0, new
distributed generation customers receive the retail rate for electricity exported to the grid, less certain non-bypassable fees. Customers
under NEM 2.0 also are subject to interconnection charges and time-of-use rates. Existing customers who receive service under the prior
net metering program, as well as new customers under the NEM 2.0 program, currently are permitted to remain covered by them on a legacy
basis for a period of 20 years. On September 3, 2020, the CPUC opened a new proceeding to review its current net metering policies and
to develop Net Energy Metering 3.0 (“NEM 3.0”), also referred to by the CPUC as the NEM 2.0 successor tariff. NEM 3.0
was finalized on December 15, 2022 and will include several changes from previous net metering plans. There will be changes that impact
the amount that homeowners with solar power will be able to recuperate when selling excess energy back to the utility grid. With NEM 3.0,
the value of the credits for net exports will be tied to the state’s 2022 Distributed Energy Resources Avoided Cost Calculator Documentation
(“ACC”). Another significant change with NEM 3.0 will be applied to the netting period: the time period over which
the utilities measure the clean energy being imported or exported. In general, longer netting periods have typically been advantageous
for solar power customers because production can offset any consumption. NEM 3.0 will instead measure energy using instantaneous netting,
which means interval netting approximately every 15 minutes. This will lead to more NEM customers’ electricity registering as exports,
now valued at the new, lower ACC value.
We utilize a limited
number of suppliers of solar panels and other system components to adequately meet anticipated demand for our solar service offerings.
Any shortage, delay or component price change from these suppliers or delays and price increases associated with the product transport
logistics could result in sales and installation delays, cancellations and loss of market share.
We purchase solar panels,
inverters and other system components from a limited number of suppliers, which makes us susceptible to quality issues, shortages and
price changes. If we fail to develop, maintain and expand relationships with existing or new suppliers, we may be unable to adequately
meet anticipated demand for our solar energy systems or may only be able to offer our systems at higher costs or after delays. If one
or more of the suppliers that we rely upon to meet anticipated demand ceases or reduces production, we may be unable to satisfy this demand
due to an inability to quickly identify alternate suppliers or to qualify alternative products on commercially reasonable terms.
In particular, there are a
limited number of inverter suppliers. Once we design a system for use with a particular inverter, if that type of inverter is not readily
available at an anticipated price, we may incur additional delay and expense to redesign the system.
In addition, production of
solar panels involves the use of numerous raw materials and components. Several of these have experienced periods of limited availability,
particularly polysilicon, as well as indium, cadmium telluride, aluminum and copper. The manufacturing infrastructure for some of these
raw materials and components has a long lead time, requires significant capital investment and relies on the continued availability of
key commodity materials, potentially resulting in an inability to meet demand for these components. The prices for these raw materials
and components fluctuate depending on global market conditions and demand and we may experience rapid increases in costs or sustained
periods of limited supplies.
Despite efforts to obtain
components from multiple sources whenever possible, many suppliers may be single-source suppliers of certain components. If we cannot
maintain long-term supply agreements or identify and qualify multiple sources for components, access to supplies at satisfactory prices,
volumes and quality levels may be harmed. We may also experience delivery delays of components from suppliers in various global locations.
In addition, while there are alternative suppliers and service providers that we could enter into agreements with to replace its suppliers
on commercially reasonable terms, we may be unable to establish alternate supply relationships or obtain or engineer replacement components
in the short term, or at all, at favorable prices or costs. Qualifying alternate suppliers or developing our own replacements for certain
components may be time-consuming and costly and may force us to make modifications to our product designs.
Our need to purchase supplies
globally and our continued international expansion further subjects us to risks relating to currency fluctuations. Any decline in the
exchange rate of the U.S. dollar compared to the functional currency of component suppliers could increase component prices. In addition,
the state of the financial markets could limit suppliers’ ability to raise capital if they are required to expand their production
to meet our needs or satisfy our operating capital requirements. Changes in economic and business conditions, wars, governmental changes
and other factors beyond our control or which we do not presently anticipate, could also affect suppliers’ solvency and ability
to deliver components on a timely basis. Any of these shortages, delays or price changes could limit our growth, cause cancellations or
adversely affect profitability and the ability to compete in the markets in which we operate effectively.
Our business substantially
focuses on solar service agreements and transactions with residential customers.
Our business substantially
focuses on solar service agreements and transactions with residential customers. Our energy system sales to homeowners utilize power purchase
agreements (“PPAs”), leases, loans and other products and services. We currently offer PPAs and leases through, EverBright,
LLC, and other financial institutions. If we were unable to arrange new or alternative financing methods for PPAs and leases on favorable
terms, our business, financial condition, results of operations, and prospects could be materially and adversely affected.
Changes in international
trade policies, tariffs, or trade disputes could significantly and adversely affect our business, revenues, margins, results of operations,
and cash flows.
On February 7, 2018, safeguard
tariffs on imported solar cells and modules went into effect pursuant to Proclamation 9693, which approved recommendations to provide
relief to U.S. manufacturers and impose safeguard tariffs on imported solar cells and modules, based on the investigations, findings,
and recommendations of the U.S. International Trade Commission (the “International Trade Commission”). Since 2021,
modules are subject to a tariff rate of 15%. Cells are subjected to a tariff-rate quota, under which the first 2.5 GW of cell imports
each year will be exempt from tariffs, and cells imported after the 2.5 GW quota has been reached will be subject to the same 30% tariff
as modules in the first year, with the same 5% decline in each of the three subsequent years. The tariff-free cell quota applies globally,
without any allocation by country or region.
The tariffs could materially
and adversely affect our business and results of operations. While solar cells and modules based on interdigitated back contact technology
were granted exclusion from these safeguard tariffs on September 19, 2018, our solar products based on other technologies continue to
be subject to the safeguard tariffs. Although we are actively engaged in efforts to mitigate the effect of these tariffs, there is no
guarantee that these efforts will be successful.
Uncertainty surrounding the
implications of existing tariffs affecting the U.S. solar market and potential trade tensions between the U.S. and other countries is
likely to cause market volatility, price fluctuations, supply shortages, and project delays, any of which could harm our business, and
the pursuit of mitigating actions may divert substantial resources from other projects. Further, the Uyghur Forced Labor Prevention Act
may inhibit importation of certain solar modules or components. In addition, the imposition of tariffs is likely to result in a wide range
of impacts to the U.S. solar industry and the global manufacturing market, as well as our business in particular. Such tariffs could materially
increase the price of our solar products and result in significant additional costs to the company, its resellers, and the resellers’
customers, which could cause a significant reduction in demand for the company’s solar power products and greatly reduce our competitive
advantage.
If we fail to manage
operations and growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately
address competitive challenges.
We have experienced significant
growth in recent periods as measured by our number of customers; we intend to continue efforts to expand our business within existing
and new markets. This growth has placed, and any future growth may place, a strain on management, operational and financial infrastructure.
Our growth requires our management to devote a significant amount of time and effort to maintain and expand relationships with customers,
dealers and other third parties, attract new customers and dealers, arrange financing for growth and manage expansion into additional
markets.
In addition, our current and
planned operations, personnel, information technology and other systems and procedures might need to be revised to support future growth
and may require us to make additional unanticipated investments in its infrastructure. Our success and ability to further scale our business
will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner.
If we cannot manage operations
and growth, we may be unable to meet expectations regarding growth, opportunity and financial targets, take advantage of market opportunities,
execute our business strategies or respond to competitive pressures. This could also result in declines in quality or customer satisfaction,
increased costs, difficulties in introducing new offerings or other operational difficulties. Any failure to effectively manage our operations
and growth could adversely impact our reputation, business, financial condition, cash flows and results of operations.
We have international
activities and customers in the European Union, and plans to continue these efforts, which subjects us to additional business risks, including
logistical and compliance related complexity.
A portion of our sales are
made to customers outside of the U.S., and a substantial portion of our supply agreements are with supply and equipment vendors located
outside of the U.S. We have solar cell and module production lines located at our outsourced manufacturing facilities in Thailand, Vietnam,
and India. We are also considering other manufacturing locations.
Risks we face in conducting
business internationally include:
| ● | multiple, conflicting and changing
laws and regulations, export and import restrictions, employment laws, data protection laws, environmental protection, regulatory requirements,
international trade agreements, and other government approvals, permits and licenses; |
| ● | difficulties and costs in staffing
and managing foreign operations as well as cultural differences; |
| ● | potentially adverse tax consequences
associated with current, future or deemed permanent establishment of operations in multiple countries; |
| ● | relatively uncertain legal
systems, including potentially limited protection for intellectual property rights, and laws, changes in the governmental incentives
that we rely on, regulations and policies which impose additional restrictions on the ability of foreign companies to conduct business
in certain countries or otherwise place them at a competitive disadvantage in relation to domestic companies; |
| ● | inadequate local infrastructure
and developing telecommunications infrastructures; |
| ● | financial risks, such as longer
sales and payment cycles and greater difficulty collecting accounts receivable; |
| ● | currency fluctuations, government-fixed
foreign exchange rates, the effects of currency hedging activity, and the potential inability to hedge currency fluctuations; |
| ● | political and economic instability,
including wars, acts of terrorism, political unrest, boycotts, curtailments of trade and other business restrictions; |
| ● | trade barriers such as export
requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make the company
less competitive in some countries; and |
| ● | liabilities associated with
compliance with laws (for example, the Foreign Corrupt Practices Act in the U.S. and similar laws outside of the U.S.). |
We have an organizational
structure involving entities globally. This increases the potential impact of adverse changes in laws, rules and regulations affecting
the free flow of goods and personnel, and therefore heightens some of the risks noted above. Further, this structure requires us to manage
our international inventory and warehouses effectively. If we fail to do so, our shipping movements may not correspond with product demand
and flow. Unsettled intercompany balances between entities could result, if changes in law, regulations or related interpretations occur
in adverse tax or other consequences that affect capital structure, intercompany interest rates and legal structure. If we are unable
to successfully manage any such risks, any one or more could materially and negatively affect our business, financial condition and results
of operations.
We have incurred losses
and may be unable to achieve or sustain profitability in the future.
We have incurred net losses
in the past and had an accumulated deficit of $364.5 million and $354.9 million as of March 31, 2024 and December 31, 2023, respectively.
We will continue to incur net losses as spending increases to finance the expansion of operations, installation, engineering, administrative,
sales and marketing staffs, spending increases on brand awareness and other sales and marketing initiatives and implement internal systems
and infrastructure to support the company’s growth. We do not know whether revenue will grow rapidly enough to absorb these costs,
and our limited operating history makes it difficult to assess the extent of these expenses or their impact on results of operations.
Our ability to achieve profitability depends on a number of factors, including but not limited to:
| ● | Growing the customer base; |
| ● | Maintaining or further lowering
the cost of capital; |
| ● | Reducing the cost of components
for our solar service offerings; |
| ● | Growing and maintaining our
channel partner network; |
| ● | Growing our direct-to-consumer
business to scale; and |
| ● | Reducing operating costs by
lowering customer acquisition costs and optimizing our design and installation processes and supply chain logistics. |
Even
if we do achieve profitability, we may be unable to sustain or increase profitability in the future.
A material drop in the
retail price of utility-generated electricity or electricity from other sources could adversely impact our ability to attract customers,
which would harm our business, financial condition, and results of operations.
We believe a homeowner’s
decision to buy solar energy from us is primarily driven by a desire to lower electricity costs. Decreases in the retail prices of electricity
from utilities or other energy sources would harm our ability to offer competitive pricing and could harm its business. The price of electricity
from utilities could decrease as a result of:
| ● | the construction of a significant
number of new power generation plants, including nuclear, coal, natural gas or renewable energy technologies; |
| ● | the construction of additional
electric transmission and distribution lines; |
| ● | a reduction in the price of
natural gas or other natural resources as a result of new drilling techniques or other technological developments, a relaxation of associated
regulatory standards, or broader economic or policy developments; |
| ● | energy conservation technologies
and public initiatives to reduce electricity consumption; |
| ● | subsidies impacting electricity
prices, including in connection with electricity generation and transmission; and |
| ● | development of new energy technologies
that provide less expensive energy. |
A reduction in utility electricity
prices would make the purchase of our solar service offerings less attractive. If the retail price of energy available from utilities
were to decrease due to any of these or other reasons, we would be at a competitive disadvantage. As a result, we may be unable to attract
new homeowners and growth would be limited.
We face competition
from both traditional energy companies and renewable energy companies.
The solar energy and renewable
energy industries are both highly competitive and continually evolving as participants strive to distinguish themselves within their markets
and compete with large utilities. Our primary competitors are the traditional utilities that supply energy to potential customers. We
compete with these utilities primarily based on price, predictability of price and the ease by which customers can switch to electricity
generated by our solar energy systems. If we cannot offer compelling value to its customers based on these factors, then our business
will not grow. Utilities generally have substantially greater financial, technical, operational and other resources than us. As a result
of their greater size, these competitors may be able to devote more resources to the research, development, promotion and sale of their
products or respond more quickly to evolving industry standards and changes in market conditions than we can. Utilities could also offer
other value- added products and services that could help them compete with us even if the cost of electricity they offer is higher than
ours. In addition, a majority of utilities’ sources of electricity is non-solar, which may allow utilities to sell electricity more
cheaply than electricity generated by our solar energy systems.
Our business is concentrated
in certain markets including California, putting us at risk of region-specific disruptions.
As of March 31, 2024, a substantial
portion of our installations were in California. We expect much of its near-term future growth to occur in California, further concentrating
our customer base and operational infrastructure. Accordingly, our business and operations results are particularly susceptible to adverse
economic, regulatory, pollical, weather, and other conditions in this market and other markets that may become similarly concentrated.
We may not have adequate insurance, including business interruption insurance, to compensate for losses that may occur from any such significant
events. A significant natural disaster could have a material adverse impact on our business, results of operations and financial condition.
In addition, acts of terrorism or malicious computer viruses could cause disruptions in our business, our partners’ businesses or
the economy as a whole. To the extent that these disruptions result in delays or cancellations of installations or the deployment of solar
service offerings, our business, results of operations and financial condition would be adversely affected.
Our growth strategy
depends on the widespread adoption of solar power technology.
The distributed residential
solar energy market is at a relatively early stage of development compared to fossil fuel-based electricity generation. If additional
demand for distributed residential solar energy systems fails to develop sufficiently or takes longer to develop than we anticipate, the
company may be unable to originate additional solar service agreements and related solar energy systems and energy storage systems to
grow the business. In addition, demand for solar energy systems and energy storage systems in our targeted markets may not develop to
the extent it anticipates. As a result, we may need to successfully broaden our customer base through origination of solar service agreements
and related solar energy systems and energy storage systems within its current markets or in new markets we may enter.
Many factors may affect the
demand for solar energy systems, including, but not limited to, the following:
| ● | availability, substance and
magnitude of solar support programs including government targets, subsidies, incentives, renewable portfolio standards and residential
net metering rules; |
| ● | the relative pricing of other
conventional and non-renewable energy sources, such as natural gas, coal, oil and other fossil fuels, wind, utility-scale solar, nuclear,
geothermal and biomass; |
| ● | performance, reliability and
availability of energy generated by solar energy systems compared to conventional and other non-solar renewable energy sources; |
| ● | availability and performance
of energy storage technology, the ability to implement such technology for use in conjunction with solar energy systems and the cost
competitiveness such technology provides to customers as compared to costs for those customers reliant on the conventional electrical
grid; and |
| ● | general economic conditions
and the level of interest rates. |
The residential solar energy
industry is constantly evolving, which makes it difficult to evaluate our prospects. We cannot be certain if historical growth rates reflect
future opportunities or its anticipated growth will be realized. The failure of distributed residential solar energy to achieve, or its
being significantly delayed in achieving, widespread adoption could have a material adverse effect on our business, financial condition
and results of operations.
Our business could be
adversely affected by seasonal trends, poor weather, labor shortages, and construction cycles.
Our
business is subject to significant industry-specific seasonal fluctuations. In the U.S., many customers make purchasing decisions towards
the end of the year in order to take advantage of tax credits. In addition, sales in the new home development market are often tied to
construction market demands, which tend to follow national trends in construction, including declining sales during cold weather months.
Natural disasters, terrorist
activities, political unrest, economic volatility, and other outbreaks could disrupt our delivery and operations, which could materially
and adversely affect our business, financial condition, and results of operations.
Global pandemics or fear of
spread of contagious diseases, such as Ebola virus disease (EVD), coronavirus disease 2019 (COVID-19), Middle East respiratory syndrome
(MERS), severe acute respiratory syndrome (SARS), H1N1 flu, H7N9 flu, avian flu and monkeypox, as well as hurricanes, earthquakes, tsunamis,
or other natural disasters could disrupt our business operations, reduce or restrict operations and services, incur significant costs
to protect its employees and facilities, or result in regional or global economic distress, which may materially and adversely affect
business, financial condition, and results of operations. Actual or threatened war, terrorist activities, political unrest, civil strife,
future disruptions in access to bank deposits or lending commitments due to bank failures and other geopolitical uncertainty could have
a similar adverse effect on our business, financial condition, and results of operations. On February 24, 2022, the Russian Federation
launched an invasion of Ukraine that has had an immediate impact on the global economy resulting in higher energy prices and higher prices
for certain raw materials and goods and services which in turn is contributing to higher inflation in the U.S. and other countries across
the globe with significant disruption to financial markets. We have outsourced product development and software engineering in Ukraine
and we may potentially indirectly be adversely impacted any significant disruption it has caused and may continue to escalate. Similarly,
the current armed conflict in Israel and the Gaza Strip may impact our operations. Any one or more of these events may impede our operation
and delivery efforts and adversely affect sales results, or even for a prolonged period of time, which could materially and adversely
affect our business, financial condition, and results of operations. We cannot predict the full effects the supply chain constraints will
have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties.
We depend on a limited
number of customers and sales contracts for a significant portion of revenues, and the loss of any customer or cancellation of any contract
may cause significant fluctuations or declines in revenues.
In 2023, our top customer
accounted for 55% of our total revenues, while in 2022 another customer accounted for 47% of our total revenues from continuing operations.
We anticipate that our dependence on a limited number of customers may continue for the foreseeable future. As a result of customer concentration,
our financial performance may fluctuate significantly from period to period based, among others, on exogenous circumstances related to
its clients. In addition, any one of the following events may materially adversely affect cash flows, revenues and results of operations:
| ● | reduction, delay or cancellation
of orders from one or more significant customers; |
| ● | loss of one or more significant
customers and failure to identify additional or replacement customers; |
| ● | failure of any significant
customers to make timely payment for our products; or |
| ● | the customers becoming insolvent
or having difficulties meeting their financial obligations for any reason. |
We are exposed to the
credit risk of customers and payment delinquencies on its accounts receivables.
While customer defaults have
been immaterial to date, we expect that the risk of customer defaults may increase as we grow our business. If we experience increased
customer credit defaults, our revenue and our ability to raise new investment funds could be adversely affected. If economic conditions
worsen, certain of our customers may face liquidity concerns and may be unable to satisfy their payment obligations to us on a timely
basis or at all, which could have a material adverse effect on our financial condition and results of operations.
We may not realize the
anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business.
In November 2022, we acquired
The Solaria Corporation (“Solaria”), after which Complete Solar was renamed “Complete Solaria, Inc.” In October
2023, we subsequently sold solar panel assets of Solaria, including intellectual property and customer contracts, to Maxeon Solar Technologies,
Ltd., which resulted in an impairment loss of $147.5 million and loss on disposal of $1.8 million. In the future, we may acquire additional
companies, project pipelines, products, or technologies, or enter into joint ventures or other strategic initiatives. Our ability as an
organization to integrate acquisitions is unproven. We may not realize the anticipated benefits of our acquisitions or any other future
acquisition or the acquisition may be viewed negatively by customers, financial markets or investors.
Any acquisition has numerous
risks, including, but not limited to, the following:
| ● | difficulty in assimilating
the operations and personnel of the acquired company; |
| ● | difficulty in effectively integrating
the acquired technologies or products with current products and technologies; |
| ● | difficulty in maintaining controls,
procedures and policies during the transition and integration; |
| ● | disruption of ongoing business
and distraction of management and employees from other opportunities and challenges due to integration issues; |
| ● | difficulty integrating the
acquired company’s accounting, management information and other administrative systems; |
| ● | inability to retain key technical
and managerial personnel of the acquired business; |
| ● | inability to retain key customers,
vendors, and other business partners of the acquired business; |
| ● | inability to achieve the financial
and strategic goals for the acquired and combined businesses; |
| ● | incurring acquisition-related
costs or amortization costs for acquired intangible assets that could impact operating results; |
| ● | failure of due diligence processes
to identify significant issues with product quality, legal and financial liabilities, among other things; |
| ● | inability to assert that internal
controls over financial reporting are effective; and |
| ● | inability to obtain, or obtain
in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions. |
We depend on our intellectual
property and may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in
the loss of significant rights.
From time to time, we and
our customers, or the third parties with whom we work may receive letters, including letters from other third parties, and may become
subject to lawsuits with such third parties alleging infringement of their patents. Additionally, we are required by contract to indemnify
some customers and third-party intellectual property providers for certain costs and damages of patent infringement in circumstances where
our products are a factor creating the customer’s or these third-party providers’ infringement liability. This practice may
subject us to significant indemnification claims by customers and third-party providers. We cannot assure investors that indemnification
claims will not be made or that these claims will not harm our business, operating results or financial condition. Intellectual property
litigation is very expensive and time-consuming and could divert management’s attention from our business and could have a material
adverse effect on our business, operating results or financial condition. If there is a successful claim of infringement against us, our
customers or our third-party intellectual property providers, we may be required to pay substantial damages to the party claiming infringement,
stop selling products or using technology that contains the allegedly infringing intellectual property, or enter into royalty or license
agreements that may not be available on acceptable terms, if at all. Parties making infringement claims may also be able to bring an action
before the International Trade Commission that could result in an order stopping the importation into the U.S. of our solar products.
Any of these judgments could materially damage our business. We may have to develop non-infringing technology, and our failure in doing
so or in obtaining licenses to the proprietary rights on a timely basis could have a material adverse effect on the business.
We may be required to
file claims against other parties for infringing its intellectual property that may be costly and may not be resolved in its favor.
To protect our intellectual
property rights and to maintain competitive advantage, we have filed, and may continue to file, suits against parties we believe infringe
or misappropriate our intellectual property. Intellectual property litigation is expensive and time-consuming, could divert management’s
attention from our business, and could have a material adverse effect on our business, operating results, or financial condition, and
our enforcement efforts may not be successful. In addition, the validity of our patents may be challenged in such litigation. Our participation
in intellectual property enforcement actions may negatively impact our financial results.
Developments in technology
or improvements in distributed solar energy generation and related technologies or components may materially adversely affect demand for
our offerings.
Significant developments in
technology, such as advances in distributed solar power generation, energy storage solutions such as batteries, energy storage management
systems, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other forms of distributed
or centralized power production may materially and adversely affect demand for our offerings and otherwise affect our business. Future
technological advancements may result in reduced prices to consumers or more efficient solar energy systems than those available today,
either of which may result in current customer dissatisfaction. We may not be able to adopt these new technologies as quickly as its competitors
or on a cost-effective basis.
Additionally, recent technological
advancements may impact our business in ways not currently anticipated. Any failure by us to adopt or have access to new or enhanced technologies
or processes, or to react to changes in existing technologies, could result in product obsolescence or the loss of competitiveness of
and decreased consumer interest in its solar energy services, which could have a material adverse effect on its business, financial condition
and results of operations.
Our business is subject
to complex and evolving data protection laws. Many of these laws and regulations are subject to change and uncertain interpretation and
could result in claims, increased cost of operations or otherwise harm its business.
Consumer personal privacy
and data security have become significant issues and the subject of rapidly evolving regulation in the U.S. Furthermore, federal, state
and local government bodies or agencies have in the past adopted, and may in the future adopt, more laws and regulations affecting data
privacy. For example, the state of California enacted the California Consumer Privacy Act of 2018 (“CCPA”) and California
voters recently approved the California Privacy Rights Act (“CPRA”). The CCPA creates individual privacy rights for consumers
and places increased privacy and security obligations on entities handling the personal data of consumers or households. The CCPA went
into effect in January 2020 and it requires covered companies to provide new disclosures to California consumers, provides such consumers,
business-to-business contacts and employees new ways to opt-out of certain sales of personal information, and allows for a new private
right of action for data breaches. The CPRA modifies the CCPA and imposes additional data protection obligations on companies doing business
in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. The CCPA and the CPRA may
significantly impact Complete Solaria’s business activities and require substantial compliance costs that adversely affect its business,
operating results, prospects and financial condition. To date, we have not experienced substantial compliance costs in connection with
fulfilling the requirements under the CCPA or CPRA. However, we cannot be certain that compliance costs will not increase in the future
with respect to the CCPA and CPRA or any other recently passed consumer privacy regulation.
Outside the U.S., an increasing
number of laws, regulations, and industry standards may govern data privacy and security. For example, the European Union’s General
Data Protection Regulation (“EU GDPR”) and the United Kingdom’s GDPR (“UK GDPR”) impose strict
requirements for processing personal data. Under the EU GDPR, companies may face temporary or definitive bans on data processing and other
corrective actions; fines of up to 20 million Euros or 4% of annual global revenue, whichever is greater; or private litigation related
to processing of personal data brought by classes of data subjects or consumer protection organizations authorized at law to represent
their interests. Non-compliance with the UK GDPR may result in substantially similar adverse consequences to those in relation to the
EU GDPR, including monetary penalties of up to £17.5 million or 4% of worldwide revenue, whichever is higher.
In addition, we may be unable
to transfer personal data from Europe and other jurisdictions to the U.S. or other countries due to data localization requirements or
limitations on cross-border data flows. Europe and other jurisdictions have enacted laws requiring data to be localized or limiting the
transfer of personal data to other countries. In particular, the European Economic Area (“EEA”) and the United Kingdom
have significantly restricted the transfer of personal data to the U.S. and other countries whose privacy laws it believes are not adequate.
Other jurisdictions may adopt similarly stringent interpretations of their data localization and cross- border data transfer laws. Although
there are currently various mechanisms that may be used to transfer personal data from the EEA and UK to the U.S. in compliance with law,
such as the EEA and UK’s standard contractual clauses, these mechanisms are subject to legal challenges, and there is no assurance
that Complete Solaria can satisfy or rely on these measures to lawfully transfer personal data to the U.S. If there is no lawful manner
for us to transfer personal data from the EEA, the UK, or other jurisdictions to the U.S., or if the requirements for a legally-compliant
transfer are too onerous, we could face significant adverse consequences, including the interruption or degradation of its operations,
the need to relocate part of or all of its business or data processing activities to other jurisdictions at significant expense, increased
exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with partners, vendors and other
third parties, and injunctions against its processing or transferring of personal data necessary to operate its business. Some European
regulators have ordered certain companies to suspend or permanently cease certain transfers out of Europe for allegedly violating the
EU GDPR’s cross-border data transfer limitations.
Any inability to adequately
address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations and policies,
could result in additional cost and liability to us damage our reputation, inhibit sales and adversely affect our business. Furthermore,
the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to our business may
limit the use and adoption of, and reduce the overall demand for, its solutions. If we are not able to adjust to changing laws, regulations
and standards related to privacy or security, our business may be harmed.
Any unauthorized access
to or disclosure or theft of personal information we gather, store or use could harm our reputation and subject us to claims or litigation.
We receive, store and use
personal information of customers, including names, addresses, e-mail addresses, and other housing and energy use information. We also
store information of dealers, including employee, financial and operational information. We rely on the availability of data collected
from customers and dealers in order to manage our business and market our offerings. We take certain steps in an effort to protect the
security, integrity and confidentiality of the personal information collected, stored or transmitted, but there is no guarantee inadvertent
or unauthorized use or disclosure will not occur or third parties will not gain unauthorized access to this information despite our efforts.
Although we take precautions to provide for disaster recovery, our ability to recover systems or data may be expensive and may interfere
with normal operations. Also, although we obtain assurances from such third parties that they will use reasonable safeguards to secure
their systems, we may be adversely affected by unavailability of their systems or unauthorized use or disclosure or its data maintained
in such systems. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified
until they are launched against a target, our suppliers or vendors and our dealers may be unable to anticipate these techniques or to
implement adequate preventative or mitigation measures.
Cyberattacks in particular
are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data
and other electronic security breaches that could lead to disruptions in critical systems, disruption of customers’ operations,
loss or damage to data delivery systems, unauthorized release of confidential or otherwise protected information, corruption of data and
increased costs to prevent, respond to or mitigate cybersecurity events. In addition, certain cyber incidents, such as advanced persistent
threats, may remain undetected for an extended period.
Unauthorized use, disclosure
of or access to any personal information maintained by us or on the behalf of us, whether through breach of our systems, breach of the
systems of our suppliers, vendors or dealers by an unauthorized party or through employee or contractor error, theft or misuse or otherwise,
could harm our business. If any such unauthorized use, disclosure of or access to such personal information were to occur, our operations
could be seriously disrupted and we could be subject to demands, claims and litigation by private parties and investigations, related
actions and penalties by regulatory authorities.
In addition, we could incur
significant costs in notifying affected persons and entities and otherwise complying with the multitude of federal, state and local laws
and regulations relating to the unauthorized access to, use of or disclosure of personal information. Finally, any perceived or actual
unauthorized access to, use of or disclosure of such information could harm our reputation, substantially impair our business, financial
condition and results of operations. While we currently maintain cybersecurity insurance, such insurance may not be sufficient to cover
against claims, and we cannot be certain that cyber insurance will continue to be available on economically reasonable terms, or at all,
or that any insurer will not deny coverage as to any future claim.
If we fail to comply
with laws and regulations relating to interactions by the company or its dealers with current or prospective residential customers could
result in negative publicity, claims, investigations and litigation and adversely affect financial performance.
Our business substantially
focuses on solar service agreements and transactions with residential customers. We offer leases, loans and other products and services
to consumers by contractors in our dealer networks, who utilize sales people employed by or engaged as third-party service providers of
such contractors. We and our dealers must comply with numerous federal, state and local laws and regulations that govern matters relating
to interactions with residential consumers, including those pertaining to consumer protection, marketing and sales, privacy and data security,
consumer financial and credit transactions, mortgages and refinancings, home improvement contracts, warranties and various means of customer
solicitation, including under the laws described below in “As sales to residential customers have grown, we have increasingly
become subject to substantial financing and consumer protection laws and regulations.” These laws and regulations are dynamic
and subject to potentially differing interpretations and various federal, state and local legislative and regulatory bodies may initiate
investigations, expand current laws or regulations, or enact new laws and regulations regarding these matters. Changes in these laws or
regulations or their interpretation could dramatically affect how we and our dealers do business, acquire customers and manage and use
information collected from and about current and prospective customers and the costs associated therewith. We and our dealers strive to
comply with all applicable laws and regulations relating to interactions with residential customers. It is possible, however, these requirements
may be interpreted and applied in a manner inconsistent from one jurisdiction to another and may conflict with other rules or our practices
or the practices of our dealers.
Although we require dealers
to meet consumer compliance requirements, we do not control dealers and their suppliers or their business practices. Accordingly, we cannot
guarantee they follow ethical business practices such as fair wage practices and compliance with environmental, safety and other local
laws. A lack of demonstrated compliance could lead us to seek alternative dealers or suppliers, which could increase costs and have a
negative effect on business and prospects for growth. Violation of labor or other laws by our dealers or suppliers or the divergence of
a dealer or supplier’s labor or other practices from those generally accepted as ethical in the U.S. or other markets in which the
company does or intends to do business could also attract negative publicity and harm the business.
From time to time, we have
been included in lawsuits brought by the consumer customers of certain contractors in our networks, citing claims based on the sales practices
of these contractors. While we have paid only minimal damages to date, we cannot be sure that a court of law would not determine that
we are liable for the actions of the contractors in our networks or that a regulator or state attorney general’s office may hold
us accountable for violations of consumer protection or other applicable laws by. Our risk mitigation processes may not be sufficient
to mitigate financial harm associated with violations of applicable law by our contractors or ensure that any such contractor is able
to satisfy its indemnification obligations to us. Any significant judgment against us could expose it to broader liabilities, a need to
adjust our distribution channels for products and services or otherwise change our business model and could adversely impact the business.
We may be unsuccessful
in introducing new services and product offerings.
We intend to introduce new
offerings of services and products to both new and existing customers in the future, including home automation products and additional
home technology solutions. We may be unsuccessful in significantly broadening our customer base through the addition of these services
and products within current markets or in new markets the company may enter. Additionally, we may not be successful in generating substantial
revenue from any additional services and products introduced in the future and may decline to initiate new product and service offerings.
Damage to our brand
and reputation or change or loss of use of our brand could harm our business and results of operations.
We depend significantly on
our reputation for high-quality products, excellent customer service and the brand name “Complete Solaria” to attract new
customers and grow our business. If we fail to continue to deliver solar energy systems or energy storage systems within the planned timelines,
if our offerings do not perform as anticipated or if we damage any of our customers’ properties or delays or cancels projects, our
brand and reputation could be significantly impaired. Future technological improvements may allow the company to offer lower prices or
offer new technology to new customers; however, technical limitations in our current solar energy systems and energy storage systems may
prevent us from offering such lower prices or new technology to existing customers.
In addition, given the sheer
number of interactions our personnel or dealers operating on our behalf have with customers and potential customers, it is inevitable
that some customers’ and potential customers’ interactions with us or dealers operating on our behalf will be perceived as
less than satisfactory. This has led to instances of customer complaints, some of which have affected our digital footprint on rating
websites and social media platforms. If we cannot manage hiring and training processes to avoid or minimize these issues to the extent
possible, our reputation may be harmed and our ability to attract new customers would suffer.
In addition, if we were to
no longer use, lose the right to continue to use or if others use the “Complete Solaria” brand, we could lose recognition
in the marketplace among customers, suppliers and dealers, which could affect our business, financial condition, results of operations
and would require financial and other investment and management attention in new branding, which may not be as successful.
Our success depends
on the continuing contributions of key personnel.
We rely heavily on the services
of our key executive officers and the loss of services of any principal member of the management team could adversely affect operations.
There have been, and from time to time there may continue to be, changes in our management team resulting from the hiring or departure
of executives and key employees, or the transition of executives within our business, which could disrupt our business.
We are investing significant
resources in developing new members of management as we complete our restructuring and strategic transformation. We also anticipate that
over time we will need to hire a number of highly skilled technical, sales, marketing, administrative, and accounting personnel. The competition
for qualified personnel is intense in this industry. We may not be successful in attracting and retaining sufficient numbers of qualified
personnel to support its anticipated growth. We cannot guarantee that any employee will remain employed with us for any definite period
of time since all employees, including key executive officers, serve at-will and may terminate their employment at any time for any reason.
If we or our dealers
or suppliers fail to hire and retain sufficient employees and service providers in key functions, our growth and ability to timely complete
customer projects and successfully manage customer accounts would be constrained.
To support growth, we and
our dealers need to hire, train, deploy, manage and retain a substantial number of skilled employees, engineers, installers, electricians
and sales and project finance specialists. Competition for qualified personnel in this industry has increased substantially, particularly
for skilled personnel involved in the installation of solar energy systems. We and our dealers also compete with the homebuilding and
construction industries for skilled labor. These industries are cyclical and when participants in these industries seek to hire additional
workers, it puts upward pressure on us and our dealers’ labor costs. Companies with whom our dealers compete to hire installers
may offer compensation or incentive plans that certain installers may view as more favorable. As a result, our dealers may be unable to
attract or retain qualified and skilled installation personnel. The further unionization of the industry’s labor force or the homebuilding
and construction industries’ labor forces could also increase our dealers’ labor costs.
Shortages of skilled labor
could significantly delay a project or otherwise increase dealers’ costs. Further, we need to continue to increase the training
of the customer service team to provide high-end account management and service to homeowners before, during and following the point of
installation of its solar energy systems. Identifying and recruiting qualified personnel and training them requires significant time,
expense and attention. It can take several months before a new customer service team member is fully trained and productive at the standards
established by us. If we are unable to hire, develop and retain talented customer service or other personnel, we may not be able to grow
our business.
Our operating results
and ability to grow may fluctuate from quarter to quarter and year to year, which could make future performance difficult to predict and
could cause operating results for a particular period to fall below expectations.
Our quarterly and annual operating
results and its ability to grow are difficult to predict and may fluctuate significantly. We have experienced seasonal and quarterly fluctuations
in the past and expect to experience such fluctuations in the future. In addition to the other risks described in this “Risk Factors”
section, the following factors could cause operating results to fluctuate:
| ● | expiration or initiation of
any governmental rebates or incentives; |
| ● | significant fluctuations in
customer demand for our solar energy services, solar energy systems and energy storage systems; |
| ● | our dealers’ ability
to complete installations in a timely manner; |
| ● | our and our dealers’
ability to gain interconnection permission for an installed solar energy system from the relevant utility; |
| ● | the availability, terms and
costs of suitable financing; |
| ● | the amount, timing of sales
and potential decreases in value of Solar Renewable Energy Certificates (“SRECs”); |
| ● | our ability to continue to
expand its operations and the amount and timing of expenditures related to this expansion; |
| ● | announcements by us or our
competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments; |
| ● | changes in our pricing policies
or terms or those of competitors, including centralized electric utilities; |
| ● | actual or anticipated developments
in competitors’ businesses, technology or the competitive landscape; and |
| ● | natural disasters or other
weather or meteorological conditions. |
For these or other reasons,
the results of any prior quarterly or annual periods should not be relied upon as indications of our future performance.
Our ability to obtain
insurance on the terms of any available insurance coverage could be materially adversely affected by international, national, state or
local events or company-specific events, as well as the financial condition of insurers.
Our insurance policies cover
legal and contractual liabilities arising out of bodily injury, personal injury or property damage to third parties and are subject to
policy limits.
However, such policies do
not cover all potential losses and coverage is not always available in the insurance market on commercially reasonable terms. In addition,
we may have disagreements with insurers on the amount of recoverable damages and the insurance proceeds received for any loss of, or any
damage to, any of our assets may be claimed by lenders under financing arrangements or otherwise may not be sufficient to restore the
loss or damage without a negative impact on its results of operations. Furthermore, the receipt of insurance proceeds may be delayed,
requiring us to use cash or incur financing costs in the interim. To the extent our experiences covered losses under its insurance policies,
the limit of our coverage for potential losses may be decreased or the insurance rates it has to pay increased. Furthermore, the losses
insured through commercial insurance are subject to the credit risk of those insurance companies. While we believe our commercial insurance
providers are currently creditworthy, we cannot assure such insurance companies will remain so in the future.
We may not be able to maintain
or obtain insurance of the type and amount desired at reasonable rates. The insurance coverage obtained may contain large deductibles
or fail to cover certain risks or all potential losses. In addition, our insurance policies are subject to annual review by insurers and
may not be renewed on similar or favorable terms, including coverage, deductibles or premiums, or at all. If a significant accident or
event occurs for which we are not fully insured or the company suffers losses due to one or more of its insurance carriers defaulting
on their obligations or contesting their coverage obligations, it could have a material adverse effect on our business, financial condition
and results of operations.
We may be subject to
breaches of our information technology systems, which could lead to disclosure of internal information, damage to our reputation or relationships
with dealers, suppliers, and customers, and disrupt access to online services. Such breaches could subject us to significant reputational,
financial, legal, and operational consequences.
Our business requires the
use and storage of confidential and proprietary information, intellectual property, commercial banking information, personal information
concerning customers, employees, and business partners, and corporate information concerning internal processes and business functions.
Malicious attacks to gain access to such information affects many companies across various industries, including ours.
Where appropriate, we use
encryption and authentication technologies to secure the transmission and storage of data. These security measures may be compromised
as a result of third-party security breaches, employee error, malfeasance, faulty password management, or other irregularity or malicious
effort, and result in persons obtaining unauthorized access to data.
We devote resources to network
security, data encryption, and other security measures to protect our systems and data, but these security measures cannot provide absolute
security. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently,
target end users through phishing and other malicious techniques, and/or may be difficult to detect for long periods of time, we may be
unable to anticipate these techniques or implement adequate preventative measures. As a result, we may experience a breach of our systems
in the future that reduces our ability to protect sensitive data. In addition, hardware, software, or applications we develop or procures
from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security.
Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving
team members, contractors and temporary staff. If we experience, or are perceived to have experienced, a significant data security breach,
fail to detect and appropriately respond to a significant data security breach, or fail to implement disclosure controls and procedures
that provide for timely disclosure of data security breaches deemed material to our business, including corrections or updates to previous
disclosures, we could be exposed to a risk of loss, increased insurance costs, remediation and prospective prevention costs, damage to
our reputation and brand, litigation and possible liability, or government enforcement actions, any of which could detrimentally affect
our business, results of operations, and financial condition.
We may also share information
with contractors and third-party providers to conduct business. While we generally review and typically request or require such contractors
and third-party providers to implement security measures, such as encryption and authentication technologies to secure the transmission
and storage of data, those third-party providers may experience a significant data security breach, which may also detrimentally affect
our business, results of operations, and financial condition as discussed above. See also under this section, “We may be required
to file claims against other parties for infringing its intellectual property that may be costly and may not be resolved in our favor.”
We rely substantially upon trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are
not sufficiently protected, our ability to compete and generate revenue could suffer.
As sales to residential
customers have grown, we have increasingly become subject to consumer protection laws and regulations.
As we continue to seek to
expand our retail customer base, our activities with customers are subject to consumer protection laws that may not be applicable to other
businesses, such as federal truth-in-lending, consumer leasing, telephone and digital marketing, and equal credit opportunity laws and
regulations, as well as state and local finance laws and regulations. Claims arising out of actual or alleged violations of law may be
asserted against us by individuals or governmental entities and may expose the company to significant damages or other penalties, including
fines. In addition, our affiliations with third-party dealers may subject the company to alleged liability in connection with actual or
alleged violations of law by such dealers, whether or not actually attributable to us, which may expose us to significant damages and
penalties, and we may incur substantial expenses in defending against legal actions related to third-party dealers, whether or not ultimately
found liable.
The competitive environment
in which we operate often requires the undertaking of customer obligations, which may turn out to be costlier than anticipated and, in
turn, materially and adversely affect our business, results of operations and financial condition.
We are often required, at
the request of our end customer, to undertake certain obligations such as:
| ● | system output performance warranties;
and |
Such customer obligations
involve complex accounting analyses and judgments regarding the timing of revenue and expense recognition, and in certain situations these
factors may require us to defer revenue or profit recognition until projects are completed or until contingencies are resolved, which
could adversely affect revenues and profits in a particular period.
We are subject to risks
associated with construction, cost overruns, delays, regulatory compliance and other contingencies, any of which could have a material
adverse effect on its business and results of operations.
We are a licensed contractor
in certain communities that we service and are ultimately responsible as the contracting party for every solar energy system installation.
A significant portion of our business depends on obtaining and maintaining required licenses in various jurisdictions. All such licenses
are subject to audit by the relevant government agency. Our failure to obtain or maintain required licenses could result in the termination
of certain of our contracts. For example, we hold a license with California’s Contractors State License Board (the “CSLB”)
and that license is currently under probation with the CSLB. If we fail to comply with the CSLB’s law and regulations, it could
result in termination of certain of our contracts, monetary penalties, extension of the license probation period or revocation of its
license in California. In addition, we may be liable, either directly or through its solar partners, to homeowners for any damage we causes
to them, their home, belongings or property during the installation of our systems. For example, we either directly or through its solar
partners, frequently penetrate homeowners’ roofs during the installation process and may incur liability for the failure to adequately
weatherproof such penetrations following the completion of construction. In addition, because the solar energy systems we or our solar
partners deploy are high voltage energy systems, we may incur liability for failing to comply with electrical standards and manufacturer
recommendations.
Further, we or our solar partners
may face construction delays or cost overruns, which may adversely affect our or our solar partners’ ability to ramp up the volume
of installation in accordance with our plans. Such delays or overruns may occur as a result of a variety of factors, such as labor shortages,
defects in materials and workmanship, adverse weather conditions, transportation constraints, construction change orders, site changes,
labor issues and other unforeseen difficulties, any of which could lead to increased cancellation rates, reputational harm and other adverse
effects.
In addition, the installation
of solar energy systems, energy storage systems, and other energy-related products requiring building modifications are subject to oversight
and regulation in accordance with national, state, and local laws and ordinances relating to building, fire, and electrical codes, safety,
environmental protection, utility interconnection and metering, and related matters. We also rely on certain employees to maintain professional
licenses in many of the jurisdictions in which we operate, and the failure to employ properly licensed personnel could adversely affect
our licensing status in those jurisdictions. It is difficult and costly to track the requirements of every individual authority having
jurisdiction over our installations and to design solar energy systems to comply with these varying standards. Any new government regulations
or utility policies pertaining to our systems may result in significant additional expenses to homeowners and us and, as a result, could
cause a significant reduction in demand for solar service offerings.
While we have a variety of
stringent quality standards that the company applies in the selection of its solar partners, we do not control our suppliers and solar
partners or their business practices. Accordingly, we cannot guarantee that they follow our standards or ethical business practices, such
as fair wage practices and compliance with environmental, safety and other local laws. A lack of demonstrated compliance could lead us
to seek alternative suppliers or contractors, which could increase costs and result in delayed delivery or installation of our products,
product shortages or other disruptions of its operations. Violation of labor or other laws by our suppliers and solar partners or the
divergence of a supplier’s or solar partners’ labor or other practices from those generally accepted as ethical in the U.S.
or other markets in which we do business could also attract negative publicity and harm our business, brand and reputation in the market.
Our management has identified
conditions that raise substantial doubt about our ability to continue as a going concern.
Since our inception, we have
incurred losses and negative cash flows from operations. We incurred net losses of $9.6 million and $23.5 million, during the thirteen-weeks
ended March 31, 2024 and April 2, 2023, respectively, and had an accumulated deficit of $364.5 million and current debt of $65.2 million
as of March 31, 2024. We had cash and cash equivalents of $1.8 million as of March 31, 2024, which were held for working capital expenditures.
These conditions raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern
requires that we obtain sufficient funding to meet our obligations and finance our operations.
If we are not able to secure
adequate additional funding when needed, we will need to reevaluate our operating plan and may be forced to make reductions in spending,
extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs or cease operations entirely.
These actions could materially impact our business, results of operations and future prospects. There can be no assurance that in the
event we require additional financing, such financing will be available on terms that are favorable, or at all. Failure to generate sufficient
cash flows from operations, raise additional capital or reduce certain discretionary spending would have a material adverse effect on
our ability to achieve our intended business objectives.
We expect that we will
need to raise additional funding to finance our operations. This additional financing may not be available on acceptable terms or at all.
Failure to obtain this necessary capital when needed may force us to curtail planned programs or cease operations entirely.
Our operations have consumed
significant amounts of cash since inception. We expect to incur significant operating expenses as we continue to grow our business. We
believe that our operating losses and negative operating cash flows will continue into the foreseeable future.
We had cash and cash equivalents
of $1.8 million as of March 31, 2024. Our cash position raises substantial doubt regarding our ability to continue as a going concern
for 12 months after the consolidated financial statements issuance. We will require substantial additional capital to continue operations.
Such additional capital might not be available when we need it and our actual cash requirements might be greater than anticipated. We
cannot be certain that additional capital will be available on attractive terms, if at all, when needed, which could be dilutive to stockholders,
and our financial condition, results of operations, business and prospects could be materially and adversely affected.
We have identified material
weaknesses in our internal controls over financial reporting. If we are unable to maintain effective internal controls over financial
reporting and disclosure controls and procedures, the accuracy and timeliness of our financial and operating reporting may be adversely
affected, and confidence in our operations and disclosures may be lost.
In connection with the preparation
and audit of our financial statements for the years ended December 31, 2022 and 2021, and our consolidated financial statements for the
year ended December 31, 2023, our management identified a material weakness in our internal control over financial reporting. A material
weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected
on a timely basis. The material weakness is as follows:
| ● | We do not have sufficient full-time
accounting personnel, (i) to enable appropriate reviews over the financial close and reporting process, (ii) to allow for appropriate
segregation of duties, and (iii) with the requisite experience and technical accounting knowledge to identify, review and resolve complex
accounting issues under generally accepted accounting principles in the U.S. (“GAAP”). Additionally, we did not adequately
design and/or implement controls related to conducting a formal risk assessment process. |
In connection with the preparation
and audit of our consolidated financial statements for the year ended December 31, 2023, our management identified a material weakness
in our internal control over financial reporting. The material weakness is as follows:
| ● | Inventory controls related
to the completeness, existence, and cut-off of inventories held at third parties, and controls related to the calculation of adjustments
to inventory for items considered excessive and obsolete. |
Had such an evaluation been
performed, additional control deficiencies may have been identified by the Company’s management, and those control deficiencies
could have also represented one or more material weaknesses.
Complete Solaria was not required
to evaluate internal control over financial reporting as of December 31, 2023 in accordance with the provisions of the Sarbanes-Oxley
Act. Had such an evaluation been performed, Complete Solaria’s management may have identified additional control deficiencies, and
those control deficiencies could have also represented one or more material weaknesses.
We have taken certain steps,
such as recruiting additional personnel, in addition to utilizing third-party consultants and specialists, to supplement our internal
resources, to enhance our internal control environment and plan to take additional steps to remediate the material weaknesses. Although
we plan to complete this remediation process as quickly as possible, we cannot estimate how long it will take. We cannot assure that the
measures we have taken to date, and may take in the future, will be sufficient to remediate the control deficiencies that led to our material
weakness in internal control over financial reporting or that such measures will prevent or avoid potential future material weaknesses.
If we are not able to maintain
effective internal control over financial reporting and disclosure controls and procedures, or if material weaknesses are discovered in
future periods, a risk that is significantly increased in light of the complexity of our business, we may be unable to accurately and
timely report our financial position, results of operations, cash flows or key operating metrics, which could result in late filings of
the annual and quarterly reports under the Exchange Act, restatements of financial statements or other corrective disclosures, an inability
to access commercial lending markets, defaults under its secured revolving credit facility and other agreements, or other material adverse
effects on our business, reputation, results of operations, financial condition or liquidity.
Compliance with occupational
safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant
penalties, operational delays and adverse publicity.
The installation and ongoing
operations and maintenance of solar energy systems and energy storage systems requires individuals hired by us, our dealers, or third-party
contractors, potentially including employees, to work at heights with complicated and potentially dangerous electrical systems. The evaluation
and modification of buildings as part of the installation process requires these individuals to work in locations that may contain potentially
dangerous levels of asbestos, lead, mold or other materials known or believed to be hazardous to human health. There is substantial risk
of serious injury or death if proper safety procedures are not followed. Our operations are subject to regulation by the Occupational
Safety and Health Administration (“OSHA”) and the Department of Transportation (“DOT”) and equivalent state and
local laws. Changes to OSHA or DOT requirements, or stricter interpretation or enforcement of existing laws or regulations, could result
in increased costs. If we fail to comply with applicable OSHA or DOT regulations, even if no work-related serious injury or death occurs,
we may be subject to civil or criminal enforcement and be required to pay substantial penalties, incur significant capital expenditures
or suspend or limit operations. Because individuals hired by us or on our behalf to perform installation and ongoing operations and maintenance
of the company’s solar energy systems and energy storage systems, including its dealers and third-party contractors, are compensated
on a per project basis, they are incentivized to work more quickly than installers compensated on an hourly basis. While we have not experienced
a high level of injuries to date, this incentive structure may result in higher injury rates than others in the industry and could accordingly
expose the company to increased liability. Individuals hired by or on behalf of us may have workplace accidents and receive citations
from OSHA regulators for alleged safety violations, resulting in fines. Any such accidents, citations, violations, injuries or failure
to comply with industry best practices may subject us to adverse publicity, damage its reputation and competitive position and adversely
affect the business.
Our business has benefited
from the declining cost of solar energy system components, but it may be harmed if the cost of such components stabilizes or increases
in the future.
Our business has benefited
from the declining cost of solar energy system components and to the extent such costs stabilize, decline at a slower rate or increase,
our future growth rate may be negatively impacted. The declining cost of solar energy system components and the raw materials necessary
to manufacture them has been a key driver in the price of our solar energy systems, and the prices charged for electricity and customer
adoption of solar energy. Solar energy system component and raw material prices may not continue to decline at the same rate as they have
over the past several years or at all. In addition, growth in the solar industry and the resulting increase in demand for solar energy
system components and the raw materials necessary to manufacture them may also put upward pressure on prices. An increase of solar energy
system components and raw materials prices could slow growth and cause business and results of operations to suffer. Further, the cost
of solar energy system components and raw materials has increased and could increase in the future due to tariff penalties, duties, the
loss of or changes in economic governmental incentives or other factors.
Product liability claims
against us could result in adverse publicity and potentially significant monetary damages.
It is possible our solar energy
systems or energy storage systems could injure customers or other third parties or our solar energy systems or energy storage systems
could cause property damage as a result of product malfunctions, defects, improper installation, fire or other causes. Any product liability
claim we face could be expensive to defend and may divert management’s attention. The successful assertion of product liability
claims against us could result in potentially significant monetary damages, potential increases in insurance expenses, penalties or fines,
subject the company to adverse publicity, damage our reputation and competitive position and adversely affect sales of solar energy systems
or energy storage systems. In addition, product liability claims, injuries, defects or other problems experienced by other companies in
the residential solar industry could lead to unfavorable market conditions to the industry as a whole and may have an adverse effect on
our ability to expand its portfolio of solar service agreements and related solar energy systems and energy storage systems, thus affecting
our business, financial condition and results of operations.
Our warranty costs may
exceed the warranty reserve.
We provide warranties that
cover parts performance and labor to purchasers of our solar modules. We maintain a warranty reserve on our financial statements, and
our warranty claims may exceed the warranty reserve. Any significant warranty expenses could adversely affect our financial condition
and results of operations. Significant warranty problems could impair our reputation which could result in lower revenue and a lower gross
margin.
We are subject to legal
proceedings and regulatory inquiries and may be named in additional claims or legal proceedings or become involved in regulatory inquiries,
all of which are costly, distracting to our core business and could result in an unfavorable outcome or harm our business, financial condition,
results of operations or the trading price for our securities.
We are involved in claims,
legal proceedings that arise from normal business activities. In addition, from time to time, third parties may assert claims against
us. We evaluate all claims, lawsuits and investigations with respect to their potential merits, our potential defenses and counter claims,
settlement or litigation potential and the expected effect on us. In the event that we are involved in significant disputes or are the
subject of a formal action by a regulatory agency, we could be exposed to costly and time-consuming legal proceedings that could result
in any number of outcomes. Although outcomes of such actions vary, any claims, proceedings or regulatory actions initiated by or against
us whether successful or not, could result in expensive costs of defense, costly damage awards, injunctive relief, increased costs of
business, fines or orders to change certain business practices, significant dedication of management time, diversion of significant operational
resources or some other harm to the business. In any of these cases, our business, financial condition or results of operations could
be negatively impacted. We make a provision for a liability relating to legal matters when it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect
the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining
to a particular matter. Depending on the nature and timing of any such controversy, an unfavorable resolution of a matter could materially
affect our future business, financial condition or results of operations, or all of the foregoing, in a particular quarter.
The requirements of
being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified
directors and officers.
We will face increased legal,
accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley
Act, including the requirements of Section 404, as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated and to be promulgated thereunder, the PCAOB
and the securities exchanges, impose additional reporting and other obligations on public companies. Compliance with public company requirements
will increase costs and make certain activities more time- consuming. A number of those requirements will require us to carry out activities
we had not done previously.
If any issues in complying
with those requirements are identified (for example, if we or the auditors identify a material weakness or significant deficiency in the
internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues
could adversely affect our reputation or investor perceptions of it. It may also be more expensive to obtain director and officer liability
insurance. Risks associated with our status as a public company may make it more difficult to attract and retain qualified persons to
serve on our board of directors or as executive officers. The additional reporting and other obligations imposed by these rules and regulations
will increase legal and financial compliance costs and the costs of related legal, accounting and administrative activities. These increased
costs will require us to divert a significant amount of money that could otherwise be used to expand the business and achieve strategic
objectives. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance and reporting requirements,
which could further increase costs.
Our ability to use net
operating loss carryforwards and certain other tax attributes may be limited.
We have incurred substantial
losses during our history and do not expect to become profitable in the near future and may never achieve profitability. Under current
U.S. federal income tax law, unused losses for the tax year ended December 31, 2017 and prior tax years will carry forward to offset future
taxable income, if any, until such unused losses expire, and unused federal losses generated after December 31, 2017 will not expire and
may be carried forward indefinitely but will be only deductible to the extent of 80% of current year taxable income in any given year.
Many states have similar laws.
In addition, both current
and future unused net operating loss (“NOL”) carryforwards and other tax attributes may be subject to limitation under
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership
change,” generally defined as a greater than 50 percentage point change (by value) in equity ownership by certain stockholders over
a three-year period. The Business Combination may have resulted in an ownership change for us and, accordingly, our NOL carryforwards
and certain other tax attributes may be subject to limitations (or disallowance) on their use after the Business Combination. Our NOL
carryforwards may also be subject to limitation as a result of prior shifts in equity ownership. Additional ownership changes in the future
could result in additional limitations on our NOL carryforwards. Consequently, even if we achieve profitability, we may not be able to
utilize a material portion of our NOL carryforwards and other tax attributes, which could have a material adverse effect on cash flow
and results of operations.
The trading price of
our common stock may be volatile, and you could lose all or part of your investment.
Fluctuations in the price
of our securities could contribute to the loss of all or part of your investment. Prior to the Business Combination, there was no public
market for Solaria’s stock and trading in the shares of our common stock (prior to consummation of the Business Combination, “FACT
Common Stock”) was not active. Accordingly, the valuation ascribed to Solaria and FACT Common Stock in the Business Combination
may not have been indicative of the price that will prevail in the trading market following the Business Combination. If an active market
for our securities develops and continues, the trading price of our securities could be volatile and subject to wide fluctuations in response
to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your
investment in our securities and our securities may trade at prices significantly below the price you paid for them. In such circumstances,
the trading price of our securities may not recover and may experience a further decline.
Factors affecting the trading
price of our securities:
| ● | actual or anticipated fluctuations
in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; |
| ● | changes in the market’s
expectations about our operating results; |
| ● | our operating results failing
to meet the expectation of securities analysts or investors in a particular period; |
| ● | changes in financial estimates
and recommendations by securities analysts concerning us or the market in general; |
| ● | operating and stock price performance
of other companies that investors deem comparable to us; |
| ● | our ability to develop product
candidates; |
| ● | changes in laws and regulations
affecting our business; |
| ● | commencement of, or involvement
in, litigation involving us; |
| ● | changes in our capital structure,
such as future issuances of securities or the incurrence of additional debt; |
| ● | the volume of shares of our
securities available for public sale |
| ● | any major change in our board
of directors or management; |
| ● | sales of substantial amounts
of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and |
| ● | general economic and political
conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism. |
If securities or industry
analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations
regarding our securities adversely, the price and trading volume of our securities could decline.
The trading market for our
securities is influenced by the research and reports that industry or securities analysts may publish about us, our business, our market,
or our competitors. If any of the analysts who currently cover us change their recommendation regarding our stock adversely, or provide
more favorable relative recommendations about our competitors, the price of our securities would likely decline. If any analyst who currently
cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which
could cause our stock price or trading volume to decline. If we obtain additional coverage and any new analyst issues, an adverse or misleading
opinion regarding us, our business model, our intellectual property or our stock performance, or if our operating results fail to meet
the expectations of analysts, our stock price could decline.
A market for our securities
may not continue, which would adversely affect the liquidity and price of our securities.
The price of our securities
may fluctuate significantly due to general market and economic conditions and an active trading market for our securities may not be sustained.
In addition, the price of our securities can vary due to general economic conditions and forecasts, our general business condition and
the release of our financial reports. If our securities are not listed on, or become delisted from Nasdaq for any reason, and are quoted
on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange,
the liquidity and price of our securities may be more limited than if we were quoted or listed on Nasdaq or another national securities
exchange. You may be unable to sell your securities unless a market can be established or sustained.
There can be no assurance
that we will be able to comply with the continued listing standards of Nasdaq.
If Nasdaq delists our securities
from trading on its exchange for failure to meet the listing standards, we and our stockholders could face significant material adverse
consequences including:
| ● | a limited availability of market
quotations for our securities; |
| ● | a determination that our common
stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules, possibly
resulting in a reduced level of trading activity in the secondary trading market for our common stock; |
| ● | a limited amount of analyst
coverage; and a decreased ability to issue additional securities or obtain additional financing in the future. |
Sales of a substantial
number of our common stock in the public market by our shareholders could cause the price of our common stock to decline.
Sales of a substantial number
of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our
stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could
decline.
Provisions in our Certificate
of Incorporation and Bylaws and provisions of the Delaware General Corporation Law may delay or prevent an acquisition by a third party
that could otherwise be in the interests of shareholders.
Our Certificate of Incorporation
and Bylaws contain several provisions that may make it more difficult or expensive for a third party to acquire control of us without
the approval of our board. These provisions, which may delay, prevent or deter a merger, acquisition, tender offer, proxy contest, or
other transaction that stockholders may consider favorable, include the following:
| ● | advance notice requirements
for stockholder proposals and director nominations; |
| ● | provisions limiting stockholders’
ability to call special meetings of stockholders and to take action by written consent; |
| ● | restrictions on business combinations
with interested stockholders; |
| ● | no cumulative voting; and |
| ● | the ability of the board of
directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used, among
other things, to institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile
acquirer, likely preventing acquisitions by such acquirer. |
These
provisions of our Certificate of Incorporation and Proposed Bylaws could discourage potential takeover attempts and reduce the price that
investors might be willing to pay for the shares of our common stock in the future, which could reduce the market price of our common
stock.
The provision of our
Certificate of Incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware and the federal district courts
of the U.S. for certain types of lawsuits may have the effect of discouraging lawsuits against directors and officers.
Our Certificate of Incorporation
provides that, unless otherwise consented to by us in writing, the Court of Chancery of the State of Delaware (or, if the Court of Chancery
does not have jurisdiction, another State court in Delaware or the federal district court for the District of Delaware) will, to the fullest
extent permitted by law, be the sole and exclusive forum for the following types of actions or proceedings:
| ● | any derivative action or proceeding
brought on behalf of us; |
| ● | any action asserting a claim
of breach of a duty (including any fiduciary duty) owed by any of our current or former directors, officers, stockholders, employees
or agents to us or our stockholders; |
| ● | any action asserting a claim
against us or any of our current or former directors, officers, stockholders, employees or agents relating to any provision of the Delaware
General Corporation Law (“DGCL”) or our Certificate of Incorporation or the Bylaws or as to which the DGCL confers jurisdiction
on the Court of Chancery of the State of Delaware; and |
| ● | any action asserting a claim
against us or any of our current or former directors, officers, stockholders, employees or agents governed by the internal affairs doctrine
of the State of Delaware, in each such case unless the Court of Chancery (or such other state or federal court located within the State
of Delaware, as applicable) has dismissed a prior action by the same plaintiff asserting the same claims because such court lacked personal
jurisdiction over an indispensable party named as a defendant therein. |
Our Certificate of Incorporation
will further provide that, unless otherwise consented to by us in writing to the selection of an alternative forum, the federal district
courts of the U.S. will, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any complaint against
any person in connection with any offering of our securities, asserting a cause of action arising under the Securities Act. Any person
or entity purchasing or otherwise acquiring any interest in our securities will be deemed to have notice of and consented to this provision.
Although our Certificate of
Incorporation contains the choice of forum provisions described above, it is possible that a court could rule that such provisions are
inapplicable for a particular claim or action or that such provisions are unenforceable. For example, under the Securities Act, federal
courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act, and investors
cannot waive compliance with the federal securities laws and the rules and regulations thereunder. In addition, Section 27 of the Exchange
Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the
rules and regulations thereunder, and, therefore, the exclusive forum provisions described above do not apply to any actions brought under
the Exchange Act.
Although we believe these
provisions will benefit us by limiting costly and time-consuming litigation in multiple forums and by providing increased consistency
in the application of applicable law, these exclusive forum provisions may limit the ability of our shareholders to bring a claim in a
judicial forum that such shareholders find favorable for disputes with us or our directors, officers or employees, which may discourage
such lawsuits against us and our directors, officers and other employees.
We may be required to
repurchase up to 6,720,000 shares of common stock from the investors with whom we entered into Forward Purchase Agreements in connection
with the closing of the Business Combination, which would reduce the amount of cash available to us to fund our growth plan.
On and around July 13, 2023,
FACT entered into separate Forward Purchase Agreements with certain investors (together, the “FPA Investors”), pursuant
to which FACT (now Complete Solaria following the Closing) agreed to purchase in the aggregate, on the date that is 24 months after the
Closing Date (the “Maturity Date”), up to 6,720,000 shares of common stock then held by the FPA Investors (subject
to certain conditions and purchase limits set forth in the Forward Purchase Agreements). Pursuant to the terms of the Forward Purchase
Agreements, each FPA Investor further agreed not to redeem any of the FACT Class A Ordinary Shares owned by it at such time. The per price
at which the FPA Investors have the right to sell the shares to us on the Maturity Date will not be less than $5.00 per share.
If the FPA Investors hold
some or all of the 6,720,000 forward purchase agreement shares on the Maturity Date, and the per share trading price of our common stock
is less than the per share price at which the FPA Investors have the right to sell the common stock to us on the Maturity Date, we would
expect that the FPA Investors will exercise this repurchase right with respect to such shares. In the event that we are required to repurchase
these forward purchase agreement shares, or in the event that the forward purchase agreements are terminated the amount of cash arising
from the Business Combination that would ultimately be available to fund our liquidity and capital resource requirements would be reduced
accordingly, which would adversely affect our ability to fund our growth plan in the manner we had contemplated when entering into the
forward purchase agreements.
Warrants to purchase
shares of our common stock may not be exercised at all or may be exercised on a cashless basis and we may not receive any cash proceeds
from the exercise of such warrants.
The exercise price of warrants
to purchase shares of our common stock may be higher than the prevailing market price of the underlying shares of common stock. The exercise
price of such warrants is subject to market conditions and may not be advantageous if the prevailing market price of the underlying shares
of common stock is lower than the exercise price. The cash proceeds associated with the exercise of such warrants to purchase our common
stock are contingent upon our stock price. The value of our common stock will fluctuate and may not align with the exercise price of such
warrants at any given time. If such warrants are “out of the money,” meaning the exercise price is higher than the market
price of our common stock, there is a high likelihood that warrant holders may choose not to exercise their warrants. As a result, we
may not receive any proceeds from the exercise of such warrants.
Furthermore, with regard to
certain warrants to purchase shares of our common stock that were issued in a private placement at the time of FACT’s IPO and warrants
issued to certain selling securityholders in connection with conversion of working capital loans, it is possible that we may not receive
cash upon their exercise, since these warrants may be exercised on a cashless basis. A cashless exercise allows warrant holders to convert
the warrants into shares of our common stock without the need for a cash payment. Instead of paying cash upon exercise, the warrant holder
would receive a reduced number of shares based on a predetermined formula. As a result, the number of shares issued through a cashless
exercise will be lower than if the warrants were exercised on a cash basis, which could impact the cash proceeds we receive from the exercise
of such warrants.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Number |
|
Exhibit Description |
|
Form |
|
File Number |
|
Exhibit |
|
Filing Date |
2.1 |
|
Amended and Restated Business Combination Agreement, dated as of May 26, 2023, by and among Freedom Acquisition I Corp., Jupiter Merger Sub I Corp., Jupiter Merger Sub II LLC, Complete Solar Holding Corporation, and The Solaria Corporation |
|
S-4 |
|
333-269674 |
|
2.1 |
|
May 31, 2023 |
2.2 |
|
Agreement and Plan of Merger, dated as of October 3, 2022, by and between Complete Solar Holding Corporation, Complete Solar Midco, LLC, Complete Solar Merger Sub, Inc., The Solaria Corporation, and Fortis Advisors LLC |
|
S-4 |
|
333-269674 |
|
2.4 |
|
February 10, 2023 |
2.3 |
|
Asset Purchase Agreement dated September 19, 2023, by and among Complete Solaria, Inc., SolarCA, LLC, and Maxeon Solar Technologies, Ltd. |
|
8-K |
|
001-40117 |
|
2.1 |
|
2023-09-21 |
3.1 |
|
Certificate of Incorporation of Complete Solaria |
|
8-K |
|
001-40017 |
|
3.1 |
|
2023-07-21 |
3.2 |
|
Bylaws of Complete Solaria |
|
8-K |
|
001-40017 |
|
3.2 |
|
2023-07-21 |
4.1 |
|
Form of Replacement Warrant |
|
8-K |
|
001-40117 |
|
4.1 |
|
2023-10-12 |
4.2 |
|
Form of First Amendment to Replacement Warrant |
|
8-K |
|
001-40117 |
|
4.2 |
|
2023-10-12 |
4.3 |
|
Amended and Restated Registration Rights Agreement, dated July 18, 2023, by and among the Company and certain other stockholders party thereto |
|
8-K |
|
001-40117 |
|
4.1 |
|
2023-07-24 |
4.4 |
|
Warrant Agreement, dated February 25, 2021, by and between the Company and Continental Stock Transfer & Trust Company, as warrant agent |
|
8-K |
|
001-40117 |
|
4.1 |
|
2021-03-2 |
10.1 |
|
Form of SAFE (2024) |
|
8-K |
|
001-40017 |
|
10.1 |
|
2024-02-16 |
31.1* |
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
|
31.2* |
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
|
32.1** |
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
|
32.2** |
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
|
101* |
|
Inline XBRL Document Set for the unaudited consolidated condensed financial statements and accompanying notes in Consolidated Condensed Financial Statements and Supplemental Details |
|
|
|
|
|
|
|
|
104* |
|
Cover Page Interactive Data File - formatted in Inline XBRL and included as Exhibit 101 |
|
|
|
|
|
|
|
|
Signatures
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Complete Solaria, Inc. |
|
|
|
Date: May 15, 2024 |
By: |
/s/ THURMAN J. RODGERS |
|
|
Thurman J. Rodgers |
|
|
Chief Executive Officer and Executive Chairman |
|
|
|
Date: May 15, 2024 |
By: |
/s/ BRIAN WUEBBELS |
|
|
Brian Wuebbels |
|
|
Chief Operating Officer |
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I, Thurman J. Rodgers, certify that:
In connection with the Quarterly Report on Form 10-Q of Complete Solaria, Inc. (the “Company”)
for the period ended March 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: