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דו"ח פשיטת הרגל של סולינדרה
דו"ח פשיטת הרגל של סולינדרה
דו"ח פשיטת הרגל של סולינדרה
דו"ח פשיטת הרגל של סולינדרה
דו"ח פשיטת הרגל של סולינדרה
דו"ח פשיטת הרגל של סולינדרה
דו"ח פשיטת הרגל של סולינדרה
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דו"ח פשיטת הרגל של סולינדרה
דו"ח פשיטת הרגל של סולינדרה
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דו"ח פשיטת הרגל של סולינדרה

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  • 1. REPORT OF R. TODD NEILSON Chief Restructuring Officer March 21, 2012 2049 Century Park East, Suite 2525 Los Angeles, CA 90067 310.499.4750 brg-expert.com
  • 2. TABLE OF CONTENTSI. INTRODUCTION .................................................................................................................................... 1II. SCOPE OF ANALYSIS.......................................................................................................................... 2III. SUMMARY OF CONCLUSIONS ........................................................................................................ 3IV. REPORT SUMMARY .......................................................................................................................... 4 A. General Overview .............................................................................................................. 4 B. Solyndra’s Product and Technology .................................................................................. 6 C. Financing and Construction of Solyndra Manufacturing Facilities ................................... 8 D. The Impact of the Sudden Downturn in the Solar Market and the Global Financial Crisis ................................................................................................................ 10 E. The DOE Loan Guarantee and Construction of Fab 2 ..................................................... 13 F. Solyndra’s Financial Performance ................................................................................... 18 G. Solyndra’s Restructuring and Capital Raising Efforts in 2010 ........................................ 20 H. Events Leading to and Summary of February 2011 Restructuring .................................. 28 1. Tranche A Debt................................................................................................... 29 I. Events Leading to Bankruptcy Filing .............................................................................. 32V. SOLAR TECHNOLOGY AND PRODUCTS ...................................................................................... 36 A. History ............................................................................................................................. 36 B. Design .............................................................................................................................. 36 C. Comparative Advantage .................................................................................................. 38 D. New Products ................................................................................................................... 40VI. EXTERNAL ENVIRONMENT AND MARKET CONDITIONS ..................................................... 41 A. Impact of the Recession of 2008...................................................................................... 42 B. Incentive Programs .......................................................................................................... 44 1. Germany ............................................................................................................. 46 2. Spain ................................................................................................................... 46 3. Italy ..................................................................................................................... 47 C. Competition ..................................................................................................................... 47 1. Polysilicon (P-Si) Based Competitors ................................................................ 48 a. Polysilicon (P-Si) Supply....................................................................... 49 2. China Enters Market ........................................................................................... 50 D. Private Investment in the Solar Industry.......................................................................... 53VII. CORPORATE STRUCTURE ............................................................................................................ 54 i
  • 3. VIII. FAB 1 MANUFACTURING FACILITY ......................................................................................... 56IX. CUSTOMER AGREEMENTS ............................................................................................................ 59 A. Overview of Customer Agreements................................................................................. 59 B. Key Terms........................................................................................................................ 60 C. Customer Agreements...................................................................................................... 61 1. Phoenix Solar AG ............................................................................................... 61 2. Solar Power, Inc.................................................................................................. 62 3. GeckoLogic GmbH ............................................................................................. 64 4. Carlisle Syntec, Incorporated .............................................................................. 65 5. SunConnex B.V. ................................................................................................. 66 6. EBITSCHenergietechnik GmbH ........................................................................ 67 7. USE Umwelt Sonne Energie GmbH ................................................................... 68 8. Alwitra, GmbH ................................................................................................... 69 9. SunSystem, S.p.A. .............................................................................................. 70X. $535 MILLION DOE LOAN GUARANTEE ...................................................................................... 72 A. Brief History of the DOE Loan Guarantee Program........................................................ 73 1. Title XVII of the Energy Policy Act of 2005 ..................................................... 74 2. 2006 Advanced Energy Initiative ....................................................................... 75 3. The American Recovery and Reinvestment Act of 2009 ................................... 75 4. Department of Energy Loan Guarantee Office ................................................... 76 B. DOE Loan Guarantee Process ......................................................................................... 79 1. Application Submission ...................................................................................... 79 2. Initial Due Diligence and Term Sheet Negotiation............................................. 80 3. Credit Analysis and Review ............................................................................... 80 4. Deal Approval ..................................................................................................... 80 5. Final Due Diligence and Negotiation of Financing Documents ......................... 81 6. Closing ................................................................................................................ 81 C. The “$535 Million” DOE Loan Guarantee ...................................................................... 81 1. DOE Loan Guarantee Solicitation ...................................................................... 82 2. Solyndra’s Pre-Application................................................................................. 82 3. Invitation to Submit Full Application ................................................................. 83 4. Submission of Full Application .......................................................................... 84 a. Summary of Full Application ................................................................ 85 5. Revisions to Full Application ............................................................................. 86 ii
  • 4. a. Solyndra’s Key Consultants and Advisors for DOE Loan Guarantee ............................................................................................... 87 6. DOE Due Diligence Activities and Term Sheet Negotiations. ........................... 88 7. Finalized Term Sheet and DOE Conditional Commitment ................................ 94 8. Loan Closing and Agreements ............................................................................ 95 a. Key Terms of Loan as Executed in Loan Documents ........................... 96 b. Key Agreements and Documentation .................................................... 96D. Loan Funding and Reporting Requirements .................................................................... 98 1. Loan Funding Requirement ................................................................................ 98 2. Financial Reporting Requirements ................................................................... 100 a. Quarterly Reporting ............................................................................. 100 b. Annual Financial Statements and Reports ........................................... 101 c. Periodic and Other Reporting .............................................................. 101E. Construction and Loan Funding (Fab 2 Phase I) ........................................................... 101 1. Fab 2 Phase I Construction ............................................................................... 103 a. Equipment Supply Agreement ............................................................. 106 b. Operations and Maintenance Agreement ............................................. 107F. Second DOE Loan Guarantee Application (Fab 2 Phase II) ......................................... 108 1. Fab 2 – Phase II Loan Application Details ....................................................... 108 2. Construction Plans ............................................................................................ 109 3. Solyndra IPO .................................................................................................... 111 4. Third Party Consultants .................................................................................... 112 a. Status of Application ........................................................................... 114G. February 2011 Loan Restructuring ................................................................................ 114 1. Activities Leading up to Restructuring ............................................................. 115 2. Summary of Restructuring ................................................................................ 127 a. Tranche A Debt.................................................................................... 128 b. Tranche B Debt .................................................................................... 130 c. Tranche C Debt .................................................................................... 130 d. Tranche D Debt.................................................................................... 130 e. Tranche E Debt .................................................................................... 131 3. Summary of February 2011 Loan Restructuring Documentation..................... 132 a. Key Agreements and Documentation .................................................. 133 4. Modified Financial Reporting Requirements.................................................... 134 a. Weekly Reporting ................................................................................ 134 iii
  • 5. b. Monthly Reporting............................................................................... 135 c. Quarterly Reporting ............................................................................. 135 d. Annual Reporting................................................................................. 136XI. HISTORICAL FINANCIAL STATEMENT ANALYSIS ................................................................ 138 A. Financial Analysis Recap............................................................................................... 138 1. Fiscal Years 2005 through 2008 – Prior to DOE Loan Guarantee Facility ...... 139 a. Recap of Operations for Fiscal Year 2005........................................... 139 b. Recap of Operations for Fiscal Year 2006........................................... 139 c. Recap of Operations for Fiscal Year 2007........................................... 139 d. Recap of Operations for Fiscal Year 2008........................................... 140 2. Fiscal Years 2009 through 2011 - Following DOE Loan Guarantee Facility .............................................................................................................. 141 a. Recap of Operations for Fiscal Year 2009........................................... 141 b. Recap of Operations for Fiscal Year 2010........................................... 142 c. Recap of Operations for Fiscal Years 2005 - 2011 .............................. 143 B. Summary of Quarterly Reports Provided to the DOE ................................................... 146 1. Quarterly Financial Results Reported to the DOE ............................................ 146XII. FINANCIAL FORECASTS & PROJECTIONS .............................................................................. 148 A. Key Metrics in Forecasts & Plans.................................................................................. 148 B. Risks Facing Solyndra ................................................................................................... 149 C. Impact of Risks on Solyndra’s Forecasts and Plans ...................................................... 152 D. Comparison of Forecast and Historical Financial Results ............................................. 154 1. Forecast #1 - December 2006 - Pre Application to the D.O.E filed on December 28, 2006 ........................................................................................... 155 2. Forecast #2 - Comparison of Actual Financial Results to the July 31, 2009 Solyndra Sponsor Company Plan ............................................................ 157 a. Revenue Results................................................................................... 159 b. ASP Results ......................................................................................... 160 c. Average Watt Per Panel Results .......................................................... 161 d. Panels Produced Results ...................................................................... 162 e. Summary of Sponsor Forecast Results ................................................ 163 3. Forecast #3 - Consolidation Plan – October 2010 (“Consolidation Plan”)....... 165 4. Forecast #4 - Restructuring Plan – February 2011 ........................................... 169XIII. SOURCES AND USES OF CASH................................................................................................. 175 A. Sources ........................................................................................................................... 175 1. Collections of Accounts Receivable ................................................................. 176 iv
  • 6. 2. Sale of Preferred Stock ..................................................................................... 177 3. DOE Loan Guarantee........................................................................................ 177 4. Convertible Secured Promissory Notes (Tranche E) ........................................ 177 5. Tranche A Debt................................................................................................. 177 B. Uses: .............................................................................................................................. 177 1. Property, Plant & Equipment Fab 2 Phase I ..................................................... 178 2. Property, Plant & Equipment Fab 1 .................................................................. 179 3. Payroll ............................................................................................................... 179 4. Direct Materials ................................................................................................ 179 5. Professional Services ........................................................................................ 179 6. Other Uses ........................................................................................................ 181XIV. COMPENSATION ......................................................................................................................... 181 A. Annual Payroll ............................................................................................................... 181 B. Compensation to Senior Managers ................................................................................ 181 C. Solyndra Headcount and Average Compensation by Year............................................ 182 D. Labor Statistics of California and Local Counties ......................................................... 183 E. Staffing Companies and Temporary Labor.................................................................... 184 F. Executive Incentive Plan (“EIP”) & Key Contributor Incentive Plan (“KCIP”) ........... 185 G. CIGS / System Tech Incentive Program ........................................................................ 186 H. Cash Bonus Program ..................................................................................................... 187 I. Core Retention Bonus Program ..................................................................................... 190 J. Bonus Summary ............................................................................................................. 191XV. EVENTS LEADING TO BANKRUPTCY FILING ....................................................................... 192EXHIBITSExhibit #1 Resume of R. Todd NeilsonExhibit #2 Glossary of Defined TermsExhibit #3 Timeline of Key EventsExhibit #4 Private Investment in the Solar Industry Reporting – Thomson ReutersExhibit #5 Timeline of Key DOE Loan Guarantee EventsExhibit #6 Schedule of Identified Financial Projections Sent to the DOEExhibit #7 Summary of Key Terms of Finalized Term Sheet (March 2009)Exhibit #8 Summary of Key Terms of Loan as Executed in Loan Documents (September 2009)Exhibit #9 Summary of Key Loan Fund Requirements and Procedures (September 2009) v
  • 7. Exhibit #10 Summary of Key Financial Reporting Requirements (September 2009)Exhibit #11 Summary of Key Terms Relating to the Tranche A DebtExhibit #12 Summary of Key Terms Relating to the Tranche B DebtExhibit #13 Summary of Key Terms Relating to the Tranche D DebtExhibit #14 Summary of Key Terms Relating to the Tranche E DebtExhibit #15 Summary of Solyndra, Inc. Quarterly Financial Information (3rd Qtr 2009 – 2nd Qtr 2011)Exhibit #16 Solyndra – Executive Management Charts (Top Level Mgmt. Organizational Chart)Exhibit #17 Solyndra 2008 Executive Incentive Plan (EIP) and Key Contributor Incentive Plan (KCIP) Overview.APPENDICES 1Appendix A - List of AppendicesAppendix B - Solyndra TechnologyAppendix C - External Market InformationAppendix D - Various Board Minutes & PresentationsAppendix E - Customer AgreementsAppendix F - Solyndra’s Form S-1 Documentation filed with Securities and Exchange CommissionAppendix G - DOE Loan Guarantee Program Background DocumentationAppendix H - Solyndra Pre-Application for DOE Loan GuaranteeAppendix I - Various DOE Related Correspondence and CommunicationsAppendix J - Various Solyndra Presentations Sent to the DOEAppendix K - Solyndra DOE Loan Guarantee Application (2008) (Solicitation No: PS01-06LG00001 – Invitation No: 1013)Appendix L - Certain DOE Loan Guarantee Term SheetsAppendix M – Sponsor Payment Letters (DOE Loan Guarantee)Appendix N - Goldman Sachs, DOE Credit Review Board - Draft Credit Memo Submitted to the DOE, December 17, 2008.Appendix O - DOE Independent Consultant ReportsAppendix P - DOE Loan Guarantee Closing Documentation (September 2009)Appendix Q - DOE Quarterly Reporting PackagesAppendix R - DOE Annual Reporting PackagesAppendix S - Construction Progress Reports (RW Beck)Appendix T - DOE Loan Guarantee DrawsAppendix U - Second DOE Loan Guarantee Application (Fab 2 Phase II)1 Appendices are not attached hereto because they are voluminous and contain confidential information.Appendices may be provided to parties in interest subject to appropriate confidentiality restrictions. vi
  • 8. Appendix V - DOE Loan Guarantee WaiversAppendix W - Restructuring of $535 Million DOE Loan Guarantee Closing Documentation (February 2011)Appendix X - DOE Monthly Reporting PackagesAppendix Y - DOE Weekly Reporting PackagesAppendix Z - Audited Financial StatementsAppendix AA – Other Private Equity and Secured Debt DocumentationAppendix AB - Accounts Receivable & Inventory Purchase and Sale AgreementAppendix AC – Compensation Related Documentation vii
  • 9. I. INTRODUCTION On October 6, 2011, the Debtors 2 retained R. Todd Neilson as Chief RestructuringOfficer (“CRO”) pursuant to an order of the United States Bankruptcy Court for the District ofDelaware (the “Court”). The CRO’s engagement was approved jointly by the Holdings’ Boardof Directors and Solyndra LLC’s Board of Managers (together, the “Board”). The CRO wasselected by a subcommittee of the Board composed of independent directors and managers(“Subcommittee”). By order dated November 1, 2011, the Court authorized the employment ofthe CRO, along with his firm, Berkeley Research Group, LLC (“BRG”). The engagement of the CRO by the Board and his subsequent appointment by the Courtwas the result of a unique sequence of events that began with the Debtors’ Chapter 11bankruptcy filings on September 6, 2011. Two days later, on September 8, 2011, the FederalBureau of Investigation (“FBI”), acting in concert with the Department of Energy Office ofInspector General (“OIG”), executed search warrants at the Debtors’ headquarters in Fremont,California and the United States Attorney commenced a criminal investigation. In addition tothe Federal criminal investigation, pre-petition, Solyndra was also subject to a Congressionalinvestigation that escalated upon the commencement of these cases. Shortly after the commencement of the cases, the Board determined that a ChiefRestructuring Officer was needed to manage the Debtors’ bankruptcy cases, particularly in lightof the anticipated resignation of the Debtors’ Chief Executive Officer and as other topmanagement was expected to leave to find other employment. In light of the Federal criminalinvestigation and ongoing Congressional investigation, in addition to the customary roles for aCRO, the CRO and the Subcommittee agreed that the CRO would act in an independent capacityin determining if any improprieties had occurred with respect to the Debtors’ finances. Further,the CRO was to submit a report to the full Board detailing his findings. The Board felt that theCRO was particularly well-suited to conduct such investigation in light of his unique backgroundand experience. Among other things, the CRO is a former FBI agent (See Resume attached asExhibit #1) who has acted as Chapter 11 Trustee in a number of high profile bankruptcy cases.2 Solyndra LLC and 360 Degree Solar Holdings, Inc. (“Holdings”) are hereinafter referred to as the “Debtors.” 1
  • 10. This report was prepared with the assistance of BRG. The CRO is a Director at BRG.The CRO has utilized BRG’s services extensively in the preparation of this report. References inthis report to the CRO may reflect the collective analysis and conclusions of both the CRO andBRG. The CRO has prepared this report pursuant to his engagement by the Board. Adescription of the principal issues addressed by this report is set forth in the section belowentitled “Report Summary.” The CRO is hopeful that this report will provide an independent analysis for parties ininterest regarding various issues surrounding Solyndra, 3 substantiate the use of investor andgovernment funds, and describe the circumstances that led to Solyndra’s chapter 11 bankruptcyfiling. The CRO is appreciative of the personnel at Solyndra who provided assistance in thepreparation of this report. The CRO relied on Solyndra employees for much of the financial andbackground information contained in this report, both in documentary form and based oninformal interviews. The CRO attempted to conduct informal interviews of Solyndra’s formerChief Executive Officers, Dr. Chris Gronet (“Gronet”) and Brian Harrison (“Harrison”). BothGronet and Harrison declined, through their legal counsel, to speak directly to the CRO. The CRO also thanks the Board for its cooperation and assistance. The CRO met withboth the Board and the Subcommittee on a number of occasions. At no time did the CRO feelany pressure to provide the Board with anything but an unvarnished report of the results of hisanalysis and conclusions. Hence, this report reflects the CRO’s independent views based onaccess to Solyndra’s records and personnel and other third-party documentation. II. SCOPE OF ANALYSIS The CRO has performed an extensive analysis of the company’s accounting records,electronic files, internal and external communications, conducted informal interviews of key3 For purposes of this report, unless otherwise noted, the term “Solyndra” refers collectively to Solyndra LLC,Holdings, and each of their current and former affiliates. 2
  • 11. personnel, and researched third party documentation regarding certain areas discussed in furtherdetail throughout this report. The CRO’s work has included, among other things, the analysis ofthe Debtors’: (a) solar technology and products; (b) external environment and market conditions;(c) corporate structure; (d) Fab 1 manufacturing facility; (e) customer agreements; (f) $535million loan guarantee from the U.S. Department of Energy (“DOE”) for the Fab 2manufacturing facility; (g) historical financial statements; (h) financial forecasts and projections;(i) sources and uses of cash; and (j) employee compensation. The report includes a substantialnumber of industry specific terms, which are routinely defined within the report. However, dueto the voluminous amount of the defined terms, a glossary is attached herewith as “Exhibit 2 –Glossary of Defined Terms.” The work performed by the CRO and his firm BRG involved financial and investigativeaccounting services. The CRO has not performed an audit of the financial statements inaccordance with Generally Accepted Auditing Standards (“GAAS”) to determine whether thefinancial statements were prepared in accordance with General Accepted Accounting Principles(“GAAP”), nor has the CRO performed a review or compilation of the financial statements inaccordance with the standards promulgated by the American Institute of Certified PublicAccountants. III. SUMMARY OF CONCLUSIONS As a result of his analysis, the CRO has reached the following independent conclusions,which are summarized below: • The CRO has reviewed the accounting records of Solyndra and found that the construction costs were correctly recorded in the accounting records and no material funds were diverted from their original intended use. • The CRO has reviewed the vast level of communications and the underlying records between the DOE and Solyndra. It is the opinion of the CRO that the DOE had sufficient information to understand the risks and challenges associated with the guarantee obtained from DOE and make an informed decision as to the ongoing financial condition of Solyndra throughout the loan guarantee time frame based upon the level of documentation and information provided. 3
  • 12. • The CRO undertook a review of the loan draw packages submitted and approved by the DOE’s independent engineer assigned to the project, RW Beck, Inc. (“RW Beck”), along with the loan agreements underlying the $535 million Loan Guarantee between Solyndra and the DOE. It is his opinion that all of the funds drawn under the DOE Loan Guarantee were spent in accordance with the relevant loan documents. • The CRO has reviewed the unaudited financial information provided to the DOE by Solyndra and compared that information to the final audited financial statements issued by PricewaterhouseCoopers (“PWC”) for the same period to determine whether the financial information provided by Solyndra in the quarterly reports was materially correct. It is the opinion of the CRO that the information provided to the DOE, as certified, was materially correct when compared to the audited financial statements of PWC.4 • The CRO has reviewed the actual results and underlying metrics which should have been utilized under the parameters of the Cash Bonus Program and concludes that the actual calculations used by the company to compute and pay the cash bonuses are within materially acceptable limits. The conclusions and bases for these independent conclusions are discussed in furtherdetail within the Report Summary below and in the various detailed sections of this report. Theconclusions expressed herein are based on the information provided and obtained as of the dateof this report and upon the pattern of facts that the CRO has observed during his review andanalysis of such information. The CRO reserves the right to supplement, update or otherwisemodify this report at a later date based on additional documentation and information he mayreceive. IV. REPORT SUMMARYA. General Overview Founded in 2005 as Gronet Technologies, Inc., 5 Solyndra is a U.S. manufacturer of thinfilm solar photovoltaic power systems specifically designed for large commercial and industrial4 It should be noted that there are non-cash differences between the audited financial statements of the company andthe financial information provided to the DOE related to the accelerated depreciation of equipment caused by theconsolidation of equipment in Fab 1facility and Fab 2 facility (Phase I). Such discrepancies were not surprisinggiven that the financial effects of such amalgamation were not fully known until the consolidation was fullycompleted.5 Founder Dr. Chris Gronet holds a B.S. in materials science and a Ph.D. in semiconductor processing, both fromStanford University. He acted as Solyndra’s CEO until July 2010. He retained the title of Chairman until June 2011,but his involvement with the operations of the company was limited after July 2010. 4
  • 13. rooftops and for certain shaded agricultural applications. Solyndra developed a new technologyfor solar panels, as outlined within this report, which offered the promise of clean solar power forlow-slope commercial and industrial white rooftops. Solyndra received substantial private funding (over $1.2 billion) for this promisingtechnology and was also the first recipient of a loan guarantee from the DOE. Specifically, inJuly 2005, President George W. Bush (“President Bush”) signed into law Title XVII of theEnergy Policy Act of 2005 (“EPAct2005”) authorizing the DOE to issue and administer a loanguarantee program to provide federal support to alternative energy companies in an effort to spurcommercial investment for “clean” energy. As a result of the tight credit markets created by the2008 financial crisis, President Barack Obama (“President Obama”) signed into law theAmerican Recovery and Reinvestment Act of 2009 (“ARRA”) in January 2009, which, amongother things, temporarily expanded the Loan Guarantee Program (“LGP”) to support cleanenergy projects facing difficulties in securing financing. 6 According to the Loan GuaranteePrograms Office (“LGPO”) website, the LGP has guaranteed over $35 billion of loans as ofJanuary 31, 2012. On September 3, 2009, Solyndra, and one of its subsidiaries Solyndra Fab 2, LLC (“Fab2, LLC”), entered into financing agreements with the Federal Financing Bank (the “FFB”) 7 thatprovided for a $535 million loan guaranteed by the DOE 8 to construct a state of the artmanufacturing facility. Unfortunately, like many new start-up companies, Solyndra did notsurvive the rigors and uncertainty of the marketplace and, just two years later, filed bankruptcy. The U.S. government’s involvement in Solyndra and likely loss of over one half billiondollars has been well publicized. However, there were also a number of private investors whobelieved in the promise of Solyndra’s technology to the point of investing over $1.2 billion of6 See Appendix G.17, Written Statement for the Record of Jonathan Silver, Executive Director of the LoanPrograms Office, U.S. Department of Energy, United States Senate Committee on Energy & Natural Resources,September 23, 2010.7 The FFB is a government corporation created by Congress in 1973 under the general supervision of the U.S.Treasury. The FFB was established to centralize and reduce the cost of federal borrowing and federally-assistedborrowing from the public.8 In actuality, the DOE only funded $528 million of the originally agreed sum of $535 million. However, forpurposes of this report we will generally refer to the Solyndra’s loan guarantee as having $535 million inavailability. 5
  • 14. private venture funds, the vast majority of which will be lost, including $195.2 million as aparticipatory share for the construction of the manufacturing facility. 9 Exhibit #3 provides an illustration of the key events that are summarized within thissection of the report and further analyzed within the report’s body.B. Solyndra’s Product and Technology The solar energy industry has long been dominated by crystalline silicon based modules(referred to as “conventional panels”). In 2008, roughly 80% of the photovoltaic (“PV”) solarpanel modules sold used this crystalline based silicon process. The process of using semi-conductor grade polysilicon was adopted due to the availability of polysilicon feedstock from thesemi-conductor industry and the efficiency of the technology to produce electricity. However, asthe global demand for solar modules outpaced the capacity for polysilicon (“P-Si”) production,many researchers began to explore usable alternatives to the polysilicon based solar modules. Thin film photovoltaic technology (as utilized in the Solyndra process) is the dominantalternative to polysilicon based modules. Within the thin film group, amorphous silicon,cadmium telluride (“CdTe”), and copper, indium, gallium, diselenide (“CIGS”), are the mostcommon alternative materials used for energy generation. Solyndra believed that CIGStechnology, as adapted to its manufacturing process, could best compete in the global solarmarket. Utilizing this unique technology, Solyndra adopted a cylindrical tube design to protectthe CIGS thin film material from degradation and damage caused by moisture, and set forth on apath to produce large volumes of panels for low-slope commercial and industrial white rooftopapplications. After extensive analysis on strength, panel weight, cost, and other factors, Solyndradecided to use a 15mm diameter CIGS coated glass inner tube encapsulated inside of a 22mmdiameter outer tube. Design of the coating equipment set the length of each tube at about 1meter. This assembly would be called a module and the Solyndra technology was born.9 The $1.2 billion referenced above includes $75 million from Tranche A, as further outlined in the report, whichwill receive a priority distribution from the proceeds of the sale of Solyndra’s assets. 6
  • 15. This design not only protected the CIGS material from degradation, it also allowed thepanel to collect light from more than just direct sunlight making it naturally more efficient atproducing wattage power. The diagram below from a Solyndra marketing presentation showshow the panels receive direct, diffuse, and reflected sunlight from every angle of the panel. The ends of the tubes are hermetically sealed with metal caps, eliminating the risk ofexposure and increasing the lifespan of the product. Finally, the tubes were connected using a“wiring harness” and attached to a mounting system. At the time of its entry into the market, Solyndra’s leading competitive advantage was itslow Balance of System (“BOS”) cost, which means the aggregate cost associated with installingand maintaining solar panels. Due to the unique slatted design of the modules, along with their 7
  • 16. ability to be installed with zero degrees of tilt, Solyndra’s panels allowed wind to pass throughwith minimal resistance. Unlike traditional crystalline based panels, which require significantsupport systems to handle moderate to high wind gusts, Solyndra’s panels could be installedrelatively easily and at a fraction of the cost of traditional systems. The cost of installation for the end user was a major pricing factor that set Solyndra apartfrom its competitors as the ease of installation and the lack of mounting equipment needed tosupport wind resistance made the BOS cost for Solyndra panels almost half that of traditional P-Si modules. In addition, traditional solar systems occasionally required additional supportingsystems to allow the roof to sustain their increased weight while the lightweight Solyndra panelsystems required no such modification. With thousands of flat roofs throughout the world awaiting the comparativelyuncomplicated installation of efficient Solyndra solar panels, and the active participation ofgovernment subsidies including ample European feed-in tariffs, the future looked bright forSolyndra and its unique technology.C. Financing and Construction of Solyndra Manufacturing Facilities In 2007, Solyndra leased its first fabrication facility (“Fab 1”) and began to focus itsefforts on commercializing its technology and designing and deploying the custom equipmentneeded to produce its panels on a large scale. In July, 2008, Solyndra began its first commercialshipments from Fab 1. Solyndra’s business plan required scale. Accordingly, Solyndra planned additionalmanufacturing facilities. The complex path to the construction of Solyndra’s secondmanufacturing facility, hereinafter after referred to as Fab 2 Phase I (“Fab 2 Phase I”) started in2006, during the Bush administration, when the company learned of a new program that allowedthe DOE to provide federally backed loan guarantees to emerging alternative energy companies.The program was dedicated to the public policy objectives of pursuing initiatives for energyindependence and clean energy. As a result of this new federal program, Solyndra embarked onan unexpectedly long and costly road to obtain funding from the DOE to support its vision to 8
  • 17. commercially scale its solar panel technology to be a competitive force in the emerging solarindustry. The process began in December 2006 with an initial application filed with the DOE andended with a $535 million loan in September 2009 from the FFB, which was guaranteed by theDOE (the “DOE Loan Guarantee”). Solyndra’s efforts to obtain the DOE Loan Guarantee werecostly and time-consuming, and a significant portion of these efforts occurred during the Bushadministration. The process took place over a period of 2 ½ years, during which numerousmeetings and discussions were held with the DOE. In addition, thousands of pages of documentswere provided to the DOE, including financial projections, historical financial performanceanalyses, market studies, sensitivity analyses, legal and engineering services documentation, andnumerous meetings were held before the DOE finally approved the application. During 2007, while Solyndra waited for the DOE to respond to its original pre-application of December 2006, the company, through investor funds and loans, started toassemble its first manufacturing facility, which became Fab 1. During that formative period, theprimary issue facing Solyndra was how to ramp up manufacturing quickly in order to fill ordersto satisfy what appeared to be an escalating demand for solar panels. In fact, from the period of2007 through 2009, Solyndra entered into nine customer agreements, described in Section IXbelow, (the “Customer Agreements”) which contemplated, in some form, sales of up to 529Megawatts 10 (“MW”) and a revenue stream, of up to $1.5 billion11 through 2014.Notwithstanding that the Customer Agreements did not create a contractual obligation for allcontemplated future sales, they were, at a minimum, a reflection of measurable interest inSolyndra’s technology at a time when the company had not yet shipped a single solar module. 1210 A watt is the primary measure of solar panel sales that will be utilized throughout this report. For instance, 529MWs is 529 million watts. At a price of $1 per watt for illustrative purposes, 529 MWs will translate into $529million in sales.11 These agreements were not wholly binding contracts to acquire $1.5 billion of product, but in many instances,options on the part of buyers.12 In actuality, for a variety of reasons, including a worldwide reduction in the cost of solar panels, as outlined in theCustomer Agreements section of the Report, the final sales based on these agreements were a fraction of what wasoriginally anticipated. 9
  • 18. D. The Impact of the Sudden Downturn in the Solar Market and the Global Financial Crisis Between the buoyant optimism infused in the filing of the original DOE loan pre-application in 2006 and Solyndra’s ultimate bankruptcy filing in 2011, the worldwide solarindustry experienced a dramatic shift in market conditions. That shift had a particularly drasticeffect upon Solyndra and its business model. In 2008, during the period in which Solyndra first started to produce modules, the priceof polysilicon (a critical component of P-Si modules used by competitors) fluctuated between$250/kg and $500/kg depending on the data source, due to a shortage in capacity to refine theelement to solar grade quality. Consequently, the high price of production materials forcrystalline silicon producers led to a higher average sales price per watt (“ASP”) for all solarproducts throughout the market. As previously stated, one of the competitive advantages thatSolyndra’s cylindrical, thin-film solar cells offered, when compared to conventional panelproducers, was the low BOS cost of installation. However, as the price of polysilicon steadfastlydropped, primarily due to the aggressive entry of Chinese manufacturers into the P-Si market,panel manufacturers using polysilicon were able to reduce the cost and price of their panelssubstantially, and that single component was no longer sufficient to compensate for the disparitybetween the prices for Solyndra cylindrical modules and the standard costs of the typicalpolysilicon panels of flat panel producers. Due to these circumstances Solyndra was compelledto reduce its prices in order to remain competitive. Unfortunately, Solyndra’s total costs ofproduction, including materials, did not experience a commensurate reduction, which wasdevastating. The entry of Chinese manufacturers into the P-Si market between 2009 and 2011, oftenwith subsidized funds from the Chinese government, resulted in a steep drop in production costsfor solar manufacturers utilizing P-Si in their products. 13 Because Solyndra did not rely on P-Siin its thin-film solar technology, the company did not benefit from the price declines associatedwith P-Si products. Solyndra’s cost structure remained unaffected while its competitors, whowere producing 80% of the world’s solar panels, experienced the beneficial results of the steep13 In 2005, China produced less than 10% of the global PV market. By 2010, that amount had increased to over50%. See Appendix C.5, EPIA -- Global Market Outlook for Photovoltaic’s until 2015, pg. 36. 10
  • 19. P-Si price declines. In addition, Chinese producers had access to capital from the ChinaDevelopment Bank, which allowed such producers to move their products to market at a muchlower cost than their U.S. or European counterparts. 14 At the time of Solyndra’s entry into the market place, the ASP at which the companycould sell its modules was approximately $3.30. 15 Had the price stabilized at approximately$3.30 per watt and the government subsidies remained in place, it is possible that Solyndra mighthave continued its operations and ultimately, may have become a successful company. Given itsunique technology, the company may have had a significant impact on the solar industry.However, Solyndra simply could not survive under the market conditions imposed by theprecipitous drop in the ASP at which Solyndra could sell its product. At present, the ASP forsolar panels hovers at approximately $1.00 per watt. 16 This rapid drop in ASP was probably thesingle greatest contributor to Solyndra’s failure. The drop in the ASP was accentuated by the fixed costs embedded in the manufacturingprocess Solyndra utilized. These static costs intensified Solyndra’s inability to rapidly adapt tochanging market conditions. Nonetheless, Solyndra tried to compensate for the falling salesprices by boosting other elements, such as manufacturing output and the increase of averagewatts per panel (“Wp”), 17 as well as implementing various cost reduction initiatives. WhileSolyndra’s technology was certainly capable of being modified and, in certain instances, wasactually improved, it was somewhat resistant to the rapid time demand which was needed torespond to changing market conditions. Another problem that beset the solar industry during this period was the European debtcrisis, a spillover from the global recession triggered in 2008, which weighed down the Europeaneconomy and led to much slower growth in the overall demand for solar installations between2009 and 2011. There were two primary reasons for such reduced growth in demand. First, theglobal recession caused many businesses to either cancel or delay capital spending projects in14 See Appendix C.6, European Commission Joint Research Centre Institute for Energy, “PV Status Report 2011,”July 2011, pg. 83.15 The price during that period would occasionally rise to the level of $3.75 per watt.16 See Appendix C.1, PVinsights.com, Solar PV Module Weekly Spot Price, February 22, 2012.17 The Wp was the primary measurement of wattage output – the higher the wattage, the greater the efficiency andhigher the price that could be charged. (See Section XII. Financial Forecasts and Projections). 11
  • 20. exchange for near term cash savings. Second, reduced tax revenue caused many countries tosubstantially reduce or eliminate subsidies previously allocated to the solar industry. Theprimary government subsidy program utilized in Europe consisted of feed-in-tariffs (“FiT”),which are long-term contracts offered to purchase energy generated from a renewable source.The countries with the most generous FiTs, Germany, Italy and Spain, are the European leadersin global solar PV demand. Together with the United States, these countries accounted foralmost 70% of the world’s installed PV production capacity at the end of 2010. The reduction orcessation of European FiTs had a serious effect on Solyndra. The European market accountedfor approximately 60% of Solyndra sales between 2009 and 2011. The convergence of these two components ((a) the drop in the price for solar panels; and(b) the withdrawal of many of government subsidies) permanently altered the financial landscapefor Solyndra. Solyndra had many competitors in different stages of growth with different paneltechnologies, none of which were immune to the frenetic changes that the market faced between2007 and 2011. Examining the value of those companies that are publically traded provides aclear picture of the dire circumstances faced by the solar market. The most notable company tofall victim to the external market conditions is Massachusetts-based Evergreen Solar, which filedfor Chapter 11 bankruptcy in August 2011. Executives from that company blamed EvergreenSolar’s demise on government subsidized competition from China and the failure of the U.S.government to fully invest in clean energy policies. 18 For those companies that are still operating, market conditions have also taken asignificant toll on the value of their shares. Fellow thin film producer First Solar, Inc saw itsshares fall 70%, from a high of over $300 per share in mid 2008 to under $90 per share at thetime of Solyndra’s bankruptcy filing. Shares of San Jose-based Sunpower Corp. have fallen over90% from their high of almost $150 per share in November 2007. Finally, China-based SuntechPower and Yingli Solar both saw reductions in share value of between 88%-95% betweenNovember 2007 and September 2011.18 See Bloomberg, “Evergreen Solar Seeks Bankruptcy With Plans to Sell Itself,” Steven Church, August 15, 2011. 12
  • 21. Solyndra spent its first several years developing the technology, designing the tools tomanufacture, building the initial infrastructure, and obtaining certification to sell its uniquecylindrical modules. By the end of 2008, Solyndra had incurred a total cumulative net loss of$385.1 million, and yet the company was eager to introduce its technology to the market andanticipated its future operations would yield a return. By the end of 2008, Fab 1 had acquiredapproximately $247.4 million in property, plant and equipment, primarily purchased with fundsobtained from private investors. Commercial shipments from Fab 1 began in July 2008, yieldingtotal sales of just over $6 million for that year.E. The DOE Loan Guarantee and Construction of Fab 2 In 2008, Solyndra received notification from the LGPO that the company had beenselected, based upon Solyndra’s pre-application submitted in December 2006, to submit a fullapplication to the DOE. Following meetings with the LGPO in Washington, D.C. to address therequirements and expectations of a full application, Solyndra filed a full application beginningwith a partial submission on May 6, 2008 that was completed by August 27, 2008 (the “FullApplication”). Since the Fab 1 facility was already close to becoming operational, the FullApplication entailed the construction of a new facility, which was referred to as Fab 2 (“Fab 2”).This partial application was more expansive (including a facility capable of manufacturing up to420 MW per year) than the application ultimately finalized and was initially deemed too largefor the DOE. As a result of the DOE’s reluctance to fund the larger project originally submitted,the planned Fab 2 facility was split into two phases, the first phase consisted of a 210 MWfacility with a projected cost of $713 million,19 which would double the projected operationalcapability of Fab 1. 20 The Full Application contained over 1,500 pages of documentation andinformation including, but not limited to, a project description, technical information, a businessplan, a financing plan, preliminary cash flow and detailed and extensive spread sheets outliningbasic financial projections, estimated project costs, constructions risks and a mitigation strategy,federal and state approval documents, environmental reports, credit history and audited financialstatements for 2005, 2006, and 2007.19 The total project costs were ultimately budgeted at $733 million.20 For a variety of operational reasons associated with the manufacturing process, the total annual output for Fab 1never exceeded 67 MW, considerably less than the projected annual output of 120 MW. 13
  • 22. In January 2009, President Obama signed into law the ARRA. A component of theARRA amended the EPAct2005 by adding Section 1705 which temporarily expanded the loanguarantee program (the “1705 Program”) in an effort to set in motion the country’s clean energysector by supporting projects that faced difficulties in securing financing as a result of the tightcredit markets created by the 2008 financial crisis. 21 In March 2009, 28 months after filing the first pre-application with the DOE, a term sheetwas executed which provided for a $535 million loan from the FFB, guaranteed by the DOE withFab 2 LCC as the borrower, and Solyndra, Inc. as the Sponsor. Some of the major termsincluded: (a) total project costs of $733 million; (b) loan guarantee by the DOE of $535 million(73%); (c) equity contribution of $198 million by Solyndra, Inc. (27%); (d) a seven year term;(e) a low interest rate based on Treasury bill rates; (f) fees to be paid by Solyndra totaling over$4 million; and (g) a $30 million cost overrun reserve to be funded solely by Solyndra, Inc. 22 Solyndra was the first company to secure a guaranteed loan facility under the LGP. OnSeptember 3, 2009, the company and Fab 2, LLC entered into financing agreements with theDOE and FFB that provided for a $535 million loan guaranteed by the DOE. The loan to Fab 2,LLC was for the construction of a new state-of-the-art manufacturing facility in Fremont,California. The Fab 2 Phase I facility was projected to have approximately 210 MW of annualmanufactured output, over twice the amount of the previous output capability of Fab 1. The Fab2 Phase I facility was constructed ahead of schedule and under budget. The aerial overhead below is a reflection of the area surrounding the existing Solyndramanufacturing facility, Fab 2 Phase I, as well as the original facility, Fab 1.21 See Appendix G.17, Written Statement for the Record of Jonathan Silver, Executive Director of the LoanPrograms Office, U.S. Department of Energy, United States Senate Committee on Energy & Natural Resources,September 23, 2010.22 The term sheet also outlined the significant documentation to be negotiated and executed, conditions precedent toloan closing, conditions precedent to each periodic approved budget, conditions precedent to each disbursementdate, bank accounts to be opened and maintained, representations and warranties, covenants, events of default,reporting requirements, reaffirmation that Solyndra agrees to pay all DOE’s independent consultants and outsidelegal counsel fees, and various other provisions. 14
  • 23. Funds drawn on the DOE Loan Guarantee were either sent to Solyndra directly, asreimbursement for invoices paid or pursuant to provisions in the project agreements executed atloan closing. Solyndra would in turn incur obligations for the benefit of Fab 2 in hiringemployees, contracting with vendors, and constructing the tooling that went into Fab 2. Incertain instances, loan funds were wired directly to the vendor. Each invoice was included in apacket sent along with the draw request for review by RW Beck. For funds wired directly tovendors, a confirmation email was required to ensure that the funds were received. Of the $733million budgeted, $723 million was ultimately drawn by over 100 separate vendors, includingSolyndra, as of the bankruptcy petition date. The unique cylindrical form factor of the Solyndra module, as well as the proprietaryCIGS manufacturing process, meant that there were no commercially available production toolsfor the Fab 2 Phase I project to purchase; Solyndra necessarily would provide the equipment andpersonnel. Solyndra, either directly or through its affiliate, Solyndra Operator, LLC (“OperatorLLC”) received almost 50% of the total loan proceeds. The basis for these draws were laid outwithin, and such payments were in accordance with, various project related agreements includingthe Equipment Supply Agreement (“ESA”) and the Operations and Maintenance Agreement(“O&M Agreement”). The ESA was developed to allow Solyndra to “supply and sell” to Fab 2, LLC (the entitythat held title to Fab 2 Phase I) equipment needed to operate Fab 2 Phase I. The ESA wasnecessary as the equipment was unique and had to be developed solely for the Solyndramanufacturing process utilizing the Solyndra technology, and the completed tools of productionwere proprietary to Solyndra. In addition, it was a logical conclusion that Solyndra personnelwould, by and large, replicate the machines presently being used in the Fab 1 manufacturingprocess, which was already producing Solyndra panels. The agreed-upon contract price for theESA was $318.9 million. Solyndra, as the Sponsor, was responsible for any cost overruns. Theactual amount drawn towards the ESA was $312.9 million. The O&M Agreement was created to designate the operational, management andmaintenance duties of the Fab 2 facility to a new operating entity, Operator LLC. These dutieswere designated as either pre-operational services or management services. Pre-operation 16
  • 24. services included material procurement, engineering, and other administrative activities leadingup to the facilities operational period, while management services focused on the ongoingmonitoring and management of the Fab 2 facility. In total, Operator LLC drew $43.5 millionfrom the DOE loan for providing such services. As Solyndra moved into fiscal year 2011, Fab 2 Phase I became operational andcommenced shipping product in January 2011. The total projected cost of the Fab 2 Phase Ifacility was projected to be $733 million, of which $535 million23 would be funded by the DOELoan Guarantee and the remaining $198 million by private investors. The CRO has reviewed the accounting records of Solyndra and has found that theconstruction costs were correctly recorded upon the books. No material funds were divertedfrom their original intended use. As part of his engagement, the CRO undertook a review of the loan draw packagessubmitted to RW Beck, along with the loan agreements entered into by Solyndra and the DOE.It is his opinion that the funds drawn under the DOE Loan Guarantee were spent in accordancewith the loan documents. Concurrent with the funding of the DOE Loan Guarantee, Solyndra was obligated toprovide internal unaudited financial information directly to the DOE on a quarterly basis,pending issuance of audited financial statements by PWC. Solyndra’s quarterly statements andcertifications were signed by Solyndra’s Chief Financial Officer. 24 The CRO has reviewed the unaudited financial information provided to the DOE bySolyndra and compared that information to the final audited financial statements issued by PWCfor the related annual period to determine whether the financial information provided bySolyndra in the quarterly reports was materially correct. Following that analysis, described ingreater detail in this report, it is the opinion of the CRO that the information provided to the23 The DOE Loan Guarantee actually only funded $528 million of the $535 million original loan amount.24 All of the quarterly statements and certifications in the possession of the CRO have been attached as Appendix Q. 17
  • 25. DOE, as certified, was materially correct when compared to the audited financial statements ofPWC.25F. Solyndra’s Financial Performance During 2009, when the DOE approved the loan guarantee and construction commencedon Fab 2, Phase I, signals of impending financial deterioration were starting to appear. AlthoughSolyndra’s sales would briskly move from $6 million in 2008 to over $100.5 million in 2009,and the ASP was still in the range of $3.30 per watt, there were two troubling developments.First, while sales increased, they were not as robust as originally envisioned in the pre-application in 2006. In fact, sales were less than half of forecast levels in the pre-application. 26In addition, while sales were only half of the projected amount, manufacturing and operatingcosts were almost twice as much as originally projected therein. Solyndra ended 2009 with a netloss of $172.5 million and a total net loss since 2005 of $557.7 million. Solydnra continued to search for capital sources in order to fund its expansion ofproduction capacity and scaling of manufacturing costs. In December 2009, Solyndra filed aForm S-1 Registration Statement (“S-1”) with the United States Securities and ExchangeCommission (“SEC”) for an initial public offering (“IPO”) to raise additional capital to fundoperations and a portion of the cost for the construction of the second phase of the Fab 2facility. 27 This public document included a substantial amount of information which was vettedthrough an extensive review by the company and its financial advisors, accountants and legalcounsel. The S-1 contained approximately 200 pages of detailed information regarding thecompany’s historical operations and performance, technology, customer base and marketingstrategy, capital structure, significant risk associated with projects, and other related informationabout the company. The S-1 reflected a frank assessment of the operational changes required forSolyndra to move into profitability. The S-1 was ultimately withdrawn in the summer of 2010 as25 It should be noted that there are non-cash differences between the audited financial statements of the company andthe financial information provided to the DOE related to the accelerated depreciation of equipment caused by theconsolidation of equipment in Fab 1 and Fab 2 Phase I. Such discrepancies were not surprising given that thefinancial effects of such amalgamation were not fully known until the consolidation was completed.26 When compared to the original forecast included in the Pre-Application filed with the DOE in December 2006.27 The Fab 2 Phase II project was originally included in the partial application submitted by Solyndra to the DOE inMay 2008. At the time, the DOE was reluctant to include the second phase due to the size of the combined project. 18
  • 26. the company pursued additional private capital based on the recommendation of investmentadvisors. With the benefit of hindsight, Solyndra’s decision to move forward with the constructionof Fab 2 Phase I in September 2009 was an extremely pivotal decision for the future of thecompany. It was the company’s best hope for success, but ultimately, along with other factors,led to its demise. During the construction of Fab 2 Phase I, the structural changes in the solarindustry resulted in a dramatic reduction of Solyndra’s panel pricing and cash flow from productsales. The only possible avenue of survival for Solyndra, other than substantial infusions ofcapital, lay in massively increased volume. This required Solyndra’s projections and businessplans for the foreseeable future to continue to assume production at full capacity and to sell allmanufactured products and it was critically necessary to reach those levels as quickly aspossible. If that volume was not quickly realized, Solyndra would be overwhelmed by lossesattendant to its fixed operating costs. Solyndra’s investors and lenders were well advised ofthese risks facing the company. These underlying financial problems, which became evident in 2009, became furtheraggravated in fiscal year 2010, as evidenced by the circumstances listed below. • Sales increased from 30.48 MW in 2009 to 57.02 MW in 2010, for an increase of 87%. However, while panel sales increased by 87%, the resulting revenue from those sales increased only 45%, due in large part to the ASP charged by Solyndra, which slipped from $3.30 in January to $2.39 at the end of 2010, for a yearly decrease of approximately 28%. 28 • Concurrently, the price for polysilicon, the primary component in the manufacturing process of P-Si flat panels, was priced in 2008 ranging from $250 to $500 per kg, depending on the data source, and started a rapid descent throughout 2009 to approximately $60 per kilogram at the end of 2010. 29 This precipitous drop in polysilicon prices of approximately 80% portended serious problems for the future of Solyndra’s CIGS cylindrical technology. • During this tumultuous period, Solyndra continued to lose money on each panel sold while trying to compete. For instance, in June 2010, during the massive construction process for Fab 2, Solyndra was selling its panels for $3.24 per watt while production28 This steady decrease in the ASP continued to approximately $2.12 at the time of the Solyndra’s bankruptcy filingand presently stands at less than $1.00.29 The weekly spot price for PV grade P-Si ranged between $30.50 to $35.00 per kg as of February 22, 2012according to PVinsights.com. See Appendix C.1. 19
  • 27. costs exceeded $4.00 per watt. 30 In fact, due to these competing factors and its high operational burden, Solyndra sold every panel at a loss. • Employee headcount was over 1,100 at the end of the year and, by and large, the operational costs were fixed at a high level. 31 • As this inexorable drive to compete intensified, other solar panel factories were moving toward production costs of $1.00 per watt. Solyndra, however, could only operate its existing Fab 2 Phase I facility at $2.00 per watt if it reached full production capacity and met certain technical milestones. • The Chinese government aggressively moved into the market with substantial low cost capital and additionally allowed Chinese manufacturers to extend favorable credit terms. The cash demands pressing upon Solyndra did not allow it to compete in that manner. • The expansion of China into the solar market, concurrent with the withdrawal of many government subsidies, especially in Germany, Italy, and Spain, caused a worldwide oversupply of photovoltaic panels and severely impacted Solyndra’s capital requirements and the anticipated time to reach positive cash flow from operations.G. Solyndra’s Restructuring and Capital Raising Efforts in 2010 In February 2010, after approximately 19 months of operations in the Fab 1 facility andfive months of construction on the Fab 2 facility, Solyndra management concluded a “groundup” review of the company’s internal and external operating environments was necessary as aresult of the recent performance and current operating environment. Pursuant to its review, tworevised draft plans 32 were created utilizing various scenarios and alternative assumptions toaddress the significant increase in future capital needs. The estimated future fundingrequirements were calculated by company management and ranged between $316 million and$719 million depending on the scenario and assumptions in the revised plans. A two day meeting with the Board was held in April 2010 to describe the currentfinancial condition of the company due to the competitive factors referenced herein as well as the30 See Appendix F.2, Solyndra Amended Form S-1 Registration Statement.31 The manufacturing costs inherent in Fab 2, were largely fixed costs of operation regardless of actual output in agiven period.32 The revised draft plans included a “Stretch Plan” and a “Base Plan.” The Stretch Plan was characterized bycompany management as an aggressive “target,” a plan the company could strive to accomplish. The Base Plan wasconsidered by company management to be a high confidence plan. It still had dependencies and risks; however, theintent was to portray a “base result” that would be achieved absent an unlikely turn of events. 20
  • 28. shortfalls in the prior plan and projections. 33 Solyndra management provided a detailed 143page presentation describing the company’s current status, sales and marketing efforts,operations, research and development, cash flow, and finance related areas, which included asobering assessment of future business operations as outlined above. 34 Based on the information presented, the company continued to pursue an IPO andconsidered alternative paths for financing. The possibility of not completing the construction ofFab 2 Phase I was considered as an option, but was not pursued. 35 The Board also decided toconduct a search for a new president and/or CEO. Within a week of the Board meeting,Solyndra provided the DOE with preliminary insights into the review of the Fab 2, Phase Ifinancial forecasts including revisions to future ASP based on recent declines in the market. 36 The Board met again on April 21, 2010, a day after Solyndra’s discussion with the DOE,to better understand the company’s cash requirements, IPO timeline, and the ramifications ofmissing the first quarter 2010 estimates. In that meeting, Stover described the need to raiseadditional capital by June 2010 should an IPO not be feasible by then. In an effort to solve the pressing capital needs by June 2010, Steve Mitchell (“Mitchell”),from Argonaut Ventures I, LLC (“Argonaut”), presented a term sheet 37 to the Board on May 18,2010 to raise additional capital from insider investors and described the circumstances that led toformation of the term sheet, including the need to fund substantial additional capital up to $350million, the immediate need for short-term funding by the middle of June 2010, and the lack ofother viable alternatives within the limited timeframe. Mitchell proposed using a convertibledebt instrument to provide the company with flexibility and additional time to seek additionalcapital from outside investors. Mitchell acknowledged the extreme dilution that would occur ifthe additional financing from outside investors was not raised by October 2010 and the proposed33 See Appendix D.1, Solyndra Board Minutes, April 12-13, 2010.34 See Appendix D.1, Solyndra Board Presentations, April 12-13, 2010.35 In fact, in the February 2011 agreement between the DOE and Solyndra, the DOE inserted a provision whichwould allow the government to assume responsibility for the construction of Fab 2 should Solyndra not be able tocontinue in that role. The position of the DOE is understandable in light of a final credit rating letter issued by Fitchin August 2009 indicating a probability of default rating of “BB-” (considered Speculative under Fitch’s ratingdefinitions) and an estimated recovery of 89%. (See Appendix P.75, Final Fitch Credit Rating).36 See Appendix I.100, Email from John Scott (“Scott”), Vice President of Global Project Finance and BusinessDevelopment for the company, to DOE dated April 20, 2010.37 The term sheet was prepared by two of the company’s lead investors, Argonaut and Argonaut and MadronePartners, LP (“Madrone”). 21
  • 29. note holders converted into equity; however, if the company did not have a fully funded plan byOctober, its long-term viability would be significantly impacted. Mitchell stated to the Board theimportance of having all the inside investors participate in the proposed minimum internal roundof $200 million to be funded by mid-June so the company could continue operations.Additionally, Stover indicated to the Board that any remaining amounts on the existing $50million line of credit from Argonaut could not be accessed at this point because the company wascurrently unable to meet its commercial shipments covenant. Pursuant to the proposals andinformation provided, the Board discussed the proposal in detail, the company’s efforts inaccessing other sources of funds, and any additional cost cutting measures that could be taken. 38 On June 3, 2010, Solyndra provided the DOE with a revised “base case” plan for Fab 2Phase I, that, among other things: (a) started Fab 2 Phase I production two months earlier thananticipated; (b) included higher yields and panel power; (c) included lower ASP forecast due toexternal pricing pressures; and (d) included the installation of three new CIGS tools to counterlower-than-expected line speeds. The higher yields and panel power as outlined in the “base case” plan for Fab 2 Phase Iwas based on increasing the Wp (watts per panel), which was a key metric in Solyndra’sattempts to ameliorate the financial effects of a lower ASP. To a great extent, demand forSolyndra’s product and the price at which it could be sold were both dependent upon the Wpwhich could be achieved in the manufacturing process. The Wp provided the primarymeasurement of wattage output – the higher the wattage, the greater the efficiency and the higherthe price that could be charged. Solyndra’s manufacturing process was structurally limited to afixed number of tubes and/or solar panels which they could produce. In other words, themanufacturing facility could only produce a finite number of panels even under optimumconditions with throughput and yield 39 at their maximum levels. However, Wp was a factor thatthe company hoped to improve to maintain an increasing level of watts sold and thereby38 See Appendix D.4, Solyndra Board Minutes dated May 18, 2010.39 The forecasts define “output” as a calculation based on three specifications for each tool in the production process:baseline throughput, utilization percentage, and yield percentage. Baseline throughput is the highest throughputpossible with the facility running at the maximum level of twenty four hours a day and seven days a week.Utilization percentage is the percentage of time in a given period that a tool is running (i.e., not down formaintenance and repair). Yield percentage is the percentage of material processed by a tool that goes on to the nextstep and meets minimum specifications. 22
  • 30. maintain or increase revenues even with the ASP (averages sales price per watt) declining overtime. Solyndra was successful in improving average Wp over the limited period of time whenFab 2 Phase I was operational; however, in most projections this remained well below theforecast levels. 40 On June 9, 2010, the Board was informed the company would not be in a position tocontinue operations without an infusion of capital in the next two weeks. As a result, thecompany entered into a short-term note purchase agreement with certain investors allowing forthe issuance of convertible secured promissory notes (not to exceed $200 million) to address theimmediate capital needs and bridge the funding gap. Solyndra issued $175 million ofconvertible notes (“Convertible Notes”) through September 2010 with a maturity date inDecember 2010 in order to continue operations. In July 2010, the DOE began requesting additional information concerning thecompany’s cost cutting measures, current sales, pricing, and average product costs. On July 29,2010, pursuant to a sizable document and financial information request from the White HouseOffice of Management and Budget (“OMB”), including the terms of the $175 millionConvertible Notes, information concerning the “going concern” audit opinions, 41 and the reasonsfor withdrawing the S-1, 42 Solyndra promptly provided a detailed response on August 4, 2010. Also in July 2010, Harrison joined Solyndra as its new CEO and President. FollowingHarrison’s arrival, he undertook an extensive analysis of the company’s operations, businessmodels, and sales and marketing strategies. The company and Navigant Consulting, Inc.(“Navigant”) (as the DOE’s independent market consultant for the Fab 2 Phase II application)had also analyzed the existing distribution and marketing plans prior to Harrison’s arrival. As aresult of these analyses, the company came to the conclusion that the current distribution model40 Solyndra introduced the 200 series panel in July 2010. The 200 series panel was averaging almost 210 watts perpanel. This panel was to replace the 150 series panel. Customer demand for the 150 series continued longerthereby delaying further panel power improvements. Accordingly, actual watts per panel continued to lag forecastamounts.41 The “going concern” audit opinions were issued routinely in the Solyndra financial statements beginning in 2007.The term “going concern” assumes that a business will continue in operation for the “foreseeable future” andaccordingly will be able to realize the benefit of its assets and discharge its liabilities in the normal course ofoperations. The term “foreseeable future” takes into consideration all known factors for at least, but not limited to,twelve months from the balance sheet date.42 See Appendix I.103, DOE email to Scott dated July 29, 2010 and the OMB request for information. 23
  • 31. developed under Dr. Gronet involving the sales to limited integrators and installers was notconducive to expanding sales opportunities and was problematic for the future of the company.Harrison believed a new distribution model focusing more on the ultimate end-users providedmuch more promise. The new distribution model being developed would pursue direct strategicaccounts (including larger retailers such as Walmart and Target), real estate owners (such asREITs), utilities, agricultural applications, and government agencies. The DOE contacted Solyndra on September 7, 2010 regarding Solyndra’s request forapprovals of various cost cutting measures being implemented by the company which requiredthe execution of additional agreements with the DOE. Solyndra also informed the DOE that itwould report in November that the company would fall below the 70% Fab 1 performancetargets, set forth in the loan agreements. The DOE acknowledged that Solyndra was bringing theissue to the DOE’s attention several weeks in advance of required disclosure in the spirit ofmanaging the loan relationship. Solyndra requested an in-person meeting to introduce Harrisonand discuss various topics and issues. The meeting was scheduled for September 15-16, 2010 inWashington, D.C. with the LGPO. 43 A day after the initial discussion, the DOE sent Solyndra alist of detailed questions and requests for Solyndra Inc’s financial information which included,amount other things: (a) monthly historical data since 2007; (b) projected monthly forecastthrough 2016; (c) monthly cash flow forecasts for next 12 months; (d) detailed historical monthlycash burn for last twelve months; (e) annual and quarterly financial statements for 2009 and2010; (f) an updated matrix of executed framework agreements; (g) a cost-reduction roadmap;(h) the offering memorandum and closing documents for Convertible Notes; (i) an accountingfor the Equipment Supply Agreement; (j) a consolidated financial model through 2016; and (k)details relating to raising additional capital. 44 Solyndra promptly provided its responses to theDOE questions on September 13, 2010. 45 Solyndra attended two days of meetings with the various DOE representatives inWashington, D.C. on September 15-16, 2010. The stated purpose of the initial meeting was tointroduce Harrison to the DOE and to discuss the company’s current performance and loanmonitoring issues. During this meeting, Jonathan Silver (“Silver”), the Executive Director of the43 See Appendix I.105, Scott email to Schwartz dated September 7, 2010.44 See Appendix I.108, DOE email to Scott and Schwartz dated September 8, 2010 in email chain.45 See Appendix I.108, Scott email to DOE team dated September 13, 2010. 24
  • 32. LGP, expressed concern regarding Solyndra’s liquidity and its ability to sell out all production.There were also discussions concerning how Solyndra would manage competition from Chinesemanufacturers given the Chinese government’s policy to support renewable manufacturing. Themajority of the remaining meetings were with Nwachuku, LGPO Director of PortfolioManagement and the LGPO staff to discuss various financial and loan monitoring issues. Duringthese meetings, the LGPO team 46 questioned Harrison on a variety of issues including cashbalances, financial plans, Fab 1 production, sales forecasts for third and fourth quarters of 2010,and certain questions regarding the materials recently sent to the DOE. Solyndra also discussedits continued requests for an agreement to address certain cost cutting measures, including theuse of existing excess capacity at the Fab 2 facility. The DOE acknowledged they understoodthe merits of the requests and that Solyndra was currently using the Fab 2 Phase I tools.Solyndra also reiterated that it would be seeking a waiver with respect to the issue of Fab 1production falling below the required 70% target metric. Nwachuku was concerned aboutSolyndra’s ability to raise additional capital and to compete effectively in an industry challengedby depressed ASP. Based on her concerns, Nwachuku indicated that the DOE would withholdapprovals of all open requests unless Solyndra agreed to improve the DOE’s security position byproviding a guarantee of Solyndra, Inc. on the entire term of the DOE Loan Guarantee, and anextension of intellectual property rights to permit the DOE to build-out Fab 2 Phase I in the eventof default. 47 As a result of the meeting, Nwachuku requested another meeting, to follow-up onthe issues discussed. 48 The Board conducted another meeting on September 30, 2010 to obtain a current updateof the company. Harrison discussed the continuing challenges facing the company includinginsufficient end-user demand, lower than expected manufacturing execution in the third quarter,and continued cash burn 49 that would accelerate in the future. The $175 million recently raisedwould be depleted by January 1, 2011. The Board was provided an update of recent DOEmeetings, requests by the DOE for additional security and a request for a waiver on the DOEwhich could present a problem for future draws on the loan.46 The DOE team included Nwachuku, Program Manager, Ove Westerheim (“Westerheim”), Ken Cestari, EmilioGhersi, Chris Tsai, Daniel Lee, Scott Stevens, Steve Shulman, and Brian Oakley.47 See Appendix I.109, Scott email to Solyndra management team dated September 17, 2010.48 See Appendix I.111, Nwachuku email to Scott dated September 27, 2010.49 Cash was being depleted at $15 to $20 million per month. 25
  • 33. Pursuant to the September 2010 Board meeting, the Board held a conference call onOctober 6, 2010 to follow-up on the issues previously discussed. company managementprovided the Board with a recommended course of action which included, amount other things;(a) trimming spending by reducing production and deferring capital expenditures; (b) securingDOE cooperation for an adjusted plan that demonstrated debt service capability; (c) obtaininginterim financing of $150 million to build demand, achieve positive cash flow, and assure theDOE of a fully funded plan; and (d) completing the Fab 2 facility by consolidating and utilizingcertain Fab 1 tools and Fab 1 operations (the “Consolidation Plan”). A number of proposedmodifications of the DOE Loan Guarantee were discussed and analyzed by the Board. 50 Harrison contacted the DOE on October 8, 2010 to describe the recent quarterly financialresults which made it impractical to obtain additional capital in the short-term based on thecurrent financial environment. The DOE, through Silver, questioned the ability of the companyto continue operations into the future. Harrison indicated the company could continue undervarious scenarios until either December 31, 2010 or toward the end of March or April 2011under the company’s new Consolidation Plan, which included redeploying existing Fab 1 toolsand equipment to the Fab 2 facility in hopes of increasing operational efficiency and reducing thelabor force by approximately 200 people. Harrison informed the DOE that under the proposedConsolidation Plan the company would need to raise an additional $150 million to fund the plan,and requested flexibility and time from the DOE to develop the plan and marketing revision andcomplete the Fab 2 facility. In response to the call with the DOE, Stover provided a detailed email to Nwachuku onOctober 11, 2010 which provided additional materials and details regarding Harrison’s previousdiscussions and also requested, among other things, various loan modifications includingmaturity extensions, forbearance of further interest payments for a period, removal of anobligation to fund the $30 million cost overrun account, and consolidation of Fab 1 equipment tothe Fab 2 facility. Solyndra officials personally met with the DOE in Washington, D.C. on October 15,2010 to discuss in detail the current situation and the information provided in Stover’s e-mail.50 See Appendix D.8, Solyndra Board Presentation dated October 6, 2010. 26
  • 34. They discussed the company’s ongoing financial performance, considered various options, theConsolidation Plan, proposed DOE loan modifications, sales and market information, andoperational issues. 51 Within days of the October 15th meeting, representatives of the DOEtravelled to Solyndra on October 19, 2010 for two days of further detailed meetings anddiscussions regarding the company’s sales pipeline, demand forecasts, operational and technicalissues, and the proposed Consolidation Plan.52 In November 2010, Solyndra provided the DOE with “weekly performance dashboardreports” to track ongoing weekly performance. Solyndra also provided additional informationconcerning projected cash flows and revised projections concerning costs and sales. Solyndraalso held additional meetings with the DOE throughout the month. Another Board meeting was held on December 2, 2010 wherein an update was providedconcerning ongoing efforts to raise additional capital and obtain DOE loan modifications. As aresult of these discussions, the Board reviewed the company’s alternatives, including astandalone Fab 1 facility, a sale of all or part of the business and a potential bankruptcy filing. 53 Solyndra contacted the DOE to schedule a meeting on December 6, 2010 to negotiate therestructuring of the DOE Loan Guarantee and provide proposed modifications to the DOE loan.The DOE, in turn, provided a proposed term sheet. The company and the DOE continued tonegotiate an acceptable term sheet in December 2010 which resulted in final documents inFebruary 2011 for restructuring of the existing debt, which ultimately included a seniorliquidation preference for a new infusion of $75 million from a group of investors includingArgonaut and Madrone. Chart #1 below provides the actual results of Operations from March 1, 2009 untilNovember 30, 2010.51 See Appendix J.6, Solyndra Presentation to DOE dated October 15, 2010.52 See Appendix J.7, Solyndra Presentation to DOE dated October 19, 2010 and Appendix J.8, SolyndraPresentation to DOE dated October 20, 2010.53 See Appendix D.9, Solyndra Board Minutes and Board Presentation dated December 2, 2010. 27
  • 35. H. Events Leading to and Summary of February 2011 Restructuring Through the end of fiscal year 2010, Solyndra had received over $961.3 million infunding from the sale of redeemable convertible preferred stock, including certain bridge loansconverted to preferred stock. Solyndra had also issued an additional $175 million in convertiblenotes. The company had acquired property and equipment of $850.3 million in the constructionof Fab 1 and Fab 2 Phase I. The total cumulative losses incurred by Solyndra from inception to2010 totaled $886.4 million. As a result of continuing losses, Solyndra consumed the additional infusion of $175million within six months, and again found itself in need of additional capital. The companyapproached both existing and new potential investors, as well as the DOE. Efforts to secure newinvestor capital, even with the assistance of investment bankers, proved unsuccessful.Ultimately, the company’s existing investors came forward with a proposal for a new $75million loan on terms that were more favorable to the company and its creditors than any otherfinancing options available to the company at the time. As is customary in cases wheredistressed companies seek new debt financing, the lenders required, as a condition to providingthe new capital, that the new financing had priority, in the event of liquidation, over the 28
  • 36. company’s existing debt, including the DOE Loan Guarantee. The parties ultimately finalized aglobal restructuring on February 23, 2011 (the “Restructuring”), which included liquidationpriority for the new $75 million loan in the event of a liquidation prior to March 2013. Theagreements and documents were heavily negotiated between the parties and contained over 2,100pages. 54 The restructuring was intended to consolidate operations, thereby reducing costs, andobtain additional funding to operate the company while the company repositioned itself tocompete in the deteriorating and challenging solar market. The principal amount of therestructured secured debt and relative priority by Tranche is as follows: Table #1 Summary of Restructured Secured Debt Principal Amount 55 Secured Debt Committed Tranche A $75 Million Tranche B $150 Million 56 Tranche C Not Funded Tranche D $385 Million 57 Tranche E $186 Million TOTAL $796 Million 1. Tranche A Debt The DOE and the company’s investors, lead by Argonaut and Madrone (the “LeadInvestors”) agreed to restructure the company’s existing indebtedness, whereby the new $75million loan (“Tranche A Debt”) from existing investors that agreed to participate would have aliquidation priority over the DOE Tranche B debt. The funds were to be used in theimplementation of the Consolidation Plan.54 See Appendix W, February 2011 Restructuring Agreements and Documentation.55 Principal amount for Tranche A and Tranche B represent the commitments of the credit parties and not the actualamounts drawn.56 Tranche C was not funded pursuant to the February 2011 Restructuring. It was established as a result of near-termanticipated future capital requirements and allows for funding of an additional $75 million.57 Tranche E was composed of $175 million in outstanding principal obligations under the Convertible Notes, plusaccrued interest of $11 million through the date of the Restructuring. 29
  • 37. All of the existing Convertible Note holders and preferred stockholders were offered theright to participate as lenders in the Tranche A Debt. 58 Approximately 23 of the company’sexisting investors accepted the offer and became a lender in the restructured Tranche A Debt. On February 23, 2011 Solyndra entered into a restructuring whereby all of the assets ofSolyndra, Inc. (including all of Solyndra, Inc.’s equity interests in subsidiaries and intellectualproperty) were conveyed to Solyndra LLC and all of the liabilities of Solyndra, Inc. wereassumed by Solyndra LLC. Fab 2, LLC changed its name to Solyndra LLC (included in thecollective Solyndra) to reflect the fact that Solyndra LLC would become the primary operatingentity going forward. Following the February 2011 Restructuring, Solyndra adhered to even more extensivereporting requirements, including weekly, monthly and quarterly reporting of financial andoperational performance, sales and marketing updates, production metrics, cash balances,working capital requirements, loan advance reporting, head counts, inventory balances, andbudget to actual comparisons. The DOE representatives also attended all Board meetings asobservers and received various Board materials beginning in February 2011. Having reviewed communications and the underlying records between the DOE andSolyndra, it is the opinion of the CRO that, based upon the level of documentation andinformation as cited above, the DOE had sufficient information to understand the risks andchallenges associated with the DOE Loan Guarantee and make an informed decision as to theongoing financial condition of Solyndra in advance of granting the original loan guarantee andthereafter, including in connection with the February Restructuring and through thecommencement of the bankruptcy case. Even though Fab 2 Phase I was operational at the beginning of 2011, the financial lossescontinued to mount. In fact, the three largest quarterly net operating losses reported by Solyndraoccurred during the fourth quarter of 2010 and the first and second quarters of 2011, which were58 On February 16, 2011, Solyndra, Inc. sent a Tranche A – Rights Offering Information letter to the holders of theexisting Convertible Notes and preferred stock. The rights offering expired on March 16, 2011 and participantswere required to be accredited investors under applicable federal securities laws. See Appendix W.146, Tranche A– Rights Offering Information Letter. 30
  • 38. $77.7 million, $114 million and $91.1 million respectively for a nine-month total of $282.8million. The weekly report provided to the DOE noted that sales and cash continued to declineduring the first seven weeks of the third quarter of 2011. By August 20, 2011, the reported cashbalance was just $5.0 million and sales for the same seven week period were only $5.3 million,$13.8 million below the February 2011 forecast for the same seven week period. By July 2, 2011, a little more than a month prior to the bankruptcy filing, Solyndra hadreported losses totaling almost $1.1 billion. Long-term debt exceeded $787 million and cash haddwindled to just over $18 million. Solyndra was never able to operate at a profit. The schedule below provides a graphicrepresentation of total revenue from 2005 through 2011 and the corresponding net operating lossduring that same period. In fact, as detailed below, from 2009 through 2011 Solyndra had a net operating loss perwatt of $3.92. 31
  • 39. Table #2 SOLYNDRA, INC Revenues and Expenses on a per Watt Basis For Fiscal Year 2009 Through July 2, 2011 Revenue per Watt $ 2.56 Manufacturing Costs (4.28) Operating Expenses (2.20) Total Costs per Watt (6.48) Net Operating Loss per Watt $ (3.92)I. Events Leading to Bankruptcy Filing At the time of the Restructuring, Solyndra and its existing investors and creditorsunderstood that the company required further incremental capital beyond the $75 million ofTranche A Debt 59 to fund the Consolidation Plan. Thus, the Restructuring documents providedfor further Tranche C Debt funding of up to an additional $75 million. Beginning in the second quarter of 2011, Solyndra pursued various funding alternatives,including multiple strategic and financial investors, in an attempt to attract the required capitalunder the terms provided for in the Tranche C Debt. On May 5, 2011, Solyndra managementreported to the Board that the company would need incremental financing by early June tocontinue operations. 60 In an effort to address the immediate and pressing cash requirements, Solyndraapproached certain of its Tranche A Debt holders and the DOE to explore alternative debtfinancing arrangements, including the sale of accounts receivable and inventory. As a result, adraft term sheet was presented to the Board regarding a proposed accounts receivable purchasefacility (“A/R Facility”) whereby Solyndra LLC could sell up to $75 million of qualifyingaccounts receivable to a special purpose entity established by certain investors led by Argonaut,Madrone and Rockport to fund short-term cash requirements. 6159 As a result of the Restructuring provided the commitment of the Tranche A Debt left the company with more than$783 million in senior secured debt.60 See Appendix D.14, Solyndra Board Minutes and Board Presentation dated May 5, 2011.61 See Appendix D.15, Solyndra Board Minutes and Board Presentation dated May 20, 2011. 32
  • 40. Under the terms of the Restructuring, the consent of the DOE was required to implementthe A/R Facility, and as a result the DOE was extensively involved in the negotiation of thetransaction. Solyndra obtained the written consent of the DOE and executed agreements on June3, 2011, and began to receive proceeds from the A/R facility. 62 By July 7, 2011, the A/R Facilityhad provided Solyndra with a cash infusion of approximately $29.2 million. However, thecompany still required additional capital, and worked with its existing investors and the DOE ona second facility whereby certain inventory of Solyndra would be sold to a special purposevehicle formed by certain existing investors (“the “Inventory Facility”). Management apprisedthe Board of the need for the Inventory Facility, and indicated to the Board that Solyndra wascontinuing with its necessary cost cutting and vendor management measures in order tominimize the immediate cash requirements and that the A/R Facility and Inventory Facility onlyprovided short-term liquidity and did not replace the need for long-term capital. As a result,Tranche C Debt financing would still be required by August 2011. 63 Solyndra obtained thewritten consent of the DOE and executed the agreements relating to the Inventory Facility onJuly 29, 2011 allowing for the sale of inventory and funding under the agreed-upon terms. 64 In early August, Solyndra, certain holders of Tranche A Debt, and representatives of theDOE began negotiations on a financing structure that would allow Solyndra to attract new long-term investment. Argonaut presented a proposal to Solyndra and the DOE involving thesignificant restructuring of Solyndra’s balance sheet, which would have included the write-off ofa significant portion of the Tranche B Debt, all of the Tranche D Debt and all of the Tranche EDebt, and indicated that it would be willing to underwrite the additional investment on theseterms (“Argonaut Proposal”). The DOE engaged Lazard, Freres & company (“Lazard”) to assistit with these negotiations and to help identify potential sources of capital for the company. TheDOE initially responded that the Argonaut Proposal was unacceptable, and made acounterproposal to Argonaut that sought to preserve most of the DOE’s debt. After Argonautindicated that it would not be willing to move forward with a transaction based on those terms,the DOE indicated that it would attempt to obtain the approvals necessary to move forward witha transaction based on the original terms of the Argonaut Proposal. However, by this time62 See Appendix AB, AR Facility discussion and documentation.63 See Appendix D.17, Solyndra Board Minutes and Board Presentation dated July 7, 2011.64 See Appendix AB, Inventory Facility discussion and documentation. 33
  • 41. Argonaut had lost the necessary internal support to move forward with such a transaction, and itindicated it was no longer willing to underwrite any transaction without significant participationfrom a new investor. Nonetheless, the parties continued to discuss a long-term restructuringdeal. These negotiations over the terms of the incremental capital continued throughout August2011, and during this time, the parties to the Inventory Facility continued to purchase Solyndrainventory to provide needed liquidity to Solyndra. After it was clear that a transaction could notbe accomplished under the terms set forth in the Argonaut Proposal, the DOE and certainexisting investors began negotiations for bridge financing to allow Solyndra additional time tofind a new source of capital and complete an overall restructuring. Under the proposed terms ofthe bridge financing, both the DOE, as the loan servicer of the Tranche B debt, and the holders ofthe Tranche A Debt would have released additional funds to Solyndra. On August 26, 2011, the DOE indicated it was unable to provide additional funds underthe Tranche B facility; however, the parties continued to work on interim financing alternatives.In light of the DOE’s stated position, Mitchell indicated to the Board that Argonaut was notwilling to be the sole source of the required additional long-term capital and based on the statusof discussions among Argonaut, other potential investors and the DOE, he had severereservations in making a recommendation to Argonaut to provide additional long-term capital atthat time. At the Board meeting, Nwachuku updated the Board on the DOE’s continuedcommitment to the company and stressed the continued work the DOE and its financial advisorswere doing in an attempt to find a solution to the company’s capital requirements. 65 Two days later, the Board met again to address the pressing financing and capital issues.The Board was informed that an understanding had been reached between the representatives ofthe Tranche A lenders and the DOE. Subject to the DOE obtaining necessary governmentalapprovals, the lenders agreed to provide additional “bridge” funding to the company to affordadditional time to secure long term capital. The contemplated “bridge” funding involved therelease of approximately $8 million of the remaining DOE Loan Guarantee funds, approximately$6 million of remaining Tranche A Debt proceeds, and the DOE’s permission for the company to65 See Appendix D.21, Solyndra Board Minutes dated August 26, 2011. 34
  • 42. access an additional $3 million of funds (proceeds of equity infusions) held in a restrictedaccount. A commitment was also made by the parties to the Inventory Facility to purchaseapproximately $3 million of additional inventory pursuant to the Inventory Facility to allow theDOE sufficient time to obtain the necessary approvals for the interim funding arrangement. Immediately prior to an August 30, 2011 Board meeting, the DOE informed the companythat it was unable to obtain the necessary consents from the other agencies to allow for theinterim funding of the remaining Tranche B proceeds unless the funding was part of a fullyfunded business plan. company management updated the Board of the DOE’s position at theAugust 30th Board meeting. At the same meeting, Mitchell also informed the Board that theTranche A lenders were not prepared to release the remaining funds without the release of theTranche B funds, and they could not commit to fully funding the company. Solyndra was leftwith no other option but to immediately suspend operations and begin the process of filing itsChapter 11 petitions. 66 As a result, on August 31, 2011, Solyndra immediately suspended its manufacturingoperations and terminated the vast majority of its workforce. Inasmuch as the company’s assetsinclude complex equipment and intellectual property, the company retained key employees tomaintain its assets with the ability to re-start operations while restructuring options wereexplored, to assist with sales of assets and, as necessary, to wind-down the business following asale or liquidation of assets. A week later, on September 6, 2011, Solyndra commenced itsChapter 11 bankruptcy cases. The summarized report above contains an overview of the significant events thatSolyndra faced as it navigated the highly competitive renewable energy market. Thecomplexities of the company’s operations and the numerous details examined by the CROrequired the analysis of thousands of documents and interviews with certain key individuals. Amore detailed analysis of the findings and conclusions of the CRO are presented within the bodyof the full report as detailed below.66 See Appendix D.23, Solyndra Board Minutes dated August 30, 2011. 35
  • 43. V. SOLAR TECHNOLOGY AND PRODUCTSA. History The solar energy industry has long been dominated by crystalline silicon based modules(referred to as “conventional panels”). The process of using semi-conductor grade polysiliconwas adopted due to the availability of polysilicon feedstock from the semi-conductor industryand the efficiency of the technology to produce electricity. However, as the global demand forsolar modules outpaced the capacity for polysilicon production, many researchers began toexplore usable alternatives to polysilicon based solar modules. Thin film photovoltaic technology (utilized in the Solyndra process) is the dominantalternative to polysilicon based modules. Within the thin film group, amorphous silicon, CdTe,and CIGS, are the most common alternative materials used for energy generation. Whileamorphous silicon and CdTe either lack the energy yield capacity or cost savings to competewith polysilicon, Solyndra believed that CIGS technology could compete in the global solarmarket. Utilizing this technology, Solyndra adopted a cylindrical tube design to protect theCIGS thin film material from degradation and damage caused by moisture, and set forth on apath to produce large volumes of panels for low-slope commercial and industrial white rooftopapplications.B. Design After extensive analysis on strength, panel weight, cost, and other factors, Solyndradecided to use a 15mm diameter CIGS coated inner tube encapsulated inside of a 22mmdiameter outer tube. This design not only protected the CIGS material from degradation, it alsoallowed the panel to collect light from more than just direct sunlight, making it naturally moreefficient at producing wattage power. The diagram below from a Solyndra marketingpresentation shows how the panels receive direct, diffuse, and reflected sunlight from everyangle of the panel. 6767 Solyndra’s products have been designed and developed to be used on flat white commercial roofs for optimumresults. 36
  • 44. Design of the coating equipment set the length of each tube at about 1 meter. Thisassembly would be called a module. The next challenge was to determine the best number ofmodules to place in a panel, and to optimize the spacing between the modules. Based on themaximum weight for a two-person lift, and the need to have the number of modules easilyfactored to support automation, the decision was made to include 40 modules in each panel.Wider spacing between the modules would allow more sunlight to strike each module, resultingin higher power and lower cost per watt. Tighter spacing would result in more watts per squaremeter of panel, and also increase the snow load capacity of the panel. The inside of the glass tubes contain an “opticalcoupling agent”, which is a fluid that has an index ofrefraction matched with the glass. 68 The fluid concentratesthe sunlight entering the tube, increasing the efficiency andreducing the relative amount of PV material required. 69The ends of the tubes are hermetically sealed with metalcaps, eliminating the risk of exposure and increasing thelifespan of the product. Finally, the tubes were connectedusing a “wiring harness” and attached to a mountingsystem. The first prototypes of this panel, later called the“100 Series” were produced in September of 2007. ByJanuary 2008, samples were ready for certification.68 Based on information provided by Ben Bierman.69 See Appendix B.1, Solyndra Product and Sales Introduction dated December 1, 2009. 37
  • 45. Certification was achieved in April of 2008 and shipments to customer sites began. Initialshipments had an average watt per panel between 135 and 150 watts. 70C. Comparative Advantage At the time of its entry into the market, Solyndra’s leading competitive advantage was itslow BOS (balance of system) cost, which means the aggregate cost associated with installing andmaintaining solar panels. Due to the unique slatted design of the modules, along with theirability to be installed with zero degrees of tilt, Solyndra’s panels allowed wind to pass throughwith minimal resistance. Conventional PV panels, such as the one displayed below, generate asignificant amount of lift and/or load on the roof structure due to the angle of installation andlack of an outlet for the incoming wind gusts. Unlike traditional crystalline based panels, whichrequire significant support systems to handle moderate to high wind gusts, Solyndra’s panelscould be installed relatively easily and at a fraction of the cost of traditional systems. Conventional PV Solyndra PV The cost of installation for the end user was the major pricing factor that set Solyndraapart from its competitors. Due to a reduction in the cost of polysilicon (as discussed in SectionVI. External Environment and Market Conditions), the cost per watt of traditional silicon panelsfell below a price point that Solyndra could match. However, the ease of installation and thelack of mounting equipment needed to support wind resistance made the BOS cost for Solyndrapanels almost half that of traditional models. Below, in a chart provided to Solyndra employeesas part of the State of the Business update on November 3, 2010, 71 the cost breakdown isillustrated for the upcoming quarter and for the projected following year. Solyndra believed thatit could make up its roughly $1.00 higher per watt panel price with a corresponding advantage in70 See Footnote 68.71 See Appendix B.2, Solyndra Q3 State of Business Presentation dated November 3, 2010. 38
  • 46. the BOS cost of the system. The challenge for the company was educating prospectivecustomers on the total project cost instead of a narrow focus on the ASP of the modulesthemselves. In July 2010, Solyndra began shipping its new “200 Series” panel. The aluminum framehad been eliminated, as had all other exposed metal surfaces. The panels and mounts now linkedtogether without the use of screws. As there were no exposed conductive surfaces, it was nowpossible to eliminate the need to ground the panels and array. Ground wiring was eliminated.Installation labor was cut in half compared to the 100 series. The spacing between the tubesincreased from 22 to 35 mm, boosting power by about 9%. The new high-voltage modulesadded an additional 2%, for a total power boost of 11%. As a result of these improvements,Solyndra was able to produce panels of up to 220 average Wp. Since the panels no longerincluded a metal frame, and self stacked for crating without the need for separators, they weremuch easier to build and ship. By February 2011, Solyndra had ceased production of the 100 series product. Demandwas shifting to the 200 series. When customers wanted the higher watt density of the 100 series,they were offered the new “150 Series”, a 100 series frame with the new, higher voltage, 200series modules. 39
  • 47. The 20X panel was primarily a cost reduction program. By making a frame that requiredmore supports to handle heavy snow loads, and by making a lower specification mount, a $15-20per panel cost reduction would be realized. Implementation, including tooling and certificationtesting, would cost approximately $10M, resulting in a six to nine month payback time atplanned run rates of one million panels per year. Solyndra was unable to realize the full benefitof its innovations as financial problems intervened. VI. EXTERNAL ENVIRONMENT AND MARKET CONDITIONS Solyndra was formed May 2005 and filed its original DOE loan application in 2006.Between 2006 and Solyndra’s bankruptcy filing, there was a dramatic shift in the overall globalsolar market. Since the company’s inception, one of Solyndra’s projected competitiveadvantages was the cost savings that its cylindrical, thin-film solar cells offered compared totraditional polysilicon (P-Si) solar panels. In 2008, the price of P-Si had peaked between$250/kg and $500/kg depending on the data source, 72 due to a shortage in capacity to refine theelement into solar grade quality. The high price of production materials for P-Si solar cellmanufacturers (referred to as “conventional panel producers”) led to a higher ASP for all solarproducts throughout the market. However, the solar market conditions that existed in 2008 began to shift dramaticallydownward in terms of pricing in 2009 and continued on a steady decline through 2011. Chinesemanufacturers, often with subsidized funds from the Chinese government, began to significantlyincrease their capacity for producing P-Si. The net result was a steep drop in production costsfor solar manufacturers utilizing P-Si in their products. Because Solyndra did not rely on P-Si inits thin-film solar technology, the company did not benefit from the price declines associatedwith P-Si products. Solyndra’s cost structure remained unaffected. Yet, the company had towithstand downward pricing pressure resulting from declining ASPs across the market for solarmanufacturers caused by reductions in costs associated with producing P-Si.72 The weekly spot price for PV grade P-Si ranged between $30.50 to $35.00 per kg as of February 22, 2012according to PVinsights.com. See Appendix C.1. 41
  • 48. In addition to the fall in ASPs in the solar market, the European debt crisis, a spilloverfrom the global recession triggered in 2008, led to slower growth in the overall demand for solarinstallations between 2009 and 2011. There were two primary reasons for such slower growth indemand. First, the global recession caused many businesses to either cancel or delay capitalspending projects in exchange for near term cash savings. Second, reduced tax revenue causedmany countries to substantially reduce or eliminate solar subsidies. Although it is uncertain whether a favorable market would have allowed Solyndra tomeet its projections and remain economically viable, the economic obstacles described in moredetail below, certainly made the company’s progress more challenging.A. Impact of the Recession of 2008 Solyndra began its progression from startup to commercial manufacturer at a time whenthe world was experiencing the effects of an economic recession that began in 2008. In August2008, Solyndra finalized its application for the DOE Loan Guarantee intended to finance theconstruction of the company’s Fab 2 Phase I facility which would triple the company’s then-current manufacturing capacity. During the following month, Lehman Brothers filed for Chapter11 bankruptcy protection. 73 The fall of Lehman triggered a collapse in global markets and shedlight on the dangerously fragile balance sheets of the world’s largest financial institutions. Theturmoil that followed, as has been well-documented, reached every sector of the global economy. One of the major policy actions taken by the Obama administration in the wake of thefinancial crisis was the ARRA, which was signed by the President on February 17, 2009. 74ARRA had a large impact on Solyndra’s quest to obtain financing through the DOE LoanGuarantee program. ARRA appropriated an additional $6 billion dollars to the EPAct2005, to“pay the costs of guarantees made under” that section 75 and contained a provision for the DOE tobe allocated funds for the payment of the credit subsidy cost (“CSC”) on behalf of loanapplicants. The CSC was a measurement of the Borrower’s risk of default. Payment of the CSCby the borrower was a condition precedent to the closing of a loan guarantee. In December2008, Solyndra learned that the CSC for the Fab 2 DOE Loan Guarantee was estimated to be73 See Appendix C.2, Lehman Brothers press release dated September 15, 2008.74 See Appendix G.11, American Recovery and Reinvestment Act of 2009.75 Id. 42
  • 49. between 6% and 14% of the total loan amount. 76 Having those funds paid under ARRA onSolyndra’s behalf allowed the company to save between $32.1 and $74.9 million in up-frontcosts. Notwithstanding the payment of the CSC, the overall effect of the global economicdownturn was overwhelmingly negative for Solyndra. Following conditional approval of theDOE Loan Guarantee for the Fab 2 Phase I facility in March 2009, the global recession began tohave a significant negative effect on Solyndra’s business. First, Solyndra’s efforts to raiseadditional capital, either through an IPO or additional private funding, were hampered by globaleconomic conditions. Second, Solyndra’s customers had difficulty obtaining financing for theirprojects due to the credit freeze. Finally, the amount of government assistance provided to thesolar industry was reduced as countries facing large budget deficits began reducing the amountof subsidies offered under their incentive programs. To illustrate the scale of the credit freeze caused by the recession, the chart below fromthe St. Louis Federal Reserve Bank’s database shows the decline in the Commercial andIndustrial (“C&I”) lending market since the economic downturn. 77 According to these statistics,the global C&I market dropped by close to 25% between December 2008 and December 2010, acritical time period for Solyndra’s operations.76 See Appendix I.35, Bill Miller (DOE) email to John Scott dated December 9, 2008.77 See Appendix C.3, Federal Reserve Bank of St. Louis, Commercial and Industrial Loans at All CommercialBanks (January 1, 2009 to January 1, 2012). 43
  • 50. The combination of reduced access to the funding sources that purchasers of solar panelstypically relied upon and a more challenging sales environment were heavy burdens on Solyndrawhile it attempted to ramp-up production. To match sales with the company’s expandedcapacity, Solyndra required a market that was both receptive to the company’s new technologyofferings and could find ways to finance the purchase of solar panels. Unfortunately forSolyndra, the market was mired by what many consider to be the worst financial conditions sincethe Great Depression.B. Incentive Programs The demand for Solyndra’s products was driven by various external factors over whichthe company had little control. Perhaps the most significant factor that influenced demand in thesolar industry was the amount of government assistance dedicated to growing the industry.Many countries have set national standards for renewable energy production in an attempt toreduce their dependence on traditional fossil fuels. In order to meet these objectives, countriesoften use public policy tools to increase demand for renewable energy by making solar powermore competitive with carbon-based fuel. Absent such government intervention, many ofSolyndra’s end users would be unable to justify the cost of using renewable energy sources whencompared to traditional carbon based sources. 44
  • 51. Examples of the policy tools commonly used by governments to encourage renewableenergy generation are FiTs, renewable energy certificates (“REC”), and renewable portfoliostandards (“RPS”). 78 A FiT is a long-term contract offered to purchase energy generated from arenewable source. An REC is a certificate awarded to renewable energy producers based on theamount of energy produced. An REC can be used as a revenue generating tool when it is sold tonon-renewable energy producers/consumers that need to meet the requirements of RPS (mostoften referred to as the “cap-and-trade system”). While the foregoing policy tools are used throughout the world in varying degrees, FiTsare the most widely utilized in Europe, which has had the most generous subsidies benefittingsolar manufacturers. From 2000 to 2009, FiTs accounted for more than 15 gigawatts 79 (“GW”)of solar PV production in the European Union. 80 The countries with the most generous FiTstend to be the leaders in global solar PV demand. Germany, due to the success of the FiTprogram passed in 2000 as part of the Renewable Energy Sources Act, is estimated to accountfor over 40% of the global demand for PV products. 81 The next two largest consumers, Italy andSpain, each have similar FiTs in place in order to spur demand for PV installations. Togetherwith the United States, these three European countries accounted for almost 70% of the world’sinstalled capacity at the end of 2010. 82 Government tools to increase renewable energy production have played a large role inestablishing the current market conditions for solar power demand. Since the establishment ofFiT programs in the early 2000’s, countries like Germany, Spain, and Italy have demonstratedthe effect these policy tools can have on global market sales. In total, it is estimated that 75% ofglobal PV installations are a direct result of a FiT policy. 83 Recent economic conditions have caused worldwide reductions in the economicincentives available for investment in renewable energy production. However, this reduction in78 See Appendix C.4, National Renewable Energy Laboratory (“NREL”), “Policymaker’s Guide to Feed-in TariffPolicy Design,” June 2010, pg. 14.79 One gigawatt equals one billion watts or one thousand megawatts.80 See Footnote 78, pg. v.81 See Appendix C.5, European Photovoltaic Industry Association (“EPIA”), “Global Market Outlook forPhotovoltaics until 2015”, pg. 28.82 Id.83 See Footnote 78, pg. v. 45
  • 52. FiT rates has occasionally caused temporary spikes in demand. In Germany for example, thecountry saw growth of over 90% in 2010 for total MW installed. This growth was a direct resultof installers attempting to get out ahead of planned reductions in FiTs that were scheduled tooccur in July and October of 2010. 84 Similar growth occurred in many of the other Europeanmarkets as incentives for future installations were scheduled to be reduced in order to meetbudget constraints caused by the European debt crisis. Although these spikes in demand have atemporary positive impact on the industry, the effect of the reductions in incentives will have anegative impact on long term demand. The direct correlation between the availability ofgovernmental incentives and the continued viability of solar based PV companies highlights theinterdependency of nascent solar companies with government sponsored programs. 1. Germany As noted above, in 2000, Germany passed a law which introduced a FiT for electricityproduced from solar PV systems. The FiT was designed to pay a guaranteed rate over a 20-yearperiod with built-in annual reductions. 85 In a presentation to Solyndra’s board dated April 13,2010, Germany was identified as the “largest and (most) predictable PV market.” 86 This boardpresentation also predicted that Germany’s share of the global commercial and industrial (C&I)market will grow from 1,172 MW in 2010 to 1,756 MW in 2013. This estimated demand is overtwice the annual demand of any other country, with the exception of the United States, whichwas estimated to grow from 460 MW in 2010 to 2,674 MW in 2013. 2. Spain Spain is the second largest consumer of PV with almost 4 GW of cumulative installedcapacity to date. The country saw a dramatic spike in demand in 2008, ahead of a planneddecrease in the FiT payment rates. Approximately 2.7 GW of PV capacity was installed in Spainin 2008, more than double the projected capacity for that year. 87 Since the “bubble” effect of theFiT decrease in 2008, Spain’s annual projected MW demand for 2011 through 2015 was between84 Solar Buzz, “European PV Markets”, June 2011, pg. 76.85 See Appendix C.6, European Commission Joint Research Centre Institute for Energy, “PV Status Report 2011”,July 2011, pg. 19.86 See Appendix D.1, Solyndra Board Presentation dated April 13, 2010.87 See Footnote 85, pg. 19. 46
  • 53. 500 MW to 1,000 MW per year pursuant to the European PV Industry Association (“EPIA”),placing Spain below other countries with faster growing demand. 88 According to J.P. Morgan’smarket research report issued in January 2012, approximately eight months later, Spain’s actualPV demand for 2009 was 180 MW and 200 MW for 2010. J.P. Morgan also projected PVdemand of 250 MW for 2011 and 300 MW for 2012. J.P. Morgan’s referenced PV demand wassignificantly lower than the projections made by the EPIA in April 2011. 89 3. Italy Whereas Spain is second in cumulative MW installed, Italy was the second largest innewly installed capacity for 2010. 90 Italy saw a spike in 2010 installations that far exceededexpectations, at 2.3 GW. The EPIA speculated that the spike was due to increased uncertaintyover changes in FiT regulations set to go into effect in May 2011. Unlike Spain, which saw abubble grow then burst with a change in FiT rules, 2011 market predictions for Italy remain highfor the next two years. 91C. Competition A substantial portion of solar industry demand is driven by the overall cost of PV systemsin comparison to traditional energy sources. While incentives such as FiTs positively influencedglobal demand for PV installations, Solyndra’s ability to compete was adversely impacted byreductions in the price of P-Si. As noted above, in the period between 2009 and 2011, the priceof silicon-based modules dropped significantly, making Solyndra’s products less desirable froma cost standpoint. An example of the sudden change in the P-Si market can be seen by examining the twoindependent market study reports prepared as a requirement of Solyndra’s DOE loan application.In the DOE’s market study dated April 2009, RW Beck noted that “silicon modules are moreexpensive to produce compared to thin-filmed modules, as this technology relies on siliconfeedstock, which has historically been more expensive than respective feedstock of competing88 See Footnote 81, pg. 19.89 J.P. Morgan, “Alternative Energy: 2012 Solar Industry Outlook – Its Going To Be Another Tough Year, LookElsewhere For Outperformance”, January 9, 2012.90 See Footnote 85, pg. 19.91 See Footnote 81, pg. 15. 47
  • 54. technologies.” 92 Just over a year later, the market study prepared by Navigant in September2010 stated that “low cost crystalline silicon modules continue to be the biggest threat toSolyndra’s success in the marketplace.” 93 1. Polysilicon (P-Si) Based Competitors Historically, the market for solar panels was dominated by crystalline silicon basedmodules. In 2008, roughly 80% of the PV market used crystalline based silicon. 94 The chartbelow from the DOE’s 2008 Solar Technology Report, illustrates the dominance of P-Si basedsolar modules historically and in future forecasted time periods. The report however notes adifference in expert opinion on the degree that thin film will gain market share in future periods.Some experts believed that thin film solar modules could gain over 30% of the market share by2012. Due to lower efficiency yields that thin film offers as compared to P-Si panels, Solyndrawas faced with the need to decrease the cost per watt in order to make its products more92 See Appendix O.2, RW Beck Final Market Study Report, pg. 1793 See Appendix O.3, Navigant Final Market Study Report. pg. 7894 See Appendix C.7, U.S. Department of Energy – Energy Efficiency and Renewable Energy, “2008 SolarTechnologies Market Report, January 2010, pg. 30. 48
  • 55. competitive with P-Si. Between 2004 and 2008, the prices for P-Si were moving towards arecord high, making competitors (like Solyndra) that were not dependent on P-Si optimisticabout their ability to overtake the solar market. That condition changed in 2008 when the pricefor P-Si turned sharply downward, making the cost per watt of P-Si panels much morecompetitive when compared to thin film producers. The reduction in cost of silicon based PVmodules is related to (1) the increased global supply of P-Si, and (2) the entrance of Chinesemanufacturers into the production market. a. Polysilicon (P-Si) Supply In a report issued in October of 2005, PiperJaffray estimated the global supply of P-Sicapacity to be 34,200 metric tons (“MT”) for 2006 and almost 37,000 MT for 2007. 95 Thefollowing year, CIBC World Markets (“CIBC”) estimated that the global demand for P-Si duringthat same time period would be closer to 40,000 MT. Further, CIBC forecasted that in 2010global P-Si demand would be greater than 70,000 MT. 96 The impact of these market projections caused a spike in price from approximately$75/kg in 2005 to between $250 to $500/kg in 2008, depending on the data source, and asubsequent flurry of new P-Si production facilities to meet the future supply needs. By 2008, aproduction forecast issued by the National Renewable Energy Laboratory (“NREL”), forecastedP-Si production to be 90,000 MT in 2009 and over 120,000 MT in 2010, far exceedingforecasted demand for that same time period. 97 The increased production capacity for P-Sicaused the bubble to burst, and prices for P-Si began to fall dramatically in the 4th quarter of2008 and the 1st quarter of 2009. 98 The ASP per watt that drives the solar industry is closely correlated to the global price ofP-Si. In a market study published in November 2010, Credit Suisse provides a chart thatillustrates the relationship between $/kg for P-Si and the $/watt for panels in the market.95 PipperJaffrey, “Solar Powered: an Emerging Growth Industry Facing Severe Supply Constraints”, October 2005,pg 27.96 CIBC World Markets, “Alternative Energy – Balance a Bright Future with Near-Term Risk, July 2006, pg. 25.97 See Footnote 94, pg. 33.98 See Footnote 72. 49
  • 56. During that same time period, the ASP that Solyndra was able to achieve with itscustomers followed a similar trend line, falling from an average of $3.39 in 2009 to $2.31 in2011. 2. China Enters Market Although Chinese manufacturers are now the dominant producers within the PV market,their presence within the solar industry is still relatively new compared to the U.S. and Europeanproducers. In 2005, China produced less than 10% of the global PV market. By 2010, thatamount had increased to over 50%. 99 The majority of panels produced during this time periodwere exported to countries with heavy demand for PV products, while Chinese consumption ofPV during that same time period remained at under 10% of global market demand. 100 China’s growth in capacity for production had a significant impact on the global supplyof solar products. The chart below shows the rapid growth in annual PV production that began99 See Footnote 81, pg 36.100 Id. 50
  • 57. in 2007. Between 2007 and 2010, PV production capacity increased from 5 GW to almost 25GW. 101 During that same time period, The European Commission Joint Research Centreestimated that demand only rose to slightly above 17 GW in 2010. 102 The outpacing of supplycompared to demand had a negative impact on the ASP that producers could realize for theirproduct.101 See Footnote 85, pg. 9.102 See Footnote 85, pg. 13. 51
  • 58. The growth of the Chinese solar manufacturing industry was driven in large part byinvestments made by the China Development Bank. In their prepared remarks before theSubcommittee on Oversight and Investigations Committee on Energy and Commerce in 2011,the Executive Director of the Loan Program Office and the Secretary of Energy, both referencedinvestments made by the Chinese government in the Chinese solar industry as having asignificant impact on Solyndra’s ability to compete. 103 The access to capital, along with China’slower wage rates and lax regulatory conditions, allowed these Chinese manufacturers to movetheir products to market at a much lower cost than their U.S. or European counterparts. In late 2011, members of the solar community, led by the German based SolarWorld AG,accused Chinese manufacturers of “illegally dumping” P-Si based solar panels into the market.The petitioners argued that the subsidies provided to the Chinese solar industry by government-controlled banks has given those producers an unfair competitive advantage. The issue ispresently under investigation by the Commerce Department and the U.S. International TradeCommission.104103 See Appendix G.22 for prepared statement of Secretary of Energy Steven Chu and Appendix G.21 for preparedstatement of Jonathan Silver (DOE Loan Program Director) before U.S. House of Representatives Subcommittee onEnergy and Commerce.104 See Appendix C.8, Bloomberg Article, “U.S. Commerce Department Opens Dumping Investigation of ChinaSolar Cells”, November 9, 2011. 52
  • 59. D. Private Investment in the Solar Industry Since its filing for bankruptcy protection in September 2011, public statements regardingSolyndra focus on the fact that the company received a $535 million loan guarantee from theDOE. While true, this focus may overlook the substantial private equity investment of over $1.2billion that the company received before and after the DOE Loan Guarantee, the vast majority ofwhich will be lost. To put that into perspective, according to Thomson Reuters’ private equity database,reporting companies in the US solar energy field each received an average of approximately$300 million in private equity during the time period that Solyndra was operating. While thisdata is limited to those equity firms that choose to report their investment with Thomson Reuters,the analysis indicates that private investors considered Solyndra to be worthy of substantiallymore investment than the typical US solar company. Below is a chart of Solyndra as comparedto other companies that received at least $150 million between the years 2005 and 2011. Acomplete list of the investment deals identified by Thomson Reuters can be found in Exhibit #4. 53
  • 60. VII. CORPORATE STRUCTURE As originally named, Gronet Technologies, Inc. was incorporated in the state of Delawareon May 10, 2005. On January 26, 2006, the entity name was changed to Solyndra, Inc., andthrough February 23, 2011, it served as the primary operating entity of the company. During thisperiod, numerous subsidiaries of Solyndra, Inc. were incorporated, both domestically andinternationally, to serve various purposes and functions. Some of the key subsidiaries include:(i) Fab 2, LLC, which served as a project company to hold all of the assets of Fab 2 as requiredunder the terms of the DOE Loan Guarantee; 105 (ii) Solyndra GmbH, which served as themarketing entity for Europe, the Middle East and Africa; 106 and (iii) Solyndra InternationalA.G., which was established as Solyndra’s European headquarters and sales entity. 107 Othersubsidiaries incorporated during this period include the following (in order by date ofincorporation): • Solyndra Fab 1 LLC - A Delaware limited liability company incorporated on March 2, 2007 to hold the Fab 1 assets. However, the asset transfer to Fab 1 was not consummated and this entity was dormant until dissolution on January 28, 2011. • Solyndra Services LLC - A Delaware limited liability company incorporated on June 27, 2008 to operate as a holding company for foreign subsidiaries until its dissolution on March 7, 2011. • Solyndra (Cayman) Ltd - Created for tax structuring purposes, was an exempted company incorporated in the Cayman Islands with limited liability on October 8, 2008. Assets were never transferred and the company was dormant until its dissolution on March 31, 2011. • Solyndra Operator, LLC - A Delaware limited liability company incorporated on July 10, 2009 pursuant to the DOE Loan Guarantee to operate Fab 2. The company was dissolved on March 7, 2011 subsequent to the restructuring of the DOE Loan Guarantee in February 2011.105 A Delaware limited liability company incorporated on June 27, 2008.106 Solyndra GmbH was a corporation organized under the laws of Germany and registered on February 16, 2009.The company established the following branch offices in Europe for marketing Solyndra’s products in variousjurisdictions: (a) France, originally established in Paris on July 28, 2010; (b) Italy, established on December 23,2010; and (c) Czech Republic, established on October 19, 2010.107 Solyndra International AG was a corporation organized under the laws of Switzerland and registered onDecember 23, 2010. The company established a branch office in the Netherlands for logistics relating to theinternational shipment of product on March 21, 2011. 54
  • 61. • Solyndra (Korea) Limited - A limited company incorporated in South Korea on June 16, 2009 (currently dormant) and established as a sales and marketing entity for potential sales in Korea. • Solyndra Services Ltd. - Incorporated under the laws of the United Arab Emirates on March 15, 2010 (currently dormant) and established as a sales and marketing entity for potential sales in the Middle East. • Solyndra International LLC - A Delaware limited liability company incorporated on November 10, 2010 for tax structuring purposes. No assets were transferred to the company and remained dormant until its dissolution on March 16, 2011. • New Shape Solar LLC - A Delaware limited liability company incorporated on March 8, 2010 (currently dormant) to hold the equity interests of Photon Solar LLC. • Solyndra California Development LLC - A Delaware limited liability company incorporated on April 6, 2010 (currently dormant) to hold the equity interests of multiple project subsidiaries that would develop solar projects. • Photon Solar LLC - A Delaware limited liability company incorporated on April 6, 2010 to own the assets related to a solar project development with Southern California Edison. All of the equity interests in Photon Solar LLC were conveyed to ProLogis, Inc. on July 7, 2011. On February 23, 2011, Solyndra, Inc. entered into a restructuring whereby all of theassets of Solyndra, Inc. (including its equity interests in its subsidiaries) were conveyed to, andall of its liabilities assumed by, Fab 2, LLC. In conjunction with the restructuring, Fab 2, LLCchanged its name to Solyndra LLC and became the primary operating entity from that pointforward. Furthermore, as part of the restructuring, Solyndra GmbH became a wholly ownedsubsidiary of Solyndra International AG, which became the primary European operating entity ofSolyndra with its European headquarters located in Switzerland. Subsequently, on June 28,2011, Solyndra, Inc. changed its name to 360 Degree Solar Holdings, Inc. Following the restructuring, Solyndra LLC entered into financing arrangements wherebyit sold certain of its accounts receivable and inventory to two special purpose vehiclesestablished by certain existing investors. In order to avoid collateral issues in connection withthe sale of the accounts receivable and inventory to the special purpose vehicles, Solyndra LLCincorporated Solyndra Financing LLC as a Delaware limited liability company on May 25, 2011.The corporate structure as of February 22, 2011, and September 6, 2011, is depicted below inCharts #10 and #11, respectfully. 55
  • 62. the product to the next stage. In order to reach a production cost level that would allow thecompany to bring its product to market, Solyndra recognized the need to achieve economies ofscale. Solyndra’s first milestone towards the goal of manufacturing its cylindrical panels enmasse was achieved through Fab 1. In late 2005 and early 2006, Solyndra leased space and acquired manufacturingequipment. By July 2006, Solyndra commenced production of “mini-panels” utilizing thecompany’s thin film solar technology. Although these mini-panels were only 9% of a full sizedpanel and were capable of producing only 10-14 watts of power, the mini-panels allowed forpanel performance to be measured in actual tests. These tests included, but were not limited to,photovoltaic performance, wind resistance, mechanical strength, and sensitivity to roofreflectivity. By October 2006, Solyndra was producing ten mini panels a week pendingcompletion of the Fab 1 facility which would allow for the production of full-size modules. The DOE pre-application filed in December 2006 contemplated three phases to the Fab 1manufacturing facility. The first phase was an initial mini-production line capable of 12 MW ofannual production which was to be completed in 2007. The second phase contemplated anadditional 60 MW production line which would be completed in 2008. The final phase would beanother 60 MW production line which would be completed in the first quarter of 2009. Solyndra’s DOE pre-application identified two properties under lease for purposes of thecompany’s manufacturing operations. As stated in the DOE pre-application: “First, Solyndra has leased an 183,000 square foot hard disk drive manufacturing facility that will be reconfigured for solar panel manufacturing. Within this building, both a Mini Production Line capable of producing up to 12 megawatts per year of solar panels and the full scale 60 megawatt line will be constructed, installed and commissioned…” “The facility is ideal for Solyndra’s needs, as it is already equipped with all of the key utilities required to support the company’s manufacturing equipment. This includes 15 megawatts of electrical service, 1000 gallons per minute of process cooling water, 750 gallons per minute of de-ionized water and over 1000 gallons per minute of waste water treatment. Furthermore, the building is already zoned and rated for Solyndra’s 57
  • 63. future manufacturing operations. The presence of these services and characteristics reduces both the estimated building preparation costs and duration of the project build-out and, combined with ICOM’s [general construction contractor for Fab 1] familiarity with the facility, is expected to both reduce the overall capital costs and increase the speed of construction of the overall project.” On February 7, 2007, Solyndra executed the original lease for the Fab 1 facilities locatedat 47700 Kato Road and 1055 Page Road in Fremont, California. The company initiallyintended the building at 47700 Kato Road to house Fab 1’s front-end manufacturing equipmentand the building at 1055 Page Road to serve as the location of the processing equipment for Fab1’s back-end facilities and company administrative offices. However, during April 2008,Solyndra signed a new lease for a facility at 1210 California Circle in Fremont, California whichwas intended to house the back-end manufacturing for Fab 1. With adequate funding from salesof preferred stock, Solyndra was on track to complete Fab 1 and to commence commercialshipments. Solyndra anticipated construction costs of approximately $130.8 million for completionof the mini production line and the first 60 MW production line. Subsequent to the DOE pre-application in December 2006, Solyndra was engaged in the process of constructing the miniproduction line and both phases of 60 MW lines for Fab 1. By the end of fiscal year 2007(December 29, 2007), Solyndra had acquired a total of $113.9 million in property and equipmentfunded entirely from the proceeds of preferred stock. By the end of fiscal year 2008 (January 3,2009), Solyndra had acquired $247.4 million in property and equipment. As noted above, theconstruction plans for Fab 1 required various modifications. The first prototypes of the Solyndra solar panels, referred to as the “100 Series” wereproduced at Fab 1 in September 2007. By January 2008, samples were ready for the certificationprocess. Certification was finalized in April 2008 and shipments to various customer sitesbegan. Initial shipments were in the 135 to 150 Wp range. Commercial shipments by Solyndraand initial revenues began in July 2008. By the end of the fiscal year 2008, total sales were justover $6 million. As production in Fab 1 continued to ramp up, revenues increased to $100.5million for fiscal year 2009. 58
  • 64. During fiscal year 2010 production continued at Fab 1 and revenues increased to $141.9million. However, by the fall of 2010, Solyndra’s financial condition had worsened and withFab 2 Phase I facility nearing completion, the company decided to close Fab 1 and consolidatecertain equipment into Fab 2 Phase I, which was to be accomplished at the end of 2010 or thefirst quarter of 2011. During the course of Fab 1’s operations from 2008 through its closure in December 2010,Fab 1 produced approximately 99.6 MW and sold approximately 89.1 MW of solar panels. Totalrevenues generated by Fab 1 were approximately $248.4 million. Solyndra’s net operatinglosses from July 2008 through December 2010, exceeded $500 million. IX. CUSTOMER AGREEMENTSA. Overview of Customer Agreements Between 2007 and 2009, Solyndra entered into the Customer Agreements with thefollowing nine (9) prospective customers: (1) Phoenix Solar AG (“Phoenix Solar”), (2) SolarPower Inc. (“Solar Power”), (3) GeckoLogic GmbH (“GeckoLogic”), (4) Carlisle SyntecIncorporated (“Carlisle Syntec”), (5) SunConnex B.V. (“SunConnex”),(6) EBITSCHenergietechnik GmbH (“EBITSCH”), (7) USE Umwelt Sonne Energie GmbH(“USE Umwelt”), (8) Alwitra GmbH & Co. Klaus Göbel (“Alwitra”), and (9) SunSystems S.p.A.(“SunSystems”). The terms of the Customer Agreements vary. Many of these agreements were negotiatedduring a period of high demand and generally, each of the Customer Agreements contemplatedthat Solyndra would deliver certain product to the customer over a defined timetable and, incertain instances, at a specified price. The firmness of the contractual commitment to purchaseproduct in any particular period as well as the penalties for failure to purchase product, if any,varied widely between agreements and from actual deliveries of product by Solyndra tocustomers. Revenues generated from such customers were significantly below the maximum 59
  • 65. possible amounts projected in the Customer Agreements. A summary of each of the CustomerAgreements is set forth below. 108 In early December 2008, Solyndra provided four (4) of the Customer Agreements to theDOE as well as the summary information included in Table #3 below. The foregoinginformation was provided as part of Solyndra’s loan application process. The four CustomerAgreements produced to the DOE consisted of those related to Phoenix Solar, Solar Power,GeckoLogic, and Carlisle Syntec. Table #3 2008 2009 2010 2011 2012 Total Annual Revenue, $M $3.4 $111.7 $251.8 $453.7 $625.8 Cumulative Revenue, $M $3.4 $115.1 $366.9 $820.6 $1,446.4 Total Annual Volume, MWp 0.9 32.0 78.0 154.0 233.0 Total Cumulative Volume, MWp 0.9 32.9 110.9 264.9 497.9 At the time the Customer Agreements were executed, there was a shortage of solar panelsupply and it was important for customers to obtain a supply commitment. However, from 2009on, as the effects of the global financial crisis took hold and global production capacityincreased, 109 the market shifted and customers moved away from long term supply agreementsand instead began to place orders on a purchase order basis as needed. Solyndra noted this trendin the “Risk Factor” section of its S-1, filed with the SEC. 110B. Key Terms The following key terms are utilized in certain of the Customer Agreements: Minimum Contracted Volume (“MCV”): This is the specific number of MW of PVpanels that Solyndra committed to manufacture in each year of the agreement and, with someexceptions, each customer committed to purchase in the same calendar year.108 Please refer to Appendix E for copies of the Customer Agreements.109 See Appendix C.9, “First Solar Guidance” dated December 14, 2011 prepared by First Solar, Inc. at pg. 5.110 “[Solyndra’s] existing framework agreements set forth volume and price expectations over a number of years, butthey generally do not result in a firm purchase commitment until a purchase order is issued.” See Appendix F.2,Amended Solyndra S-1, pg. 20. 60
  • 66. Additional Contracted Volume (“ACV”): This is the maximum number of additionalMW (above the Minimum Contracted Volume) that Solyndra could offer to a customer during acalendar year and that the customer, in some instances, had the option to purchase and, in otherinstances, was obligated to purchase. Optional Volume (“OV”): This is the mutually agreed number of MW above the sumtotal of Minimum Contracted Volume and Additional Contracted Volume that Solyndra and thecustomer could negotiate to add to the total annual volume. Take-or-Pay: A customer’s failure to order product, in certain instances, did not reducethe customer’s obligation to pay for the Minimum Contracted Volume. If the customer failed toorder the Minimum Contracted Volume in any calendar year, and failed to remedy such defaultwithin a certain time period following notice, Solyndra had the right to demand, and thecustomer was obligated to pay, the balance of the price for that year’s Minimum ContractedVolume. Most of the Customer Agreements did not contain Take-or-Pay Provisions.C. Customer Agreements 1. Phoenix Solar AG Phoenix Solar, headquartered in Sulzemoos, Germany, entered into a CustomerAgreement with Solyndra dated July 24, 2008. The term of the agreement extended throughDecember 31, 2012. The agreement called for a total MCV of 216 MW or approximately $522million111 in sales over the term of the agreement. In the event that Phoenix Solar failed to orderquantities of product in projected amounts, the agreement provided no penalty for the calendaryear 2008, a penalty of 5% of the deficit volume in calendar year 2009, and a penalty of 10% ofthe deficit volume in calendar years 2010 to 2012. To the extent Solyndra failed to deliverquantities of product in projected amounts, Solyndra was required to pay penalties to PhoenixSolar. The agreement also was subject to renegotiation in the events of substantial marketchanges. On September 7, 2009, Phoenix Solar sent a notice of termination to Solyndra based onthe failure to have executed certain required schedules to the agreement. On October 7, 2009,111 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 61
  • 67. Phoenix Solar and Solyndra entered into an amended framework agreement that superseded theoriginal agreement. Under the terms of the amended agreement, the parties would work in goodfaith to agree on a volume for each quarter six weeks in advance and Phoenix Solar was onlyobligated to purchase and Solyndra was only obligated to deliver the quantity of product that wasagreed to for that particular quarter. 112 The projected contracted volumes as outlined under the original agreement are set forthbelow: Table #4 Phoenix Solar, Inc. Price Total Pur. Vol. Year (per Wp) MCV (MW) ACV (MW) OV (MW) (€ in millions) 2008 € 2.75 0.40 - - € 1.10 2009 2.57 10.00 - - 25.71 2010 2.15 28.00 - - 60.20 2011 1.97 68.00 - - 133.77 2012 1.79 110.00 - - 196.92 Total 216.00 - - € 417.71 In US Dollars $ 522.13 Had Phoenix Solar purchased all the volume under its original agreement with Solyndra,it would have purchased approximately 78 MW for a total amount of $203 million113 from 2008through August 2011. As it turned out, Phoenix Solar purchased 4.5 MW in the amount of $12.2million114 from 2008 through 2011. 2. Solar Power, Inc. Solar Power, an entity headquartered in Roseville, CA entered into a CustomerAgreement with Solyndra dated February 19, 2007. The agreement was amended on July 24,112 “To the extent that the Parties agree on volumes and pricing [for the quarter], the Buyer shall then be obligated topurchase the agreed volume of Panels from Manufacturer in quarterly numbers defined as “Contractual Volume” atthe agreed specified prices for the quarter and manufacturer shall be obliged to deliver based on the agreed deliverytiming requirements. The resulting agreed volumes and prices will be fixed in a new Appendix B (“Price/VolumeTable”). In case such negotiation fails, both Parties are freed of any sales or purchase obligations, but should still tryto find a consensus for the quarter in questions nevertheless.” See Appendix E.1, Customer Agreement, October 7,2009, Section 2.2.1, p. 3.113 Id.114 The sale amount includes product/shipping costs and other miscellaneous adjustments. 62
  • 68. 2008 and June 8, 2009. The agreement as amended provided for a term through December 31,2012. The original agreement contemplated a purchase of approximately 10 MW, with theoption to purchase an additional 6 MW, in years 2008 and 2009. The first amended agreementcalled for a total MCV of 101 MW or approximately $327 million in sales from 2008 through2012. Approximately 28.25 additional MW was included as Optional Volume. The second amendment to the agreement gave Solar Power the option to make purchasesfrom Solyndra and eliminated the contractual obligation to purchase any particular amount ofproduct. Specifically, the definition of MCV was revised as follows: “Buyer may purchase, butis not obligated to purchase, this volume during the same calendar year.” Similarly, thedefinition of ACV was revised as follows: “If Additional Contracted Volume is offered toBUYER during the calendar year, BUYER may purchase additional panels.” The second amendment to the agreement also revised the description of Price to add thefollowing: “In the event there has been a substantial and unexpected change in the photovoltaicmarket, the Parties will negotiate in good faith for amendments to the Price and/or ContractedVolumes. Relevant market changes might be caused for example by a repeal or expiration ofkey national photovoltaic tariffs or incentives, or by a significant sustained change in the marketor competitive landscape.” Since there was no obligation to purchase any contractual amount,there were no penalties in the event Solar Power elected not to purchase the volumes set forth inthe agreement. Based on the second amendment, the projected volumes that Solar Power had the optionto purchase under the agreement are set forth below: 63
  • 69. Table #5 Solar Power, Inc. Price Total Pur. Vol. Year (per Wp) MCV (MW) ACV (MW) OV (MW) (€ in millions) 2008 $ 3.85 0.75 - 0.25 $ 2.89 2009 3.70 10.00 - 4.00 37.00 2010 3.50 20.00 - 5.00 70.00 2011 3.25 30.00 - 10.00 97.50 2012 3.00 40.00 - 15.00 120.00 Total 101.00 - 34.00 $ 327.39 Under the second amendment, Solar Power had the right to purchase up to approximately50.1 MW for a total amount of $174 million from 2008 through August 2011. As it turned out,Solar Power purchased 0.6 MW in the amount of $2.2 million115 from 2008 through 2011. 3. GeckoLogic GmbH GeckoLogic, headquartered in Wetzlar, Germany, entered into a Customer Agreementwith Solyndra dated September 15, 2008. The term of the agreement covered a period of five (5)years through September 15, 2013. The agreement called for a total MCV of 81 MW orapproximately $227 million 116 in sales over the term of the agreement, plus ACV of 20 MW thatGeckoLogic was obligated to purchase if offered by Solyndra. GeckoLogic sent a termination letter to Solyndra on December 9, 2009 based on apurported failure to deliver required quantities and quality issues. Solyndra attempted tonegotiate an agreement with GeckoLogic eliminating volume commitments, but in March 2010,GeckoLogic withdrew from such negotiations. The agreement with GeckoLogic contained a Take-or-Pay provision that requiredGeckoLogic to pay Solyndra for the balance of any contracted volume not purchased byGeckoLogic in any calendar year covered by the agreement. Solyndra disputes the terminationof the GeckoLogic contract, and as a result, Solyndra has scheduled a potential breach ofcontract claim against GeckoLogic for the breach of the Take-or-Pay provision. The projected contracted volumes under the agreement are set forth below:115 The sale amount includes product/shipping costs and other miscellaneous adjustments.116 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 64
  • 70. Table #6 GeckoLogic, GmbH Price Total Pur. Vol. Year (per Wp) MCV (MW) ACV (MW) OV (MW) (€ in millions) 2008 € 2.99 0.20 0.40 - € 0.60 2009 2.72 5.00 2.00 - 13.60 2010 2.48 15.00 4.00 - 37.20 2011 2.25 25.00 6.00 - 56.25 2012 2.05 36.00 8.00 - 73.80 Total 81.00 20.00 - € 181.45 In US Dollars $ 226.81 In summary, GeckoLogic was to purchase approximately 36.7 MW for a total amount of$111 million117 from 2008 through August 2011. As it turned out, GeckoLogic purchased 1.8MW in the amount of $6.1 million118 from 2008 through December 2009. 4. Carlisle Syntec, Incorporated Carlisle Syntec, an entity headquartered in Carlisle, Pennsylvania, entered into aCustomer Agreement with Solyndra dated November 11, 2008. The term of the agreementcovered a period of five (5) years through November 11, 2013. The agreement called for a totalMCV of up to 97 MW or approximately $309 million in sales over the term of the agreement,plus ACV of up to 3.5 MW, provided that the agreement stated that the MCV was “firm” onlyfor year 2009 and that the MCV for year 2010 and thereafter was subject to further negotiationbetween the parties. In the event that the parties failed to offer or purchase quantities of productin projected amounts for calendar year 2009, the agreement provided a penalty of 10% of thedeficit volume for that year. Subsequent to year 2009, Solyndra and Carlisle Syntec were toconfer at least 60 days prior to calendar year end to determine MCV and any penalties associatedwith failure to offer or purchase such MCV. The projected volumes (including the volumeswhich were not firm) under the agreement are set forth below:117 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.118 The sale amount includes product/shipping costs and other miscellaneous adjustments. 65
  • 71. Table #7 Carlisle Syntec, Inc. Price Total Pur. Vol. Year (per Wp) MCV (MW) ACV (MW) OV (MW) (€ in millions) 2008 $ 3.80 0.06 - - $ 0.23 2009 3.69 3.50 3.50 - 12.92 2010 3.50 15.00 - - 52.50 * 2011 3.25 31.00 - - 100.75 * 2012 3.04 47.00 - - 142.88 * Total 96.60 3.50 - $ 309.27 * Minimum contract volume not firm. Starting with year 2010, at least 60 days prior to the start of each calendar year, Solyndra and Carlisle Syntec were to determine Minimum Contract Volume for the following year. Carlisle Syntec was contractually committed to purchase approximately 4.1MW during2008 and 2009 for a total amount of $13 million and had projected additional purchase volumesof up to approximately 35MW through August 2011 for a total amount of $119 million from2010 through August 2011 based on the assumption that the volume projections for 2010 and2011 were reduced to firm commitments. As it turned out, Carlisle Syntec purchased 7.1 MW inthe amount of $21.1 million 119 from 2008 through August 2011. 5. SunConnex B.V. SunConnex, located in Amsterdam, Netherlands, entered into a Customer Agreementwith Solyndra dated April 23, 2009. The term of the agreement covered a period of five (5)years through April 23, 2014. The agreement called for a total MCV of 34 MW orapproximately $90 million 120 in sales over the term of the agreement, plus ACV of 33 MW thatSunConnex was not obligated to purchase if offered by Solyndra. The agreement withSunConnex contained a Take-or-Pay provision that required SunConnex to pay Solyndra for thebalance of any contracted volume not purchased by SunConnex in calendar year 2009. For eachsubsequent year after 2009, Solyndra and SunConnex were to confer in good faith by meeting sixmonths in advance of the subsequent calendar year regarding MCV and pricing based onmaterial market changes. Unless the parties met and agreed in writing to a revised MCV andpricing five months in advance of each subsequent calendar year, the volume and pricing set119 The sale amount includes product/shipping costs and other miscellaneous adjustments.120 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 66
  • 72. forth in the original agreement became firm. Solyndra never agreed in writing to a revisedMCV, and as a result, Solyndra has scheduled a potential breach of contract claim againstSunConnex for the breach of the Take-or-Pay provision. The projected contracted volumes under the agreement are set forth below: Table #8 SunConnex, BV Price Total Pur. Vol. Year (per Wp) MCV (MW) ACV (MW) OV (MW) (€ in millions) 2009 € 2.60 1.00 1.00 - € 2.60 2010 2.43 3.00 2.00 - 7.29 2011 2.27 5.00 5.00 - 11.35 2012 2.12 10.00 10.00 - 21.20 2013 1.98 15.00 15.00 - 29.70 Total 34.00 33.00 - € 72.14 In US Dollars $ 90.18 In summary, SunConnex was to purchase approximately 7.3 MW for a total amount of$21.7 million121 from 2009 through August 2011. As it turned out, SunConnex purchased 3.7MW in the amount of $11.1 million122 from 2009 through August 2011. 6. EBITSCHenergietechnik GmbH EBITSCH, an entity is headquartered in Zapendorf, Germany, entered into a CustomerAgreement with Solyndra dated April 17, 2009. The term of the agreement covered a period offive (5) years through April 17, 2014. The agreement called for a total MCV of 25 MW orapproximately $62 million 123 in sales, over the term of the agreement, plus ACV of 17 MW thatEBITSCH had the option to purchase if offered by Solyndra. The agreement with EBITSCHcontained a Take-or-Pay provision that required EBITSCH to pay Solyndra for the balance ofany contracted volume not purchased by EBITSCH in any calendar year covered by theagreement. As a result, Solyndra has scheduled a potential breach of contract claim againstEBITSCH for the breach of the Take-or-Pay provision.121 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.122 The sale amount includes product/shipping costs and other miscellaneous adjustments.123 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 67
  • 73. The projected contracted volumes under the agreement are set forth below: Table #9 EBITSCH, GmbH Price Total Pur. Vol. Year (per Wp) MCV (MW) ACV (MW) OV (MW) (€ in millions) 2009 € 2.60 0.50 1.00 - € 1.30 2010 2.39 2.00 2.00 - 4.78 2011 2.20 5.00 3.00 - 11.00 2012 2.02 7.00 5.00 - 14.14 2013 1.86 10.00 6.00 - 18.60 Total 25.00 17.00 - € 49.82 In US Dollars $ 62.28 To summarize, EBITSCH was to purchase approximately 5.8 MW for a total amount of$16.7 million124 from 2009 through August 2011. As it turned out, EBITSCH purchased 1.3MW in the amount of $4.1 million125 from 2009 through August 2011. 7. USE Umwelt Sonne Energie GmbH USE Umwelt, an entity located in Holzgerlingen, Germany, entered into a CustomerAgreement with Solyndra dated July 2, 2009. The term of the agreement covered a period offive (5) years through July 2, 2014. The agreement called for a total MCV of 66 MW orapproximately $167 million 126 in sales over the term of the agreement, plus ACV of 18.1 MWthat USE Umwelt was obligated to purchase if offered by Solyndra. There were no specificpenalty provisions in the agreement in the event USE Umwelt failed to make the purchasescontemplated there under, but the obligation to purchase was a firm commitment unless theparties met and agreed in writing to a revised MCV. Solyndra never agreed in writing to arevised MCV, and as a result, Solyndra has scheduled a potential breach of contract claimagainst USE Umwelt for the breach of its obligation to purchase the agreed upon MCV. The projected contracted volumes under the agreement are set forth below:124 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.125 The sale amount includes product/shipping costs and other miscellaneous adjustments.126 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 68
  • 74. Table #10 USE Umwelt Price Total Pur. Vol. Year (per Wp) MCV (MW) ACV (MW) OV (MW) (€ in millions) 2009 € 2.43 3.40 1.10 - € 8.26 2010 2.25 7.00 3.00 - 15.75 2011 2.09 12.00 4.00 - 25.08 2012 1.96 19.00 5.00 - 37.24 2013 1.89 25.00 5.00 - 47.25 Total 66.40 18.10 - € 133.58 In US Dollars $ 166.98 USE Umwelt was to purchase approximately 18.3 MW for a total amount of $50.7million127 from 2009 through August 2011. As it turned out, USE Umwelt purchased 9.7 MW inthe amount of $29.2 million 128 from 2009 through August 2011. 8. Alwitra, GmbH Alwitra, an entity headquartered in Trier, Germany, entered into a Customer Agreementwith Solyndra dated November 4, 2009. The term of the Agreement extended through December31, 2010. The agreement called for a total committed volume of 4 MW or approximately $10million129 in sales over the term of the agreement. The parties also set out additional plannedvolume of 17 MW which was subject to further negotiation and agreement on price. In the eventthat the parties failed to offer or purchase quantities of product in projected amounts for 2009and any subsequent calendar year in which the parties agreed on a firm volume and price, theagreement provided a penalty of 5% of the deficit volume for that year. The projected contracted volumes under the agreement are set forth below:127 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement128 The sale amount includes product/shipping costs and other miscellaneous adjustments.129 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 69
  • 75. Table #11 Alwitra, GmbH Price Total Pur. Vol. Year (per Wp) MCV (MW) ACV (MW) OV (MW) (€ in millions) 2009 € 2.04 1.00 - - € 2.04 2010 Q1 2.04 3.00 - - 6.12 2010 Q2 – Q4* 2.04 17.00 - - 34.68 Total 21.00 - - € 42.84 In US Dollars $ 53.55 *Includes planned volume that is subject to further negotiation on price and volume. Price and volume included herein are for illustrative purposes only. In summary, Alwitra committed to purchase 4 MW for a total amount of $10 million 130 inthe fourth quarter of 2009 and first quarter of 2010. In addition, Alwitra had planned volume,subject to further negotiation, of 17 MW in the remainder of 2010. As it turned out, Alwitrapurchased 13.7 MW in the amount of $35.8 million 131 from 2009 through August 2011. 9. SunSystem, S.p.A. SunSystems, based in Milan, Italy, entered into a Customer Agreement with Solyndradated on October 26, 2010. The term of the agreement covered a period of five (5) years throughOctober 26, 2015. The agreement called for a total MCV of 19 MW or approximately $44million132 in sales over the term of the agreement, plus ACV of 19 MW that SunSystems had theoption to purchase if offered by Solyndra, provided that the MCV and pricing for years 2011through 2013 were subject to negotiation at a later date. The agreement required SunSystems topay Solyndra for the balance of any contracted volume not purchased by SunConnex in calendaryear 2010. For each subsequent year after 2010, Solyndra and SunSystems were to confer ingood faith by meeting six months in advance of the subsequent calendar year regarding MCVand pricing based on material market changes. Unless the parties met and agreed in writing to arevised MCV and pricing five months in advance of each subsequent calendar year, the volumeand pricing set forth in the original agreement became firm. Solyndra did not agree in writing toany revised MCV and as a result, Solyndra has scheduled a potential breach of contract claimagainst SunSystems for the breach of its commitment to purchase the MCV.130 Id.131 The sale amount includes product/shipping costs and other miscellaneous adjustments.132 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement. 70
  • 76. The projected contracted volumes under the agreement are set forth below: Table #12 SunSystem, SpA Price Total Pur. Vol. Year (per Wp) MCV (MW) ACV (MW) OV (MW) (€ in millions) 2010 € 2.15 2.00 3.00 - € 4.30 2011* 2.02 4.00 3.50 - 8.08 2012* 1.89 5.00 5.00 - 9.45 2013* 1.77 7.50 7.50 - 13.28 2014 TBD TBD TBD - TBD 2015 TBD TBD TBD - TBD Total 19.00 19.00 - € 35.11 In US Dollars $ 43.88 * Minimum Contract Volume subject to possible additional negotiation. SunSystem was to purchase approximately 4.6 MW for a total amount of $12 million 133from 2010 through August 2011. As it turned out, SunSystems purchased 2.9 MW in the amountof $8.1 million 134 from 2009 through August 2011. During the period of 2008 through August 2011, Solyndra’s nine (9) CustomerAgreements indicate projected and possible sales of up to approximately 266 MW totaling $791million assuming that Solyndra was able to reduce volume expectations to firm commitmentswith all of its customers. Solyndra actually sold to these nine (9) customers 45.4 MW totaling$129.9 million during 2008 through August 2011. See Table #13 below:133 Assumes an exchange rate of $1.25 from Euro to US Dollar throughout the term of the agreement.134 The sale amount includes product/shipping costs and other miscellaneous adjustments. 71
  • 77. Table #13 ($’s in thousands) Name MW Sold Amount Solar Power Inc. 0.64 $ 2,220 Phoenix Solar AG 4.54 12,191 GeckoLogic Group AG 1.78 6,067 Carlisle Syntec, Inc. 7.14 21,098 Sunconnex BV 3.69 11,161 EBITSCH GmbH 1.29 4,075 USE GmbH 9.68 29,203 Alwitra GmbH 13.74 35,788 Sun System SpA 2.94 8,123 Total 45.44 $129,926 The four (4) Customer Agreements that were sent to the DOE in early December 2008,indicate projected and committed sales of up to approximately 210 MW totaling $636 million tobe sold during 2008 through August 2011 assuming that Solyndra was able to reduce all volumeexpectations to firm commitments. Solyndra actually sold to these four (4) customersapproximately 14.1 MW in the amount of $41.6 million during 2008 through August 2011. SeeTable #14 below: Table #14 ($’s in thousands) Name MW Sold Amount Solar Power Inc. 0.64 $ 2,220 Phoenix Solar AG 4.54 12,191 GeckoLogic Group AG 1.78 6,067 Carlisle Syntec, Inc. 7.14 21,098 Total 14.10 $ 41,576 X. $535 MILLION DOE LOAN GUARANTEE Since its inception in 2005, Solyndra was an early stage development company thatpursued available avenues to obtain capital to fund the development of its unique thin-film 72
  • 78. cylindrical solar panel technology. These efforts included individual founder loans, privateequity investments, traditional financing, government-guaranteed loans, and an IPO. In 2006, the company learned about a new federal program that allowed the DOE toprovide federally-backed loan guarantees to emerging alternative energy companies. Theprogram was dedicated to the public policy objectives of pursuing initiatives for energyindependence and clean energy. Solyndra embarked on an effort to obtain funding from theDOE under this program to support the company’s vision to commercially scale its solar paneltechnology. The process began in December 2006 with an initial application filed with the DOEand ultimately resulted in the availability of the DOE Loan Guarantee. 135 Solyndra ultimatelywas permitted to borrow $528 million under the DOE Loan Guarantee. This portion of the CRO report, together with the exhibits and appendices hereto,provides the underlying facts and details surrounding the DOE Loan Guarantee in the followingtopic areas: • Brief History of the DOE Loan Guarantee Program • DOE Loan Guarantee Process • $535 Million DOE Loan Guarantee • Loan Funding and Reporting Requirements • Fab 2 Construction and Loan Funding • Second DOE Loan Guarantee Application • February 2011 Debt RestructuringA. Brief History of the DOE Loan Guarantee Program A brief history of the LGP is necessary to understand the program and the substantialprocedural, financial, and time requirements that must be met before a loan guarantee isapproved and awarded.135 The FFB is a government corporation, created by Congress in 1973 under the general supervision of theTreasury. The FFB was established to centralize and reduce the cost of federal borrowing and federally-assistedborrowing from the public. 73
  • 79. 1. Title XVII of the Energy Policy Act of 2005 On July 29, 2005, Congress passed the EPAct2005 which was signed into law byPresident Bush on August 8, 2005. Under the EPAct2005, the DOE was authorized to issue andadminister a loan guarantee program to provide federal financial support to alternative energycompanies in an effort to spur commercial investment for “clean” energy projects. The EPAct2005 authorizes the DOE to issue loan guarantees for projects that “avoid,reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases” and “employnew or significantly improved technologies as compared to commercial technologies in servicein the United States at the time of the guarantee.” 136 Section 1703(b) of the EPAct2005 definesthe various general categories of projects eligible for loan guarantees, including: (a) renewableenergy systems, (b) advanced fossil energy technology, (c) Hydrogen fuel cell technologies forresidential, industrial, or transportation application, (d) advanced nuclear energy facilities,(e) carbon capture and sequestration practices and technologies, (f) efficient electricalgeneration, transmission, and distribution technologies, (g) efficient end-use energytechnologies, (h) production facilities for fuel efficient vehicles, (i) pollution control equipment,and (j) refineries, meaning facilities at which crude oil is refined into gasoline. 137 The LGPinitially authorized by the EPAct2005 is commonly referred to as the 1703 program (“1703Program”). The LGP involved loans made by the FFB or through private lenders that are backed bythe full faith and credit of the United States allowing the borrower to obtain debt financing atclose to the U.S. Government’s much lower cost of capital and on more favorable terms. Sincethese loans are not risk free loans, the government assumes the risk of default if the borrower isunable to repay the loan. To take into account the risk of default, Section 1702 of theEPAct2005 required credit subsidy costs 138 to be calculated and paid for each loan guarantee.Credit subsidy costs would be paid by the borrower (the “borrower pays” option) or by an136 See Appendix G.1, EPAct2005, Section 1703(a).137 See Appendix G.1, EPAct2005, Section 1703(b).138 Section 502(5)(C) of the Federal Credit Report Act of 1990 (“FCRA”) defines credit subsidy costs as the netpresent value (at the time the guaranteed loan is disbursed) of the estimated payments by the federal government tocover defaults and delinquencies, interest subsidies, or other payments, and payments to the federal governmentincluding origination and other fees, penalties and recoveries. In essence, the credit subsidy cost is the estimatedliability to the federal government if the borrower does not perform on its loan or obligation. 74
  • 80. appropriation from the federal government. In 2007, Congress instructed the DOE to proceedunder the borrower pays option requiring the borrower to pay credit subsidy costs. 139 The 1703Program was contemplated to be a “self pay” program, meaning the applicant would pay thecredit subsidy costs associated with loans under the LGP. 2. 2006 Advanced Energy Initiative In February 2006, President Bush outlined his Advanced Energy Initiative (“AEI”) to theAmerican public. 140 The AEI focused on taking steps to increase the supply of energy, includingalternative and renewable sources, and to address the country’s energy challenges by attemptingto reduce its dependence on foreign sources of energy. The AEI indicated that President Bushand his administration had spent nearly $10 billion since 2001 to develop cleaner, cheaper, andmore reliable alternative energy sources. To build on these efforts, the AEI provided for a 22-percent increase in funding for clean-energy technology research at the DOE. The goal of theseefforts was to change the way Americans fuel their vehicles by improving efficiency andexpanding alternative fuels, and the way they power their homes and businesses by developingclean coal, advanced nuclear power, and renewable sources such as solar and wind. 3. The American Recovery and Reinvestment Act of 2009 In February 2009, President Obama signed into law the ARRA. A component of theARRA amended the EPAct2005 by adding Section 1705 which temporarily expanded the loanguarantee program in an effort to stimulate the country’s clean energy sector by supportingprojects that faced difficulties in securing financing as a result of tight credit markets created bythe 2008 financial crisis. 141 This 1705 Program authorized loan guarantees for certain renewableenergy systems, electric power transmission systems, and leading biofuels projects thatcommenced construction by September 30, 2011. Another significant amendment to theEPAct2005 related to the applicants’ required payment of credit subsidy costs. The 1705139 See Appendix G.10, United States Government Accountability Office (“GAO”) Report to CongressionalCommittees, Department of Energy – New Loan Guarantee Program Should Complete Activities Necessary forEffective and Accountable Program Management, July 2008, Page 2.140 See Appendix G.2, 2006 Advanced Energy Initiative of George W. Bush.141 See Appendix G.17, Written Statement for the Record of Jonathan Silver, Executive Director of the LoanPrograms Office, U.S. Department of Energy, United States Senate Committee on Energy & Natural Resources,September 23, 2010. 75
  • 81. Program no longer required applicants to pay the credit subsidy costs associated with the loanguarantees that were previously required under the 1703 Program. The credit subsidy costs werepaid by the DOE using funds appropriated by Congress pursuant to ARRA. 4. Department of Energy Loan Guarantee Office The DOE began to create and develop the new loan guarantee program under Secretaryof Energy Samuel W. Bodman (“Secretary Bodman”) after EPAct2005 was signed into law in2005. Initially, a small office was established utilizing three employees from other DOEorganizations under the Chief Financial Officer of the DOE. 142 The DOE issued the firstsolicitation inviting interested parties to submit a pre-application for federal loan guaranteesrelating to projects that employ innovative technologies in August 2006. 143 The solicitationperiod for pre-applications closed in December 2006. The DOE received pre-applications for143 projects, including Solyndra’s. In February 2007, Congress initially appropriated funds of $7 million from borrower feesto fund the operation of the LGP and provided initial loan guarantee authority for up to $4 billionof guaranteed loans. 144 The Credit Review Board (“CRB”) was established in March 2007 andchaired by the Deputy Secretary of Energy. The CRB was created to approve major policydecisions of the LGPO, review LGPO recommendations to the Secretary of Energy regarding theissuance of loan guarantees for specific projects, and to advise the Secretary of Energy on loanguarantee matters. In April 2007, the LGPO was funded, CRB met for the first time, and the technicalreview of the pre-application began. The DOE issued a Notice of Proposed Rulemaking for theLGP in May 2007 to begin the rule making process and allow for public comment on itsproposed regulations. In June 2007, the DOE held a meeting allowing the public to comment onits proposed regulations for the LGP and began the financial review of the pre-applicationssubmitted. 145 The DOE announced that it named David Frantz (“Frantz”) as Director of the LGP142 See Appendix G.5, United States Government Accountability Office, April 20, 2007 Letter to House ofRepresentatives Subcommittee on Energy and Water Development (B-308715).143 See Appendix G.3, DOE Loan Guarantee Solicitation Announcement (DE-PS01-06LG00001), August 8, 2006.144 See Appendix G.4, DOE News Release, “Loan Guarantee Provisions from Public Law No. 110-5, the RevisedContinuing Appropriations Resolution”, February 26, 2007.145 See Appendix G.6, DOE News Release, “DOE Reports Progress on Loan Guarantee Program”, June 20, 2007. 76
  • 82. to manage the LGPO, and that Frantz would report directly to the DOE’s Chief FinancialOfficer. 146 The LGP also conducted technical and financial review meetings to develop finalrecommendations to the CRB for the pre-applications received. 147 In October 2007, the DOE’s final rules for the LGP were issued 148 and 16 of the initial143 pre-applicants were selected and invited to submit full applications to the LGPO for furtherconsideration. 149 As a result of the invitations sent, the DOE began to receive and analyze fullapplications in April 2008. 150 Solyndra submitted its Full Application to the LGPO in partsbeginning in May 2008 through August 2008 with an initial expectation of closing thetransaction in September 2008. In January 2009, Dr. Steven Chu was appointed as Secretary of Energy (“Secretary Chu”)and replaced Secretary Bodman, a month prior to the enactment of ARRA. As of January 2009,the LGPO had 16 federal employees. 151 Solyndra received its conditional commitment for its DOE Loan Guarantee in March2009 152 and was the first loan guarantee closed by the DOE in September 2009. 153 In November2009, the DOE announced Silver as the new Executive Director of the LGP to oversee the LGPand report directly to Secretary Chu. Silver was responsible for staffing the program, leadingorigination, analysis, and negotiations of the loan guarantees, and managing the full range of theDOE’s alternative energy investments. 154 In July 2010, Nwachuku joined the LGPO as theDirector of Portfolio Management responsible for monitoring and risk management for the DOEloan and guarantee portfolio. As of September 23, 2010, the LGPO had over 80 federal146 See Appendix G.7, DOE News Release, “Energy Department Names Director of its Loan Guarantee Office”,August 3, 2007.147 See Appendix G.10, GAO Report to Congressional Committees, “Department of Energy – New Loan GuaranteeProgram Should Complete Activities Necessary for Effective and Accountable Program Management”, July 2008.148 See Appendix G.8, Department of Energy 10 CFR Part 609, Loan Guarantees for Projects that EmployInnovative Technologies; Final Rule, October 23, 2007.149 See Footnote 147.150 Id.151 See Footnote 141.152 See Appendix G.13, DOE News Release, “Obama Administration Offers $535 Million Loan Guarantee toSolyndra, Inc.”, March 20, 2009.153 See Appendix G.14, DOE News Release, “Vice President Biden Announces Finalized $535 Million LoanGuarantee for Solyndra”, September 4, 2009.154 See Appendix G.15, DOE News Release, “DOE Announces New Executive Director of Loan GuaranteeProgram”, November 10, 2009. 77
  • 83. employees supported by a number of subject-matter experts engaged on a contract basis. 155According to the LGPO website, the LPG has guaranteed over $35 billion of loans as of January31, 2012. Since the LGP was established, the LGP was audited by the GAO and the DOE Office ofInspector General (“IG”) on several occasions, which identified various issues relating to theLGP. As a result, delays were incurred with the processing of the existing loan guaranteeapplications, including Solyndra’s application, while the LGPO addressed issues identified.These reports identified a number of positive and negative findings of the LPG and aresummarized below: • IG Special Report (September 2007) 156 – This report concluded that there were a number of steps that should have been taken to foster the success of the LGP, including finalizing a staff plan, developing risk mitigation strategies, implementing and executing a monitoring system, and promulgating procedures relating to loan defaults. • GAO Report (July 2008) 157 – This report concluded that the DOE was not well positioned to manage the LGP effectively and maintain accountability because it had not completed a number of key management and internal control activities. The report noted that the LGP had not sufficiently determined the resources it would need or completed detailed policies, criteria, and procedures for evaluating applications, identifying eligible lenders, monitoring loans and lenders, estimating program costs, or accounting for the program. • IG Audit Report (February 2009) 158 – This report found that while the Program had developed and implemented some key programmatic safeguards, the Program had not completed a control structure necessary to award loan guarantees and to monitor associated projects. Specifically, the Program had not finalized policies and procedures, formally documented portions of its applicant reviews, or formalized procedures for disbursing loan proceeds. • GAO Report (July 2010) 159 – This report found that performance measures developed for the LGP did not reflect the full scope of program activities. In addition, the report155 See Footnote 141.156 See Appendix G.9, IG Special Report (DOE/IG-0777), “Loan Guarantees for Innovative Energy Technologies”,September 2007.157 See Footnote 147.158 See Appendix G.12, IG Audit Report (DOE/IG-0812), “The Department of Energy’s Loan Guarantee Programfor Innovative Energy Technologies”, February 2009.159 See Appendix G.16, GAO Report to Congressional Committees, “Department of Energy – Further Actions areNeeded to Improve DOE’s Ability to Evaluate and Implement the Loan Guarantee Program”, July 2010. 78
  • 84. noted that the LGP had treated applicants inconsistently and lacked mechanisms to identify and address their concerns. • IG Audit Report (March 2011) 160 – This report found that the LGP could not always readily demonstrate, through systematically organized records, including contemporaneous notes, how it resolved or mitigated relevant risks prior to granting loan guarantees. The report noted other areas of needed improvement where the LGP had not updated its policies and procedures to include improvements in its loan processing to provide for consistent use of lessons learned and provided financial oversight of its independent advisors to ensure the allowability and reasonableness of costs.B. DOE Loan Guarantee Process In order for Solyndra and other applicants to obtain a DOE Loan Guarantee, they wererequired to follow a comprehensive application and loan underwriting process that adhered to thesubstantial requirements and procedures ultimately finalized by the LGP in its Final Rule onOctober 23, 2007. 161 The Final Rule set forth the general scope of the program, evaluationprocesses, and other requirements necessary for the approval and issuance of a loan guarantee.In Silver’s testimony to the United States Senate Committee on Energy & Natural Resources inSeptember 2010, he explained the process of the LGP to review and approve loan guaranteeapplications. 162 A general description of the loan guarantee process is provided below pursuantto the Final Rule and Silver’s testimony: 1. Application Submission Applications for loan guarantees were submitted to the LGPO in two parts. The firstsubmission was a summary application, which the LGPO would review to determine if theproposed project was eligible for the LGP. If the LGPO determined the project was eligible, theapplicant would be selected to submit a more comprehensive application, which the LGPOwould analyze to determine if the project warranted additional review and due diligence.160 See Appendix G.18, IG Audit Report (DOE/IG-0849), “The Department of Energy’s Loan Guarantee Programfor Clean Energy Technologies”, March 2011.161 The DOE published its Final Rule 10 CFR Part 609 for Loan Guarantees for Projects that Employ InnovativeTechnologies (“Final Rule”) in the Federal Register on October 23, 2007 after a public comment process, seeAppendix G.8.162 See Appendix G.17, Written Statement for the Record of Jonathan Silver, Executive Director of the LoanPrograms Office, U.S. Department of Energy, United States Senate Committee on Energy & Natural Resourcesdated September 23, 2010. 79
  • 85. 2. Initial Due Diligence and Term Sheet Negotiation After the LGPO received the more comprehensive application from the applicant, itbegan to conduct due diligence, including: (a) a close examination of the technology;(b) analysis of the financial model and plan for the project; (c) detailed legal, market, andenvironmental reviews; and (d) engagement of outside consultants and advisors with specializedexpertise relevant to the project to assist the DOE with the transaction. After due diligenceproceeded to a point where the substantive business points made sense, the LGPO would beginto negotiate with the applicant on the terms and conditions of the potential loan guarantee. 3. Credit Analysis and Review The LGPO credit staff would undertake a comprehensive credit analysis of the proposedtransaction. The credit team calculated an estimated credit subsidy score based on the agreedterm sheet between the applicant and the DOE and other factors. The credit subsidy score wascalculated using a methodology approved by the OMB. The LGPO would review and scoreevery aspect of the transaction, including the pledge of collateral, market risk, technology risk,regulatory risk, contractual foundation, operational risk, and recovery profile. The result was apreliminary credit subsidy range that incorporated all available information regarding the projectand financing at the time. 4. Deal Approval Once the term sheet was agreed upon between the applicant and the LGPO, thetransaction would be submitted for the necessary approvals. The first step was submission to theCredit Review Committee (“CRC”) which consisted of DOE officials with financial andtechnical expertise. If the CRC recommended the project for approval, the transaction was thenpresented to the CRB, also consisting of top-level DOE officials. Prior to submission to theCRB, the LGPO would present the project to the OMB and U.S. Department of Treasury(“Treasury”) for review, consistent with statutory requirements. If the CRB recommendedapproval of the deal, it was presented to the Secretary of Energy, who had the ultimate authorityto approve loan guarantees. If the Secretary of Energy approved the transaction, a conditionalcommitment for a loan guarantee was provided to the applicant upon execution and payment of 80
  • 86. the required fee. The commitment was “conditional” because it was subject to the satisfactorynegotiation of definitive documentation and Secretary of Energy’s final decision at the time ofthe close. 5. Final Due Diligence and Negotiation of Financing Documents After the conditional commitment was issued, the LGPO would complete any remainingdue diligence and final loan documentation would be drafted and negotiated. 6. Closing Once all due diligence was completed, necessary financing documents negotiated, and allother statutory, regulatory, and other requirements had been satisfied, the LGPO credit staffwould conduct a comprehensive credit analysis based on the final terms and conditions of theloan. The analysis results in the calculation of the project’s estimated credit subsidy cost. Theestimated credit subsidy cost was sent to the OMB for final approval. Once the credit subsidycost was finalized, the project could close and the loan guarantee obligating the DOE would beput into place. Upon closing, the applicant could immediately draw upon the loan in accordancewith the contemplated draw schedule if all conditions and requirements referenced in thefinancing documents were met.C. The “$535 Million” DOE Loan Guarantee Solyndra was the first company to secure a guaranteed loan facility under the LGP. OnSeptember 3, 2009, the company, and one of its subsidiaries, Fab 2, LLC, entered into financingagreements with the DOE and FFB 163 that provided for a $535 million loan guaranteed by theDOE. The loan to Fab 2, LLC was for the construction of a new state-of-the-art manufacturingfacility in Fremont, California (referred to as the Fab 2 Phase I facility). The company’s pursuitof a DOE Loan Guarantee was not without its challenges. The LGP was a new programestablished by the EPAct2005 that required multi-agency approvals and ultimately resulted innumerous delays that proved to consume significant financial resources of the company over the2 ½ year approval process. Exhibit #5 provides a timeline detailing the key events relating tothe DOE Loan Guarantee.163 Fab 2 LLC was the “Borrower” and Solyndra, Inc. was the “Sponsor” in the DOE financing agreements. 81
  • 87. The lengthy approval process and attendant costs for Solyndra to proceed it are discussedin further detail in the section below: 1. DOE Loan Guarantee Solicitation As a result of the EPAct2005, the DOE issued a solicitation on August 8, 2006 invitingsubmission of pre-applications for eligible projects that promoted President Bush’s AEI (the“2006 Solicitation”). 164 The DOE pre-application (the “Pre-Application”) required informationand documentation to be provided including: (a) the complete Pre-Application form; (b) abusiness plan for the project; 165 (c) a financing plan overview; 166 (d) an explanation of the impactthat the loan guarantee would have on financing terms and structure; (e) a commitment letterfrom an eligible lender; 167 (f) an equity commitment letter from the project sponsor; (g) anoverview on the project eligibility under section 1703 of the EPAct2005; (h) an outline ofpotential environmental impacts of the project and how they would be mitigated; (i) a descriptionof the anticipated air pollution and greenhouse gas reduction benefits; (j) a description of howthe project advances the AEI; and (k) an executive summary describing the key project featuresand attributes. These items were required to be organized and submitted in three volumes whichwould be reviewed by the CRB to determine if an invitation would be extended to submit a fullapplication to further the process. 2. Solyndra’s Pre-Application In response to the 2006 Solicitation, Solyndra prepared and submitted its Pre-Applicationon December 28, 2006. 168 The Pre-Application was signed by Gronet and identified Solyndra,164 See Appendix G.3, DOE Loan Solicitation Announcement (PS01-06LG00001) dated August 8, 2006. The 2006Solicitation was issued in conjunction with the issuance of the “Loan Guarantees for Projects that EmployInnovative Technologies; Guidelines for Proposals Submitted in Response to the First Solicitation under Title XVIIof the Energy Policy Act of 2005.”165 The business plan was to include an overview of the proposed project, a description of the project sponsor, adescription of the technology to be utilized, an estimate of the total project costs, the time frame required forconstruction and commissioning of the facility, and a description of the primary revenue-generating agreement(s)that would primarily provide financial support for the project.166 The financing plan overview was to include an overview describing the amount of equity to be invested and thesources of such equity, the amount of the total debt obligations to be incurred and the funding sources of all suchdebt, and a financial model detailing the investments and the cash flows generated from the project over the life ofthe project.167 The commitment letter was to be from an eligible lender expressing its commitment to provide the required debtfinancing necessary to construct and fully commission the project.168 See Appendix H, Solyndra DOE Loan Guarantee Application (Volumes 1-3) dated December 28, 2006. 82
  • 88. Inc. as the project sponsor (“Sponsor”). The Pre-Application described the project to be built asa 183,000 square foot manufacturing facility in Fremont, California, referred to as the Fab 1facility, capable of manufacturing up to 132 MW of the company’s unique cylindrical thin-filmphotovoltaic solar panels utilizing one mini production line (used for development) and two fullscale production lines. The project was estimated to cost approximately $130.8 million.Solyndra applied for a loan guarantee of $80 million, or 80% of a proposed $100 millionconstruction loan from HSH Nordbank, over an 8 year term. At the time, Solyndra had 120employees, including a management team experienced in high-tech manufacturing, 169 and hadalready raised over $100 million of capital. 170 Solyndra’s Pre-Application was submitted inthree volumes as required by the 2006 Solicitation containing approximately 67 pages of detailednarrative, various figures and tables, and other related materials. Months after the Pre-Application was submitted, Solyndra received no indication fromthe DOE that its project would be selected for the program and moved forward with thedevelopment of its Fab 1 facility utilizing bank financing from HSH Nordbank and equity capitalfrom its investors. 3. Invitation to Submit Full Application Solyndra eventually received notification from the LGPO that it had been selected tosubmit a full application on October 4, 2007, 171 over 10 months after the submission of its Pre-Application. Solyndra notified the LGPO it was accepting the invitation on October 5, 2007. 172169 The management team included Gronet as Chief Executive Officer (former Vice President at Applied Materials),Dr. Kelly Truman (“Truman”) as Vice President of Marketing and Business Development (former Vice President ofMarketing at ReVera), Ben Bierman (“Bierman”) as Vice President of Operations (former Vice President ofBusiness Management at Coherent’s Laser Systems group), Jonathan Michael (“Michael”) as Chief FinancialOfficer (former Vice President of Finance at Fairchild Semiconductor), Ratson Morad (“Morad”) as Vice Presidentof Engineering, Front-End Manufacturing (former Chief Executive Officer of Blue 29), and Benny Buller (“Buller”)as Vice President of Engineering, Back-End Manufacturing (former program manager at Applied Materials).170 The shareholders included Rockport Capital Partners, U.S. Venture Partners, Argonaut Private Equity, CMEAVentures, KKR Financial Corp, Madrone Capital Partners, Pinnacle Ventures, and Redpoint Ventures.171 See Appendix I.1, DOE Invitation to Submit Full Proposal from Loan Guarantee Program dated October 4,2007.172 See Appendix I.2, Solyndra Acceptance of DOE Invitation dated October 5, 2007. 83
  • 89. 4. Submission of Full Application In preparation to submit the Full Application in response the LGPO invitation, Solyndrapersonnel attended a meeting with the LGPO in Washington, D.C. on December 19, 2007 to“kickoff” the process, address the requirements and expectations for the Full Application, and toprovide the LGPO with information regarding its contemplated Fab 2 facility to be constructed,since the Fab 1 facility discussed in the Pre-Application was already underway. In this meeting,Solyndra provided a detailed presentation to the DOE which included: (a) a snapshot of thecompany; (b) a description of the technology; (c) a description of the status of the Fab 1 facility;(d) a description of the contemplated four phase 1.2 GW Fab 2 facility; (e) a description of thechallenges in reducing costs and growing capacity; (f) a description of the company’s marketfocus; (g) a description of the benefit of a loan guarantee; (h) a description of Solyndra’s existingdebt and equity financing; and (i) a description of the management team and board ofdirectors. 173 The DOE also provided Solyndra with written instructions and guidance materialsoutlining the requirements for the submission of the Full Application. company personnel had numerous other meetings and telephone conversations with the 174LGPO leading up to the submission of Solyndra’s Full Application, between December 2007and the submission of its Full Application beginning in May 2008. 175 Scott was the company’spoint-of-contact with the LGPO and would report back to the Solyndra management team and itsBoard regarding the progress of the application and issues that needed to be addressed. Thesemeetings and discussions covered various topics, including the DOE’s continued support for theproject, Solyndra’s required equity contributions, eligible project costs, program procedures anddocumentation requirements, calculation of credit subsidy costs, and obtaining a credit rating bya reputable rating agency. The DOE strongly encouraged Solyndra to evaluate third-partylenders as an alternative to a loan with the FFB and estimated that the process would take sixmonths from the completion of the Full Application to funding. The DOE acknowledged prior tothe submission of the Full Application that Solyndra had moved forward with the Fab 1 facility173 See Appendix J.1, Solyndra Presentation to DOE dated December 19, 2007.174 The initial LGPO team included various DOE personnel and contractors such as: David C. Schmitzer(“Schmitzer”), LGP Director of Loan Origination; William Miller (“Miller”), Origination Program Manager;Douglas Schultz, Program Manager; Ove Westerheim, Director of Project and Portfolio Management; Dan Tobin,Senior Investment Manager; and Richard Corrigan, DOE Contractor.175 See Appendix I, Various DOE Related Correspondence and Communications. 84
  • 90. and that submission of the Full Application would include a new Fab 2 facility. The DOEsupported the new project, but indicated Solyndra would face a higher level of scrutiny on theincreased size and dollar amount of the project. Solyndra submitted part of its Full Application on May 6, 2008 and completed theremainder of the required submissions by August 27, 2008. 176 The Full Application wasvoluminous, containing over 1,500 pages of documentation and information, including theapplication form, changes from the original Pre-Application, company background, projectdescription, technical information, business plan, financing plan, applicant information, applicantcertifications, preliminary construction milestone schedule, preliminary cash flow, financialprojections, 177 equipment and capacity assumptions, preliminary front-end construction budget,articles of incorporation, estimated project costs, construction risks and mitigation strategy,status of federal, state, and local approvals, engineering report from Solyndra’s engineer,environmental report, Sponsor involvement, contractual arrangements, operational risks andmitigation strategies, preliminary credit assessment, 178 credit history, and audited financialstatements of Solyndra, Inc. for 2005, 2006 and 2007. The LGPO indicated in its letter toSolyndra dated May 13, 2008 that the LGPO could begin its informal analysis of the projectbased on the information submitted in the initial partial application upon receipt of anacknowledgment by Solyndra, which was provided by Stover, the company’s current ChiefFinancial Officer. a. Summary of Full Application The Full Application submitted by Solyndra was signed by Gronet and identifiedSolyndra, Inc. as the Sponsor. The Full Application sought a DOE Loan Guarantee to construct176 See Appendix K, Full Application submitted between May 6, 2008 and August 27, 2008.177 The model created by Solyndra for the financial projections included in the Full Application was very detailedand extensive. The model was developed in Microsoft Excel and included 20 different worksheets or tabs withdetailed inputs for various financial data and assumptions. The model included thousands of rows and/or columnsof data. The model included worksheets for key assumptions, projected financial statements and financialperformance, metrics summary, capital budget, power and average sale prices, corporate expense allocations, yieldsand utilizations, direct materials, Fab output, contractor estimates, equipment assumptions, direct labor assumptions,overhead assumptions, cost of goods sold assumptions, capital expenditures, and other various calculations.178 Solyndra solicited preliminary credit assessments from FitchRatings, part of the Fitch Group (“Fitch”), andStandard and Poor’s (“S&P”), two of the “Big Three” credit agencies. Solyndra chose to submit the preliminaryFitch credit assessment which included a B+ rating with a 63% estimated recovery percentage to the DOE as part ofits Full Application. This document was the last document to complete the Full Application. The S&P preliminaryassessment included an estimated recovery percentage through a liquidation of assets of approximately 25%. 85
  • 91. and operate the company’s proposed Fab 2 Phases I & II facility capable of manufacturing up to420 megawatts per year of its photovoltaic solar panels with an estimated total project cost ofapproximately $1.03 billion. The proposed funding for the project consisted of a loan from theFFB in the amount of $822 million with a 7 year term, guaranteed by the DOE, and an equitycontribution by Solyndra, Inc. of $205 million, or 20% of the total estimate project costs. Theproposed site for the Fab 2 Phases I & II front-end facility was a 30-acre parcel located at 47488Kato Road in Fremont, California, approximately one quarter mile from the company’s existingFab 1 facility. The project contemplated the construction of an approximately 600,000 squarefoot facility with six production lines that would be utilized to manufacture cylindrical modulesduring the deposition manufacturing phase. Solyndra also intended to lease one or morebuildings aggregating approximately 300,000 square feet for the back-end manufacturing facilityincluding encapsulation, finishing, and packaging processes. 5. Revisions to Full Application Prior to the complete submission of the Full Application, the scope of the project wasreduced to what is commonly referred to as Fab 2 Phase I. As a result, many aspects of the Fab 2project changed, such as a reduction of the total estimated project costs, funding requirement,financial projections, and expected capacity. The revised project had a reduced expectedproduction capacity of 210 megawatts per year utilizing three production lines (instead of six)and a reduction in total estimated project costs of $713 million. The financing request was alsomodified to include a $535 million loan from the FFB, guaranteed by the DOE, and required anequity participation of $178 million representing a 25% percent equity contribution percentagecompared to the original 20% requested. In support of Solyndra’s Full Application, there wereseveral financial models prepared and provided to the DOE as additional adjustments based onchanging assumptions prior to the completion of the application in August 2008 (See Exhibit #6for a list of all identified financial models sent to the DOE). The finalized financial modelincluded in the loan closing documentation was submitted by Solyndra to the DOE on August18, 2009. 86
  • 92. a. Solyndra’s Key Consultants and Advisors for DOE Loan Guarantee Pursuant to Solyndra’s pursuit of the DOE Loan Guarantee, the company evaluated andretained several reputable and well qualified companies and firms with large scale constructionexperience to provide key advice and services relating to the construction of the Fab 2 facility,including: • Studios Architecture – Solyndra retained San Francisco based Studios Architecture, a West Coast architecture firm that has substantial experience with designing commercial buildings in the San Francisco Bay Area and knowledge of local building codes and requirements, to provide master planning and architecture services. 179 • Hathaway Dinwiddie Construction company – Solyndra engaged Hathaway Dinwiddie Construction company for pre-construction services, including identifying key material requirements that might cause schedule delays and developing initial construction cost estimates based on project specifications. • CH2M Hill – Solyndra contracted with CH2M Hill to provide detailed engineering and architectural services for the project. 180 CH2M Hill had significant experience and an international reputation in designing semiconductor fabrication facilities. CH2M Hill had been working on the initial engineering plans since 2007 and provided a detailed engineering report that was included in the Full Application. • Rudolph and Sletten General Engineering Contractors (“Rudolph”) – Rudolph was selected as the general contractor for the construction of the Fab 2 facility. Solyndra believed Rudolph had extensive high-tech manufacturing experience, large-scale construction and project management expertise, project finance management wherewithal and corporate financial stability. • Environmental Management and Planning Solutions, Inc. – Solyndra retained Environmental Management and Planning Solutions, Inc. to conduct its required National Environmental Policy Act (“NEPA”) assessment and analysis for the Fab 2 facility. In addition to the engagement of consultants, contractors, and engineers regarding theconstruction and design of the Fab 2 facility, Solyndra also retained legal counsel, investmentbankers, and financial advisors, and utilized lobby consultants to address the legal, financial, andgovernmental affair issues surrounding the DOE Loan Guarantee and raising additional requiredcapital. Some of the key professionals include:179 Solyndra required CH2M Hill, the engineering and architectural firm engaged by Solyndra, to subcontract thearchitecture services of Fab 2 to Studio Architecture.180 Id. 87
  • 93. • Wilson Sonsini Goodrich & Rosati, PC – Wilson Sonsini Goodrich & Rosati, PC is an international law firm with expertise in energy and clean technologies. Solyndra engaged this firm to provide legal counsel regarding the DOE Loan Guarantee, including the negotiation of a term sheet and legal documents executed at closing. • Goldman, Sachs & Co. (“Goldman Sachs”) – Goldman Sachs is an international investment banker and financial advisor that provides services to corporations, financial institutions, governments, and high-net-worth individuals throughout the world. Solyndra engaged Goldman Sachs to provide various investment banking and financial advisory services. Goldman Sachs was engaged in various capacities including providing assistance with the DOE Loan Guarantee (including certain governmental affairs consulting), raising of additional capital through private debt or equity offerings, an initial public offering, and other financial advisory services. • McBee Strategic Consulting, LLC – McBee Strategic Consulting, LLC is a consulting firm that specializes in government affairs and lobby services in Washington, D.C. Solyndra engaged this firm to provide general and governmental consulting, monitor federal legislative and regulatory activity, coordinate and attend meeting between Solyndra and federal officials, and furnish logistical support during Washington, D.C. visits by Solyndra representatives. 181 • Dutko Worldwide – Dutko Worldwide is a consulting firm that specializes in government affairs, lobby, and strategic business consulting services in Washington, D.C. Solyndra engaged this firm to provide services relating to the DOE Loan Guarantee in 2008. 182 • Holland and Knight – Holland and Knight is an international law firm that provides legal services in a variety of practice areas and industries. Solyndra retained this firm to provide lobby related services relating to the DOE Loan Guarantee in 2008. The amounts paid by Solyndra to the foregoing companies for their services areaddressed in a separate section of the CRO report. Please see Section XIII. – Sources and Usesof Cash for additional information. 6. DOE Due Diligence Activities and Term Sheet Negotiations. After the submission of the partial application in May 2008, there were numerousmeetings and telephone conversations that took place between Solyndra personnel and DOErepresentatives, in Washington, D.C. and at the Solyndra facilities, involving the status and181 Solyndra also engaged other government consultants and lobbying firms in conjunction with the DOE LoanGuarantee.182 Id. 88
  • 94. progress of Solyndra’s application. 183 The DOE began an informal review of the applicationupon receiving the partial submission in May 2008. Solyndra maintained consistentcommunications with the DOE throughout the process to keep the project and applicationprocess moving forward. In June 2008, Scott met with the LGPO in Washington, D.C. andprovided training on the detailed financial model provided in the Full Application so the DOEcould run its own sensitivity and negative scenario analyses on the model. In the same meeting,Scott addressed the anticipated timeline to complete due diligence and submit the application forCRB review and approval. The LGPO also indicated that they were close to completing thedrafting of terms to be included in the term sheet which would be the basis of the agreementbetween the DOE and Solyndra. 184 The DOE indicated that a September 2008 credit approvalwas on track although the schedule was tight, a credit subsidy debate between the LGPO and theOMB was close to being resolved, and the Solyndra project continued to enjoy significantattention inside the LGPO. 185 In early July 2008, Schmitzer indicated to Scott that the LGPOoffice was extremely frustrated by the delays caused by several rounds of legal review of itsRequests for Proposal and expected them to go out shortly. 186 Schmitzer also encouraged Scottto lock-down a commitment for delivery of a credit assessment. 187 Solyndra began providingdocumentation to Fitch for its credit assessment on July 1, 2008. At approximately the sametime, the GAO issued its July 2008 report which concluded the DOE was not well positioned tomanage the LGP effectively and maintain accountability because it had not completed a numberof key management and internal control activities. In mid-July 2008, Gronet and Scott met withthe LGPO where they were informed the retention of the DOE’s due diligence consultants wasdelayed until at least September 2008 which would push back the CRB review to at leastNovember 2008. Solyndra continued to coordinate its efforts with the DOE to avoid further delays. In aneffort to accelerate the process, Solyndra, with its counsel and financial advisor, drafted a termsheet in August 2008 which was sent to the DOE. 188 Sometime before September 2008, thetimetable for CRB approval was delayed again to January 2009. Gronet had become frustrated183 See Appendix I, Various DOE Related Correspondence and Communications.184 See Appendix I.9, Scott email to Solyndra management team dated June 19, 2008185 See Appendix I.11, Scott email to Solyndra management team dated June 27, 2008.186 The third party consultants were required to go through a lengthy full federal procurement process.187 See Appendix I.13, Scott email to Solyndra management team dated July 7, 2008.188 See Appendix L.1, Preliminary Draft Term Sheet dated August 27, 2008. 89
  • 95. with the delays and exchanged a number of emails with Frantz regarding the timetable ofselecting due diligence consultants. Frantz indicated that the DOE, in spite of its best efforts,was still experiencing delays due to “growing pains and circumvented road bumps along theway”. Gronet stated in one of his emails to Frantz: “We continue to spend on this project at avery high rate to ensure that we have all of the prerequisites in place for a successful and timelyproject. I know the intent of the DOE program is to support the expansion of companies likeSolyndra that have game-changing technologies that can have a real impact on our energy andglobal warming issues. But please realize that these delays are now in danger of having theOPPOSITE effect. We are a relatively small company with a small balance sheet and simplycannot afford such delays.” 189 Shortly after these email exchanges, Frantz informed Solyndrathat its application was substantially complete and that the LGPO could initiate its duediligence. 190 After the acknowledgement by Frantz that the Solyndra application wassubstantially complete, Solyndra continued to work aggressively with the LGPO to move theprocess along and minimize further delays, due to Solyndra’s continued and substantial financialcommitments to the project. Another point of considerable concern for Solyndra was the calculation of the requiredcredit subsidy costs. Depending on the size calculated by the LGPO, and approved by the OMB,the company could be required to pay additional amounts which might total tens of millions ofdollars. At this point, the DOE was still working on the credit subsidy model with the OMB andwas unable to provide Solyndra with a projected cost. In addition, the DOE was attempting todetermine the recovery value of production assets in various liquidation scenarios with the OMB.According to the LGPO, the OMB (as well as S&P and Fitch) were characterizing the assets as“scrap” in default scenarios, and they were arguing that positive cash flow assets have a highermarket value. 191 The DOE indicated that the credit subsidy cost calculation and approval byOMB should be completed by October 2008. Solyndra’s Board was anxious to obtain the creditsubsidy cost estimate in order to be certain that it would not adversely affect the economics ofthe project.189 See Appendix I.16, Gronet email to Frantz dated September 8, 2008 and corresponding email chain.190 The DOE had been informally reviewing the Solyndra application since its partial submission in May 2008.191 See Appendix I.20, Email chains between Scott and DOE dated September 17-19, 2009 and Appendix I.21,Scott email to Solyndra management team dated September 22, 2008. 90
  • 96. Solyndra continued to work with the LGPO to address various questions and issues risingfrom the review of the extensive documentation provided by Solyndra. The company continuedto provide additional documentation and information including updated financial models,customer agreements, financial statements, and other items requested by the LGPO. 192 After months of delay, the DOE’s consultants, RW Beck 193 and Morrison & FoersterLLP (“MoFo”), 194 were selected and engaged in December 2008 after a lengthy procurementprocess. RW Beck was engaged to perform and prepare an independent engineering report forthe Fab 2 project, and MoFo to provide legal services in regard to the negotiation anddocumentation of the agreements. Solyndra was told by the DOE that it would be responsiblefor payment of all fees and costs incurred by the DOE consultants and executed SponsorPayment Letters 195 with each consultant. The RW Beck fees were initially capped atapproximately $525,000; 196 however, Solyndra was informed by the DOE that there would notbe any caps on the MoFo fees and costs. Shortly after their engagement, Solyndra startedproviding RW Beck with documentation and information for its analysis. The timeline for various milestones continued to be pushed back based on delays fromthe LGPO. In early December 2008, the DOE indicated its frustration with the need to informSolyndra that it would need another two weeks before a preliminary credit subsidy cost rangecould be provided. The DOE stated it was running scenarios with Solyndra’s financials andother projects to test the calculations. The DOE provided a preliminary credit subsidy cost rangeon December 9, 2008 which ranged from 6% to 14% of the $535 million DOE Loan Guarantee,or approximately $32.1 million to $74.9 million. The LGPO office was also concerned that theprocurement of a market consultant for due diligence would not occur in time for a January CRBapproval, and decided it would perform the market analysis in-house. 197 In an effort to move the192 See Exhibit #6 for list of financial models provided to DOE.193 RW Beck was an internationally recognized management consulting and engineering firm providing services topublic and private sector clients in the areas of energy, water, wastewater, solid waste, and telecommunications.RW Beck was acquired in 2009 by Science Applications International Corporation.194 MoFo is a well recognized and experienced international law firm with over 1,000 lawyers throughout the worldwith experience in renewable and alternative energy projects.195 See Appendix M, Sponsor Payment Letters.196 Fees were eventually increased.197 See Appendix I.34, Scott email to Solyndra management team dated December 8, 2008. 91
  • 97. process forward, Solyndra also had Goldman Sachs prepare a preliminary credit memo whichcould be used by the DOE. 198 Concerned about the credit subsidy cost range, Scott spoke with Miller regarding thepossibility of extending the term of the loan guarantee from 7 to 10 years in an effort to reducethe credit subsidy costs. Miller indicated that the LGPO analysts indicated that a 10 year termreduced the credit subsidy costs and Solyndra prepared and sent to the LGPO several revisedfinancial plans with a 10 year term for further evaluation in January 2009. The DOE did notrespond with a credit subsidy range for a 10 year project, and given the then-present timetableand possibilities of further delay, Solyndra determined not to further these discussions with theDOE. Upon the engagement of MoFo in December 2008, significant progress was madediscussing and negotiating deal terms in preparation of a draft term sheet. 199 The LGPOindicated a need to have as many deal terms finalized before submission to the CRB forapproval. On January 8, 2009, the DOE provided a draft term sheet (39 pages) to Solyndra. 200The next day, the DOE informed Solyndra that the CRC met and concluded that the governmentmust have rigorous adherence to internal policy and procedures, particularly on the first loan ofthe LGP, and would not proceed without a third party consultant market report. Additionally, theCRC indicated a need to have all LGPO materials submitted with sufficient time for review anddeliberation including a fully negotiated term sheet, which was not provided. Solyndra and the DOE continued to move forward with the negotiation of the term sheetand Solyndra provided additional financial models, including “down case scenarios,” 201 to theDOE. The equity contribution percentage was discussed. The company strenuously requestedand fought for a 20% equity contribution, while the DOE wanted a much higher equity factor.Ultimately, a 27% equity contribution percentage was agreed upon. Additionally, anothersignificant condition was the provision requiring an incremental cost overrun reserve to befunded by the company, which the DOE believed should be around $30 million.198 See Appendix N, Goldman Sachs Draft Credit Review Board Credit Memo submitted to the DOE datedDecember 17, 2008.199 Solyndra presented its draft term sheet to the LGPO in August 2008. See Appendix L.1.200 See Appendix L.2, Initial Draft DOE Term Sheet dated January 8, 2009.201 Down case scenarios were basically financial sensitivity models utilizing ranges of varying assumptions. 92
  • 98. Secretary Chu was appointed in January 2009 and was briefed by Frantz on the Solyndraproject, which was identified as one of the first projects likely to get through the process.Secretary Chu confirmed that a quorum of CRB members was in place and would be ready tomeet within a month. 202 In the following month, ARRA was passed and signed into law byPresident Obama, which among other things, amended the EPAct2005 and temporarily expandedthe LGP by adding the 1705 Program. A significant change to the credit subsidy cost in theARRA provided a mechanism for the DOE, rather than the borrower or sponsor, to pay thesignificant credit subsidy costs through appropriations. The DOE ultimately agreed that thecredit subsidy costs for Solyndra (filed under the 1703 Program) would be assumed by thefederal government and receive the treatment described under the new 1705 Program. In February 2009, RW Beck concluded its 47 page independent engineering report 203 andconcluded, among other things: • Solyndra had previously demonstrated the capability to construct and operate facilities of similar size and technology as the Fab 2 facility; • Proposed manufacturing technology was technically viable and the facility had been designed to provide the required infrastructure for the technology; • Fab 2 facility should have a useful life beyond 20 years; • Construction cost estimates were developed in accordance with generally accepted engineering practices and methods of estimation; • Provided that Solyndra’s responsibilities were completed on schedule, the 35-month overall duration from start of engineering on November 2008 through the 210MW run rate in September 2011, was “somewhat aggressive, but achievable” using generally accepted project, engineering and construction management practices; and • Certain performance assumptions used in the financial projections provided were achievable based on the information reviewed and Solyndra’s contingency plans to mitigate the risks of scale-up and yield improvements. RW Beck was also selected as the DOE’s independent market consultant in February2009 and issued a draft Independent Market Consultant Report in March 2009, with its finalreport in April 2009. 204 The final report concluded, among other things, that:202 See Appendix I.59, Scott email to Solyndra management team dated January 26, 2009.203 See Appendix O.1, RW Beck DOE Independent Engineer’s Reports. 93
  • 99. • The target market was many times Solyndra’s overall 210MW annual production from the Fab 2 facility; • Solyndra’s marketing staff appeared to have appropriate background and was adequately sized to implement its marketing plan; • In low-slope, cool roof applications, the average system delivered price per kilowatt hour to the end user produced from Solyndra’s technology was projected to be competitive with that of wafer-silicon technology; • In low-slope, cool roof applications, integrators should be able to offer a retail system price per watt to the financing companies using Solyndra’s technology competitive with that realized when using wafer-silicon technology. • The average selling prices assumed in Solyndra’s projections and pro forma would allow project financiers to offer energy prices that were competitive with peak retail commercial rates in Solyndra’s primary U.S. market and lower than FiTs in Solyndra’s primary European markets. 7. Finalized Term Sheet and DOE Conditional Commitment After the DOE Loan Guarantee was reviewed and approved by the CRC and submitted tothe CRB, the CRB approved the conditional guarantee in March 2009. A term sheet (38 pages)was finalized and executed on March 20, 2009 (the “March 2009 Term Sheet”). 205 The March2009 Term Sheet provided for a $535 million loan from the FFB, guaranteed by the DOE withFab 2 LCC as the borrower, and Solyndra, Inc. as the Sponsor. Some of the major termsincluded: (a) total project costs of $733 million; (b) equity contribution of $198 million bySolyndra, Inc. (27%); (c) a 7 year term; (d) a low interest rate based on Treasury bill rates;(e) fees paid to the DOE by Solyndra totaling over $4 million; and (f) a $30 million cost overrunreserve to be funded by Solyndra, Inc. 206 See Exhibit #7 for a summary of the key terms. On the same day, the DOE issued a press release announcing the loan and its “conditionalcommitment” 207 in support of the company’s construction of its commercial-scale Fab 2204 See Appendix O.2, RW Beck DOE Independent Market Reports.205 See Appendix L.3, Final Executed Term Sheet (Fab 2 Phase I) dated March 19, 2009.206 The term sheet also outlined the anticipated and significant documentation to be negotiated and executed,conditions precedent to loan closing, conditions precedent to each periodic approved budget, conditions precedent toeach disbursement date, bank accounts to be setup and maintained, representations and warranties, covenants, eventsof default, reporting requirements, reaffirmation that Solyndra agrees to pay all DOE’s independent consultants andoutside legal counsel fees, and various other provisions.207 The “conditional commitment” was subject to the Secretary’s decision at the time of closing. 94
  • 100. manufacturing facility. According to the press release, Secretary Chu was offering the loanguarantee by signing a “conditional commitment” following approval by the CRB that week.The conditional commitment signaled the DOE’s intent to move forward with Solyndra’sapplication for a $535 million loan guarantee provided the company met its obligations and theparties agreed upon mutually acceptable definitive documentation. The press release indicated“Before offering a conditional commitment, the DOE takes significant steps to ensure risks areproperly mitigated for each project prior to approval for closing a loan guarantee. TheDepartment performs due diligence on all projects, including a thorough investigation andanalysis of each project’s financial, technical and legal strengths and weaknesses. In addition tothe underwriting and due diligence process, each project is reviewed in consultation withindependent consultants.” 208 Solyndra and the DOE continued to prepare for a closing of the DOE Loan Guarantee. Inthe months leading up to the closing, the company concluded its NEPA 209 environmental study,prepared and provided various financial models to the DOE based on adjustments to variousassumptions, 210 addressed the conditions precedent to closing, and worked with the DOE tonegotiate final agreements and documents. To fund the required equity contribution, thecompany raised $286 million ($198 million earmarked for the DOE Loan Guarantee) through aSeries F preferred stock offering in July 2009. To complete some of the final requirements priorto closing, Fitch issued a final credit rating letter in August 2009 indicating a probability ofdefault rating of “BB-” 211 and an estimated recovery of 89%, 212 and the LGPO submitted itscredit subsidy recommendation to the OMB for final approval. 213 8. Loan Closing and Agreements Solyndra closed the $535 million DOE Loan Guarantee on September 3, 2009. Therewere numerous delays and substantial negotiations with the DOE, and extensive legal analysis208 See Appendix G.13, DOE Press Release, “Obama Administration Offers $535 Million Loan Guarantee toSolyndra, Inc.”, dated March 20, 2009.209 The National Environmental Policy Act.210 See Exhibit #6 for listing of identified financial models provided to the DOE.211 The “BB” category ratings are considered Speculative under Fitch’s rating definitions.212 See Appendix P.75, Fitch Credit Rating Report dated August 7, 2009.213 The credit subsidy cost was approved by the OMB and the CRB which was paid by the DOE through itsappropriations. Solyndra was not provided the final number. 95
  • 101. and internally generated services performed by Solyndra’s and the DOE’s counsel 214 to prepareand document the transaction in detail. The closing of the DOE Loan Guarantee included the execution of numerous loan andproject related agreements and documentation (“DOE Loan Closing Documentation”). Thisdocumentation was extensive due to the complexity and size of the transaction and included over30 different agreements and a substantial amount of supporting documentation including, but notlimited, to, contracts, deeds, certificates, schedules, financial analyses, and exhibits totaling over2,500 pages. 215 The documentation included the following categories: • Loan Documentation – The loan documentation included the Common Agreement, credit facility documents, sponsor loan documents, security documents, equity pledge documents, direct agreements, and the Environmental Indemnity Agreement. • Project Documentation – The project documentation included land documents, construction documents, and operating documents. a. Key Terms of Loan as Executed in Loan Documents The parties agreed to the final terms, conditions, and requirements for the DOE LoanGuarantee consistent with the provisions of the March 2009 Term Sheet. The key terms of theloan as executed in the loan documents are summarized in Exhibit #8. b. Key Agreements and Documentation The agreements and documentation executed at closing for the DOE Loan Guaranteewere extensive and provided exhaustive requirements and obligations for each party. Some ofthe key agreements and documentation of the loan are highlighted below: 216 • Common Agreement – The Common Agreement is between Fab 2, LLC, as Borrower, the DOE, as Credit Party and Loan Servicer, and U.S. Bank National Association (“US Bank”), as Collateral Agent. This main agreement encompassed and embodied the numerous other agreements utilized to complete and close the DOE Loan Guarantee. The Common Agreement provided for certain common representations, warranties, and covenants of the Borrower, certain uniform conditions of214 Solyndra was also required to pay all fees for DOE’s legal counsel totaling $3.1 million for all services renderedthrough the bankruptcy petition in September 2011.215 See Appendix P, September 2009 DOE Loan Closing Documentation.216 Id. 96
  • 102. disbursement for the loan, and certain events of default. The key elements of the Common Agreement included: (a) definitions and rules of interpretation; (b) requirements for funding of loan proceeds, requirements for payments and prepayments; (c) conditions precedent to advances; (d) representations and warranties; (e) affirmative covenants; (f) negative covenants; (g) events of default and remedies; (h) agents and advisors; (i) reimbursement agreement; and (j) various miscellaneous items.• Future Advance Promissory Note – The Future Advance Promissory Note (“FFB Note”) was between Fab 2 LLC and the FFB as the holder of the FFB Note. The FFB Note established the $535 million loan obligation with the FFB and provided the terms and conditions for the advancement of loan proceeds.• Secretary’s Guarantee – Guarantee from the DOE to the FFB for all payments due in accordance with the terms of the FFB Note.• Security Agreement – The Security Agreement was between Fab 2, LLC, as Borrower, and US Bank, as the Collateral Agent. The Security Agreement defined the security interest granted in all of Fab 2, LLC’s rights, title, and interest in its personal property.• Deed of Trust – The Deed of Trust provided the DOE and FFB with a security interest in the land where the Fab 2 front-end facility was to be built at 47488 Kato Road, Fremont, California.• Equity Funding Agreement – The Equity Funding Agreement was between Solyndra, Inc., Fab 2, LLC, DOE, and US Bank. The agreement provided the terms and procedures to fund the required equity commitments of Solyndra, Inc.• Project Sales Agreement – The Project Sales Agreement was between Solyndra, Inc. and Fab 2, LLC. The agreement provided for an arrangement whereby Fab 2, LLC would sell, exclusively, the entire capacity of products manufactured to Solyndra, Inc., to be marketed and sold to third parties.• Equipment Supply Agreement – The Equipment Supply Agreement was between Solyndra, Inc. and Fab 2, LLC. The agreement provided for the purchase, supply and installation of Solyndra, Inc.’s proprietary tools and equipment to Fab 2, LLC to be used in the manufacturing of solar panels in the Fab 2 facility. The agreement provided a fixed price listing for each of the work cells and tool, addressed construction schedules or milestones, included provisions for the purchase and sale of spare parts and consumables to maintain the tools, and described applicable warranties offered.• Intellectual Property License Agreement – The Intellectual Property License Agreement was between Solyndra, Inc. and Fab 2, LLC. The agreement granted Fab 2, LLC a license to operate and maintain a facility that utilized Solyndra, Inc.’s proprietary technologies to manufacture and sell its solar panels. 97
  • 103. • Operation and Maintenance Agreement – The Operation and Maintenance Agreement was between Fab 2, LLC, as owner, and Operator LLC, as operator. Operator LLC is a wholly owned subsidiary of Solyndra, Inc. and contracted to provide pre and post operational, maintenance, management, and additional services. • Material Supply Agreement – The Material Supply Agreement was between Solyndra, Inc. and Fab 2, LLC. The agreement provided for the purchase, by Solyndra, Inc. at its costs, of raw materials, commodities, and other supplies used or necessary to manufacture solar panels from third parties to resale to Fab 2. The agreement described the mechanics and procedures required for the purchase of materials.D. Loan Funding and Reporting Requirements Once the DOE Loan Guarantee was closed, the DOE Loan Closing Documentationcontained substantial requirements that Solyndra was required to follow in order to obtain loanadvances and to comply with the various agreements. 1. Loan Funding Requirement To receive LGP funds, Fab 2, LLC was required to meet certain criteria included withinthe Common Agreement. The criteria included stringent reporting requirements, adherence tocertain performance metrics, and detailed periodic certifications by both internal and externalparties as to the progress of the Fab 2 project including RW Beck, the DOE’s independentconsultant (See Exhibit #9 for additional details). These loan funding requirements included,but were not limited to: 217 • Master advance notice submitted to both DOE, US Bank, as Collateral Agent, and RW Beck indicating amount of request, date of request, and the project costs being financed; • Updated advance schedule submitted to the DOE with certifications from Fab 2, LLC and RW Beck that: (a) the updated advance schedule was consistent with the construction budget and the project milestone schedule; (b) the funds spent since the Common Agreement date had been spent in a previously approved manner; (c) proceeds from the advances for the upcoming three-month period were needed for eligible project costs;217 The term “certification” has the same meaning as defined in the DOE Loan Closing Documentation. 98
  • 104. • Fab 2, LLC was required to provide RW Beck with documentation and information necessary to prepare a monthly construction progress report (“Monthly Construction Progress Report”);• Certification from Fab 2, LLC and RW Beck that the Monthly Construction Progress Report was a good faith estimate with respect to: (a) the construction process remaining in-line with the project milestone schedule and the construction budget; (b) total funding was sufficient to pay all remaining total project costs; (c) there were no liens outstanding; (d) and that nothing had occurred during the most recent site visit to materially impact the construction of the project;• DOE should receive confirmation that all DOE credit facility fees and periodic expenses had been paid or were to be paid with the proceeds of the requested advance or by other satisfactory arrangements;• DOE should receive certification from Fab 2, LLC that all consents and approvals that were required in connection with the proposed loan draw had been received with no pending appeals or unsatisfactory conditions that could result in a material modification or cancellation of the approval;• DOE should receive certification from Fab 2, LLC and its insurance advisor that all relevant insurance policies had been provided, were up-to-date, and in good standing;• DOE should receive certification from Fab 2, LLC that all corporate proceedings were in general order and available upon request of the DOE and US Bank;• DOE should receive certification from RW Beck that preparation for the Fab 2 back- end facility was underway and in accordance with the project plans;• DOE should receive certification from Fab 2, LLC that no event of default or potential default had occurred and was continuing;• DOE should receive certification from Fab 2, LLC and RW Beck that no changes to the technical requirements of the existing governmental approvals had occurred that could reasonably be expected to have a material adverse effect on the project;• DOE should receive certification from Solyndra, Inc. and RW Beck that the Fab 1 facility had achieved at least 70% of its projected shippable megawatts produced;• DOE should receive certification from Fab 2, LLC and RW Beck that there had been no change to the construction budget since the previous periodic approval date and the aggregate amount expended for each type of project costs did not exceed the aggregate amount budgeted for such cost, except for approved changes;• DOE should receive certification from Solyndra, Inc. and US Bank that the amount of base equity required with respect to the advances made had been funded through 99
  • 105. allocation of the approved pre-closing equity credit or amounts transferred from the equity funding account. 2. Financial Reporting Requirements The DOE Loan Closing Documentation required extensive financial and operationalreporting to the DOE. Some of the key reporting requirements under the loan documentationclosed in September 2009 are as follows: (See Exhibit #10 for additional details). a. Quarterly Reporting Fab 2, LLC was required to provide quarterly financial reporting to the DOE within 45days after the end of each fiscal quarter (referred to as “Quarterly Reporting Packages”). TheQuarterly Reporting Packages were executed by Stover and included: 218 • Quarterly Reporting Certificate indicating the required documentation and information was included in the Quarterly Reporting Package provided to the DOE. • Discussion and Analysis by a financial officer of Fab 2, LLC identifying any transactions occurring between Fab 2 LLC and Solyndra, Inc. (other than transactions pursuant to the intercompany project documents) and a certification of the calculation to show compliance with the debt-to-equity contribution ratio of Fab 2, LLC. • Unaudited Quarterly Financial Statement of Fab 2, LLC and certification signed by the financial officer. • Unaudited Quarterly Financial Statement of Solyndra, Inc. and certification signed by the financial officer. • Summary Construction Report and certification signed by the financial officer providing a detailed assessment of the Fab 2 project in comparison with the construction budget and project milestone schedule, basic data relating to construction of the facility, description and an explanation of any material casualty losses, material disputes, and/or any material non-compliance with any governmental approvals. • Updated Project Construction Budget and certification signed by the financial officer. • Summary of information delivered to the DOE during the quarter.218 See Appendix Q, DOE Quarterly Reporting Packages. 100
  • 106. b. Annual Financial Statements and Reports Fab 2, LLC was required to provide annual financial statements and other reports to theDOE as soon as available, but not more than 180 days after the fiscal year-end. Therequirements included: 219 • Financial statements of Fab 2, LLC for each fiscal year certified by its accountant and accompanied by any management letter. • A discussion and analysis by the management of Fab 2, LLC of the company’s business and operations at the end of such fiscal year; • A report certified by Fab 2, LLC and Solyndra, Inc. addressing the extent to which the Fab 1 facility performance targets have been achieved during the construction period; • A report from Fab 2, LLC’s accountant including: (a) certification of no knowledge of events of defaults or potential events of default having occurred and are continuing; (b) a comparison between the actual Debt-to-Equity Contribution Ratio and the Debt-to-Equity Contribution Ratio for the construction period; and (c) a comparison between the annual financial statements and the projections contained in the operating forecast for the operating period; (d) and a certification that it has no knowledge that Fab 2, LLC was not, and is not, in compliance with Section 7.14 (Debt Service Coverage Ratio) or, if such non-compliance has occurred a statement as to the nature of non-compliance. c. Periodic and Other Reporting The Common Agreement requires a variety of additional items to be reported to the DOEon a periodic basis. 220 For purposes of brevity, this report does not include the other voluminousrequired documents and reports under Section 6 of the Common Agreement. 221E. Construction and Loan Funding (Fab 2 Phase I) Shortly after the closing of the DOE Loan Guarantee, Solyndra broke ground on theconstruction of the Fab 2 front-end facility 222 on September 4, 2009 (with an original scheduled219 See Appendix R, DOE Annual Reporting Packages.220 See Appendix P.3, Common Agreement, Sections 6(h).221 See Appendix P.3, Common Agreement, Section 6.222 A ground breaking ceremony was held on September 4, 2009 at the Fab 2 Front-End Facility site and wasattended by Secretary Chu, former California Governor, Arnold Schwarzenegger, and Vice President Joe Biden, viasatellite. 101
  • 107. plan was ultimately deemed too large for the DOE and in the final application filing in August of2008, the planned facility was split into two phases, with Phase I consisting of a 230 MW facilitywith a total construction cost of $733 million. That construction was to be funded by the DOEloan ($535 million) and private investor funds ($198 million). After a year of due diligence andfurther review by third party consultants, approval for a $535 million loan was granted inSeptember 2009 and the construction of Fab 2 Phase I was under way. 1. Fab 2 Phase I Construction As discussed above, the total cost for the Fab 2 Phase I project was $733 million.226 Thetable below shows how those funds were allocated in the original construction budget. In orderto ensure that Solyndra remained within the original budget parameters, RW Beck providedmonthly reviews to the DOE on the progress of construction. Over the lifetime of the project,Fab 2 Phase I was constructed ahead of schedule and under budget. Table #15 Fab 2 Phase I Construction Budget (in thousands) Task Budget Equipment Line 1 $113,490 Equipment Line 1 Overrun Contingency1,3 6,242 Equipment Line 2 82,377 Equipment Line 2 Overrun Contingency1,3 4,531 Equipment Line 3 82,124 Equipment Line 3 Overrun Contingency1,3 4,517 Labs & Other Equipment 24,238 Labs & Other Equipment Overrun Contingency1,3 1,333 Front End: Foundation Complete 78,448 Front End: Shell Enclosure Complete 107,658 Front End: Line 3 Installation Complete 66,714 Front End: Overrun Contingency2,3 42,979 Back End: Line 3 Installation Complete 34,205 Back End: Line 3 Installation Complete Overrun Contingency 5,815 Other Project Costs: Cash Flow Positive 45,648 Real Estate Purchase 32,681 Total Project Budget $733,000226 See Appendix P.60, Construction Budget in the DOE Loan Closing Documentation. 103
  • 108. RW Beck provided a tracking chart of the construction budget in its CPRs. 227 Thesereports, generally submitted to the DOE on a monthly basis, each covered a specific time periodbased on a review of construction materials, visits to the site, and interviews of Solyndraemployees. The table below shows the various CPRs that were issued and the time periodcovered: Table #16 Construction Progress Report Time Periods CPR # 1: 9/2/09 to 9/18/09 CPR# 12: 7/21/10 to 8/19/10 CPR # 2: 9/19/09 to 10/19/09 CPR# 13: 8/20/10 to 9/19/10 CPR# 3: 10/21/09 to 11/17/09 CPR# 14: 9/20/10 to 10/20/10 CPR# 4: 11/18/09 to 12/15/09 CPR# 15: 10/21/10 to 11/16/10 CPR# 5: 12/16/09 to 1/20/10 CPR# 16: 11/17/10 to 12/15/10 CPR# 6: 1/21/10 to 2/17/10 CPR# 17: 12/16/10 to 1/15/11 CPR# 7: 2/18/10 to 3/19/10 CPR# 18: 1/16/11 to 2/15/11 CPR# 8: 3/20/10 to 4/19/10 CPR# 19: 2/16/11 to 3/15/11 CPR# 9: 4/20/10 to 5/19/10 CPR# 20: 3/16/11 to 5/7/11 CPR# 10: 5/20/10 to 6/17/10 CPR# 21: 5/8/11 to 6/8/11 CPR# 11: 6/18/10 to 7/20/10 CPR# 22: 6/9/11 to 7/6/11 The CPRs provided the DOE with a snapshot of the current progress of construction andthe amount of funds that had been spent through the reporting period. Within each CPR, RWBeck provided an update on the amount drawn as of the report date, and the amount remaining ofthe $733 million construction budget. Below is a chart of the CPR reported spending figures,including the percent of the total $733 million budget that had been used through each of thereporting periods. This figure includes both the 73% funding from the DOE and the 27%released from the restricted cash account representing the Sponsor’s equity contribution.227 See Appendix S, Construction Progress Reports. 104
  • 109. The funding shown in the chart above was drawn from the DOE loan facility and theequity contributions in 28 separate draws ranging from $1.3 to $69.7 million. The first draw,called the “pre-development” draw, was taken on September 2, 2009, and covered $37.9 millionin expenses incurred prior to the loan closing, including $32.7 million for the purchase of theland for the FE facility. The draws occurred on a monthly basis, and were subject to theborrower meeting the conditions precedent to funding discussed previously in Section X.E –Construction and Loan Funding of this report. Funds drawn were either sent to Solyndra, as reimbursement for invoices paid, or incertain instances wired directly to the vendor. Each invoice was included in a packet sent alongwith the draw request for review by RW Beck. For funds wired directly to vendors, aconfirmation email was required to ensure that the funds were received. Of the $733 millionbudgeted, $723 million was ultimately drawn by over 100 separate vendors, including Solyndra,as of the petition date. Below is a table of the ten largest vendors that received funds from theFab 2 construction budget. 228228 See Appendix T for a summary and detailed schedule of DOE Loan Guarantee draw amounts with supportingdocumentation. 105
  • 110. Table #17 Solyndra, Inc Loan Draw Funding -- Top 10 Vendors % of Total Vendor Amount Amount Rank Name Paid Drawn 1 Solyndra, Inc. $314,155,510 43.45% 2 Rudolph & Sletten, Inc. 284,012,000 39.28% 3 Solyndra Operator, LLC 43,460,000 6.01% 4 Chicago Title company 32,719,179 4.53% 5 CH2M Hill Engineers 11,888,670 1.64% 6 U.S. Treasury Department 7,541,103 1.04% 7 PG&E 5,136,525 0.71% 8 Morrison & Foerster, LLP 3,128,995 0.43% 9 Wilson Sonsini Goodrich & Rosati 2,965,391 0.41% 10 City of Fremont 2,851,114 0.39% Remaining Vendors 15,166,913 2.10% Total $723,025,400 100.00% As shown above, Solyndra, either directly or through its affiliate, Operator LLC, receivedalmost 50% of the total loan proceeds. The basis for these draws were laid out within the ESA(Equipment Supply Agreement) and the O&M (Operations and Maintenance Agreement). Theeffect of these agreements and further information about the uses of these funds can be foundbelow. a. Equipment Supply Agreement Pursuant to the ESA dated as of September 2, 2009, Solyndra agreed to “supply and sell”and Fab 2, LLC, the entity that held title to Fab 2, agreed to purchase the equipment needed torun Fab 2. The ESA was necessary because the tooling needed to operate the plant wasdeveloped by Solyndra and Solyndra had the equipment manufacturing expertise to build theunique tooling necessary to manufacture Solyndra’s proprietary panels. The ESA provided themeans for Solyndra to be reimbursed or advanced funds to build, install, and deploy theequipment required to operate Fab 2. 229 The ESA included a table that provided a detailedlisting of the equipment that was sold to Fab 2, LLC and the fixed price associated with each229 The equipment was unique and specialized for use in the manufacturing of Solyndra’s panels and had limitedvalue outside of that process. 106
  • 111. “work cell” as approved by the DOE. The total contract price for the ESA was $318.9million.230 The actual amount drawn towards the ESA was $312.9 million. 231 b. Operations and Maintenance Agreement The O&M Agreement between Operator LLC and Fab 2, LLC was created to designatethe operational, management, and maintenance duties of the Fab 2, construction project toOperator LLC. These duties were designated as either pre-operational services or managementservices. Pre-operational services included material procurement, engineering, and otheradministration activities leading up to the facilities operational period, while managementservices focused on the ongoing monitoring and management of the Fab 2 Phase I facility. 232 Intotal, Operator LLC drew $43.5 million from the DOE loan for providing those services. The agreement initially called for an annual fee to be paid to Operator LLC in quarterlyinstallments which totaled $12.9 million in the first year. The annual fee in subsequent yearswas to be calculated based on the percent change in a GDP-based inflation rate and “anyincremental increase or decrease in the actual costs incurred by Operator LLC over the mostrecent fiscal quarter and Operator LLC’s good faith estimate of the actual reasonable costs likelyto be incurred over the next year.” 233 Calculating fees based on more recent operating costsallowed for a most accurate estimate of the annual fee. Following the end of the initial year, the amount paid to Operator LLC increased over275%, growing from $3.2 million per quarter in the first year to $12.5 million in the first quarterof the second year. This dramatic change in fees mirrored the shift from pre-operational servicesto management services. The increase in costs was projected in the base case financialprojections provided to the DOE at loan closing and all increases in fees charged by OperatorLLC were disclosed and approved by RW Beck. As part of his engagement, the CRO undertook a review of the loan draw packagessubmitted to RW Beck, along with the loan agreements entered into by Solyndra and the DOE.230 See Appendix P.46, ESA Agreement, pgs A-2-1to A-2-3.231 Total amount paid to Solyndra, Inc. was $314.2 million, with $312.9 million as payment towards the ESA, andthe other $1.3 million going towards the Construction Management Fee and other miscellaneous expenses .232 See Appendix P.54, O&M Agreement, pgs. E-1-1and E-2-1.233 See Appendix P.54, O&M Agreement, pg. 18. 107
  • 112. It is his opinion that the funds drawn under the DOE loan guarantee were spent in accordancewith the loan documents. The CRO has reviewed the accounting records of Solyndra and found that theconstruction costs were correctly recorded in the accounting records and no material funds werediverted from their original intended use.F. Second DOE Loan Guarantee Application (Fab 2 Phase II) As previously discussed within this section, Solyndra’s partial application, filed with theDOE in May of 2008, outlined a new production facility with the capability of producing over420 MWs per year, with an estimated construction cost of over $1 billion. The project was splitinto two phases to better suit the project for loan approval from the DOE. On September 4,2009, the financing for Fab 2 Phase I closed, and one week later, on September 11, 2009,Solyndra submitted the first part of its application for Fab 2 Phase II. For the next year, the Fab2 Phase II application participated in the same due diligence vetting process as the previousapplication. However, in late 2010, when Solyndra’s financial condition became the mostimminent concern, the application for Fab 2 Phase II was shelved. Below is a further analysis ofthe Fab 2 Phase II application. 1. Fab 2 – Phase II Loan Application Details The total construction cost for Fab 2 Phase II, was originally estimated to be $632million, of which 73% ($461.4) originated with funds from FFB and 27% ($170.6) fromSolyndra’s private investors. On November 19, 2009, Solyndra increased the requestedconstruction amount to $642 million, with the same 73/27 funding ratio. That changed the totalamount requested from the DOE for Fab 2 Phase II to $468.7 million and the amount requiredfrom sponsor equity to $173.3 million. In the amended application, Solyndra explains that themajority of the $10 million increase in the overall project cost was due to an increase in salestaxes on manufacturing equipment from 8.8% to 9.8%. 234 Solyndra submitted the Phase II loan application in order to take advantage of theanticipated cost savings that could be achieved from additional manufacturing capacity. As234 See Appendix U.20, Fab 2 Phase II Application. Section A: Part II, pg. 2. 108
  • 113. detailed within the application, “Solyndra believes the combined scale of Phase I and Phase IIare required to achieve the economies of scale that would result in a cost of goods sold thatwould support long-term competitiveness.” 235 Increasing capacity, while maintainingadministrative costs near existing levels, would greatly reduce the per panel cost of Solyndra’sproduct. The company described the importance of the second phase of the Fab 2 project: “theSponsor may not be profitable unless it is able to spread the overhead cost for management,R&D and its equipment fabrication group across a large scale of production output.” 236 2. Construction Plans The Fab 2 Phase II project was an expansion of the Fab 2 Phase I project whichcommenced construction in September 2009. Fab 2 Phase I funds were allocated to theconstruction and upgrading of two separate facilities. The FE required the construction of300,000 square feet of a new manufacturing plant. The other facility, the BE, required the build-out of approximately 200,000 square feet of leased space east of the Solyndra’s Fab 1 facility.Fab 2 Phase II proposed to double the capacity of the Phase I facility by proposing an additional300,000 of FE space to be added onto the Phase I building. Additional tools and minor upgradesto the BE facility would be required to handle the increased FE capacity. The project budget, shown in Table #18 below, provided the allocation between costs forconstruction and new equipment. The FE facility dominates the facilities portion of the budgetbecause the BE facility requires minimal structural upgrades due to the work that will have beencompleted during the Fab 2 Phase I process. FE, on the other hand, was a ground-upconstruction project that would receive no pass-through benefit from the Phase I project. Table #18 Fab 2 Phase II – Project Costs (in thousands) Equipment Equipment: Line 4 $115,122 Equipment: Line 5 83,561 Equipment: Line 6 83,305 Labs & Other Equipment 9,336235 See Appendix U.2, Fab 2 Phase II Application. Section B: Part I. Project Description, pg. 2.236 See Appendix U.2, Fab 2 Phase II Application. Section B: Part I. Project Description 2, pg. 23. 109
  • 114. $291,324 Facilities Front End $182,717 Back End 34,205 $216,922 Contingency Front End $31,062 Back End 5,815 Equipment 16,023 $52,900 Other Project Costs $80,854 Total Project Costs $642,000 As with the Fab 2 Phase I project, the equipment costs for the Phase II project areoutlined within the ESA between the Borrower (Phase 2, LLC) and the Sponsor (Solyndra, Inc).Instead of creating a new ESA to match these project costs, the ESA from Phase I was includedin the application as a model during the application negotiations. That is similar for otheragreements between the Borrower and Solyndra, including the O&M Agreement which allocatesthe majority of funds flowing into the Other Project Costs budget line. As stated in theapplication, “The Applicant believes that the Solyndra Phase 2 application substantially benefitsfrom the due diligence that the DOE performed for Phase 1 as well as from the fully-documentedproject agreements negotiated by DOE and the Applicant for the Phase 1 project which aresuitable for reuse with modification to acknowledge Phase 2 in relation to Phase 1.” 237 The application called for construction to begin in the second quarter of 2010.Solyndra’s stated goal was to seamlessly allocate resources from Phase I into Phase II once theconstruction of Phase I was complete. The Phase II project timeline from the application isincluded below.237 See Appendix U.2, Fab 2 Phase II Application. Section B: Part I. Project Description, pg. 2. 110
  • 115. Although the capacity listed on the project timeline showed an increase of 77 MW foreach line install, the projected capacity from the application was more conservative. Solyndraprojected the annual capacity shipped from Fab 2 Phase II to be 9 MW in 2011, 152 MW in2012, 230 MW in 2013, and 231 MW each year thereafter. 238 3. Solyndra IPO As part of the Fab 2 Phase II application and plan, Solyndra filed its S-1 with the SEC inDecember 2009 for an IPO to raise additional capital to fund operations with a portion of the238 See Appendix U.5, Fab 2 Phase II Application. Section D: Part I. Business Plan, pg. 9. 111
  • 116. funds allocated to the construction of the second phase of the Fab 2 facility. This publicdocument included a substantial amount of information which was vetted through an extensivereview by the company and its financial advisors, accountants and legal counsel. The S-1contained approximately 200 pages of detailed information regarding the company’s historicaloperations and performance, technology, customer base and marketing strategy, capital structure,significant risks associated with projects, and other related information about the company thatwas available to the public, including the DOE and other creditors. 239 The S-1 was amended andfiled with the SEC on March 16, 2010. 240 As required under the terms of the DOE LoanGuarantee, Solyndra delivered to the DOE a copy of the initial S-1 and the subsequentamendment. 4. Third Party Consultants As was the case in the first DOE loan application, the procedures for the Fab 2 Phase IIapplication required a third party market analysis, legal opinion, and engineering study. MoFoand RW Beck were selected by the DOE to continue their engagement for the services whichthey provided for the Phase I project as legal and engineering consultants. RW Beck hadprovided the market analysis for the initial loan application. However, for the secondapplication, the DOE selected Navigant to provide the report. On May 18, 2010, Solyndraexecuted a payment letter with Navigant. On May 27, 2010, a team from Navigant traveled toSolyndra to begin its analysis. Navigant’s final report was delivered to the DOE on September 22, 2010. The reportcontained a review of Solyndra’s business plan, financial model, and the external market forcesin which the company operated. The business plan review examined the company’smanagement team experience, sales pipeline, and production expectations. Navigant concludedthat there was a significant risk that the sales marketing plan was not sufficiently robust to meetthe company’s projections to sell all of the output from Fab 2 Phase II. 241239 See Appendix F.1, Solyndra, Inc. Form S-1 Registration Statement filed with the SEC on December 18, 2009.240 See Appendix F.2, Solyndra, Inc. Amendment No. 1 to Form S-1 Registration Statement filed with the SEC onMarch 16, 2010.241 See Appendix O.3, Navigant DOE Independent Market Study. 112
  • 117. Navigant reviewed Solyndra’s financial model and examined whether the forecasts andprojections given to the DOE were reasonable expectations. The chart below was includedwithin the Navigant report wherein Solyndra estimated yearly revenue from the Fab 2 Phase IIfacility, along with Navigant’s pessimistic, most likely, and optimistic projections. Navigantrecommended that Solyndra mitigate the potential risks by increasing the sales and marketingstaff to include individuals with experience working in the company’s targeted marketsegments. 242 Chart #14 Source: Solyndra Market Study prepared by Navigant. It is noteworthy that both Solyndra and Navigant each projected annual sales within thefirst year of the facility’s production of $300 to $500 million, notwithstanding the significantrisks outlined in the Navigant report, including Navigant’s recognition that “if channels tomarket take longer to develop, bankability/customer acceptance is delayed, or prices are notreduced low enough to induce customers to take all of Solyndra’s Fab 1 + Fab 2 Phase I + Fab 2Phase II output, Solyndra will sell [sic] undersell its capacity.” 243 Having provided an analysis of the considerable challenges that Solyndra may face, thereport concluded that the project may be a good investment for the DOE if the companyaddressed the following two items. First, “Solyndra can offer modules at competitive ASPs thattranslate to system level LCOE’s that meet or beat market prices (set by crystalline silicon242 See Appendix O.3, Navigant DOE Independent Market Study. pg. 43.243 See Appendix O.3, Navigant DOE Independent Market Study. pg. 52. 113
  • 118. systems).” Second, “Solyndra can demonstrate that most of Phase I capacity has been sold outwhich in turn indicates significant market pull for the product. This will also confirm the factthat the partnerships forged are the right ones to access the commercial and industrialmarkets.” 244 a. Status of Application At the time of the application filing, Solyndra may have had understandable reasons to beoptimistic about its business prospects. The Fab 1 facility had begun to produce and shipproduct and construction of the Fab 2 facility was well under way, having finally cleared thehurdles of due diligence. The company stated in its Fab 2 Phase II DOE loan application datedSeptember 11, 2009: “The Sponsor is financially strong. The Sponsor’s cash balance as ofSeptember 4, 2009 was $55.5 million, exclusive of $160.0 million of restricted cash which isirrevocably pledged as Sponsor’s Equity for Solyndra Fab 2 - Phase 1. The Sponsor’s totalassets are over $250 million. The Sponsor enjoys the support of several large venture capital andinstitutional investors and private foundations which in aggregate manage billions of dollars ofcapital.” 245 Nevertheless, Solyndra was to face many challenges between 2009 and 2010. By mid-2010, cash management became paramount to the company’s continued operation. Thecompany successfully obtained an infusion of $175 million in convertible notes in order tomaintain a positive cash balance. Through Solyndra’s periodic reporting, the DOE wascontinually apprised of the company’s cash situation. By late 2010, the company was againfacing a cash shortage that was brought to the attention of the DOE. Solyndra proposed arestructuring of the obligations under the original loan. Once the company and the loanparticipants from the Fab 2 Phase I project began discussing a restructuring of the original loan,the application for Fab 2 Phase II was put on hold indefinitely.G. February 2011 Loan Restructuring A dramatic decline in the cost of competing silicon-based photovoltaic products and aworldwide oversupply of photovoltaic panels resulted in continuing price declines and softening244 See Appendix O.3, Navigant DOE Independent Market Study. pg. 92.245 See Appendix U.2, Fab 2 Phase II Application. Section B: Part I. Project Description 2, pg. 23. 114
  • 119. demand for Solyndra’s PV solar panels. These significant pricing declines along withcompetition from Chinese solar manufacturers, reductions in solar subsidies, and other industrypressures, severely impacted the company’s ongoing capital requirements and its efforts toachieve positive cash flow from operations. As a result, Solyndra was in need of additionalcapital. The company contacted both existing and new potential investors as well as the DOE inlate 2010 in an effort to raise additional capital and restructure the company’s secured debt. Theparties ultimately finalized a global restructuring on February 23, 2011 (the “Restructuring”).The agreements and documents were heavily negotiated between the parties and contained over2,100 pages. 246 1. Activities Leading up to Restructuring After approximately 19 months of operations in the Fab 1 Facility and six months ofconstruction on the Fab 2 facility, Solyndra management met with the Board in April 2010 fortwo days to describe the current financial condition of the company due to the competitivefactors referenced herein as well as the shortfalls in the prior plan and projections. 247 Solyndramanagement provided a detailed 143 page presentation describing the company’s current status,sales and marketing efforts, operations, research and development, cash flow, and finance relatedareas. 248 Below are some of the highlights of the presentation: 249 • Revenues of $46.6 million fell short of the first quarter 2010 plan by $5.8 million or 12%; • Actual ASP was 6% lower than projected for first quarter 2010 plan ($2.88 per watt vs. plan of $3.05 per watt); • Chinese P-Si panel price reductions, Euro currency fluctuations, and reductions of FiT incentives substantially reduced ASP forecasts; • Second quarter 2010 orders were less than 50% of plan, but momentum was improving in the U.S. and Canada; 250 • COGS were likely 10% higher in first quarter 2010;246 See Appendix W, February 2011 Restructuring Agreements and Documentation.247 See Appendix D.1, Solyndra Board Minutes, April 12-13, 2010.248 See Appendix D.1, Solyndra Board Presentations, April 12-13, 2010.249 Actual results were compared to the November 2009 POR (Plan of Record).250 Historically, a substantial amount of sales occurred during the last three weeks of the quarter. 115
  • 120. • Solyndra was creating new sales and business development initiatives to address the pricing and volume challenges; • Company was experiencing challenges with module uniformity when increasing line speed from 30cm to 36cm centimeters per minute; • Fab 2 facility construction was two months ahead of schedule; • 200 Series panels timetable was proceeding slower than original management plan. Solyndra management reported to the Board that in February 2010 they had initiated a“ground up” review of the competitive landscape and the company’s business model. Pursuantto its review, two revised draft plans 251 were created utilizing various scenarios and alternativeassumptions to address the significant increase in future capital needs. The estimated futurefunding requirements were calculated by company management to range between $316 millionand $719 million depending on the scenario and assumptions in the revised plans. 252 Based onthe information presented, the company continued to pursue an IPO and considered alternativepaths for financing. The Board also decided to conduct a search for a new president and/or CEO.Within a week of the Board meeting, Solyndra provided the DOE with some preliminary insightsinto the review of the Fab 2 financial forecasts, including revisions on future ASP based onrecent declines in the market. 253 The Board met again on April 21, 2010, a day after Solyndra’s discussion with the DOE,to better understand the company’s cash requirements, IPO timeline, and the ramifications ofmissing the first quarter 2010 estimates. In that meeting, Stover described the need to raiseadditional capital by June 2010 and reviewed the requirements to complete an IPO within thattime frame. The Board discussed engaging Goldman Sachs and Morgan Stanley to solicit adviceon the timing of an IPO. Alternatively, contingency plans were discussed for raising the required251 The revised draft plans included a “Stretch Plan” and a “Base Plan”. The Stretch Plan was characterized bycompany management as an aggressive “target”, a plan the company could strive to accomplish. The Base Plan wasconsidered by company management to be high confidence plan. It still had dependencies and risks; however, theintent was to portray a “base result” that would be achieved absent an unlikely turn of events.252 Including certain scenarios utilizing results from Fab 2 Phase II and some utilizing results from Fab 2 Phase Ionly.253 See Appendix I.100, Scott email to DOE dated April 20, 2010. 116
  • 121. additional private capital if the bankers concluded that an IPO was not feasible by the end ofJune. 254 As a result of the previous Board meeting, Goldman Sachs and Morgan Stanleyconducted a detailed analysis of the company and existing market conditions and presented theirfindings to the Board on May 4, 2010. The investment bankers concluded that the market wouldnot be receptive to a Solyndra IPO and urged the company to consider alternative sources ofcapital. 255 In an effort to solve Solyndra’s pressing capital needs by June 2010, Steve Mitchell ofArgonaut presented a term sheet 256 to the Board on May 18, 2010 to raise additional capital frominsider investors based on the need to fund substantial additional capital up to $350 million, theimmediate need for short-term funding by the middle of June 2010, and the lack of other viablealternatives within the limited timeframe. Mitchell proposed using a convertible debt instrumentto provide the company with flexibility and additional time to seek additional capital fromoutside investors. Mitchell acknowledged the extreme dilution that would occur if the additionalfinancing from outside investors was not raised by October 2010 and the proposed note holdersconverted into equity; however, if the company did not have a fully funded plan by October, itslong-term viability would be significantly impacted. Mitchell stated to the Board the importanceof having all the inside investors participate in the proposed minimum internal round of $200million to be funded by mid-June so the company could continue operations. Additionally,Stover indicated to the Board that any remaining amounts on the existing $50 million line ofcredit from Argonaut could not be accessed at this point because the company was currentlyunable to meet its commercial shipments covenant. 257 Pursuant to the proposals and informationprovided, the Board discussed the proposal in detail, the company’s efforts in accessing othersources of funds, and any additional cost cutting measures that could be taken. 258254 See Appendix D.2, Solyndra Board Minutes and Board Presentation dated April 21, 2010.255 S See Appendix D.3, Solyndra Board Minutes and Board Presentation dated May 4, 2010.256 The term sheet was prepared two of the company’s lead investors, Argonaut and Madrone.257 The Argonaut Line of Credit was executed in July 2009 providing a $50 million revolving loan facility. Solyndrareceived a total of $40 million from the Argonaut Line of Credit, which was repaid in early September 2009 fromthe proceeds of the Series F preferred stock.258 See Appendix D.4, Solyndra Board Minutes dated May 18, 2010. 117
  • 122. The Board conducted another meeting on June 3, 2010 to get an update on the debtfinancing and cash position. Stover presented the Board with a comparison of plans without Fab2 Phase II to review a possible scenario where the Fab 2 Phase II plan would be scrapped toreduce future requirement capital needs. 259 On the same day, Solyndra provided the DOE with arevised “base case” plan for Fab 2, LLC that, among other things: (a) started Fab 2 Phase Iproduction two months earlier than anticipated; (b) included higher yields and panel power; (c)included lower ASP forecast due to external pricing pressures from Chinese manufactures; and(d) included installation of three new CIGS tools to counter lower-than-expected line speeds. 260 The Board met again on June 9, 2010 at which time Stover explained that the companyhad less than $30 million in cash available and without an additional capital infusion within thenext two weeks, the company would not be in a position to continue operations. The Boardreviewed the final terms of the note purchase agreement for the convertible notes, status ofinvestor commitments, and approved the transaction. 261 As a result, the company entered into ashort-term note purchase agreement with certain investors on June 17, 2010 allowing for theissuance of convertible secured promissory notes (not to exceed $200 million) to address theimmediate capital needs and bridge the funding gap. 262 Solyndra issued $175 million ofConvertible Notes through September 2010 with a maturity date in December 2010 to continueoperations. As a result of the existing circumstances and existing market conditions, thecompany decided to postpone an IPO and withdrew its S-1 to provide additional flexibility toseek other private capital in June 2010. In July 2010, the DOE began requesting additional information regarding the company’scost cutting measures, current sales and pricing, and average product costs in conjunction withthe timing of Nwachuku joining the DOE as the Director of Portfolio Management for theLPGO. At this same time, Harrison joined Solyndra as its new CEO and President. As a resultof the executive changes and press speculation, the LGPO requested additional information onJuly 29, 2010 pursuant to a sizeable document and information request received from the OMBwhich included, among other things, monthly variance reports, current market prices, cost data,259 See Appendix D.5, Solyndra Board Minutes and Board Presentation dated June 3, 2010.260 See Appendix I.101, Scott email to Westerheim dated June 3, 2010 and Exhibit #6, list of identified financialmodels provided to DOE.261 See Appendix D.6, Solyndra Board Minutes dated June 9, 2010.262 See Appendix AA.9, Convertible Notes, Note Purchase Agreement dated June 17, 2010. 118
  • 123. sales contract update, terms regarding the $175 million Convertible Notes, information regarding“going-concern” audit opinions, 263 and reasons for withdrawing the S-1. 264 Solyndra promptlyprovided a detailed response to the various inquires by the OMB on August 4, 2010. 265 Upon his arrival, Harrison undertook an extensive analysis of the company’s operations,business models, and sales and marketing strategies. Prior to Harrison’s arrival, Solyndra hadbeen analyzing available sales distribution channels in an effort to increase sales volumes. As aresult of the prior analyses performed by Solyndra, Harrison’s review, and independent duediligence conducted by Navigant (pursuant to its Fab 2 Phase II market study), the companydetermined that the current distribution model developed under Gronet involving sales to limitedintegrators and installers was creating challenges in meeting projected sales volumes. Harrisonconcluded a new distribution model focusing more on end-user projects provided much morepromise. The new distribution model being developed would pursue strategic accounts(including larger retailers such as Walmart and Target), real estate owners (such as REITs),utilities, agricultural applications, and government agencies. Given the company’s laggingfinancial performance, Solyndra began pursuing this new distribution and marketing strategy toboost sales. The DOE contacted Solyndra on September 7, 2010 regarding certain requestedapprovals for various cost cutting measures being implemented by the company, which requiredthe execution of additional agreements with the DOE. Solyndra also informed the DOE it wouldreport in November that the company would fall below the 70% Fab 1 performance targets, setforth in the loan agreements. The DOE acknowledged that Solyndra was bringing the issues tothe DOE’s attention several weeks in advance of required disclosure in the spirit of managing theloan relationship. Solyndra requested an in-person meeting to introduce Harrison and discussvarious topics and issues. The meeting was scheduled for September 15-16, 2010 inWashington, D.C. with the LGPO. 266 A day after the initial discussion, the DOE sent Solyndra a263 The “going-concern” audit opinions were included in the S-1 filed in December 2009. According to thecompany, PricewaterhouseCoopers was aware of Solyndra’s plans to raise additional capital; however, they werecompelled by auditing standard AU Section 341 to include a “going-concern” opinion regarding the company’sfinancial statements.264 See Appendix I.103, DOE email to Scott dated July 29, 2010 and the OMB request for information.265 See Appendix I.104, Scott email to DOE dated August 4, 2010.266 See Appendix I.105, Scott email to Schwartz dated September 7, 2010. 119
  • 124. list of detailed questions and requests for Solyndra, Inc.’s financial information which included,amount other things: (a) monthly historical data since 2007; (b) projected monthly forecastthrough 2016; (c) monthly cash flow forecasts for next 12 months; (d) detailed historical monthlycash burn for last twelve months; (e) annual and quarterly financial statements for 2009 and2010; (f) an updated matrix of executed framework agreements; (g) a cost-reduction roadmap;(h) the offering memorandum and closing documents for the Convertible Notes; (i) anaccounting for the Equipment Supply Agreement; (j) a consolidated financial model through2016; and (k) details relating to raising additional capital. 267 Solyndra promptly provided itsresponses to the DOE questions on September 13, 2010. 268 Solyndra attended two days of meetings with the various DOE representatives inWashington, D.C. on September 15-16, 2010. The stated purpose of the initial meeting was tointroduce Harrison to the DOE and to discuss the company’s current performance and loanmonitoring issues. During this meeting, Silver expressed concern regarding Solyndra’s liquidityand its ability to sell the company’s product. There were also discussions concerning howSolyndra would manage competition from Chinese manufacturers. The majority of theremaining meetings were with Nwachuku and the LGPO staff to discuss various financial andloan monitoring issues. During these meetings, the LGPO team 269 questioned Harrison on avariety of issues including cash balances, financial plans, Fab 1 production, sales forecasts forthird and fourth quarters of 2010, and certain questions regarding the materials recently sent tothe DOE. Solyndra also discussed its ongoing requests to address certain cost cutting measures,including the use of existing excess capacity at the Fab 2 facility. The DOE acknowledged themerits of such requests and that Solyndra was currently using the Fab 2 tools. Solyndra alsoreiterated that it would be seeking a waiver with respect to the issue of Fab 1 production fallingbelow the required 70% target metric. Nwachuku was concerned about Solyndra’s ability toraise additional capital and to compete effectively in an industry challenged by declining ASPs.Based on her concerns, Nwachuku indicated that the DOE would withhold approvals of all openrequests unless Solyndra agreed to improve the DOE’s security position by providing aguarantee of Solyndra, Inc. to the entire balance of the DOE Loan Guarantee, including a grant267 See Appendix I.108, DOE email to Scott and Schwartz dated September 8, 2010 in email chain.268 See Appendix I.108, Scott email to DOE team dated September 13, 2010.269 The DOE team included Nwachuku, Westerheim, Ken Cestari, Emilio Ghersi, Chris Tsai, Daniel Lee, ScottStevens, Steve Shulman, and Brian Oakley. 120
  • 125. of a security interest in intellectual property rights. 270 As a result of the meeting, Nwachukurequested another meeting, to follow-up on the issues discussed. 271 The Board conducted another meeting on September 30, 2010 to obtain a current statusupdate on the company. During this meeting, Harrison described the continuing challengesfacing the company including insufficient end-user demand, lower than estimated manufacturingexecution in the third quarter, and continued cash burn 272 that would accelerate. The $175million recently raised from the Convertible Notes would be depleted by January 1, 2011. Thecompany was taking action and developing plans to create additional demand, fix manufacturingoutput problems, conserve cash, and moderate capital spending. In this meeting, Stoverdescribed various alternatives the company had explored to address the present condition of thecompany and described the challenge associated with each scenario presented. The Board wasprovided with an update from the recent DOE meetings, requests by the DOE for additionalsecurity, and the request for waiver on the DOE which could be problematic for future draws onthe loan. Additionally, Goldman Sachs discussed with the Board the alternative paths forfunding including insider funding, pursuing other financial investors, targeting strategicinvestors, or engaging in loan modification discussion with the DOE. The Board authorizedGoldman Sachs to engage with a select group of strategic investors to gauge interest. 273 Pursuant to the September 2010 Board meeting, the Board held a conference call onOctober 6, 2010 to follow-up on the issues previously discussed. company managementprovided the Board with a recommended course of action which included, amount other things;(a) trimming spending by reducing production and deferring capital expenditures; (b) securingDOE cooperation for an adjusted plan that demonstrated debt service capability; (c) obtaininginterim financing of $150 million to build demand, achieve positive cash flow, and assure theDOE of a fully funded plan; and (d) completing the Fab 2 facility by consolidating and utilizingcertain Fab 1 tools and Fab 1 operations (the “Consolidation Plan”). A number of proposedmodifications of the DOE Loan Guarantee were discussed and analyzed by the Board. 274270 See Appendix I.109, Scott email to Solyndra management team dated September 17, 2010.271 See Appendix I.111, Nwachuku email to Scott dated September 27, 2010.272 Cash was being depleted at $15 to $20 million per month.273 See Appendix D.7, Board Minutes and Board Presentation dated September 30, 2010.274 See Appendix D.8, Board Presentation dated October 6, 2010. 121
  • 126. As a result of the significant challenges facing Solyndra and the discussion with theBoard, Harrison contacted the DOE on October 8, 2010 to describe the recent quarterly financialresults which made it impractical to obtain additional capital in the short-term based on thecurrent financial environment. Silver questioned the ability of the company to continueoperations into the future. Harrison indicated the company could continue under variousscenarios until either December 31, 2010 under the existing plan and toward the end of March orApril 2011 under the company’s new Consolidation Plan depending on accessibility to existinginvestors and/or external sources of cash. Harrison informed the DOE that under the proposedConsolidation Plan, the company needed to raise an additional $150 million to fund the plan andthat the company needed some flexibility and time from the DOE to develop its productmarketing revision, execute the plan, complete the Fab 2 facility, and repay the DOE LoanGuarantee. Silver indicated that the DOE was there to work with them and looked forward togetting the details. 275 In response to the call with the DOE, Stover provided a detailed email to Nwachuku onOctober 11, 2010 which provided additional materials and details regarding Harrison’s previousdiscussions. Stover described the company’s current situation, the Consolidation Plan developedby the company to confront the existing financial distress, and proposed DOE Loan Guaranteeaccommodations and modifications the company believed were essential for the ConsolidationPlan to work. Stover sent Nwachuku the detailed Consolidation Plan the following day. Beloware some key details included in Stover’s email: 276 Current Situation • The company undertook a comprehensive review of all elements of operations, industry conditions, and status of market development upon the arrival of Harrison in July 2010. • Industry competition was severe and demand creation for the company’s solar panels was “proceeding noticeably behind” the projections in the plan. • Management determined during the last three weeks of the third quarter (ending October 2, 2010) that sales were likely going to fall short of the forecast and that275 See Appendix I.112, Harrison email to Solyndra management team dated October 8, 2010.276 See Appendix I.113, Stover email to Nwachuku on October 11, 2010. 122
  • 127. finished goods inventory would accumulate. The implications were significant in regard to the company’s liquidity and ability to raise additional private capital. • The company was projected to deplete cash necessary to sustain operations in the first quarter of 2011. The company would deplete cash in November 2010 if it did not have access to the remaining DOE Loan Guarantee funds in October, November, and December for the previously completed work. 277 • The company’s last business plan projected a very rapid build out of the Fab 2 facility, which essentially would have tripled capacity in a year. Without assurance of customer demand for the rapid scaling of production capacity and firm commitments for an additional $300 million of capital, the company was forced to consider alternative business plans. Consolidation Plan • The Consolidation Plan fundamentally changed the course of completing the Fab 2 Phase I capacity by redeploying existing Fab 1 tools and equipment 278 to the Fab 2 facility. Instead of Solyndra spending incremental capital to finish building certain tools for lines 2 and 3 in the Fab 2 facility, Solyndra would terminate manufacturing in the Fab 1 facility over a period of several months and move the production tools into the Fab 2 facility. The company believed that a consolidation of operations would enable it to operate more efficiently by lowering production to better match near term production with existing market demand, reduce cash requirements for labor and materials, and reduce the labor force by approximately 200 people. • The company believed the Consolidation Plan would allow it to optimize operations, raise additional capital, service debt, and successfully build its business at a more moderate scale. Proposed Loan Modifications • The proposed DOE Loan Guarantee modifications essential to successfully implement the Consolidation Plan included: (a) loan maturity to be extended three years to December 15, 2019, 279 (b) first principal payment date to be extended one year to May 15, 2013, (c) forbearance on further interest payments from November 2010 to May 2013, (d) removal of obligation to pre-fund $30 million cost overrun account, (e) consolidation of Fab 1 operations to Fab 2 facility, (f) adjustment of Fab 1 performance target to allow for ramp of Fab 2 factory and CIGS line speed of 30 cm/minute, (g) DOE payment of any incremental credit subsidy costs resulting from restructuring, (h) complete and unconditional guarantee by Solyndra, Inc. of all Fab 2 obligations, (i) first priority security interest in all assets of Solyndra, Inc. (including277 Remaining funds available on the FFB loan were approximately $133.2 million.278 Tools and equipment were owned by Solyndra, Inc. and were not subject to the liens under the DOE LoanGuarantee.279 The existing term of the DOE Loan Guarantee was seven years. 123
  • 128. intellectual property and Fab 1 assets), and (j) deferral of any decision on the Fab 2 Phase II application. • The company briefed its Board, key shareholders, and key noteholders regarding concessions that may be required by DOE to secure its commitment to support the Consolidated Plan including: (a) commitment to a fully-funded plan ($150 million), (b) first priority security interest in all Solyndra, Inc. assets, and (c) Solyndra, Inc.’s guarantee of Fab 2 indebtedness. Solyndra officials personally met with the DOE in Washington, D.C. on October 15,2010 to discuss in detail the current situation and the information provided in Stover’s e-mail.They discussed the company’s ongoing financial performance and Consolidation Plan,considered options, and Solyndra’s proposed DOE loan modifications. 280 Within days of theOctober 15th meeting, DOE representatives traveled to Solyndra on October 19, 2010 for twodays of further detailed meetings and discussions regarding the company’s sales pipeline,demand forecasts, operational and technical issues, and the proposed Consolidation Plan. 281According to Solyndra, the DOE appeared supportive and constructive as a result of thesemeetings. Later in the month, Goldman Sachs provided a report to the Board and the DOEregarding its effort to locate additional funding. Goldman Sachs indicated that efforts had notbeen well received in the market due to a number of factors including: (a) concerns about long-term competitiveness; (b) the amount of capital invested historically; (c) preference for othertechnologies; and (d) the difficult price environment including fierce competition from publicsolar companies and low-priced Chinese panels. An employee meeting was conducted onNovember 3, 2010 to review the plan and address personnel concerns 282 and communications tocustomers, vendors, and third parties regarding its plan. In November 2010, Solyndra provided the DOE with “weekly performance dashboardreports” to track ongoing weekly performance beginning on November 4, 2010. Solyndra alsoprovided additional documentation and information per the DOE’s request and conductedadditional meetings and discussions with DOE personnel throughout the month. As part of the280 See Appendix J.6, Solyndra Presentation to DOE dated October 15, 2010.281 See Appendix J.7, Solyndra Presentation to DOE dated October 19, 2010 and Appendix J.8, SolyndraPresentation to DOE dated October 20, 2010.282 See Appendix B.2, Solyndra “Q3 State of the Business” Presentation dated November 3, 2010. 124
  • 129. DOE’s examination, it wanted to determine the drivers impacting the projected cash flows andrevised projections to conclude the reasonableness of the projections from both a cost reductionand sales standpoint. The DOE also wanted to understand the decision making process relatingto production output and sales. Solyndra explained that its costs were primarily fixed based onthe production processes and the true variable production costs were small making it challengingto base production runs based solely on actual sales. A Board meeting was held on December 2, 2010 where Solyndra management providedan update regarding the ongoing efforts to raise additional funding and obtain FFB Loanmodifications. Stover indicated that the outreach to strategic investors had not resulted in anyinterested parties coming forth, although several financial investors continued with duediligence, although it was extremely unlikely that the financial investors would be in a positionto commit capital in the timeframe required by the company. Stover indicated that the DOEcontinued to express a willingness to work with the company and suggested there was a highdegree of flexibility around the terms of the loan, but was unwilling to convert any of its existingdebt to equity as a previously proposed option. As a result of the discussions, the Boardreviewed the company’s alternatives, including a standalone Fab 1 facility, a sale of all or part ofthe business, and a potential bankruptcy filing. 283 As a result of the December 2nd Board meeting, Solyndra contacted the DOE to schedulea meeting on December 6, 2010 in an effort to negotiate a common ground solution to restructurethe DOE Loan Guarantee and sent them a presentation including Solyndra’s proposedmodifications which included the following key terms: 284 • $100 million increase to FFB loan; • $50 million in new convertible debt by existing investors (with optional additional $50 million under same terms); • New capital would have priority over existing debt; • Security interest would expand to include all assets of Solyndra, Inc.; • Complete and unconditional guarantee by Solyndra, Inc.;283 See Appendix D.9, Solyndra Board Minutes and Board Presentation dated December 2, 2010.284 See Appendix L.4, Solyndra Presentation sent to DOE dated December 6, 2010. 125
  • 130. • Loan maturity would extend to December 15, 2020; • $535 million FFB loan and $175 million Convertible Notes would have pari passu rights after new capital is paid; • Removal of $30 million cost overrun reserve; and • Continued loan advances on existing FFB loan. In preparation for the schedule meeting, Nwachuku sent a draft proposed term sheetrepresenting the DOE’s proposal for a loan restructuring. The DOE’s proposed key termsincluded: 285 • $200 million DOE Senior Tranche ($95 million remaining under original facility and no additional increase); 286 • $75 million new investment by existing investors to be funded “pro-rata” with remaining DOE commitment; • Subordinated Secured - $260 million of FFB Loan and $175 million Convertible Notes; • $75 million of existing FFB Loan to be converted to new convertible notes; • $75 million of additional investment in the form of a convertible note to be funded pro-rata with remaining $95 million FFB Loan; • Security interest would expand to include all assets of Solyndra, Inc.; • Complete and unconditional guarantee by Solyndra, Inc.; and • Senior Debt would mature in December 2015 and subordinated debt would mature in December 2019. The company and the DOE continued to negotiate a term sheet in December 2010 andfinal documents in February 2011 for a restructuring of its existing debt which ultimatelyincluded a senior liquidation preference for the new funds committed by the existing investorsunderwritten by Argonaut and Madrone.285 See Appendix L.5, DOE Proposed Term Sheet for Restructuring sent on December 5, 2010.286 According to the DOE, program statutory restrictions made any additional commitment infeasible. 126
  • 131. 2. Summary of Restructuring As a result of the negotiations with Solyndra’s investors, the DOE, and other creditors,the Restructuring of the company’s outstanding secured debt and raise of additional capital wasfinalized on February 23, 2011. The Restructuring was an effort to consolidate operations,reduce operating costs, obtain additional funding, and position the company to compete in thedeteriorating and challenging solar market. The effects of the Restructuring are summarized asfollows: • The Fab 2, LLC entity was originally established for the specific purpose of constructing and operating the Fab 2 facility. As a result of the Restructuring, the parties required the name of the company to be changed to Solyndra LLC to facilitate the consolidation of Fab 1 and Fab 2 operations and assets. • The Restructuring required Solyndra, Inc. to change its name as a result of the intellectual property being transferred to Solyndra LLC.287 • The company received a new $75 million loan from private investors with a liquidation priority over other secured debt through March 2013; • The assets of Solyndra, Inc. (including the Fab 1 assets and intellectual property) were transferred to Solyndra LLC (resulting in the consolidation of Fab 1 and Fab 2 operations and assets) to secure the new Tranche A debt as well as the DOE Loan Guarantee which was previously only secured by assets of Fab 2, LLC and did not include liens on the intellectual property owned by Solyndra, Inc.; • The existing DOE Loan Guarantee was split into two tranches: Tranche B debt and Tranche D debt with Tranche B debt having a priority security interest in the assets of the combined company; • The Convertible Notes were exchanged for Tranche E debt, • All preferred stock was converted to common equity; • The DOE obtained the right to have an observer attend all board meetings of the company and to receive all board materials; • Existing intercompany project agreements under the original DOE Loan Guarantee were terminated.287 Pursuant to the Restructuring Solyndra, Inc. changed its name to 360 Degree Solar Holdings, Inc. on June 28,2011. 127
  • 132. The executed agreements between the parties called for a modification of the secureddebt structure to address, among other things, the additional funding requirements and revisionsto the security interests and collateral of the lenders. The principal amount committed of therestructured secured debt by Tranche is as follows: Table #1 Summary of Restructured Secured Debt Principal Amount 288 Secured Debt Committed Tranche A $75 Million Tranche B $150 Million 289 Tranche C Not Funded Tranche D $385 Million 290 Tranche E $186 Million TOTAL $796 Million a. Tranche A Debt The DOE and Solyndra’s investors, lead by Argonaut and Madrone, agreed to restructurethe company’s existing indebtedness whereby the DOE would subordinate its recovery rightsupon liquidation (for a portion of its loan) to a new $75 million loan (the Tranche A Debt) fromexisting investors that agreed to participate. The funds were to be used in the implementation ofthe Consolidation Plan. See Exhibit #11 for a summary of key terms relating to the Tranche ADebt. All of the existing Convertible Note holders and preferred stockholders were offered theright to participate as lenders in the Tranche A Debt. 291 Approximately 23 of Solyndra’s existing288 Principal amount for Tranche A and Tranche B represent the commitments of the credit parties and not the actualamounts drawn.289 Tranche C was not funded pursuant to the February 2011 Restructuring. It was established as a result of near-term anticipated future capital requirements and allows for funding of an additional $75 million.290 Tranche E was composed of $175 million in outstanding principal obligations under the Convertible Notes, plusaccrued interest of $11 million through the date of the Restructuring.291 On February 16, 2011, Solyndra, Inc. sent a Tranche A – Rights Offering Information letter to the holders of theexisting Convertible Notes and preferred stock. The rights offering expired on March 16, 2011 and participantswere required to be accredited investors under applicable federal securities laws. See Appendix W.146. 128
  • 133. investors accepted the offer and became lenders in the restructured Tranche A Debt. A summaryof the top participating lenders is provided below in Table #19: Table #19 Summary of Top Lenders in Tranche A Debt Lender Name Amount % Owned Argonaut Ventures I, LLC $35,311,321 47.08% Madrone Partners, L.P. 24,235,608 32.31% Rockport Capital Partners III, LP 6,000,000 8.00% Masdar Clean Tech Fund, LP 2,000,000 2.67% Beltest Shipping Company Limited 1,631,840 2.18% Other Remaining Lenders 5,821,231 7.76% TOTAL $75,000,000 100.00% Pursuant to the Restructuring, the participants in the Tranche A Debt received warrants(“Tranche A Warrants”) to purchase shares of common stock of Solyndra, Inc. that wouldrepresent approximately 99.99% of the fully diluted equity ownership of Solyndra, Inc. 292 Asconsideration for the Lead Investors underwriting of the Tranche A Debt and placing significantfunds in escrow since January 2011, each of the participating lenders entered into a letteragreement with the Lead Investors on April 6, 2011 that would transfer all Tranche A Warrantsto the Lead Investors upon a bankruptcy filing or liquidating event. 293 Solyndra, Inc. was not aparty to the side letter regarding the potential transfer of warrants. The side letter was executed,among other things, to preserve the substantial net operating loss (“NOL”) attributes of Solyndra,Inc. A separate side letter was executed between the DOE and the Lead Investors regardingthe NOL on February 23, 2011. The parties agreed that the Lead Investors would not take anyactions that would permit the NOL to be transferred or used for any purpose other than to offsetthe income tax liability of Solyndra, Inc. unless a bankruptcy or insolvency proceeding was filedand or the DOE restructured debt was paid in full. The obligations by the Lead Lenders under292 See Appendix W.147, Restructuring and Warrant Issuance Agreement dated February 23, 2011.293 See Appendix W.149, Side Letter Agreement Regarding Solyndra, Inc. Warrants between Lead Investors andthe other participating lenders dated April 6, 2011. 129
  • 134. this agreement regarding the NOL ceased 60 days after the bankruptcy filing in September2011. 294 b. Tranche B Debt As part of the Restructuring, the DOE agreed to perform under its guarantee andSolyndra LLC was obligated to reimburse the DOE for all guarantee payments made by theDOE. The original $535 million DOE Loan Guarantee was split into two separate tranches:Tranche B and Tranche D. The Tranche B portion included a loan up to $150 million, whichincorporated the remaining $48.8 million not yet drawn on the original loan as of theRestructuring date (“Tranche B Debt”). See Exhibit #12 for a summary of key terms relating tothe Tranche B Debt. c. Tranche C Debt In addition to the Tranche A Debt and Tranche B Debt, the Restructuring contemplated afuture Tranche of debt to fund the Consolidation Plan (“Tranche C Debt”). The future TrancheC Debt was anticipated to raise an additional $75 million of capital to be used for generalcorporate purposes and required working capital, subordinate to the Tranche A Debt and paripassu with the Tranche B Debt. The Consolidation Plan forecasted that the Tranche C Debtfunding was required by June 2011. The funding from the anticipated Tranche C Debt was neverraised. As a result, the company structured an agreement with certain investors to factor/sell itsaccounts receivable and inventory to manage its cash flow until other funding sources could beobtained or another debt restructuring consummated. 295 d. Tranche D Debt As a result of the Restructuring, the DOE agreed, among other things, to modify theterms and conditions of the DOE Loan Guarantee including its security interest and collateral.As mentioned above, the DOE Loan Guarantee was split into two parts: Tranche B and TrancheD. The Tranche D portion of the restructured DOE Loan Guarantee included the remaining $385294 See Appendix W.144, Side letter between the DOE and the Lead Investors regarding NOL dated February 23,2011.295 See Appendix AB.1 for discussion regarding the accounts receivable and inventory purchase and salesagreements for additional details. 130
  • 135. million of the original $535 million DOE Loan Guarantee (“Tranche D Debt”) that already hadbeen disbursed for the construction of the Fab 2 facility. See Exhibit #13 for a summary of keyterms relating to the Tranche D Debt. e. Tranche E Debt A component of the Restructuring involved the exchange of the existing $175 millionConvertible Notes originally purchased between June 2010 and October 2010 and held byapproximately 40 investors. On February 9, 2011, Solyndra, Inc. sent the holders of the existingConvertible Notes an Offer to Exchange and Consent Solicitation (“Exchange Offer”) 296 togarner approval of the proposed Restructuring. Pursuant to this Exchange Offer, existing holdersof the Convertible Notes were offered the right to exchange their existing notes for new SecuredPromissory Notes (“Tranche E Debt”). Each holder who desired to participate in the exchangeoffer were required to tender their existing notes and consent to the amendment of certain termsand conditions of the existing Convertible Notes by March 10, 2011. The proposed amendmentswould extend the maturity date, release the security interest in all collateral, terminate theexisting related collateral documents, eliminate certain covenants and events of default, andeliminate the convertibility of the existing Convertible Notes. If the holder did not agree totender any portion of their existing Convertible Notes in the exchange offer, the holder’s existingConvertible Notes would have substantially fewer rights and benefits than they were previouslyprovided pursuant to the Restructuring. See Exhibit #14 for a summary of key terms relating tothe Tranche E Debt. All of the existing Convertible Note holders were offered to convert their existing notesto Tranche E Debt. All of the Convertible Note holders (40 holders) exchanged their existingnotes and executed the new notes included in the Tranche E Debt pursuant to the Restructuring.Argonaut and Madrone together held approximately $125.8 million of the Tranche E Debt alone.A summary of the top participating lenders is provided below in Table #20:296 See Appendix W.64, Solyndra Offer to Exchange and Consent Solicitation (Tranche E) dated February 9, 2011. 131
  • 136. Table #20 Summary of Top Lenders in Tranche E Debt Lender Name Amount % Owned Argonaut Ventures I, LLC $89,108,788 50.92% Madrone Partners, L.P. 36,688,833 20.97% Rockport Capital Partners III, LP 7,300,000 4.17% 297 US Venture Partners (Various) 6,000,000 3.43% Howard Hughes Medical Institute 4,401,432 2.52% Other Remaining Lenders 31,500,947 17.99% TOTAL $175,000,000 100.00% 3. Summary of February 2011 Loan Restructuring Documentation The closing of the Restructuring involved the execution of numerous agreements anddocumentation executed between Solyndra LLC, Solyndra, Inc., DOE, Convertible Note holders,Argonaut, 298 and US Bank 299 (the “Restructuring Documentation”). This documentation wasextensive due to the complexity and size of the Restructuring and included over 30 differentagreements and a substantial amount of supporting documentation including, but not limited to,deeds of trust, side letters, assignments, UCC-1 filings, certificates, schedules, financial analyses,and exhibits totaling over 2,100 pages. 300 The Restructuring Documentation included the following categories of documentation: • Loan Documentation – The loan documentation included the First Amended and Reinstated Common Agreement, credit facility agreements, note purchase agreement, secured promissory notes, intercreditor agreement, equity funding agreement, and other related documentation. • Security Documentation – The security documentation included amendments to the deeds of trust, First Amended and Restated Security Agreement, trademark and patent security agreements, UCC-1 filings, equity pledge agreements, bank account control agreements and other related documentation.297 Includes USVP Entrepreneur Partners VII-A, L.P., USVP Entrepreneur Partners VII-B, L.P., U.S. VenturePartners VII, L.P., U.S. Venture Partners IX, L.P., U.S. Venture Partners X, L.P., USVP X Affiliates Fund, L.P., and2180 Associates Fund VII, L.P.298 As the Tranche A Credit Facility Agent, Tranche C Credit Facility Agent, and Tranche E Credit Facility Agent.299 As the Master Collateral Agent.300 See Appendix W, February 2011 Restructuring Agreements and Documentation. 132
  • 137. • Asset Transfer Documentation – The asset transfer documentation included an asset transfer agreement, bill of sale and assignment agreement, capital contribution agreement, intercompany project termination agreement, assignments, and related documentation. • Equity Documentation – The equity documentation included a warrant issuance agreement, a disclosure letter, individual warrant, a side letter, and related documentation. a. Key Agreements and Documentation The agreements and documentation executed at closing for the Restructuring wasextensive and provided the requirements and obligations of each party. Some of the keyagreements and documentation of the Restructuring are highlighted below: • First Amended and Restated Common Agreement - Solyndra LLC and each representative of the Tranche A Debt, Tranche B Debt, Tranche C Debt (if any), Tranche D Debt and Tranche E Debt (collectively, the “Tranche Representatives”) entered into a First Amended and Restated Common Agreement (“Amended Common Agreement”) pursuant to the Restructuring. The Amended Common Agreement provided for common representations and warranties, affirmative and negative covenants, and events of default. Under the Amended Common Agreement, certain covenants were included that limited and restricted the company’s ability to pay dividends and distributions, use its intellectual property outside of its current business, modify its annual budget or plan without prior consent, make investments, incur additional indebtedness, and enter into a transaction creating a change of control of the business or company. The Amended Common Agreement also included provisions and terms for loan funding, principal and interest payments and various conditions precedent prior to advances being made. • Intercreditor Agreement – Argonaut, the DOE, and US Bank entered into Intercreditor Agreement relating to the various secured debt tranches. The agreement defined the rights and obligations of the holders of the various Tranches with regards to the sharing of collateral pursuant to the distribution priority of each Tranche and other specified matters. The agreement also granted the DOE substantial rights with respect to the timing and control over any involuntary bankruptcy filing by a holder of the other non-DOE Tranches and imposed significant restrictions and limitations on the non-DOE Tranches relating to any restructuring of their indebtedness or to accelerate their indebtedness due to an event of default under the Amended Common Agreement. • Tranche A Credit Facility Agreement – Solyndra LLC and Argonaut entered into a Tranche A Credit Facility Agreement. The agreement provided for the terms and conditions of the Tranche A Credit Facility. 133
  • 138. • Payment and Reimbursement Agreement (Tranches B and D) – Solyndra LLC and the DOE entered into a Payment and Reimbursement Agreement that obligated Solyndra LLC to pay make certain payments and reimbursements to the DOE with respect to DOE’s payments under the DOE guarantee. • Note Purchase Agreement (Tranche E) and Secured Promissory Notes – Solyndra, Inc., Solyndra LLC, and the Convertible Note holders entered into a Note Purchase Agreement (Tranche E) and Secured Promissory Notes whereby the existing Convertible Notes are converted to new Tranche E notes. • First Amended and Restated Equity Funding Agreement – Solyndra, Inc., Solyndra LLC, the DOE, and US Bank entered into a First Amended and Restated Equity Funding Agreement. The agreement provided the revised terms and procedures to fund the required equity commitments of Solyndra, Inc. pursuant to the Restructuring. • Asset Transfer Agreement – Solyndra, Inc. and Solyndra LLC entered into an Asset Transfer Agreement. The agreement transferred substantially all of the assets of Solyndra, Inc. to Solyndra LLC. Solyndra LLC also assumed substantially all of the liabilities of Solyndra, Inc. • Security Agreements – Each Tranche executed Security Agreements regarding the collateral owned and transferred to Solyndra LLC. The Intercreditor Agreement addresses how the Collateral is shared between the various Tranches. 4. Modified Financial Reporting Requirements As a result of the Restructuring, the agreements required more stringent reportingincluding weekly, monthly, quarterly and annual reporting to the credit parties. Some of the keyreporting requirements under the Restructuring are as follows: 301 a. Weekly Reporting Solyndra LLC was required to provide weekly reporting on the Wednesday following theprior week’s activity (“Weekly Reporting Packages”). The Weekly Reporting Packages wereexecuted by Stover and included: 302 • Sales and shipment information; • Updated sales pipeline, projections and average sale prices;301 See Appendix W.2, First Amended and Restated Common Agreement, Section 6.302 See Appendix Y, DOE Weekly Reporting Packages 134
  • 139. • Financial information including cash balance, accounts payable, and accounts receivable data; • Production information including panels and megawatts produced, average watts/panel produced and production yield; • Current head counts; and • Inventory balances of finished goods. b. Monthly Reporting Solyndra LLC was required to provide monthly reporting within 25 days after the end ofeach fiscal month (“Monthly Reporting Packages”). The Monthly Reporting Packages wereexecuted by Stover and included: 303 • Consolidated monthly unaudited financial statements of Solyndra LLC including a budget to actual comparison; • Calculation of Debt-to-Equity Contribution Ratio during construction period; • Report of the advances made during the month; • Operating metrics achieved during the month including actual uptime, run-rate, and yields for the production process, module production by model, panel efficiency, panel costs, and average selling price; and • Material warranty or product liability claims. c. Quarterly Reporting Solyndra LLC was required to provide quarterly reporting (including certifications by anauthorized official of Solyndra LLC) within 25, 35, or 45 days after the end of fiscal quarterdepending on the specific requirement (“Quarterly Reporting Packages”). The QuarterlyReporting Packages were executed by Stover and included: 304 • Consolidated quarterly unaudited financial statements of Solyndra LLC (within 45 days) including management discussion and analysis of results; • Discussion and analysis by a financial officer of Solyndra LLC of the business and operations (within 45 days);303 See Appendix X, DOE Monthly Reporting Packages304 See Appendix Q, DOE Quarterly Reporting Packages 135
  • 140. • Calculation of Debt-to-Equity Contribution Ratio during construction period; • Summary operating report including a budget to actual comparison; • Updated Restructuring construction budget (within 35 days); • Updated annual budget, base case projections, and technology milestone schedule; • Various operating metrics achieved during the quarter; • Report detailing the working capital available at the end of the quarter; • Copy of risk assessment report; and • Updated sales and marketing plan. d. Annual Reporting Solyndra LLC was required to provide annual reporting (including certifications by anauthorized official of Solyndra LLC) within 25, 60, or 180 days after the end of fiscal yeardepending on the specific requirement (“Annual Reporting Packages”). The Annual ReportingPackages were executed by Stover and included: 305 • Consolidated unaudited financial statement of Solyndra LLC (within 60 days); • Audited annual financial statements of Solyndra LLC (within 180 days); • Discussion and analysis of Solyndra’s business and operations prepared by management (within 180 days); • Annual budget for the year (prior to January 1); • Budget to actual comparison with explanation of variances (no later than January 31); and • Various operating metrics achieved during the year. As part of the Restructuring, Solyndra agreed to allow DOE representatives to attendeach of its periodic Board meetings and obtain the related Board materials. As a result, one ormore DOE representatives attended all Board meetings (as an observer) conducted betweenFebruary 2011 and the date of filing of the bankruptcy petition in September 2011. Pursuant to305 Solyndra LLC did not prepare and submit an Annual Reporting Package prior to bankruptcy filing in September2011. 136
  • 141. the required reporting and attendance of the various Board meetings, the DOE was provideddetailed information about company’s finances, operations, and prospects. From the initial Pre-Application in 2006 though the bankruptcy filing in September 2011,Solyndra provided the DOE with thousands upon thousands of pages of documentation andinformation, had numerous face-to-face meetings and telephone discussions (including tours andmeetings at the Solyndra facilities), provided numerous detailed financial models prepared by thecompany as the economic environment and assumptions changed, trained the DOE on various ofthe financial models to run its own sensitivity analyses, worked with and provideddocumentation and information to the DOE’s own independent engineer and market consultantsfor review, complied with various regulatory requirements, provided the DOE with advancednotice of potential waiver requests in late 2010, provided actual financial results indicatinghundreds of millions of operating losses, and expended significant resources during the DOELoan Guarantee approval, monitoring, and restructuring phases. Solyndra complied with the extensive reporting requirements of the DOE which includedannual and quarterly information including actual financial and operational results of bothSolyndra, Inc. and Fab 2, LLC, construction progress reports for the Fab 2 facility, and all otherinformation requested by the DOE prior to the Restructuring. Following the Restructuring Plan of February 2011, Solyndra adhered to even morestringent reporting requirements including, among other things, weekly, monthly, and quarterlyreporting of financial and operational performance, sales and marketing updates, productionmetrics, cash balances, working capital requirements, loan advance reporting, head counts,inventory balances, and budget to actual comparisons. The DOE representatives also attendedall Board meetings and received various Board materials beginning in February 2011. Having reviewed communications and the underlying records between the DOE andSolyndra, it is the opinion of the CRO that based upon the level of documentation andinformation as cited above, the DOE had sufficient information to understand the risks andchallenges associated with the DOE Loan Guarantee and make an informed decision as to theongoing financial condition of Solyndra in advance of granting the original loan guarantee and 137
  • 142. thereafter, including in connection with the February Restructuring and through thecommencement of the bankruptcy case. XI. HISTORICAL FINANCIAL STATEMENT ANALYSISA. Financial Analysis Recap PWC issued audited financial statements for Solyndra for the fiscal years from inceptionin 2005 through January 1, 2011 (Fiscal year 2010). 306 In addition to the audited financialstatements, Solyndra provided weekly, monthly, and quarterly financial reports to the DOEprepared by the company. In accordance with the DOE financing documents, a number ofSolyndra’s financial reports required certification. 307 Thus, certain monthly, quarterly andannual reports were signed and certified by Solyndra’s Chief Financial Officer. These reportsbegan with the closing of the DOE Loan Guarantee for Fab 2 Phase I, with the first suchquarterly report covering the third quarter of 2009. Quarterly reports continued through thesecond quarter of 2011. Solyndra also provided certain weekly and monthly information to theDOE which has been used to supplement the quarterly information for the periods following thesecond quarter of 2011 through the petition date. 308306 See Appendix Z, Solyndra Audited Financial Statements.307 Common Agreement Section 6.1(d) states, “…such Financial Statements shall be certified by a Financial Officerof the Borrower as having been prepared in accordance with GAAP on a consistent basis and as fairly presenting inall material respects the financial condition of the Borrower as of the date thereof and the results of operations andcash flows of the Borrower for the periods presented. Such certification shall also include a certification that thePerson has made or caused to be made a review of the transactions and financial condition of the Borrower duringthe relevant fiscal period and (i) that other than as set out in such Financial Statements, there are no liabilities orobligations of the Borrower that are required to be presented in such Financial Statements in accordance withGAAP, and (ii) that no Event of Default or Potential Default exists, or of such certification cannot be made, thenature and period of such Event of Default or Potential Default and what corrective action the borrower has taken orproposes to take with respect thereto:” See Appendix P.3.308 See Appendix X and Appendix Y, Certain Portions of Weekly and Monthly Reports. 138
  • 143. 1. Fiscal Years 2005 through 2008 – Prior to DOE Loan Guarantee Facility a. Recap of Operations for Fiscal Year 2005 Solyndra’s operations during fiscal year 2005 were limited. During 2005, there were norevenues and the net loss for fiscal 2005 was $1.3 million, which was funded primarily fromfunds loaned directly to the company by Mr. Gronet. b. Recap of Operations for Fiscal Year 2006 During fiscal year 2006, Solyndra received its first funding from the sale of redeemableconvertible preferred stock (“Preferred Stock”) in the amount of $97.7 million. An initial $19.9million was raised from the sale of Series A-1 and A-2 Preferred Stock. 309 Later that year, anadditional $77.8 million was raised from the sale from the sale of Series B Preferred Stock. 310Solyndra also received a net inflow of $7.2 million in the form of loans and notes payable. 311 Asa result of these cash infusions, the company ended the year with approximately $71.1 million incash, short-term investments and restricted cash. During 2006, Solyndra added $5.1 million toproperty, plant and equipment. Solyndra had no operating revenues and the yearly net loss wasapproximately $27.2 million. Also, in December 2006, Solyndra filed its initial application withthe DOE seeking funds to begin construction of its first manufacturing facility. c. Recap of Operations for Fiscal Year 2007 During fiscal year 2007, Solyndra continued to receive funding in the form of preferredstock and short-term notes payable. For the year 2007, Solyndra raised approximately $213.9million from the sale of redeemable convertible preferred stock and received a net of $66.6million as a result of various loans and notes payable. It concluded the year with over $158.1million in cash and restricted cash. During that year, Solyndra was well into the construction ofits first manufacturing facility which came to be known as Fab 1. During 2007, Solyndra added$108.7 million to property, plant and equipment. Solyndra had no operating revenues andincurred a net loss of $114.1 million. In the course of its audit of the 2007 financial statements,309 See Appendix AA.1 for discussion of equity funding.310 Id.311 The term “net” is reflective of the total funds received from loans minus payments made on such loans. 139
  • 144. PWC issued an opinion including an emphasis of a matter paragraph; that emphasis being thequestion concerning Solyndra’s ability to continue as a “going concern.” 312 The auditors goingconcern opinion may have been required but was not particularly determinative as to thelikelihood of success or failure. The same going concern issue was raised by PWC in everysubsequent financial audit through 2010. Through the first two and one half years of itsoperations, Solyndra received over $311.6 million in funding from the sale of redeemableconvertible preferred stock and a net of $74.7 million from short-term notes payable and otherloans. Additionally, the company had acquired property, plant and equipment for $113.9 millionin the construction of Fab 1. During the same period, Solyndra had incurred a total net loss of$142.6 million. Through the end of fiscal year 2007, Solyndra was identified as a developmentstage company. 313 d. Recap of Operations for Fiscal Year 2008 During fiscal year 2008, Solyndra continued to receive additional funding in the form ofboth preferred stock and short-term notes payable. In total, during 2008, Solyndra raisedapproximately $309.8 million from the sale of redeemable convertible preferred stock 314 andincurred a net outflow of $79.5 million in the form of payments on loans and notes. Thecompany ended the year with over $82.2 million in cash and cash equivalents. During the sameperiod, Solyndra was nearing completion of the Fab 1 building and certain equipment. In 2008,Solyndra acquired $133.9 million in property, plant and equipment. As with fiscal year 2007,PWC again raised the issue as to whether Solyndra would be able to continue as a going concern. In the first half of 2008, the company’s photovoltaic panels were first certified forcommercial sale and in July 2008, Fab 1 produced a saleable product. Total revenues were $6312 The term “going concern” assumes that a business will continue in operation for the “foreseeable future” andaccordingly will be able to realize the benefit of its assets and discharge its liabilities in the normal course ofoperations. The term “foreseeable future” takes into consideration all known factors for at least, but not limited to,twelve months from the balance sheet date.313 A “development stage company” devotes most of its activities to establishing a new business. It is furtherdefined as a business for which principal operations have not commenced or principal operations have generated aninsignificant amount of revenue. The financial statements of such companies are to be identified as those of adevelopment stage company.314 This sum also included $119.1 million in the form of bridge loans which were subsequently converted topreferred stock. 140
  • 145. million for the year. The net loss for the year of 2008 was $242.5 million 315, bringing totallosses for all years of operation to $385.1 million. From 2005 through the end of fiscal year 2008, Solyndra had received over $620.4million in funding from the sale of redeemable convertible preferred stock 316 and ended fiscalyear 2008 with no long-term or short-term notes payable. The company had acquired property,plant and equipment totaling $247.4 million. 317 Solyndra had also incurred a total net loss frominception of $385.1 million over that four year period. At the end of fiscal year 2008, Solyndrawas no longer considered a development stage company. 2. Fiscal Years 2009 through 2011 - Following DOE Loan Guarantee Facility a. Recap of Operations for Fiscal Year 2009 In March of 2009 the company received conditional commitment for the financing of theFab 2 Phase I project, and in September 2009 the $535 million DOE Loan Guarantee closed.Solyndra withdrew $140.9 million in proceeds from the DOE Loan Guarantee during the year.Additionally, Solyndra raised approximately $335.7 million from the sale of redeemableconvertible preferred stock and ended the year with $50.3 million in cash and cash equivalents.The ramp up of Fab 1 production continued and construction of Fab 2 Phase I was commencedin September 2009. During 2009, Solyndra added approximately $209.3 million to property,plant and equipment. For the five year period ending in 2009, Solyndra had received over $961.3 million infunding from the sale of redeemable convertible preferred stock. 318 All existing notes payableand long-term loans were paid, with the exception of the $140.9 million DOE Loan Guarantee.The company had also acquired property, plant and equipment in the amount of $457.1 millionin the construction of Fab 1 and Fab 2 Phase I. Through the end of fiscal year 2009, Solyndra315 Total net loss attributable to common stockholders was $242.5 million which included a deemed dividend onpreferred stock of $10.4 million.316 This sum also included $119.1 million in the form of bridge loans which were subsequently converted topreferred stock.317 During the year, property, plant and equipment was reduced by $20.8 million of impairment charges related topre-production tools that were abandoned prior to the end of their estimated useful lives.318 Including the bridge loans ultimately converted to preferred stock. 141
  • 146. had also spent over $316.7 million in research and development expenses and had incurred atotal net loss from inception of $557.7 million. As production in Fab 1 continued to ramp up, revenues increased to $100.5 million for2009 and the net loss for the year was $172.5 million, reduced from the $242.5 million net lossin 2008. b. Recap of Operations for Fiscal Year 2010 During fiscal year 2010, Solyndra neared completion of the Fab 2 Phase I building. Toolinstallation was continuing and plans to move certain tools and manufacturing equipment fromFab 1 into Fab 2 Phase I were initiated, including the shut-down of Fab 1. Property, plant andequipment added during that period were $393.2 million. The DOE loan facility increased by$317.3 million. Overall market conditions negated the company’s attempts at accessing publiccapital markets and Solyndra instead obtained an additional $175.0 million of convertible debtfinancing. Revenues increased to $141.9 million in 2010, but the net loss also increased from theprior year to $328.6 million. 319 Through the end of fiscal year 2010, Solyndra had received over $961.3 million infunding from the sale of redeemable convertible preferred stock, including certain bridge loansconverted to preferred stock. Cumulative losses from inception to 2010 totaled $886.4 million.Solyndra had drawn $458.2 million on the DOE Loan Guarantee and had issued an additional$175 million in convertible notes. It had also acquired property, plant and equipment of $850.3million in the construction of Fab 1 and Fab 2 Phase I. During late 2010, Solyndra began restructuring talks with the DOE and other creditors(see Section X.G February 2011 Loan Restructuring). As noted in Note 1 to the financialstatements: “In February 2011, the Company reached agreements with the DOE and other existing creditors to restructure the terms of the existing indebtedness whereby the DOE would subordinate its recovery rights on liquidation with respect to a portion of its indebtedness to the new319 Approximately $65.3 million of this increased operating loss resulted from accelerated depreciation resultingfrom the closure of Fab 1 equipment as the manufacturing facilities for Fab 1 were incorporated into Fab 2 Phase I. 142
  • 147. promissory notes to be issued (See Note 16). In addition to restructuring the liquidation rights, the DOE and other existing creditors also agreed to modify other terms of loans such as interest rates and amortization periods of principal and interest due under the existing indebtedness. As a result of restructuring, the Company will not have any principal or interest payments due for the existing indebtedness until March 2013.” “The Company’s future capital requirements will depend on many factors, including the rate of revenue growth, the selling price of the Company’s photovoltaic systems, the expansion of sales and marketing activities, the timing and extent of spending on research and development efforts and the continuing market acceptance of the Company’s systems. There can be no assurance that, in the event the Company requires additional financing, such financing will be available. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending or to remain in compliance with the covenants contained in the DOE guaranteed loan facility, could have a material adverse effect on the Company’s ability to achieve its intended business objectives and continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.” PWC issued the same qualified opinion regarding Solyndra’s ability to continue as agoing concern. c. Recap of Operations for Fiscal Years 2005 - 2011 The charts as detailed below provide a year by year comparative analysis of Solyndra’sconsolidated Operating Results, Financing Sources, Cash and Cash Equivalents, and EquipmentPurchases for fiscal years 2005 through 2011. 143
  • 148. * Reflects the full payment of prior year loans and notes payable.** Includes convertible notes of $175 million ultimately designated as Tranche E.*** Includes $75 million cash infusion during restructuring designated as Tranche A. 144
  • 149. Solyndra’s three largest quarterly operating losses occurred during the fourth quarter of2010 and the first and second quarters of 2011. The net operating losses reported for the fourthquarter 2010 and first and second quarters of 2011 were approximately $77.7 million, $114.0million and $91.1 million, respectively, for a nine-month total of $282.8 million. By July 2, 2011, a little more than a month prior to bankruptcy, Solyndra had reportedlosses totaling almost $1.1 billion. Long-term debt exceeded $787.8 million and cash haddwindled to just over $18.3 million. 145
  • 150. Cash continued to decline during the first seven weeks of the third quarter of 2011 andsales were behind plan. By August 20, 2011, the reported cash balance was just $5.0 million andsales for the same seven week period were only $5.3 million, $13.8 million below the thirdquarter 2011 weekly dashboard forecast for the same seven week period.B. Summary of Quarterly Reports Provided to the DOE 1. Quarterly Financial Results Reported to the DOE Concurrent with the funding of the DOE Loan Guarantee, Solyndra was obligated toprovide internal unaudited financial information directly to the DOE on a quarterly basis. All thequarterly statements and certifications were certified 320 by Solyndra’s Chief Financial Officer. 321 The CRO has reviewed the unaudited financial information provided to the DOE bySolyndra and compared that information to the final audited financial statements issued by PWCfor the related annual period to determine whether the financial information provided bySolyndra in the quarterly reports was materially correct. It is the opinion of the CRO that theinformation provided to the DOE, as certified, was materially correct when compared to theaudited financial statements of PWC.322 As of October 3, 2009, Solyndra was reporting an Accumulated Deficit (or total netlosses) of $504.3 million. The first quarterly financial reports submitted to the DOE by Solyndrashowed revenues for the nine months ended October 3, 2009, of just under $58.8 million and anet loss of just over $119.1 million for the same period. Construction of Fab 2 Phase I had justbegun. The unrestricted cash balance was approximately $45.3 million. The next unaudited quarterly financial statements were submitted by Solyndra to theDOE on or about February 16, 2010, for the three months and twelve months ended January 2,2010. During the fourth quarter of 2009, Solyndra reported revenues of nearly $41.7 million anda quarterly net loss of over $51.3 million. The net loss for the year had decreased by320 See Footnote 307.321 All of the quarterly statements and certifications in the possession of the CRO are included as Appendix Q.322 It should be noted that there are non-cash differences between the audited financial statements of the companyand the financial information provided to the DOE related to the accelerated depreciation of equipment caused bythe consolidation of equipment in Fab 1 and Fab 2 Phase I. Such discrepancies were not surprising given that thefinancial effects of such amalgamation were not fully known until the consolidation was fully completed. 146
  • 151. approximately $61.0 million from the prior year, due in large part to a decrease in research anddevelopment expenses. The financial information reported to the DOE for the 2009 fiscal year closelyapproximates the financial results reported in Solynra’s audited financial statements for theapplicable period. 323 Selected information from the unaudited quarterly reports for fiscal year2009 and the audited financial statements for the same year are compared in the table below: Table #21 SOLYNDRA, INC. SELECTED CONSOLIDATED FINANCIAL INFORMATION For the year ended January 2, 2010 (in thousands) Per Reports Per Audited Submitted to Financial the DOE Statements Cash and cash equivalents $ 50,265 $ 50,265 Property, plant and equipment, net 375,873 375,873 Redeemable convertible preferred stock 961,270 961,270 Accumulated deficit (556,319) (557,744) Revenues 100,464 100,465 Cost of Revenues (162,165) (162,166) Net Loss (171,070) (172,495) Similar to the last two quarters of 2009, Solyndra reported quarterly operating losses forthe next six successive quarters. A summary of the quarterly financial information reported tothe DOE is included as Exhibit #15. For fiscal year 2010, Solyndra reported a combined net loss of just under $261 million tothe DOE in its quarterly reports. Solyndra’s audited financial statements for fiscal year 2010reported a net loss of over $328 million. The increased net loss as compared to the preliminaryinformation submitted to the DOE was primarily the result of an adjustment for accelerateddepreciation of Fab 1 assets. A plan of consolidation of Fab 1 manufacturing equipment was323 The unaudited preliminary financial information submitted to the DOE was required to be submitted prior to thefinal closing of the books and examination by the independent public accountants. 147
  • 152. established at the end of 2010, which was ultimately consummated in early 2011.Approximately $65.3 million of accelerated depreciation was recorded in the audited financialstatements for 2010, which was not unusual under the circumstances. The closure of Fab 1,including the consolidation of certain equipment into Fab 2 Phase I, was not anticipated by thecompany until late 2010. As such, final determination as to the amount of the write-down couldnot be determined until the closure/consolidation plan was executed. Selected financial information from Solyndra’s unaudited quarterly reports for fiscal year2010 and audited financial information for the same year are compared in Table #22 below: Table #22 SOLYNDRA, INC. SELECTED CONSOLIDATED FINANCIAL INFORMATION For the year ended January 1, 2011 (in thousands) Per Reports Per Audited Submitted to Financial the DOE Statements Cash and cash equivalents $ 31,816 $ 31,816 Property, plant and equipment, net 726,594 660,179 Redeemable convertible preferred stock 961,270 961,270 Accumulated deficit (818,595) (886,389) Revenues 147,782 141,947 Cost of Revenues (224,206) (283,997) Net Loss (260,685) (328,645) XII. FINANCIAL FORECASTS & PROJECTIONSA. Key Metrics in Forecasts & Plans At varying times and in accordance with certain commitments, Solyndra was obligated toprovide financial forecasts and plans to the DOE, the Board, and investors. Solyndra alsoprovided the DOE with access to the company’s financial models and trained DOErepresentatives to allow them to change assumptions and observe the impacts flowing therefrom. 148
  • 153. Solyndra management devoted significant time to explaining its financial forecasts and plans andsensitivities therein to the DOE, the Board and investors. The company also relied on itsfinancial forecasts and plans internally as operational benchmarks for management. The preparation of virtually any financial forecast, especially those looking years into thefuture, can be tenuous, even for well established businesses with a prior history of operations.Solyndra’s circumstances were aggravated by a number of factors, many of which were beyondthe control of management. It was made more problematic by the fact that Solyndra wasventuring forth with a new and unproven technology. While Solyndra was understandablyoptimistic, this new technology amplified the uncertainties inherent in providing a businessforecast based on manufacturing and production efforts that had not been fully formulated andwere very much a work in process. Solyndra was also operating in an extremely competitive international marketplace wherecircumstances totally beyond its control could dramatically alter the underlying assumptionsupon which the forecasts were predicated. It is therefore not surprising that in this rapidlychanging environment, the company was, in most instances, not particularly successful inpredicting its future operational capabilities. Therefore, any reader of this section should bemindful of those facts, prior to drawing any conclusions.B. Risks Facing Solyndra Solyndra was well aware of the risks noted above and routinely disclosed such risks tothe readers of its audited financial statements. For instance, Note 1 to Solyndra’s auditedfinancial statements for fiscal year 2009 stated as follows: 324 “The Company has a limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by companies in this stage of development. These risks include, but are not limited to, the Company’s ability to increase its production capacity by completing the expansion of the Company’s first manufacturing facility (“Fab 1”), developing additional manufacturing facilities, including the324 See Appendix Z.4, Solyndra, Inc. Consolidated Financial Statements as of January 2, 2010 as audited by PWCwith notes thereon. 149
  • 154. Company’s second manufacturing facility (“Fab 2 Phase I”), and increasing its production, throughput and yield;” The underlying risks outlined within this note discuss the important points of Solyndra’sneed to increase production by completing both Fab 1 and Fab 2 Phase I and increasingthroughput and yield in the manufacturing process. Note 1 further discussed the company’s ability to generate sales sufficient to supportoperations: “…the fact that the Company’s business is based on a new technology, and if the Company’s photovoltaic systems or manufacturing processes fail to achieve the performance and cost metrics that the Company expects, the Company may be unable to develop demand for the systems and generate sufficient revenue to support operations;” The foregoing notes recognized that Solyndra’s business was susceptible to a widevariety of risks, including production risks associated with manufacturing and supplyingSolyndra’s product and demand risks associated with finding willing buyers for Solyndra’s newtechnology at prices that will sustain operations. The estimation of sales is one of the problems which challenged Solyndra due to thechanging market place. As the notes to the financial statements point out, given that Solyndrawas in the process of constructing a new manufacturing facility (Fab 2 Phase I) which wouldmore than double the company’s production capacity, the ability to sell out, and collect cash onall this expanded production would prove essential to the viability of the company. The key assumption underlying every Solyndra forecast and business plan during thisperiod was that the company’s manufacturing facilities would be operating at maximumavailable output and that Solyndra’s product would be sold promptly. As Fab 2 Phase I drewnearer to completion, given the market conditions and performance of the company, there was noflexibility to change this key assumption. In the years between Solyndra’s DOE Pre-Application of 2006 and the construction ofFab 1, the economic landscape of the solar industry was markedly different from what it is 150
  • 155. today. 325 At that time, the primary concern was for Solyndra to swiftly get its technology tomarket in order to fill the burgeoning demand for solar panels spurred by generous subsidies,especially in Europe. This buoyant atmosphere supported Solyndra’s ability to raise privatecapital and move forward with the construction of its manufacturing facilities. Unfortunately, as Solyndra moved closer to breaking ground on Fab 2 Phase I, whichwould vastly increase its manufacturing capability, the solar market experienced significantchange. Chinese manufacturers aggressively added capacity at unprecedented rates which hadthe effect of pushing prices of conventional flat panels downward, which also negativelyimpacted the prices at which Solyndra could competitively sell its product. At the same time,governments throughout the world were limiting subsidies that had previously spurred demand. With the benefit of hindsight, Solyndra’s decision to move forward with the constructionof Fab 2 Phase I in late 2009, which was funded with $195.2 million of private investor fundsand the DOE loan of $527.8 million, 326 was an extremely pivotal decision for the future of thecompany. It was the company’s best hope for success, but ultimately, along with other factors,led to its demise. During the construction of Fab 2 Phase I, the structural changes in the solarindustry resulted in a dramatic reduction of Solyndra’s panel pricing and cash flow from productsales. The only possible avenue of survival for Solyndra, other than substantial infusions ofcapital, lay in massively increased volumes. This required Solyndra’s projections and businessplans for the foreseeable future to continue to assume production at full capacity and to sell all ofits manufactured products. It was critically necessary to reach those levels as quickly as possibleas increasing production levels would, by its very nature, reduce the cost per watt, an importantdeterminant of profitability. Ultimately, the combination of the increased manufacturingcapacity in the solar industry worldwide, an unprecedented drop in the price of polysilicon, andexpiring subsidies and a global recession had the effect of significantly reducing demand forSolyndra’s product. Solyndra’s investors and lenders were well advised of these risks facing thecompany.325 See discussions in Section VI. External Environment and Market Condition.326 The DOE loan was originally $535 million, but was ultimately funded in the amount of $528 million. 151
  • 156. C. Impact of Risks on Solyndra’s Forecasts and Plans Solyndra’s forecasts and business plans assumed that the company would meet certaintimetables in terms of its manufacturing and sales targets. Some of the company’s targets provedto be aggressive, particularly in years 2010 through 2011 when the solar market wasexperiencing a dramatic decline. In order to move briskly into production and yield the benefits from the sale of itsproduct, almost every plan Solyndra submitted to the Board of Directors and the DOEsubsequent to 2009, anticipated the elapsed time from start up to full production from eighteen totwenty-four months. The company anticipated that any delay in effectuating such ramp-up ofFab 2 Phase I could have a significant impact on the company’s liquidity needs given that thecosts of production were primarily composed of fixed costs and any reduction in the timing offuture sales would only put additional strain on cash flows and capital requirements. 327 One key metric in Solyndra’s forecasts and financial plans presented to both the Boardand the DOE is Wp (watts per panel). To a great extent, demand for Solyndra’s product and theprice at which it could be sold were both dependent upon the Wp that could be achieved in themanufacturing process. The Wp provided the primary measurement of wattage output – thehigher the wattage, the greater the efficiency and the higher the price that could be charged.Solyndra’s manufacturing process was structurally limited to a fixed number of tubes and/orsolar panels which the company could produce. In other words, the manufacturing facility couldonly produce a finite number of panels even under optimum conditions with throughput andyield 328 at their maximum levels. However, Wp was a factor that the company hoped to improveto maintain an increasing level of watts sold and thereby maintain or increase revenues even withthe ASP (averages sales price per watt) declining over time. As demonstrated below, Solyndra327 Perhaps for this reason, inter-office communications between Solyndra personnel characterize slower ramp-uptimes as “unworkable.”328 The forecasts define “output” as a calculation based on three specifications for each tool in the productionprocess: baseline throughput, utilization percentage, and yield percentage. Baseline throughput is the highestthroughput possible with the facility running at the maximum level of twenty four hours a day and seven days aweek. Utilization percentage is the percentage of time in a given period that a tool is running (i.e., not down formaintenance and repair). Yield percentage is the percentage of material processed by a tool that goes on to the nextstep and meets minimum specifications. 152
  • 157. was successful in improving average Wp over the limited period of time when Fab 2 Phase I wasoperational; however, in most projections this remained well below the forecast levels. 329 Chart #18 reflects the estimated Wp based on three separate forecasts provided bySolyndra to the DOE. The first in August 2009, the second in October 2010 and the last forecastwas prepared as part of the restructuring agreement in February of 2011. Each of these forecastsincluded the estimated Wp for Fab 2 Phase I. The actual Wp achieved by Fab 2 Phase I for thefirst eight months of 2011 is included as well, though Fab 2 Phase I was still in the process oframping up production during 2011. ASP (average sales prices per watt) – Solyndra’s forecasts and business plans appear, tosome extent, to take into account downward market pressures on price in years 2009 through2011, as evidenced by a gradual reduction of the ASP. This downward pressure continued tomanifest reductions from 2009 through 2011. Because of market pressures and other factors, the329 Solyndra introduced the 200 series panel in July 2010. The 200 series panel was averaging almost 210 watts perpanel. This panel was to replace the 150 series panel. Customer demand for the 150 series continued longer thananticipated thereby delaying further panel power improvements. Accordingly, actual watts per panel continued tolag forecast amounts. 153
  • 158. ASP was not independently established by the company. Almost without exception, theforecasts included reductions in the ASP. This is illustrated in Chart #19 below: The foregoing continual decline of ASP had a material negative impact on Solyndra’soperating results.D. Comparison of Forecast and Historical Financial Results Solyndra utilized complex financial modeling in preparing the forecasts. The forecastsincluded detailed production metrics including analysis by specific processes, operational costs,receipts analyses, and other key financial data as well as the effect of utilizing various types ofequipment in the production process. The forecasts relied on the validity of a critical group ofbusiness assumptions and metrics which are discussed in further detail. The forecasts wereincorporated in complex electronic financial models that allowed the company to run multipleiterations of its forecasts and business plans. The DOE had access to Solyndra’s financialmodels and could adjust the assumptions in the model to analyze sensitivities contained therein. 154
  • 159. The CRO reviewed a significant number of forecasts prepared by Solyndra. Thefollowing are four examples of important forecasts which were issued at critical junctures forSolyndra. The forecasts are also reflective of the difficulties inherent in preparing a forecastwhen, for a variety of reasons, the possibility that one or more of these underlying assumptionsmay prove to be incorrect. The forecasts are discussed in chronological order beginning with the limited financialinformation included in Solyndra’s original Pre-Application filed with the DOE in December2006, and follow sequentially to the forecast prepared a few months preceding Solyndra’sbankruptcy filing. • Forecast #1 - December 2006 - Pre Application to the DOE filed on December 28, 2006 - Forecast #1 was submitted to the DOE in December 2006 in hopes of securing a loan guarantee from the government to fund the initial manufacturing facility (Fab 1). Solyndra ultimately attained funds for the construction of Fab 1 from private investors. • Forecast #2 - Sponsor company Plan dated July 31, 2009 through December 2013 - In September 2009, Solyndra closed on its loan guarantee from the DOE which was to be utilized for the construction of Fab 2 Phase I. This forecast represented the company’s best effort to project operations for the Sponsor company which, at the time, included only the operations of Fab 1 • Forecast #3 - October 2010 - Consolidation Plan - By Fall 2010, Fab 1 had been in production for almost two years and Fab 2 Phase I was under construction with the first scheduled shipments to begin in January 2011. The gap between forecast and actual performance had widened as the market experienced significant structural changes and significant changes were needed which resulted in the development of the Consolidation Plan. • Forecast #4 - Restructuring Plan - February 2011 - In February 2011, Solyndra consummated a restructuring based on a new forecast (the “Restructuring Plan”) and operations limited to Fab 2 Phase I. 1. Forecast #1 - December 2006 - Pre Application to the D.O.E filed on December 28, 2006 On December 28, 2006, Solyndra filed a Pre-Application with the DOE, which includedthe following optimistic statements regarding sales, revenues and demand for its product: “Solyndra’s opportunities for sales will be constrained by production capacity rather than customer demand. The Company is in discussions 155
  • 160. with six of the world’s largest solar power installers and has received extremely positive responses to our technology. In many cases, these future customers have provided Letters of Intent to purchase Solyndra’s panels when they become available. Although it would be possible to pre- sell the entire plant capacity through 2009, the Company plans to reserve some production capacity for new customers.” (Volume 1, pg 31); “These estimates are based on discussions with a limited number of select customers, every one of which has expressed strong interest in purchasing panels. In some cases, the figures reflect signed letters of intent. Management expects that revenue generation will be constrained by capacity rather than demand.” (Volume 1, pg 42); “These estimates are based on discussions with a limited number of select customers, every one of which has expressed strong interest in purchasing panels. In some cases, the figures reflect signed letters of intent.” (Volume 1, pg 44). Solyndra states in the Pre-Application that it believes that the combined productioncapacity of 72 megawatts a year will be fully completed and in place by July 2008. Meaningfulsales were to begin in May 2008. Table 15 in the Pre-Application shows that Solyndra intendedto be at a run rate of 52 megawatts a year by the 4th quarter of 2008. In addition to the sales and marketing detail, Solyndra also indicated that it believed thatits cost structure was very favorable. In the Pre-Application Solyndra stated: “Solyndra’s module architecture facilitates low cost of manufacturing and rapid scale up, eventually reaching a manufacturing cost of less than $1/Wp. Together with the low BOS cost enabled by Solyndra’s panels, we have the potential to provide electricity at 50% of the cost of conventional silicon modules” (Volume 1, pg 25) As detailed in the above comments, Solyndra was optimistic regarding revenues,production volumes and costs, sales and profitability in the initial Pre-Application filed with theDOE in late 2006, and continued to be optimistic in subsequent plans and forecasts up to andincluding the Restructuring Plan. Unfortunately, Solyndra faced market changes that were unforeseen in 2006 (Seediscussion in Section VI. External Environment and Market Conditions). 156
  • 161. These changing market conditions severely transformed many the initial assumptions under which Solyndra filed these optimistic projections. To demonstrate the effect these market forces imposed upon Solyndra, Table #23 below reflects the forecasted numbers included in the original DOE application and the actual results from 2008 through 2010. 330 Table #23 Comparison of 2006 DOE Pre-Application Forecast* and Actual** Results ($’s in millions) 2008 2008 2009 2009 2010 2010 Totals Totals Forecast* Actual** Forecast* Actual** Forecast* Actual** Forecast* Actual**MW Shipped 19.2 1.6 61.7 30.5 115.0 57.0 195.9 89.1ASP $ 3.49 $ 3.75 $ 3.34 $ 3.30 $ 3.12 $ 2.49 $ 3.23 $ 2.79(numbers in millions)Revenues $ 67.0 $ 6.0 $ 205.9 $ 100.5 $ 358.8 $ 141.9 $ 631.7 $ 248.4Cost of Goods Sold (45.5) (44.4) (99.3) (162.2) (177.1) (284.0) (321.9) (490.6)Gross Margin 21.5 (38.4) 106.7 (61.7) 181.7 (142.1) 309.9 (242.2)Operating Expenses (46.6) (182.1) (47.9) (108.0) (42.5) (128.9) (137.0) (419.0)Operating Profit/(Loss) $ (25.1) $ (220.5) $ 58.8 $ (169.7) $ 139.2 $ (271.0) $ 172.9 $ (661.2)* Forecast data from December 2006 DOE Pre- Application for Fab 1.** Actual results for Fab 1 - Solyndra, Inc results less any operating results for Fab 2 LLC. As detailed in Table #23, Solyndra projected a profit of $172.9 million for the three-year period from 2008 through 2010. Solyndra actually incurred operating losses of $661.2 million. 2. Forecast #2 - Comparison of Actual Financial Results to the July 31, 2009 Solyndra Sponsor Company Plan In September 2009, Solyndra closed on its loan guaranteed by the DOE. A forecast dated as of July 2009 (the “Sponsor Forecast”) for Solyndra, Inc. (as the Sponsor) was attached to the common agreement between the parties 331 and submitted to the DOE. This forecast represented Solyndra’s best effort to project operations for the Sponsor which, at the time, included only the operations of Fab 1. At the time the Sponsor Forecast was prepared, Fab 1 production was in an 330 Although the initial DOE Application included limited forecast results for Fab 1, we have included selected information for comparative purposes along with actual results available for Fab 1. 331 The common agreement is the form of loan agreement utilized by the DOE. 157
  • 162. early stage and actual manufacturing and operating results were therefore limited. Also, at thistime Solyndra had substantial reasons to be optimistic in its forecast, even though ASPs weredeclining. Among other things, in 2009, Solyndra appeared to be well-positioned in the solarmarketplace since its thin-film, solar cells avoided both the costs of installation of flat panels andthe high price of polysilicon – the principal component in conventional solar panels. TheSponsor Forecast anticipated a modest ramp-up to full production over the following two yearsand assumed that Solyndra would be cash flow positive by the 3rd quarter of 2010. Subsequentforecasts for Fab 1 and Fab 2 Phase I reduced the ramp-up schedule to approximately eighteenmonths. The Sponsor Forecast contained a projection for the six quarters starting with thirdquarter 2009 and ending with fourth quarter 2010. A comparative analysis between theforecasted and actual financial results for these quarters is set forth in the table below: TABLE #24 Comparison of Forecast and Actual Results For the Six Quarters From July 2009 through December 2010 (in thousands) % Projected Actual Variance Variance Total Revenue $ 363,005 $ 223,731 $ (139,274) -38.37% Cost of Sales Direct Materials 110,349 112,362 2,013 1.82% Direct Labor & Related Costs 77,882 65,290 (12,592) -16.17% Direct Overhead 43,314 86,373 43,059 99.41% Depreciation 56,946 52,572 (4,374) -7.68% Warranty, other Cost of Sales 5,445 13,633 8,188 150.38% Total Cost of Sales 293,936 330,230 36,294 12.35% Gross Margin 69,069 (106,499) (175,568) -254.19% Operating Expenses Research & Development 80,367 118,850 38,483 47.88% Sales & Marketing 19,567 27,241 7,674 39.22% General & Administrative 29,987 49,477 19,490 64.99% Pre-Production Start-up 837 32,236 31,399 3,751.37% Total Operating Expenses 130,758 227,804 97,046 74.22% Operating Margin $ (61,689) $ (334,303) $ (272,614) -441.92% 158
  • 163. As set forth above, actual sales for the six highlighted above quarters fell short offorecasted amounts by $139.3 million or 38% ($363 million versus $223.7 million). Actual costsof sale were higher than projected by 12% ($330.2 million compared to forecast costs of sale of$293.9 million. For the same six quarters, operating expenses were estimated to be $130.8 million, butactual operating expenses totaled $227.8 million, or 74% higher than originally estimated. Costswere particularly underestimated in the areas of “Research and Development” and “Pre-Production Start-up” costs. As a result, Solyndra incurred a negative operating margin betweenthird quarter 2009 and fourth quarter 2010 of $334.3 million, as compared to the forecastednegative operating margin of $61.7 million. These financial results required Solyndra to obtainadditional capital. For the last two quarters of 2009 and continuing into the first quarter 2010, Solyndra’sactual results were generally consistent with the Sponsor Forecast. Beginning in the secondquarter 2010, due to a variety of reasons including a global financial crisis and declininggovernment subsidies, Solyndra’s financial performance began to take a downward turn andsignificant differences appear. The following four charts graphically compare actual versusforecasted results during the six quarters reflected in the Sponsor Plan in terms of certain keymetrics: (a) revenues, (b) ASPs, (c) watts per panel and (d) panels produced. a. Revenue Results As illustrated in the chart below entitled “Fab 1 Revenue – Projected vs. Actual,” duringthe last two quarters of 2009, Solyndra’s actual revenues exceeded forecast revenues by a smallmargin. However, beginning in the first quarter 2010 and continuing thereafter, actual salesstarted to fall significantly below the Sponsor Forecast and this disparity continued to grow forthe duration of 2010. 159
  • 164. b. ASP Results As illustrated in the chart entitled “Fab 1 ASP per Watt – Sponsor Forecast: Projected vs.Actual,” Solyndra’s results with reference to ASP per watt mirror the results in the prior chartfor revenues. There is a direct correlation between ASP per watt and the revenues derived from thosesales. For instance, if the market provides an ASP per watt of $3.20 and a panel containing 200watts is sold, the resulting revenue from that sale is $640 ($3.20 X 200). However, if the ASP perwatt decreases to $2.20, the sales generated for a similar transaction is only $440. As with projected revenues, Solyndra’s actual ASP exceeded the Sponsor Forecast inthird quarter 2009, but worsened in the first quarter of 2010 and continued downwardthroughout that year. Many of the factors causing this falling off were beyond the control ofSolyndra as the declining ASP prices were largely a result of conditions within the marketplace. 160
  • 165. Although Solyndra sought to distinguish itself from other solar energy manufacturers, it couldnot escape worldwide pricing trends. c. Average Watt Per Panel Results Average watts per panel is an essential component of both sales and ASP. As illustratedin the chart below entitled “Sponsor Forecast: Fab 1 Average Watts Per Panel Projected vs.Actual,” Solyndra’s actual results for Wp fell below the Sponsor Forecast for third quarter of2009 and remained substantially below forecasted levels for all six quarters covered by theForecast. 332332 This was due in part to the slower transition to the 200 series panel. 161
  • 166. d. Panels Produced Results In the chart below entitled “Fab 1 Panels Produced,” the number of solar panels producedby Solyndra tracked the Sponsor Forecast through second quarter 2010. During the last twoquarters of 2010, however, production slipped below forecasted results. As a result of suchproduction shortfalls and also taking into account that Wp did not increase as forecasted duringthat time period (see preceding chart), the total watts actually produced and available for salewere significantly under forecast. The effect of Wp and production differences resulted inprojections which were 43.5% less than projected in the Sponsor Forecast by fourth quarter2010. 162
  • 167. In connection with the DOE loan, the Sponsor was required to meet goals embodied inthe Sponsor Forecast and report those results to the DOE. By way of example, the Sponsor wasrequired to achieve 70% of its estimated forecast production of MW’s. By the third quarter of2010, it became apparent, based on actual results, that Solyndra would fall short of thisrequirement. Following discussions between RW Beck, the independent engineer retained by theDOE, and Bierman, Executive Vice President of Operations, Solyndra sought and received awaiver 333 from the DOE with respect to this requirement. 334 e. Summary of Sponsor Forecast Results Table #25 below illustrates the overall impact of the differences between the SponsorForecasts and actual results in the first three quarters to the Sponsor Forecast and the actualresults of the last three quarters of 2010. As shown below, the difference between the forecastedand actual negative net operating margin for the first three quarters ended April 3, 2010 was333 See Appendix V for DOE Loan Guarantee waivers obtained from DOE beginning in October 28, 2010 throughthe bankruptcy petition.334 Bierman cited the primary causes as lower line speed and recent mfg excursion which resulted in shorter CIGSruns and lower yield. Bierman assured RW Beck that corrective actions were under way and he expected recoveryin the first quarter of 2011. 163
  • 168. $71.9 million. This difference almost tripled to $210.7 million for the last three quarters endingJanuary 1, 2011. TABLE #25 Comparison of Forecast and Actual Results For the Three Quarters Ended April 3, 2010 and January 1, 2011 (In thousands) For the 3 Quarters Ended For the 3 Quarters Ended April 3, 2010 January 1, 2011 Projected Actual Projected ActualTotal Revenue $ 126,244 $ 120,965 $ 236,761 $ 102,766 Cost of Sales Direct Materials 43,107 49,317 67,243 63,045 Direct Labor & Related Costs 38,791 27,959 39,092 37,331 Direct Overhead 20,133 47,461 23,181 38,912 Depreciation 25,585 24,423 21,361 28,149 Warranty, other Cost of Sales 1,894 15,852 3,551 (2,219) Total Cost of Sales 129,510 165,012 154,428 165,218Gross Margin (3,266) (44,047) 82,333 (62,452) Operating Expenses Research & Development 48,937 67,134 31,430 51,726 Sales & Marketing 9,780 10,579 9,787 16,662 General & Administrative 14,576 20,836 15,411 28,641 Pre-Production Start-up 837 6,730 - 25,506 Total Operating Expenses 74,130 105,279 56,628 122,535Operating Margin $ (77,396) $(149,326) $ 25,705 $(184,987) As previously stated, by the end of the three quarters ending April 3, 2010, the actualoperating margin was $71.9 million less than forecast in the Sponsor Forecast. Notwithstandingthe magnitude of this loss, it is not uncommon for start-up companies in the early stages ofoperation to underestimate future losses and to make accommodation for those circumstancesthrough the infusion of capital. However, the underestimation of projected losses by $210 million just precedent to thefinalization of Fab 2 Phase I and the starting of production raised significant liquidity concernsfor the company and required immediate action to raise new capital. 164
  • 169. 3. Forecast #3 - Consolidation Plan – October 2010 (“Consolidation Plan”) By Fall 2010, Fab 1 had been in production for almost two years and Fab 2 Phase I wasunder construction with the first scheduled shipments to begin in January 2011. The gapbetween forecast and actual performance had widened as the market experienced significantstructural changes and significant changes were needed which resulted in the development of theConsolidation Plan (the “Consolidation Plan”). The Consolidation Plan is the first forecast which contemplated the closure of Fab 1. Anumber of Chinese competitors that sold conventional solar panels and were the beneficiaries ofa drop in their material cost components put increased pressure on solar panel pricing worldwide.These market conditions made Solyndra’s business more challenging and caused Solyndra torevisit the Sponsor Forecasts. Recognizing a need to make adjustments in its business structure in October 2010,Solyndra developed the Consolidation Plan which contemplated the phase out and closure of Fab1 and transfer of certain equipment from Fab 1 to Fab 2 Phase I with future operations focusedon Fab 2 Phase I only. The Consolidation Plan also served as the basis for negotiations torestructure Solyndra’s debt and seek new capital. The Consolidation Plan was submitted to the DOE on or about October 12, 2010, andsubsequently presented to the Board on October 26, 2010. One of the most pressing elements ofthe Consolidation Plan was Solyndra’s cash position, which was projected to be reduced tobelow $0 in March 2011 and remain negative through August 2014. Without an incrementalcapital infusion, the lowest negative balance of $142 million was projected to occur in February2012. The negative cash balances as forecast in this projection reflected the need for newcapital contributions. Two additional tranches of debt were incorporated into a laterrestructuring plan in February 2011 - Tranche A for $75 million and Tranche C for $75 million.With these additional infusions it was assumed that the ending cash balance for the restructuredcompany would remain positive. 165
  • 170. Solyndra approached the DOE in late 2010 and requested an increase in its loancommitment. The DOE declined. However, the company recognized the need to raiseadditional capital given there was very little margin of error in the Consolidation Plan. If any ofthe key metrics of production, Wp or ASP failed to meet forecast levels by even a fewpercentage points, the new capital infusion would be insufficient to stem the correspondingnegative cash flow. The Consolidation Plan recognized decreasing ASPs in the marketplace and included theassumption that there would be further erosion in price during the forecast period whichextended through December 2020. Chart #24 reflects a substantial reduction in actual ASPfrom 2009 through 2010 and a further reduction in forecasted ASP from late 2010 through theend of 2012. However, the accurate forecasting of future price reductions beyond 2012 is, atbest, speculative. The actual results for Wp through October 2010 and the forecast for Wp in theConsolidation Plan are set forth in Chart #25 below. 166
  • 171. Chart #26 below shows the actual production levels achieved by Fab 1 and thesubstantially increased production forecast for Fab 2 Phase I in the Consolidation Plan. 167
  • 172. The company’s inability to reach production targets is as much, if not more, a reflectionof an inability to secure sales equal to the production capabilities of the facilities than a limitationof its ability to reach production targets. Given that the ramp of Fab 2 Phase I would more thandouble the company’s production capacity, the capability to sell this considerably higherproduction output was critical. The Consolidation Plan reflected the stark economic facts thatmarket forces had imposed upon Solyndra. During 2010, prices for solar panels had decreasedsignificantly thereby increasing Solyndra’s losses, while at the same time government subsidiesof solar installations began to decline substantially further reducing demand for Solyndra’sproducts. Faced with these downward trends, Solyndra’s only path to survival, other than furtherinfusions of capital, was to increase wattage output per panel, maximize sales, and operate itsmanufacturing facilities at full capacity in order to minimize the relative effect of Solyndra’sfixed costs. Solyndra did not achieve the level of sales needed to deplete the maximum output asenvisioned under these production scenarios. In retrospect, it was a challenging task to cope 168
  • 173. with these inescapable modifications of the market conditions. With the benefit of hindsight,Solyndra’s projections appear to be optimistic, but that is no different than the typical ventureinvestment in a new technology or industry. Although Solyndra failed to achieve its projectionson various levels, Solyndra also was the victim of outside market pressures that no one couldhave accurately predicted. In Solyndra’s early stages, when the market price for solar productswas at a sustainable level and demand actually exceeded supply, the possibility of successseemed well within reach. However, as market forces continued to deteriorate Solyndra wasunable to overcome the limits of its technology and cost structure. By early 2011, Solyndraneeded to move to a new restructuring strategy. 4. Forecast #4 - Restructuring Plan – February 2011 In February 2011, Solyndra consummated a restructuring based on a new forecast (the“Restructuring Plan”) and operations limited to Fab 2 Phase I. By this time, Solyndra had a total net loss of approximately $501.1 million for years 2009and 2010. Sales for the same two-year time period were approximately $242.4 million. The existence of a net operating loss is not unusual for development stage companiessuch as Solyndra. It is also not unusual for revenues to increase dramatically as time progresses.Solyndra’s revenues for the first quarter of 2009 started slowly at approximately $8.2 million.Revenues for the fourth quarter 2010 were approximately $41.0 million, a five-fold increase overthe first quarter 2009. However, even with a five-fold increase in revenues, Solyndra’s quarterlynet loss of approximately $46.4 million during the first quarter of 2009 widened to a quarterlynet loss of $77.7 million by the fourth quarter 2010. Chart #1 below illustrates the actual results of operations for the months of March 2009through November 2010. As can be seen in the chart below, revenues are sporadic while netoperating lossed are relatively consistent. 169
  • 174. As illustrated in the table below, for the period fiscal year 2009 through July 2, 2011,Solyndra ultimately lost $3.92 for every watt of solar energy it produced and sold. The averagerevenue per watt for this period was $2.56, while the combined manufacturing and operatingcosts were approximately $6.48 per watt. This is illustrated in Table #2 below: Table #2 SOLYNDRA, INC Revenues and Expenses on a per Watt Basis For Fiscal Year 2009 Through July 2, 2011 Revenue per Watt $ 2.56 Manufacturing Costs (4.28) Operating Expenses (2.20) Total Costs per Watt (6.48) Net Operating Loss per Watt $ (3.92) The results included herein are a reflection of the fact that Solyndra needed to produceand sell at full capacity to minimize the impact of its relative fixed costs and to do so in a moreattractive pricing environment for solar cells. 170
  • 175. The need to achieve full capacity and the controlling element of fixed costs is illustratedby the break-even analysis below which provides the amount of revenue required to break evenon a cost revenue basis for the fourth quarter of 2010. During the fourth quarter 2010, Solyndraproduced approximately 89,704 solar panels or approximately 16.5 million watts and sold 88,154solar panels, or 16.2 million watts at an average sales price of $2.43 per watt. In order to break-even during the fourth quarter 2010, Solyndra would need to increasesales by 212% to approximately 274,826 solar panels in order for the operating margin to break-even. By way of comparison, the Restructuring Plan projects that Solyndra achieves this level ofproduction during the first quarter of 2013. 335335 Management was clearly aware of actual results and what was needed to achieve improved results. Theseimprovements included (1) higher panel power, (2) higher yields, (3) adjusting warranty and other costs of sales, and(4) reductions to R&D expense. As such, many of these were included in the Restructuring Plan. 171
  • 176. Table #26 Break-even Analysis - Fourth Quarter 2010 (In thousands) 4th Quarter 4th Quarter 2010 2010 % Actual Break-even Variance Variance Total Revenue $ 41,014 $ 127,864 $ 86,850 211.76% Cost of Sales Direct materials 18,618 57,040 38,422 206.37% Direct Labor & Related Costs 16,184 16,184 - 0.00% Direct Overhead 9,427 9,427 - 0.00% Depreciation 9,807 9,807 - 0.00% Warranty and Other COGS* 11,647 3,836 (7,811) -67.07% Total Cost of Sales 65,683 96,294 30,611 Gross Margin (24,669) 31,570 56,239 Operating Expenses Research & Development 15,498 15,498 - 0.00% Sales & Marketing 6,178 6,178 - 0.00% General & Administrative 9,894 9,894 - 0.00% Total Pre-production Start-up 10,654 - (10,654) 100.00% Total Operating Expenses 42,224 31,570 (10,654) Operating Margin $ (66,893) $ 0 $ 66,893 100.00% Wp 184 184 ASP $ 2.53 $ 2.53 Direct material Cost per Watt $ 1.13 $ 1.13 Panels Shipped 88,154 274,826 186,672 211.76% * Assumed to be 3% of total revenues for purposes of the breakeven analysis The data supporting Chart #27 and Chart #28 detailed below was included inRestructuring Plan and contain four or five months of additional data based on actualperformance. Given external market pressures, ASP’s (average sales price per watt) were in astate of decline. Solyndra also was limited in the changes that could be effectuated in thecompany’s production process. One component that could be improved with appreciable effectwas watts per panel. Solyndra was continually striving to increase its watts per panel and wassuccessful in doing so to a limited degree. If the Wp could be increased, there would be a 172
  • 177. corresponding increase in sales without having to adjust the ASP of the panels or the productionoutput. As detailed below in Chart #27, from the fourth quarter 2010 to the fourth quarter 2012,the Restructuring Plan envisioned that the average Wp would increase from 184 to 244, a 33%increase. The Restructuring Plan recognized that ASPs would continue to decrease and includedfurther erosion of prices throughout the restructuring forecast as detailed in Chart #28 below: 173
  • 178. Portions of the revenue stream included in the Restructuring Plan were based on sales andmarketing changes implemented by Harrison, who assumed the role of Chief Executive Officerof Solyndra on July 29, 2010. Prior to Harrison’s arrival, Solyndra had been in the process ofanalyzing the effectiveness of the sales program instituted during Gronet’s tenure as CEO, whichwas somewhat loosely based on the assumed superiority of the Solyndra product and itscapability to “sell itself” when placed into the hands of knowledgeable middlemen, such asintegrators and installers. However, those middlemen were most often driven by price, in whicharea Solyndra consistently did not excel. Further, integrators and installers did not havesufficient capital to pay for the panels without securing an end-buyer for the sale. Accordingly,there was not a great deal of loyalty to the Solyndra product, which had a detrimental effect onsales. Harrison and management undertook an extensive analysis of the company’s operations,business models and sales and marketing strategies at the same time Navigant was preparing themarket study for the Fab 2 Phase II application. As a result of these analyses, Harrisonredirected the marketing and sales structure of Solyndra to focus more directly on the end userssuch as Wal-Mart, Target, Coca-Cola and other flat roof customers. The availability of 174
  • 179. thousands of large flat roofs and the creation of a dedicated sales staff committed to extolling thesingular virtues of the Solyndra product was the genesis for new sales projections as outlined inthe Restructuring Plan. Unfortunately, the change in strategy came too late to overcome themarket pressures. As a result, the liquidity issues faced by Solyndra forced the company to filefor bankruptcy on September 6, 2011. XIII. SOURCES AND USES OF CASH The CRO has analyzed the disposition of the various loan and investment funds obtainedby Solyndra, focusing on the period December 30, 2007 (first day of the 2008 fiscal year)through September 6, 2011 (bankruptcy petition). The period between December 30, 2007 andSeptember 6, 2011, covers the funding of the DOE Loan Guarantee, construction of Fab 2 PhaseI, closure of Fab 1, and all commercial production and related sales activities of the company. As part of his analysis, the CRO has prepared a summary of Solyndra’s sources and usesof cash based on available financial records. Actual sources and uses may vary slightly from theamounts included below due to various accruals and payables and other non-cash items. To theextent any such variations exist, they are considered immaterial for purposes of this analysis.A. Sources As outlined in Table #27 below, Solyndra’s funding was limited to a defined set ofsources. The most significant funding and consumption of cash incurred subsequent to fiscalyear 2007. Solyndra began fiscal year 2008 with approximately $158.1 million in cash,including restricted cash, and ended September 6, 2011, with $23.4 million. This net change incash of $134.7 million represents a source of funds for the company. 336 Cash-on-hand as ofJanuary 1, 2008 was primarily the result of prior preferred stock sales. Collection of revenuesfrom product sales accounted for $316.2 million or 16.5% of total sources for the period. Salesof preferred stock generated $649.7 million during the period. Issuances of convertible notes andborrowings under Solyndra’s Tranche A facility generated $244.3 million in the aggregate. By336 Between February 2006 and December 2007, Solyndra raised approximately $311.6 from the sale of preferredstock through Series A-1, A-2, B, C-1 and C-2. See Appendix AA.1 for additional detail regarding preferred stocksales. 175
  • 180. September 6, 2011, the company had drawn $527.8 million on the DOE Loan Guarantee (SeeSection X.E. Construction and Loan Funding). Including miscellaneous receipts, the totalsources for the period were approximately $1.9 billion. Table #27 Estimated Sources of Cash (in millions) Dec. 30, 2007 to Sept. 6, 2011 Amount % of Total Net Cash on Hand* $ 134.7 7.0% Product Sales & Collections (1)** 316.2 16.5% Capital Funding Sources: Preferred Stock (net proceeds) (2) 649.7 34.0% DOE Loan (3) 527.8 27.6% Tranche E Debt/Convertible Notes (4) 175.0 9.1% Tranche A Debt (5) 69.3 3.6% Other Long-term Debt - 0.0% Other Miscellaneous Sources 39.9 2.1% Total Sources $ 1,912.6 100.0% * Reflects change in cash balance, including restricted cash. ** Includes $17.5 million received pursuant to Inventory Sales Agreement. 1. Collections of Accounts Receivable The $316.2 million of collections of accounts receivable generated from product salesinclude payments received from the sale of accounts receivable pursuant to the AccountsReceivable Sales Agreement. 337 This amount also includes $17.5 million received pursuant tothe Inventory Sales Agreement. 338337 See Appendix AB.1, Accounts Receivable Purchase and Sales Agreement and Appendix AB.6, Amended andRestated Receivable Purchase Sale Agreement.338 See Appendix AB.5, Inventory Purchase and Sales Agreement 176
  • 181. 2. Sale of Preferred Stock From July 2008 through August 2009, Solyndra raised approximately $649.7 millionfrom the sale of preferred stock in Series D-2, D-3 E and F. The largest of these was Series Ewhich raised approximately $281.7 million. These Series E funds provided the source ofSolyndra, Inc’s equity funding for Fab 2 Phase I. 339 3. DOE Loan Guarantee From September 2009 through September 6, 2011, Solyndra received $527.8 million indraws on the DOE credit facility. These loan proceeds were used in accordance with the DOEloan documentation for the construction and operation of Fab 2 Phase I. 4. Convertible Secured Promissory Notes (Tranche E) From June 17, 2010 through October 1, 2010, Solyndra sold $175 million of convertiblesecured promissory notes. On February 23, 2011, as part of the restructuring, the $175 millionconvertible secured promissory notes were converted into Solyndra LLC - Tranche E securedpromissory notes, which included $11 million of accrued interest on the original notes as of therestructuring date.. 340 5. Tranche A Debt As part of the restructuring process, twenty-three (23) investors from other preferredstock offerings loaned $69.3 million to Solyndra LLC between February 23 and March 23, 2011in the form of Tranche A debt. 341B. Uses: Solyndra’s uses of cash for the period December 30, 2007 through September 6, 2011 canbe divided into three general categories: (1) Property, Plant & Equipment (“PP&E”), (2)Operating Expenses, and (3) Other Uses, as set forth in Table #28 below:339 See Appendix AA.1 for a discussion of preferred stock equity funding.340 See Appendix W.16 and Appendix W.64 for additional details regarding the conversion of the ConvertibleNotes to Tranche E Debt.341 See Appendix W.12 for additional details regarding Tranche A Debt. 177
  • 182. Table #28 Estimated Uses of Cash (in millions) Dec. 30, 2007 to Sept 6, 2011 Amount % of Total Fixed Assets: Property, Plant & Equip. - Fab 2 Phase I* (1) $ 684.2 35.8% Property, Plant & Equip. - Fab 1 & Other Fac.* (2) 143.8 7.5% Operating Expenses: Salary, Wages & Benefits Payroll & Benefits (3) 309.6 16.2% Bonuses 17.3 0.9% Temporary Labor 50.0 2.6% Capitalized Labor** - 0.0% Direct Materials*** (4) 261.0 13.6% Professional Services (5) 27.9 1.5% Rent (6) 21.5 1.1% Interest on the DOE Loan (6) 7.5 0.4% Other Manufacturing & Operating Expenses**** (6) 276.7 14.5% Other Uses: Long-term Debt Payments 78.6 4.1% Other Assets 34.5 1.8% Total Uses $ 1,912.6 100.0% * Amount assumes all Property, Plant & Equipment in 2011 related to Fab 2 ** Capitalized labor of $41.5 million is included in Property, Plant & Equipment *** Includes 31 largest vendors **** Includes all remaining operating expenses 1. Property, Plant & Equipment Fab 2 Phase I For the period December 30, 2007 through September 6, 2011, Solyndra paid $684.2million for PP&E related to Fab 2 Phase I. Included in this amount is a significant portion of the$41.5 million of capitalized labor. This amount also includes all expenditures for PP&E incurredby the company after January 2011 as well as PP&E transferred/sold from Fab 1 as part of therestructuring. A complete discussion regarding the construction of Fab 2 Phase I can be found inSection X.E. Construction and Loan Funding of this report. 178
  • 183. 2. Property, Plant & Equipment Fab 1 For the period December 30, 2007 through September 6, Solyndra paid $143.8 millionfor PP&E related to Fab 1. Included in this amount is a smaller amount of the $41.5 million ofcapitalized labor. This amount also includes any PP&E transferred/sold from Fab 1 to Fab 2Phase I as part of the restructuring. Fab 1 PP&E that was not transferred or sold to Fab 2 Phase Iwas either fully depreciated or written down to zero. 3. Payroll For the period December 30, 2007 through September 6, 2011, Solyndra paid $418.4million for payroll, benefits and temporary staffing services and capitalized labor (See discussionof payroll in the Section XIII. Compensation of this report for more detail). Outside of PP&E,payroll and related costs was the single largest expense category for the company. Of thisamount, approximately $41.5 million was capitalized into PP&E for Fab 2 Phase I and PP&E forFab 1. Bonuses of $17.3 million and temporary labor of $50.0 million are included in the payrollcategory. Bonuses are discussed in more detail in Section XIII. Compensation of this report. 4. Direct Materials Direct material costs were incurred for production of the company’s solar panels andresearch and development. For the period December 30, 2007 through September 6, 2011, the company paidapproximately $261.0 million to its 31 largest vendors for direct materials, including directmaterials used in research and development. 5. Professional Services For the period December 30, 2007 through September 6, 2011, Solyndra paidapproximately $27.9 million for professional services, including legal, investment banking,accounting, consulting and lobbying charges. 179
  • 184. Legal fees paid totaled $17.6 million. These amounts were paid to nineteen differentfirms. The five largest of these firms received $15.6 million, as identified below: Table #29 Summary of Legal Fees Amount Wilson Sonsini Goodrich & Rosati $ 6,629,994 342 Morrison & Foerster, LLP 3,128,995 Jones, Day 2,398,363 343 Gibson, Dunn & Crutcher LLP 2,404,483 Cravath, Swaine & Moore LLP 1,069,874 Total $ 15,631,709 These legal fees do not appear excessive given that they cover over three years ofoperations and considering the size and complexity of Solyndra’s operations and capitalstructure. Solyndra paid $4.3 million to Goldman Sachs for investment banking services includingpreparation and filing of an S-1 with the intent of making a public offering of stock. Otherservices included assisting the company in locating and securing funding in its various capitalraising efforts. Solyndra paid approximately $2.7 million in the form of professional fees for accountingservices. The bulk of this amount, $2.4 million, was paid to PWC for financial auditing services.The remainder was paid to three other firms for various tax services both in the United States andinternationally. Solyndra paid consulting fees of $2.4 million to various entities for services relating tothe DOE loan facility, common stock valuations and public relations. The largest of these wasRW Beck which was paid $0.9 million for services provided directly related to the DOE loan andFab 2 Phase I project review.342 Morrison & Foerster, LLP represented the DOE. Solyndra was contractually obligated to pay the DOE’s feeswith regard to the DOE Loan Guarantee.343 Gibson, Dunn & Crutcher LLP represented Argonaut and other investors/lenders. Solyndra was contractuallyobligated to pay the fees incurred by such investors/lenders. 180
  • 185. Finally, Solyndra paid $1.0 million to six different firms for lobbying and strategicconsulting related to the DOE loan facility. Considering Solyndra’s international business andits involvement in the DOE loan program, the amount paid for these services does not appear tobe excessive and is consistent with the company’s requirements. 6. Other Uses For the period December 30, 2007 through September 6, 2011, Solyndra paidapproximately $21.5 million for rent of various manufacturing and office facilities. Solyndraalso paid $7.5 million in interest to the Treasury on the DOE loan. All other manufacturing andoperating expenses not specifically discussed above totaled $276.7 million. XIV. COMPENSATIONA. Annual Payroll Table #30 below provides the annual amount of payroll paid by Solyndra from 2008through 2011, including wages, salaries, taxes and all other fringe benefits, plus capitalized laborand temporary labor costs. Table #30 Annual Payroll Year 2008 2009 2010 2011 Total Wages $ 63,956,880 $ 74,671,636 $114,080,736 $74,211,197 $326,920,449 Capitalized Labor 12,591,728 12,936,182 8,518,878 7,431,957 41,478,745 Temporary 14,483,227 15,152,722 13,942,321 6,382,750 49,961,020 $ 91,031,835 $ 102,760,540 $136,541,934 $88,025,904 $418,360,214B. Compensation to Senior Managers According to a management organization chart dated July 28, 2011, there wereapproximately forty positions included within the definition of “Top Level” management atSolyndra. The CRO has included compensation information for the thirty-four of Solyndra’sdomestic managers, which include the following positions: Chief Executive Officer, Chief 181
  • 186. Financial Officer, Vice President of North American Sales, Vice President of Research &Development, and Vice President of Engineering. See Exhibit #16 (Top Level Mgmt Chart) foradditional positions. From January 2009 through September 30, 2011, the individuals in thirty-four of theforty “Top Level” senior positions at Solyndra received approximately $19.5 million in grosspayroll compensation, bonus awards and “other” compensation. “Other” compensation isdefined as payments for corporate housing, vehicle expense, relocation bonus/expenses, etc. Thepayments identified as “other” compensation items are considered taxable income by the InternalRevenue Service and included in the gross wages for each employee. In 2009, individuals in the thirty-four “Top Level” senior positions receivedapproximately $4.4 million. During 2010, individuals in the same thirty-four “Top Level” seniorpositions received an additional $6.1 million dollars in compensation, including bonus awardsand “other” compensation. Of the $6.1 million paid, $4.9 million represented compensation forannual base salary. The remaining $1.2 million related to bonus plans, sales commission andother compensation. In 2011, the individuals in the thirty-four “Top Level” senior positions of Solyndra’smanagement received approximately $8.9 million dollars in compensation, including bonusawards and “other” compensation. Of the $8.9 million paid, $5.1 million was compensation forannual base salary. The remaining $3.8 million consisted of $3.6 million in bonus-relatedpayments and $200,000 related to other compensation.C. Solyndra Headcount and Average Compensation by Year. The total number of employees as of December 31, 2007 was 307, 344 with total 2007annual compensation of approximately $22 million. During 2008, Solyndra had a total of 646 employees, of which 553 were active onDecember 31, 2008 345. The total gross payroll 346 was approximately $51 million, or344 According to 2007 year-end payroll statements.345 According to 2008 year-end payroll statements.346 Represents gross salaries before deductions for employee payroll taxes and employee benefits. 182
  • 187. approximately $79,000 average annual base gross salary per employee (including part-timeemployees). As of December 31, 2009, Solyndra had 725 active employees. 347 In total, approximately857 employees worked for Solyndra during the calendar year of 2009. The total gross payroll 348paid for compensation during that year was $62 million. On average, the annual base salary ofeach employee was $72,000 during 2009 (including part-time employees). During 2010, Solyndra had a total of 1,462 employees, of which 927 were active onDecember 31, 2010. 349 The total gross payroll 350 was approximately $91 million, orapproximately $62,000 annual base gross salary per employee (including part-time employees). As of September 30, 2011, 351 Solyndra had approximately 81 active employees. In total,approximately 1,400 employees worked for Solyndra during calendar year 2011. 352 The totalgross payroll 353 during 2011 was $74 million. On average, the annual base salary of eachemployee was $53,000 through the month of September 2011 (including part-time employees).D. Labor Statistics of California and Local Counties According to the U.S. Department of Labor – Bureau of Labor Statistics as of May2010, 354 the State of California had an estimated mean annual income of $50,370 for alloccupations. Also according to the U.S. Census Bureau, American Community Survey of 2010, theaverage annual salary per household was $95,331 with a median of $76,794 within the county ofSanta Clara, CA. 355347 According to 2009 year-end payroll statements.348 See Footnote 346.349 According to 2010 year-end payroll statements.350 See Footnote 346.351 The September 30, 2011 payroll statement used because it included the most recent quarter-end payrollinformation prior to the bankruptcy filing.352 According to 2011 year-end payroll statements.353 See Footnote 346.354 See Appendix AC.1, California May 2010 OES State Occupational Employment and Wage Estimates.355 See Appendix AC.2, City of San Jose Fact Sheet: History & Geography. 183
  • 188. The U.S. Bureau of Labor Statistics indicates that the average annual salary in the SanJose-Sunnyvale-Santa Clara Metropolitan area was $67,850 for the year 2010, which is the mostrecent figure available. 356 The California Employment Development Department states that the average wages bymajor industry in Santa Clara County area for 2010 were as follows: Information - $178,118;Manufacturing - $139,295; Professional/Technical - $115,966; Utilities - $97,779; WholesaleTrade - $95,427; Management $94,247; Finance & Insurance - $93,329. This information issummarized below in Chart #29. 357E. Staffing Companies and Temporary Labor Solyndra also used staffing companies to fulfill its labor needs. Solyndra engaged WestValley Staffing and Aerotek Staffing to assist in retaining temporary employees. On average,these staffing agencies typically had 150 – 200 employees working at Solyndra. From 2008through the filing of Solyndra’s bankruptcy case, Solyndra’s two staffing agencies received over356 See Occupational Employment Statistics (OES) Survey, May 2010 OES Estimates athttp://www.bls.gov/oes/oes dl.htm.357 See Footnote 355. 184
  • 189. $50 million. See Table #31 below for additional information on payments to Temporary Laborpayments. Table #31 Company 2008 2009 2010 2011 Total W. Valley Staffing $13,258,347 $11,938,731 $9,925,566 $4,250,667 $39,373,311 Aerotek Staffing Agy. 1,224,880 3,213,992 4,016,754 2,132,083 10,587,709 $14,483,227 $15,152,723 $13,942,320 $6,382,750 $49,961,020 Skilled employees are a valuable asset of any new company. Solyndra, like most earlystage companies, sought to retain those employees deemed crucial to its success through variousincentive plans based on measurable goals.F. Executive Incentive Plan (“EIP”) & Key Contributor Incentive Plan (“KCIP”) Solyndra’s EIP & KCIP commenced in the second half of 2006 and continued untilDecember 31, 2008. According to Solyndra, “the purpose of the EIP & KCIP [was] toincentivize executives, managerial employees and individual contributors to achieve challengingtactical and/or strategic objectives that extend beyond the participant’s basic job requirements byproviding the opportunity for additional cash compensation in addition to base salary.” 358 Thoseemployees deemed eligible for the EIP or KCIP included executives, senior level managers, andselect key individual contributors who had been with company for a minimum of six months andwho otherwise met the participation criteria. Non-exempt employees were not eligible toparticipate in the plan. The 2008 EIP & KCIP company overview states, that “each participant must have writtenmeasurable objectives, including three to five key strategic objectives that should be weighted(maximum 100% total) and scaled. If not indicated differently, each objective will be weightedequally. These objectives should be “stretch” objectives, quantifiable (where possible), andoutside the basic attainable parameters of the participants job.” 359358 See Exhibit #17 Solyndra 2008 Executive Incentive Plan & Key Contributor Plan Overview.359 Id. 185
  • 190. The EIP & KCIP maximum target incentive payment for 2008 through 2009 was 20% ofannual base salary for all employees participating in the plan, calculated semi-annually. Theincentive payment pool was calculated as a total of 20% of each participant’s annual salarydivided by 50% for each half of the year. The participants in the incentive pool for each periodwould be nominated by the group Vice President and approved by the CEO, CFO andCompensation Committee every 6 months (January and July). For example, an employeemaking $100,000 annual base salary, would be eligible for either an EIP or KCIP bonus for thefirst half of the year in the amount of $10,000 (100,000*20%, divided by 2). If the employee isnominated again during the second half of the year, that employee can receive an additional$10,000. From the second half of 2006 through the end of 2008, the EIP bonus programdistributed approximately $1 million to eligible employees and the KCIP distributedapproximately $2.7 million. Table #32 below provides an annual summary: Table #32 Year KCIP EIP Total 2006 $ 139,953 $ 225,450 $ 365,403 2007 383,739 187,524 571,262 2008 2,202,419 666,742 2,869,161 $ 2,726,110 $ 1,079,716 $ 3,805,826G. CIGS / System Tech Incentive Program During 2007 and 2008, Solyndra initiated an additional incentive program for theindividuals who worked with and operated the CIGS machines. 360 The CIGS machines not onlyhad the most significant impact on Wp, but became the bottle neck of the production process andwere therefore extremely important. It became apparent to Solyndra that in order to improve theoutput of the Fab 1 & Fab 2 facilities, the CIGS machines had to produce at a much higher level.In order to incentivize CIGS operators from the Research & Development (“R&D”) Departmentto achieve a greater CIGS production, Solyndra introduced the CIGS/System Tech IncentiveProgram. The Senior Vice President of R&D determined the bonuses. The CIGS bonuses were360 Solyndra tools that utilized the CIGS (Copper, Indium, Gallium, and Selenide) process to evaporate and apply themetals in a thin film to cylindrical glass tubes. 186
  • 191. calculated and paid on a quarterly basis. The quarterly bonus amount was determined by a bonuspercentage factor for each employee computed on a quarterly basis. For example, an individualwith an annual salary of $100,000 and an approved $10% factor, would earn a $2,500 CIGSbonus ((100,000/4)*.10). In total, approximately $0.5 million was paid to Solyndra employeesunder the CIGS/System Tech incentive program during 2007 and 2008.H. Cash Bonus Program The Cash Bonus Plan (“CBP”) was a multi-faceted bonus structure instituted in 2010, thefirst and only year that it was utilized. The CBP was created to compensate individuals for theircontribution to the success of Solyndra 361 based on company-wide performance objectives atyear end 2010. Distributions under the CBP were made during the first week of February 2011. The CBP was computed based upon three factors. An employee’s annual base salary, atarget bonus percentage, which was set by management and varied by individual andparticipatory group, and a company factor percentage score, which was determined through anumber of metrics, including multipliers for certain achievements, the threshold (multiplier of0.5), achievement of Plan of Record (“POR”) components (multiplier of 1.0) and the StretchPlan (multiplier of 1.5). 362 If all the stretch factors were achieved, the company’s factor scorecould have exceeded 100%. The following metrics and their associated payout weight allocationfor the CBP are as follows: 363 • Cumulative Panels Sold -- Second Quarter to Fourth Quarter 2010 – 10% Weighting Factor - If the cumulative panels sold is less than 340,000 there is no payout for this metric. If the panels sold are between 340,000 and 345,000, there would be a multiplier between 0.5 and 1.0 payout. The POR or target sales was 345,000 panels, if panels sold was between 345,000 and 356,000, the multiplier would be between 1.0 and 1.5. If the panels sold surpassed 356,000, the multiplier would be 1.5. Depending on the panels produced, the payout would shift from 0 to 15%; • Module Efficiency – Fourth Quarter 2010 – 20% Weighting Factor - The module efficiency was calculated by dividing the Wp by 40 tubes. The metric carries a 20% weight and for the fourth quarter 2010 the threshold was 4.525. If Solyndra does not achieve a module efficiency of 4.525, the payout was zero. If efficiency was between361 See Appendix AC.3, Letter to Solyndra employee who received CBP dated January 31, 2011.362 The multipliers increase from each level of accomplishment on a given/calculated slope and are not fixed at 0.5,1.0, and 1.5.363 See Appendix AC.4, 2010 Cash Bonus Program worksheet. 187
  • 192. 4.526 and 4.625, the multiplier was between 0.5 and 1.0, if between 4.626 and 4.774, the multiplier was between 1.0 and 1.5 and efficiency equal or greater than 4.775, the multiplier would be 1.5. Depending on the module efficiency, the payout would shift from 0 to 20%.• Cost per Wp; Manufacturing Cost – Fourth Quarter 2010 – 20% Weighting Factor - The Cost per Wp was a 20% weight and a ceiling of $3.30. If the average cost per watt was greater than $3.30 in the given quarter, there would be no payout for this specific metric. If the cost per watt was between $3.25 and $3.29, the multiplier would be between 0.5 and 1.0. A multiplier between 1.0 and 1.5 occurred when the cost per watt was between $3.25 and $2.96. Finally, if the cost per watt was equal to or below $2.95, the multiplier would be 1.5. Depending on the cost per Wp, the payout would shift from 0 to 20%.• Key Channel Sales – Fourth Quarter 2010 – 15% Weighting Factor – The key channel sales metric had a weight of 15% and a threshold of 3 MW. If the key channel sales were less than 3 MW, there would be no payout for this metric. A key channel sales amount equal to 3, but less than 4, would achieve a multiplier between 0.5 and 1.0. If 4 and 5 MW’s were achieved, the multiplier would be between 1.0 and 1.5. If more than 5 MW’s were achieved, the multiplier would be 1.5. Depending on the MW’s sold through key channels, the payout could shift from 0 to 15%.• 200 Series Panel Deployment – Fourth Quarter 2010 - 20% Weighting Factor – The 200 series panel deployment metric had a weight of 20% within the total cash bonus equation. The deployment metric had a threshold of 25%. If the actual percentage of shipped 200 Wp panels was less than 25% of the total panels shipped, no payout would be available. If the percentage of panels shipped was between 26% and 34%, the multiplier would be between 0.5 and 1.0. If the percentage was between 35% and 56%, the multiplier would be between 1.0 and 1.5. If Solyndra could achieve a deployment of over 57% of 200 Wp panels, the multiplier would be 1.5. Depending on the number of 200 Wp panels, the payout could shift from 0 to 20%.• Cumulative Commercial Shipments $’s – Second Quarter to Fourth Quarter 2010 – 15% Weighting Factor - The cumulative commercial shipment in dollars for the second quarter through the fourth quarter had to be above $120 million or no payout would be applied in the cash bonus equation. The commercial shipment’s percentage weight within the bonus calculation was 15%. The commercial shipment metric had a threshold of 120 million. If the dollar value of shipments totaled $120 - $151 million, a multiplier between 0.5 and 1.0 was used. If the total amount of shipments totaled $152 - $178 million, the multiplier would be between 1.0 and 1.5. Finally, if the shipments totaled $179 million or more, a multiplier of 1.5 would be used in the calculation. Depending on the dollar value of cumulative shipments, the payout could shift from 0 to 15%.Table #33 below provides a breakout of the CBP cumulative calculations: 188
  • 193. Table #33 Cash Bonus Program Fiscal Year 2010 Stretch Threshold POR Plan No Metric Category Weight Payout 0.5 1.0 1.5 Cumulative Panels Sold (Q2 - Q4) 10% < 340 340 345 356 Module Efficiency (Q4) 20% < 4.525 4.525 4.625 4.775 Cost per Wp (Q4 Manufacturing Cost) 20% > $3.30 $ 3.30 $ 3.25 $ 2.95 Key Channel sales (Q4) 15% < 3 MW 3 4 5 200 Series Panel deployment (Q4) 20% < 25% 25% 35% 57% Cum. Commercial Shipment ($M Q2 - Q4) 15% <$120M $ 120.00 $152.00 $179.00 100% In total, approximately 810 U.S. and European employees received approximately $3.1million in February 2011 under the provisions of the CBP. As detailed in Table #34 below, the2010 aggregate factor was calculated to be 55.31%. For example, if an employee had an annualbase salary of $100,000, his or her target bonus percentage was set at 4% and the company factorpercentage was 55.3%, which would result in a CBP bonus of $2,212. Table #34 Cash Bonus Program - Actual Results Fiscal Year 2010 Stretch Threshold POR Plan Probable Metric Category Weight 0.5 1.0 1.5 Actual Weighted Cumulative Panels Sold (Q2 - Q4) 10% 340 345 356 280.53 0.00% Module Efficiency (Q4) 20% 4.525 4.625 4.775 4.4 0.00% Cost per Wp (Q4 Manufacturing Cost) 20% $ 3.30 $ 3.25 $ 2.95 $ 3.25 20.00% Key Channel sales (Q4) 15% 3 4 5 5 22.50% 200 Series Panel deployment (Q4) 20% 25.00% 35.00% 57.00% 27.81% 12.81% Cum Commercial Shipment ($M Q2 - Q4) 15% $ 120.00 $ 152.00 $ 179.00 $ 110.00 0.00% 100% Resulting Aggregate Factor 55.31% 189
  • 194. The CRO has reviewed the actual results and underlying metrics which should have beenutilized under the parameters of the CBP and concludes that the actual calculations used by thecompany to compute and pay the cash bonuses are within materially acceptable limits. 364 The 2010 CBP was replaced in 2011 with a bonus program that contained a similarstructure for bonus payments. Throughout 2011, Solyndra continued to accrue the potentialbonus payout on its books, accruing $2.5 million for future bonuses to be paid once Solyndra metits financial/productivity goals for 2011. However, no bonuses were paid in 2011 due toSolyndra’s bankruptcy filing.I. Core Retention Bonus Program The Core Retention Bonus Program (“CRP”) was established in the fourth quarter of2010. Following Board approval of the CRP, a letter was distributed to each employee includedin the program. Such employees were advised that “they are being recognized as part of a groupof employees who are essential and valuable to the success of Solyndra.” The letter furtherclarifies the purpose of the CRP stating: “This letter confirms Solyndra’s commitment toprovide additional compensation as you continue to stay with Solyndra, especially during theupcoming year.” Approximately 114 employees received a distribution under the CRP asfollows: • Payout 1: 10% of annual base salary, to be paid before Thanksgiving 2010. • Payout 2: 20% of annual base salary, paid on or around April 1, 2011. • Payout 3: 20% of annual base salary, paid on or around July 1, 2011. Thus, an employee with an annual base salary of $100,000 would have received $10,000on November 25, 2010, $20,000 on April 1, 2011 and $20,000 on July 1, 2011. In total, theeligible employee would receive $50,000 or 50% of their annual base salary in bonuses fromThanksgiving 2010 to July 2011. One of the essential elements for participating in the CRP was absolute confidentiality. Ifany participating party were to breach that confidentiality, he or she could be subjected to364 The company used $3.25 cost per Wp, however the actual cost per Wp was $3.20, the differential did not result ina material deviation. 190
  • 195. immediate disqualification. 365 The rationale behind the CRP was explained to Solyndra’s Boardby Harrison, Solyndra CEO. The following is an excerpt of the minutes of the December 2, 2010Board meeting: “He reiterated his earlier comments with respect to the challenges of employee retention. He explained that the Company had implemented a retention program for approximately 100 key employees within the Company. Under this retention program, each of these employees had received an initial cash payment and the Company had communicated that each employee that was still employed in April of 2011 would receive an additional payment as well as a final retention payment to be made in July of 2011 for those key employees that remained with the Company through that time. Mr. Harrison explained the timing of the payments was designed to get the Company through the challenging months ahead so the employees could make decision on whether they wanted to remain with the Company after the plan had been de-risked” A total of 114 employees agreed to the terms outlined and received an aggregate sum of$6.6 million under the CRP with final payments made in July 2011.J. Bonus Summary In sum, during the period from July 2006 through July 2011, Solyndra expendedapproximately $18.4 million in bonuses to its executives and employees. Approximately $9.7million or 52% of the total amount paid in bonuses was paid to executives and employees withinthe 10 month period prior to Solyndra’s bankruptcy. Table #35 below is a summary reflecting the full amount of bonuses paid to Solyndraemployees through 2011:365 See Appendix AC.5, Letter to Solyndra employee who received CRB dated November 9, 2010. 191
  • 196. Table #35 Solyndra Incentive / Bonus Programs Time Period 2006 through 2011 CIGS/Sys Year KCIP EIP Tech Cash Core Ret. Other Total 2006 $ 139,953 $ 225,450 $ - $ - $ - $ - $ 365,403 2007 383,739 187,524 144,000 - - - 715,262 2008 934,797 275,742 245,087 - - 1,628,864 3,084,490 2009 1,267,622 391,000 138,458 - - 606,443 2,403,523 2010 - - - - 1,454,006 1,190,035 2,644,041 2011 - - - 3,119,519 5,172,824 912,880 9,205,223 $ 2,726,110 $ 1,079,716 $ 527,545 $3,119,519 $6,626,830 $ 4,338,222 $ 18,417,942 Solyndra paid approximately $18.4 million in bonuses, since mid 2006, of whichapproximately $14.1 million was paid in accordance with the established programs; EIP, KCIP,CIGS, CBP and the CRP. See Table #35 above. The remaining $4.3 million paid in bonuseswas paid as Hiring Bonuses, Service Awards and under other miscellaneous bonus programs.The CRO has not received documentation concerning these programs. As previously stated, 366 the CRO reviewed the draw packages submitted to RW Beck, theproject engineer, as well as the loan agreements entered into between Solyndra and the DOE.The CRO believes all funds drawn were spent in accordance with the loan documents andconsistent with the agreements. Further, there was no specific documentation in the drawrequests, which were ultimately paid by the DOE, which related to bonuses. XV. EVENTS LEADING TO BANKRUPTCY FILING At the time of the Restructuring, Solyndra and its existing investors and creditorsunderstood that the company required further incremental capital beyond the $75 million ofTranche A Debt 367 to fund the Consolidation Plan. Thus, the Restructuring documents providedfor further Tranche C Debt funding of up to an additional $75 million.366 See Section X.E Construction and Loan Funding.367 As a result of the Restructuring provided the commitment of the Tranche A Debt left the company with morethan $783 million in senior secured debt. 192
  • 197. Beginning in the second quarter of 2011, Solyndra pursued various funding alternativesincluding multiple strategic and financial investors in an attempt to attract the required capitalunder the terms provided for in the Tranche C Debt. On May 5, 2011, Solyndra managementreported to the Board that the company would need incremental financing by early June tocontinue operations. 368 In an effort to address the immediate and pressing cash requirements, Solyndraapproached certain of its Tranche A Debt holders and the DOE to explore alternative debtfinancing arrangements, including the sale of accounts receivable and inventory. As a result, adraft term sheet was presented to the Board regarding the proposed A/R Facility, wherebySolyndra LLC could sell up to $75 million of qualifying accounts receivable to a special purposeentity established by certain investors led by Argonaut, Madrone and Rockport to fund short-term cash requirements. 369 Under the terms of the Restructuring, the consent of the DOE was required to implementthe A/R Facility, and as a result the DOE was extensively involved in the negotiation of thetransaction. Solyndra obtained the written consent of the DOE and executed agreements on June3, 2011, and began to receive proceeds from the A/R facility. 370 By July 7, 2011, the A/RFacility had provided Solyndra with a cash infusion of approximately $29.2 million. However,the company still required additional capital, and worked with its existing investors and the DOEon the Inventory Facility, whereby certain inventory of Solyndra would be sold to a specialpurpose vehicle formed by certain existing investors. Management apprised the Board of theneed for the Inventory Facility and indicated to the Board that Solyndra was continuing with itsnecessary cost cutting and vendor management measures in order to minimize the immediatecash requirements and that the A/R Facility and Inventory Facility only provided short-termliquidity and did not replace the need for long-term capital. As a result, Tranche C Debtfinancing would still be required by August 2011. 371 Solyndra obtained the written consent of368 See Appendix D.14, Solyndra Board Minutes and Board Presentation dated May 5, 2011.369 See Appendix D.15, Solyndra Board Minutes and Board Presentation dated May 20, 2011.370 See Appendix AB, AR Facility discussion and documentation.371 See Appendix D.17, Solyndra Board Minutes and Board Presentation dated July 7, 2011. 193
  • 198. the DOE and executed the agreements relating to the Inventory Facility on July 29, 2011allowing for the sale of inventory and funding under the agreed upon terms. 372 In early August, Solyndra, certain holders of Tranche A Debt, and representatives of theDOE began negotiations on a financing structure that would allow Solyndra to attract new long-term investment. Argonaut presented a proposal to Solyndra and the DOE involving thesignificant restructuring of Solyndra’s balance sheet, which would have included the write-off ofa significant portion of the Tranche B Debt, all of the Tranche D Debt and all of the Tranche EDebt and indicated that it would be willing to underwrite the additional investment on theseterms. The DOE engaged Lazard to assist it with these negotiations and to help identify potentialsources of capital for the company. The DOE initially responded that the Argonaut Proposal wasunacceptable, and made a counterproposal to Argonaut that sought to preserve most of theDOE’s debt. After Argonaut indicated that it would not be willing to move forward with atransaction based on those terms, the DOE indicated that it would attempt to obtain the approvalsnecessary to move forward with a transaction based on the original terms of the ArgonautProposal. However, by this time, Argonaut had lost the necessary internal support to moveforward with such a transaction, and indicated it was no longer willing to underwrite anytransaction without significant participation from a new investor. Nonetheless, the partiescontinued to discuss a long-term restructuring deal. These negotiations over the terms of the incremental capital continued throughout August2011, and during this time, the parties to the Inventory Facility continued to purchase Solyndrainventory to provide needed liquidity to Solyndra. After it was clear that a transaction could notbe accomplished under the terms set forth in the Argonaut Proposal, the DOE and certainexisting investors began negotiations for bridge financing to allow Solyndra additional time tofind a new source of capital and complete an overall restructuring. Under the proposed terms ofthe bridge financing, both the DOE, as the loan servicer of the Tranche B debt, and the holders ofthe Tranche A Debt would have released additional funds to Solyndra. On August 26, 2011, the DOE indicated it was unable to provide additional funds underthe Tranche B facility; however, the parties continued to work on interim financing alternatives.372 See Appendix AB, Inventory Facility discussion and documentation. 194
  • 199. In light of the DOE’s stated position, Mitchell indicated to the Board that Argonaut was notwilling to be the sole source of the required additional long-term capital and based on the statusof discussions among Argonaut, other potential investors and the DOE, he had severereservations in making a recommendation to Argonaut to provide additional long-term capital atthat time. At the Board meeting, Nwachuku updated the Board on the DOE’s continuedcommitment to the company and stressed the continued work the DOE and its financial advisorswere doing in an attempt to find a solution to the company’s capital requirements. 373 Two days later, the Board met again to address the pressing financing and capital issues.The Board was informed that an understanding had been reached between the representatives ofthe Tranche A lenders and the DOE. Subject to the DOE obtaining necessary governmentalapprovals, the lenders agreed to provide additional “bridge” funding to the company to affordadditional time to secure long term capital. The contemplated “bridge” funding involved therelease of approximately $8 million of the remaining DOE Loan Guarantee funds, approximately$6 million of remaining Tranche A Debt proceeds, and the DOE’s permission for the company toaccess an additional $3 million of funds (proceeds of equity infusions) held in a restrictedaccount. A commitment was also made by the parties to the Inventory Facility to purchaseapproximately $3 million of additional inventory pursuant to the Inventory Facility to allow theDOE sufficient time to obtain the necessary approvals for the interim funding arrangement. Immediately prior to an August 30, 2011 Board meeting, the DOE informed the companythat it was unable to obtain the necessary consents from the other agencies to allow for theinterim funding of the remaining Tranche B proceeds unless the funding was part of a fullyfunded business plan. company management updated the Board of the DOE’s position at theAugust 30th Board meeting. At the same meeting, Mitchell also informed the Board that theTranche A lenders were not prepared to release the remaining funds without the release of theTranche B funds, and they could not commit to fully funding the company. Solyndra was leftwith no other option but to immediately suspend operations and begin the process of filing itsChapter 11 petitions. 374373 See Appendix D.21, Solyndra Board Minutes dated August 26, 2011.374 See Appendix D.23, Solyndra Board Minutes dated August 30, 2011. 195
  • 200. As a result, on August 31, 2011, Solyndra immediately suspended its manufacturingoperations and terminated the vast majority of its workforce. Inasmuch as the company’s assetsinclude complex equipment and intellectual property, the company retained key employees tomaintain its assets with the ability to re-start operations while restructuring options wereexplored, to assist with sales of assets and, as necessary, to wind-down the business following asale or liquidation of assets. A week later, on September 5, 2011, Solyndra commenced itsChapter 11 bankruptcy cases. 196

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