A Solyndra Insider’s Words

Courtesy of ZeroHedge. View original post here.

On September 16th I received an email from a Solyndra (“SOL”) employee. This individual was on of the management team at SOL. He is a part of the Silicon Valley world and does not want his name to come out. I have his permission to use his words. As a “Wanna Be” journalist I’m reluctant to introduce information without attributing it to a source. That said, I respect the position of this individual. His words of explanation:

My apologies for not completely identifying myself, but I am not currently in any spotlight w/ regards to visits from men in blue windbreakers with stenciling on the back. My goal is to steer as well clear of that particular issue as I can…. Thanks for your patience in not asking for my identity at this juncture.

On the Importance of the Failed 2009 IPO

Note: S1 is the SEC document for an Initial Public Offering. Fab 1&2 are the company’s manufacturing facilities

The original plan was to have Fab 1 operating on a "almost at profit basis" (a proof of concept + – type level), then use an IPO to fund the next push into economies of scale. Or use strategic partnerships and sovereign relationships to that.

The S-1 had been filed in the Nov Dec 2009 time frame, and I had heard that at the fateful Board meeting that preceded the putsch, that it had been announced that that financial situation of the country and the position of the Solyndra’s strategy had led the I-bankers to tell the execs that any IPO would be a failure and they should expect a lead balloon from the market. The I bankers then told the e-team that *if* Fab 2 was finished in time, and brought to good production, *and* the solar prices should at any point start to pull out of the crash, *then* they would recommend the IPO. The "recommend" was their words, but I believe that this is the way of saying that they would in no way do the IPO at that time.

The Fed money was explicitly tied to being *solely* used to build Fab 2. Solyndra could not use the loan proceeds for *anything* else.

This exchange is important. The company plan was to turn FAB#1 into a profit and then expand. The investment bankers said no “No Money” to that plan. It is clear that in late 2009 SOL committed to the strategy of rapidly using the DOE money to build out FAB#2. How much influence did the investment banker’s recommendations have on this fateful decision? It would be interesting to see company files on this topic. Even more interesting would be a review of the DOE files. If we find a memo that reads: “We’re doing it the way the bankers are telling us to” it will prove the point. It’s interesting, in this context, to note that Wall Street does not have to create toxic synthetic securities to cause the taxpayers to suffer a loss. They just have to talk.

The Role of Goldman Sachs

Goldman was the main underwriter/adviser…… I think they were exclusive in the role of adviser in the DOE deal and in the proposed IPO. They were also very heavily involved in the larger private equity raises.

Argonaut is a funding vehicle for the Kaiser Family Foundation. His *foundation* "channeled money. Further, this is not a case of a corporate shell. The fact is that if Soly had made 20 billion dollars, GK would receive —– zero. The foundation is a 501(c)(3) non-profit entity, and subject to strict controls by both state and federal law on the purposes that they can engage their assets for. It has a fiduciary responsibility that does not include benefiting GK. For example, everyone knows that there would be a world of difference in classifying an investment from Bill Gates, and one from the Bill and Melinda Gates Foundation. And that is precisely the issue here.

Draw what you will of this exchange. It does put the role of George Kaiser in a different light.

On SOL and Obama

For Solyndra, it knew from the get go that its existence was predicated on economies of scale. So it had a huge urge to build a *big* plant. Unfortunately the equities had already at that time pumped 600 million or so into it, and HSH Nordbank had committed to a 90 million loan. The 2008 well went dry….. and it needed 800 million to build a plant that would be cost effective (a fair and reasonable price for a good semi fab these days….)

The Obama admin was jonesing for a two-fer: green jobs *and* stimulus. And you now have two people who want the same result (albeit one for political purposes and one for "greed" purposes).

Look, no one pointed a gun at Solyndra and said "apply and take this loan". It needed BIG capital to get the project over the hill. And in 2008-2009, there was only one game in town.

It takes two to tango.

On the Obama Plant Visit

With a heavy dose of ironic twists, the WH approaches Upper Management telling them that they would be very interested in a trip by the President. Do you tell them "no, our CEO is headed out the door, and we are *not* going to let you showcase the completion of our Fab that *you* helped pay for?"……. The entire Presidential trip was a rush undertaking, I think there was only about 1.5 weeks between the request and the trip.

And then the June cramdown occurs, and Solyndra loses a massive amount of technical talent in the next three months. It is quite a story filled with ironic twists.

On the Sale of Assets to Argonaut pre-bankruptcy

Note: On 9/15 I wrote about a transaction that occurred on July 29, 2011 where Sol sold the inventory and accounts receivables to a new company affiliated with George Kaiser’s family foundation (Argonaut Ventures). This is in response to that article:

You mentioned the following as to the A/R sale on Solyndra:

"This could have been an arms-length transaction that was a last ditch effort to save SOL."

This is exactly the point. Solyndra was on the cusp of closing a second funding deal with Madrone and Argonaut as lead investors. In fact, the funding event in Dec – Jan contemplated such a second funding, as Argonaut and Madrone committed to the present round, but Solyndra had to try and find other entities (not necessarily get them to sign on to the term sheet, but had to try and get new ones in). Nonetheless, as part and parcel of the Dec/Jan/Feb funding event (the one that DOE subordinated to), the leads in that committed to the second round.

The fact that a SPV was set up in regards to a "factor" or towards a greater control of inventory by the investors is no surprise to me. If you read carefully, the Dec/Jan/Feb round had a similar trajectory. In fact, Solyndra Inc. winked out of existence (essentially) in March, as all assets were transferred to a wholly owned subsidiary (Solyndra LLC) as part of the restructure in conjunction with the DJF funding. Solyndra Inc. changed its name to 360 Solar Holdings, and reflected that the original Inc had been transformed into a holding company.

Was There Any Hanky Panky in the 7/29/11 transaction?

This is transaction that *has* to be approved by the Board, both as materiality and as to a potential self-dealing issue.

If the transaction was done w/o the approval by the Board, then you have a big-time civil case *and* (b/c of the Feds) potential criminal issues. Knowing the people involved, there is no way this is the case.

If it was approved by the Board, then the Board majority had to approve. (if not, see above) There is no way the Board would approve this potential of *handing out* stuff to others w/o something coming back as consideration. Again, there were multiple entities involved in approving this decision. If it was done underhandedly, then a vast civil/criminal conspiracy exists among all the board members, the executive team, and potentially the board observers.

Occam’s razor tells me that this is a legit injection operation, that fell apart prior to final closing.

The conclusion is that there were so many eyes and so many lawyers who knew that a worst-case outcome was possible that there was no manipulation. They all knew that this story would come out in the light of day.

Did insiders understand what was happening?

Trouble was brewing a year and a half ago with the first "massive wipeout" equity round, and when Chris Gronet was consigned to a figurehead role in Feb of last year. The co. was run between Feb and June by a triumvirate of Stover (cfo), Gaffney (GC), and (damn i forgot the name of the sales VP who bolted to the roofing company in texas…… was it Kirk Roller?)

Was there a “surprise” collapse at the end? Who walked?

I am very aware that this second funding was being worked on feverishly all the way up until the night before the "mass layoff". In fact, just a week before the deal was described to me as being in the bag, as to *everyone* on all sides of the deal.

So who walked at the last minute? Was it George Kaiser or was it Madrone (Wal-Mart family). We might find out the answer to this one-day. I’m betting it was Madrone.

Was business that bad?

In April 2011, the all hands meeting showed a big bubble in upcoming expected orders —- enough that the Company seemed very confident of meeting its internal goal of doubling sales year to year over 2010 (i.e. from 110 million to 220 million).

Note that the figures made known were broken down into actuals, "hard" expectations (i.e. negotiations nearly complete), "soft" expectations (negotiations starting or ongoing), and leads. Each category showed significant increase on a year to year comparison.

On the wisdom of the DOE accepting subordination of it’s debt.

DOE had a crappy decision in December 2010. The same decision faced by *everyone* who is the primary lender/holder in a cramdown situation.

The decision was: subordinate and give up "veto", or they could have killed the DJF deal and walked away with 5 cents on the dollar in foreclosure. (i.e. the DOE had a right to "take Fab 2 and run it" in that circumstance, but does *anyone* really believe that they could have tempted even a smidgen of the people to "cross over" to Fab 2, especially since the cramdown in May pretty much smoked the talent pool at Solyndra already…..)

By taking the commands of the "last dollar’ at the table, they basically said that we will give up that last 5 cents to try and let SOLY get going. And I really do believe that the strides that SOLY took between last May and now were actually quite good. So I wouldn’t say that DOE got outfoxed, they got outmuscled by the "last dollars in the door" (as happens every single time)

On the changing role of the DOE

Note: In February of 2011 the DOE agreed to provide seniority (preference in BK) to a new loan from existing equity investors. (D,J,F) refers to the recapitalizations that took place in December, January and February.

Prior to DJF funding, the DOE role was one of secured creditor with heavy liens on the major component of Solyndra operations. In fact, the operating agreements that went into the loan went well beyond the "secured creditor." What existed prior to the DJF funding was that DOE would foreclose on Solyndra Fab 2 LLC, which held the operations and assets associated with the new fab. (In fact, this entity went onto be Solyndra LLC after the DJF funding). I do not believe they had much (if any) role in the operation of Solyndra Inc, who then owned Sol Fab 2 LLC as a wholly owned subsidiary (the sub subject to foreclosure upon by the DOE)

Subsequent to the DJF round, DOE subordinated its lien on the main assets of Solyndra: i.e. Fab 2 LLC and all assets under it. DOE won the right to have an observer at all Board meetings (which it ostensibly excercised much to the glee of conservative bloggers….. 🙂 )

Accordingly, I don’t see how DOE could agree to the deal, except in the role of an essentially unsecured creditor. I do not know if the rework even gave them that right (ie. the right "agree" to items like this).

So, I do not have that particular knowledge. DOE *must* have known about the deal, but absent any "can stop clause" associated with the rework in DJF, I don’t see how they could have actively agreed to anything.

From this I conclude that when the DOE took a back seat on it’s loan, it also took a backseat in its oversight/involvement in the company. Any documentation that would support this conclusion would prove embarrassing to the DOE.

On Solyndra The DOE and George Bush

The DOE had the Bush loan program going, and Solyndra hopped on that train early and got one of the first "semifinalist" announcements. IIRC, the Bush admin was also really jonesing to get the loan out, so as to feather 43’s cap. But that didn’t happen in time.

On Chris Gronet

Note: Founder, former CEO and Chairman of SOL

Chris really resigned (was fired) in Feb last year. He was around, but did nothing between then and June, since the triumvirate was running the company.

After Harrison came in, Chris "had an office", but was never around. His sole function was as Chairman of the Board.

This is since there were two "wipeout" equity rounds: one in March-ish last year, and then the one in DJF this year.

In each case, investors having more than x shares could participate and maintain their relative % ownership. They set this low, since they were very worried about derivative lawsuits in the future due to the cramdowns, and how the beneficence would accrue to only "insiders" w/o this provision. Chris opted in, thus maintaining his ownership share both through the dilution from cramdown and the subsequent 100x dilution/cramdown.So in *each* round he stayed on as Chairman, actually due to the sheer numbers of shares he opted in for (even though he was still not at all involved in *anything* to do with the day to day operation of the company for over a year and half.)

On 8/19, which was right in the throes of the latest cramdown/equity round, Chris resigned only one position: that of Chairman of the Board. I believe he actually also was no longer even to be on the Board post last putative equity round. So, the announcement was made of his resignation, which appears to be a clear indication that Chris either didn’t participate in the last round (or was somehow not included….. which would seem odd given his holdings)

The resignation of Gronet on 8/19 is indicative that his ownership position reqts were outrun by his pocketbook. But to reiterate, Gronet had *no* day to day interaction with Solyndra from last February. His only interaction in that time between last Feb and just currently was in the role as Chairman of the Board.

Note: This discussion confirms that there were numerous calls of capital on the equity investors in 2011. These were met (the dilution numbers). While the amounts of additional equity are not clear, the shellacking for the investors is bigger than previously reported. It also speaks to their intent. The equity was trying to keep Sol alive.

On the personnel changes at the top

John Gaffney came in as GC in Dec 2009. Gaffney had been GC at First Solar, and had very deep historical ties to the Walton family (Walmart). The Waltons were investors in Solyndra through the Madrone partnership.

Within 3 months there was a massive shakeup in the Exec team. The two mainstays of Solyndra were "put to pasture" in either March or April. Kelly Truman was "reoragnized" from VP of Sales and Marketing to some bullshit corner job, and (at least internally to Solyndra) it was announced that Chris Gronet was assuming the role of the "face of the company". In the same email, it was also announced that day to day operations were going to be done by the troika of Gaffney, Bill Stover, and Kirk Roller. Kirk left Solyndra about a month and a half later.

This is a Silicon Valley story. No different than the dozens before it. Huge successes and spectacular failures. The only difference is that tax-payer money got involved. That’s probably a good lesson to learn for the folks in the Valley and the big family money that makes it tick. Keep the Feds out of your backyard and we’ll all be better off.

My sincere thanks to this ex Solyndra employee for allowing me to share his thoughts.