PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
I. Executive Summary
Purpose. This memorandum analyzes whether Calloway-Briggs Renewables Inc. qualifies as an "emerging growth company" ("EGC") as defined in Section 2(a)(19) of the Securities Act of 1933, as amended (the "Securities Act"), as added by Section 101(a) of the Jumpstart Our Business Startups Act of 2012 (Pub. L. 112-106) (the "JOBS Act"), and identifies the scaled disclosure accommodations and regulatory benefits available to CBR in connection with its proposed initial public offering (the "IPO" or the "Offering") of approximately $600,000,000 of common stock, par value $0.01 per share (the "Common Stock"), on the New York Stock Exchange (proposed ticker symbol: CBRI). This memorandum is intended to provide the engagement team and the responsible partner with a comprehensive analysis of the applicable statutory and regulatory framework, the factual basis for CBR's EGC qualification, and our recommendations regarding the elections that CBR should make in connection with the preparation and filing of its registration statement on Form S-1 (the "S-1") with the Securities and Exchange Commission (the "SEC").
Conclusion. Based on our review of the applicable statutory provisions, SEC rules, staff guidance, and the factual record as set forth herein, we conclude that CBR qualifies as an EGC. The Company's total annual gross revenues for its fiscal year ended December 31, 2021 ("FY 2021") were $487.3 million, which is substantially below the statutory threshold of $1.235 billion (as adjusted for inflation pursuant to SEC Release No. 33-10332, dated March 31, 2017). None of the four statutory disqualification events enumerated in Section 2(a)(19) of the Securities Act apply to CBR as of the date of this memorandum. CBR has not previously sold common equity securities pursuant to an effective registration statement under the Securities Act; CBR has not issued more than $1.0 billion in registered non-convertible debt securities during the prior three-year period; and CBR is not currently a reporting company or a large accelerated filer. Accordingly, CBR is entitled to avail itself of the full suite of scaled disclosure and regulatory accommodations afforded to EGCs under the JOBS Act and related SEC rules, including confidential submission of its draft registration statement on Form S-1, which was submitted to the SEC Division of Corporation Finance on April 11, 2022 (EDGAR Accession No. 0001948372-22-000001).
Recommendation. We recommend that CBR elect to take advantage of all available EGC accommodations in the S-1 registration statement and all related filings, subject to the specific recommendations set forth in Section V below regarding each accommodation. In particular, we recommend that CBR irrevocably opt out of the extended transition period for new or revised accounting standards under Section 107(b) of the JOBS Act, for the reasons discussed in Section V.E below. All other accommodations should be elected and appropriately disclosed. The specific elections and their implications for the S-1 drafting process, the offering timeline, and post-IPO reporting obligations are discussed in detail in the sections that follow.
II. Background — The Company and the Proposed Offering
A. The Company
Calloway-Briggs Renewables Inc. is a corporation organized under the laws of the State of Delaware, with its principal executive offices located at 4200 Ridgeline Parkway, Suite 1100, Austin, Texas 78746 (Employer Identification Number: 83-4027615). The Company was founded in 2014 by Garrett Calloway and Elaine Briggs (the "Founders") and has since grown to become a developer, owner, and operator of utility-scale solar, onshore wind, and battery energy storage projects across the southwestern and south-central United States. Since its founding, CBR has assembled a substantial operating portfolio and development pipeline that positions it as a significant participant in the domestic renewable energy infrastructure market.
As of the date of this memorandum, CBR's operating portfolio consists of approximately 3.8 gigawatts ("GW") of installed capacity across 22 projects located in Texas, New Mexico, Arizona, California, and Oklahoma. In addition, CBR has approximately 1.4 GW of capacity currently under construction and a development pipeline of approximately 6.2 GW at various stages of development, including projects with executed power purchase agreements ("PPAs"), projects with interconnection agreements, and earlier-stage development projects.
B. Pre-IPO Ownership Structure
CBR's pre-IPO equity capitalization is concentrated among the following principal holders:
• Pinnacle Vista Capital Partners III, LP ("Pinnacle Vista"): Approximately 62% of the outstanding equity interests. Pinnacle Vista is a private equity fund managed by Pinnacle Vista Capital Management LLC, which led a growth equity investment in CBR in 2018 and has since served as the Company's largest institutional investor and controlling stockholder.
• Founders and Management: Approximately 24% of the outstanding equity interests, held collectively by Garrett Calloway (Co-Founder and Chief Executive Officer), Elaine Briggs (Co-Founder and President), and other members of senior management.
• Earlier-Stage Investors and Employees: Approximately 14% of the outstanding equity interests, held by earlier-stage venture and strategic investors, as well as employees holding vested equity awards.
C. The Proposed Offering
The proposed IPO contemplates an aggregate offering of approximately $600,000,000 of Common Stock, at an assumed midpoint offering price of $22.00 per share, to be listed on the New York Stock Exchange under the ticker symbol "CBRI." The key terms of the proposed offering are as follows:
• Pre-IPO shares outstanding: 100,000,000 shares of Common Stock (on a fully diluted, post-reclassification basis, giving effect to the conversion of all outstanding preferred stock and the reclassification of the Company's multi-class equity structure into a single class of Common Stock, as contemplated by the pre-IPO restructuring).
• Primary shares offered (base offering): Approximately 23,713,636 shares (assuming an offering price of $22.00 per share and aggregate gross proceeds of approximately $521,700,000 from the primary offering).
• Shares offered by selling stockholders (base offering): Approximately 3,563,636 shares (assuming aggregate gross proceeds of approximately $78,400,000 from the secondary component, with selling stockholders consisting principally of Pinnacle Vista and certain members of management).
• Post-IPO shares outstanding (base offering): 123,713,636 shares of Common Stock.
• Overallotment option: The underwriters will have an option to purchase up to an additional 3,559,091 shares (representing 15% of the base offering shares), exercisable within 30 days following the date of the final prospectus. Post-IPO shares outstanding assuming full exercise of the overallotment option: 127,272,727 shares.
D. Working Group
The following parties constitute the principal members of the IPO working group:
• Issuer's Counsel: Calderwood & Harkness LLP ("C&H").
• Underwriters' Counsel: Prescott, Danforth & Yee LLP ("PD&Y") (Margaret Yee, Partner; Scott Halverson, Partner).
• Lead-Left Book-Running Manager: Hargrove Keating & Co.
• Joint Book-Running Managers: Linden Pratt Securities LLC and Graymont Brothers Inc.
• Co-Managers: Barfield Stuart & Co. and Crane Whitley Capital LLC.
• Independent Auditor: Ashford & Pemberton LLP (Gregory Sondheim, Lead Engagement Partner; Irene Valdez, Audit Manager).
• Tax Advisor: Kessler McBride & Associates LLP (Alan Kessler, Managing Partner; Linda McBride, Partner, Tax Structures).
• Compensation Consultant: Clarendon Rowe Advisory Group LLC (Patricia Voss, Senior Managing Director).
• Investor Relations Advisor: Broadmark Strategic Communications Inc. (Jason Eklund, Managing Director).
E. Confidential Submission
The Company's confidential draft registration statement on Form S-1 (the "DRS-1") was submitted to the SEC Division of Corporation Finance on April 11, 2022, pursuant to the procedures for confidential submission by emerging growth companies under Section 6(e) of the Securities Act, as amended by Section 106(a) of the JOBS Act. The SEC has assigned CBR CIK No. 0001948372. The DRS-1 has not been publicly filed and has not been declared effective as of the date of this memorandum.
III. Statutory Definition of Emerging Growth Company
A. Section 2(a)(19) of the Securities Act
The term "emerging growth company" is defined in Section 2(a)(19) of the Securities Act, which was added by Section 101(a) of the JOBS Act. As originally enacted, the statute defined an EGC as an issuer that had "total annual gross revenues" of less than $1,070,000,000 during its most recently completed fiscal year. The definition was intended to capture a broad range of mid-sized companies that were entering the public markets for the first time, providing them with a temporary set of regulatory accommodations designed to reduce the cost and complexity of the IPO process and the transition to public-company reporting.
The revenue threshold set forth in Section 2(a)(19) is measured as of the date the issuer first sells its common equity securities pursuant to an effective registration statement under the Securities Act. For a company undertaking an IPO, the relevant measurement period is the most recently completed fiscal year as of the date of the initial public offering. For CBR, this is FY 2021 (the fiscal year ended December 31, 2021), which is the most recently completed fiscal year as of the date of the confidential submission and the anticipated date of the offering.
The term "total annual gross revenues" is not separately defined in the JOBS Act or the Securities Act. However, the SEC staff has interpreted this term to mean total revenues as reported in the issuer's audited consolidated financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). For CBR, this figure is derived from the Company's FY 2021 audited consolidated financial statements, which were prepared by Ashford & Pemberton LLP and reflect total annual gross revenues of $487.3 million.
B. Five-Year Sunset and Disqualification Events
Under Section 2(a)(19) of the Securities Act, an issuer ceases to be an EGC upon the occurrence of the earliest of the following four disqualification events:
1. Revenue Threshold Exceeded. The last day of the fiscal year during which the issuer has total annual gross revenues of $1.235 billion or more (as adjusted for inflation; see Section III.C below).
2. Five-Year Sunset. The last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act. For a company that completes its IPO in calendar year 2022, this sunset would occur on the last day of fiscal year 2027 (i.e., December 31, 2027, assuming a calendar-year fiscal year).
3. Non-Convertible Debt Issuance. The date on which the issuer has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt. For purposes of this test, the SEC staff has confirmed that only debt securities issued pursuant to a registration statement under the Securities Act (i.e., registered public debt offerings) are counted toward the $1.0 billion threshold. Privately placed debt, bank credit facilities, project-finance facilities, and other non-registered debt instruments are not included. See SEC Division of Corporation Finance, Jumpstart Our Business Startups Act Frequently Asked Questions, Question 36 (updated April 2, 2014).
4. Large Accelerated Filer Status. The date on which the issuer becomes a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under Rule 12b-2, an issuer is a large accelerated filer if, among other things, it has an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates (i.e., "public float") of $700 million or more as of the last business day of the issuer's most recently completed second fiscal quarter. For a calendar-year company, the relevant measurement date is June 30 of each year.
These four disqualification triggers operate independently, and an issuer will lose its EGC status upon the earliest occurrence of any one of them. The burden is on the issuer to monitor these triggers on an ongoing basis following its IPO and to make timely disclosures regarding any change in its EGC status.
C. Revenue Threshold — Inflation Adjustment
Section 2(a)(19)(D) of the Securities Act directs the SEC to index the EGC revenue threshold for inflation every five years. Pursuant to this directive, the SEC issued Release No. 33-10332 (March 31, 2017), which adjusted the revenue threshold from the original $1.07 billion to $1.235 billion, effective as of April 12, 2017. This adjusted threshold of $1.235 billion is the operative threshold for purposes of CBR's EGC qualification analysis. The next scheduled inflation adjustment has not yet been adopted as of the date of this memorandum, and the $1.235 billion threshold remains in effect.
IV. Application to Calloway-Briggs Renewables Inc.
A. Revenue Test
CBR's total annual gross revenues for FY 2021, as reported in the Company's audited consolidated financial statements prepared in accordance with GAAP and audited by Ashford & Pemberton LLP (Gregory Sondheim, lead engagement partner), were $487.3 million. This figure represents the Company's total consolidated revenues for the twelve-month period ended December 31, 2021, and includes revenues from energy sales under long-term PPAs, revenue from the sale of renewable energy certificates ("RECs"), and other operating revenues.
The $487.3 million in total annual gross revenues for FY 2021 is well below the statutory threshold of $1.235 billion by a margin of approximately $747.7 million, or approximately 60.5% below the threshold. Accordingly, CBR satisfies the revenue test for EGC qualification with a substantial margin of safety.
For additional context, the Company's historical revenue trajectory is as follows:
Even on an annualized basis using Q1 2022 unaudited revenues of $131.4 million (implying approximately $525.6 million for the full fiscal year), CBR's total annual gross revenues remain substantially below the $1.235 billion threshold. The Company's audited financial statements for FY 2019, FY 2020, and FY 2021 were prepared by Ashford & Pemberton LLP and are included in the DRS-1.
B. No Prior Public Offering of Common Equity
CBR has not previously sold common equity securities pursuant to an effective registration statement under the Securities Act. The Company is a privately held corporation, and its equity securities have been issued and sold exclusively in transactions exempt from the registration requirements of the Securities Act, including private placements to Pinnacle Vista, the Founders, and other investors pursuant to Section 4(a)(2) of the Securities Act, Regulation D thereunder, and the exemption provided by Rule 701 for compensatory equity grants.
The DRS-1 was submitted to the SEC Division of Corporation Finance on a confidential basis on April 11, 2022 and has not been publicly filed. The S-1 has not been declared effective, and no sales of Common Stock have been made pursuant to an effective registration statement. Accordingly, the five-year sunset provision described in Section III.B.2 above has not yet been triggered, and the five-year clock will not begin to run until the date of the first sale of Common Stock pursuant to the effective registration statement (i.e., the closing of the IPO).
C. Non-Convertible Debt Issuance Test
As of December 31, 2021, CBR's total outstanding indebtedness was approximately $1.71 billion, comprising the following principal facilities:
While CBR's total outstanding indebtedness exceeds $1.0 billion in the aggregate, none of this debt constitutes non-convertible debt securities issued pursuant to a registration statement under the Securities Act. The $1.0 billion non-convertible debt disqualification threshold set forth in Section 2(a)(19) of the Securities Act applies exclusively to debt securities issued in registered public offerings. All of CBR's outstanding indebtedness is in the form of bank credit facilities (the revolving credit facility and term loan B, both arranged by Veltrano National Bank as administrative agent), project-finance construction and term loan facilities (the Mesquite Wind and Cimarron Solar facilities with Prairie Commercial Bank, N.A.), and a tax-equity partnership investment (the Solaris West partnership with Veltara Basin Financial LLC). These are all private transactions that were not registered under the Securities Act and do not count toward the $1.0 billion threshold.
The SEC Division of Corporation Finance has confirmed in its Jumpstart Our Business Startups Act Frequently Asked Questions (Question 36, updated April 2, 2014) that the non-convertible debt test applies only to debt issued in registered offerings and does not encompass privately placed debt instruments, bank loans, or project-finance facilities. Accordingly, this disqualification trigger is not implicated with respect to CBR, and the Company satisfies this prong of the EGC qualification analysis.
D. Large Accelerated Filer Test
CBR is not currently a reporting company under the Exchange Act and has no publicly traded securities. The Company does not have a public float, and the large accelerated filer test under Rule 12b-2 of the Exchange Act is therefore inapplicable to CBR at this time. CBR cannot become a large accelerated filer until after the IPO has been consummated and the Company has become a reporting company with publicly traded Common Stock.
For purposes of forward-looking analysis, we note the following considerations regarding CBR's potential transition to large accelerated filer status after the IPO:
• The implied post-money equity valuation of CBR on a base offering basis is approximately $2.72 billion (123,713,636 post-IPO shares outstanding × $22.00 per share assumed midpoint offering price).
• Following the IPO, Pinnacle Vista will continue to hold a significant portion of the outstanding Common Stock. Based on the base offering assumptions, Pinnacle Vista is expected to hold approximately 49% of the post-IPO shares outstanding (approximately 47% assuming full exercise of the overallotment option). The Founders and management are expected to hold an additional significant percentage. Because shares held by affiliates (including Pinnacle Vista and the Founders) are excluded from the public float calculation, the actual public float will be substantially less than the total market capitalization.
• Whether CBR becomes a large accelerated filer will depend on the market value of Common Stock held by non-affiliates (i.e., the public float) as of the last business day of the Company's most recently completed second fiscal quarter. For a calendar-year company that completes its IPO in 2022, the first relevant measurement date would be June 30, 2023 (assuming the Company files its first annual report on Form 10-K for FY 2022). If the public float exceeds $700 million as of that date, CBR would become a large accelerated filer and would lose its EGC status.
• Given the significant proportion of shares expected to be held by affiliates, the public float may remain below $700 million even if the total market capitalization exceeds that threshold. However, share price appreciation, secondary sales by insiders (whether through registered offerings, Rule 144 sales, or block trades), and the expiration of lock-up periods could increase the public float over time. The working group should monitor this trigger carefully following the IPO.
E. Conclusion on EGC Qualification
Based on the foregoing analysis, we conclude that Calloway-Briggs Renewables Inc. qualifies as an emerging growth company under Section 2(a)(19) of the Securities Act. Specifically:
1. CBR's total annual gross revenues for FY 2021, its most recently completed fiscal year, were $487.3 million, which is substantially below the $1.235 billion statutory threshold.
2. CBR has not previously sold common equity securities pursuant to an effective registration statement under the Securities Act, and the five-year sunset provision has not been triggered.
3. CBR has not issued more than $1.0 billion in registered non-convertible debt securities during the prior three-year period. All of CBR's outstanding indebtedness consists of private bank facilities, project-finance debt, and tax-equity investments.
4. CBR is not a reporting company and does not have a public float, and therefore is not and cannot currently be a large accelerated filer.
Accordingly, CBR is entitled to avail itself of the full suite of scaled disclosure and regulatory accommodations available to emerging growth companies under the JOBS Act and related SEC rules, as described in Section V below.
V. Available Scaled Disclosure Accommodations
This Section V describes each of the principal accommodations available to CBR by virtue of its EGC status and sets forth our recommendation regarding CBR's election with respect to each accommodation.
A. Confidential Submission of Draft Registration Statement
Under Section 6(e) of the Securities Act, as added by Section 106(a) of the JOBS Act, an emerging growth company may submit a confidential draft registration statement to the SEC for nonpublic review by the SEC staff prior to the public filing of the registration statement. This accommodation permits an EGC to receive initial SEC staff comments on its draft registration statement without publicly disclosing the Company's intention to pursue an IPO, thereby preserving the Company's flexibility to proceed with or abandon the offering process without the market impact of a public filing.
CBR has availed itself of this accommodation by submitting its DRS-1 to the SEC Division of Corporation Finance on April 11, 2022 (EDGAR Accession No. 0001948372-22-000001; SEC CIK: 0001948372). The confidential submission was made through the EDGAR system in accordance with SEC procedures for nonpublic submissions by EGCs.
The following operational requirements and considerations apply to the confidential submission process:
• Public Filing Requirement. The draft registration statement, together with all prior confidential submissions and all SEC staff comment letters and the Company's response letters, must be publicly filed on EDGAR at least 15 days before the date on which the Company commences its roadshow (or, if there is no roadshow, at least 15 days before the requested effective date of the registration statement). The working group should build this 15-day lead time into the offering timeline and roadshow scheduling.
• Dormancy Consideration. If the offering is placed in dormant status and subsequently reactivated, the Company will need to publicly file its S-1 (including all prior confidential submissions and the full SEC comment-and-response correspondence) upon reactivation. The staleness of financial statements and the continued satisfaction of EGC qualification criteria should be re-verified at that time. We address this consideration further in the separate Dormancy / Shelf-Life Memorandum (to be dated June 20, 2022) and in Section X below.
• Multiple Submissions. The SEC staff typically provides comments within 30 days of a confidential submission, and the Company may submit amended drafts on a confidential basis in response to such comments. The confidential submission process may involve multiple rounds of comment and response before the registration statement is publicly filed.
B. Reduced Financial Statement Periods in the Registration Statement
Under Section 102(b)(1) of the JOBS Act, an EGC is required to present only two years of audited financial statements in its registration statement, rather than the three years ordinarily required for non-EGC issuers under Regulation S-X Rule 3-01. Correspondingly, the selected financial data (which is normally required for five fiscal years under Item 301 of Regulation S-K) may be limited to two years, and the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") (required under Item 303 of Regulation S-K) need only cover the periods presented in the audited financial statements (i.e., two years rather than three years).
Notwithstanding the availability of this accommodation, CBR's DRS-1 includes three years of audited financial statements, covering FY 2019, FY 2020, and FY 2021, together with a corresponding three-year MD&A discussion. The audited financial statements for all three years were prepared by Ashford & Pemberton LLP (Gregory Sondheim, lead engagement partner). The Company has made the voluntary decision to present three years of audited financial data in order to enhance investor confidence, facilitate comparability with other publicly traded renewable energy companies, and provide the investing public with a more complete picture of the Company's revenue trajectory and operating performance during a period of significant growth.
This voluntary decision to present additional financial data does not constitute a waiver or forfeiture of CBR's EGC status. The SEC staff has confirmed that an EGC may voluntarily provide more disclosure than required without losing its EGC status. See SEC Division of Corporation Finance, Jumpstart Our Business Startups Act Frequently Asked Questions, Question 20.
In addition to the audited financial statements, the S-1 includes selected financial data for FY 2019, FY 2020, and FY 2021, as well as unaudited interim financial statements for Q1 2022 (the three-month period ended March 31, 2022). Had CBR elected the full EGC accommodation, only two years of selected financial data would have been required.
Recommendation. While CBR has elected to present three years of audited financial statements in the current DRS-1, the EGC accommodation remains available for any future registration statement, amendment, or annual report. Should circumstances change — for example, if the inclusion of an additional year of audited financials would delay the offering or impose undue cost — CBR may avail itself of the two-year accommodation at that time.
C. Executive Compensation Disclosure — Scaled Requirements
Under Section 102(a)(1) of the JOBS Act, an EGC may comply with the executive compensation disclosure requirements applicable to a "smaller reporting company" under Item 402 of Regulation S-K, rather than the full compensation disclosure requirements applicable to accelerated filers and large accelerated filers. This accommodation significantly reduces the scope and detail of the executive compensation disclosures that must be included in the registration statement and in subsequent annual proxy statements.
The key differences between the full compensation disclosure regime and the scaled disclosure available to EGCs are as follows:
• Summary Compensation Table. Under the scaled disclosure requirements, the Summary Compensation Table is required for only three named executive officers (the Chief Executive Officer plus the two other most highly compensated executive officers), rather than the five named executive officers required under the full disclosure regime. In addition, the Summary Compensation Table need only cover two fiscal years of compensation, rather than three.
• Compensation Discussion and Analysis ("CD&A"). An EGC relying on the scaled disclosure accommodation is not required to include a Compensation Discussion and Analysis in its registration statement or annual proxy statement. The CD&A is a lengthy narrative disclosure describing the Company's compensation philosophy, objectives, and decision-making processes, and its omission represents a significant reduction in the disclosure burden.
• Compensation Committee Report. An EGC is not required to include a Compensation Committee Report, which is the formal statement by the Compensation Committee of the Board of Directors that it has reviewed and discussed the CD&A with management.
• Pay-Versus-Performance Disclosure. An EGC is not required to include the pay-versus-performance tabular disclosure required by Item 402(v) of Regulation S-K (adopted pursuant to Section 953(a) of the Dodd-Frank Act).
• CEO Pay Ratio Disclosure. An EGC is not required to include the CEO pay ratio disclosure required by Item 402(u) of Regulation S-K (adopted pursuant to Section 953(b) of the Dodd-Frank Act), which requires disclosure of the ratio of the median employee's total compensation to the CEO's total compensation.
• Other Tables and Narrative Disclosures. Certain other tabular and narrative disclosures, including the Grants of Plan-Based Awards table, the Outstanding Equity Awards at Fiscal Year-End table (in its expanded form), and the Option Exercises and Stock Vested table, may be omitted or simplified under the smaller-reporting-company scaled disclosure format.
Notwithstanding the availability of the scaled compensation disclosure accommodation, CBR intends to provide robust disclosure in the S-1 regarding the Company's equity incentive plans and IPO-related equity grants. Specifically, the S-1 will include disclosure regarding the following:
• 2022 Omnibus Equity Incentive Plan. CBR intends to adopt the 2022 Omnibus Equity Incentive Plan (the "2022 Equity Plan") in connection with the IPO. The 2022 Equity Plan will authorize the issuance of up to 12,727,273 shares of Common Stock (representing 10% of the post-IPO shares outstanding on a fully diluted basis, assuming full exercise of the overallotment option and based on 127,272,727 total shares outstanding), subject to customary evergreen and automatic increase provisions.
• 2022 Employee Stock Purchase Plan. CBR intends to adopt the 2022 Employee Stock Purchase Plan (the "2022 ESPP") in connection with the IPO. The 2022 ESPP will authorize the issuance of up to 2,545,455 shares of Common Stock (representing 2% of the post-IPO shares outstanding on a fully diluted basis).
• IPO Equity Grants. In connection with the IPO, CBR intends to make the following grants of restricted stock units ("RSUs") under the 2022 Equity Plan to key executive officers: (i) Garrett Calloway, Chief Executive Officer — 500,000 RSUs; (ii) Elaine Briggs, President — 400,000 RSUs; and (iii) the Company's Chief Financial Officer (to be identified) — 300,000 RSUs. Additional IPO grants to other officers and key employees are expected. Vesting schedules and other terms will be described in the S-1.
• Compensation Benchmarking. Clarendon Rowe Advisory Group LLC (Patricia Voss, Senior Managing Director) has been engaged as the Company's compensation consultant and has provided benchmarking data derived from a peer group of publicly traded renewable energy and utility companies. This benchmarking data has informed the design of the 2022 Equity Plan and the sizing of the IPO equity grants.
Recommendation. CBR should elect the scaled executive compensation disclosure accommodations available under the JOBS Act. This election is consistent with prevailing market practice for EGC IPOs and will reduce the disclosure burden on the Company without materially impairing investor understanding of the Company's compensation program. The inclusion of voluntary disclosure regarding the equity plans and IPO grants will provide investors with the information most relevant to their assessment of CBR's compensation practices.
D. Exemption from Auditor Attestation on Internal Controls (SOX Section 404(b))
Under Section 103(a)(1) of the JOBS Act, which amends Section 404(b) of the Sarbanes-Oxley Act of 2002 ("SOX"), an emerging growth company is exempt from the requirement to obtain an attestation report from its independent registered public accounting firm on the effectiveness of the company's internal control over financial reporting. This exemption remains available for so long as the company retains EGC status.
It is important to distinguish between the two components of the SOX Section 404 internal controls framework:
• Section 404(a) — Management's Assessment. Section 404(a) of SOX requires management to include in its annual report on Form 10-K an assessment of the effectiveness of the company's internal control over financial reporting. This requirement is not affected by EGC status. CBR will be required to include a management assessment of internal controls beginning with its second annual report on Form 10-K (i.e., the Form 10-K for FY 2023, assuming the IPO closes in 2022 and the first annual report covers FY 2022). Newly public companies are afforded an exemption from the Section 404(a) requirement for the first annual report.
• Section 404(b) — Auditor Attestation. Section 404(b) of SOX requires the company's independent auditor to attest to, and report on, management's assessment of internal controls. This requirement is the one from which EGCs are exempt. For CBR, this means that Ashford & Pemberton LLP (Gregory Sondheim, lead engagement partner; Irene Valdez, audit manager) will not be required to perform an attestation engagement under PCAOB Auditing Standard No. 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, during CBR's EGC period.
The SOX 404(b) exemption is particularly significant for CBR at this stage. As detailed in the IPO Readiness Assessment Memorandum prepared by the engagement team (dated March 21, 2022), the Company's internal controls assessment has identified certain control deficiencies and material weaknesses that management is currently in the process of remediating, including deficiencies in the areas of revenue recognition for complex PPA structures, accounting for tax-equity partnership flip transactions, and information technology general controls. The SOX 404(b) exemption provides CBR with additional runway to design, implement, and test remediated controls before being subjected to an external audit of those controls. Management should use the EGC period to establish robust public-company internal controls in anticipation of the eventual requirement for auditor attestation.
Recommendation. CBR should take advantage of the SOX 404(b) auditor attestation exemption during the EGC period. The Company should simultaneously continue to invest in the buildout of its internal controls infrastructure, with the goal of achieving full SOX 404 compliance (including auditor attestation readiness) before the loss of EGC status.
E. Extended Transition Period for New or Revised Accounting Standards
Under Section 102(b)(1) of the JOBS Act, an EGC may elect to take advantage of an extended transition period for complying with new or revised financial accounting standards that are issued by the Financial Accounting Standards Board ("FASB") after April 5, 2012, until such time as those standards would apply to private companies. This accommodation recognizes that private companies are often afforded longer transition periods for new GAAP standards than public companies, and the extended transition period allows EGCs to follow the private-company effective dates rather than the accelerated public-company effective dates.
An EGC that elects the extended transition period is not required to adopt new GAAP standards on the same timetable as other public companies, which may provide a cost benefit by allowing the company additional time to implement complex new accounting guidance. However, the election also has potential disadvantages:
• Comparability. If CBR were to elect the extended transition period, its financial statements might not be directly comparable to those of other publicly traded companies in the renewable energy and utility sector, many of which are not EGCs and have already adopted recent GAAP standards on the public-company timetable. This lack of comparability could confuse investors and reduce the usefulness of CBR's financial disclosures.
• Irrevocability. Under Section 107(b) of the JOBS Act, an EGC's decision regarding the extended transition period is subject to an asymmetric irrevocability rule. Specifically, if an EGC elects to opt out of the extended transition period (i.e., elects to follow the public-company effective dates for new accounting standards), such election is irrevocable — the company cannot subsequently change its mind and opt back in. However, an EGC that initially elects to opt in to the extended transition period may subsequently opt out at any time (though such opt-out would then become irrevocable). The irrevocability of the opt-out decision means that CBR should carefully consider this election before making it.
• Market Practice. Most large EGC IPOs in the energy and utilities sector have opted out of the extended transition period, electing to adopt new GAAP standards on the public-company timetable to maintain comparability with peer companies. This is the prevailing market practice for EGC IPOs of CBR's size and profile.
CBR has discussed this election with its independent auditor, Ashford & Pemberton LLP (Gregory Sondheim and Irene Valdez), and with its tax advisor, Kessler McBride & Associates LLP (Alan Kessler, Managing Partner; Linda McBride, Partner, Tax Structures). Both firms concur with the recommendation to opt out of the extended transition period.
Recommendation. CBR should irrevocably opt out of the extended transition period for new or revised accounting standards, electing to adopt all new GAAP standards on the same timetable as other public companies. This election should be disclosed in the S-1 in accordance with Section 107(b) of the JOBS Act, including a statement that the election is irrevocable. The opt-out will ensure that CBR's financial statements remain directly comparable to those of its publicly traded peers in the renewable energy sector, which we believe is in the best interests of CBR and its prospective investors.
F. Exemption from Certain Governance and Disclosure Requirements Under Dodd-Frank and Other Laws
By virtue of its EGC status, CBR is exempt from several corporate governance and disclosure requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and other federal securities laws. These exemptions include:
• Say-on-Pay Votes. Under Section 951 of the Dodd-Frank Act (codified at Section 14A(a) of the Exchange Act), public companies are generally required to submit a non-binding advisory vote on executive compensation to their stockholders at least once every three years (the "say-on-pay" vote). EGCs are exempt from this requirement for so long as they retain EGC status.
• Say-on-Frequency Votes. Under Section 14A(a)(2) of the Exchange Act, public companies are required to hold a non-binding advisory vote on the frequency of say-on-pay votes (i.e., whether the say-on-pay vote should occur annually, biennially, or triennially). EGCs are exempt from this requirement.
• Say-on-Golden-Parachute Votes. Under Section 14A(b) of the Exchange Act, public companies are required to hold a non-binding advisory vote on "golden parachute" compensation arrangements in connection with a merger, acquisition, or similar transaction. EGCs are exempt from this requirement.
These exemptions are available to CBR for so long as the Company retains EGC status and operate independently of any other exemptions from corporate governance requirements. In particular, we note that CBR may also qualify for the "controlled company" exemption under Section 303A.00 of the NYSE Listed Company Manual, which provides additional flexibility regarding board committee independence requirements. The EGC exemptions and the controlled-company exemption are separate and cumulative — CBR may rely on both sets of exemptions simultaneously, as applicable. The interplay between these exemptions is discussed further in Section VIII below.
Recommendation. CBR should take advantage of the Dodd-Frank Act exemptions available to EGCs, including the exemptions from say-on-pay, say-on-frequency, and say-on-golden-parachute votes, during the EGC period. Appropriate disclosure of these exemptions should be included in the S-1 and in subsequent proxy statements.
G. "Testing the Waters" Communications
Under Section 105(a) of the JOBS Act (codified at Section 5(d) of the Securities Act), an EGC or any person authorized to act on its behalf may engage in oral or written communications with potential investors that are qualified institutional buyers ("QIBs") as defined in Rule 144A under the Securities Act, or institutions that are accredited investors as defined in Rule 501(a) of Regulation D under the Securities Act ("institutional accredited investors" or "IAIs"), to determine whether such investors might have an interest in the contemplated securities offering, either before or after the filing of a registration statement.
These "testing the waters" ("TTW") communications represent a significant practical advantage for EGC issuers, as they allow the Company and the underwriting syndicate to gauge investor interest and receptivity to the proposed offering before committing to a full roadshow and formal marketing effort. Key considerations regarding TTW communications include:
• Scope. TTW communications may be made both before and after the filing (or confidential submission) of a registration statement. They are not limited to any particular time period and may continue up to and including during the roadshow.
• Eligible Recipients. TTW communications may be directed only to QIBs and IAIs. Communications with retail investors or other non-qualifying persons are not permitted under the JOBS Act safe harbor.
• Regulatory Treatment. TTW communications are exempt from the restrictions of Section 5 of the Securities Act (including the free-writing prospectus ("FWP") rules under Rule 433) and are not deemed to be prospectuses or offers for purposes of Section 2(a)(10) of the Securities Act. However, TTW communications remain subject to the anti-fraud provisions of the federal securities laws, including Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
• No Filing Requirement. Unlike free-writing prospectuses, TTW materials are not required to be filed with the SEC. However, as a matter of best practice, the Company should maintain records of all TTW communications and materials.
In connection with the IPO, CBR and the underwriting syndicate (led by Hargrove Keating & Co. as lead-left book-running manager, with Linden Pratt Securities LLC and Graymont Brothers Inc. as joint book-running managers, and Barfield Stuart & Co. and Crane Whitley Capital LLC as co-managers) may use TTW materials to gauge investor interest in the proposed offering prior to the commencement of the formal roadshow. Broadmark Strategic Communications Inc. (Jason Eklund, Managing Director) has been engaged as investor relations advisor and may assist in the preparation of TTW materials, including investor presentations and related collateral.
Recommendation. CBR and the underwriting syndicate should prepare testing-the-waters materials for use with QIBs and IAIs prior to the formal roadshow. All TTW materials should be reviewed and approved by Calderwood & Harkness LLP prior to use to ensure compliance with the anti-fraud provisions and consistency with the disclosure in the DRS-1 and any subsequent amendments.
H. Research Reports — Safe Harbor
Under Sections 105(b) and 105(c) of the JOBS Act (amending Sections 2(a)(3) and 5(c) of the Securities Act), the publication or distribution of research reports about an EGC by a broker or dealer that is participating or will participate in the offering of the EGC's securities shall not constitute an "offer" for purposes of Section 2(a)(10) of the Securities Act or a violation of Section 5(c) of the Securities Act. This safe harbor permits the underwriters' research analysts to publish and distribute research reports about CBR during and immediately after the offering without the restrictions that would otherwise apply to such publications.
The research report safe harbor is an important accommodation in the IPO process, as it allows the underwriting syndicate's research departments to initiate coverage of CBR in connection with the IPO, providing investors with independent research perspectives on the Company, its industry, and its investment merits. Under the traditional regulatory framework applicable to non-EGC IPOs, the publication of research by participating broker-dealers during the offering period is subject to significant restrictions, including the SEC's "quiet period" rules and FINRA Rules 2241 and 2242. The JOBS Act safe harbor relaxes these restrictions for EGC offerings.
The underwriters' research analysts should coordinate with the capital markets and equity syndicate desks of their respective firms, and research reports should comply with applicable FINRA rules regarding research analyst conflicts of interest.
VI. Disclosure Requirements in the S-1
A. Required Disclosure of EGC Status
The S-1 registration statement must include specific disclosures regarding CBR's EGC status and the accommodations that the Company has elected or intends to elect. The SEC staff expects EGC issuers to provide clear and prominent disclosure so that investors are fully informed about the nature and extent of the scaled disclosures in the registration statement. The following specific disclosure requirements apply:
1. Prospectus Cover Page or Summary. The prospectus cover page or the prospectus summary section should include a clear statement that CBR is an "emerging growth company" as defined in the JOBS Act. This statement should be prominent and easily identifiable.
2. Extended Transition Period Election. If CBR opts out of the extended transition period for new accounting standards (as we recommend), the S-1 must disclose this irrevocable election in accordance with Section 107(b) of the JOBS Act. The disclosure should clearly state that CBR has irrevocably elected not to take advantage of the extended transition period and will comply with new GAAP standards on the same timetable as non-EGC public companies.
3. Description of Accommodations. The S-1 should include a description of each EGC accommodation relied upon by the Company, including the reduced financial statement periods (if elected), the scaled executive compensation disclosure, the SOX 404(b) auditor attestation exemption, and the exemptions from Dodd-Frank say-on-pay and related votes. The disclosure should explain the impact of each accommodation on the comparability of the Company's disclosures to those of non-EGC issuers.
4. Risk Factors. The S-1 risk factors should include one or more risk factors addressing CBR's EGC status, as discussed in Section VI.B below.
B. Risk Factor Considerations
The S-1 risk factors section (see the separate Risk Factors drafting file maintained by the engagement team) should include a dedicated risk factor addressing CBR's EGC status. The risk factor should cover the following topics:
• Reduced Disclosure. The risk factor should inform investors that CBR is an EGC and has elected to take advantage of certain reduced disclosure and regulatory accommodations, including scaled executive compensation disclosure, the SOX 404(b) auditor attestation exemption, and exemptions from certain Dodd-Frank governance requirements. Investors should be advised that the Company's disclosures may be less extensive than those provided by non-EGC issuers, and that this reduced disclosure could make the Common Stock less attractive to certain investors.
• Investor Perception. The risk factor should disclose the possibility that some investors may find the Company's securities less attractive as a result of CBR's reliance on EGC accommodations. Certain institutional investors have adopted investment policies that restrict or limit investment in companies that rely on scaled disclosures, and the reduced information available to investors may adversely affect the trading price and liquidity of the Common Stock.
• Loss of EGC Status. The risk factor should describe the circumstances under which CBR could lose its EGC status, including: (i) exceeding the $1.235 billion revenue threshold; (ii) the passage of five years from the date of the first sale of Common Stock pursuant to the effective registration statement; (iii) the issuance of more than $1.0 billion in registered non-convertible debt; or (iv) the attainment of large accelerated filer status. The risk factor should explain that upon the loss of EGC status, CBR will become subject to increased compliance costs and disclosure obligations, including the requirement to obtain an auditor attestation on internal controls, full executive compensation disclosure requirements, and Dodd-Frank say-on-pay and related voting requirements.
The specific language of the risk factor should be drafted in coordination with the full risk factors section and should be reviewed by underwriters' counsel at PD&Y for consistency with underwriting due diligence requirements.
VII. Duration of EGC Status — Projected Timeline
CBR will retain its EGC status until the earliest occurrence of any of the four disqualification events described in Section III.B above. Based on the information currently available, we project the following timeline for CBR's EGC period:
A. Revenue Trajectory Analysis
CBR's historical revenue growth has been significant, reflecting the Company's expansion of its operating portfolio and development pipeline. The relevant revenue data is summarized below:
The compound annual growth rate ("CAGR") of CBR's revenues from FY 2019 to FY 2021 was approximately 24.8%. If this growth rate were to continue, CBR's annual revenues would be projected to approach or exceed the $1.235 billion threshold within approximately four to five years, as follows:
• FY 2022 (projected): ~$608 million (based on 24.8% CAGR from FY 2021)
• FY 2023 (projected): ~$759 million
• FY 2024 (projected): ~$947 million
• FY 2025 (projected): ~$1.18 billion
• FY 2026 (projected): ~$1.47 billion
Under this illustrative growth trajectory, CBR's revenues could approach the $1.235 billion threshold in FY 2025 and likely exceed it in FY 2026, at which point CBR would lose EGC status at the end of the fiscal year in which the threshold is exceeded. However, actual revenue growth will depend on a number of variables, including the timing of project completions and commercial operation dates ("CODs"), PPA pricing and contract structures, weather and resource variability, and general market conditions. Key project milestones that will influence revenue growth include:
• Mesquite Wind: Expected COD Q3 2022.
• Cimarron Solar: Expected COD Q1 2023.
• Silverleaf Wind: Expected COD Q4 2024.
• Copper Basin Solar + Storage: Expected COD Q2 2025.
The completion and commissioning of these projects will incrementally add to CBR's revenue base and will be the primary drivers of revenue growth during the EGC period.
B. Five-Year Sunset
If the IPO is consummated in calendar year 2022, the five-year anniversary of the first sale of Common Stock pursuant to the effective registration statement will occur in 2027. Under the five-year sunset provision, CBR would lose EGC status on the last day of the fiscal year following the fifth anniversary — i.e., December 31, 2027 (assuming a calendar-year fiscal year). This represents the absolute outer bound of CBR's EGC period, regardless of revenue levels or other factors.
C. Large Accelerated Filer
As discussed in Section IV.D above, CBR's attainment of large accelerated filer status will depend on the public float (shares held by non-affiliates multiplied by market price) as of the last business day of the second fiscal quarter of each year. Given the implied post-money equity valuation of approximately $2.72 billion and the significant proportion of shares expected to be held by affiliates (Pinnacle Vista, the Founders, and management), the public float at the time of the IPO may be below $700 million. However, changes in the stock price, secondary offerings, insider sales, and lock-up expirations could increase the public float over time. If the public float exceeds $700 million at the relevant measurement date, CBR would become a large accelerated filer and lose EGC status.
The first relevant measurement date for the large accelerated filer test would likely be June 30, 2023, assuming the IPO closes in 2022 and the Company files its first annual report on Form 10-K for FY 2022. The working group should monitor the public float closely following the IPO and model various scenarios for insider sales and share price appreciation.
D. Estimated EGC Period
Taking into account the revenue trajectory, the five-year sunset, and the large accelerated filer risk, we estimate that CBR's EGC period will last approximately three to five years following the IPO. The most likely disqualification trigger is either the revenue threshold (estimated FY 2025–2026) or the large accelerated filer test (which could be triggered earlier depending on market conditions and insider sales). The five-year sunset (December 31, 2027) represents the maximum duration under any scenario.
VIII. Interaction with Controlled-Company Exemption
Following the consummation of the IPO, CBR expects to qualify as a "controlled company" under Section 303A.00 of the NYSE Listed Company Manual. Under the NYSE rules, a company is a "controlled company" if more than 50% of its voting power for the election of directors is held by an individual, a group, or another company. Based on the pre-IPO ownership structure and the terms of the Stockholders' Agreement among CBR, Pinnacle Vista Capital Partners III, LP, and the Founders, Pinnacle Vista (together with the Founders pursuant to the Stockholders' Agreement) is expected to hold a majority of the Company's voting power following the IPO.
The controlled-company exemption provides CBR with exemptions from certain NYSE corporate governance requirements, including:
• The requirement that a majority of the board of directors be comprised of independent directors;
• The requirement that the Compensation Committee be composed entirely of independent directors; and
• The requirement that the Nominating/Corporate Governance Committee be composed entirely of independent directors.
These controlled-company exemptions are distinct from and supplementary to the EGC accommodations described in Section V above. CBR may rely on both the EGC accommodations and the controlled-company exemption simultaneously, to the extent applicable. The two sets of exemptions address different regulatory requirements — the EGC accommodations relate primarily to SEC disclosure and reporting requirements, while the controlled-company exemption relates to NYSE listing standards for corporate governance.
The interplay between the two sets of exemptions should be clearly disclosed in the S-1, including in the corporate governance section and in the risk factors. Investors should be informed that CBR is relying on both sets of exemptions and should understand the cumulative effect of these exemptions on the Company's governance and disclosure practices.
For a more detailed analysis of the controlled-company exemption and its application to CBR, please refer to the separate Controlled-Company Exemption Memorandum maintained in the engagement file (Matter No. 1015-00001).
IX. Impact on Comfort Letter and Audit Procedures
CBR's EGC status has certain implications for the scope of the engagement with Ashford & Pemberton LLP, the Company's independent registered public accounting firm. We summarize these implications below:
• SOX 404(b) Attestation. As discussed in Section V.D above, Ashford & Pemberton LLP will not be required to perform an attestation engagement on the effectiveness of CBR's internal control over financial reporting under PCAOB Auditing Standard No. 2201 during the EGC period. This reduces the scope and cost of the annual audit engagement. Gregory Sondheim (lead engagement partner) and Irene Valdez (audit manager) have been advised of CBR's EGC election and the resulting impact on the scope of their engagement.
• Comfort Letter Procedures. The EGC status does not modify the comfort letter procedures applicable to the IPO. Ashford & Pemberton LLP will be required to deliver comfort letters to the underwriting syndicate in accordance with the Statement on Auditing Standards No. 72 (AU-C Section 920), Letters for Underwriters and Certain Other Requesting Parties. Three comfort letter deliveries ("circle-ups") remain planned: (i) an initial comfort letter to be delivered at the time of the public filing of the S-1; (ii) a bring-down comfort letter to be delivered at the time of the pricing of the offering; and (iii) a closing comfort letter to be delivered at the time of closing. The scope and procedures for the comfort letters have been discussed with the working group and are not affected by EGC status.
• Audit Scope. The scope of the annual audit of CBR's consolidated financial statements (including the audit of FY 2019, FY 2020, and FY 2021 financial statements included in the S-1) is not modified by EGC status. The audits were performed in accordance with the standards of the Public Company Accounting Oversight Board ("PCAOB"), and Ashford & Pemberton LLP has issued unqualified audit opinions for all three fiscal years.
X. Recommendations and Action Items
Based on the analysis set forth in this memorandum, we recommend the following actions:
1. Elect EGC Accommodations. CBR should affirmatively elect all available EGC accommodations in the S-1 registration statement and related filings, as described in Section V above. The specific accommodations to be elected include confidential submission, scaled executive compensation disclosure, the SOX 404(b) auditor attestation exemption, exemptions from Dodd-Frank say-on-pay and related voting requirements, and the use of testing-the-waters communications.
2. Irrevocably Opt Out of Extended Transition Period. CBR should irrevocably opt out of the extended transition period for new or revised accounting standards under Section 107(b) of the JOBS Act, electing to adopt all new GAAP standards on the public-company timetable to maintain comparability with public-company peers in the renewable energy sector. This election should be disclosed in the S-1.
3. Use Scaled Executive Compensation Disclosure. CBR should follow the executive compensation disclosure requirements applicable to smaller reporting companies under Item 402 of Regulation S-K, as permitted for EGCs. This includes providing a Summary Compensation Table for three named executive officers covering two fiscal years, without a CD&A, Compensation Committee Report, pay-versus-performance disclosure, or CEO pay ratio disclosure.
4. Rely on SOX 404(b) Exemption. CBR should rely on the EGC exemption from the auditor attestation requirement on internal controls during the EGC period. The Company should continue its SOX 404(a) readiness preparation, including the remediation of control deficiencies identified in the IPO Readiness Assessment Memorandum.
5. Prepare Testing-the-Waters Materials. CBR and the underwriting syndicate should prepare testing-the-waters materials for use with QIBs and IAIs prior to the formal roadsho