PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP at the direction of and for the benefit of its client, Calloway-Briggs Renewables Inc., and is protected from disclosure by the attorney-client privilege and the work-product doctrine. This memorandum should not be disclosed to any third party without the prior written consent of counsel.
MEMORANDUM
To: Jennifer Kwon, Responsible Partner, Capital Markets, Calderwood & Harkness LLP
From: Leonard Cross, Specialist Partner, Tax, Calderwood & Harkness LLP
CC: Theodore Langston, Billing Partner; Brendan Walsh, Lead Associate; Natasha Forbes, Working Associate
Date: April 25, 2022
Re: Calloway-Briggs Renewables Inc. — Section 409A Valuation Review and Cheap-Stock Analysis
Matter No.: 1015-00001
Client: Calloway-Briggs Renewables Inc. ("CBR" or the "Company")
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I. Executive Summary
This memorandum sets forth our review and analysis of the common stock valuation history of Calloway-Briggs Renewables Inc. ("CBR" or the "Company") from 2019 through the first quarter of 2022, for purposes of assessing compliance with Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder. In addition, this memorandum presents our cheap-stock analysis conducted in connection with the Company's proposed initial public offering ("IPO") of common stock and the related registration statement on Form S-1 (the "Registration Statement").
Background and Context. CBR is a Delaware-incorporated, Texas-headquartered developer, owner, and operator of utility-scale solar, wind, and battery energy storage projects across the United States. The Company proposes to conduct an approximately $600,000,000 IPO of shares of its common stock on the New York Stock Exchange under the proposed ticker symbol "CBRI," at an assumed midpoint offering price of $22.00 per share. The Company confidentially submitted its Draft Registration Statement on Form S-1 ("DRS-1") to the Securities and Exchange Commission (the "SEC") on April 11, 2022. SEC Staff review was anticipated, and the Company received its first-round comment letter on May 6, 2022, containing eighteen (18) comments touching on a range of disclosure, accounting, and legal topics, including several comments implicating the equity compensation and valuation matters addressed in this memorandum.
The SEC is well known to apply heightened scrutiny to pre-IPO equity compensation grants and the underlying fair market value determinations that support the exercise prices of stock options and the valuations attributed to restricted stock units ("RSUs") and other equity-based awards. This scrutiny is particularly acute where there is a significant differential between the contemporaneous 409A fair market value ("FMV") and the anticipated IPO offering price, and where grants have been made in the twelve to eighteen months preceding the filing of the registration statement.
Purpose. The specific objectives of this memorandum are threefold:
(a) to review and assess whether CBR's historical 409A valuations—six independent appraisals spanning from March 31, 2019 through March 31, 2022—were performed in accordance with the requirements of Section 409A of the Code and Treasury Regulation §1.409A-1(b)(5)(iv), including satisfaction of the independent-appraisal safe harbor;
(b) to confirm that the exercise prices of all stock options granted by the Company during this period were set at or above the FMV of the Company's common stock on each applicable grant date, such that the options qualify for the stock-right exclusion from Section 409A; and
(c) to conduct a cheap-stock analysis evaluating whether the SEC is likely to require the Company to record additional stock-based compensation expense under ASC 718 (Stock Compensation) in its financial statements included in the Registration Statement, and to assess the defensibility of the Company's disclosure position.
Overall Conclusion. Based on our review of the six independent appraisal reports, the underlying grant agreements and board resolutions, the Company's financial and operating data, and consultations with the Company's independent auditor, Ashford & Pemberton LLP, and outside tax counsel at Kessler McBride & Associates LLP, we conclude the following:
(1) CBR's historical 409A valuations were performed by a qualified independent appraiser in accordance with applicable standards, including Section 409A and Treasury Regulation §1.409A-1(b)(5)(iv), and each valuation satisfied the requirements of the independent-appraisal safe harbor.
(2) The exercise price of each stock option granted by the Company from 2019 through Q1 2022 was set at or above the FMV per share as determined by the applicable contemporaneous independent appraisal. No stock option was granted at a discount to FMV, and accordingly, no option constitutes deferred compensation subject to Section 409A.
(3) No additional stock-based compensation expense (i.e., no "cheap-stock charge") under ASC 718 is required. The progression of 409A valuations from $8.50 per share (March 31, 2019) to $19.75 per share (March 31, 2022) is supported by documented and verifiable business developments, consistent application of valuation methodology, and reasonable reductions in the discount for Lack of Marketability ("DLOM") as the Company progressed through its IPO process. The remaining gap between the most recent 409A FMV of $19.75 per share and the assumed $22.00 per share IPO midpoint price is attributable to the liquidity premium associated with a public listing, residual IPO execution risk reflected in the pre-offering valuation, and the competitive dynamics of the book-building process.
Key Risk Areas. While our overall conclusion is favorable, we identify the following areas warranting particular attention:
• Proximity of grants to IPO filing. Certain equity grants made in Q4 2021 and Q1 2022 fall within the twelve-month look-back window most closely scrutinized by the SEC Staff. We address each of these grants individually in Section V and Section VI below.
• Rapid appreciation. The Company's per-share FMV increased from $8.50 (March 31, 2019) to $19.75 (March 31, 2022)—an appreciation of approximately 132% over three years. This appreciation, while substantial, is consistent with and supported by the Company's significant revenue growth (from $312.8 million in FY 2019 to $487.3 million in FY 2021), capacity growth (from approximately 2.1 GW to 3.8 GW), and profitability improvement (from a net loss of ($22.4) million in FY 2019 to net income of $41.7 million in FY 2021).
• Retrospective analysis. The SEC may request a retrospective reconciliation of each 409A FMV to the $22.00 IPO midpoint price, with particular focus on whether interim events between valuation dates should have prompted updated or refreshed valuations.
• DLOM reduction trajectory. The DLOM applied decreased from 30% (March 31, 2019) to 5% (March 31, 2022). The SEC may question whether the DLOM was reduced sufficiently quickly in light of the Company's progression toward an IPO.
Coordination. This analysis was conducted in coordination with the following advisors:
• Kessler McBride & Associates LLP (Alan Kessler, Managing Partner; Linda McBride, Partner — Tax Structures): provided input on tax-structure considerations affecting the valuation methodology, including the treatment of tax-equity partnerships and tax-credit impacts on discounted cash flow projections.
• Ashford & Pemberton LLP (Gregory Sondheim, Lead Engagement Partner; Irene Valdez, Audit Manager): provided guidance on accounting implications under ASC 718, reviewed the Company's stock-based compensation expense calculations, and confirmed the appropriateness of the Company's accounting treatment.
The remainder of this memorandum sets forth our detailed analysis.
II. Legal and Regulatory Framework
A. Section 409A Overview
Section 409A of the Internal Revenue Code, enacted as part of the American Jobs Creation Act of 2004 and effective January 1, 2005, imposes comprehensive requirements on nonqualified deferred compensation arrangements. Section 409A applies broadly to any plan, agreement, or arrangement that provides for the deferral of compensation, subject to certain statutory exclusions.
Stock options and stock appreciation rights ("SARs") are potentially subject to Section 409A because they may involve a deferral of compensation—namely, the right to receive compensation at a future date that is determined by reference to the appreciation in the value of the underlying stock. However, stock options and SARs are specifically excluded from the definition of "deferred compensation" under Section 409A if certain conditions are met. The most critical of these conditions, and the one that is the focus of this memorandum, is that the exercise price of the stock option must not be less than the fair market value of the underlying stock on the date of grant. This requirement is set forth in Treasury Regulation §1.409A-1(b)(5)(i)(A).
In addition to the exercise-price requirement, a stock option must satisfy the following conditions to be excluded from Section 409A:
(1) the option must be granted with respect to "service recipient stock" (generally, common stock of the employer corporation or its direct or indirect parent);
(2) the option must not include any feature for the deferral of compensation beyond the exercise of the option and transfer of the underlying stock;
(3) the option must be granted by the service recipient (or a related entity) to a service provider in connection with the performance of services; and
(4) the number of shares subject to the option and the exercise price must be fixed or determinable on the date of grant.
Consequences of Non-Compliance. If a stock option is determined to have been granted with an exercise price that is less than the FMV of the underlying stock on the grant date, the option fails to qualify for the exclusion from Section 409A and is treated as "deferred compensation" subject to the full panoply of Section 409A requirements. The consequences for the option holder are severe:
(a) Immediate income inclusion. All amounts deferred under the arrangement that have vested (i.e., that are no longer subject to a substantial risk of forfeiture) are includible in the option holder's gross income in the taxable year in which the amounts vest, regardless of whether the option has been exercised.
(b) 20% additional tax. The option holder is subject to an additional tax equal to 20% of the amount required to be included in income under Section 409A(a)(1)(B)(i)(II).
(c) Interest penalty. The option holder is subject to an additional premium interest tax, computed at the underpayment rate plus one percentage point, on the amount of any underpayment that would have occurred had the deferred compensation been includible in income when first vested. This interest accrues from the date of vesting through the date of actual income inclusion. See Section 409A(a)(1)(B)(i)(I).
From the Company's perspective, non-compliance with Section 409A does not result in a direct tax liability to the Company itself. However, the Company faces several adverse consequences: (i) the Company is required to report amounts includible under Section 409A on the affected employees' Forms W-2 (Box 12, Code Z), triggering potential reporting obligations and correction requirements; (ii) the Company may face liability exposure under indemnification provisions in employment agreements or equity plan documents; (iii) the Company may need to participate in IRS correction programs, which can be time-consuming and administratively burdensome; and (iv) the disclosure of 409A non-compliance in the Registration Statement could create negative optics and invite additional SEC scrutiny, potentially delaying the IPO timeline.
B. Fair Market Value Determination — Treasury Regulation §1.409A-1(b)(5)(iv)
The question of how FMV is determined is central to this analysis. For stock that is readily tradeable on an established securities market, FMV is generally the closing price on the grant date (or a reasonable method based on actual transactions, such as the average of the high and low prices). However, for stock of a private company that is not traded on an established securities market—as was the case for CBR prior to its proposed IPO—the determination of FMV is governed by Treasury Regulation §1.409A-1(b)(5)(iv)(B).
Under this regulation, the FMV of stock of a privately held company must be determined by the "reasonable application of a reasonable valuation method." The regulation identifies a non-exclusive list of factors that must be considered in determining FMV:
(1) the value of tangible and intangible assets of the company;
(2) the present value of anticipated future cash-flow of the company;
(3) the market value of stock or equity interests in similar corporations and other entities engaged in trades or businesses substantially similar to those engaged in by the company, the value of which can be readily determined through nondiscretionary, objective means (such as through trading prices on an established securities market or an amount paid in an arm's-length private transaction);
(4) recent arm's-length transactions involving the sale or transfer of the company's stock or equity interests;
(5) the existence of control premiums or discounts for lack of marketability; and
(6) whether the valuation method is used for other purposes that have a material economic effect on the service recipient, its stockholders, or its creditors.
The regulation further provides that a valuation method will not be treated as reasonable if it does not take into account all available information material to the value of the corporation. A valuation is not considered reasonably applied if it fails to reflect information available after the date of the valuation that may indicate that the value was calculated in a manner that either combinator failed to account for or was inconsistent with the available information.
Safe-Harbor Methods. Treasury Regulation §1.409A-1(b)(5)(iv)(B) establishes three safe-harbor methods that, if satisfied, create a presumption that the valuation method and its application are reasonable. The burden shifts to the IRS to demonstrate that the valuation was "grossly unreasonable." The three safe-harbor methods are:
(1) Independent appraisal (Treas. Reg. §1.409A-1(b)(5)(iv)(B)(1)). A valuation determined by an independent appraisal as of a date that is no more than 12 months before the relevant grant date. The appraiser must be a qualified individual or firm with significant experience in performing valuations of the type of property being valued. This is the safe harbor upon which CBR has relied for all grants reviewed in this memorandum.
(2) Formulaic method (Treas. Reg. §1.409A-1(b)(5)(iv)(B)(2)). A valuation determined by a formula that, if used as part of a non-lapsing restriction on the stock, would be considered in determining the fair market value of the stock under Section 83 of the Code. The formula must be used consistently for all purposes involving the transfer of stock (including regulatory filings, loan covenants, and other transactions). Given the variability in CBR's project-level cash flows and the complexity of its capital structure (including tax-equity partnerships), a formulaic method was not practical or appropriate for the Company.
(3) Illiquid start-up company method (Treas. Reg. §1.409A-1(b)(5)(iv)(B)(3)). A valuation performed by a person with significant knowledge and experience or training in performing similar valuations, taking into account the factors enumerated above, with respect to a corporation that (a) has been in business for less than 10 years, (b) has no class of equity securities traded on an established securities market, and (c) does not reasonably anticipate a change in control within the ensuing 90 days or an IPO within the ensuing 180 days. This safe harbor is manifestly inapplicable to CBR. The Company was founded in 2014 (more than seven years before the most recent valuations), had FY 2021 revenue of $487.3 million and total assets of $3.94 billion, and was actively planning an IPO throughout the later portion of the review period. Even if the 10-year requirement were satisfied, the IPO-anticipation prong would have been failed beginning no later than mid-to-late 2021.
CBR's Reliance on the Independent-Appraisal Safe Harbor. For each of the six valuations reviewed in this memorandum, CBR retained Whitfield Greer & Co., a nationally recognized independent valuation firm, to prepare a formal 409A valuation of the Company's common stock. Whitfield Greer & Co. is accredited by the American Society of Appraisers (ASA) and each engagement was led by Steven Whitfield, ASA, CFA, CEIV, a principal of the firm with over twenty years of experience in business valuations, including valuations of privately held companies in the energy and infrastructure sectors. The valuations were performed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) and the standards promulgated by the American Society of Appraisers.
Each valuation was completed within 12 months of the corresponding grant dates, thereby satisfying the temporal requirement of the independent-appraisal safe harbor. The details of each valuation are set forth in Section IV below.
C. Cheap-Stock Considerations in the IPO Context
Distinct from the federal income tax analysis under Section 409A, the "cheap-stock" inquiry arises in the context of SEC review of a company's registration statement filed in connection with an IPO. The SEC Staff has historically scrutinized pre-IPO equity grants where there is a significant gap between the exercise price (or grant-date FMV for RSUs) and the anticipated IPO offering price, particularly for grants made within the twelve to eighteen months preceding the filing of the registration statement.
The Staff's concern is straightforward: if the contemporaneous 409A FMV was set artificially low—whether intentionally or as a result of a flawed methodology—then the Company may have granted equity compensation at a below-market price, resulting in an unrecognized stock-based compensation charge. Under ASC 718 (Stock Compensation), stock-based compensation expense must be measured based on the fair value of the award at the grant date. If the SEC determines that the contemporaneous 409A valuation understated the true FMV, the registrant may be required to (a) increase the recorded stock-based compensation expense, (b) restate prior-period financial statements if the understatement is material, and (c) revise the disclosure in the registration statement.
The SEC's analysis is retrospective in nature: the Staff considers the totality of the circumstances, including the business developments that occurred between the valuation date and the IPO filing date, to assess whether the valuation was reasonable at the time it was performed. The SEC does not automatically equate a difference between the 409A FMV and the IPO price with a cheap-stock problem; rather, the Staff expects the registrant to provide a cogent reconciliation explaining the factors that drove the appreciation in value.
Key Factors in the SEC's Analysis. The SEC Staff typically focuses on the following factors when evaluating potential cheap-stock issues:
(a) Timing of grants relative to significant corporate events. Grants made shortly before or after significant events—such as completion of a financing round, execution of a transformative contract, or achievement of a key milestone—may suggest that the board was aware of information that should have been reflected in a higher FMV.
(b) Magnitude of the gap between exercise price and IPO price. A larger gap invites greater scrutiny. The SEC generally expects a narrowing trajectory as the IPO approaches.
(c) Consistency of methodology. The SEC expects consistent application of valuation methodology across periods. Unexplained changes in methodology, discount rates, or DLOM may raise red flags.
(d) Qualitative and quantitative changes in the business. Revenue growth, profitability improvements, pipeline expansion, and other business developments occurring between valuation dates are expected to be reflected in the trajectory of 409A FMVs.
(e) Disclosure adequacy. The SEC expects robust disclosure in the registration statement regarding the Company's equity compensation practices, valuation methodology, and the factors contributing to the difference between the most recent 409A FMV and the IPO price.
Relevant Accounting Guidance. The accounting treatment of stock-based compensation is governed primarily by ASC 718 (Stock Compensation), which requires entities to recognize compensation expense for equity instruments granted to employees based on the fair value of those instruments at the grant date. For stock options, the fair value is determined using an option-pricing model (e.g., Black-Drubeck or a lattice model). For RSUs, the fair value is generally the fair value of the underlying stock on the grant date (less the present value of expected dividends, if applicable). If the SEC determines that the grant-date FMV was understated, the Company would be required to remeasure the awards using the corrected FMV, resulting in additional stock-based compensation expense.
ASC 505-50 (Equity-Based Payments to Non-Employees) is also potentially relevant to the extent that any equity awards were granted to non-employee service providers (e.g., consultants or advisors). Based on our review, all equity grants during the review period were made to employees and directors, and ASC 505-50 does not apply.
We have coordinated closely with Ashford & Pemberton LLP (Gregory Sondheim and Irene Valdez) on the accounting implications of our analysis. Ashford & Pemberton has confirmed that the Company's stock-based compensation expense calculations under ASC 718 are consistent with the 409A FMVs determined by Whitfield Greer & Co. and that no additional compensation charges are required based on the valuations reviewed.
D. Section 409A Correction Programs
In the event that a stock option is determined to have been granted with an exercise price below FMV, the IRS has established correction programs that may mitigate the adverse tax consequences for affected option holders. The principal guidance in this area is IRS Notice 2008-113, which provides relief for certain types of Section 409A failures, including the grant of discounted stock options, subject to specified conditions and deadlines.
Under Notice 2008-113, a discounted stock option may be corrected by amending the option to increase the exercise price to the correct FMV and requiring the option holder to include in income an amount equal to the excess of the FMV of the underlying stock on the date of correction (or, if earlier, the date the stock first became substantially vested) over the original exercise price. The correction must be completed by the end of the second taxable year following the taxable year in which the option was granted (for options that were not vested at the time of correction). More limited relief is available for options that have already vested or been exercised.
Assessment. Based on our analysis set forth in Sections IV through VII below, we have concluded that no correction action under Notice 2008-113 or any other IRS correction program is necessary. All stock options granted by CBR during the review period were granted at exercise prices at or above the contemporaneous 409A FMV, and the valuations satisfied the independent-appraisal safe harbor. We do not recommend any remedial action at this time.
III. CBR's Pre-IPO Capitalization and Ownership Structure
An understanding of CBR's capitalization history and ownership structure is essential context for the valuation analysis that follows. This section summarizes the key elements of the Company's equity capitalization from its founding through the IPO filing date.
Founding and Early History. CBR was founded in 2014 by Garrett Calloway and Elaine Briggs and was incorporated in the State of Delaware. The Company's principal executive offices are located at 4200 Westheimer Road, Suite 1800, Houston, Texas 77027. From its founding through 2016, the Company was funded primarily through founder capital contributions and a small number of seed-stage investments from individuals and family offices, totaling approximately $47 million in equity and $25 million in project-level debt.
Pinnacle Vista Investment. In 2017, Pinnacle Vista Capital Partners III, LP ("PVCP III" or "Pinnacle Vista"), a Series III infrastructure and energy fund with a 2016 vintage and a total committed capital of $4.8 billion, made an initial equity investment of $385 million in CBR. This investment was structured as a combination of preferred stock and common stock, with certain protective provisions, board designation rights, and registration rights customary for a majority sponsor investment of this type. PVCP III's investment was transformative for CBR, providing the balance sheet capacity to pursue utility-scale projects and to establish the Company as a credible counterparty for long-term power purchase agreements ("PPAs") and interconnection agreements.
In 2019, PVCP III made a follow-on equity investment of $120 million, bringing its total invested capital in CBR to $505 million. The follow-on investment was made in connection with the Company's pipeline expansion and the construction of the Solaris West Solar project (450 MW, Pecos County, Texas).
Pre-IPO Ownership. As of the date of this memorandum (and immediately prior to the proposed IPO), the Company's capitalization and ownership structure is as follows:
• PVCP III: Approximately 62% of the fully diluted shares outstanding, reflecting the conversion of all outstanding preferred stock into common stock in connection with the pre-IPO reclassification.
• Co-Founders and Management: Approximately 24% of the fully diluted shares outstanding, including shares held by Garrett Calloway, Elaine Briggs, and other members of the senior management team.
• Earlier-Stage Investors and Employees: Approximately 14% of the fully diluted shares outstanding, including shares held by seed-stage investors, former employees, and current employees who received equity grants under the Company's pre-IPO equity plan.
Share Count. The Company has 100,000,000 shares of common stock outstanding on a fully diluted basis (after giving effect to the conversion of all outstanding preferred stock into common stock and the reclassification of the Company's capitalization in connection with the IPO), with a par value of $0.01 per share. The reclassification was approved by the Board of Directors and the requisite stockholders in March 2022 and became effective upon the filing of the Company's Amended and Restated Certificate of Incorporation with the Delaware Secretary of State on March 22, 2022.
Implied Pre-IPO Equity Valuation. At the assumed $22.00 per share IPO midpoint price, the implied pre-money equity valuation of the Company (i.e., the value of the shares outstanding immediately prior to the offering, excluding the new shares to be issued in the IPO) is:
100,000,000 shares × $22.00 per share = $2,200,000,000 ($2.2 billion)
On a post-money basis (assuming the sale of 27,272,727 new shares at $22.00 per share, generating gross proceeds of approximately $600,000,000), the total number of shares outstanding would be approximately 127,272,727, resulting in a post-money equity valuation of approximately $2,800,000,000 ($2.8 billion). Total enterprise value, including $1.74 billion in total debt and adjusting for $185 million in cash (as of December 31, 2021), would be approximately $4,355,000,000, or approximately $4,247,000,000 on a pre-money basis.
EIN. The Company's Employer Identification Number is 83-4027615.
The foregoing capitalization and ownership data form the basis for the equity-per-share calculations underlying each of the 409A valuations discussed in Section IV below.
IV. History of 409A Valuations
A. Independent Appraisers Retained
As noted above, CBR retained Whitfield Greer & Co. ("WGC"), a nationally recognized independent valuation firm, to prepare all six 409A valuations covering the period from March 31, 2019 through March 31, 2022. WGC is accredited by the American Society of Appraisers and has extensive experience in the valuation of equity securities of privately held companies, including companies in the renewable energy and infrastructure sectors. Each engagement was led by Steven Whitfield, ASA, CFA, CEIV, a founding principal of WGC, with support from WGC's senior valuation professionals.
WGC's retention as the Company's 409A valuation provider was coordinated with Kessler McBride & Associates LLP (Alan Kessler and Linda McBride), who provided input on the valuation methodology, particularly with respect to the treatment of the Company's tax-equity partnerships, the impact of investment tax credits ("ITCs") and production tax credits ("PTCs") on projected cash flows, and the appropriate discount rates for a renewable energy company with CBR's risk profile.
Each valuation was performed in accordance with the independent-appraisal safe harbor of Treasury Regulation §1.409A-1(b)(5)(iv)(B)(1). The valuations were conducted in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP), the standards of the American Society of Appraisers (ASA), and the American Institute of Certified Public Accountants (AICPA) Practice Aid on the Valuation of Privately-Held-Company Equity Securities Issued as Compensation (the "AICPA Practice Aid").
B. Chronological Valuation Summary
1. Valuation as of March 31, 2019
Valuation Date: March 31, 2019
Business Context. The March 31, 2019 valuation was prepared following PVCP III's follow-on equity investment of $120 million, which closed in February 2019. At the time, the Company's Red Mesa Wind project (380 MW, Custer County, Oklahoma) was approaching its commercial operations date ("COD"), which was achieved in April 2019. The Company's total operating capacity was approximately 1.8 GW as of the valuation date and was expected to reach approximately 2.1 GW by the end of fiscal year 2019 upon full commissioning of Red Mesa Wind. FY 2019 revenue was projected at approximately $312.8 million, and the Company was still in a net loss position, reflecting the front-loaded capital expenditure profile of its growth strategy.
The broader market environment for renewable energy companies in early 2019 was characterized by steady but not yet accelerated investor interest. The Inflation Reduction Act and its predecessor proposals were not yet on the legislative horizon, and ESG-driven investment mandates were still in their relatively early stages. Public company comparables in the renewable energy sector were trading at moderate multiples.
FMV Per Share Determined: $8.50
Methodologies Employed and Weightings. WGC employed three valuation approaches, with the following weightings:
• Income Approach (Discounted Cash Flow): 50% weighting. WGC developed a ten-year discounted cash flow ("DCF") model based on management's projections of revenue, EBITDA, and free cash flow, incorporating project-level cash flows from operating assets and probabilistically weighted cash flows from the construction and development pipeline. The discount rate applied was 12.5%, reflecting the Company's cost of equity capital, calibrated using the Capital Asset Pricing Model with adjustments for size, industry-specific risk, and the Company's leverage profile. The terminal value was calculated using a 3.0% perpetuity growth rate applied to the terminal year's normalized free cash flow.
• Market Approach (Guideline Public Company Method): 35% weighting. WGC selected a set of eight publicly traded comparable companies in the renewable energy and independent power producer sectors, including Penmark Group; Sterling Reach Enterprises; Drayton & Co.; Beaumont Enterprises; Beaumont Group; Cobalt Ridge Corporation; Pinnacle Holdings; and Harborline Enterprises The median EV/EBITDA multiple of the selected comparables was approximately 13.2x (trailing twelve months as of March 31, 2019). WGC applied a selected multiple of 12.5x to CBR's projected FY 2019 Adjusted EBITDA.
• Asset / Cost Approach: 15% weighting. Given the asset-intensive nature of CBR's business, WGC also considered the net asset value of the Company's operating projects, construction-stage projects, and development pipeline, with appropriate discounts for development-stage assets to reflect execution and permitting risk.
discounts Applied. A discount for Lack of Marketability ("DLOM") of 30% was applied to the preliminary equity value per share. The 30% DLOM was supported by empirical studies (including restricted-stock studies and pre-IPO discount studies) and reflected the following factors: (i) CBR's common stock was not publicly traded and could not be readily sold; (ii) the pre-IPO stockholders' agreement imposed significant transfer restrictions, including rights of first refusal, co-sale rights, and lock-up provisions; (iii) there was no imminent liquidity event or IPO on the horizon; and (iv) Pinnacle Vista's exit timeline was uncertain, with an expected hold period of approximately four to six years from its initial investment.
Key Assumptions. The key assumptions underlying the March 31, 2019 valuation included:
• Projected FY 2019 revenue of $312.8 million, growing to approximately $350–$370 million in FY 2020.
• Projected FY 2019 Adjusted EBITDA of $138.7 million (44.3% margin).
• Total operating capacity of approximately 2.1 GW by year-end 2019.
• Construction pipeline of approximately 770 MW (Solaris West Solar 450 MW and Painted Rock Solar 320 MW).
• Development pipeline of approximately 3.5 GW at various stages of maturity.
• discount rate of 12.5%.
• Terminal growth rate of 3.0%.
• DLOM of 30%.
Safe-Harbor Compliance. The March 31, 2019 valuation was completed and delivered to the Company on May 15, 2019. All equity grants relying on this valuation (discussed in Section V below) were made within 12 months of the valuation date, thereby satisfying the temporal requirement of the independent-appraisal safe harbor.
2. Valuation as of December 31, 2019
Valuation Date: December 31, 2019
Business Context. The December 31, 2019 valuation was prepared following the completion of FY 2019, for which the Company reported revenue of $312.8 million, Adjusted EBITDA of $138.7 million, and a net loss of ($22.4) million. The Red Mesa Wind project (380 MW) was fully operational, bringing total operating capacity to approximately 2.1 GW. The Solaris West Solar project (450 MW, Pecos County, Texas) was under construction, with COD expected in Q3 2020. The Painted Rock Solar project (320 MW, Maricopa County, Arizona) was also in active construction, with COD expected in Q4 2020.
The Company's development pipeline had expanded to approximately 4.0 GW, reflecting new land positions, interconnection applications, and PPA negotiations across multiple states. The Company's total employee headcount was approximately 680 as of year-end 2019.
FMV Per Share Determined: $9.25
Methodologies Employed and Weightings. WGC employed the same three valuation approaches as in the March 31, 2019 valuation, with the following updated weightings:
• Income Approach (DCF): 50% weighting. Updated management projections reflected full-year FY 2019 results and updated construction and development timelines. The discount rate was maintained at 12.5%.
• Market Approach (Guideline Public Company Method): 35% weighting. Comparable company multiples had expanded modestly, with the median EV/EBITDA multiple increasing to approximately 13.8x. WGC applied a selected multiple of 13.0x to CBR's projected FY 2020 Adjusted EBITDA of approximately $179.2 million, with appropriate adjustments.
• Asset / Cost Approach: 15% weighting. Updated to reflect the progress of construction-stage projects and new additions to the development pipeline.
DLOM Applied: 28%. The modest reduction from 30% reflected (i) the passage of time since PVCP III's initial investment (now approximately 2.5 years), bringing the typical hold period closer to a potential exit, (ii) the Company's improved operating track record, and (iii) slightly improved market conditions for renewable energy assets. However, no concrete IPO discussions were underway, and the DLOM remained at a level consistent with a mid-stage private company with no near-term liquidity event.
Key Business Developments Reflected. The valuation reflected the following developments compared to the March 31, 2019 valuation:
• Completion of the Red Mesa Wind project, adding 380 MW of operational capacity and approximately $40 million of incremental annual revenue.
• Progress on Solaris West Solar and Painted Rock Solar construction.
• Expansion of the development pipeline from approximately 3.5 GW to approximately 4.0 GW.
• Modest improvement in public-company comparable multiples.
Safe-Harbor Compliance. The December 31, 2019 valuation was completed and delivered on February 28, 2020. All equity grants relying on this valuation were made within 12 months of the valuation date.
3. Valuation as of September 30, 2020
Valuation Date: September 30, 2020
Business Context. The September 30, 2020 valuation was a significant milestone in the Company's valuation history, as it reflected a period of transformative operational growth and the Company's transition to profitability. The Solaris West Solar project (450 MW, Pecos County, Texas) reached COD in August 2020, and the Painted Rock Solar project (320 MW, Maricopa County, Arizona) was approaching COD in Q4 2020. Operating capacity was growing from approximately 2.1 GW toward approximately 2.9 GW (inclusive of Painted Rock, which reached COD in November 2020).
FY 2020 revenue was tracking toward $401.5 million, representing year-over-year growth of approximately 28.3% over FY 2019. Adjusted EBITDA was tracking toward $179.2 million (44.6% margin), and the Company was on pace to achieve its first full year of profitability, with projected net income of $14.1 million. This transition from a net loss of ($22.4) million in FY 2019 to net income of $14.1 million in FY 2020 represented a fundamental shift in the Company's financial profile and was a key factor in the step-up in per-share FMV.
The COVID-19 pandemic, which had caused significant market dislocation in Q1 and Q2 2020, had a mixed impact on the Company's operations and valuation. On the operating side, the Company experienced modest construction delays at Solaris West Solar (approximately six weeks) due to supply chain disruptions and workforce restrictions, but these delays were largely recovered by mid-2020. On the valuation side, the pandemic initially depressed public-company multiples and increased discount rates, but by September 2020, the renewable energy sector had recovered strongly, driven by accelerating ESG investment flows, institutional demand for sustainable infrastructure assets, and expectations of supportive policy actions from a potential Biden administration.
Tax-Equity Partnership — Solaris West Solar. The Solaris West Solar project was financed, in part, through a tax-equity partnership-flip structure with Veltara Basin Financial LLC, which invested $280 million in exchange for allocations of investment tax credits ("ITCs") and accelerated depreciation benefits, together with a priority return on its investment. The partnership-flip structure, under which Veltara Basin's economic interest "flips" from 99% to 5% upon achievement of a target internal rate of return (expected in approximately 2028), required the application of the Hypothetical Liquidation at Book Value ("HLBV") methodology for determining each partner's share of the partnership's book income and loss. WGC reviewed the tax-equity structure and, in coordination with Kessler McBride & Associates LLP, confirmed that the HLBV allocations were consistent with the overall enterprise valuation and that the tax-equity interest was appropriately reflected in the determination of the Company's equity value.
FMV Per Share Determined: $11.75
Methodologies Employed and Weightings.
• Income Approach (DCF): 50% weighting. Updated projections reflected the Company's growth trajectory, including the contribution of Solaris West Solar and the expected contribution of Painted Rock Solar upon COD. The discount rate was reduced to 11.5%, reflecting a decrease in the risk-free rate environment, lower perceived project execution risk given the Company's demonstrated track record of completing projects on budget and on schedule, and a narrowing of the Company-specific risk premium.
• Market Approach (Guideline Public Company Method): 35% weighting. Comparable company multiples had expanded meaningfully in 2020, driven by the "green wave" in public equity markets. The median EV/EBITDA multiple for the selected comparables had increased to approximately 15.6x. WGC applied a selected multiple of 14.5x to CBR's projected FY 2021 Adjusted EBITDA.
• Asset / Cost Approach: 15% weighting. Updated to reflect the Solaris West and Painted Rock projects reaching or approaching operational status.
DLOM Applied: 25%. The reduction from 28% reflected the Company's improved financial profile (profitability, scale, and demonstrated construction execution), a deeper pool of potential buyers or exit paths, and the general increase in private capital activity in the renewable energy sector. However, no specific IPO or sale discussions were underway, and the DLOM remained at a level appropriate for a company without a near-term liquidity catalyst.
4. Valuation as of June 30, 2021
Valuation Date: June 30, 2021
Business Context. The June 30, 2021 valuation reflected a period of continued operational expansion and strengthening sector tailwinds. The Pronghorn Wind project (510 MW, Nolan County, Texas) reached COD in May 2021, adding significant capacity and revenue. The Brazos Storage project (200 MW / 800 MWh, Fort Bend County, Texas), the Company's first standalone battery energy storage project, was under construction and approaching COD in Q4 2021. Total operating capacity was reaching approximately 3.4 GW as of mid-2021 and was expected to reach approximately 3.8 GW by year-end upon completion of Brazos Storage.
FY 2021 revenue was on track toward $487.3 million (21.4% year-over-year growth), Adjusted EBITDA was trending toward $218.6 million (44.9% margin), and net income was projected at $41.7 million—nearly tripling the FY 2020 figure. Total assets were approaching $3.94 billion, and total debt stood at approximately $1.71 billion.
The renewable energy sector was experiencing strong tailwinds in mid-2021. The Biden administration's infrastructure and climate proposals (the Build Back Better framework, which would later inform the Inflation Reduction Act of 2022) signaled potential extensions and expansions of ITCs and PTCs, direct-pay provisions, and other incentives favorable to renewable energy developers. ESG investment mandates from institutional investors were driving significant capital flows into the sector. Several renewable energy companies had completed successful IPOs or SPACs in 2020 and early 2021, establishing favorable valuation benchmarks.
FMV Per Share Determined: $15.50
Methodologies Employed and Weightings.
• Income Approach (DCF): 45% weighting. Updated projections reflected the Company's higher revenue trajectory, improved margins, and the expanding development pipeline (now approximately 5.5 GW). The discount rate was further reduced to 11.0%, reflecting improved market conditions, a lower risk-free rate environment, and the Company's enhanced scale and diversification. The terminal growth rate was maintained at 3.0%.
• Market Approach (Guideline Public Company Method): 40% weighting (increased from 35%). WGC increased the weighting on the market approach given the growing number of publicly traded comparable companies and the improved relevance of the comparable set. The median EV/EBITDA multiple for the selected comparables had increased to approximately 17.8x. WGC applied a selected multiple of 16.5x to CBR's projected FY 2021 Adjusted EBITDA of $218.6 million.
• Asset / Cost Approach: 15% weighting. Updated to reflect the contribution of Pronghorn Wind and the Brazos Storage project under construction.
DLOM Applied: 18%. The significant reduction from 25% reflected several factors: (i) the Company's scale and maturity had increased meaningfully, making it an attractive acquisition target or IPO candidate; (ii) Pinnacle Vista was beginning to explore exit alternatives, including preliminary discussions with investment banks about a potential IPO; (iii) the overall IPO market for renewable energy companies was robust, reducing the perceived risk and timeline of a liquidity event; and (iv) the Company's financial performance and market position had strengthened substantially, increasing the universe of potential exit paths. Despite these factors, no formal IPO engagement had been entered into, and the DLOM remained above the levels that would be applied once a formal IPO process was underway.
5. Valuation as of December 31, 2021
Valuation Date: December 31, 2021
Business Context. The December 31, 2021 valuation was the first to be prepared in the context of active IPO planning. By year-end 2021, the Company's full-year financial results were available: revenue of $487.3 million, Adjusted EBITDA of $218.6 million, net income of $41.7 million, total assets of $3.94 billion, total debt of $1.71 billion, and cash and cash equivalents of $185 million. Total operating capacity had reached approximately 3.8 GW, with the Brazos Storage project (200 MW / 800 MWh) reaching COD in November 2021. The Company had approximately 1.4 GW under construction (Mesquite Wind, 420 MW, and Cimarron Solar, 350 MW, among others) and a development pipeline of approximately 6.2 GW.
Pinnacle Vista was actively exploring exit strategies, and initial IPO discussions had commenced with Hargrove Keating & Co. (the eventual lead-left bookrunner) and other potential underwriters. While no formal engagement letter had been signed, the Company had retained financial advisors, conducted preliminary valuation and positioning analyses, and begun the organizational groundwork for a potential offering in the first half of 2022. The Company had approximately 1,240 employees.
FMV Per Share Determined: $17.25
Methodologies Employed and Weightings.
• Income Approach (DCF): 40% weighting. Updated to reflect FY 2021 actual results, updated management projections for FY 2022 through FY 2031, and the expanded construction and development pipeline. The discount rate was maintained at 11.0%.
• Market Approach (Guideline Public Company Method): 45% weighting (further increased). The median EV/EBITDA multiple for the selected comparables was approximately 18.5x. WGC applied a selected multiple of 17.5x to CBR's FY 2021 Adjusted EBITDA of $218.6 million. WGC also considered recent precedent transactions in the renewable energy sector, including the acquisition of Pattern Energy Group by Crestline Retirement Trust (completed 2020) at approximately 18.0x EV/EBITDA and other transactions.
• Asset / Cost Approach: 15% weighting. Updated to reflect the December 31, 2021 asset base.
DLOM Applied: 12%. The reduction from 18% to 12% reflected the initiation of concrete IPO planning, including engagement of financial advisors and preliminary discussions with underwriters. While no formal IPO engagement had been executed and no registration statement had been filed, the trajectory toward a public offering was materially more certain than at any prior valuation date. The 12% DLOM was consistent with empirical studies' findings for companies in the advanced stages of pre-IPO preparation (approximately six to twelve months before anticipated filing).
Consideration of Pinnacle Vista's Invested Capital. WGC noted that Pinnacle Vista's total invested capital of $505 million (representing approximately 62% of the Company's equity) implied an equity value for the entire Company of approximately $815 million at the time of investment ($505 million ÷ 0.62). The December 31, 2021 409A FMV of $17.25 per share implied a total equity value of $1,725,000,000 ($17.25 × 100,000,000 shares), representing a 2.12x multiple on Pinnacle Vista's total invested cost over a period of approximately four to five years. This appreciation was consistent with the Company's operational growth and financial performance over the intervening period and supported the reasonableness of the valuation progression.
6. Valuation as of March 31, 2022 (Contemporaneous with IPO Preparation)
Valuation Date: March 31, 2022
Business Context. The March 31, 2022 valuation is the most recent valuation in the review period and is the valuation most closely scrutinized by the SEC in the cheap-stock analysis. By March 31, 2022, the IPO process was actively underway:
• March 10, 2022: Calderwood & Harkness LLP (issuer's counsel) engagement letter executed.
• March 14–18, 2022: Organizational meeting held at Calderwood & Harkness's offices in New York, attended by representatives of the Company, PVCP III, the underwriters (Hargrove Keating & Co., Linden Pratt Securities, Graymont Brothers, Barfield Stuart, and Crane Whitley), issuer's counsel, underwriters' counsel, and the independent auditor.
• March 21 – April 29, 2022: Due diligence and S-1 drafting period.
• April 11, 2022: Confidential submission of the DRS-1 to the SEC.
The Company's Q1 2022 financial results (unaudited) were available: revenue of $131.4 million, Adjusted EBITDA of $59.8 million, and net income of $8.3 million. On an annualized basis, these results were tracking ahead of FY 2021 (annualized Q1 2022 revenue of $525.6 million versus FY 2021 revenue of $487.3 million). Total assets stood at approximately $4.07 billion, and total debt at approximately $1.74 billion. The Mesquite Wind project (420 MW) was progressing through construction with COD expected in Q3 2022, and the Cimarron Solar project (350 MW) had commenced foundation work.
FMV Per Share Determined: $19.75
Methodologies Employed and Weightings.
• Income Approach (DCF): 35% weighting. Updated to reflect Q1 2022 actual results and updated FY 2022 full-year projections. The discount rate was reduced to 10.5%, reflecting the significant de-risking of the business associated with the active IPO process, the Company's continued growth trajectory, and the favorable interest rate environment (notwithstanding the Federal Reserve's initial rate increases in March 2022).
• Market Approach (Guideline Public Company Method): 50% weighting (the highest weighting in any valuation, reflecting the increasing relevance of public-market comparables as the Company approached its own public listing). The median EV/EBITDA multiple for the selected comparables was approximately 19.4x. WGC applied a selected multiple of 18.5x to CBR's projected FY 2022 Adjusted EBITDA. WGC also considered the preliminary IPO valuation range discussed with the underwriters, which indicated a midpoint offering price of $22.00 per share, as a market-based data point, though the valuation was not anchored to this figure.
• Asset / Cost Approach: 15% weighting. Updated to reflect the March 31, 2022 asset base.
DLOM Applied: 5%. The dramatic reduction from 12% to 5% reflected the fact that the Company was in an active IPO process: a registration statement had been confidentially submitted to the SEC, underwriters had been engaged, and the offering was expected to price within approximately two to three months (subject to SEC review and market conditions). At this stage, the illiquidity risk was minimal—the shares were expected to become freely tradeable in the near term, and the only remaining uncertainty was the execution risk inherent in completing the IPO (i.e., the risk that the IPO might not price, might price below the expected range, or might be delayed). A DLOM of 5% was at the low end of empirical observations for companies that had filed registration statements and were in the final stages of the IPO process, and WGC's analysis was supported by reference to pre-IPO studies, including the Emory Pre-IPO discount Study, the Beaumont Strategy Partners Pre-IPO Study, and the Pluris DLOM Database.
Comparison to IPO Midpoint Price. The $19.75 per share FMV, after the 5% DLOM, implied a pre-DLOM equity value of approximately $20.79 per share ($19.75 ÷ (1 – 0.05)). The remaining gap between $19.75 and the $22.00 IPO midpoint price ($2.25 per share, or approximately 10.2% of the midpoint) was attributable to the following factors:
(a) Liquidity premium. The IPO price reflects the value of shares that will be freely tradeable on the New York Stock Exchange, with the deep liquidity, price transparency, and broad institutional participation associated with a public listing. This liquidity premium, typically estimated at 5–15% for pre-IPO valuations, is the single largest factor explaining the gap.
(b) IPO execution risk. As of March 31, 2022, the IPO had not yet been priced. The 409A valuation appropriately reflected the risk that the offering might not proceed as planned, might be delayed (as ultimately occurred, with the offering being placed on dormant status on June 17, 2022), or might price below the expected range.
(c) Competitive dynamics of the offering process. The $22.00 midpoint reflected the preliminary valuation range proposed by the underwriters based on their assessment of institutional investor demand, comparable company trading multiples, and the Company's growth story. The underwriters' range inherently incorporates a degree of pricing tension and book-building dynamics that is not replicable in a 409A appraisal context.
We believe this gap is well within the range that the SEC has historically accepted as reasonable and defensible, and the progression from $17.25 (December 31, 2021) to $19.75 (March 31, 2022) to $22.00 (expected IPO midpoint) represents a smooth and explainable trajectory.
Safe-Harbor Compliance. The March 31, 2022 valuation was completed and delivered to the Company on April 20, 2022. Any equity grants relying on this valuation must be made within 12 months of the valuation date (i.e., by March 31, 2023) to satisfy the temporal requirement of the independent-appraisal safe harbor.
C. Summary Valuation Table
The following table summarizes the six independent appraisals performed by Whitfield Greer & Co. during the review period:
The per-share FMV progression from $8.50 to $19.75 represents a compound annual growth rate ("CAGR") of approximately 32.3% over the three-year period, consistent with the Company's revenue CAGR of approximately 15.9%, EBITDA CAGR of approximately 16.3%, and the significant operating capacity additions and development pipeline expansion that occurred during this period. The more pronounced appreciation in per-share FMV (relative to revenue and EBITDA growth) is attributable to the expansion of valuation multiples in the renewable energy sector, the reduction in DLOM as the Company progressed toward its IPO, and the Company's demonstrated ability to successfully execute its growth strategy.
V. Equity Grant History (2019 – Q1 2022)
A. Overview of Equity-Based Compensation
CBR has maintained an equity-based compensation program since 2018, under which the Company has granted stock options and restricted stock units ("RSUs") to directors, executive officers, and key employees. Grants made during the review period were made under the Company's 2018 Equity Incentive Plan (the "Pre-IPO Plan"), which was adopted by the Board of Directors on October 15, 2018 and approved by the Company's stockholders. The Pre-IPO Plan authorized the issuance of up to 10,000,000 shares of common stock (representing 10% of the then-outstanding shares), subject to customary adjustment provisions for stock splits, recapitalizations, and similar events.
In connection with the IPO, the Company intends to adopt a new equity compensation plan—the 2022 Omnibus Equity Incentive Plan (the "2022 Plan")—which will become effective upon the closing of the IPO and will replace the Pre-IPO Plan for future grants. The 2022 Plan will reserve 12,727,273 shares of common stock (representing approximately 10% of the 127,272,727 post-IPO fully diluted shares), plus any shares that are forfeited, cancelled, or expire under the Pre-IPO Plan. The Company also intends to adopt the 2022 Employee Stock Purchase Plan (the "2022 ESPP"), which will reserve 2,545,455 shares (representing approximately 2% of the post-IPO fully diluted shares).
This memorandum focuses exclusively on grants made under the Pre-IPO Plan from 2019 through Q1 2022. Grants to be made under the 2022 Plan at the time of the IPO are addressed separately in Section V.E below and in the Executive Compensation — IPO Equity Grant Analysis Memorandum prepared by the compensation team.
B. Grant-by-Grant Analysis
The following table presents a comprehensive summary of all equity grants made by CBR from 2019 through Q1 2022, together with the applicable 409A valuation, the exercise price (for options), the FMV on the grant date, and our compliance assessment: