S-1 1 redaptives-1.htm S-1 Document

As filed with the Securities and Exchange Commission on November 17, 2021
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Redaptive, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4931
(Primary Standard Industrial
Classification Code Number)
47-3325760
(I.R.S. Employer
Identification Number)
340 Brannan Street, #400
San Francisco, California 94107
(415) 413-0445
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Arvin Vohra
Chief Executive Officer and Director
340 Brannan Street, #400
San Francisco, California 94107
(415) 413-0445
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Robert O'Connor
Mark Baudler
Melissa Rick
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
One Market Plaza, Spear Tower
Suite 3300
San Francisco, CA 94105-1126
(415) 947-2000
Matt Gembrin
Chief Financial Officer
Eileen Evans
Chief Legal Officer
Redaptive, Inc.
340 Brannan Street, #400
San Francisco, CA 94107
(415) 413-0445
Gregory P. Rodgers
Adam J. Gelardi
Latham & Watkins LLP
1271 Avenue of the Americas
New York, NY 10020
(212) 906-1200
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer     ☐
Accelerated filer     ☐
Non-accelerated filer     ☒
Smaller reporting company    ☒
Emerging growth company    ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of Securities Act.     ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class
of Securities to be Registered
Proposed Maximum
Aggregate
Offering Price(1)(2)
Amount of
Registration Fee
Common stock, par value $0.0001 per share
$100,000,000$9,270
(1)    Includes offering price of additional shares that the underwriters have the option to purchase.
(2)    Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.



The information contained in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated                    , 2021
                           shares
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Common stock
This is an initial public offering of shares of common stock of Redaptive, Inc.
Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price will be between $      and $       per share.
We intend to apply to list our common stock on the New York Stock Exchange under the symbol “EAAS.”
We are an “emerging growth company” and a “smaller reporting company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements in this prospectus and may elect to do so in future filings.
See “Risk Factors” beginning on page 22 to read about factors you should consider before deciding to invest in shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Per ShareTotal
Initial public offering price
$$
Underwriting discounts and commissions(1)
$$
Proceeds, before expenses, to Redaptive, Inc.
$$
__________
(1)See the section titled “Underwriting” for a description of the compensation payable to the underwriters.
We have granted the underwriters an option to purchase up to an additional             shares of our common stock from us at the initial public offering price, less the underwriting discounts and commissions.
The underwriters expect to deliver the shares against payment in New York, New York on or about                 , 2021.
BofA SecuritiesJ.P. MorganGuggenheim Securities
Credit Suisse
Canaccord GenuityRoth Capital Partners
Prospectus dated                  , 2021



TABLE OF CONTENTS
Neither we nor any of the underwriters have authorized anyone to provide you with information that is different than the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters take any responsibility for, and cannot provide any assurance as to the reliability of, any other information that others may give you. The information contained in this prospectus or in any applicable free writing prospectus is accurate only as of the date of this prospectus or such free writing prospectus, as applicable, regardless of the time of delivery of this prospectus or any such free writing prospectus or of any sale of the securities offered hereby. Our business, operating results, financial condition, and prospects may have changed since that date.
This prospectus is an offer to sell only the securities offered hereby and only under circumstances and in jurisdictions where it is lawful to do so. Neither we nor any of the underwriters have taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons who have come into possession of this prospectus in a jurisdiction outside the United States are required to inform themselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
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PROSPECTUS SUMMARY
The following summary highlights information contained elsewhere in this prospectus. It does not contain all the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. In this prospectus, unless the context requires otherwise, all references to “we,” “our,” “us,” “Redaptive,” and the “Company” refer to Redaptive, Inc. and its consolidated subsidiaries.
Overview
Redaptive was founded in 2015 with the mission to change the way that commercial and industrial (C&I) enterprises identify and implement energy efficiency initiatives to achieve their sustainability goals. To fulfill our mission, we utilize our proprietary technology-enabled platform to identify, validate, and implement energy efficiency and sustainability-focused initiatives across a C&I customer’s entire real estate portfolio. Our ability to identify energy savings opportunities, fund, and install solutions to reduce energy consumption at scale and provide ongoing, transparent reporting of the program’s success enables us to advance our customers’ progress towards achieving their sustainability goals. Through these installed measures we deliver a holistic Energy-as-a-Service (EaaS) Offering to our customers, which includes: (1) providing turnkey deployment of energy efficiency and other sustainability-focused systems at their facilities, (2) providing ongoing monitoring, maintenance, and energy analytics, and (3) funding these initiatives with a flexible, innovative performance-based contract model that often eliminates the need for upfront capital.
We believe a balanced approach including energy efficiency is required to make meaningful progress towards true carbon reduction in C&I facilities. On average, 30% of the energy used in commercial buildings is wasted, according to the U.S. Environmental Protection Agency. Our EaaS Offerings leverage our hardware and recurring software services to continuously monitor energy consumption to identify ongoing inefficiencies within the customers’ facilities. Additionally, our offerings provide real emissions reductions and thereby reduce customer dependence on fossil fuel resources.
Today, we are a leading provider of energy efficiency and data solutions for C&I enterprises with projects throughout North America and in Europe. Our technology-enabled platform leverages our proprietary hardware and software to analyze energy spend and provide solutions that enable our customers to understand their energy usage, reduce their energy consumption, lower their operating and maintenance costs, and realize environmental and economic benefits. These solutions encompass a variety of energy-related services which include LED lighting replacements, heating, ventilation, and cooling (HVAC) upgrades and retrofits, internal equipment controls, onsite solar energy generation, and energy storage. We provide these services to our C&I customers through two primary offerings:
Our Energy Service Offerings, which accounted for approximately 99.6% of our revenue in both 2020 and 2019, encompass upgrades to infrastructures within C&I facilities, submetering and verification of energy savings, funding solutions, and ongoing maintenance solutions, and include:
EaaS Offerings under which we retain ownership of the systems we install and commit that the project will satisfy agreed-upon energy reduction performance targets generating immediate saving for our customers; and
Sales of installed energy efficiency systems to customers that would like to directly purchase the systems and own them outright.
Our Data-as-a-Service (DaaS) offering, which accounted for approximately 0.4% of our revenue in both 2020 and 2019, includes innovative and advanced submeter measurement and reporting, analysis of usage patterns, identification of anomalies, and recommendations for upgrades and improvements.
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Since our founding through September 30, 2021, we have installed over 2,400 project upgrades at approximately 2,200 C&I customer facilities, saved our C&I customers approximately 1.3 billion kWh, and avoided approximately one million tons of CO2 emissions. Over this time, we have established a turnkey sustainability solution that includes agreements with approximately 70 EaaS customers and approximately 50 DaaS customers. Additionally, we have over 70 active channel and referral partners that have driven pre-qualified leads to our EaaS Offerings over the last twelve months. We compensate our referral partners on a percentage of the contract value that is booked and pay them at the time of notice to proceed. In addition, since our inception, we have developed our DaaS platform on the back of our proprietary, industry-leading submeter. As of September 30, 2021, Redaptive had 190 employees focused on supporting our mission with 131 employees in the United States and 59 employees in India. We maintain our corporate headquarters in San Francisco, California. As of September 30, 2021, we had outstanding principal under our credit facilities of $165.4 million, and we issued an additional $100 million in principal pursuant to convertible notes in November 2021. While we have been successful at raising equity and debt capital, we have incurred net losses since inception. See the section “Management’s Discussion and Analysis of Financial Operations—Liquidity and Capital Resources—Debt” for a discussion of our credit facilities.
Industry and Market Opportunity
Increasing social and investor pressure to disclose emissions reduction goals has led companies worldwide to adopt various emission reduction targets depending on their geographic location. Since 2015, over 1,700 companies have committed to achieving sustainability goals as set by the Science Based Targets Initiative (SBTi) which involves development of an emissions reduction target and annual sustainability reporting. Furthermore, initiatives for goal setting escalated in 2020 despite the major impacts of the COVID-19 pandemic. While the Renewable Energy 100 (RE100) initiative seeks to accelerate the change towards zero carbon emission grids, more than 300 global companies have committed to targeting 100% renewables by 2030 as of August 2021, an increase of 52% from 2019. Notably, 60% of the Fortune 500 has made a climate or energy commitment. The increasing number of international initiatives promotes a unique market opportunity for energy solutions as corporations look to satisfy these clean energy goals through renewable generation and electricity reduction through energy efficiency measures.
According to the U.S. Environmental Protection Agency, the average building in the United States wastes 30% of the energy it consumes, resulting in 30% more carbon emissions and unnecessary costs. In addition, aging and outdated infrastructure present additional opportunities for efficiency solutions. Addressing emissions from the C&I sector is of critical importance in ultimately achieving net zero carbon emissions. Indeed, today emissions from the C&I sector in the United States are more than 5x total combined wind and solar generation capacity. While renewable generation is an important pathway for companies to meet their climate and sustainability commitments, according to the EIA energy efficiency solutions are expected to be the single largest pathway for companies to reduce their emissions and carbon footprint.
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Source: IEA, CO2 emissions reductions by measure in the Sustainable Development Scenario relative to the Stated Policies Scenario, 2010-2050, IEA, Paris https://www.iea.org/data-and-statistics/charts/co2-emissions-reductions-by-measure-in-the-sustainable-development-scenario-relative-to-the-stated-policies-scenario-2010-2050; as modified by Redaptive, Inc.
(1)CCUS defined as Carbon Capture, Utilization, and Storage.
(2) Includes nuclear and fuel switching.
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To underline the importance of energy efficiency in achieving C&I sustainability goals, distributed solar has an energy density of 6.1 kWh / sq. ft compared to energy consumption of 14.6 kWh / sq. ft in the average commercial building, implying that improvements in energy efficiency are essential to addressing emissions from C&I facilities.
Based upon management estimates, common energy efficiency upgrades largely fall into three categories based on the sources of energy consumption for C&I buildings:
Energy Consumption by Source in a C&I Building
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Internal Equipment / Load – Smart plug controls to optimize office and manufacturing equipment as well as other plug loads and high efficiency process equipment
Lighting – Replace incandescent or fluorescent lights with energy efficient LEDs
Heating, Ventilation, and Cooling (HVAC) & Controls – High-efficiency upgrades and/or controls to package units and central plant equipment (boilers, chillers, and cooling towers)
We have a diverse set of customers across a number of sectors, including diversified capital goods, industrial, business services, logistics, oil and gas, telecommunications, financial services, healthcare, and universities. Our customers own or use real estate with a variety of structural features and end-use cases, but the majority of them have targets for efficiency and sustainability. We believe our unique capabilities and diverse experience enable us to be a leading provider in helping our customers achieve their sustainability objectives while saving them money.
Total Addressable U.S. Market
The U.S. Energy Information Administration (EIA) reported 1,361 and 1,002 TWh of C&I energy usage in 2019, respectively. EIA also reported average C&I retail prices of $0.11/kWh and $0.07/kWh, respectively. Assuming a 30% average reduction in consumption from implementing energy efficiency and a 50% penetration rate, we believe the addressable market in the United States for energy efficiency measures is approximately $32 billion based on 2019 annual energy usage and ranges. Additionally, in an effort to provide additional sustainability solutions, on-site renewable generation, primarily via rooftop C&I solar, represents a substantial opportunity. The C&I sector is a large and growing market opportunity for on-site generation and is expected to increase from $4.8 billion to $16.0 billion by 2024 according to Lazard 2020 Levelized Cost of Energy Report. Additionally, energy storage installations are primed to increase due to supportive U.S. federal policies, a strong project pipeline stemming from a recovering economy, and customers’ interest in implementing sustainability solutions. The United States is on track to install 4.7 GW of energy storage projects in 2021, more than quadrupling 2020 additions
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according to BloombergNEF. Furthermore, from 2021 to 2025 the United States is projected to add approximately 36 GW in energy storage capacity, of which approximately 700 MW is expected to be added in the commercial segment specifically according to BloombergNEF. Commercial storage uptake could increase to 13 GW by 2030, according to BloombergNEF, supported by a near-term opportunity for standalone storage for demand charge reduction.
In addition to installation of energy efficiency systems and on-site generation and storage, each commercial building in the United States and Canada represents a viable target for our DaaS offering. According to the U.S. EIA, there are approximately 5.9 million commercial buildings in the United States, totaling over 97 billion square feet of floor space. In addition, as stated by Natural Resources Canada – Office of Energy Efficiency, in 2014, there were about 482,000 commercial or industrial buildings in Canada, representing a total floor area of nearly nine billion square feet. These commercial buildings include offices, warehouses and storage facilities, educational institutions, stores, healthcare facilities, and restaurants. Assuming a spending rate of $0.05 per square foot per annum on data management software by commercial buildings, representing the average 2021 rate for our standalone DaaS solution across its various offerings, the U.S. and Canada markets represent an estimated total market opportunity of over $5 billion in annual revenue opportunity in commercial buildings alone. Additionally, we believe there is an even larger opportunity when considering industrial buildings, including manufacturing.
Factors for Growth
Key drivers for continued growth in the adoption of energy efficiency initiatives include:
Wide Applicability – Energy efficiency upgrades can be implemented across any building or facility and are not limited to a specific type of infrastructure. Additionally, our Energy Service Offerings span several technologies such as lighting, HVAC, and building controls and expand into broader sustainability offerings including on-site generation, on-site storage, and demand flexibility.
Significant Environmental Benefits – Reduces carbon emissions by installing more energy efficient technologies that reduce parasitic and wasted loads, allowing for implementation of more sustainable supply-side services such as solar and storage.
Greater Safety and Resiliency in Buildings – Improves the condition of the buildings and facilities by upgrading outdated systems due for replacement with minimal business interruption. These upgrades often result in better lighting which lowers safety incidents at our industrial and manufacturing customer locations or better HVAC performance which is a critical safety need at hospitals, senior living facilities, and some retail settings. In addition, given the aging grid infrastructure, increasing concerns over wildfires, and frequency of weather-driven outages, our offerings include resiliency solutions which can both lower cost and improve safety as well.
Increased Transparency of Project and Asset Performance – Visibility and validation of the performance of energy efficiency upgrades allows business leaders to gain confidence in future proposals and technologies, which in turn supports expansion in investment in the space.
Economic Benefits – Based on the type of technology, installation of energy efficiency systems can have a short payback period and result in substantial savings for businesses. For instance, based on our internal estimates, LED lighting retrofits can have a payback of three to five years, and HVAC equipment can have a payback of three to 10 years. In addition to energy savings, the new systems are typically less expensive to maintain going forward and result in long-term maintenance savings.
C-PACE Loan Program – Commercial property-assessed clean energy (C-PACE) is a program overseen by the U.S. Department of Energy that facilitates financing for clean energy improvements for commercial properties. We have historically been involved in C-PACE programs as a developer and have provided strategic advice and assisted in the administration of approximately $110 million in financing for our customers through C-PACE programs since 2018, a portion of which was paid to us for projects that we developed. We also receive financing and/or success fees for our advisory services related to C-PACE
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loans. We believe that C-PACE programs will create growth opportunities for our business by providing our customers with more options for financing.
Potential Future Regulatory Support – The Biden Administration and Congress have proposed increases in climate-related spending, particularly in clean energy projects, and plan to launch several programs designed to increase energy efficiency and renewable energy capacity, which we believe, if implemented, will provide additional growth opportunities to us.
While there are major tailwinds to the sector, companies have historically struggled to roll out energy efficiency and sustainability measures as they addressed sustainability goals through piecemeal solutions offered by multiple different providers adding friction costs to deployments and slowing adoption of energy efficiency solutions. We believe companies have traditionally experienced difficultly implementing these upgrades across their real estate portfolios for three primary reasons:
Capital Availability – Generally, there are internal capital constraints due to limited budgets or budget appropriation for sustainability-focused investments. Additionally, budget appropriations are typically at the site/facility-level and not considered for portfolio-wide programs that address the entire real estate footprint of a company.
Performance Measurement and Verification – Traditional utility bills only show total consumption and obtaining asset-level data can be expensive to collect. This contributes to a lack of understanding of the benefits of energy efficiency upgrades including the potential energy savings and return on investment. In addition, the lack of real time measurement of energy consumption makes it difficult for companies to assess the correlation between energy efficiency and savings.
Program Development, Management, and Ongoing Maintenance – The process requires multiple vendors and significant upfront costs. Companies may not have sufficient resources or technical expertise to effectively manage a broad network of vendors both in the near-term during installation and over-time to operate and maintain the assets.
We believe deploying our integrated solution to energy efficiency provides customers a means to address their long-term sustainability targets and ultimately reduce the amount of energy wasted across their real estate portfolios.
Our Solutions
Energy Service Offerings
Our technology-enabled platform allows us to leverage our proprietary hardware and software to offer solutions that allow C&I enterprises to mitigate common challenges they experience in attempting to implement corporate sustainability initiatives. Our EaaS Offerings, which make up the majority of Energy Service Offerings, fully integrate the deployment, funding, monitoring, verification, and reporting of energy building upgrades with a simple, comprehensive solution consisting of a single provider, a single monthly payment, and immediate savings. We identify and implement facility initiatives that allow our customers to reduce costs and achieve their sustainability goals often without capital investment and/or on-going maintenance costs, and reduced performance risk. The component parts of our EaaS Offerings to C&I customers are as follows:
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(1)Origination, Scoping, and Underwriting – We primarily originate sales of our Energy Service Offerings through our referral partners. Often, our subcontractors perform “at risk” energy audits to qualify leads which drives low-cost origination. Once we enter into enterprise-level agreements with our C&I customers, we collaborate with them to identify energy-efficiency upgrades with the aim of optimizing the energy footprint across their real estate portfolio. Through our proprietary software-enabled underwriting process, we are able to structure our EaaS Offerings for our C&I customers based on the capital intensity of the upgrades, the forecasted payback period, and the financial objectives of the customer.
(2)Deployment – We develop, design, engineer, and implement the energy efficiency upgrades. We source equipment from vendors leveraging pre-negotiated discounts, select contractors, and manage the installation. We outsource to third parties, particularly when there is an existing saturated market, while managing the process, retaining sole interface with the customer, and providing the customer with a single point of contact.
(3)Monitoring and Verification – As part of every installation, we install proprietary submeters to measure energy usage, provide our reporting via the Redaptive Customer Dashboard and communicate our monthly billing. Additionally, our customers can opt for our enhanced DaaS service package, and access to our ElectronBI platform. This granular data enables us to evaluate future energy efficiency opportunities and facilitate further deployment with our customers.
(4)Maintenance – Maintenance is included in all of our EaaS Offerings. We own and maintain the equipment over the useful life of the contract, contracting with third-party providers on an as needed basis to make repairs. Our owner-operator model relieves our customers of having to manage in-place assets and hire additional personnel.
With our EaaS Offerings, we typically enter into a master service agreement, which accommodates the deployment of a variety of energy-related services at multiple customer sites. In many cases, after a master service agreement is signed, a customer will enter into a portfolio framework agreement, which are non-binding agreements that outline an expected amount of addressable contract value under which we later propose site-level NTPs. In some cases, customers choose to execute a site-level NTP under the master service agreement on a site-by-site basis without first entering into a portfolio framework agreement. By executing a site-level NTP under the master service agreement, the customer agrees to pay a monthly fee over the term of the NTP for the reduction in energy usage multiplied by an “avoided rate” established at the start of the agreement that is typically lower than the customer’s current utility rate. Our NTPs generally have terms that range from five to 15 years. Ongoing energy usage and reductions are measured by our proprietary submeter that is installed at every site and utilizes our DaaS platform to determine the recurring customer payments. Our customers pay for directly identified and measured energy savings and enjoy persistent monitoring and maintenance services. Upon termination or expiration of our EaaS contracts, the customer generally has the right to elect either of the following options: (i) we continue to provide monitoring
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and / or maintenance services related to the installed energy efficiency system, subject to terms mutually agreed between the us and the customer within a specified time period; or (ii) we are relieved of any further obligation related to the energy efficiency system. Under option (ii), we do not perform any incremental energy efficiency services and are not legally required to remove the underlying energy efficiency system, restore the customer site, or take any other further action. Further, under option (ii), we also do not actively transfer title to or assign ownership of the energy efficiency system to the customer.
Our sales pipeline begins with the initial contact with the customer and ends, when successful, with a signed NTP under a portfolio framework agreement or binding site-specific schedule, in each case under our master service agreement. During the contracting process, we typically conduct preliminary on-site audits at a sample of customer sites to determine the scope of the existing opportunities as well as identify the savings that may be expected to be generated from upgrading the customer’s energy infrastructure. At this point, we also determine the subcontractors needed, what equipment will be used, and assist in arranging for third party-financing, as applicable. Once on-site audits and feasibility studies are completed, we develop a proposal and, if accepted in principal, we complete the contracting process by negotiating a master service agreement with the customer. In recent periods, our sales pipeline has grown and become more technologically diverse. For example, as of September 30, 2021, our sales pipeline had grown by approximately 73% compared to our sales pipeline as of September 30, 2020. Approximately 66% of our sales pipeline as of September 30, 2021 is at the proposal development stage or later, with existing customers under master service agreements comprising a majority of our sales pipeline as of September 30, 2021.
Once a customer who has signed a master service agreement also signs a non-binding portfolio framework agreement or a signed single site-specific schedule under the master service agreement, we track that as Contracted Pipeline. The timeline from initial contact to commencement of installation at any specific site can take anywhere from two to 24 months. Historically, approximately 70% of portfolio framework agreements reached NTP within 18 months, depending on technology and number of sites.
For our EaaS business, total Contracted Pipeline, which includes project sales, was $127 million and $101 million for the year ended December 31, 2020 and 2019, respectively, and $100 million for the nine months ended September 30, 2021 and $145 million for the ten months ended October 31, 2021. Total Contracted Pipeline, which includes project sales, in these periods represent significant growth relative to prior periods, with total Contracted Pipeline of $56 million, $51 million and $13 million for the year ended December 31, 2018, 2017, and 2016, respectively.
We enter into Energy-as-a-Service agreements with our customers which are expected to generate recurring payments over a five-to-15-year term. We refer to the estimated nominal contracted payments remaining under these agreements as Total Backlog. We track Total Backlog at two stages: Contracted Installing Backlog and Fully Installed Backlog, and report estimated nominal contracted payments remaining under both stages.
Contracted Installing Backlog: Represents estimated nominal contracted payments remaining from projects which are in the process of installation where a customer has signed a site-specific NTP under a binding contract.
Our projects become fully operational once a site-specific NTP project is fully installed, commissioned, and accepted by a customer. The date at which a project becomes fully operational is the commercial operation date (COD) for that project.
Fully Installed Backlog: Represents estimated nominal contracted payments remaining from projects that have achieved COD and are fully operational.
Total Backlog is a forward-looking number, and we use judgment in developing the assumptions used for the calculation of Total Backlog. The primary assumption in the calculation is the annual energy savings performance of our EaaS Offerings, estimated based on the Energy Conservation Measures (ECM), which represents the volume of energy savings (in kWh) and the associated avoided cost in $/kWh.
As of September 30, 2021, we had Total Backlog of approximately $191.0 million in future revenue related to signed customer contracts for the installation or construction of projects, which we expect to be recognized over a
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weighted average term of 7.2 years. Approximately $54.7 million of future revenue is Contracted Installing Backlog. Approximately $136.3 million of future revenue is Fully Installed Backlog. The timeframe from NTP signature to COD has averaged approximately nine months over the past three years. See section “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics.”
Data-as-a-Service
Our DaaS solution leverages our proprietary submeter and data analytics platform to provide a highly compelling stand-alone offering to a broad spectrum of outside end users and development partners. For end users, our software provides a central place for customers to gain a more granular view into their utility spend, validate the performance of energy projects they’ve implemented, and contribute to sustainability reporting, where getting kWh information from the utility is difficult and inconsistent. For development partners, our solution helps them to establish credibility with their end-user customers by validating the success of their programs. Additionally, once installed, our solution helps our partners to identify new projects to pursue, as well as provides them with a white-labeled energy dashboard to help produce more consistent engagement with their customer. Our proprietary submeters provide the backbone to the Energy Service Offerings. The installed meters capture granular energy data, which is then securely transmitted to, and consolidated in, our backend servers. Our software platform, ElectronBI, utilizes this data set to generate actionable insights, data visualization, and anomaly identification, while unlocking high margin annual recurring software revenues for our business. The DaaS platform also provides a seamless, cost-effective means of converting customers into customers of Energy Service Offerings through ongoing analytics that lead to various upgrade opportunities.
In our DaaS agreements, our customers typically pay an onboarding fee, and thereafter a monthly service fee for access to our proprietary data-as-a-service platform, which provides reporting and data analytics with respect to energy usage. Contract terms vary from month-to-month to up to 10-year commitments. If a customer desires to terminate their agreement (or an order under an agreement) early, they may do so by paying an “Early Termination Fee”, which is typically the onboarding fee (unless already paid), plus an amount equal to three months of service fees.
Otherwise, upon expiration of the initial term, the agreements (or orders under an agreement) generally automatically renew on a month-by-month basis, during which time the customer will only owe the monthly services fee, provided all fees in connection with the initial term have been paid.
Data is made available to our customers through three mediums: online energy dashboards, curated reporting modules, and a customer access Application Programming Interface (API). In addition to the availability of the data, we provide turn-key implementation of both the hardware systems and data commissioning. We utilize a broad network of third-party vendors to perform site audits and installations across our customer regions. Our vendors utilize our mobile data capture and commissioning application to streamline the installation and ensure that we have high quality data passing to our servers. We utilize the data collected from our customers’ sites to evaluate energy efficiency opportunities and facilitate further Energy Service Offerings opportunities to our customers, utilizing DaaS as a low-cost entry point.
Our DaaS Platform
Our DaaS platform is a web-based software interface, which enables customers to access their granular energy data. The platform allows users to combine numerous data sources, such as temperature, kWh, utility rates, and voltage into a single pane of glass to allow for comparative analytics and reporting. Energy data is acquired using our proprietary submetering product (or third-party sensors in select instances). The remaining data sets are being ingested via API or directly provided by the customer. The software platform allows users to filter data across numerous parameters, viewing data at macro building level, and then zoom into energy consumption all the way to the asset level. The system has multiple modules, to provide deeper analysis across various energy consuming systems. For example, we offer a lighting module, which identifies lighting usage outside of operating hours, quantifies the savings potential associated with a LED lighting or lighting controls installation, and provides performance reporting for installed lighting upgrade projects. The system then calculates actual wasted energy spent
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due to suboptimal operating discipline. This data can be used to drive better investment decisions, validate project performance, and optimize existing systems that may have fallen out of configuration.
Our DaaS platform enables customers to unlock opportunities in the energy efficiency project space, and have more accurate information as an input for environmental, social, and governance (ESG) reporting, where utility bill data is not easily available. Leveraging granular electrical circuit data and our proprietary submetering technology, we have created an innovative AI-enabled software product to uncover energy opportunities at scale and launch our DaaS platform.
Redaptive Data Platform (RDP) – The RDP databases store proprietary customer data captured during the submeter installation process. We have digitized electrical panel label data, electrical system mapping, audit, as-built, and submeter installation details in RDP. We capture this data using a custom mobile application that allows us to streamline field capture and data organization. Future work in the RDP databases includes direct integrations to apps for installers in the field and similar automations to rapidly extract, transform, and load a variety of partner-derived source data. We have also planned vendor-facing interfaces to enhance the vendor experience and expand origination pipeline opportunities.
Redaptive Automated Circuit Classification Tool (ReACCT) – ReACCT is a machine-learning classification program that automatically determines the building system of each connected circuit (e.g. lighting, HVAC, industrial equipment, plug load, battery charger, etc.). ReACCT takes a hybrid approach using both text classification from panel labels and consumption feature extraction from the submeter time-series data. ReACCT is 96% accurate in binary lighting versus non-lighting classification, and 91% accurate in multiclassification. Redaptive plans to expand upon both the functionality and applications of ReACCT to further unlock the power of AI in its software systems.
Redaptive Grand Central – Our Grand Central user interface is an internal-facing workspace to provide visibility, configure, and troubleshoot submeters and connected sensors in the field. The Grand Central application stack enables our automated tools (called Electron Verified) to detect incorrectly installed submeters and correct the submeter data remotely via submeter data cleaning processes.
Redaptive Customer Dashboard – Our customers have access to both site and portfolio-level savings information and submeter data through our customer dashboard, including EaaS invoice detail. This customer dashboard can be white-labeled to accommodate customer needs and continues to expand and grow as we envision a more modern and usable customer experience. In this dashboard, we aspire to provide customers a more robust customer experience by expanding the information and functionality available to customers, e.g. including additional EaaS project technologies, such as solar.
ElectronBI – We have created an enhanced, premium-tier customer experience in the ElectronBI platform for both direct DaaS customers as well as existing customers. We merge real-time granular sensor data with weather data, utility inputs, and facility asset data to automatically identify energy saving opportunities, performance insights, and provide asset monitoring. We acquire sensor data using our own proprietary submeters, or third-party sensors as needed. The on-premises sensor data is either provided to us by our customers, or transmitted via an established data backhaul. Utility data is provided to us by the customer, third party data acquisition companies, or the utility directly. Weather data is pulled from publicly available databases. Facility asset data is acquired during our on-site audit process or from partners, in which we capture equipment counts, equipment make/model, and name plate information. Using this content, we provide our customers with robust data visualization and analytics, automated assessment of financial impacts, and transparent validation of project performance. ElectronBI utilizes data from over 100,000 monitored assets (including energy efficiency systems installed by us and legacy customer-owned equipment) to seed its AI-enabled platform.
Redaptive Meter Data API – Our Meter Data API (formerly known as Partner API) tracks 15 parameters of electrical data for all 48 connected current transformers of each of our submeters. These parameters include voltage, current, active power, apparent power, reactive power, and power factor, enabling advanced analytics about equipment usage and health for connected sensors such as poor power factors and
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phase imbalances in three-phase equipment such as HVAC and other large industrial equipment. In addition, the Meter Data API exposes the submeter and circuit data mapping (a reflection of the information in RDP databases), giving customers the power to connect and map their own data into existing dashboards and building intelligence systems. As of September 30, 2021, we have deployed approximately 100,000 submeter nodes in 1,250 buildings, resulting in 2.8 billion hours of monitoring to date.
Our Value Proposition
Our EaaS Offerings provide a “turnkey sustainability solution” with unique advantages to our customers relative to the piecemeal solutions offered by multiple different providers or customers’ attempt to self-perform:
No Up-Front Customer Capital. We provide the up-front capital investment to deploy our EaaS Offerings and related assets enabling portfolio-scale deployments that multiplies the scale and accelerates the recognition of savings and ESG outcomes. Our EaaS model eliminates the need for the customer to make an up-front capital investment, and alternatively, the customer pays a monthly fee based upon the energy savings realized from the customer’s use of the energy efficiency system over an estimated contract term, which typically results in immediate, tangible savings following the installations. Our customers’ payments are generally considered variable, based directly on the realized savings from the use of the system, and do not depend on an index or rate. As such, we believe that this results in a limited balance sheet impact for our customers in many circumstances.
Reduced Performance Risk. Under our EaaS Offerings agreements, we generally retain ownership of the energy efficiency equipment and related project assets and commit that the project will satisfy agreed-upon performance targets that vary from project to project. These performance commitments are typically based on the design, capacity, efficiency, or operation of the specific equipment and systems we install, thus reducing nearly all asset-related uptime performance risk over the term of the service agreement. Additionally, we manage the operation and maintenance of the equipment and related project assets over the agreement term.
Turnkey Deployment. Currently, C&I enterprises must navigate a complex, cumbersome, site-by-site approach to implementing energy efficiency upgrades within their facilities with common barriers including (1) lack of internal resources and/or experience to sufficiently develop programs, (2) insufficient access to capital leading to short-sighted “opportunity cost” decisions, (3) lack of transparent, cost-effective performance monitoring to validate the efficacy of the upgrades, and (4) lack of resources and/or maintenance budget for future repairs. Under our EaaS agreements, we remove the common customer barriers by acting as a turnkey developer to design, engineer, fund, construct, install, performance monitor, and maintain the upgrades we identify and deploy.
Enterprise-Level Scale Through Portfolio Approach. We are uniquely able to achieve large-scale energy saving opportunities for our customers by designing, financially underwriting, and deploying energy efficiency and renewable generation solutions across their entire estate portfolio. During our contracting process we typically evaluate a sample of facilities and, based on that sample, offer terms to customers to scale the program to every site in their real estate portfolio under a portfolio framework agreement. All of this is done under our flexible master service agreement that allows us to add in new sites and new technologies without additional legal, finance, or procurement review.
Technology-Driven Scoping, Underwriting, and Validation. Leveraging unique energy datasets to scope, underwrite, and validate program success is core to our proposition. Our proprietary submeters capture granular energy data associated with the buildings and projects installed. Our DaaS platform leverages this data to provide visibility to granular power management at the building, system, and asset-level. The platform enables transparency of our services by providing our customers with a real-time energy dashboard to monitor their energy savings, which evidences the improvements our solutions made to their facilities. Additionally, where possible, our DaaS platform leverages the energy data to help identify and quantify new EaaS opportunities which we are able to underwrite, execute, and manage under the existing agreement. Our reporting is consistent across the portfolio and can be used for the customer’s broader energy monitoring and sustainability reporting.
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Competitive Strengths
Our competitive strengths include the following:
Turnkey Sustainability. We believe we are a premier provider of “turnkey sustainability” solutions to large companies globally. Our innovative model provides customers with a seamless experience making one monthly payment for equipment, installation, maintenance, and monitoring and reporting over a contract duration typically spanning five to 15 years. Approximately 40% of our customers are in the Fortune 500 and, of that, six are in the Fortune 50, and we have saved them approximately 1.3 billion kilowatt hours (kWh) and deployed approximately 100,000 submeter nodes from our inception through September 30, 2021.
Low-Cost Origination. We have an extensive referral partner network that brings us qualified leads keeping our cost of customer acquisition low. Our referral partner network includes energy service companies, original equipment manufacturers (OEMs), mechanical contractors, lighting contractors, energy supply consultants, facility management providers, and former Fortune 500 executives and advisors. We only engage with pre-qualified leads and our partners typically perform “at-risk” energy audits to further qualify and develop customer opportunities. Approximately 85% of our master service agreements with at least one site NTP’d expand into multiple sites and/or multiple technologies.
Customer Cross-Sell Opportunities via Modular Contracting. Our deep customer relationships and flexible EaaS Offerings enable us to add additional services in a rapid and seamless fashion. In customer engagements that have started with LED lighting, we have successfully incorporated HVAC, solar, and water solutions and maintain the potential to rapidly expand into complementary services such as storage, green energy supply, demand response, and micro-grids and grid resilience solutions. For our EaaS Offerings, we use a modular contracting structure that accommodates multiple service offerings by incorporating short-form, offering-specific, addenda to a succinct master service agreement, thereby enabling us to provide customers a broad suite of service offerings under a single agreement.
Highly Scalable. We deliver solutions using an enterprise level approach which enables rapid deployment of efficiency measures across a customer’s real estate portfolio. We provide a seamless customer experience from facility audit through installation while enabling our customers to lower their energy costs and meet their sustainability goals. Although our extensive network of referral partners provides pre-qualified leads, we typically retain sole interaction with our customers. We source equipment from vendors leveraging pre-negotiated discounts and outsource installations to our third-party network of pre-qualified vendors. We have access to contractors nationwide, and our installer network is capable of deploying over 10 million square feet per month.
Data-Driven. Our proprietary submeters are highly cost effective and measure load every second versus industry-standard 15-minute intervals. In addition, our submeters are minimally invasive with in-panel installation in under 45 minutes, and provide bank-grade encryption of data transmission via cellular back-haul (no connection to customer network) to a cloud-based energy warehouse with API integration for our customers, and lower all-in cost than other meters available in the market. Our submeters allow for on-going monitoring and uncover new opportunities for savings from EaaS Offerings that fuel our pipeline.
First-Mover Advantage. We believe we are a pioneer of the energy-as-a-service model. To our knowledge, we are the only company providing C&I customers with energy savings agreements based directly on realized savings from underlying efficiency improvements. Our contracts are extensible into multiple energy savings technologies, measured by our in-place submetering, providing an advantage over competitors that lack the direct in-building meter data of our install base We expect we will benefit from trends enabling sustainability across our target customer base and believe that our experience provides us a strong runway to continue growing. Based on our estimates, we believe we have only realized approximately 4% of the addressable projects in our current customer base leaving substantial opportunity for us to secure continued growth and market share in our current footprint and beyond.
Demonstrated Access to Diversified Funding Sources. We have financed the capital investment required for our EaaS Offerings from both commercial lenders and investors. Our relationships with, and access to, these investors have allowed us to raise sufficient committed capital to fund our growth and support our pipeline without
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incremental equity capital requirements. Our diversified access to capital and long-term relationships with multiple funding sources have enabled us to retain significant assets on our balance sheet, without the need to sell assets to raise cash.
Our Strategy
We intend to leverage our competitive strengths, customer relationships, and first-mover market share position within the C&I sector to be the premier provider of “turnkey sustainability” solutions to large companies globally by utilizing the following strategies:
Grow Origination Volume with New Partnerships. We intend to continue to rapidly expand our referral partner base by adding new partners annually. We currently maintain relationships with over 70 active channel and referral partners – a small fraction of the total partnership opportunities in the marketplace. We plan to target partner expansion with OEMs, mechanical installation firms, energy supply consultants, and other relevant companies to our Energy Service Offerings. To support this growth, we have internally developed a referral partner learning and development platform to increase the efficacy of on-boarding and growing origination volume.
Leverage Submeter Data and Software Innovation to Drive New Business. Scaling adoption of our DaaS offering will allow us to leverage submeter data to identify new energy efficiency and building upgrades. The development and roll-out of our “Click-to-Fix” automated solution will maximize our cross-selling capability by serving automated offers and/or product recommendations derived from submeter data. Our DaaS offering creates a value-added cycle from installation to future opportunity identification with extremely low cost of customer acquisition. We intend to continue investing in in-house talent and research and development in core areas such as data science, predictive analytics, and artificial intelligence based upon our first-mover advantage holding historical, high-resolution submeter data.
Further Extend Offerings into On-Site Generation and Storage. The C&I sector is a large and growing market opportunity for on-site generation and is expected to increase from $4.8 billion to $16.0 billion by 2024 (according to Lazard 2020 Levelized Cost of Energy Report). Based upon management estimates derived from interviews with market participants, the C&I sector represents the best returns in solar – a market opportunity which we believe can scale rapidly. Additionally, on-site power generation paired with storage capabilities enables businesses to not only benefit from the energy cost savings of on-site renewable generation, but also from the resiliency and reliability of storage. The United States is on track to install 4.7 GW of energy storage projects in 2021, more than quadrupling 2020 additions.
Expand into Complementary Services. The sustainability megatrend is forcing large businesses to use less energy, buy from renewable sources, spend less on what they use, build resilience to climate change-related weather events, and demonstrate meaningful progress towards sustainability objectives while minimizing their investment in capital, people, and infrastructure to achieve these objectives. Achieving their goals requires, but is not limited to, a broad range of services such as efficiency upgrade development, on-site generation, and storage, demand response, green energy supply, and data analytics and reporting. We will continue to develop these complementary, expansion services to provide a premier experience.
Risk Factors Summary
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include the following:
We have incurred significant losses in the past and we do not expect to be profitable in the near future.
Our limited operating history at current scale and our nascent industry make evaluating our business and future prospects difficult.
If the estimates and assumptions we use to determine the size of our total addressable market are inaccurate, our future growth rate may be affected, and the potential growth of our business may be limited.
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Our financial condition and results of operations and other key metrics are likely to fluctuate on a quarterly basis in future periods, which could cause our results for a particular period to fall below expectations, resulting in a severe decline in the price of our common stock.
The performance of our Energy Service Offerings may not meet our customers’ expectations or needs.
We are exposed to the credit risk of customers and payment delinquencies on our accounts receivables.
If any energy efficiency or generation systems procured from vendors and provided to our customers contain manufacturing defects, our business and financial results could be adversely affected.
If our estimates of useful life for our Energy Service Offerings are inaccurate or if our third-party vendors do not meet service obligations, our business and financial results could be adversely affected.
We primarily rely on circuit-level submeters to validate savings or generation resulting from the installation and operation of energy efficiency or generation systems, and any significant disruption or failure of the submeters could adversely affect our business, financial condition, and results of operations.
Failure to adhere to contractual support services obligations may adversely affect our relationships with our customers and adversely affect our business, financial condition, and results of operations.
Our business may rely on the availability of rebates, tax credits and other financial incentives. The reduction, modification, or elimination of government economic incentives could adversely affect business, financial condition, and results of operations.
Our Energy Service Offerings involve a lengthy sales and installation cycle, and if we fail to close sales on a regular and timely basis it could adversely affect our business, financial condition, and results of operations.
The economic benefit of our Energy Service Offerings to our customers depends on the cost of electricity available from alternative sources, including local electric utility companies, which cost structure is subject to change.
Our business is subject to risks associated with construction, cost overruns and delays, including those related to obtaining government permits and other contingencies that may arise in the course of completing installations.
The growth of our business depends on our brand, reputation, expansion potential, and additional service offerings, and damage to our brand or reputation or failure to expand our brand or service offerings could harm our business and results of operations.
We derive a substantial portion of our revenue and Backlog from a limited number of customers, and the loss of or a significant reduction in orders from a large customer could have a material adverse effect on our business, financial condition, and results of operations.
We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal control over financial reporting, this may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations or cause our access to the capital markets to be impaired.
We currently face and will continue to face competition.
Our growth depends in part on the success of our relationships with third parties.
Our business could be adversely affected by trade tariffs or other trade barriers.
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A failure of our information technology and data security infrastructure could adversely affect our business and operations.
If we cannot obtain financing to support the sale or leasing of our service offerings to customers, such failure may adversely affect our liquidity and financial position.
We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
Channels for Disclosure of Information
Investors, the media and others should note that, following the effectiveness of the registration statement of which this prospectus forms a part, we intend to announce material information to the public through filings with the Securities and Exchange Commission (SEC), the investor relations page on our website, press releases, public conference calls and webcasts.
The information disclosed by the foregoing channels could be deemed to be material information. However, information disclosed through these channels does not constitute part of this prospectus and is not incorporated by reference herein.
Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.
Recent Transactions
2021 Convertible Note Transaction
On November 12, 2021, we entered into, issued, and sold convertible promissory notes to certain investors for the principal amount of $100 million (the 2021 Convertible Notes). The 2021 Convertible Notes have an annual interest rate of 6.25%. If we have not completed a qualified public offering by November 12, 2022, the annual interest rate for the 2021 Convertible Notes increases to 9.50%. Interest accrues daily and compounds semi-annually and is payable at maturity or upon conversion of the 2021 Convertible Notes. The 2021 Convertible Notes mature 60 months after issuance, unless we and the holders of at least 50% of the then aggregate outstanding amount under the 2021 Convertible Notes extend the maturity date or unless the 2021 Convertible Notes are converted into shares of our common stock prior to maturity.
The 2021 Convertible Notes are convertible into shares of our common stock at the option of each note holder any time following the closing of this offering by dividing the principal and interest outstanding under the 2021 Convertible Notes by a price equal to 1.15 multiplied by our initial public offering price. Additionally, 18 months after the consummation of this offering, we will have the option to force conversion of the 2021 Convertible Notes into shares of our common stock at a price equal to 1.15 multiplied by the initial public offering price (the Conversion Price), if the volume weighted average price of our common stock for any 20 consecutive trading day period exceeds a price that is a 50% premium to the Conversion Price.
The 2021 Convertible Notes are redeemable or partially redeemable by the note holders in the following events: (1) if we receive more than $100,000 in net proceeds from the from the sale of assets, other than certain permitted sales, we must offer to redeem the 2021 Convertible Notes on a pro rata basis plus a premium; (2) if we distribute a cash dividend, we must offer to redeem the 2021 Convertible Notes on a pro rata basis plus a premium; (3) if we incur secured debt in excess of $200 million, we must to redeem the 2021 Convertible Notes on a pro rata basis in excess of $200 million, plus a premium; or (4) if we consummate a change of control prior to the maturity date, then the note holders will be entitled to elect either (i) to receive the entire principal amount plus all accrued and unpaid interest or (ii) to convert the 2021 Convertible Notes into shares of the most senior class and series of our capital stock then outstanding.
In connection with the 2021 Convertible Note transaction, we repurchased Conversion Shares, consisting of 608,926 shares of our common stock, from certain entities affiliated with CarVal Investors L.P. (CarVal) for $26.1
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million of 2021 Convertible Notes (the CarVal Repurchase). As part of the CarVal Repurchase, we amended the Amendment and Conversion Agreement between us and CarVal to remove the upward adjustment to the 608,926 shares held by CarVal into additional shares of common stock based on the initial public offering price and to eliminate CarVal’s put right with respect to the shares.
Corporate Information
We were incorporated in Delaware in February 2015. Our principal executive offices are located at 340 Brannan Street, #400, San Francisco, California 94107. Our telephone number is (415) 413-0445. Our website is https://redaptiveinc.com/. Information contained on, or that can be accessed through, our website is not a part of, and is not incorporated into, this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.
We use Redaptive, the Redaptive logo and other marks as trademarks in the United States and other countries. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us, by any other entity.
Implications of Being an Emerging Growth Company and a Smaller Reporting Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS Act). As such, we may take advantage of reduced disclosure and other requirements otherwise generally applicable to public companies, including:
presentation of only two years of audited financial statements and related financial disclosure;
exemption from the requirement to have our registered independent public accounting firm attest to management’s assessment of our internal control over financial reporting;
exemption from compliance with the requirement of the Public Company Accounting Oversight Board (PCAOB) regarding the communication of critical audit matters in the auditor’s report on the financial statements;
reduced disclosure about our executive compensation arrangements; and
exemption from the requirement to hold non-binding advisory votes on executive compensation or golden parachute arrangements.
We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have at least $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.
As a result of this status, we have taken advantage of reduced reporting requirements in this prospectus and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. In particular, in this prospectus, we have provided only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations, and we have not included all of the executive compensation-related information that would be required if we were not an emerging growth company. In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies unless it otherwise irrevocably elects not to avail itself of this exemption. We have elected to use this extended transition period for complying with a majority of the new or revised accounting standards issued until we are no longer an emerging growth company or until we affirmatively
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and irrevocably opt out of the extended transition period; however, we have adopted certain new accounting standards earlier than required under the private company adoption dates. As a result, our consolidated financial statements may not be comparable to the financial statements of companies that comply with new or revised accounting pronouncements as of public company effective dates.
We are also a “smaller reporting company” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). We will remain a smaller reporting company until the last day of the fiscal year in which the aggregate market value of our common stock that is held by non-affiliates is at least $250 million or the last day of the fiscal year in which we have at least $100 million in revenue and the aggregate market value of our common stock that is held by non-affiliates is at least $700 million (in each case, with respect to the aggregate market value of our common stock held by non-affiliates, as measured as of the last business day of the second quarter of such fiscal year). If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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THE OFFERING
Common stock offered by us
          shares.
Underwriters’ option to purchase
additional shares from us
          shares.
Common stock to be outstanding
immediately after this offering
          shares (or          shares if the underwriters exercise their option to purchase additional shares in full).
Use of proceeds
We estimate that the net proceeds from the sale of shares of our common stock in this offering will be approximately $      million (or approximately $      million if the underwriters exercise their option to purchase additional shares in full), based upon the assumed initial public offering price of $     per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, facilitate future access to the public equity markets by us, our employees, and our stockholders, and increase our visibility in the marketplace. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time. See the section titled “Use of Proceeds.”
Dividend policy
We do not anticipate paying any dividends on our common stock in the foreseeable future. See the section titled “Dividend Policy.”
Risk factors
See the section titled “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
Proposed trading symbol
“EAAS”
The total number of shares of common stock that will be outstanding immediately after this offering is based on 26,360,539 shares of our common stock outstanding as of September 30, 2021, after giving effect to our repurchase of 608,926 shares of common stock in connection with the CarVal Repurchase, and reflects:
no exercise of outstanding options described below;
the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, which will occur immediately prior to the closing of this offering; and
no exercise of the underwriters’ option to purchase additional shares.
The total number of shares of common stock that will be outstanding excludes:
               shares of common stock issuable upon the exercise of warrants to purchase shares of common stock with a weighted average exercise price of $     per share as of September 30, 2021;
906,797 shares of common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $3.10 per share as of September 30, 2021;
              shares of common stock reserved for future issuance under our 2015 Equity Incentive Plan (2015 Plan) as of September 30, 2021, which number of shares will be added to the shares of our common stock to be reserved under our 2021 Equity Incentive Plan (2021 Plan), upon its effectiveness, at which time we will cease granting awards under our 2015 Plan;
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               shares of common stock issuable upon conversion of our 2021 Convertible Notes, based on a conversion price of $      which is 1.15x the assumed initial public offering price of $     per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, if the principal and interest under the 2021 Convertible Notes converted into shares of our common stock as of the date of this prospectus. A $1.00 decrease in the initial public offering price, and corresponding decrease in the conversion price of the 2021 Convertible Notes, would result in us issuing           shares of our common stock and a $1.00 increase in the initial public offering price, and corresponding increase in the conversion price of the 2021 Convertible Notes, would result in us issuing           shares of our common stock, if the principal and interest under the 2021 Convertible Notes converted into shares of our common stock as of the date of this prospectus. See the section title “Prospectus Summary—Recent Transactions–2021 Convertible Note Transaction”;
             shares of common stock reserved for future issuance under our 2021 Plan, which will become effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part; and
              shares of common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan (ESPP), which will become effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part.
The 2021 Plan and the ESPP each provide for annual automatic increases in the number of shares of our common stock reserved thereunder, and the 2021 Plan also provides for increases to the number of shares of our common stock that may be granted thereunder based on shares under the 2015 Plan that expire, are forfeited or are repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefit and Stock Plans.”
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth a summary of our consolidated financial data as of, and for the periods ended on, the dates indicated. The consolidated statements of operations for the years ended December 31, 2019 and 2020, and the consolidated balance sheet data as of December 31, 2020, are derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The consolidated statements of operations for the nine months ended September 30, 2020 and 2021 and the consolidated balance sheet data as of September 30, 2021 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial data set forth below have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair statement of such data. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results. The summary consolidated financial data in this section are not intended to replace, and are qualified in their entirety by, the consolidated financial statements and related notes included elsewhere in this prospectus.
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Consolidated Statements of Operations Data
Year Ended
December 31,
Nine Months Ended
September 30,
2020201920212020
(in thousands, except for share and per share data)
Energy-as-a-Service revenue
$36,275 $23,959 $46,656 $22,702 
Project revenue
4,656 16,111 4,570 3,468 
Other revenue
1,376 1,254 433 910 
Total revenue
42,307 41,324 51,659 27,080 
Cost of Energy-as-a-Service revenue26,288 17,095 30,609 16,351 
Cost of project revenue4,369 14,998 4,050 3,260 
Cost of other revenue446 254 188 
Total cost of revenue
31,103 32,102 34,913 19,799 
Gross margin
11,204 9,222 16,746 7,281 
Operating expenses
General and administrative
9,416 10,177 12,995 7,048 
Sales and marketing
7,941 5,034 8,871 5,535 
Research and development
3,352 6,130 3,262 2,464 
Total operating expenses
20,709 21,341 25,128 15,047 
Loss from operations
(9,505)(12,119)(8,382)(7,766)
Other expenses
Interest expense
8,864 6,294 12,191 5,599 
Change in fair value of conversion shares and embedded derivative8,435 — 
Loss on extinguishment of debt
1,696 — — 1,696 
Total other expenses10,560 6,294 20,626 7,295 
Loss before income taxes
(20,065)(18,413)(29,008)(15,061)
Income tax benefit (expense)
596 (1,648)401 191 
Net loss
(19,469)(20,061)(28,607)(14,870)
Net loss per share attributable to common shareholders, basic and diluted
$(1.51)$(1.81)$(1.34)$(1.19)
Weighted-average shares used in computing net loss per share, basic and diluted
12,890,990 11,072,024 21,360,518 12,509,728 
Pro forma net loss per share, basic and diluted
$$$$
Weighted average number of shares used to compute pro forma basic and diluted net loss per share (unaudited)

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Consolidated Balance Sheet Data:
ActualActual
Pro forma as of September 30, 2021(1)(2)
Pro forma as Adjusted as of September 30, 2021(3)
As of December 31,
As of September 30, 2021
(in thousands)2020
2019
Cash
$17,076 $1,545 $11,470 
Working capital(4)
(9,650)(24,819)(12,749)
Restricted cash
4,103 2,943 5,632 
Total assets
139,339 109,273 142,909 
Total liabilities
189,522 140,915 220,320 
Total stockholders’ deficit
(50,183)(31,642)(77,411)
__________________
(1)The pro forma consolidated balance sheet data gives effect to the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the completion of this offering.
(2)The pro forma consolidated balance sheet data gives effect to the $69.0 million of net proceeds from our issuance of the 2021 Convertible Notes in November 2021 after deducting transaction expenses and the CarVal Repurchase.
(3)Reflects, on a pro forma as adjusted basis, the pro forma adjustments described in footnotes (1) and (2) above and the issuance and sale by us of                shares of common stock in this offering at the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $     per share would increase or decrease, as applicable, each of our cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares offered by us would increase or decrease, as applicable, each of our cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $       million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.
(4)Working capital is defined as current assets less current liabilities.
Key Operating Metrics
We regularly review a number of metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions. Some of these key operating metrics are estimates. The estimates are based on our beliefs and assumptions and on information currently available to management. Although we believe that we have a reasonable basis for each of these estimates, we caution you that these estimates are based on a combination of assumptions that may prove to be inaccurate over time. Such inaccuracies could be material, particularly given that the estimates relate to cash flows up to 11.5 years in the future. Furthermore, other companies may calculate these metrics differently than we do now or in the future, which would reduce their usefulness as a comparative measure. For additional information about our key operating metrics, including their definitions and limitations, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics.”
Backlog
As of
 September 30,
As of
 December 31,
2021202020202019
(in thousands)(in thousands)
Fully Installed Backlog$136,274 $146,596 $154,318 $120,631 
Contracted Installing Backlog54,720 47,002 47,633 27,286 
Total Backlog$190,994 $193,598 $201,951 $147,917 
Backlog consists of the following weighted average remaining terms:
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As of
September 30,
As of
 December 31,
2021202020202019
(in years)(in years)
Fully Installed Backlog5.65.55.65.4
Contracted Installing Backlog11.411.510.86.8
Total Backlog7.27.06.85.6
Annual Recurring Revenue (“ARR”)
ARR represents the annualized value of recurring revenues from (1) our EaaS Offerings for projects where a customer has signed a site-specific NTP under a binding contract, and (2) our DaaS related services earned in the specified period. We use ARR to depict the general visibility and trajectory of our EaaS Offerings and DaaS businesses. ARR is equal to backlog divided by weighted average remaining life. As of September 30, 2021 and September 30, 2020, ARR was approximately $26.4 million and $27.7 million, respectively. As of December 31, 2020 and December 31, 2019, ARR was approximately $29.5 million and $26.2 million, respectively.
Non-GAAP Financial Measure
We review a number of operating and financial metrics, including the following financial measure that was not prepared in accordance with GAAP to evaluate our business. We use Adjusted EBITDA in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecast, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our financial performance. For additional information about our non-GAAP financial measure, including its definition and limitations, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measure” for a description of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.
Year Ended
 December 31,
20202019
(in thousands)
Net loss$(19,469)$(20,061)
Adjusted EBITDA$14,140 $4,198 

Nine Months Ended
September 30,
20212020
(in thousands)
Net loss$(28,607)$(14,870)
Adjusted EBITDA$22,117 $6,070 



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RISK FACTORS
Investing in our common stock involves a high degree of risk. Before making an investment decision, you should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. Our business, operating results, financial condition or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, operating results, financial condition and prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
We have incurred significant losses in the past and we do not expect to be profitable in the near future.
Since our inception, we have incurred significant net losses and have used significant cash in our business. As of September 30, 2021 we had an accumulated deficit of $105.1 million. We expect to continue to incur net losses for the foreseeable future as we expand our operations, including by investing in sales and marketing, research and development, staffing systems, and infrastructure to support our growth. Our ability to achieve profitability in the future will depend on a number of factors, including:
growing our sales volume in EaaS agreements, DaaS agreements, and project revenue;
increasing sales by further penetrating existing customers, such as upgrading the HVAC system for an existing customer that completed a lighting upgrade;
attracting new customers for our installation of energy efficiency or generation systems;
improving our ability to procure energy efficiency or generation systems from vendors, on cost-effective terms;
improving our consolidated gross margins reflecting the ability to maintain favorable contract pricing and terms with our customers for our hardware and software-enabled services;
improving our consolidated operating margins reflecting the ability to reduce SG&A and R&D expenses as a percentage of revenues driven by lower average customer acquisition costs through increasing customer penetration over time;
expanding our service offerings;
complying with and adjusting to the current and changing regulatory requirements and industry and market standards;
accessing financing on favorable terms to fund future growth and achieve scale;
improving the effectiveness of our sales and marketing activities; and
attracting and retaining key talent in a competitive marketplace.
Even if we do achieve profitability when expected, we may be unable to sustain or increase our profitability in the future.
Our limited operating history at current scale and our nascent industry make evaluating our business and future prospects difficult.
We have a limited history operating our business at its current scale, and therefore a limited history upon which you can base an investment decision. We are a provider of energy efficiency and data solutions and utilize hardware and software to analyze energy spend and provide solutions that enable our customers to understand their energy
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usage, reduce their energy consumption, lower their operating and maintenance costs, and realize environmental and economic benefits through our EaaS and DaaS Offerings.
There is rising demand for energy solutions within the C&I sector, our target customer base. Among other energy market trends, we expect our business results to be driven by the cost of manufacturing and installing energy efficiency or generation systems. However, predicting our future revenue and appropriately budgeting for our expenses is difficult, and we have limited insight into trends that may emerge and affect our business. While trends in the energy efficiency market appear to represent a substantial opportunity for our EaaS and DaaS Offerings, our industry remains quite nascent. New energy efficiency solutions that may enter our nascent industry will further affect our ability to predict future revenues and appropriately budget our expenses. We have limited insights into these trends and potential new solutions, which makes it difficult for us to evaluate our business and future prospects.
If the estimates and assumptions we use to determine the size of our total addressable market are inaccurate, our future growth rate may be affected, and the potential growth of our business may be limited.
Market estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. The assumptions relating to our market opportunity include, but are not limited to, the following: (1) the amount of kWh energy consumption in C&I end-markets; (2) the amount of energy savings realized by energy efficiency services; and (3) increased complexity of the energy demands of buildings. Our market opportunity is also based on the assumption that the trends driving the C&I sector to invest in energy efficiency will continue and that our existing and future offerings will be more attractive to our customers and potential customers than competing service offerings. If these assumptions prove inaccurate, our business, financial condition and results of operations could be adversely affected. For more information regarding our estimates of market opportunity and the forecasts of market growth included herein, see the section titled “Business — Industry and Market Opportunity.”
Our financial condition and results of operations and other key metrics are likely to fluctuate on a quarterly basis in future periods, which could cause our results for a particular period to fall below expectations, resulting in a severe decline in the price of our common stock.
Our financial condition and results of operations and other key metrics have fluctuated significantly in the past and may continue to fluctuate in the future due to a variety of factors, many of which are beyond our control. For instance, our customers may elect to pay off certain sites within their contracts early instead of making monthly payments through the end of the contract term, resulting in the accelerated recognition of revenue at the time the site is paid off early instead of in subsequent periods. In addition to the other risks described herein, the following factors could also cause our financial condition and results of operations to fluctuate on a quarterly basis:
the timing of installations of our equipment, which may depend on many factors such as availability of inventory, product quality or performance issues, or local permitting requirements, utility requirements, environmental, health and safety requirements, weather and customer facility construction schedules, availability, and schedule of our third-party general contractors;
size and complexity of particular customer hardware installations and number of sites involved in any particular quarter;
fluctuations in our service costs;
fluctuations of our project sales;
changes in our service offerings;
interruptions in our supply chain or that of our vendors;
the timing and volume of contract buy-outs by existing customers;
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the timing and volume of additional purchases by existing or new customers;
the timing of advancing Contracted Pipeline opportunities to binding site-specific installations and NTPs under our portfolio framework agreements; and
disruptions in our sales, production, service, or other business activities resulting from our inability to hire, attract and retain qualified personnel.
In addition, our revenue, key operating metrics, and other operating results in future quarters may fall short of the expectations of investors and financial analysts, which could have an adverse effect on the price of our common stock.
The performance of our Energy Service Offerings may not meet our customers’ expectations or needs.
The energy efficiency or generation systems installed for our customers are subject to various operating risks that may cause them to generate less value for our customers than expected. These risks include a failure or wearing out of equipment; an inability to find suitable replacement equipment or parts; or volume shortfalls in output of energy savings. Any extended interruption or failure of our customer’s projects for any reason, could adversely affect our business, financial condition, and results of operations. In addition to our operating results, our ability to continue to grow our sales volume or to increase sales to existing customers or new customers may be adversely affected if any of our customers’ projects incur unexpected operational issues.
We are exposed to the credit risk of customers and payment delinquencies on our accounts receivables.
Our customer agreements are typically for five to 15 years and require the customer to make monthly payments to us. Accordingly, we are subject to the credit risk of customers. As of December 31, 2020, the weighted average credit rating for our customers is BBB as rated by S&P Global Ratings, a division of S&P Global Inc. (S&P). While customer defaults have been immaterial to date, we expect that the risk of customer defaults may increase as we grow our business. If we experience increased customer credit defaults, our revenue and our ability to raise additional capital, could be adversely affected. If economic conditions worsen, certain of our customers may face liquidity concerns and may be unable to satisfy their payment obligations to us on a timely basis or at all, which could have a material adverse effect on our financial condition and results of operations.
If any energy efficiency or generation systems procured from vendors and provided to our customers contain manufacturing defects, our business and financial results could be adversely affected.
The energy efficiency and generation systems we implement for our customers are complex. We rely on our vendors to control the quality of the required equipment and other components that make up the system that is installed for our customers. We are not involved in the manufacture of any components of the energy efficiency or generation systems. As a result, our ability to seek recourse for liabilities and recover costs from our vendors depends on our contractual rights as well as the financial condition and integrity of such vendors that supply us with the components of our Energy Service Offerings. Such systems may contain undetected or latent errors or defects. Any manufacturing defects or other failures of our Energy Service Offerings could cause us to incur significant re-engineering costs, divert the attention of our personnel from managing operating and maintenance efforts, expose us to adverse regulatory action and significantly and adversely affect customer satisfaction, market acceptance and our business reputation. Furthermore, our vendors may be unable to correct manufacturing defects or other failures of any energy efficiency or generation systems in a manner satisfactory to our customers, which could adversely affect customer satisfaction, market acceptance and our business reputation.
Our energy efficiency or generation systems require significant upfront costs, and we may need to obtain additional debt and/or equity financing to finance our growth.
Our energy efficiency or generation systems require significant upfront costs. We may need to obtain sufficient debt and/or equity financing to support our growth. Generally, in the future, the deployment of a portion of our Backlog may be contingent on securing available financing. However, as of September 30, 2021, none of our Backlog was contingent on securing additional financing because our access to additional borrowings under the
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various debt instruments in-place provides us with sufficient available capacity. In the future, our ability to attract third-party financing may depend on many factors that are outside of our control, including our perceived creditworthiness, the creditworthiness of our customers, and the condition of credit markets generally. In general, if we are unable to finance our energy efficiency or generation systems, our business will be harmed.
Our sales process requires that we make assumptions on future interest costs.
Our sales process for Energy Service Offerings often require that we make certain assumptions regarding the future cost of financing capital. Actual financing costs may vary from our estimates due to factors outside of our control, including changes in customer creditworthiness, macroeconomic factors, the returns offered by other investment opportunities available to our financing partners, and other factors. If the cost of financing ultimately exceeds our estimates, we may be unable to proceed with some or all of the impacted projects or our revenue from such projects may be less than our estimates.
If our estimates of useful life for our EaaS Offerings are inaccurate or if our third-party vendors do not meet service obligations, our business and financial results could be adversely affected.
For our EaaS Offerings, we enter into long-term service contracts with customers, which range from five to 15 years, to install, monitor, and typically maintain, energy efficiency or generation systems. Our pricing is based upon the value we expect to deliver to our customers, including considerations such as the energy savings or generation resulting from the installation and operation of energy efficiency or generation systems relative to prevailing electricity prices. We also typically provide operations and maintenance services over the term of the applicable service contract. Other than with lighting and HVAC installations, we do not have a long history with a large number of field deployments of other types of Energy Conservation Measures (ECM), and our estimates with respect to such ECMs may prove to be incorrect.
Further, the occurrence of chronic defects or other chronic performance problems with respect to deployed energy efficiency or generation systems, could result in:
reduced fee revenue from customers;
termination penalty liability, which would void the remaining fee balance due on a contract;
loss of customers;
legal claims, including warranty and service level agreement claims; or
diversion of our resources, including through increased service and warranty expenses or financial concessions, and increased insurance costs.
The costs incurred in correcting any material defects in the installed energy efficiency or generation systems may be substantial and could adversely affect our business, financial condition, and results of operations.
Future product recalls could materially adversely affect our business, financial condition, and results of operations.
Any product recall in the future that involves products incorporated into our energy efficiency or generation systems may result in negative publicity, damage our brand, and materially adversely affect our business, financial condition, and results of operations. In the future, we may voluntarily or involuntarily, initiate a recall if any of our products that are proven or possibly could be defective or noncompliant with applicable environmental laws and regulations, including health and safety standards. Such recalls involve significant expense and diversion of management attention and other resources, which could adversely affect our brand image, as well as our business, financial condition and results of operations.
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We primarily rely on circuit-level submeters to validate savings or generation resulting from the installation and operation of energy efficiency or generation systems, and any significant disruption or failure of the submeters could adversely affect our business, financial condition, and results of operations.
We currently install proprietary circuit-level submeters (and in the past installed and currently on occasion install third-party circuit-level submeters) at customer sites in connection with the installation and operation of energy efficiency or generation systems. The submeters transmit encrypted data to our data ingestion and storage platform via a cellular data back-haul. The submeters are used to monitor system performance, provide the underlying data to our software interface thereby allowing customers to visualize their energy data, validate the savings or generation resulting from the installation of the system, and most critically, to provide the data to support monthly invoices for customer contracts that are based upon a variable payment model (i.e., the customer pays for the actual savings or generation realized during the applicable billing period). The submeters draw power from the customer site and are thus susceptible to power outages at customer sites. Submeters may also lose cellular connectivity. Submeters return to a normal functioning state once power is restored after an outage. Our proprietary submeters that lose cellular connectivity can continue to operate on their own for nine to 12 months, and can recover up to nine to 12 months of system data to address outages. Our proprietary submeter has been certified to UL standards by Intertek in the United States, to CSE standards in Canada, and to CE Mark in the European Union, and historically has a 99.96% uptime performance level. The majority of outages have been site-specific in cases where cellular connectivity was lost for long periods of time at a specific site, and in these cases our technicians have installed an enhanced cellular modem to improve connectivity. Third-party submeters deployed by us have uptime and performance attributes similar to those of our proprietary submeter, however, the performance of our proprietary submeter is generally superior while also being less expensive. Third-party submeters were deployed prior to the development of our proprietary submeter and continue to be deployed in narrow cases for certain types of generation and net metering applications. However, we continue to trend towards using our proprietary submeter. From 2015 through February 2020, approximately 83% of submeters deployed are our proprietary submeter and approximately 17% are third-party submeters. Since March 2020, approximately 95% of submeters deployed are our proprietary submeter and 5% are third-party submeters.
In the event a submeter fails to function, we are permitted to calculate invoices using the historical average of savings or generation resulting from the installation of the system. However, sustained or repeated submeter failures would reduce the attractiveness of our services to customers, as customer invoicing expectations are premised on actual performance as measured by the submeters rather than historical averages. Any negative publicity arising from any significant disruptions or failure of the submeters could adversely affect our reputation and brand and may adversely affect the usage of our services.
Furthermore, our data ingestion and storage platform is hosted on one or more data centers provided by Amazon Web Services (AWS), a third-party provider of cloud infrastructure services. We do not have control over the operations of the facilities of AWS that we use. AWS’ facilities are vulnerable to damage or interruption from natural disasters, cybersecurity attacks, terrorist attacks, power outages, and similar events or acts of misconduct. The continuing and uninterrupted performance of our data ingestion and storage platform is critical to our success. We have experienced, and expect that in the future we will experience, interruptions, delays, and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints. Sustained or repeated system failures would reduce the attractiveness of our services to customers.
Any of the above circumstances or events may adversely affect our reputation and brand, reduce the availability or usage of our services, lead to a significant short-term loss of revenue, increase our costs, and impair our ability to attract new customers, any of which could adversely affect our business, financial condition, and results of operations.
Limitations on our ability to collect third-party data could diminish the quality of our offerings, which could harm our business.
We rely on third-party data to drive certain inputs into our offerings, such as weather data and utility usage information, most of which is publicly available and free of charge. If the third-party data we use in our business is
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no longer free or is limited or inaccessible for any reason, our offerings may not function as intended which could harm our relationships with partners and customers and adversely harm our business.
A drop in the price of electricity sold may reduce demand for our service offerings and harm our business, financial condition, and results of operations and prospects.
Although our current service offerings under contract are not impacted by the fluctuations in price of electricity, decreases in the price of electricity may impact potential new customers’ interest in energy efficiency service offerings, and existing customers’ interest in our new service offerings, and may make our service offerings less economically attractive and reduce demand for our service offerings. The price of electricity could decrease as a result of:
construction of a significant number of new, lower-cost power generation plants, including plants utilizing natural gas, renewable energy, or other generation technologies;
relief of transmission constraints that enable distant, lower-cost generation to transmit energy less expensively or in greater quantities;
reductions in the price of natural gas or other fuels;
utility rate adjustment and customer class cost reallocation;
decreased electricity demand, including from energy conservation technologies and public initiatives to reduce electricity consumption;
development of smart-grid technologies that lower the peak energy requirements;
development of new or lower-cost customer-sited energy storage technologies that have the ability to reduce a customer’s average cost of electricity by shifting load to off-peak times; and
development of new energy generation technologies that provide less expensive energy.
If we fail to manage our recent and future growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges.
We have experienced significant growth in recent periods. For example, as of September 30, 2021, our sales pipeline had grown by approximately 73% relative to our sales pipeline as of September 30, 2020, with approximately 66% of our sales pipeline as of September 30, 2021 being at the proposal development stage or later, with existing customers under master service agreements comprising over a majority of our sales pipeline as of September 30, 2021. We intend to continue to expand our business significantly within existing and new markets and within new and existing customers. This growth has placed, and any future growth may place, a significant strain on our management, operational and financial infrastructure. In particular, we will be required to expand, train, and manage our growing employee base and scale and otherwise improve our IT infrastructure in tandem with that headcount growth. Our management will also be required to maintain and expand our relationships with customers, referral partners, and vendors and other third parties and attract new customers, referral partners, and vendors, as well as manage multiple geographic locations.
Our current and planned operations, personnel, IT and other systems and procedures might be inadequate to support our future growth and may require us to make additional unanticipated investment in our infrastructure. Our success and ability to further scale our business will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner. If we cannot manage our growth, we may be unable to take advantage of market opportunities, including opportunities in our existing sales pipeline, execute our business strategies or respond to competitive pressures and convert our sales pipeline into actual sales. This could also result in declines in quality or customer satisfaction, increased costs, difficulties in introducing new offerings or other operational difficulties. Any failure to effectively manage growth could adversely impact our business and reputation.
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Failure to adhere to contractual support services obligations may adversely affect our relationships with our customers and adversely affect our business, financial condition, and results of operations.
Our customers depend on our support organization to resolve performance issues relating to our energy efficiency or generation systems. We typically provide parts-only replacement services over the term of the applicable Energy Service Offerings contract, which obligates us to deliver replacement parts within certain time periods depending on the type of ECM. Other than with respect to lighting or HVAC installations, we do not have a long history of fulfilling replacement obligations with respect to other types of ECMs, and our estimates with respect to replacement times for such ECMs may prove to be incorrect. In addition, our sales process is highly dependent on our business reputation and on strong recommendations from our existing customers. Any failure to maintain high-quality support services, or a market perception that we do not maintain high-quality and highly-responsive support, could adversely affect our reputation, our ability to sell our service offerings to existing and prospective customers, and our business, financial condition and results of operations.
Our business may rely on the availability of rebates, tax credits and other financial incentives. The reduction, modification, or elimination of government economic incentives could adversely affect business, financial condition, and results of operations.
The U.S. federal government and some state and local governments provide incentives to end users of our Energy Service Offerings in the form of rebates, tax credits and other financial incentives, such as system performance payments and payments for renewable energy credits associated with renewable energy generation. Although we currently do not materially rely on any particular government incentive, in the future, we may rely on these governmental rebates, tax credits and other financial incentives to significantly lower the effective price of the Energy Service Offerings to our customers. Changes to these programs could reduce demand for our services, impair sales financing and adversely impact our business, financial condition, and results of operations.
Our Energy Service Offerings involve a lengthy sales and installation cycle, and if we fail to close sales on a regular and timely basis it could adversely affect our business, financial condition, and results of operations.
Our sales cycle is typically six to 18 months for entry into a binding sales contract for our Energy Service Offerings, but can vary considerably. In order to make a sale, we must typically provide a significant level of education to prospective customers regarding the use and benefits of our service offerings. The period between initial discussions with a potential customer and the sale of even a single Energy Service Offering typically depends on a number of factors, including the potential customer’s budget and energy use profile. Prospective customers often undertake a significant evaluation process, which may further extend the sales cycle. Currently, we believe the time between the entry into a binding site-specific sales contract or NTP under a portfolio framework agreement with a customer and the installation of an Energy Efficiency Offering can range from two to 24 months or more. This lengthy sales and installation cycle is subject to a number of significant risks over which we have little or no control. Because of both the long sales and installation cycles, we may expend significant resources without having certainty of generating a sale.
Prior to us entering into master portfolio framework agreements with our customers, or before the contract is booked, the lengthy sales cycle increases the risk that a customer may abandon the proposed transaction after we invested significant resources pursuing the opportunity, or delay the planned date for installation. Our operating expenses are based on anticipated sales levels, and many of our expenses are fixed. If we are unsuccessful in closing sales after expending significant resources or if we experience delays or cancellations, our business, financial condition and results of operations could be adversely affected. Historically, approximately 70% of portfolio framework agreements reached NTP within 18 months. Our ability to convert our Contracted Pipeline to NTPs and installed systems depends on many factors that are outside of our control, including the customer’s budget and energy use profile, and we expect that to continue in future periods. The failure to convert Contracted Pipeline to binding NTPs in the future above historic levels could adversely affect our business, financial condition and operating results.
Additionally, we have ongoing arrangements with our customers with respect to master contracts that have been entered with our customers. Some of these arrangements are evidenced by contracts or long-term partnership
28


arrangements. If these arrangements are terminated or if we are unable to continue to fulfill the obligations under such contracts or arrangements, our business, financial condition, and results of operations could be adversely affected.
The economic benefit of our Energy Service Offerings to our customers depends on the cost of electricity available from alternative sources, including local electric utility companies, which cost structure is subject to change.
The economic benefit of our Energy Service Offerings to our customers includes, among other things, the benefit of reducing such customer’s payments to the local electric utility company. The rates at which electricity is available from a customer’s local electric utility company is subject to change and any changes in such rates may affect the relative benefits of our Energy Service Offerings. Changes in the rates offered by local electric utilities and/or in the applicability or amounts of charges and other fees imposed by such utilities on customers acquiring our Energy Service Offerings could adversely affect the demand for our Energy Service Offerings.
Our business is subject to risks associated with construction, cost overruns and delays, including those related to obtaining government permits and other contingencies that may arise in the course of completing installations.
The installation and operation of our energy efficiency or generation systems at a particular site is generally subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building codes, safety, environmental protection and related matters, and typically requires our installers or customers obtaining and keeping in good standing various local and other governmental approvals and permits, including environmental approvals and permits, that vary by jurisdiction. In some cases, these approvals and permits require periodic renewal. It is difficult and costly to track the requirements of every individual authority having jurisdiction over energy efficiency or generation system installations, to design our systems to comply with these varying standards, and for our customers to obtain all applicable approvals and permits. We cannot predict whether or when all permits required for a given customer’s project will be granted or whether the conditions associated with the permits will be achievable. The denial of a permit or utility connection essential to a project or the imposition of impractical conditions would impair our customer’s ability to develop the project. In addition, we cannot predict whether the permitting process will be lengthened due to complexities and appeals. Delay in the review and permitting process for a project can impair or delay our customers’ abilities to develop that project or increase the cost so substantially that the project is no longer attractive to our customers. Furthermore, unforeseen delays in the review and permitting process could delay the timing of the installation of our energy efficiency or generation systems and could therefore adversely affect the timing of the revenue recognition, which could adversely affect our operating results in a particular period.
The growth of our business depends on our brand, reputation, expansion potential, and additional Energy Service Offerings, and damage to our brand or reputation or failure to expand our brand or Energy Service Offerings could harm our business and results of operations.
We depend on our brand and reputation for high-quality service offerings, and ability to expand our brand and Energy Service Offerings, to attract customers and grow our business. In addition to new Energy Service Offerings, we may depend on customers to expand their existing energy and efficiency sales contracts with us. Customer retention may decline or fluctuate as a result of a number of factors, including satisfaction with our system service offerings, functionality of installed energy efficiency or generation systems, prices, the features and pricing of competing service offerings, reductions in spending levels, mergers and acquisitions involving customers, and deteriorating general economic conditions. If we fail to continue to deliver our Energy Service Offerings within the planned timelines, if our service offerings do not perform as anticipated, or if we damage any customers’ properties or cancel projects, our brand, reputation, and ability to expand our service offerings could be significantly impaired. We also depend on referrals from customers for our growth. Therefore, our inability to meet or exceed customers’ expectations could harm our reputation and growth through referrals.
If we are unable to maintain appropriate operations and maintenance levels, we could lose credibility in the marketplace among prospective customers, vendors, and partners, which could affect our growth and our business, financial condition and results of operations may be adversely affected.
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We derive a substantial portion of our revenue and Backlog from a limited number of customers, and the loss of or a significant reduction in orders from such customers could harm our business and negatively impact revenue, results of operations and cash flows.
In any particular period, a substantial amount of our total revenue and Backlog could come from a relatively small number of customers. As an example, in the nine months ended September 30, 2021, AT&T, Bank of America, and Iron Mountain accounted for approximately 25%, 24%, and 18% of our total revenue, respectively. In the nine months ended September 30, 2020, AT&T, Prospect Medical, and Iron Mountain accounted for approximately 38%, 23%, and 11% of our total revenue, respectively. As of September 30, 2021, AT&T, Institute for Advanced Study, and Iron Mountain accounted for approximately 16%, 14%, and 11% of our Total Backlog, respectively. No other customers account for 10% or more of our Total Backlog. While we expect our sources of revenue to be spread-out among a larger number of customers in future periods, the loss of significant customers or any delays in installations of new energy efficiency or generation systems with any significant customer could harm our business and negatively impact revenue, results of operations and cash flows.
We currently face and will continue to face competition.
We compete for customers, financing partners and incentive dollars with other clean energy providers including but not limited to utility companies, deregulated suppliers, energy services companies, project developers, OEMs, specialty finance companies and IoT data start-ups. We face increasing competition in the energy efficiency solutions industry, including competitors who could duplicate our model. Our competitors may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past contract performance, geographic presence, and driver price. Further, many of our competitors may be able to utilize substantially greater resources and economies of scale to develop competing service offerings and technologies, divert sales away from us by winning broader contracts or hire away our employees by offering more lucrative compensation packages. In the event that the market for energy efficiency solutions expands, we expect that competition will intensify as additional competitors enter the market and current competitors expand their service offerings. In order to secure contracts successfully when competing with larger, well-financed companies, we may be forced to agree to contractual terms that provide for lower aggregate payments to us over the life of the contract, or result in us assuming higher liability risks, which could adversely affect our margins. If we fail to adapt to changing market conditions and to compete successfully with new competitors, we will limit our growth and adversely affect our business, financial condition, and results of operations.
We face competition from our own customers, which may elect to finance energy efficiency or generation systems themselves by relying upon our initial analysis of customer sites.
In the process of customer pursuits, we typically perform an initial analysis of one or more customer sites in order to inform and present our proposed deployment of one or more energy efficiency or generation systems. Presenting these analyses results in a knowledge transfer to the customer, and in some cases after receiving such information, customers have elected to forego working with us, and to instead finance the development and installation of energy efficiency or generation systems themselves. Thus, given the long sales cycles for our services, there is an inherent opportunity cost risk that company resources could be tied-up for many months on a pursuit only to be disintermediated closer to consummating a transaction. This type of disintermediation is difficult to predict, however, if it happened with a high number of customer pursuits, it could limit our growth and adversely affect our business, financial condition, and results of operations.
Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.
Although we have taken protective measures to protect our trade secrets, including agreements, limited access, segregation of knowledge, password protections and other measures, policing unauthorized use of proprietary technology can be difficult and expensive. For example, many of our engineers reside in California and it is not legally permissible to prevent them from working for a competitor, if and when one should exist. Also, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. Such litigation may result in our intellectual property rights being
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challenged, limited in scope, or declared invalid or unenforceable. We cannot be certain that the outcome of any litigation will be in our favor, and an adverse determination in any such litigation could impair our intellectual property rights and may harm our business, prospects, and reputation.
We rely primarily on trade secret and trademark laws, and non-disclosure, confidentiality, and other types of contractual restrictions to establish, maintain, and enforce our intellectual property and proprietary rights. However, our rights under these laws and agreements afford us only limited protection and the actions we take to establish, maintain, and enforce our intellectual property rights may not be adequate. For example, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, or misappropriated or our intellectual property rights may not be sufficient to provide us with a competitive advantage, any of which could have a material adverse effect on our business, financial condition or operating results. In addition, the laws of some countries do not protect proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately abroad.
We may need to defend ourselves against claims that we infringe, or have misappropriated, the intellectual property rights of others, which may be time-consuming and would cause us to incur substantial costs.
We generally indemnify our customers against claims that our Energy Service Offerings, including our proprietary submeters, infringe or misappropriate third-party intellectual property rights, and we may therefore be required to defend our customers against such claims. We also license technology from third parties, and incorporate proprietary and open source components supplied by third parties into our systems and solutions. Due to the significant time lag between the filing of patent applications and the publication of such patents, we cannot be certain that our licensors were the first to file the patent applications for the technology we license or, even if they were the first to file, also were the first to invent, particularly with regards to patent rights in the United States. Some of these technologies, applications or patents may conflict with our licensors’ technologies or patent applications. Such conflicts could limit the scope of the patents, if any, that our licensors may be able to obtain or result in denial of our licensors’ patent applications for the technologies we license. If patents that cover the technologies we license from third parties are issued to other companies, we may not be able to license or obtain alternative technology.
If a claim is successfully brought in the future and we, or our system or solutions, are determined to have infringed, misappropriated, or otherwise violated a third-party’s intellectual property rights, we may be required to do one or more of the following:
cease selling service offerings that incorporate the challenged intellectual property;
pay substantial damages (including treble damages and attorneys’ fees if our infringement is determined to be willful);
obtain a license from the holder of the intellectual property right, which license may not be available on reasonable terms or at all; or
redesign our service offerings, which may not be possible or cost-effective.
Any of the foregoing could adversely affect our business, financial condition, and results of operations. In addition, any litigation, or claims, whether or not valid, could adversely affect our reputation, result in substantial costs, and divert resources and management attention. We may seek indemnification from our licensors or vendors under our contracts with them, but our rights to indemnification or our vendors’ resources may be unavailable or insufficient to cover our costs and losses.
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If we fail to manage our growth effectively, include failing to attract and integrate qualified personnel, we may not be able to develop, produce, market, and sell our services successfully.
Any failure to manage our growth effectively could materially and adversely affect our business, financial condition, and operating results. We intend to expand our operations significantly. We expect our future expansion to include, among other things:
expanding the management team;
hiring and training new personnel;
conducting market research and analysis;
controlling expenses and investments in anticipation of expanded operations;
expanding service departments;
implementing and enhancing administrative infrastructure, systems, and processes; and
expanding our market share in international markets, both in markets where we have current customers (Canada, Germany, Ireland, Spain, and the United Kingdom), and prospective customers (or foreign affiliates of existing customers) in new markets in North America, Europe, and Oceania.
Our success depends, in part, on our continuing ability to identify, hire, attract, train, and develop other highly qualified personnel. Experienced and highly skilled employees are in high demand and competition for these employees can be intense. Our ability to hire, attract and retain them will depend in part on our ability to provide competitive compensation packages and a high-quality work environment. We may not be able to attract, integrate, train, motivate or retain additional highly qualified personnel, and our failure to do so could adversely affect our business, financial condition, and results of operations.
If we are unable to attract and retain key employees and hire qualified management, technical, engineering and sales personnel, our ability to compete and successfully grow our business could be adversely affected.
We believe that our success and our ability to reach our strategic objectives are highly dependent on the contributions of our key management, technical, engineering and sales personnel. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our Energy Service Offerings, and negatively impact our business, financial condition, and operating results. In particular, we are highly dependent on the services of Arvin Vohra, our Chief Executive Officer and Director, John Rhow, our President and Director, Matt Gembrin, our Chief Financial Officer, and other key employees. We cannot assure you that we will be able to successfully attract and retain executive leadership necessary to grow our business. Furthermore, there is increasing competition for talented individuals in our field. Our failure to attract and retain our executive officers and other key technology, sales, marketing, and support personnel, could adversely affect our business, financial condition, and results of operations.
We rely on third-party suppliers and because some of the raw materials and key components in our energy efficiency, generation systems, and our submeters come from limited or sole sources of supply, we are susceptible to supply shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain and could delay deliveries of our services to our customers.
All of the components that go into the manufacture of our energy efficiency or generation systems and our submeters are sourced from third-party suppliers. Some of the key components, such as integrated circuits, used to manufacture our energy efficiency, generation systems, and our submeters come from limited or sole sources of supply. We are therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our energy efficiency, generation systems, and submeters. The COVID-19 pandemic may adversely affect the ability of our third-party suppliers to source components in a timely or cost effective manner due to, among other things, work stoppages or interruptions. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and
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delivery schedules. Our third-party suppliers have in the past experienced, and may in the future experience, component shortages and price fluctuations of certain key components and materials, and the predictability of the availability and pricing of these components may be limited, which could impact the pricing of our energy efficiency, generation systems, or our submeters, and our ability to efficiently complete installation of our projects. This could adversely affect our business, financial condition, and results of operations.
Disruptions in the global supply chain and other reasons that lead to the failure of our suppliers to continue to deliver necessary components of our energy efficiency and generation systems, and submeters in a timely manner could prevent us from delivering our products within required time frames, and could cause installation delays, cancellations and damage to our reputation.
We may experience unanticipated disruptions to operations or other difficulties with our supply chain or internalized supply processes due to exchange rate fluctuations, volatility in regional markets from where materials are obtained, particularly China, changes in the general macroeconomic outlook, political instability, expropriation or nationalization of property, civil strife, strikes, insurrections, acts of terrorism, acts of war or natural disasters. The failure by us to obtain components in a timely manner, or to obtain raw materials or components that meet our quantity and cost requirements, could impair our ability to timely deliver our energy efficiency and generation systems, and submeters or increase their costs. If we cannot obtain substitute materials or components on a timely basis or on acceptable terms, we could be prevented from delivering our energy efficiency and generation systems, and submeters to our customers within required timeframes, which could result in sales and installation delays, cancellations, or damage to our reputation, and in some cases, penalty payments, any of which could have a material adverse effect on our business and results of operations. In addition, we rely on our suppliers to meet quality standards, and the failure of our suppliers to meet or exceed those quality standards could cause delays in the delivery of our energy efficiency and generation systems, and submeters, unanticipated servicing costs and damage to our reputation.
Our operations may be adversely affected by the COVID-19 global pandemic, and we face disruption risks from COVID-19 global pandemic that could impact our business. 
The COVID-19 global pandemic has resulted in the extended shutdown of certain businesses in the United States, Europe, and Asia, which has resulted in disruptions or delays to our supply chain and either have resulted in or may still result in significant disruptions to our customer base. Such disruption in these businesses have impacted and will likely continue to impact our sales and operating results.
To date COVID-19 has had a limited adverse impact on our operations, supply chains and hardware and software-enabled services. Because of travel and customer site restrictions, the frequency of site visits with prospective customers have been impacted, which has delayed the sales conversion cycle. Due to these precautionary measures, return-to-work restrictions, site closures and other governmental responses to limit the spread of COVID-19 and resulting global economic impacts, we may still experience significant and unpredictable reductions in demand for our Energy Service Offerings and our ability to staff sales and operations centers and install and maintain our hardware and software-enabled services has been impacted and may continue to be impacted. Our installation and maintenance operations have been, and will continue to be, adversely impacted by the COVID-19 global pandemic. For example, our energy efficiency installation projects have experienced delays and may continue to experience delays relating to, among other things, shortages in available labor for design, installation, and other work as well as the inability or delay in our ability to access customer facilities due to shutdowns or other restrictions. We have implemented precautionary measures intended to help minimize the risk of the virus to our employees, including initially requiring employees to work remotely and subsequently implementing social distancing protocols for limited work conducted onsite. The degree and duration of disruptions to our future business activity are unknown at this time.
We cannot predict with certainty at this time the full extent to which the COVID-19 global pandemic will impact our business, cash flows and results of operations including revenue. It will depend on many factors. These include, among others, the extent of harm to public health, the willingness of our employees and subcontractors to travel to sites and meet with customers even if permitted to do so, the disruption to the global economy and to our supply base and potential customer base and impacts on liquidity and the availability of capital. We are staying in
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close communication with our employees, subcontractors, agents, customers, vendors, and partners, and acting to mitigate the impact of this dynamic and evolving situation, but there is no guarantee that we will be able to do so.
Should we pursue acquisitions in the future, they would be subject to risks associated with acquisitions.
We may acquire additional assets, products, technologies, or businesses that are complementary to our existing business. The process of identifying and consummating acquisitions and the subsequent integration of new assets and businesses into our own business would require attention from management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on its operations. Acquired assets or businesses may not generate the expected financial results. Acquisitions could also result in the use of cash, potentially dilutive issuances of equity securities, the occurrence of goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business.
Our management has limited experience in operating a public company.
Our management team, including our executive officers, has limited experience in the management of a publicly traded company. Our management team may not successfully or effectively manage the transition to a public company that will be subject to significant regulatory oversight and reporting obligations under federal securities laws. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities which will result in less time being devoted to the management and growth of the company. We may not have adequate personnel with the appropriate level of knowledge, experience and training in the accounting policies, practices or internal control over financial reporting required of public companies in the United States. The development and implementation of the standards and controls necessary for us to achieve the level of accounting standards required of a public company in the United States may require costs greater than expected. It is likely that we will be required to expand our employee base and hire additional employees to support our operations as a public company which will increase our operating costs in future periods.
Continuing to expand operations internationally could expose us to enhanced risks.
Although we currently primarily operate in the United States, we will seek to expand our international business. We are currently operating or have contracted systems across over 2,341 locations in the United States, 36 in Canada, 28 in the United Kingdom, four in Spain, four in Ireland and one in Germany and intend to expand into other growing markets in North America, Europe, and Oceania. Managing any international expansion will require additional resources and controls. Further expansion internationally could subject our business to risks associated with international operations, including:
conformity with applicable business customs, including translation into foreign languages and associated expenses;
lack of availability of government incentives and subsidies;
potential changes to our established business model;
cost of alternative energy solutions, which could vary meaningfully outside the United States;
difficulties in staffing and managing foreign operations and installations in an environment of diverse culture, laws and customers, and the increased travel, infrastructure and legal and compliance costs associated with international operations;
customer installation challenges which we have not encountered before, which may require the development of a unique model for each country;
differing levels of demand among members of our customer base, including C&I customers, utilities, independent power producers and project developers;
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compliance with multiple, potentially conflicting and changing governmental laws, regulations and permitting processes, including environmental, banking, employment, tax, privacy and data protection laws and regulations, such as the General Data Protection Regulation (GDPR) and the EU Data Privacy Directive;
compliance with U.S. and foreign anti-bribery laws;
difficulties in collecting payments in foreign currencies and associated exposure to foreign currency exchange rate risk;
restrictions on repatriation of earnings;
compliance with potentially conflicting and changing laws of taxing jurisdictions where we conduct business and applicable U.S. tax laws as they relate to international operations, the complexity and adverse consequences of such tax laws and potentially adverse tax consequences due to changes in such tax laws; and
regional economic and political conditions.
As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful and may negatively impact our results of operations and profitability.
We have identified material weaknesses in our internal control over financial reporting which, if not corrected, could affect the reliability of our consolidated financial statements, and have other adverse consequences.
Based on its assessment as of December 31, 2020, management has identified material weaknesses in its internal controls over financial reporting that we are currently working to remediate, which relate to (1) ineffective internal controls over accounting for complex and significant transactions and (2) a lack of formality in our internal control activities, especially related to management review-type controls.
With respect to accounting for complex and significant transactions, deficiencies exist in our process for ensuring the completeness of information utilized in various technical accounting analyses and in certain instances, the proper application of the relevant accounting literature. These deficiencies could result in material adjustments for certain transactions. With respect to a lack of formality in our control activities, we did not sufficiently establish formal policies and procedures to design effective controls and establish responsibilities to execute these policies and procedures, including review over revenue recognition.
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of its financial statements would not be prevented or detected on a timely basis. These deficiencies could result in additional material misstatements to our consolidated financial statements that could not be prevented or detected on a timely basis.
Our management has concluded that these material weaknesses in our internal control over financial reporting are due to the fact that, at the time, we were a private company with limited resources and did not have the necessary business processes and related internal controls formally designed and implemented coupled with the appropriate resources with the appropriate level of experience and technical expertise to oversee our business processes and controls.
In order to address these identified material weaknesses, we have increased resources within our organization, including the expansion of our accounting, control and compliance functions (including but not limited to hiring of a Principal Accounting Officer, Assistant Controller, Senior Manager of Internal Audit, and Revenue Accounting Manager) to develop and implement continued improvements and enhancements to address the overall deficiencies that led to the material weaknesses.
We are in the process of documenting existing, and implementing additional, internal controls over financial reporting including implementation of appropriate segregation of duties and review procedures, formalization of accounting policies and controls, and retention of appropriate expertise for complex accounting transactions.
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Additionally, we have engaged external consultants to assist with documentation of our existing internal controls over financial reporting and identification of control gaps, including the existing material weaknesses, to be remediated. Finally, additional training programs are being implemented for the finance and accounting personnel related to the requirements of being a public company and internal controls over financial reporting. In order to maintain and improve the effectiveness of our internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.
We will not be able to fully remediate these control deficiencies until these steps have been completed, have been operating effectively for a sufficient period of time and management has concluded, through testing, that these controls are effective. Our management will monitor the effectiveness of our remediation plans and will make changes management determines to be appropriate. The hiring of additional finance and accounting personnel and the implementation of improvements to our accounting and proprietary systems and controls may be costly and time consuming, and the cost to remediate may impair our results of operations in the future.
If not remediated, these material weaknesses could result in further material misstatements to our annual or interim consolidated financial statements that might not be prevented or detected on a timely basis, or in delayed filing of required periodic reports. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future after the closing of this offering, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the New York Stock Exchange (NYSE), the SEC, or other regulatory authorities, which could require additional financial and management resources.
Our business could be adversely impacted by financial regulatory reform.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) was signed into law. The Dodd-Frank Act contained significant changes to the regulation of financial institutions, created the Financial Stability Oversight Council (FSOC) and Consumer Financial Protection Bureau and granted authorities and responsibilities to the FSOC and existing regulatory agencies to identify and address emerging systemic risks posed by the activities of financial services firms. The Dodd-Frank Act also provided for enhanced regulation of derivatives and asset-backed securities offerings, restrictions on executive compensation and enhanced oversight of credit rating agencies, among other things. Proposals for legislation further regulating the financial services industry are being introduced in the U.S. Congress and in state legislatures. On May 24, 2018, President Trump signed into law a financial services regulatory reform bill that received bipartisan support, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The EGRRCPA makes certain modifications to post-financial crisis regulatory requirements, including, among other things, improving consumer access to mortgage credit and tailoring regulations for certain bank holding companies, including raising the relevant thresholds for the application of the Federal Reserve's enhanced prudential standards, as well as for the designation by the FSOC of non-bank financial companies as “systemically important”. On December 4, 2019, FSOC issued final interpretive guidance in connection with its previously proposed interpretive guidance regarding the designation of nonbank financial companies as systematically important. The final guidance implements an activities-based approach for identifying and addressing potential risks to financial stability as well as enhancing the analytical framework, transparency, and efficiency of FSOC's process for designating nonbank financial companies as systematically important. While the EGRRCPA and other such legislation has and will continue to result in significant modifications to certain aspects of the Dodd-Frank Act and other post-financial crisis regulatory requirements, prospective investors should be aware that the changes in the regulatory and business landscape as a result of the Dodd-Frank Act, the EGRRCPA and future legislation and regulation, including the cost of complying with any additional laws and regulations, could have an adverse impact on our business, financial condition, and results of operations.
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Risks Related To Third Parties
Our growth depends in part on the success of our relationships with third parties.
We rely on third-party general contractors to install energy efficiency or generation systems at our customers’ sites. We currently work with a limited number of general contractors, which has impacted and may continue to impact our ability to facilitate customer installations as planned. Our work with contractors or their sub-contractors may have the effect of us being required to comply with additional rules (including rules unique to our customers) and regulations, working conditions, site remediation and other union requirements, which can add costs and complexity to an installation project. The timeliness, thoroughness and quality of the installation-related services performed by our general contractors and their sub-contractors in the past have not always met our expectations or standards and in the future may not meet our expectations and standards and it may be difficult to find and train third-party general contractors that meet our standards at a competitive cost.
In addition, a key component of our growth strategy is to develop or expand our relationships with third-party referral partners. For example, we are investing resources in establishing strategic relationships with market players across a variety of industries to generate new customers. These programs may not roll out as quickly as planned or produce the results we anticipated. A significant portion of our business depends on attracting new referral partners and retaining existing referral partners. Negotiating relationships with our referral partners, investing in due diligence efforts with potential referral partners, training such partners and monitoring them for compliance with our standards require significant time and resources and may present greater risks and challenges than expanding a direct sales or installation team. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to grow our business and address our market opportunity could be impaired. Even if we are able to establish and maintain these relationships, we may not be able to execute on our goal of leveraging these relationships to meaningfully expand our business, brand recognition and customer base. Such circumstance would limit our growth potential and our opportunities to generate significant additional revenue or cash flows.
We must maintain customer confidence in our long-term business prospects in order to grow our business.
Customers may be less likely to purchase our Energy Service Offerings if they are not convinced that our business will succeed or that our services and support and other operations will continue in the long term. Similarly, vendors and other third-party referral partners will be less likely to invest time and resources in developing business relationships with us if they are not convinced that our business will succeed. Accordingly, in order to build and maintain our business, we must maintain confidence among customers, vendors, referral partners, analysts, ratings agencies, and other parties in our Energy Service Offerings, long-term financial viability, and business prospects. Maintaining such confidence may be particularly complicated by certain factors including those that are largely outside of our control, such as our limited operating history, customer unfamiliarity with our services, delivery, and service operations to meet demand, competition or uncertainty regarding sales performance compared with market expectations.
Accordingly, in order to grow our business, we must maintain confidence among our customers, referral partners, vendors, third-party general contractor partners, financing partners and other parties in our long-term business prospects. This may be particularly complicated by factors such as:
our limited operating history at current scale;
our historical and anticipated near-term lack of profitability;
unfamiliarity with or uncertainty about our Energy Service Offerings;
prices for electricity in particular markets;
competition from alternate energy efficiency solutions;
warranty or unanticipated service issues we may experience in connection with third-party manufactured hardware and our proprietary submeter;
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the environmental consciousness and perceived value of environmental programs to our customers;
the size of our expansion plans in comparison to our existing capital base and the scope and history of operations; and
the availability and amount of incentives, credits, subsidies, or other programs to promote installation of Energy Service Offerings.
Several of these factors are largely outside our control, and any negative perceptions about our long-term business prospects, even if unfounded, would likely adversely affect our business, financial condition, and results of operations.
Regulatory Risks
Our business could be adversely affected by trade tariffs or other trade barriers.
In recent years, China and the United States have each imposed tariffs, and there remains a potential for further trade barriers. These barriers may escalate into a trade war between China and the United States. Tariffs could potentially impact the cost of procuring energy efficiency or generation systems and impact any plans to sell our service offerings in international markets. In addition, these developments could have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our business, financial condition, and results of operations.
Changes to existing federal, state, or international laws or regulations applicable to us could cause an erosion of our current competitive strengths.
Our business is subject to a variety of federal, state, and international laws and regulations, including those with respect to government incentives promoting energy efficiency, alternate forms of energy, and others. These laws and regulations, and the interpretation or application of these laws and regulations, could change. Any reduction, elimination or discriminatory application of government subsidies and economic incentives because of policy changes, fiscal tightening or other reasons may result in diminished revenues from government sources and diminished demand for our Energy Service Offerings. In addition, new laws or regulations affecting our business could be enacted. These laws and regulations are frequently costly to comply with and may divert a significant portion of management’s attention. If we fail to comply with these applicable laws or regulations, we could be subject to significant liabilities which could adversely affect our business.
In addition, there are many federal, state, and international laws that may affect our business, including measures to regulate energy efficiency, generation, and storage systems. If we fail to comply with these applicable laws or regulations, we could be subject to significant liabilities which could adversely affect our business. Additionally, there may be laws in jurisdictions we have not yet entered or laws we are unaware of in jurisdictions we have entered that may restrict our sales or other business practices. The laws in this area can be complex and difficult to interpret. Continued regulatory limitations and other obstacles that may interfere with our ability to continue to commercialize our service offerings and could have a negative and material impact on our business, financial condition, and results of operations.
Changes in public policies affecting the development and more widespread adoption of energy efficiency systems could affect the demand for our service offerings.
If the market for energy efficiency systems does not develop, demand for our service offerings could be harmed. As a result, our success depends, in part, on laws, and energy prices that affect demand for energy efficiency, generation or storage systems. For example, laws, investor demands, or corporate policies compelling the reduction of greenhouse gas emissions could create opportunity for increased sales of our service offerings. Incentives, including tax credits or rebates, for purchases of energy efficiency or generation systems to reduce greenhouse gas emissions, creates a climate in which our sales may increase. Eliminating or phasing out such incentives could have the opposite effect.
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Changes in tax laws or regulations or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.
We are subject to income- and non-income-based taxes in the United States under federal, state, and local jurisdictions and in certain foreign jurisdictions in which we operate. Tax laws, regulations and administrative practices in various jurisdictions may be subject to significant change, with or without advance notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. Our effective tax rates could be affected by numerous factors, such as changes in tax, accounting and other laws, regulations, administrative practices, principles and interpretations, the mix and level of earnings in a given taxing jurisdiction, our ownership or capital structures or examinations by U.S. federal, state or foreign jurisdictions that disagree with interpretations of tax rules and regulations in regard to positions taken on tax filings.
In addition, as our business grows, we are required to comply with increasingly complex taxation rules and practices. The development of our tax strategies requires additional expertise and may impact how we conduct our business. If our tax strategies are ineffective or we are not in compliance with domestic or international tax laws, our financial position, operating results, and cash flows could be adversely affected.
Further, U.S. federal income tax legislation referred to as the Tax Cuts and Jobs Act, is highly complex, is subject to interpretation, and contains significant changes to U.S. tax law, including, but not limited to, a reduction in the corporate tax rate, significant additional limitations on the deductibility of interest, substantial revisions to the taxation of international operations, and limitations on the use of certain net operating losses. The presentation of our financial condition and results of operations is based upon our current interpretation of the provisions contained in the Tax Cuts and Jobs Act. The Treasury Department and the U.S. Internal Revenue Service (IRS) have released and are expected to continue releasing regulations and interpretive guidance relating to the legislation contained in the Tax Cuts and Jobs Act. Any significant variance of our current interpretation of such legislation from any future regulations or interpretive guidance could result in a change to the presentation of our financial condition and results of operations and could materially and adversely affect our business, financial condition, and results of operations.
Furthermore, on April 7, 2021, the Biden administration proposed changes to the U.S. tax system, including an increase to the U.S. corporate tax rate.  We are unable to predict which, if any, U.S. tax reform proposals will be enacted into law, and what effects any enacted legislation might have on our liability for U.S. corporate tax. However, it is possible that the enactment of changes in the U.S. corporate tax system could have a material adverse effect on our liability for U.S. corporate tax and our consolidated effective tax rate.
We may incur obligations, liabilities, or costs under environmental, health and safety laws, which could have an adverse impact on our business, financial condition, and results of operations.
We are required to comply with national, state, and local laws and regulations regarding the protection of the environment and health and safety. Adoption of more stringent laws and regulations in the future could require us to incur substantial costs to come into compliance with these laws and regulations. In addition, violations of, or liabilities under, these laws and regulations may result in restrictions being imposed on our operating activities or in our being subject to adverse publicity, substantial fines, penalties, criminal proceedings, third-party property damage or personal injury claims, cleanup costs, or other costs. In addition, future developments such as more aggressive enforcement policies or the discovery of presently unknown environmental conditions may require expenditures that could have an adverse effect on our business, financial condition, and results of operations.
The installation of our Energy Service Offerings and ongoing operation of our EaaS Offerings involves safety risks.
Our Energy Service Offerings require installation of equipment that involves interfacing with electrical equipment and infrastructure, the risk of falling from lifts and rooftops, personal injuries occurring at the job site, and other risks typical of construction projects. Although we take many steps to assure the safe installation of our Energy Service Offerings and ongoing operation of our EaaS Offerings, and maintain insurance against such liabilities, we may nevertheless be exposed to significant losses arising from personal injuries or property damage arising from the installation and maintenance of our offerings.
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We could be adversely affected by any violations of the FCPA, the U.K. Bribery Act and other foreign anti-bribery laws.
The Foreign Corrupt Practices Act of 1977, as amended (FCPA), generally prohibits companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities. Our policies mandate compliance with these anti-bribery laws. However, we currently operate in, and may in the future expand into, many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our entry into certain jurisdictions requires government contact where norms can differ from U.S. standards. It is possible that our employees, subcontractors, agents, and partners may take actions in violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.
Cybersecurity and Information Technology Risks
A failure of our information technology and data security infrastructure could adversely affect our business and operations.
We rely upon the capacity, reliability, and security of our information technology (IT) and data security infrastructure and our ability to expand and continually update this infrastructure in response to the changing needs of our business. Our existing IT systems and any new IT systems we utilize may not perform as expected. If we experience a problem with the functioning of an important IT system or a security breach of our IT systems, including during system upgrades or new system implementations, the resulting disruptions could adversely affect our business.
Despite our implementation of reasonable security measures, our IT systems, like those of other companies, are vulnerable to damages from computer viruses, natural disasters, fire, power loss, telecommunications failures, personnel misconduct, human error, unauthorized access, physical or electronic security breaches, cyber-attacks (including malicious and destructive code, phishing attacks, ransomware, and denial of service attacks), and other similar disruptions. Such attacks or security breaches may be perpetrated by bad actors internally or externally (including computer hackers, persons involved with organized crime, or foreign state or foreign state-supported actors). Cybersecurity threat actors employ a wide variety of methods and techniques that are constantly evolving, increasingly sophisticated, and difficult to detect and successfully defend against. We have experienced certain incidents, such as phishing attacks, in the past, and any future incidents could expose us to claims, litigation, regulatory or other governmental investigations, administrative fines, and potential liability. Any system failure, accident or security breach could result in disruptions to our operations. A material network breach in the security of our IT systems could include the theft of our trade secrets, customer information, human resources information or other confidential data, including but not limited to personal data. Although past incidents have not had a material effect on our business operations or financial performance, to the extent that any disruptions or security breach results in a loss or damage to our data, or an inappropriate disclosure of confidential, proprietary or customer information, it could cause significant damage to our reputation, affect our relationships with our customers and strategic partners, lead to claims against us from governments and private plaintiffs, and adversely affect our business. We cannot guarantee that future cyberattacks, if successful, will not have a material effect on our business, financial condition, or results of operations.
Many governments have enacted laws requiring companies to provide notice of cyber incidents involving certain types of data, including personal data. If an actual or perceived cybersecurity breach of security measures, unauthorized access to our system or the systems of the third-party vendors that we rely upon, or any other cybersecurity threat occurs, we may incur liability, costs, or damages, contract termination, our reputation may be compromised, our ability to attract new customers could be negatively affected, and our business, financial condition, and results of operations could be materially and adversely affected. Any compromise of our security could also result in a violation of applicable domestic and foreign security, privacy or data protection, consumer, and other laws, regulatory or other governmental investigations, enforcement actions, and legal and financial exposure,
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including potential contractual liability. In addition, we may be required to incur significant costs to protect against and remediate damage caused by these disruptions or security breaches in the future.
Our technology could have undetected defects, errors or bugs in the hardware or software incorporated into our energy efficiency or generation systems, which could reduce market adoption, damage our reputation with current or prospective customers and/or expose us to liability and other claims that could materially and adversely affect our business, financial condition, and results of operations.
We may be subject to claims that our energy efficiency or generation systems have malfunctioned, and persons were injured or purported to be injured. Any insurance that we carry may not be sufficient or it may not apply to all situations. Similarly, to the extent that such malfunctions are related to components obtained from third-party vendors, such vendors may not assume responsibility for such malfunctions. In addition, our customers could be subjected to claims as a result of such incidents and may bring legal claims against us to attempt to hold us liable. Any of these events could adversely affect our brand, relationships with customers, business, financial condition, or results of operations.
Although we have contractual protections, such as warranty disclaimers and limitation of liability provisions, in many of our agreements with customers and other business partners, such protections may not be uniformly implemented in all contracts and, where implemented, may not fully or effectively protect from claims by customers, referral partners, vendors, third-party general contractor partners, financing partners and other parties in our long-term business prospects. Any insurance coverage or indemnification obligations of vendors may not adequately cover all such claims, or cover only a portion of such claims. A successful liability, warranty, or other similar claim could have an adverse effect on our business, financial condition, and results of operations. In addition, even claims that ultimately are unsuccessful could result in expenditure of funds in litigation, divert management’s time and other resources and cause reputational harm.
We are subject to various privacy and consumer protection laws.
Any failure by us or our vendor or other business partners to comply with federal, state, or international privacy, data protection or security laws or regulations could result in regulatory or litigation-related actions against us, legal liability, fines, damages, and other costs. We may also incur substantial expenses and costs in connection with maintaining compliance with such laws. For example, commencing in May 2018, the GDPR became fully effective with respect to the processing of personal information collected from individuals located in the European Union. The GDPR created new compliance obligations and significantly increases fines for noncompliance. In addition, California recently enacted the California Consumer Privacy Act (CCPA), which will, among other things, require new disclosures to California consumers and afford such consumers new abilities to opt out of certain sales of personal information, which went into effect on January 1, 2020. It remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted in the years to come. Although we currently do not process personal information of our customers, we may be required to expend significant resources to comply with data breach requirements if third parties improperly obtain and use the personal information of our customers, if applicable, or we otherwise experience a data loss with respect to customers’ personal information, if applicable. A major breach of our network security and systems could have negative consequences for our business and future prospects, including possible fines, penalties and damages, reduced customer demand for our services, and harm to our reputation and brand.
Risks Related to Liquidity and Indebtedness
If we cannot obtain financing to support the sale or leasing of our service offerings to customers, such failure may adversely affect our liquidity and financial position.
Most of our customer contracts require us to finance the energy efficiency or generation systems we sell, either ourselves or through third-party financing sources. To date, we have been successful in obtaining or providing the necessary financing arrangements. There is no certainty, however, that we will be able to continue to obtain or provide adequate financing for these arrangements on acceptable terms, or at all, in the future. Failure to obtain or provide such financing may result in the loss of material customers and sales from service offerings, which could have a material adverse effect on our business, financial condition, and results of operations. Further, if we are
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required to restrict substantial amounts of our cash to support these financing arrangements, such cash will not be available to us for other purposes, which may have a material adverse effect on our liquidity and financial position. For example, as of December 31, 2020, approximately $3.7 million of our cash was restricted to support such contracts, which prevents us from using such cash for other purposes.
We may require additional capital funding and such capital may not be available to us.
Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, growth in inventory and equipment to support both installations of new energy efficiency or generation systems and servicing the installed base, funding the growth in our “Energy-as-a-Service” solutions, which includes the installation of HVAC equipment, lighting and other energy efficiency or generation systems, growth in the energy efficiency, generation and energy storage markets, continued development and expansion of our service offerings, and payment of debt obligations. Our ability to meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and quantity of customer contracts; improving gross margins across all of our service offerings; the timing and amount of our operating expenses; the timing and costs of working capital needs; the timing and costs of building a sales base; our ability to obtain financing arrangements to support installations of our service offerings, and the terms of such agreements that may require us to pledge or restrict substantial amounts of our cash to support these financing arrangements; the timing and costs of developing marketing and distribution channels; the timing and costs of hardware service requirements; the timing and costs of hiring and training staff; the extent to which our services gain market acceptance; the timing and costs of development and introductions of our service offerings; the extent of our ongoing and new research and development programs; and changes in our strategy or our planned activities. If we are unable to fund our operations with positive cash flows and cannot obtain external financing, we may not be able to sustain future operations.
We cannot assure you that any necessary additional financing will be available on terms favorable to us, or at all. We believe that it could be difficult to raise additional funds and there can be no assurance as to the availability of additional financing or the terms upon which additional financing may be available. Additionally, even if we raise sufficient capital through additional equity or debt financings, strategic alternatives or otherwise, there can be no assurance that the revenue or capital infusion will be sufficient to enable us to develop our business to a level where it will be profitable or generate positive cash flow. If we incur debt, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. The terms of any debt securities issued could also impose significant restrictions on our operations. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds.
We may not be able to generate sufficient cash to meet our debt service obligations.
Our ability to generate sufficient cash to make scheduled payments on debt obligations we may incur to finance the deployment of our service offerings will depend on our future financial performance, which will be affected by a range of economic, competitive, and business factors, many of which are outside of our control. As of September 30, 2021, we had outstanding principal under our credit facilities of $165.4 million, and we issued an additional $100 million in principal pursuant to convertible notes in November 2021 (the 2021 Convertible Notes).
We finance a significant volume of energy efficiency or generation systems and retain a portion of the energy savings from our customers. Our ability to carry out our obligation under these financing arrangements is significantly impacted by our ability to collect customer payments. Accordingly, we have a robust customer credit evaluation process in place prior to contract execution in order to mitigate collectability risk under our EaaS arrangements. Furthermore, customer payments are generally variable and contingent upon achieving energy savings through the performance of our energy efficiency systems, and we are exclusively subject to the efficiency risk for the performance of those systems. However, the efficiency performance targets of each system are comprehensively modeled at or immediately prior to contract inception, and historically, when considering the portfolio of our energy efficiency systems in the aggregate, our energy efficiency systems have substantially met those efficiency performance targets. As such, to date, we have collected substantially all of the estimated energy savings payments from our customers.
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If we do not generate sufficient cash to satisfy our debt obligations, including interest payments, or if we are unable to satisfy the requirement for the payment of principal at maturity or other payments that may be required from time to time under the terms of our debt instruments, we may have to undertake alternative financing plans such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments, or seeking to raise additional capital. We cannot provide assurance that any refinancing or restructuring would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be available or permitted under the terms of our various debt instruments then in effect. Furthermore, the ability to refinance indebtedness would depend upon the condition of the finance and credit markets at the time which have in the past been, and may in the future be, volatile. Our inability to generate sufficient cash to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms or on a timely basis would have an adverse effect on our business, financial condition and results of operations.
In addition, servicing our indebtedness could require that we use a substantial portion of our cash flow from operations to pay principal of, and interest on, such indebtedness, which will reduce the availability of cash to fund working capital requirements, capital expenditures, research and development, growth of our business, and other general corporate or business activities. Our ability to generate cash to repay our indebtedness is subject to the performance of our business, as well as general economic, financial, competitive, regulatory, and other factors that are beyond our control. If our business does not generate sufficient cash flow from operating activities or if future capital is not available to us in amounts sufficient to enable us to fund our liquidity needs, our business, financial condition, and results of operations may be adversely affected.
Our ability to use our net operating loss carryforwards (NOLs) to offset future taxable net income may be subject to certain limitations.
Certain of our NOLs may expire and not be used. For example, under the Tax Cuts and Jobs Act, as modified by the CARES Act, NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five taxable years preceding the taxable year of such loss, but NOLs arising in taxable years beginning after December 31, 2020 may not be carried back. Additionally, under the Tax Cuts and Jobs Act, as modified by the CARES Act, NOLs from taxable years that began after December 31, 2017 may offset no more than 80% of current taxable income annually for taxable years beginning after December 31, 2020, but the 80% limitation on the use of NOLs from taxable years that began after December 31, 2017 does not apply for taxable income in taxable years beginning before January 1, 2021. NOLs arising in taxable years ending after December 31, 2017 can be carried forward indefinitely, but NOLs generated in taxable years ending before January 1, 2018 will continue to have a two-year carryback and twenty-year carryforward period. At December 31, 2020, we had approximately $99.6 million in federal, $1.5 million in foreign, and $41.7 million in state NOL carryforwards that will begin to expire in the years ending December 31, 2037 for the federal and in various years for the foreign and state NOLs, respectively. Of this amount $70.1 million of federal NOLs are not subject to expiration.
If an ownership change, as defined in Section 382 of the Internal Revenue Code of 1986, as amended (Code), occurs with respect to our capital stock, our ability to use NOLs to offset taxable income would be subject to certain limitations. Generally, an ownership change occurs under Section 382 of the Code if certain persons or groups increase their aggregate ownership by more than 50 percentage points of our total capital stock over a rolling three-year period. If an ownership change occurs, our ability to use pre-ownership change NOLs to reduce post-ownership change taxable net income is generally limited to an annual amount based on the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate. If an ownership change were to occur, use of our pre-ownership change NOLs to reduce federal taxable net income may be deferred to later years within the applicable carryover period; however, if the carryover period for any loss year expires, the use of the remaining portion of such NOLs will be prohibited. Similar rules may apply under applicable state and foreign law.
We believe that we have experienced an ownership change under Section 382 of the Code. Thus, our ability to utilize NOLs existing at the time of this offering may be subject to limitation under Section 382 of the Code. The application of such limitation may cause U.S. federal income taxes to be paid by us earlier than they otherwise would have been paid if such limitation were not in effect and could cause such NOLs to expire unused, in each case
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reducing or eliminating the benefit of such NOLs. To the extent we are not able to offset our future taxable income with our NOLs, this would adversely affect our operating results and cash flows if we have taxable income in the future. In addition, future changes in our stock ownership, some of which may be outside of our control, could result in an ownership change under Section 382 of the Code. Due to a history of taxable losses and our belief that we experienced an ownership change in the past, we recorded a valuation allowance against a majority of our deferred tax assets, including our NOLs. As of December 31, 2020, we recorded a federal valuation allowance of $15.6 million, a state valuation allowance of $1.2 million, and a foreign valuation allowance of $0.4 million.
There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire, decrease in value or otherwise be unavailable to offset future income tax liabilities. As a result, we may be unable to realize a tax benefit from the use of our NOLs, even if we generate a sufficient level of taxable net income prior to the expiration of the NOL carryforward periods.
Risks Related to Ownership of Our Common Stock and this Offering
We do not know whether an active market will develop for our common stock or what the market price of our common stock will be, and, as a result, it may be difficult for you to sell your shares of our common stock.
We intend to apply to list our common stock on the NYSE under the symbol “EAAS.” However, prior to this offering, there has been no prior public trading market for our common stock. We cannot assure you that an active trading market for our common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our common stock when desired or the prices that you may obtain for your shares.
The market price of our common stock may be volatile, and you could lose all or part of your investment.
The initial public offering price of our common stock will be determined through negotiation among us and the underwriters. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our common stock following this offering. In addition, the trading price of our common stock following this offering is likely to be volatile and could be subject to fluctuations in response to various factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the trading price of our common stock include the following:
price and volume fluctuations in the overall stock market from time to time;
the impact of the ongoing COVID-19 global pandemic on our business;
sales of shares of our common stock by us or our stockholders;
the recruitment or departure of key personnel;
the public’s reaction to our press releases, other public announcements, and filings with the SEC;
rumors and market speculation involving us or other companies in our industry;
fluctuations in the trading volume of our shares or the size of our public float;
actual or anticipated changes or fluctuations in our results of operations;
actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;
failure of securities analysts to maintain coverage of us, changes in actual or future expectations of investors or securities analysts or our failure to meet these estimates or the expectations of investors;
litigation involving us, our industry or both;
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governmental or regulatory actions or audits;
regulatory or legal developments in the United States and other countries;
general economic conditions and trends;
announcement or expectation of additional financing efforts;
expiration of market stand-off or lock-up agreements; and
changes in accounting standards, policies, guidelines, interpretations, or principles.
The realization of any of the above risks or any of a broad range of other risks, including those described in this “Risk Factors” section, could have an adverse impact on the market price of our common stock.
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Upon completion of this offering, our executive officers, directors and holders of 5% or more of our common stock will collectively beneficially own approximately        % of the outstanding shares of our common stock and continue to have substantial control over us, which will limit your ability to influence the outcome of important transactions, including a change in control.
Upon completion of this offering, our executive officers, directors and our stockholders who own 5% or more of our outstanding common stock and their affiliates, in the aggregate, will beneficially own approximately         % of the outstanding shares of our common stock, based on the number of shares outstanding as of          , 2021 and assuming no exercise of the underwriters’ option to purchase additional shares of common stock from us. As a result, these stockholders, if acting together, will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions, or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree, and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing, or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
If securities or industry analysts either do not publish research about us or publish inaccurate or unfavorable research about us, our business, or our market, or if they adversely change their recommendations regarding our common stock, the trading price or trading volume of our common stock could decline.
The trading market for our common stock will be influenced in part by the research and reports that securities or industry analysts may publish about us, our business, our market, or our competitors. If one or more securities analysts initiate research with an unfavorable rating or downgrade our common stock, provide a more favorable recommendation about our competitors, or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets and demand for our securities could decrease, which in turn could cause the price and trading volume of our common stock to decline.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these proceeds effectively
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could adversely affect our business, financial condition, and results of operations. Pending their use, we may invest our net proceeds in a manner that does not produce income or that loses value. Our investments may not yield a favorable return to our investors and may negatively impact the price of our common stock.
We may need additional capital, and we cannot be certain that additional financing will be available on favorable terms, or at all.
Historically, we have funded our operations and capital expenditures primarily through equity issuances, cash generated from our operations and debt financing for capital purchases. Although we currently anticipate that our existing unrestricted cash, cash generated from sales, and access to additional borrowings under the various debt instruments in-place will be sufficient to meet our cash needs for the foreseeable future including the amounts that we need to finance our Contracted Installing Backlog, we may require additional financing to fund additional growth. We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance, and the condition of the capital markets at the time we seek financing. We cannot assure you that additional financing will be available to us on favorable terms if required, or at all. If we raise additional funds through the issuance of equity or equity-linked securities, those securities may have rights, preferences, or privileges senior to the rights of our common stock, and our stockholders may experience dilution. If we raise additional funds through incurring indebtedness, then we may be subject to increased fixed payment obligations and could be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we may incur may result in terms that could be unfavorable to our equity investors.
A significant portion of our total outstanding shares is restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to decline significantly, even if our business is doing well.
The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, or the perception that these sales could occur. Following the completion of this offering, based on the number of our shares of our capital stock outstanding as of          , 2021, we will have a total of          shares of our common stock outstanding. Our directors and officers and substantially all of the holders of our equity securities have entered into market standoff agreements with us and have entered or will enter into lock-up agreements with the underwriters under which they have agreed or will agree, subject to specific exceptions described in the section titled “Underwriting,” not to sell any of our stock for 180 days following the date of this prospectus (or earlier pursuant to certain early lockup provisions). We refer to such period as the lock-up period. We and the underwriters may release certain stockholders from the market standoff agreements or lock-up agreements prior to the end of the lock-up period. As a result of these agreements and subject to the provisions of Rule 144 or Rule 701 under the Securities Act of 1933, as amended (Securities Act), the shares of our capital stock will be available for sale in the public market following the completion of this offering as follows:
beginning on the date of this prospectus, all shares of our common stock sold in this offering will be immediately available for sale in the public market; and
beginning 181 days after the date of this prospectus, subject to the terms of the lock-up and market standoff agreements described above, the remainder of the shares of our capital stock will be eligible for sale in the public market, subject in some cases to the volume and other restrictions of Rule 144.
Upon completion of this offering, stockholders owning an aggregate of up to          shares of our common stock will be entitled, under our investors’ rights agreement, to certain rights with respect to the registration of the offer and sale of those shares under the Securities Act. In addition, we intend to file a registration statement to register shares reserved for future issuance under our equity compensation plans. Upon effectiveness of that registration statement, subject to the satisfaction of applicable vesting restrictions and the expiration or waiver of the market standoff agreements and lock-up agreements referred to above, the shares issued upon exercise of outstanding stock options will be available for immediate resale in the public market.
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Sales of our common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the trading price of our common stock to fall and make it more difficult for you to sell shares of our common stock at a time and price that you deem appropriate.
Delaware law and provisions in our certificate of incorporation and bylaws might delay, discourage, or prevent a change in control of our company or changes in our management, thereby depressing the market price of our common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law (DGCL) may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws will contain provisions that may make the acquisition of our company more difficult or delay or prevent changes in control of our management. Among other things, these provisions will:
permit only the board of directors to establish the number of directors and fill vacancies on the board;
establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms;
provide that our directors may only be removed for cause;
permit stockholders to only take actions at a duly called annual or special meeting and not by written consent;
require that stockholders give advance notice to nominate directors or submit proposals for consideration at stockholder meetings;
eliminate cumulative voting in the election of directors;
prohibit stockholders from calling a special meeting of stockholders; and
require a super-majority vote of stockholders to amend some of the provisions described above.
These provisions, alone or together, could delay, discourage, or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
Our bylaws will designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, each of which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, stockholders or employees.
Our bylaws will provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, stockholders, officers or other employees to us or our stockholders, (3) any action arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws or (4) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another State court in Delaware or the federal district court for the District of Delaware), except for any claim as to which such court determines that there is an indispensable party not subject to the jurisdiction of such court (and the indispensable
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party does not consent to the personal jurisdiction of such court within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than such court or for which such court does not have subject matter jurisdiction. This provision would not apply to any actions arising under the Exchange Act and the rules and regulations thereunder.
Section 22 of the Securities Act establishes concurrent jurisdiction for federal and state courts over Securities Act claims. Accordingly, both state and federal courts have jurisdiction to hear such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our bylaws will also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. To the extent the exclusive forum provision restricts the courts in which claims arising under the Securities Act may be brought, there is uncertainty as to whether a court would enforce such a provision. We note that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.
Any person or entity purchasing or otherwise acquiring or holding or owning (or continuing to hold or own) any interest in any of our securities shall be deemed to have notice of and consented to the foregoing bylaw provisions. Although we believe these exclusive forum provisions benefit us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our current or former directors, officers, stockholders or other employees, which may discourage such lawsuits against us and our current and former directors, officers, stockholders and other employees. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions.
Further, the enforceability of similar exclusive forum provisions in other companies’ organizational documents have been challenged in legal proceedings, and it is possible that a court of law could rule that these types of provisions are inapplicable or unenforceable if they are challenged in a proceeding or otherwise. If a court were to find either exclusive forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur significant additional costs associated with resolving such action in other jurisdictions, all of which could harm our results of operations.
We do not intend to pay any cash distributions or dividends on our common stock in the foreseeable future.
We have never declared or paid any distributions or dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any cash distributions or dividends in the foreseeable future. Any future determination to declare cash distributions or dividends will be made at the discretion of our board of directors, subject to applicable laws and provisions of our debt instruments and organizational documents, after taking into account our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. As a result, capital appreciation in the price of our common stock, if any, may be your only source of gain on an investment in our common stock. See the section titled “Dividend Policy.”
General Risk Factors
We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including:
presentation of only two years of audited financial statements and related financial disclosure;
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exemption from the requirement to have our registered independent public accounting firm attest to management’s assessment of our internal control over financial reporting;
exemption from compliance with the requirement of the Public Company Accounting Oversight Board (PCAOB) regarding the communication of critical audit matters in the auditor’s report on the financial statements;
reduced disclosure about our executive compensation arrangements; and
exemption from the requirement to hold non-binding advisory votes on executive compensation or golden parachute arrangements.
We could be an emerging growth company for up to five years following the completion of this offering, although we expect to not be an emerging growth company sooner. Our status as an emerging growth company will end as soon as any of the following takes place:
the last day of the fiscal year in which we have at least $1.07 billion in annual revenue;
the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates;
the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or
the last day of the fiscal year ending after the fifth anniversary of the completion of this offering.
In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies unless it otherwise irrevocably elects not to avail itself of this exemption. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our consolidated financial statements may not be comparable to the financial statements of companies that comply with new or revised accounting pronouncements as of public company effective dates.
We cannot predict if investors will find our common stock less attractive if we choose to rely on any of the exemptions afforded emerging growth companies. If some investors find our common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile and may decline.
In addition, even if we no longer qualify as an “emerging growth company,” we may still take advantage of certain reduced reporting requirements as a “smaller reporting company.” For example, smaller reporting companies that do not qualify as accelerated filers are not required to provide a compensation discussion and analysis under Item 402(b) of Regulation S-K or auditor attestation of internal control over financial reporting. Until such time, however, we cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
If we fail to establish and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired, which may adversely affect investor confidence in our company and, as a result, the market price of our common stock.
As a public company, we will be required to comply with the requirements of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), including, among other things, that we establish and maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods
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specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers.
We are also continuing to improve our internal control over financial reporting. Pursuant to the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, beginning with our second annual report on Form 10-K after we become a public company, we will be required to make a formal assessment of the effectiveness of our internal control over financial reporting, and once we cease to be an emerging growth company, we will be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. We do not expect to have our independent registered public accounting firm attest to our internal control over financial reporting for so long as we are an emerging growth company. We are in the process of designing and implementing the internal control over financial reporting required to comply with this obligation, which has been time consuming, costly, and complicated. In this regard, we will need to continue to dedicate internal resources, continue to engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our internal control over financial reporting, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed time period or at all, that our internal control over financial reporting is effective as required by Section 404 of the Sarbanes-Oxley Act. Moreover, our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.
For instance, as of December 31, 2020, management has identified multiple significant deficiencies, which when aggregated, became material weaknesses in our internal controls over financial reporting. See the Risk Factor titled “—We have identified material weaknesses in our internal control over financial reporting which, if not corrected, could affect the reliability of our consolidated financial statements, and have other adverse consequences.” While we are working to address these identified material weaknesses, any failure to implement continued improvements and enhancements and maintain effective disclosure controls and procedures and internal control over financial reporting, could cause investors to lose confidence in the accuracy and completeness of our financial statements and reports, which would likely adversely affect the market price of our common stock. In addition, we could be subject to sanctions or investigations by the NYSE, the SEC and other regulatory authorities.
We rely on assumptions, estimates and unaudited financial information to calculate our key metrics and other figures presented herein, and real or perceived inaccuracies in such metrics could adversely affect our reputation and our business.
The metrics presented herein are calculated using internal company data that has not been independently verified. While these metrics and figures are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring these metrics and figures across our customer base. We cannot assure you that such metrics and other figures would not be materially different if such information was independently reviewed or audited. We regularly review and may adjust our processes for calculating our metrics and other figures to improve their accuracy, but these efforts may not prove successful and we may discover material inaccuracies. In addition, our methodology for calculating these metrics may differ from the methodology used by other companies to calculate similar metrics and figures. We may also discover unexpected errors in the data that we are using that resulted from technical or other errors. If we determine that any of our metrics or figures are not accurate, we may be required to revise or cease reporting such metrics or figures. Any real or perceived inaccuracies in our metrics and other figures could harm our reputation and adversely affect our business.
The requirements of being a public company may strain our resources and divert management’s attention, and the increases in legal, accounting, and compliance expenses that will result from being a public company may be greater than we anticipate.
As a result of this offering, we will become a public company, and as such, will incur significant legal, accounting, and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Exchange Act, and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Act, as well as the rules and regulations subsequently implemented by the SEC and
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the listing standards of the NYSE, including changes in corporate governance practices and the establishment and maintenance of effective disclosure and financial reporting controls. Compliance with these rules and regulations can be burdensome. Our management and other personnel will need to devote a substantial amount of time to these corporate governance and compliance initiatives. Moreover, these rules and regulations will increase our historical legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance than we obtained as a private company, and could also make it more difficult for us to attract and retain qualified members of our board of directors as compared to when we were a private company. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an “emerging growth company” or a “smaller reporting company.” We may need to hire additional accounting and financial staff, and engage outside consultants, all with appropriate public company experience and technical accounting knowledge and maintain an internal audit function, which will increase our operating expenses. Moreover, we could incur additional compensation costs in the event that we decide to pay cash compensation closer to that of other public companies, which would increase our operating expenses and could materially and adversely affect our profitability. In addition, as a public company, we may be subject to shareholder activism, which can lead to substantial costs, distract management, and impact the manner in which we operate our business in ways we cannot currently anticipate. As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time, resources, and costs necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations. These increased costs and demands upon management could adversely affect our business, results of operations and financial condition.
From time to time we may be involved in a number of legal proceedings and, while we cannot predict the outcomes of such proceedings and other contingencies with certainty, some of these outcomes could adversely affect our business and financial condition.
We may become involved in legal proceedings, government and agency investigations, and consumer, employment, tort, and other litigation. We cannot predict with certainty the outcomes of these legal proceedings. The outcome of some of these legal proceedings could require us to take, or refrain from taking, actions which could negatively affect our operations or could require us to pay substantial amounts of money adversely affecting our financial condition and results of operations. There can also be no assurance that we are adequately insured to protect against all claims and potential liabilities. Additionally, defending against lawsuits and legal proceedings may involve significant expense and could divert the attention of our key personnel.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include statements about:
the availability of capital to fund energy infrastructure installations and upgrades for customers of our EaaS Offerings;
the impact that existing regulations, and changes to those regulations, may have on the demand for our EaaS and DaaS Offerings;
our ability to maintain an adequate rate of revenue growth;
our ability to make required payments under our debt agreements and to comply with the various requirements of our indebtedness;
our expectations concerning relationships with third parties, including the attraction and retention of referral and channel partners;
the calculation of certain of our key financial metrics;
our ability to convert pipeline and Contracted Pipeline to binding site-specific agreements or binding NTPs under our portfolio framework agreements;
the effects of increased competition in our market and our ability to compete effectively;
the impact of the COVID-19 pandemic on our business, operations, and results of operations;
our anticipated capital expenditures and our estimates regarding our capital requirements;
the size of our addressable markets, market share, category positions and market trends;
our ability to identify, recruit and retain skilled personnel, including key members of senior management;
our ability to promote our brand and maintain our reputation;
our ability to maintain, protect, and enhance our intellectual property rights;
our ability to successfully defend litigation brought against us;
our ability to comply with existing, modified, or new laws and regulations applying to our business;
our ability to implement, maintain, and improve effective internal controls; and
our planned use of the net proceeds from this offering.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, operating results, financial condition, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus.
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Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. You should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.
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MARKET, INDUSTRY AND OTHER DATA
This prospectus contains estimates and information concerning our industry, including market size of the markets in which we participate, that are based on various third-party sources, industry publications and reports, as well as our own internal information. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates and information. We have not independently verified the accuracy or completeness of the data contained in these third-party sources, industry publications and reports. The markets in which we operate are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these sources, publications, and reports.
The sources of certain statistical data, estimates and forecasts contained in this prospectus include the following independent industry publications or reports:
Bloomberg Finance L.P., BloombergNEF 2H 2021 Energy Storage Market Outlook - Leap Ahead, July 28, 2021
Lazard, Lazard’s Levelized Cost of Energy Analysis - Version 14.0, 2020
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USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately $          million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds will be approximately $          million, after deducting underwriting discounts and commissions and offering expenses payable by us.
Each $1.00 increase or decrease in the assumed initial public offering price of $     per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds to us from this offering by $     million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the net proceeds to us from this offering by $          million, assuming that the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the initial public offering price or the number of shares by these amounts would have a material effect on our use of the proceeds from this offering, although it may accelerate the time when we need to seek additional capital.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, facilitate future access to the public equity markets by us, our employees, and our stockholders, and increase our visibility in the marketplace. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time.
Because we expect to use the net proceeds from this offering for working capital and other general corporate purposes, our management will have broad discretion over the use of the net proceeds from this offering. As of the date of this prospectus, we intend to invest the net proceeds that are not used as described above in capital-preservation investments, including short-term interest-bearing debt instruments or bank deposits.
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DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws and will depend upon, among other factors, our operating results, financial condition, contractual restrictions, and capital requirements. Our future ability to pay cash dividends on our capital stock is limited by the terms of our convertible notes due in 2024, our 2021 Convertible Notes and may be limited by any future debt instruments or preferred securities.
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CAPITALIZATION
The following table summarizes our cash, as well as our capitalization, as of September 30, 2021:
on an actual basis;
on a pro forma basis to give effect to (1) $69.0 million of net proceeds from our issuance of the 2021 Convertible Notes in November 2021 after deducting transaction expenses and the CarVal Repurchase, and (2) the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the completion of this offering; and
on a pro forma as adjusted basis to reflect (1) the pro forma adjustments set forth above and (2) the issuance and sale by us of          shares of common stock in this offering at the assumed initial public offering price of $     per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
As of September 30, 2021
ActualPro Forma
Pro Forma As Adjusted(1)
(in thousands, except share data)
Cash
$11,470 $$
Debt
$169,010 $$
Stockholders’ equity (deficit):
Common stock, $0.0001 par value per share, 30,000,000 shares authorized, 26,902,036 shares issued, 26,360,539 shares outstanding, actual;               shares authorized,                    issued and outstanding, pro forma, and               shares pro forma as adjusted
$
Additional paid-in capital
$27,669 
Accumulated deficit
$(105,083)
Total stockholders’ equity (deficit)
$(77,411)
Total capitalization
$91,599 
__________________
(1)Each $1.00 increase or decrease in the assumed initial public offering price of $     per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of our cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $     million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares offered by us would increase or decrease, as applicable, each of our cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $     million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.
The total number of shares of common stock that will be outstanding immediately after this offering is based on 26,360,539 shares of our common stock outstanding as of September 30, 2021, after giving effect to our repurchase of 608,926 shares of common stock in connection with the CarVal Repurchase, and excludes:
               shares of common stock issuable upon the exercise of outstanding options, with a weighted-average exercise price of $               per share;
               shares of common stock issuable upon the exercise of warrants to purchase shares of common stock with a weighted average exercise price of $     per share as of September 30, 2021;
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               shares of common stock reserved for future issuance under the 2015 Plan, which number of shares will be added to the shares of our common stock to be reserved under our 2021 Plan upon its effectiveness, at which time we will cease granting awards under our 2015 Plan;
               shares of common stock reserved for future issuance under the 2021 Plan, which will become effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part;
               shares of common stock reserved for future issuance under the ESPP, which will become effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part; and
               shares of common stock issuable upon conversion of our 2021 Convertible Notes, based on a conversion price of $     which is 1.15x the assumed initial public offering price of $     per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, if the principal and interest under the 2021 Convertible Notes converted into shares of our common stock as of the date of this prospectus. A $1.00 decrease in the initial public offering price, and corresponding decrease in the conversion price of the 2021 Convertible Notes, would result in us issuing           shares of our common stock and a $1.00 increase in the initial public offering price, and corresponding increase in the conversion price of the 2021 Convertible Notes, would result in us issuing           shares of our common stock, if the principal and interest under the 2021 Convertible Notes converted into shares of our common stock as of the date of this prospectus. See the section title “Prospectus Summary—Recent Transactions–2021 Convertible Note Transaction.”
The 2021 Plan and the ESPP each provide for annual automatic increases in the number of shares of our common stock reserved thereunder, and the 2021 Plan also provides for increases to the number of shares of our common stock that may be granted thereunder based on shares under the 2015 Plan that expire, are forfeited or are repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefit and Stock Plans.”
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DILUTION
If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.
Net tangible book value (deficit) per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock outstanding. Our historical net tangible book value (deficit) as of September 30, 2021 was ($82.7)  million, or ($3.14) per share. Our pro forma net tangible book value as of September 30, 2021 was $               million, or $               per share, based on the total number of shares of our common stock outstanding as of September 30, 2021, after giving effect to (1) $69.0 million of net proceeds from our issuance of the 2021 Convertible Notes in November 2021 after deducting transaction expenses and the CarVal Repurchase, and (2) the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the completion of this offering.
After giving effect to the sale by us of              shares of our common stock in this offering at the assumed initial public offering price of $          per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2021 would have been $          million, or $          per share. This represents an immediate increase in pro forma net tangible book value of $          per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $          per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:
Assumed initial public offering price per share
$
Historical net tangible book value (deficit) per share as of September 30, 2021
$(3.14)
Pro forma increase in net tangible book value per share as of September 30, 2021
Pro forma net tangible book value per share as of September 30, 2021
Increase in pro forma net tangible book value per share attributable to investors purchasing shares of common stock in this offering
Pro forma as adjusted net tangible book value per share immediately after this offering
Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering
$
Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share by approximately $        , and would increase or decrease, as applicable, dilution per share to new investors purchasing shares of common stock in this offering by $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $        per share and increase or decrease, as applicable, the dilution to new investors purchasing shares of common stock in this offering by $        per share, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise their option in full to purchase              additional shares of common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $        per share, the
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increase in the pro forma net tangible book value per share to existing stockholders would be $        per share and the pro forma as adjusted dilution to new investors purchasing common stock in this offering would be $        per share.
The following table presents, on a pro forma as adjusted basis to give effect to this offering, as of September 30, 2021, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us and the average price per share paid or to be paid to us at the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares PurchasedTotal ConsiderationAverage Price Per
Share
NumberPercentAmountPercent
Existing stockholders before this offering
%%$
Investors participating in this offering
Total
%%
Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and the total consideration paid by all stockholders by approximately $            million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares offered by us would increase or decrease, as applicable, total consideration paid by new investors and total consideration paid by all stockholders, by approximately $            million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
The table above assumes no exercise of the underwriters’ option to purchase            additional shares in this offering. If the underwriters’ option to purchase additional shares is exercised in full, the total number of shares of our common stock held by existing stockholders would be reduced to     % of the total number of shares of our common stock outstanding after this offering, and the total number of shares of common stock held by investors purchasing shares of common stock in the offering would be increased to     % of the total number of shares outstanding after this offering.
The total number of shares of common stock that will be outstanding immediately after this offering is based on 26,360,539 shares of our common stock outstanding as of September 30, 2021, after giving effect to our repurchase of 608,926 shares of common stock in connection with the CarVal Repurchase, and excludes:
               shares of common stock issuable upon the exercise of outstanding options, with a weighted-average exercise price of $               per share;
               shares of common stock issuable upon the exercise of warrants to purchase shares of common stock with a weighted average exercise price of $     per share as of September 30, 2021;
               shares of common stock reserved for future issuance under the 2015 Plan, which number of shares will be added to the shares of our common stock to be reserved under our 2021 Plan upon its effectiveness, at which time we will cease granting awards under our 2015 Plan;
               shares of common stock reserved for future issuance under the 2021 Plan, which will become effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part;
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               shares of common stock reserved for future issuance under the ESPP, which will become effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part; and
               shares of common stock issuable upon conversion of our 2021 Convertible Notes, based on a conversion price of $     which is 1.15x the assumed initial public offering price of $     per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, if the principal and interest under the 2021 Convertible Notes converted into shares of our common stock as of the date of this prospectus. A $1.00 decrease in the initial public offering price, and corresponding decrease in the conversion price of the 2021 Convertible Notes, would result in us issuing           shares of our common stock and a $1.00 increase in the initial public offering price, and corresponding increase in the conversion price of the 2021 Convertible Notes, would result in us issuing           shares of our common stock, if the principal and interest under the 2021 Convertible Notes converted into shares of our common stock as of the date of this prospectus. See the section title “Prospectus Summary—Recent Transactions–2021 Convertible Note Transaction.”
The 2021 Plan and the ESPP each provide for annual automatic increases in the number of shares of our common stock reserved thereunder, and the 2021 Plan also provides for increases to the number of shares of our common stock that may be granted thereunder based on shares under the 2015 Plan that expire, are forfeited or are repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefit and Stock Plans.”
To the extent that any outstanding options to purchase our common stock are exercised or new awards are granted under our equity compensation plans, or additional shares of our common stock are issued, there will be further dilution to investors participating in this offering.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Redaptive was founded in 2015 with the mission to change the way that commercial and industrial (C&I) enterprises identify and implement energy efficiency initiatives to achieve their sustainability goals. To fulfill our mission, we utilize our proprietary technology-enabled platform to identify, validate, and implement energy efficiency and sustainability-focused initiatives across a C&I customer’s entire real estate portfolio. Our ability to identify energy savings opportunities, fund and install solutions to reduce energy consumption at scale and provide ongoing, transparent reporting of the program’s success enables us to advance our customers progress towards achieving their sustainability goals. Through these installed measures we deliver a holistic Energy-as-a-Service (EaaS) Offerings for our customers, which includes: (1) providing turnkey deployment of energy efficiency and other sustainability-focused systems at their facilities, (2) providing ongoing monitoring, maintenance, and energy analytics, and (3) funding these initiatives with a flexible, innovative performance contract model that often eliminates the need for upfront capital.
We believe a balanced approach including energy efficiency is required to make meaningful progress towards true carbon reduction in C&I facilities. On average, 30% of the energy used in commercial buildings is wasted, according to the U.S. Environmental Protection Agency. Our EaaS Offerings leverage our hardware and recurring software services to continuously monitor energy consumption to identify ongoing inefficiencies within the customers’ facilities. Additionally, our offerings provide real emissions reductions and thereby reduce customer dependence on fossil fuel resources.
Today, we are a leading provider of energy efficiency and data solutions for C&I enterprises with projects throughout North America and in Europe. Our technology-enabled platform leverages our proprietary hardware and software to analyze energy spend and provide solutions that enable our customers to understand their energy usage, reduce their energy consumption, lower their operating and maintenance costs, and realize environmental and economic benefits. These solutions encompass a variety of energy-related services which include LED lighting replacements, heating, ventilation, and cooling (HVAC) upgrades and retrofits, internal equipment controls, onsite solar energy generation, and energy storage.
Our total revenue grew to $51.7 million for the nine months ended September 30, 2021 from $27.1 million for the nine months ended September 30, 2020. For the nine months ended September 30, 2021 and 2020, we incurred net losses of $28.6 million and $14.9 million, respectively. As of September 30, 2021, we had an accumulated deficit of $105.1 million.
Our total revenue grew from $41.3 million for the year ended December 31, 2019 to $42.3 million for the year ended December 31, 2020. For the years ended December 31, 2020 and 2019, we incurred net losses of $19.5 million and $20.1 million, respectively. As of December 31, 2020 and 2019, we had an accumulated deficit of $76.5 million and $57.0 million, respectively.
Key Factors and Trends Affecting Our Business
We believe that our performance and future success depends on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section titled “Risk Factors.”
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Availability of Capital to Fund Our Customer Projects
Our operations are heavily dependent on the availability of capital to fund energy infrastructure installations and upgrades for customers of our Energy Service Offerings. A critical factor of our business model is our ability to provide our customers with a “turnkey” energy efficiency solution with no upfront costs. Therefore, we are responsible for the capital requirements to design, develop, engineer, and install energy infrastructure upgrades for our customers. Therefore, we are heavily dependent on our existing capital providers and our ability to access additional capital in order to fund our customer projects. Historically, we have been able to secure non-recourse term debt financing for our projects that generally covers the cost of the equipment. We expect to add incremental capacity and to access new capital providers to grow our asset base. Our ability to increase our funding capacity by either adding additional capital providers or by increasing the commitments of our existing capital providers to fund projects on terms that are economically favorable to us is a critical factor in our ability to grow our business.
Investments in Our Growth
A key component of our growth strategy is to continue to invest in our service offerings and expand our relationships with both our customers and strategic partners. These investments include significantly increasing our installation capacity, hiring additional personnel, and increasing brand and sales and marketing expenses. We will continue to make significant investments to drive growth in the future. If these investments do not result in anticipated growth or if we are unable to effectively operate and maintain our customer projects, our business and results of operations will be harmed.
We also continue to invest in time and internal resources identifying and attracting new consultants, equipment, and installation vendors, and maintaining relationships with existing partners. Negotiating relationships with our referral partners, conducting due diligence before entering into such relationships, and training such partners and monitoring them for compliance with our standards requires significant time and resources. Even if we are able to establish and maintain these relationships, we may not be able to execute on our goal of leveraging these relationships to meaningfully expand our business, brand recognition, and customer base. This would limit our growth potential and our opportunities to generate significant additional revenue and cash flow.
Government Incentives and Regulation
Our cost of capital, the price we can charge our customers for energy savings, the cost of our systems and the demand for Energy Service Offerings is impacted by a number of federal, state, and local government incentives and regulations, including rebates, tax credits and other financial incentives. These programs have been challenged from time to time by utilities, governmental authorities, and others. A reduction in such incentives could adversely affect our results of operations, cost of capital, and growth prospects.
Although we are not regulated as a utility, federal, state, and local government statutes and regulations concerning electricity heavily influence the market for our service offerings. These statutes and regulations often relate to electricity pricing, net metering, incentives, taxation, competition with utilities, and the interconnection of customer-owned electricity generation. In the United States, governments continuously modify these statutes and regulations. Governments, often acting through state utility or public service commissions, change and adopt different rates for customers on a regular basis, and these changes can have a negative impact on our ability to deliver savings to customers.
Evolving Market Opportunity
The energy efficiency or generation market is new and still evolving. The future growth of this market and the success of our energy efficiency or generation service offerings depend on many factors beyond our control, including recognition and acceptance by key customer stakeholders and our ability to provide our Energy Service Offerings cost-effectively. Energy efficiency or generation service has yet to achieve broad market acceptance and depends on continued governmental incentives and favorable regulatory policies. If this support diminishes, our ability to obtain external financing on acceptable terms, or at all, could be materially and adversely affected. Growth in this market also depends in part on macroeconomic conditions and consumer preferences, each of which can change quickly. Declining macroeconomic conditions, including in the job markets and commercial real estate
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markets, could contribute to instability and uncertainty among key customer stakeholders and impact their financial wherewithal or interest in entering into long-term customer agreements with us, even if such agreements would generate immediate and long-term savings.
Impact of COVID-19
The rapid global spread of the COVID-19 virus since December 2019 is disrupting supply chains and affecting production and sales across a range of industries, and the Company expects its operations in all locations to be affected as the virus continues to proliferate. More specifically, we experienced construction delays, supply chain constraints, and delays in moving projects forward due to key decision makers being unavailable or needing to re-prioritize their focus on other projects and operations, thereby impacting our project pipeline. In response, we adjusted certain aspects of our operations to protect its employees and customers, while still meeting customers’ needs for energy efficiency and data solutions.
Management continues to evaluate the impact of the COVID-19 global pandemic on our business and industry. While governmental and non-governmental organizations are engaging in efforts to combat the spread and severity of the COVID-19 virus and related public health issues, the full extent to which the global pandemic of COVID-19 could impact our business, results of operations, and financial condition is still unknown and will depend on future developments, including new variants of the virus and large increases in cases in the areas where we operate, which are highly uncertain and cannot be predicted. Such effects may be material. Our financial statements reflect judgments and estimates that could change in the future as a result of the COVID-19 global pandemic.
Key Operating Metrics
Contracted Installing Backlog and Fully Installed Backlog
We enter into Energy-as-a-Service agreements with our customers which are expected to generate recurring payments over a five-to-15-year term. We refer to the estimated nominal contracted payments remaining under these agreements as Total Backlog. We track Total Backlog at two stages: Contracted Installing Backlog and Fully Installed Backlog, and report estimated nominal contracted payments remaining under both stages.
Contracted Installing Backlog: Represents estimated nominal contracted payments remaining from projects which are in the process of installation where a customer has signed a site-specific NTP under a binding contract.
Our projects become fully operational once a site-specific NTP project is fully installed, commissioned, and accepted by a customer. The date at which a project becomes fully operational is the commercial operation date (COD) for that project.
Fully Installed Backlog: Represents estimated nominal contracted payments remaining from projects that have achieved COD and are fully operational.
Total Backlog is a forward-looking number, and we use judgment in developing the assumptions used for the calculation of Total Backlog. The primary assumption in the calculation is the annual energy savings performance of our EaaS Offerings, estimated based on the ECM, which represents the volume of energy savings (in kWh) and the associated avoided cost in $/kWh.
Due to the long-term nature of our agreements, these key operating metrics are useful as they allow us and our investors to understand the recurring revenue generated by our EaaS agreements and the growth of our Company. The accounting policy and timing of revenue recognition for our Energy-as-a-Service revenue is described within Note 3, Leases, of the notes to our consolidated financial statements. Our key operating metrics may not be comparable to similarly titled measures used by other companies.
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Backlog consists of the following:
As of
 September 30,
As of
 December 31,
2021202020202019
(in thousands)(in thousands)
Fully Installed Backlog$136,274 $146,596 $154,318 $120,631 
Contracted Installing Backlog54,720 47,002 47,633 27,286 
Total Backlog$190,994 $193,598 $201,951 $147,917 
Backlog consists of the following weighted average remaining terms:
As of
September 30,
As of
 December 31,
2021202020202019
(in years)(in years)
Fully Installed Backlog5.65.55.65.4
Contracted Installing Backlog11.411.510.86.8
Total Backlog7.27.06.85.6

Annual Recurring Revenue (“ARR”)
ARR represents the annualized value of recurring revenues from (1) our EaaS Offerings for projects where a customer has signed a site-specific NTP under a binding contract, and (2) our DaaS related services earned in the specified period. We use ARR to depict the general visibility and trajectory of our EaaS Offerings and DaaS businesses. ARR is equal to backlog divided by weighted average remaining life. As of September 30, 2021 and September 30, 2020, ARR was approximately $26.4 million and $27.7 million, respectively. As of December 31, 2020 and December 31, 2019, ARR was approximately $29.5 million and $26.2 million, respectively.
Non-GAAP Financial Measure
Adjusted EBITDA
We define Adjusted EBITDA as net income or loss before net interest expense, income tax expense, and depreciation and amortization, excluding the effect of certain items we do not consider to be indicative of our ongoing operating performance such as, but not limited to costs of our initial public offering, other debt and equity transaction expenses, restructuring cost, losses on extinguishment of debt, certain employee-related benefits and expenses due to accounting for the Paycheck Protection Program Loan offset by certain severance and bonus expenses, certain litigation expenses, and other non-cash items such as stock-based compensation expense and change in fair value of derivatives and warrants.
We believe Adjusted EBITDA is useful to management, investors and analysts in providing a measure of core financial performance adjusted to allow for comparisons of results of operations across reporting periods on a consistent basis. These adjustments are intended to exclude items that are not indicative of the ongoing operating performance of the business.
The following tables provide our Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.
Years Ended
 December 31,
20202019
(in thousands)
Net loss$(19,469)$(20,061)
Adjusted to exclude the following:
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Interest expense8,864 6,294 
Income tax (benefit) / expense(596)1,648 
Depreciation and amortization24,246 15,836 
Stock-based compensation209 192 
Warrant expense149 134 
Loss on extinguishment of debt1,696 — 
Transaction and litigation expense257 155 
Employee-related (benefit) / expense(1,216)— 
Adjusted EBITDA$14,140 $4,198 

Nine Months Ended
 September 30,
20212020
(in thousands)
Net loss$(28,607)$(14,870)
Adjusted to exclude the following:
Interest expense12,191 5,599 
Income tax (benefit) / expense(401)(191)
Depreciation and amortization29,840 14,863 
Stock-based compensation498 153 
Warrant expense161 87 
Change in fair value of conversion shares and embedded derivative8,435 — 
Loss on extinguishment of debt— 1,696 
Transaction and litigation expense— 207 
Employee-related (benefit) / expense— (1,474)
Adjusted EBITDA$22,117 $6,070 
Components of Our Results of Operations
Revenue
Energy-as-a-Service Revenue
We generate the majority of our revenue by charging our customers for measured savings in energy costs generated through our EaaS Offering. More specifically, we enter into service contracts with customers whereby we design, engineer, construct and install energy efficiency equipment, energy consumption measurement devices and software at customer facilities in order to achieve contractually agreed-upon energy reduction performance targets. We also provide onsite maintenance services to these customers. We generally retain ownership of the installed energy efficiency systems, and pursuant to the terms of our contracts, customer payments are directly linked to realized, measured energy savings that result from the customer’s use of the integrated energy efficiency system. EaaS revenue is recognized each month over the contract term when agreed-upon energy savings are realized by the customer.
Under our EaaS agreements, the customer may have the option to pay off certain sites within the contract early for a negotiated amount based on the present value of the total remaining contract value. When an EaaS site is paid off early by the customer, we recognize the full site payoff amount as revenue at the time of payoff, resulting in an acceleration of revenue recognized.
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Project Revenue
We generate project revenue from capital equipment installation projects through the facilitation of lighting and HVAC equipment sales. Under our capital equipment installation projects, we purchase required equipment from a third-party manufacturer, which is shipped directly to our customer, and then install such equipment at customer sites. The design, procurement, and installation of such energy efficiency equipment promises the delivery of a customized, integrated solution for our customer’s energy savings needs, and upon installation, the customer obtains title to the system immediately. At the time the customer approves installation, the contract price is fixed based on the equipment that will be installed at the customer site. We generally bill our customers upon execution of a letter of acceptance with the customer, which represents the commercial operation date of the installed system; however, under certain contracts, we may structure customer payments based on project milestones. Revenue for capital equipment installation projects is recognized over the project installation period. This recognition method approximated the cost-to-cost input method, which we determined was the best available measure of progress toward satisfying our performance obligations.
Other Revenue
We generate other revenue through our DaaS offering, as well as project financing arrangements. Under our DaaS arrangements, we install proprietary company-owned submeters and provide data analytics through a cloud-based module that enables active equipment management, facilitates preventative maintenance, and provides real-time visibility into energy consumption and related energy savings. Our customers typically pay monthly service fees for utilization of our proprietary submeter in addition to access to energy data from our systems plus ongoing analytics. Revenue is recognized on a straight-line basis at the end of each month for the service fees set forth in the contract. DaaS contract terms vary from month-to-month to three- and five-year commitments.
Under our project financing arrangements, we provide strategic advice and assist in the administration of funding arrangements from third-party financing institutions with our customers. We are compensated for services in the form of financing and/or success fees based upon a fixed percentage of the project cost. Upon funding the project, we are entitled to receive the financing and/or success fee, at which point revenue is recognized.
Cost of Revenue
Cost of Energy-as-a-Service Revenue
Cost of Energy-as-a-Service revenue is primarily comprised of depreciation expense related to our energy efficiency systems. Depreciation of our energy efficiency systems is calculated using the straight-line method over the corresponding EaaS agreement terms, which represent the estimated useful lives of our energy efficiency systems. In addition, cost of Energy-as-a-Service revenue includes the amortization of deferred project costs, which are expensed as the associated revenue for the corresponding EaaS agreement is recognized.
To the extent that a customer pays off an EaaS site early, we depreciate the remaining carrying value of the energy efficiency system underlying the EaaS site at the time of the early payoff, resulting in an acceleration of depreciation.
Cost of Project Revenue
Cost of project revenue directly relates to our capital equipment installation projects and is comprised of equipment purchased from vendors and third-party professional service costs to design, implement, and install such equipment. These costs are recognized over the installation period as incurred.
Cost of Other Revenue
Cost of other revenue includes submeter depreciation and related installation costs and project financing partner consulting fees. Submeter depreciation and installation fees are recognized over the respective DaaS contract term as the associated revenue is recognized. Project financing partner consulting fees are expensed concurrently when the revenue is recognized at the time of funding
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Gross Margin
Our gross profit may fluctuate significantly from quarter to quarter. Gross profit, calculated as revenue less cost of revenue, has been, and will continue to be, affected by various factors, including fluctuations in the amount and mix of revenue.
We expect to increase our gross margin in absolute dollars and as a percentage of revenue through economies of scale.
Operating Expenses
General and Administrative
General and administrative expense primarily consists of personnel costs, including salary, benefits, and other personnel-related expenses, for personnel that support our general operations, such as executive management, information technology, finance, accounting, legal, and human resources personnel. In addition, general and administrative expense includes certain costs for supplies, professional service fees and rent expense. Following this initial public offering, we expect our general and administrative expenses to increase due to the additional costs associated with scaling our business operations as well as being a public company. Additional general and administrative costs are expected to include legal, accounting, insurance, exchange listing and SEC compliance, investor relations, and other expenses. As a result, we will require additional funding for expenses related to these activities. See the section titled “— Liquidity and Capital Resources” below for further information.
Sales and Marketing
Sales and marketing expense primarily consists of personnel costs, including salaries, benefits, travel, and lodging and other personnel-related expenses, for our sales and marketing department. Following this initial public offering, we expect to increase our sales and marketing expense as we execute on our growth strategy, which includes, adding sales and marketing personnel and expanding our marketing efforts to increase sales of our service offerings to new customers and further developing relationships with our existing customers and strategic partners.
Research and Development
Research and development expense primarily consists of personnel costs, including salaries, benefits, and other personnel-related expenses, for our engineers and specialists in the design and development of our software, hardware, and technologies. Research and development expense also includes related consulting service fees. Following this initial public offering, we expect research and development expenses to increase in future periods as we continue to invest in our service offerings and ongoing development activities related to our energy submetering and data platforms. These expenses may vary from period to period as a percentage of revenue, depending upon when we choose to make more significant investments.
Interest Expense
Interest expense consists primarily of interest incurred on our convertible notes, senior notes, promissory notes, secured term loan facility, credit agreement, and perpetual convertible notes and amortization of debt issuance costs and discounts related to those outstanding debt facilities.
Change in Fair Value of Conversion Shares and Embedded Derivative
In May 2021, we executed an Amendment and Conversion Agreement with the holders of the convertible notes due 2024. Through the execution of the Amendment and Conversion Agreement, we, along with certain investors, early converted $25.0 million of the convertible notes into 608,926 shares of our common stock (Conversion Shares). In September 2021, we further amended the Amendment and Conversion Agreement through the execution of the Second Amendment and Conversion Agreement. We account for the Conversion Shares as a liability that embodies a conditional obligation to issue a variable number of shares based on a predominately fixed monetary amount. We are required to remeasure the Conversion Shares at fair value at each reporting date, with the change in fair value presented within Change in fair value of conversion shares and embedded derivative.
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The outstanding balance adjustment feature embedded in our senior notes due 2024 represents an embedded derivative that we are required to separately account for at fair value and subsequently remeasure to fair value at each reporting date. The change in fair value of the embedded derivative is also presented within Change in fair value of conversion shares and embedded derivative.
Loss on Extinguishment of Debt
There was no extinguishments of debt during the nine months ended September 30, 2021. Loss on extinguishment of debt for the nine months ended September 30, 2020 relates to the aggregate net loss recorded for unamortized debt issuance costs and other costs incurred in connection with the extinguishment of our promissory notes issued in 2019.
Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020
The following table sets forth our results of operations for the nine months ended September 30, 2021 and 2020:
Nine Months Ended
September 30,
20212020$ Change% Change
(In thousands, except percentage)
Energy-as-a-Service revenue$46,656 $22,702 $23,954 106 %
Project revenue4,570 3,468 1,102 32 %
Other revenue433 910 (477)(52)%
Total revenue51,659 27,080 24,579 91 %
Cost of Energy-as-a-Service revenue30,609 16,351 14,258 87 %
Cost of project revenue4,050 3,260 790 24 %
Cost of other revenue254 188 66 35 %
Total cost of revenue34,913 19,799 15,114 76 %
Gross margin16,746 7,281 9,465 130 %
Operating expenses
General and administrative12,995 7,048 5,947 84 %
Sales and marketing8,871 5,535 3,336 60 %
Research and development3,262 2,464 798 32 %
Total operating expenses25,128 15,047 10,081 67 %
Loss from operations(8,382)(7,766)(616)%
Other expense
Interest expense12,191 5,599 6,592 118 %
Change in fair value of conversion shares and embedded derivative8,435 — 8,435 nm
Loss on extinguishment of debt— 1,696 (1,696)(100)%
Total other expense20,626 7,295 13,331 183 %
Loss before income taxes(29,008)(15,061)(13,947)93 %
Income tax benefit (expense)401 191 210 110 %
Net loss$(28,607)$(14,870)$(13,737)92 %
__________________
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Revenue
Revenue increased by $24.6 million, or 91%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. Revenue is comprised of the following components:
Nine Months Ended
September 30,
20212020$ Change% Change
(In thousands, except percentage)
Energy-as-a-Service revenue$46,656 $22,702 $23,954 106 %
Project revenue4,570 3,468 1,102 32 %
Other revenue433 910 (477)(52)%
Total revenue51,659 27,080 24,579 91 %
Energy-as-a-Service revenue increased by $24.0 million, or 106%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. This increase was largely driven by an increase in EaaS sites that were paid off early by customers for a negotiated amount based on the present value of the total remaining contract value, resulting in a net increase in revenue of $19.4 million for the nine months ended September 30, 2021. Further contributing to the increase in Energy-as-a-Service revenue during the nine months ended September 30, 2021 was an increase in EaaS agreement sales volume through further expansion of our services with existing customers and engagement of new customers, resulting in a net increase in revenue of $3.9 million during that period. In addition, there was a net increase of $0.6 million in maintenance savings for the nine months ended September 30, 2021.
Project revenue increased by $1.1 million, or 32%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. This increase was directly attributable to a $4.5 million net increase in project revenue from new and existing customers. Partially offsetting this increase was a decrease in project revenue of $3.4 million driven by the completion of a large capital equipment installation project during the third quarter of 2020.
Other revenue decreased by $0.5 million, or 52%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. This decrease in other revenue was directly attributable to a decrease in project financing revenue of $0.8 million during the nine months ended September 30, 2021. Partially offsetting this decrease was a $0.4 million increase in revenue from our DaaS offering.
Cost of Revenue
Cost of revenue increased by $15.1 million, or 76%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. Cost of revenue is comprised of the following components:
Nine Months Ended
September 30,
20212020$ Change% Change
(In thousands, except percentage)
Cost of Energy-as-a-Service revenue30,609 16,351 14,258 87 %
Cost of project revenue4,050 3,260 790 24 %
Cost of other revenue254 188 66 35 %
Total cost of revenue34,913 19,799 15,114 76 %
Cost of Energy-as-a-Service revenue increased by $14.3 million, or 87%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. This increase was primarily driven by a $14.3 million increase in depreciation associated with our energy efficiency systems, which is in line with the increase in Energy-as-a-Service revenue. Of the increase in depreciation for our energy efficiency systems, $12.6 million was
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attributable to a net increase in depreciation related to EaaS sites that were paid off early by customers. At the time that the customer pays off the EaaS site early, we depreciated the remaining carrying value of the underlying energy efficiency systems. In addition, there was a $0.2 million increase in the amortization of deferred project costs, specifically deferred commissions and deferred insurance. Partially offsetting the increase in Cost of Energy-as-a-Service revenue was a of $0.2 million decrease in deferred maintenance costs.
Cost of project revenue increased by $0.8 million, or 24%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The overall increase in cost of project revenue was driven by the increase in project revenue described above. The 24% increase in cost of project revenue, relative to the 32% increase in project revenue, was due to our projects achieving higher margins during the nine months ended September, 30, 2021 as compared to the nine months ended September 30, 2020.
Cost of other revenue increased by $0.1 million, or 35%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The increase in cost of other revenue was directly attributable to a $0.3 million increase in DaaS related costs that is in line with the corresponding increase in revenue from our DaaS offering. This increase is partially offset by a $0.2 million decrease in project financing partner consulting fees.
Operating Expenses
General and Administrative
General and administrative expenses increased by $5.9 million, or 84%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The increase in general and administrative expenses was driven by (i) an increase of $2.3 million in professional services fees, (ii) a net increase of $3.4 million in salaries and related personnel costs and (iii) an increase of $0.4 million in information technology and other office-related expenses during the nine months ended September 30, 2021. The increase in professional services fees was primarily attributable to an increase in legal, accounting and other professional services to augment the capacity of our administrative departments as we continue to build out these departments due to the growth in our operations and to support our broader initial public offering process. The net increase in salaries and related personnel costs was primarily attributable to expanding our personnel headcount in corporate, legal, accounting and other administrative functions to support the growth in our operations and in preparation for operating as a public company. The net increase in salaries and personnel costs also reflects the impact of $0.4 million in proceeds from our Paycheck Protection Program loan utilized for qualifying personnel expenses during the nine months ended September 30, 2020, which was accounted for as a direct offset to those qualifying expenses when incurred during that period. Partially offsetting the increase in general and administrative expenses was a $0.2 million decrease in lease expense for our office facilities.
Sales and Marketing
Sales and marketing expenses increased by $3.3 million, or 60%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The net increase in sales and marketing expenses was primarily driven by a $3.2 million net increase in salaries and related personnel costs, which is the direct result of an increased headcount in our sales and marketing departments to support our strategic growth initiatives and to expand our solutions to new and existing customers in order to continue to increase sales volumes. The net increase in salaries and personnel costs also reflects the impact of $0.8 million in proceeds from our Paycheck Protection Program loan utilized for qualifying personnel expenses during the nine months ended September 30, 2020, which was accounted for as a direct offset to those qualifying expenses when incurred during that period.
Research and Development
Research and development expenses increased by $0.8 million, or 32%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. This increase was partially attributable to a $0.4 million increase in information technology expenses and a $0.3 million increase in engineering supplies expense. In addition, actual salaries and related personnel costs incurred for the nine months ended September 30, 2021 remained materially consistent with that of the nine months ended September 30, 2020. However, for the nine
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months ended September 30, 2020, $0.4 million in proceeds from the Company’s Paycheck Protection Program loan were utilized for qualifying personnel expenses and were accounted for as a direct offset to those qualifying expenses when incurred, resulting in a $0.4 million increase in salaries and personnel costs presented for the nine months ended September 30, 2021. Partially offsetting these increases was a $0.2 million decrease in professional services fees.
Interest Expense
Interest expense increased by $6.6 million, or 118%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. This increase was primarily comprised of the following: (i) a $3.7 million increase in interest expense and a $0.4 million increase in amortization of discounts and issuance costs related to the issuance of our convertible notes due 2024 that were modified in May 2021, (ii) a $2.9 million increase in interest expense and a $0.5 million increase in amortization of issuance costs related to the issuance of our senior notes during 2021, (iii) a $1.1 million decrease in interest expense related to our promissory notes which were extinguished in September 2020, (iv) a $0.2 million decrease in interest expense related to outstanding borrowings under our secured term loan credit facility, (v) a $0.1 million increase in interest expense related to the issuance of our perpetual convertible notes in March 2020, and (vi) a $0.1 million increase in interest expense and a $0.2 million increase in amortization of issuance costs related to the issuance of the credit agreement in June 2021.
See the section titled—Liquidity and Capital Resources—Debt” below for further information on our debt facilities.
Change in Fair Value of Conversion Shares and Embedded Derivative
For the nine months ended September 30, 2021, the change in fair value of Conversion Shares and embedded derivative was $8.4 million. We account for the Conversion Shares as a liability that embodies a conditional obligation to issue a variable number of shares based on a predominately fixed monetary amount. We initially recognized the Conversion Shares at fair value and subsequently remeasured the Conversion Shares to fair value at September 30, 2021, which resulted in a $2.8 million loss for the nine months ended September 30, 2021. The outstanding balance adjustment feature embedded in the senior notes due 2024 is a derivative that was initially recognized at fair value and subsequently remeasured to fair value at September 30, 2021, which resulted in a $5.6 million loss for the nine months ended September 30, 2021.
For the nine months ended September 30, 2020, there was no change in fair value of conversion shares and embedded derivative, as the Conversion Shares and embedded derivative were not in existence during that period.
Loss on Extinguishment of Debt
For the nine months ended September 30, 2021, there was no loss on extinguishment of debt.
For the nine months ended September 30, 2020, loss on extinguishment of debt was $1.7 million. The loss on extinguishment of debt during the nine months ended September 30, 2020 was the direct result of the extinguishment of our promissory notes utilizing proceeds from the issuance of the convertible notes due 2024.
Income Tax Provision
During the nine months ended September 30, 2021, we recognized a federal deferred income tax benefit of $0.4 million and less than $0.1 million of state income tax expense. The federal deferred income tax benefit was recognized for an amount of previously recorded deferred tax expense that was estimated to be recoverable during the period.
During the nine months ended September 30, 2020, we recognized a federal deferred income tax benefit of $0.2 million and less than $0.1 million in state income taxes. The federal deferred income tax benefit was recognized for an amount of previously recorded deferred tax expense that was estimated to be recoverable during the period..
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Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019
The following table sets forth our results of operations for the years ended December 31, 2020 and 2019:
Years Ended
December 31,
20202019$ Change% Change
(In thousands, except percentage)
Energy-as-a-Service revenue$36,275 $23,959 $12,316 51 %
Project revenue4,656 16,111 (11,455)(71)%
Other revenue1,376 1,254 122 10 %
Total revenue42,307 41,324 983 %
Cost of Energy-as-a-Service revenue26,288 17,095 9,193 54 %
Cost of project revenue4,369 14,998 (10,629)(71)%
Cost of other revenue446 437 4,856 %
Total cost of revenue31,103 32,102 (999)(3)%
Gross margin11,204 9,222 1,982 21 %
Operating expenses
General and administrative9,416 10,177 (761)(7)%
Sales and marketing7,941 5,034 2,907 58 %
Research and development3,352 6,130 (2,778)(45)%
Total operating expenses20,709 21,341 (632)(3)%
Loss from operations(9,505)(12,119)2,614 (22)%
Other expense
Interest expense8,864 6,294 2,570 41 %
Loss on extinguishment of debt1,696 — 1,696 nm
Total other expense10,560 6,294 4,266 68 %
Loss before income taxes(20,065)(18,413)(1,652)%
Income tax benefit (expense)596 (1,648)2,244 (136)%
Net loss$(19,469)$(20,061)$592 (3)%
__________________
nm - not meaningful
Revenue
Revenue increased by $1.0 million, or 2%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. Revenue is comprised of the following components:
Year Ended
December 31,
20202019$ Change% Change
(In thousands, except percentage)
Energy-as-a-Service revenue$36,275 $23,959 $12,316 51 %
Project revenue4,656 16,111 (11,455)(71)%
Other revenue1,376 1,254 122 10 %
Total revenue$42,307 $41,324 $983 %
Energy-as-a-Service revenue increased by $12.3 million, or 51%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase was primarily driven by a net increase of $7.9 million
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in EaaS agreement sales volume through further expansion of our services with existing customers and engagement of new customers. Further contributing to the net increase in Energy-as-a-Service revenue was a net increase in revenue of $4.4 million related to EaaS sites that were paid off early by customers, resulting in the recognition of revenue for a negotiated amount that is based on the present value of the total remaining EaaS contract value at the time the EaaS site is paid off early.
Project revenue decreased by $11.5 million, or 71%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. Substantially all of this decrease was driven by the completion of significant milestones for a large capital equipment installation project during fiscal year 2019 that continued into fiscal year 2020.
Other revenue increased by $0.1 million, or 10%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase was driven by a $0.1 million increase in project financing revenue.
Cost of Revenue
Cost of revenue decreased by $1.0 million, or 3%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. Cost of revenue is comprised of the following components:
Year Ended
December 31,
20202019$ Change% Change
(In thousands, except percentage)
Cost of Energy-as-a-Service revenue$26,288 $17,095 $9,193 54 %
Cost of project revenue4,369 14,998 (10,629)(71)%
Cost of other revenue446 437 4,856 %
Total cost of revenue$31,103 $32,102 $(999)(3)%
Cost of Energy-as-a-Service revenue increased by $9.2 million, or 54%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase was primarily driven by an increase in depreciation and maintenance costs associated with our energy efficiency systems, which is directly in line with the increase in Energy-as-a-Service revenue. Of the increase in depreciation for our energy efficiency systems, $3.2 million was attributable to a net increase in depreciation related to EaaS sites that were paid off early by customers. At the time that the EaaS site is paid off early by the customer, we depreciated the remaining carrying value of the underlying energy efficiency systems.
Cost of project revenue decreased by $10.6 million, or 71%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The decrease in cost of project revenue was driven by the completion of significant milestones for a large capital equipment installation project in fiscal year 2019. This project required significant equipment purchases and installation efforts during fiscal year 2019.
Cost of other revenue increased by $0.4 million, or 4,856%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The increase in cost of other revenue was directly attributable to an increase in project financing partner consulting fees.
Operating Expenses
General and Administrative
General and administrative expenses decreased by $0.8 million, or 7%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The decrease in general and administrative expenses was primarily attributable to a net decrease of $1.3 million in salaries and related personnel costs during the year ended December 31, 2020. The net decrease in salaries and personnel costs directly related to the transition of certain employee roles from vendor management into account and sales management functions at the beginning of fiscal year 2020, as well as reductions in force of certain non-revenue generating roles and reduced work week schedules
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for certain employees in response to the COVID-19 pandemic. The net decrease in salaries and personnel costs was also inclusive of the impact of $0.4 million in proceeds from our Paycheck Protection Program loan utilized for qualifying personnel expenses, which was accounted for as a direct offset to those qualifying expenses when incurred. Partially offsetting the decrease in general and administrative expenses was a $0.4 million increase in operating lease expense related to our new office facility leases executed in 2020.
Sales and Marketing
Sales and marketing expenses increased by $2.9 million, or 58%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The net increase in sales and marketing expenses was primarily driven by a $3.0 million increase in salaries and related personnel costs during the year ended December 31, 2020. The net increase in salaries and personnel costs is directly related to the transition of certain project management employees into sales and marketing functions, as well as hiring new employees with a sales and marketing focus during fiscal year 2020. The $3.0 million increase in salaries and personnel costs was also inclusive of the impact of $0.8 million in proceeds from our Paycheck Protection Program loan utilized for qualifying personnel expenses, which was accounted for as a direct offset to those qualifying expenses when incurred in 2020. Partially offsetting the increase in sales and marketing expenses was a $0.2 million decrease in travel and entertainment related expenses due to COVID-19 restrictions.
Research and Development
Research and development expenses decreased by $2.8 million, or 45%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This decrease was partially attributable to a $1.1 million net decrease in salaries and related personnel costs. The net decrease in salaries and personnel costs was driven by the transition of certain employee roles on our DaaS team into sales, marketing, and administrative functions to support the continued advancement of our DaaS service offering. Further contributing to the net decrease in salaries and personnel costs were reductions in headcount and reduced work week schedules for certain employees in response to the COVID-19 pandemic. The net decrease in salaries and personnel costs was also inclusive of the impact of $0.4 million in proceeds from the Company’s Paycheck Protection Program loan utilized for qualifying personnel expenses, which was accounted for as a direct offset to those qualifying expenses when incurred. In addition, there was a $0.8 million decrease in engineering supplies expense, a $0.4 million decrease in information technology expenses and a $0.3 million decrease in depreciation and amortization expense related to other noncurrent assets during fiscal year 2020.
Interest Expense
Interest expense increased by $2.6 million, or 41%, for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase in interest expense was primarily comprised of the following: (1) a $1.2 million increase in interest expense related to the issuance of our convertible notes from September 2020 through December 2020, (2) a $0.6 million increase in interest expense related to an increase in the outstanding borrowings under our promissory notes, (3) a $0.4 million increase in interest expense related to the issuance of our perpetual convertible notes in March 2020, and (4) a $0.2 million increase in interest expense related to outstanding borrowings under our secured term loan credit facility.
See the section titled—Liquidity and Capital Resources—Debt” below for further information on our debt facilities.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $1.7 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019 where no loss on extinguishment of debt was recorded. The loss on extinguishment of debt in 2020 was the direct result of the extinguishment of our promissory notes utilizing proceeds from the issuance of convertible notes in September 2020 through December 2020.
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Income Tax Provision
During the year ended December 31, 2020, we recognized a federal deferred income tax benefit of $0.6 million. This benefit was recognized for an amount of previously recorded deferred tax expense that was estimated to be recoverable during the period.
During the year ended December 31, 2019, we recorded approximately $0.1 million in state income taxes and $1.6 million of federal deferred income tax expense. The federal deferred income tax expense related to a portion of future taxable amounts that we did not believe future benefits would offset.
Liquidity and Capital Resources
Sources of Liquidity
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, contractual obligations, and other commitments. We assess liquidity in terms of our cash flows from operations and their sufficiency to fund our operating and investing activities. To meet our payment service obligations, we must have sufficient highly liquid assets available and be able to move funds on a timely basis.
As of September 30, 2021, our principal sources of liquidity was our unrestricted cash totaling $11.5 million. We had an accumulated deficit of $105.1 million and net current liabilities of $12.8 million, with $21.5 million of debt financing coming due within the next twelve months which includes $6.5 million of our convertible notes payable on demand as of December 31, 2020. During the nine months ended September 30, 2021, we incurred a net loss of $28.6 million and had cash flows from operating activities of $19.7 million. Based on our current plans and expectations, we estimate that our cash needs will be met for at least the next twelve months through the following liquidity sources: (i) unrestricted cash on hand of approximately $11.5 million as of September 30, 2021, which includes credit-facility draw-downs completed in 2021, (ii) cash generated from sales, (iii) access to additional borrowings under the various debt instruments in-place, which total approximately $90 million as of September 30, 2021, and (iv) net proceeds of $69.0 million from the issuance of convertible promissory notes on November 12, 2021.
Our business is subject to risks, expenses, and uncertainties frequently encountered by companies in the early stages of commercial operations. Management continues to focus its efforts on increasing revenue and managing expenditures, while maintaining growth. To date, we have financed our operations primarily through equity financings, convertible notes, and other credit facilities. The attainment of profitable operations is dependent upon future events, including obtaining adequate financing to complete our development activities, maintaining adequate vendor relationships, building our customer base, successfully executing our business and marketing strategies, and hiring and retaining appropriate personnel. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require us to modify, delay or abandon some of our planned future expansion, growth, or development, or to otherwise enact operating cost reductions available to management. This could have a material adverse effect on our business, operating results, financial condition, and ability to achieve our intended business objectives.
In addition, our ability to obtain financing for our energy efficiency assets, in part, depends on the creditworthiness of our customers. If our customers’ credit ratings fall, it may make it difficult for us to maintain financing for their use of our energy efficiency assets. Our recent experience has been that financing parties have capital to deploy and are interested in financing and, at present, cash flow and results of operations, including revenue, have not been materially impacted by our inability to obtain financing for customer installations.
Capital Expenditures Commitments
For the twelve months ended September 30, 2022, we are forecasting approximately $77 million in capital expenditures primarily in support of our growth strategy. A key component of our growth strategy is to continue to invest in our Energy Efficiency Offerings, and the energy efficiency or generation systems underlying those offerings require significant capital expenditures. The capital expenditures will be funded via accessing availability
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under various in-place debt instruments and net proceeds from the issuance of convertible promissory notes in November 2021. We have sufficient funding available to complete the forecasted capital expenditures and view them as an important part of our go-forward business plan.
Debt
2021 Convertible Notes Transaction
On November 12, 2021, we entered into, issued, and sold convertible promissory notes to certain investors for the principal amount of $100 million (the 2021 Convertible Notes). The 2021 Convertible Notes have an annual interest rate of 6.25% until November 12, 2022 or following the consummation of this proposed offering. If we have not completed a qualified public company event by November 12, 2022, the annual interest rate for the 2021 Convertible Notes increases to 9.50%. Interest accrues daily and compounds semi-annually and is payable at maturity or upon conversion of the 2021 Convertible Notes. The 2021 Convertible Notes mature 60 months after issuance, unless we and the holders of at least 50% of the then aggregate outstanding amount under the 2021 Convertible Notes extend the maturity date or unless the 2021 Convertible Notes are converted into shares of our common stock prior to maturity.
The 2021 Convertible Notes are convertible into shares of our common stock at the option of each note holder any time following the closing of this proposed offering by dividing the principal and interest outstanding under the 2021 Convertible Notes by a price equal to 1.15 multiplied by our initial public offering price. Additionally, after 18 months of the consummation of this proposed offering, we have the option to force conversion of the 2021 Convertible Notes into shares of our common stock at a price equal to 1.15 multiplied by the initial public offering price (the Conversion Price), if the volume weighted average price of our common stock for any 20 consecutive trading day period exceeds a price that is a 50% premium to the Conversion Price.
The 2021 Convertible Notes are redeemable or partially redeemable by the note holders in the following events: (1) if we receive more than $100,000 in net proceeds from the sale of assets, other than certain permitted sales, we must offer to redeem the 2021 Convertible Notes on a pro rata basis plus a premium; (2) if we distribute a cash dividend, we must offer to redeem the 2021 Convertible Notes on a pro rata basis plus a premium; (3) if we incur secured debt in excess of $200 million, we must redeem the 2021 Convertible Notes on a pro rata basis in excess of $200 million, plus a premium; or (4) if we consummate a change of control prior to the maturity date, then the note holders will be entitled to elect either (i) to receive the entire principal amount plus all accrued and unpaid interest or (ii) to convert the 2021 Convertible Notes into shares of the most senior class and series of our capital stock then outstanding.
In connection with the 2021 Convertible Notes transaction, we repurchased the Conversion Shares. The Conversion Shares consist of 608,926 shares of our common stock along with various rights, including a variable share adjustment feature and a maturity date put right. Total consideration was $26.1 million, which consisted of $20.0 million in 2021 Convertible Notes and $6.2 million in cash (the Conversion Shares Repurchase). As part of the Conversion Shares Repurchase, we amended the Amendment and Conversion Agreement, removing the variable share adjustment feature and the maturity date put right.
Secured Term Loan Credit Facility
We have a $100.0 million credit facility (Credit Facility) under which we issue individual term loans that are secured by customer contracts and related assets. As of September 30, 2021, the interest rates on the individual term loans ranged from 3.56% to 8.93% per annum, with a weighted average interest rate of 6.00% per annum. The individual term loans are amortizing with monthly payments of principal and interest, beginning after the commencement date of each respective note agreement, and have a maturity date ranging from July 2022 to July 2030. As of September 30, 2021, we had $50.8 million outstanding under the Credit Facility.
Convertible Notes due 2024
From September 2020 through February 2021, the Company issued $100.0 million of convertible notes due in 2024 (Convertible Notes) as set forth in the table below (in thousands):
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Issuance MonthPrincipal
Amount
September 2020$35,000 
October 202020,000 
December 202025,000 
February 202120,000 
Total $100,000 
The Convertible Notes were issued at 98% of par. The Convertible Notes accrue interest at 8%, if paid quarterly in cash. However, the Company can elect to pay interest in kind at 10%, compounded quarterly. Additionally, interest can be paid partially in cash and partially in kind at an interest rate of 4.5% in cash and 4.5% in kind.
On May 21, 2021, the Company executed an Amendment and Conversion Agreement with the holders of the Convertible Notes. Immediately prior to this, the balance of the Convertible Notes was $103.7 million, which included accrued and unpaid interest. Through the execution of the Amendment and Conversion Agreement, the Company and Investors early converted $25.0 million of the Convertible Notes into 608,926 shares of the Company’s Common Stock (Conversion Shares). We repurchased the Conversion Shares on November 12, 2021 in connection with the 2021 Convertible Notes transaction described above.
The remaining $78.7 million of Convertible Notes were amended by removing the conversion options. The conversion options were replaced with an outstanding balance adjustment feature. Following a Qualified Event, the outstanding balance is to be increased by percentages determined based on the valuation of us. The minimum percentage is 14.4% and is increased by 1.25% for each additional $50.0 million that our valuation exceeds $550.0 million and increased by 0.625% for each additional $50.0 million that our valuation exceeds $650.0 million. The amended notes are subsequently referred to as Senior Notes. The Outstanding Balance Adjustment Feature is accounted for as an embedded derivative.
The exchange of Convertible Notes for the Conversion Shares and Senior Notes with the Outstanding Balance Adjustment Feature was accounted for as a modification of the Convertible Notes. Subsequent to the modification, the Outstanding Balance Adjustment Feature embedded in the Senior Notes and the Conversion Shares were initially recognized at fair value and subsequently remeasured at fair value each reporting period. The Company recognized a loss of $8.4 million due to changes in fair value of conversion shares and embedded derivative for the nine months ended September 30, 2021.
The Senior Notes accrue interest at 8%, if paid quarterly in cash. However, we can elect to pay interest in kind at 10%, compounded quarterly. Additionally, interest can be paid partially in cash and partially in kind at an interest rate of 4.5% in cash and 4.5% in kind.
In September 2021, we issued an additional $10.0 million of Senior Notes due in 2024 at 98% of par.
As of September 30, 2021, we had $91.6 million outstanding under the Senior Notes.
Credit Agreement
In June 2021, we executed a credit agreement with a maturity date of June 23, 2023 (Credit Agreement). The Credit Agreement allows us to borrow up to our available commitment, which is the lesser of $50.0 million or the borrowing base value, at any time. The borrowing base value was $16.5 million and the full $16.5 million was outstanding as of September 30, 2021. Borrowings under the Credit Agreement bear interest at an alternative base rate (ABR) or London Interbank Offered Rate (LIBOR), at our election, plus an applicable margin of 1.50% or 2.50% per annum for ABR loans and LIBOR loans, respectively. We are required to pay a quarterly commitment fee equal to 0.50% multiplied by the actual daily amount by which the commitments exceed outstanding loans. As of September 30, 2021, we had borrowings outstanding under our Credit Agreement of $16.5 million.
Collateral Security Interest
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As of September 30, 2021, our Credit Facility, Credit Agreement, and Senior Notes are secured by substantially all our assets.
Perpetual Convertible Notes
In March 2020, we issued $6.5 million of perpetual subordinated convertible notes (Perpetual Convertible Notes). The Perpetual Convertible Notes do not have a stated maturity date and do not require periodic interest payments; rather, they are callable at the option of the holders following December 31, 2020, at the principal amount plus all unpaid and accrued interest accruing at 8% per annum. The Perpetual Convertible Notes automatically convert into preferred stock, at a 10% discount, following a preferred stock issuance with gross proceeds exceeding $30.0 million. If gross proceeds are less than $30.0 million, the holders have the option to convert to preferred stock at a 10% discount. No preferred stock issuance related to the Perpetual Convertible Notes has occurred to date.
Upon a change of control, as defined in the agreement, we are required to repay the outstanding Perpetual Convertible Notes in an amount equal to two times the outstanding balance plus all accrued and unpaid interest. As of September 30, 2021, we had $6.5 million outstanding under the Perpetual Convertible Notes, and, on December 31, 2020, the Perpetual Convertible Notes became due on demand at the option of the holders.
Promissory Notes
In 2019, we issued various Promissory Notes for total proceeds of $13.6 million. In the nine months ended September 30, 2020, we issued additional Promissory Notes for total proceeds of $6.5 million. The Promissory Notes accrued interest ranging from 5.50% to 12.00%. The Promissory Notes were amortizing with monthly payments of principal and interest. The maturity dates ranged from December 2022 to May 2027. We used the proceeds from the Convertible Notes issued in 2020 to repay amounts outstanding under the various Promissory Notes. We recorded an aggregate net loss of $1.7 million associated with the extinguishment of the Promissory Notes during the nine months ended September 30, 2020.
Paycheck Protection Program Loan
In April 2020, we were granted an unsecured loan with a financial institution in the amount of $1.6 million, pursuant to the Paycheck Protection Program (PPP) set forth in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which was enacted by the Small Business Administration on March 27, 2020. The loan was scheduled to mature in April 2022 and bore interest at a rate of 1.0% per annum, payable monthly with a deferral of payments for the first six months. Under the terms of the PPP loan, certain amounts of the loan may be forgiven if they are used for qualifying expenses, including payroll, benefits, rent and utilities as described in the CARES Act. We used all PPP loan proceeds for qualifying expenses and received full loan forgiveness in August 2021. Based on the facts and circumstances of our PPP loan and according to the applicable accounting guidance described in Note 6, Debt, to our condensed consolidated financial statements, we have elected to account for the PPP loan proceeds as an in-substance grant that has been forgiven. As such, the PPP loan balance is not included as outstanding debt as of December 31, 2020, and we recognized the PPP loan proceeds as a systematic reduction of the related qualifying expenses for which the PPP loan proceeds were intended to compensate. We received full loan forgiveness in August 2021.
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Cash Flows  - Quarterly Results
Nine Months Ended September 30,
20212020
Cash Flow Data:
Net cash provided by / (used in) operating activities$19,749 $(8,313)
Net cash used in investing activities(35,272)(17,941)
Net cash provided by financing activities11,446 32,291 
Net increase (decrease) in cash and restricted cash$(4,077)$6,037 
Operating Activities
During the nine months ended September 30, 2021, net cash provided by operating activities was $19.7 million, primarily resulting from our net loss of $28.6 million, adjusted for non-cash charges of $46.3 million and net cash inflows of $2.1 million from net changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization related to energy efficiency systems, deferred costs, and other noncurrent assets of $29.8 million; change in fair value of conversion shares and embedded derivative of $8.4 million; paid-in-kind interest expense added to notes payable of $6.6 million; $1.2 million of debt related amortization included in interest expense; and stock-based compensation of $0.5 million. There was also a $0.4 million tax benefit for deferred income taxes. Further, the net cash inflows from changes in operating assets and liabilities was primarily driven by a $2.1 million increase in accrued expenses, a $0.6 million increase in accrued payroll, a $0.5 million decrease in other current assets, and a $0.3 million increase in other current liabilities. Partially offsetting these cash inflows from changes in net operating assets and liabilities were a $0.5 million increase in prepaid expenses, a $0.4 million decrease in accounts payable, a $0.4 million increase in deferred project costs, and a $0.3 million increase in accounts receivable.
During the nine months ended September 30, 2020, net cash used in operating activities was $8.3 million, primarily resulting from our net loss of $14.9 million, adjusted for non-cash charges of $17.5 million and net cash outflows of $10.9 million from net changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization related to energy efficiency systems, deferred costs, and other noncurrent assets of $14.9 million; loss on extinguishment of debt in the amount of $1.7 million related to the termination of the Promissory Notes utilizing proceeds from the issuance of the Convertible Notes due 2024; early terminations of energy efficiency sites in progress of $0.6 million; noncash lease expense of $0.2 million; and stock based compensation of $0.2 million. There was also a $0.2 million tax benefit for deferred income taxes. The net cash outflows from changes in operating assets and liabilities was primarily driven by a $18.2 million decrease in accrued expenses, a $2.8 million decrease in accounts payable, and a $0.4 increase in prepaid expenses. Partially offsetting these cash outflows from changes in net operating assets and liabilities were a $9.8 million decrease in accounts receivable, a $0.4 million decrease in other current assets, and a $0.3 million increase in accrued payroll.
Investing Activities
During the nine months ended September 30, 2021, net cash used in investing activities was $35.3 million, consisting primarily of $34.8 million of purchases of energy efficiency systems and $0.4 million from the issuance of notes to certain employees in connection with the exercise of stock options.
During the nine months ended September 30, 2020, net cash used in investing activities was $17.9 million, consisting of $17.5 million of purchases of energy efficiency systems and $0.5 million from the issuance of notes to certain employees in connection with the exercise of stock options.
Financing Activities
During the nine months ended September 30, 2021, net cash provided by financing activities was $11.4 million, primarily resulting from $43.9 million of net proceeds from the issuance of debt and $1.3 million of proceeds from the issuance of common stock. Partially offsetting these proceeds were $32.1 million of debt repayments and $1.7 million of payments for deferred offering costs.
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During the nine months ended September 30, 2020, net cash provided by financing activities was $32.3 million, primarily resulting from $68.2 million of net proceeds from issuance of debt, and $0.6 million proceeds from the issuance of common stock from the exercise of options. Partially offsetting these proceeds was $35.7 million of debt repayments and $0.9 million of prepayment penalties related to the extinguishment of the Promissory Notes.
Cash Flows - Annual Results 
The following table summarizes our cash flows for the periods indicated (in thousands):
Years Ended December 31,
20202019
Cash Flow Data:
Net cash used in operating activities$(11,741)$(14,500)
Net cash used in investing activities(31,651)(22,389)
Net cash provided by financing activities60,083 31,079 
Net increase (decrease) in cash and restricted cash$16,691 $(5,810)
Operating Activities
During the year ended December 31, 2020, net cash used in operating activities was $11.7 million, primarily resulting from our net loss of $19.5 million, adjusted for non-cash charges of $27.9 million and net cash outflows of $20.1 million from net changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization related to energy efficiency systems, deferred costs, and other noncurrent assets of $24.2 million; loss on extinguishment of debt in the amount of $1.7 million related to the termination of the Promissory Notes utilizing proceeds from the issuance of the Convertible Notes due 2024; early terminations of energy efficiency sites in progress of $1.6 million; and debt related amortization included in interest expense of $0.4 million. There was also a $0.6 million tax benefit for deferred income taxes. Further, the net cash outflows from changes in operating assets and liabilities was primarily driven by a $10.1 million decrease in accounts payable and a $19.1 million decrease in accrued expenses. Partially offsetting these cash outflows from changes in net operating assets and liabilities were a decrease in accounts receivable of $8.6 million and an increase in accrued payroll of $0.8 million.
During the year ended December 31, 2019, net cash used in operating activities was $14.5 million, primarily resulting from our net loss of $20.1 million, adjusted for non-cash charges of $22.9 million and net cash outflows of $17.3 million from net changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization related to energy efficiency systems, deferred costs, and other noncurrent assets of $15.8 million; early terminations of energy efficiency sites in progress of $5.0 million; and a tax provision for deferred income taxes of $1.6 million. The net cash outflows from changes in operating assets and liabilities was primarily driven by a $12.8 million increase in accounts receivable, a $5.4 million decrease in accounts payable and a $0.7 million decrease in accrued expenses. Partially offsetting these cash outflows from changes in net operating assets and liabilities were an increase in accrued payroll of $1.0 million and an increase in deferred maintenance revenue of $0.4 million.
Investing Activities
During the year ended December 31, 2020, net cash used for investing activities was $31.7 million, consisting of $31.2 million of purchases of energy efficiency systems and $0.5 million from the issuance of notes to certain executives in connection with the exercise of stock options.
During the year ended December 31, 2019, net cash used for investing activities was $22.4 million, consisting of $22.4 million of purchases of energy efficiency systems.
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Financing Activities
During the year ended December 31, 2020, net cash provided by financing activities was $60.1 million, primarily resulting from $112.1 million of net proceeds from the issuance of debt and $0.7 million of proceeds from the issuance of common stock. Partially offsetting these proceeds were $51.8 million of debt repayments and $0.9 million of prepayment penalties related to the extinguishment of the Promissory Notes.
During the year ended December 31, 2019, net cash provided by financing activities was $31.1 million, primarily resulting from $48.7 million of net proceeds from issuance of debt, and $0.3 million proceeds from the issuance of common stock from the exercise of options. Partially offsetting these proceeds was $17.9 million of debt repayments.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:
Payments Due by Period
Total20212022 - 20232024-2025Thereafter
(in thousands)
Notes payable$169,357 $25,006 $40,513 $99,642 $4,196 
Interest on notes payable*36,416 11,520 18,446 6,223 227 
Operating lease obligations3,428 906 1,614 908 — 
Total$209,201 $37,432 $60,573 $106,773 $4,423 
*Interest on the Secured Term Loan Credit Facility is determined for all loans existing as of December 31, 2020; interest on the Convertible Notes due 2024 is assumed to be 8% of the principal outstanding due September 2024 per the contractual terms; interest on the Perpetual Convertible Notes is assumed to be 8% of the principal outstanding per the contractual terms assuming payoff at December 31, 2021, which is consistent with the presentation of these notes as a current liability in the accompanying consolidated balance sheets.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, or unconsolidated variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our consolidated financial statements.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this prospectus. The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates.
Our critical accounting policies are those that materially affect our consolidated financial statements and involve difficult, subjective, or complex judgments by management. A thorough understanding of these critical accounting policies is essential when reviewing our consolidated financial statements. We believe that the critical accounting policies listed below involve the most difficult management decisions because they require the use of significant estimates and assumptions as described above.
Leases – Lessor Arrangements
We enter into EaaS agreements with customers whereby we design, engineer, construct and install energy efficiency equipment and related upgrades at customer facilities in order to achieve agreed-upon energy reduction
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performance targets. We also provide onsite maintenance services to these customers. Pursuant to the terms of our EaaS agreements, we retain ownership of all equipment installed and utilized to fulfill our EaaS agreements. We have determined that the energy efficiency systems underlying our EaaS agreements meet the definition of leases, as there is an identified asset (that is, the underlying energy efficiency system) that the customer has the right to direct the use of, and receive substantially all of the economic benefits through its use of, the system.
Under the terms of our agreements, payments made by the customer are directly linked to realized energy savings resulting from the customer’s use of the installed energy efficiency system and the efficiency performance of that system. We concluded that these customer payments represent variable payments that are not based on an index or rate, as the payments are dependent upon energy savings realized by the customer.
We determine lease classification at inception of our EaaS agreements. In making this determination, we apply Accounting Standards Update (ASU) 2021-05, Leases (Topic 842): Lessors – Certain Leases With Variable Payments, which requires a lessor to classify a lease with variable payments that do not depend on an index or rate as an operating lease on the commencement date of the lease if specified criteria are met. Through the application of ASU 2021-05 and the determination that customer payments are variable, we have concluded that substantially all of our EaaS agreements represent operating leases. As such, we capitalize the underlying assets as property, plant, and equipment titled Energy efficiency systems, net, and we depreciate these systems on a straight-line basis over the corresponding EaaS agreement terms.
We exercise significant judgement as lessor in the evaluation and classification of substantially all of our EaaS arrangements as operating leases, in particular with respect to the conclusion that customer payments are variable. More specifically, under our EaaS arrangements, we are exclusively subject to the efficiency risk of the installed energy efficiency systems, which may impact the savings realized from those systems and, thus, the corresponding savings payments made by our customers. Throughout the term of our EaaS arrangements, individual energy efficiency systems may under- or over-perform. However, the efficiency performance targets of each system are comprehensively modeled at or immediately prior to contract inception in order to mitigate our risk, and historically, our systems have substantially met efficiency performance targets when considering the portfolio of our energy efficiency systems in the aggregate. Given the risk allocation between us and our customer under our EaaS arrangements and our risk mitigation practices related to the efficiency risk of installed systems, we exercised judgement in determining that the customer payments for realized energy savings represent variable lease payments that are not based on an index or rate, rather than fixed lease payments. As a result of this conclusion, customer payments are excluded from lease payments as defined under U.S. GAAP, and, pursuant to ASU 2021-05, we classify substantially all of our EaaS arrangements as operating leases on the commencement date of the lease. To the extent that we had not concluded that customer payments for realized energy savings represented variable lease payments, those EaaS arrangements may have been classified as sales-type leases and accounted for under the sales-type lease recognition model. However, we do not reasonably expect this conclusion to change for those EaaS agreements in the future.
Energy Efficiency Systems, Net
For substantially all of our EaaS arrangements, we concluded that the underlying energy efficiency systems and equipment represent leased assets to our customers that are classified as operating leases. Accordingly, our energy efficiency systems are stated at cost, less accumulated depreciation. Capitalized costs are comprised of equipment costs and the associated development, design, implementation, and installation costs required to begin providing energy efficiency services to customers.
Depreciation is calculated using the straight-line method over the corresponding customer contract terms, which represent the estimated useful lives of the energy efficiency systems (that is, the period over which we will benefit from use of the energy efficiency systems). Most customer contract terms range from five to 15 years. We begin depreciating the respective energy efficiency systems upon completion of installation and execution of a Letter of Acceptance with the customer, which represents the start of commercial operation for a system. Repairs and maintenance costs are expensed as incurred.
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Our energy efficiency systems are subject to impairment assessments if certain indicators are present. There were no impairment charges related to our energy efficiency systems for the nine months ended September 30, 2021 and 2020.
The classification of substantially all of our energy efficiency systems as operating leases and the useful lives of our energy efficiency systems require judgment. For significant judgments related to the classification of our energy efficiency systems as operating leases, see Leases - Lessor Arrangements above. For the useful lives of our energy efficiency systems, we exercised judgment in making the determination that the corresponding customer contract term represents the useful life of the energy efficiency system. Events, such as a customer’s early payoff of an energy efficiency system, could materially affect our estimate of the useful life of that system. To the extent that a customer pays off an energy efficiency system early, the remaining carrying value of the energy efficiency system underlying the EaaS site is depreciated at the time of the early payoff, resulting in an acceleration of depreciation expense for that agreement. During the nine months ended September 30, 2021 and 2020, we recognized approximately $14.4 million and $1.9 million in depreciation expense related to early payoffs of EaaS sites, respectively. During the year ended December 31, 2020 and 2019, we recognized approximately $5.7 million and $2.5 million in depreciation expense related to early payoffs of EaaS sites, respectively.
Revenue Recognition - Project Revenue
We generate revenue from capital equipment installation projects through the facilitation of lighting and HVAC equipment sales, whereby we purchase required equipment from a third-party manufacturer, which is shipped directly to the customer, and then we install such equipment at customer sites. Under our capital equipment installation projects, the customer obtains title to the system immediately upon installation.
The design, procurement and installation of such energy efficiency equipment provides the delivery of a customized, integrated solution for the customer’s energy savings needs. We consider the bundle of goods and services to be a single performance obligation. Revenues are based on a fixed contract price that is recognized over time as control transfers to the customer, as further described below. Significant contracts generally have a duration of a few months to a year, with payment due within thirty to ninety days following the installation.
Our capital equipment installation contracts provide an enforceable right to payment for progress completed to date, including profit, at all times throughout the duration of the contract. As a result, we transfer control of the bundled goods or services over time, and therefore recognize revenue over time as the performance obligation in the contract is satisfied. We determined that a cost-to-cost input method was the best available measure of progress toward satisfying our performance obligations and, therefore, evaluated the total costs incurred on the project relative to the total expected cost to satisfy our performance obligation. Pursuant to that determination, we recognized revenue over the installation period in a manner which approximated the cost-to-cost input method. Contract costs for capital equipment installation projects include direct labor and related payroll costs, permanent materials, subcontractor costs, consumables, and indirect costs, such as equipment, insurance, and tools.
We exercise judgement in measuring progress toward satisfying our performance obligations, and we re-evaluate the total estimated costs to complete each performance obligation periodically. Such changes in the total estimated cost of satisfying a performance obligation may result in a cumulative adjustment to revenue recognition in the period in which the revision is known. If the estimated cost to satisfy a performance obligation results in a contract loss, a provision for loss is made in the period in which the loss becomes known. Historically, losses due to a revision in the estimated costs of satisfying a performance obligation have not been material.
Principal Agent Consideration
We use third parties on certain capital equipment installation contracts to provide construction and deployment services. In such arrangements, we exercise judgement in assessing whether we are the principal or agent in these arrangements through the evaluation of the nature of our promise to the customer. When we act as a principal, we record revenue on a gross basis, as we control a promised good or service before transferring that good or service to the customer. When we act as an agent, we record revenue at the net amount, as we retain agency services which is to arrange for another entity to provide the goods or services to the customer.
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Generally, we act as a principal in our capital equipment installation projects because we are the primary obligor and maintain control as the subcontractor integrates the materials, labor and equipment into the deliverables promised to the customer. As such, subcontractor materials, labor, and equipment, are presented on a gross basis in Project revenue and Cost of project revenue in our consolidated statements of operations. Our determination that we represent the principal under our capital equipment installation projects does not impact gross margin or net loss in our consolidated statements of operations.
Stock-Based Compensation
Accounting for stock-based compensation requires us to make a number of judgments, estimates and assumptions. If any of our estimates prove to be inaccurate, our net loss and operating results could be adversely affected.
We estimate the fair value of stock options granted to employees and directors using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including (i) the expected stock price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate and (iv) expected dividends. We assume an estimated forfeiture rate, which is applied to grants in the current year, but represents a prediction of forfeitures that may happen in the coming years. Our assumptions are estimated as follows:
Fair value
The fair value of our common stock underlying the stock option awards is determined by our board of directors. Given the absence of a public trading market, our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting at which awards are approved. These factors include, but are not limited to: (i) contemporaneous third-party valuations of common stock; (ii) the rights, preferences and privileges of convertible preferred stock relative to common stock; (iii) the lack of marketability of common stock; (iv) stage and development of the Company’s business; (v) general economic conditions; and (vi) the likelihood of achieving a liquidity event, such as an initial public offering (IPO) or sale of the Company, given prevailing market conditions.
Volatility
As a result of the lack of historical and implied volatility data of our common stock, the expected stock price volatility is estimated based on the historical volatilities of a specified group of companies in our industry. We select companies with comparable characteristics to us, including enterprise value, risk profiles and position within the industry and with historical share price information sufficient to meet the expected term of the stock options.
Risk-free interest rate
We use the U.S. Treasury yield for our risk-free interest rate that corresponds with the expected term.
Expected term
We determine the expected term based on the historical life of options, the vesting period of the options granted, and the contractual period of the option granted. In determining the expected term, we considered our limited history of granting options. In addition, we considered the estimated timing and likelihood of achieving a liquidity event.
Expected dividend yield
We utilize a dividend yield of zero, as we do not currently issue dividends, nor do we expect to do so in the future.
Historically, we have determined the fair value of our equity awards by considering a variety of factors including, among other things, timely valuations of our equity prepared by an independent third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants’ Statement on Standards for Valuations No. 1 and American Institute of Certified Public Accountants’ “Practice Aid”, Valuation of Privately Held Company Equity Securities Issued as Compensation. Given the absence of a public trading market
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for our equity, management exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value, including important developments in our operations, stage of development, valuations performed by an independent third-party valuation firm, actual operating results and financial performance, the conditions in similar industry sectors and the economy in general, the stock price performance and volatility of comparable public companies, the lack of liquidity of our equity, and the likelihood of achieving a liquidity event, such as an IPO or sale of the company.
Warrants for Convertible Preferred Stock
We evaluate whether our warrants for shares of convertible preferred stock are subject to liability classification. We concluded that our warrants for shares of convertible preferred stock should be classified in equity, as the shares underlying the warrants are not puttable and there are no features that would require the issuance of a variable number of shares to settle a fixed monetary amount. Further, we evaluated the anti-dilution provisions and other terms of the warrant agreements and concluded that the warrants are indexed to the convertible preferred stock and the settlement features meet the requirements for equity classification. The warrants for shares of convertible preferred stock were issued in conjunction with the issuance of promissory notes in 2019. Accordingly, the warrants were initially recognized based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance, with no subsequent remeasurement.
The fair value of the warrants of $0.7 million was determined through the Black-Scholes option-pricing model utilizing the following estimates and assumptions: (i) a term of 10 years, (ii) a risk-free rate of 2.1%, (iii) volatility of 42.0%, and (iv) no dividend yield. The warrants are exercisable at any time on or after July 12, 2019 and expire after June 30, 2029.
Income Taxes
We use the asset and liability method of accounting for income taxes based on Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Accounting for Income Taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. We record a valuation allowance to reduce tax assets to an amount for which realization is more likely than not. There are certain charges that are not deductible for tax purposes.
In evaluating the ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including our operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In the event we determine that we would be able to realize our deferred income tax assets in the future in excess of the net recorded amount, we would make an adjustment to the valuation allowance that would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.
As of December 31, 2020, we had NOL carryforwards of $142.2 million. Generally, these NOLs are available to reduce future taxable income and the related income tax liability subject to the limitations set forth in Internal Revenue Code Section 382 related to changes of more than 50% ownership of our stock by 5% or greater shareholders over a three-year period (a Section 382 Ownership Change) from the time of such an ownership change. We experienced a Section 382 Ownership Change in connection with a sale of stock by a large shareholder. Given our 382 limitation and the uncertainty of future taxable income, a valuation allowance of $17.2 million has been recorded for the year ended December 31, 2020, against the deferred tax assets, reduced by the amount of the deferred tax liability estimated to offset the deferred tax assets.
Recently Issued Accounting Pronouncements
In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB to determine the potential impact they may have on our consolidated financial statements. Recently issued accounting pronouncements that may be relevant to our operations but have not yet been adopted are outlined below.
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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistency in application. ASU 2019-12 will be effective for public entities for interim and annual periods beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 will be effective for private entities for annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2020, with early adoption permitted. We plan to adopt ASU 2019-12 for the fiscal year beginning January 1, 2022 and are currently assessing the impact, if any, the guidance will have on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting For Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 202-06). ASU 2020-06 simplifies the accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2023. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact, if any, that this new guidance may have on our consolidated financial statements. We are required to adopt ASU 2020-06 by the fiscal year beginning January 1, 2024; however, we are currently evaluating the option to early adoption ASU 2020-06 prior to the fiscal year beginning January 1, 2024.
Management currently does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our consolidated financial statements.
Refer to Note 2, Summary of Significant Accounting Policies, within the audited consolidated financial statements for further detail.
Emerging Company Status
We are an “emerging growth company” as defined in Section 2(a) of the Securities Act and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. We expect to remain an emerging growth company at least through the end of the 2022 fiscal year and expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure resulting from potential changes in inflation, exchange rates or interest rates. We do not hold financial instruments for trading purposes.
Foreign Currency Exchange Risk
Our expenses are generally denominated in U.S. dollars. However, we have foreign currency risks related to our revenue and expenses denominated in Euros, British pound sterling, Indian rupee, and Canadian dollar. We have entered into a limited number of contracts with customers and a limited number of supply contracts with vendors with payments denominated in foreign currencies. We are subject to foreign currency transaction gains or losses on our contracts denominated in foreign currencies. To date, foreign currency transaction gains and losses have not been material to our financial statements.
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Unfavorable changes in foreign exchange rates versus the U.S. dollar could increase our costs, thus reducing our gross profit and increasing overall net loss. We have not engaged in the hedging of foreign currency transactions to date; however, we may choose to do so in the future. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on our operating results or financial condition.
Interest Rate Risk
Fluctuations in interest rates may impact the level of interest expense recorded on our outstanding borrowings. Our Credit Facility, Convertible Notes, Perpetual Convertible Notes, and Promissory Notes bear interest at a fixed rate and are not publicly traded. Therefore, the fair value of our debt and the related interest expense are not materially affected by changes in market interest rates.
We do not enter into derivative financial instruments, including interest rate swaps, for hedging or speculative purposes.
Credit Risk
Financial instruments that potentially subject us to credit risk consist primarily of cash, restricted cash, and accounts receivable. Our cash and restricted cash deposits are held at financial institutions where account balances may at times exceed federally insured limits. We do not believe that we are exposed to significant credit risk due to the financial strength of the depository institutions in which our cash and restricted cash deposits are held. We have not experienced any losses on our cash deposits to date.
Our accounts receivable balances are unsecured, and we generally do not require collateral from our customers. We have not experienced any material losses related to receivables from individual customers, or groups of customers, during the nine months ended September 30, 2021 and 2020 or the year ended December 31, 2020 and 2019. Due to these factors, no additional credit risk beyond amounts provided for collection losses, when applicable, is believed by management to be probable in our accounts receivable.
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BUSINESS
Overview
Redaptive was founded in 2015 with the mission to change the way that commercial and industrial (C&I) enterprises identify and implement energy efficiency initiatives to achieve their sustainability goals. To fulfill our mission, we utilize our proprietary technology-enabled platform to identify, validate, and implement energy efficiency and sustainability-focused initiatives across a C&I customer’s entire real estate portfolio. Our ability to identify energy savings opportunities, fund, and install solutions to reduce energy consumption at scale and provide ongoing, transparent reporting of the program’s success enables us to advance our customers’ progress towards achieving their sustainability goals. Through these installed measures we deliver a holistic Energy-as-a-Service (EaaS) Offering to our customers, which includes: (1) providing turnkey deployment of energy efficiency and other sustainability-focused systems at their facilities, (2) providing ongoing monitoring, maintenance, and energy analytics, and (3) funding these initiatives with a flexible, innovative performance-based contract model that often eliminates the need for upfront capital.
We believe a balanced approach including energy efficiency is required to make meaningful progress towards true carbon reduction in C&I facilities. On average, 30% of the energy used in commercial buildings is wasted, according to the U.S. Environmental Protection Agency. Our EaaS Offerings leverage our hardware and recurring software services to continuously monitor energy consumption to identify ongoing inefficiencies within the customers’ facilities. Additionally, our offerings provide real emissions reductions and thereby reduce customer dependence on fossil fuel resources.
Today, we are a leading provider of energy efficiency and data solutions for C&I enterprises with projects throughout North America and in Europe. Our technology-enabled platform leverages our proprietary hardware and software to analyze energy spend and provide solutions that enable our customers to understand their energy usage, reduce their energy consumption, lower their operating and maintenance costs, and realize environmental and economic benefits. These solutions encompass a variety of energy-related services which include LED lighting replacements, heating, ventilation, and cooling (HVAC) upgrades and retrofits, internal equipment controls, onsite solar energy generation, and energy storage. We provide these services to our C&I customers through two primary offerings:
Our Energy Service Offerings, which accounted for approximately 99.6% of our revenue in both 2020 and 2019, encompass upgrades to infrastructures within C&I facilities, submetering and verification of energy savings, funding solutions, and ongoing maintenance solutions, and include:
EaaS Offerings under which we retain ownership of the systems we install and commit that the project will satisfy agreed-upon energy reduction performance targets generating immediate saving for our customers; and
Sales of installed energy efficiency systems to customers that would like to directly purchase the systems and own them outright.
Our Data-as-a-Service (DaaS) offering, which accounted for approximately 0.4% of our revenue in both 2020 and 2019, includes innovative and advanced submeter measurement and reporting, analysis of usage patterns, identification of anomalies, and recommendations for upgrades and improvements.
Since our founding through September 30, 2021, we have installed over 2,400 project upgrades at approximately 2,200 C&I customer facilities, saved our C&I customers approximately 1.3 billion kWh, and avoided approximately one million tons of CO2 emissions. Over this time, we have established a turnkey sustainability solution that includes agreements with approximately 70 EaaS customers and approximately 50 DaaS customers. Additionally, we have over 70 active channel and referral partners that have driven pre-qualified leads to our EaaS Offerings over the last twelve months. We compensate our referral partners on a percentage of the contract value that is booked and pay them at the time of notice to proceed. In addition, since our inception, we have developed our DaaS platform on the back of our proprietary, industry-leading submeter. As of September 30, 2021, Redaptive had 190 employees focused on supporting our mission with 131 employees in the United States and 59 employees in
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India. We maintain our corporate headquarters in San Francisco, California. As of September 30, 2021, we had outstanding principal under our credit facilities of $165.4 million, and we issued an additional $100 million in principal pursuant to convertible notes in November 2021. While we have been successful at raising equity and debt capital, we have incurred net losses since inception. See the section “Management’s Discussion and Analysis of Financial Operations—Liquidity and Capital Resources—Debt” for a discussion of our credit facilities.
Industry and Market Opportunity
Increasing social and investor pressure to disclose emissions reduction goals has led companies worldwide to adopt various emission reduction targets depending on their geographic location. Since 2015, over 1,700 companies have committed to achieving sustainability goals as set by the Science Based Targets Initiative (SBTi) which involves development of an emissions reduction target and annual sustainability reporting. Furthermore, initiatives for goal setting escalated in 2020 despite the major impacts of the COVID-19 pandemic. While the Renewable Energy 100 (RE100) initiative seeks to accelerate the change towards zero carbon emission grids, more than 300 global companies have committed to targeting 100% renewables by 2030 as of August 2021, an increase of 52% from 2019. Notably, 60% of the Fortune 500 has made a climate or energy commitment. The increasing number of international initiatives promotes a unique market opportunity for energy solutions as corporations look to satisfy these clean energy goals through renewable generation and electricity reduction through energy efficiency measures.
According to the U.S. Environmental Protection Agency, the average building in the United States wastes 30% of the energy it consumes, resulting in 30% more carbon emissions and unnecessary costs. In addition, aging and outdated infrastructure present additional opportunities for efficiency solutions. Addressing emissions from the C&I sector is of critical importance in ultimately achieving net zero carbon emissions. Indeed, today emissions from the C&I sector in the United States are more than 5x total combined wind and solar generation capacity. While renewable generation is an important pathway for companies to meet their climate and sustainability commitments, according to the EIA energy efficiency solutions are expected to be the single largest pathway for companies to reduce their emissions and carbon footprint.
prospectussummary1ba.jpg
Source: IEA, CO2 emissions reductions by measure in the Sustainable Development Scenario relative to the Stated Policies Scenario, 2010-2050, IEA, Paris https://www.iea.org/data-and-statistics/charts/co2-emissions-reductions-by-measure-in-the-sustainable-development-scenario-relative-to-the-stated-policies-scenario-2010-2050; as modified by Redaptive, Inc.
(1)CCUS defined as Carbon Capture, Utilization, and Storage.
(2) Includes nuclear and fuel switching.
To underline the importance of energy efficiency in achieving C&I sustainability goals, distributed solar has an energy density of 6.1 kWh / sq. ft compared to energy consumption of 14.6 kWh / sq. ft in the average commercial building, implying that improvements in energy efficiency are essential to addressing emissions from C&I facilities.
Based upon management estimates, common energy efficiency upgrades largely fall into three categories based on the sources of energy consumption for C&I buildings:
Energy Consumption by Source in a C&I Building
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prospectussummary2da.jpg
Internal Equipment / Load – Smart plug controls to optimize office and manufacturing equipment as well as other plug loads and high efficiency process equipment
Lighting – Replace incandescent or fluorescent lights with energy efficient LEDs
Heating, Ventilation, and Cooling (HVAC) & Controls – High-efficiency upgrades and/or controls to package units and central plant equipment (boilers, chillers, and cooling towers)
We have a diverse set of customers across a number of sectors, including diversified capital goods, industrial, business services, logistics, oil and gas, telecommunications, financial services, healthcare, and universities. Our customers own or use real estate with a variety of structural features and end-use cases, but the majority of them have targets for efficiency and sustainability. We believe our unique capabilities and diverse experience enable us to be a leading provider in helping our customers achieve their sustainability objectives while saving them money.
Total Addressable U.S. Market
The U.S. Energy Information Administration (EIA) reported 1,361 and 1,002 TWh of C&I energy usage in 2019, respectively. EIA also reported average C&I retail prices of $0.11/kWh and $0.07/kWh, respectively. Assuming a 30% average reduction in consumption from implementing energy efficiency and a 50% penetration rate, we believe the addressable market in the United States for energy efficiency measures is approximately $32 billion based on 2019 annual energy usage and ranges. Additionally, in an effort to provide additional sustainability solutions, on-site renewable generation, primarily via rooftop C&I solar, represents a substantial opportunity. The C&I sector is a large and growing market opportunity for on-site generation and is expected to increase from $4.8 billion to $16.0 billion by 2024 according to Lazard 2020 Levelized Cost of Energy Report. Additionally, energy storage installations are primed to increase due to supportive U.S. federal policies, a strong project pipeline stemming from a recovering economy, and customers’ interest in implementing sustainability solutions. The United States is on track to install 4.7 GW of energy storage projects in 2021, more than quadrupling 2020 additions according to BloombergNEF. Furthermore, from 2021 to 2025 the United States is projected to add approximately 36 GW in energy storage capacity, of which approximately 700 MW is expected to be added in the commercial segment specifically according to BloombergNEF. Commercial storage uptake could increase to 13 GW by 2030, according to BloombergNEF, supported by a near-term opportunity for standalone storage for demand charge reduction.
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In addition to installation of energy efficiency systems and on-site generation and storage, each commercial building in the United States and Canada represents a viable target for our DaaS offering. According to the U.S. EIA, there are approximately 5.9 million commercial buildings in the United States, totaling over 97 billion square feet of floor space. In addition, as stated by Natural Resources Canada – Office of Energy Efficiency, in 2014, there were about 482,000 commercial or industrial buildings in Canada, representing a total floor area of nearly nine billion square feet. These commercial buildings include offices, warehouses and storage facilities, educational institutions, stores, healthcare facilities, and restaurants. Assuming a spending rate of $0.05 per square foot per annum on data management software by commercial buildings, representing the average 2021 rate for our standalone DaaS solution across its various offerings, the U.S. and Canada markets represent an estimated total market opportunity of over $5 billion in annual revenue opportunity in commercial buildings alone. Additionally, we believe there is an even larger opportunity when considering industrial buildings, including manufacturing.
Factors for Growth
Key drivers for continued growth in the adoption of energy efficiency initiatives include:
Wide Applicability – Energy efficiency upgrades can be implemented across any building or facility and are not limited to a specific type of infrastructure. Additionally, our Energy Service Offerings span several technologies such as lighting, HVAC, and building controls and expand into broader sustainability offerings including on-site generation, on-site storage, and demand flexibility.
Significant Environmental Benefits – Reduces carbon emissions by installing more energy efficient technologies that reduce parasitic and wasted loads, allowing for implementation of more sustainable supply-side services such as solar and storage.
Greater Safety and Resiliency in Buildings – Improves the condition of the buildings and facilities by upgrading outdated systems due for replacement with minimal business interruption. These upgrades often result in better lighting which lowers safety incidents at our industrial and manufacturing customer locations or better HVAC performance which is a critical safety need at hospitals, senior living facilities, and some retail settings. In addition, given the aging grid infrastructure, increasing concerns over wildfires, and frequency of weather-driven outages, our offerings include resiliency solutions which can both lower cost and improve safety as well.
Increased Transparency of Project and Asset Performance – Visibility and validation of the performance of energy efficiency upgrades allows business leaders to gain confidence in future proposals and technologies, which in turn supports expansion in investment in the space.
Economic Benefits – Based on the type of technology, installation of energy efficiency systems can have a short payback period and result in substantial savings for businesses. For instance, based on our internal estimates, LED lighting retrofits can have a payback of three to five years, and HVAC equipment can have a payback of three to 10 years. In addition to energy savings, the new systems are typically less expensive to maintain going forward and result in long-term maintenance savings.
C-PACE Loan Program – Commercial property-assessed clean energy (C-PACE) is a program overseen by the U.S. Department of Energy that facilitates financing for clean energy improvements for commercial properties. We have historically been involved in C-PACE programs as a developer and have provided strategic advice and assisted in the administration of approximately $110 million in financing for our customers through C-PACE programs since 2018, a portion of which was paid to us for projects that we developed. We also receive financing and/or success fees for our advisory services related to C-PACE loans. We believe that C-PACE programs will create growth opportunities for our business by providing our customers with more options for financing.
Potential Future Regulatory Support – The Biden Administration and Congress have proposed increases in climate-related spending, particularly in clean energy projects, and plan to launch several programs designed to increase energy efficiency and renewable energy capacity, which we believe, if implemented, will provide additional growth opportunities to us. On May 17, 2021, the Biden Administration announced
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the development of federal government building performance standards (BPS), which will establish metrics, targets, and tracking methods to reach federal carbon emission goals. Additionally, the Administration announced the launch of the Low-Carbon Buildings Pilot program, in which partner commercial, industrial, and multifamily organizations share their experiences, successes, and challenges pursuing low carbon emissions strategies with the Department of Energy. Partner companies can participate in this program by demonstrating superior energy efficiency as a model to other companies. These efforts showcase the Administration’s support for the energy efficiency industry. Furthermore, on August 10, 2021, the U.S. Senate passed the Infrastructure Investment and Jobs Act, which will provide $550 billion in new federal spending over the next five years. The bill appropriates $16.2 billion for energy efficiency and renewable energy uses, and includes an Energy Efficiency Revolving Loan Fund Capitalization Grant Program, which enables states to establish a revolving loan fund under which the state will loan money to commercial and residential entities to conduct energy audits in order to determine overall consumption of energy and identify opportunities to reduce the energy consumption of the facilities of the recipient.
While there are major tailwinds to the sector, companies have historically struggled to roll out energy efficiency and sustainability measures as they addressed sustainability goals through piecemeal solutions offered by multiple different providers adding friction costs to deployments and slowing adoption of energy efficiency solutions. We believe companies have traditionally experienced difficultly implementing these upgrades across their real estate portfolios for three primary reasons:
Capital Availability – Generally, there are internal capital constraints due to limited budgets or budget appropriation for sustainability-focused investments. Additionally, budget appropriations are typically at the site/facility-level and not considered for portfolio-wide programs that address the entire real estate footprint of a company.
Performance Measurement and Verification – Traditional utility bills only show total consumption and obtaining asset-level data can be expensive to collect. This contributes to a lack of understanding of the benefits of energy efficiency upgrades including the potential energy savings and return on investment. In addition, the lack of real time measurement of energy consumption makes it difficult for companies to assess the correlation between energy efficiency and savings.
Program Development, Management, and Ongoing Maintenance – The process requires multiple vendors and significant upfront costs. Companies may not have sufficient resources or technical expertise to effectively manage a broad network of vendors both in the near-term during installation and over-time to operate and maintain the assets.
We believe deploying our integrated solution to energy efficiency provides customers a means to address their long-term sustainability targets and ultimately reduce the amount of energy wasted across their real estate portfolios.
Our Solutions
Energy Service Offerings
Our technology-enabled platform allows us to leverage our proprietary hardware and software to offer solutions that allow C&I enterprises to mitigate common challenges they experience in attempting to implement corporate sustainability initiatives. Our EaaS Offerings, which make up the majority of Energy Service Offerings, fully integrate the deployment, funding, monitoring, verification, and reporting of energy building upgrades with a simple, comprehensive solution consisting of a single provider, a single monthly payment, and immediate savings. We identify and implement facility initiatives that allow our customers to reduce costs and achieve their sustainability goals often without capital investment and/or on-going maintenance costs, and reduced performance risk. The component parts of our EaaS Offerings to C&I customers are as follows:
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Origination, Scoping, and Underwriting – We primarily originate sales of our Energy Service Offerings through our referral partners. Often, our subcontractors perform “at risk”