Communication and Collaboration Lead to Successful First-Time Audit of Cleantech Company

Our client is a growth-stage company focused on the development of energy storage technologies and products for residential, small industrial, and remote power applications. Ownership changes occurred from 2015 to 2018. In 2018, the publicly traded parent company, listed on NASDAQ, decided to divest the subsidiary’s business and sell back to the Company’s founders. The newly independent Company closed a Series A financing along with venture debt and warrants. In 2020, the Company entered into a Series B stock purchase agreement. With the Series B financing came a requirement for GAAP-compliant, audited financial statements beginning with 2020.

Challenge

Series A investors are now more frequently giving companies a pass on the financial statement audit requirement, which defers this covenant until the next financing round. This means companies save the compliance cost, but the window of time for financial transactions being unaudited and subject to inspection in a first-time audit grows.

At the time of the 2018 spin-out, management did not document its considerations and analysis supporting the business combination accounting. The spin-out, as well as certain complexities with debt and equity financing, needed additional accounting analysis. These complexities included:

• Convertible notes with beneficial conversion terms, derivative features relating to change in control premiums in multiple debt instruments, and warrants issued along with the debt instruments all needed to be addressed.
• Management made a good-faith valuation of the acquired technology at the time of the spin-out. However, this required a closer look in relation to traditional valuation methodologies.

Solution

Success in the early stage of the audit relies heavily on a kickoff meeting between management and the senior Wolf team working collaboratively to identify all the historical accounting matters requiring additional analysis and mapping a strategy to complete that analysis. As part of this process, it is critical for the auditor to review key agreements to understand the terms of significant transactions and to highlight any transactions of concern for proper GAAP application. Wolf collaborated with the executive management team, filling in GAAP knowledge gaps common to early-stage companies, discussing various accounting considerations, and validating their conclusions:

• A lack of historical information for the valuation of acquired technology rights meant that traditional valuation methods were difficult to apply. Wolf agreed with management that the non-traditional valuation approach was reasonable and supported.
• Wolf supported management’s evaluation of the relevant guidance when deciding on the proper accounting treatment for the debt derivatives and warrant complexities.

Result