December 19, 2020 - 4:24pm EST by
2020 2021
Price: 11.00 EPS 0 0
Shares Out. (in M): 5 P/E 0 0
Market Cap (in $M): 51 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 51 TEV/EBIT 0 0
Borrow Cost: General Collateral

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  • Unborrowable




Immediately after closing, the float will be the public shares not redeemed plus the converted rights (approx. 2.6m shares). For ALAC Sponsor and SolarMax shareholders, there is a 6-month lockup for 50% of shares and 50% are locked up until the earlier of (i) 6 months post-closing and (ii) share price exceeds $12.50 for 20 out of 30 trading days.


Since ALAC already has the votes to approve the merger and the deal can close even with 100% redemptions, they are not even trying to market the deal to public shareholders for approval.


SolarMax Overview

SolarMax is an integrated solar energy company based in Riverside, CA that was founded in 2008 to conduct business in the U.S. and subsequently commenced operation in China following two acquisitions in 2015 (ZHTH and ZPV). 


In the US, SolarMax has three 100%-owned – SolarMax Renewable Energy Provider Inc. (SREP), SolarMax Financial Inc. (SolarMax Financial), SolarMax LED Inc. (SolarMax LED) and one 93.75% owned subsidiary – SMX Capital Inc. (SMX Capital). The 6.25% minority interest in SMX Capital is held by Yu-Min “Richard” Gu, a former President of the Company’s China operations.


The Company’s wholly-owned subsidiaries outside the United States are Accumulate (parent company of ZHPV), SolarMax Hong Kong (parent company of SolarMax Shanghai and ZHTH), Golden SolarMax and SolarMax Cayman.



Through its US subsidiaries, SolarMax designs, installs and sells/finances PV solar energy systems and backup battery systems for residential and commercial customers and sales/installs LED systems in California. 


Unlike the US, which is focused on residential and small business installations, the China segment is focused on larger scale solar farm projects (30-100MW). SolarMax’s China business is conducted through ZHTH, which is engaged in project development and ZHPV, which provides EPC services for solar farms. The Company’s main activities in China are:

-   Through ZHTH: identifying, procuring and selling solar farm projects primarily to subsidiaries of a related party that hold permits to solar farm projects and to third party developers;

-   Through ZHPV: performing EPC services pursuant to solar farm project EPC contracts; and to a much lesser extent performing O&M services for solar farm projects and sales and installation of residential and commercial photovoltaic systems.


The project subsidiaries established by ZHTH are typically sold to buyers at net asset value so no material gains/losses are generated from these sales.  ZHPV performs EPC services for buyers who purchase a project subsidiary and also performs EPC services as a general contractor for a solar farm owner that already owns a permit. Upon completion of a solar farm, ZHPV also provides O&M services through its subsidiaries.



SolarMax was founded by, managed and is controlled by the same group of individuals – David Hsu, Ching Liu and Simon Yuan who own a substantial equity interest in the Company (10%, 6.2% and 5.5%, respectively with total insider ownership at 36.5%) and serve on the BoD. David Hsu serves as Chairman of the Board and Corporate Governance Chair, Ching Liu serves as EVP – Chief Strategy Officer and Treasurer and Secretary of the Board, and Simon Yuan (who previously served as CFO) serves as the Audit Committee Chair. The Co-founders have set up a web of other entities and interrelated companies that transact with SolarMax.


The employment agreements with David Hsu and Ching Liu were amended in 2017 to provide for bonus compensation (70% in restricted stock and 30% in cash) based on a specified percentage of consolidated revenue achieved in each year which creates an incentive to further inflate revenues.


SolarMax Red Flags – There are probably more not mentioned here

Solar Max has made several failed attempts to go public via a traditional IPO since 2013 and this is the only way for management and insiders to dump their shares. ALAC has not published any investor materials on the target but information is available in the latest S-1 filed earlier this year (here) and in lawsuits by the former CFO of the Company alleging fraud (here). The public information available raises a number of red flags about SolarMax. Some of major ones are highlighted below.


(1)       Abuse of the EB5 investor scheme through a web of companies owned by the SolarMax Co-Founders


SolarMax has been largely financed by loans from the sale of EB5 visas to Chinese investors EB5 Loans through two Regional Centers beneficially owned and managed by the co-founders. The Inland Empire Renewable Energy Regional Center (“IERE”), located in Riverside, Calif. where SolarMax is headquartered was designated as an EB-5 Regional Center by USCIS in June 2011 authorizing it to offer investment opportunities in exchange for permanent residency status to foreign investors who invest at least $500,000 toward job-creating projects. The IERE, which is owned and managed by David Hsu, Ching Liu, and Simon Yuan has been used to target Chinese investors and pool and direct EB5 investment funds to SolarMax. The money has been loaned to SolarMax through two investment limited partnerships Clean Energy Fund LP (“CEF”) and Clean Energy Funding II LP (“CEF II”) where IERE acts as the general partner. IERE also acts as a general partner of a third limited partnership, Clean Energy Center (“CEC”) which received a $13m loan to SMX Property LLC, another entity owned by the co-founders, in order to purchase and renovate the office building located at 3080 12th Street Riverside, CA.


Essentially SolarMax’s co-founders have been channeling EB5 investor funds to a Regional Center, which they owned, profiting from admin fees charged to investors and channeling the remaining funds into their own companies including SolarMax and SMX Property LLC which takes lease payments from SolarMax.


CEF I and CEF II have provided SolarMax’s US subsidiaries with a total of $55m in secured loans under two loan facilities - $45m to SREP from CEF and $13m to LED. As of September 30, 2019, SolarMax had fully maxed out the CEF I and had $2.5m available to use under CEF II. These loans typically have a 4-year term and can be extended until investors have met all the requirements under the EB5 program for permanent resident status (I-829 approval date). Given the terms of the loan financing offered to residential customers by SolarMax which average 7 years, it is logically not feasible for the Company to repay EB5 investors within the 4-year time frame. 


In January 2020, LPs accounting for $23m of these loans had their petitions approved which triggers the maturity of these loans, $22m of LPs had a pending status for their petitions and the remaining $10.5m was scheduled to mature 2020-2021. Basically, if SolarMax is unable to find new EB5 investors it will be unable to repay the outstanding loans to CEF I and CEF II. So in Q4 2019, SolarMax issued to 11 LPs of CEFI  $5.5m of convertible notes, which convert into common stock at 80% of the IPO price. The Company is probably using the public listing as a way to repay some of its existing EB5 liabilities through the issuance of converts.


SolarMax has also employed several methods to divert funds from SREP and other US subsidiaries to SolarMax Technology (parent holding company), which is outside the EB5 purview. In the past, as detailed in the lawsuit, SREP has entered into fake procurement contracts with sham entities controlled by individuals linked to the co-founders to ultimately channel cash to the parent.


Starting in 2016, SolarMax Technology, executive directors implemented a hefty management fee based on 10% of the subsidiary’s revenue. In 2016, 2017 and 2018, SolarMax Technology received management fee income of $3.1m, $3.3m and $3.2m, respectively. Furthermore, all of the Company’s lease agreements are from real estate owned by the Company’s co-founders.


(2)        Financials reveal dependency on related parties


SolarMax’s financial performance in the US and in China has been volatile. The explanation for this is a large portion of the Company’s revenues are derived from sales to related party customers rather than from external customers, particularly in China. Similarly, the Company’s significant suppliers for panels are also related parties or possibly connected to the Company.


The 2015 lawsuit alleges that in the 2011 and 2012 (prior to China entry), SolarMax engaged in round trip transactions with sham middleman entities to inflate US sales figures reported approximately $50m of phantom revenue on its 2011 and 2012 audited financial statements.


It appears that the Company may be still engaging in similar transactions through various related party entities.




US Operations

In the US, most of the revenues come from the installation and sale of solar systems to residential customers through SREP. SREP sells solar energy systems to residential and commercial customers through (i) direct cash sales (ii) sales with third-party financing arranged by the Company, and (iii) sales with financing provided by SolarMax Financial (3 to 15 year repayment terms) and (iv) leasing exclusively through Sunrun (NASDAQ: RUN).


In January 2015, the Company entered into a 3-year channel agreement with Sunrun, which was extended until January 2021 under which SolarMax effectively acts as Sunrun’s sales representative for Sunrun’s products in southern California. When a customer signs a Sunrun lease, SolarMax purchases equipment from a list of pre-approved vendors, and is required to purchase meters from a subsidiary of Sunrun. SolarMax then performs the design and EPC services until the system is permitted. Sunrun pays the Company 80% of the purchase price of the system after the system receives the city sign off and the final 20% after receiving the permit to operate. Similar to solar systems sold directly to residential and commercial customers, the Company recognizes the revenue on the solar systems sold to Sunrun when the permit to operate is received. Sunrun owns the equipment, leases the system and also services the lease. Sunrun may terminate the agreement if the Company fails to meet specified minimum volume requirements. Sunrun also has the right to terminate certain incentives contained in the agreement at any time.


Prior to Sunrun, SREP had a similar arrangement with Sunpower from December 2011 to February 2017, which was terminated because the Company installed systems, which did not meet the production guarantee for power generated. This probably drove the decision to switch to Sunrun.




Interestingly, after entering into the channel agreement, Sunrun’s share of solar energy sales has been steadily declining from $11m in 2016 (39%) to $3m during 9M 2019 (11%) which implies that SREP’s direct sales mainly through extending credit to customers have been increasing to compensate for the decline in revenues through this channel. To attract sales, SolarMax Financial has been trying to offer cheap financing to customers with the share of the customer loan portfolio with a 0% interest rate increasing to 29% at 9M 2019 from less than 1% in 2017.


China Operations

SolarMax first generated revenue from its China operations in 2016. To date, almost all of the China revenue has come from providing EPC services to solar farms developed and beneficially owned by a related party called Changzhou Almaden Co., Ltd., (“AMD”), a publicly traded solar panel manufacturer in Asia and the Middle East and a 8.9% shareholder in SolarMax. Jinxi Lin, who founded AMD in 2006 serves as the Chairman and has been a Director of SolarMax since 2014. AMD accounted for 100% and 53% of the Company’s revenue in China during 2017 and 2018, respectively. SolarMax doesn’t generate significant amounts of revenues from non-related parties.


Revenue from AMD totaled $55m in 2017, $31m in 2018 and $4.5m during 9M 2019 for EPC services. EPC revenue is recognized on a percentage completed basis. O&M revenue is not significant because once AMD sold the projects, the service contracts were terminated by the buyer.


SolarMax also purchased solar panels from AMD in 2018 totaling $31.5m and staring in 2019 has been using AMD project receivables to offset the payables outstanding for purchases of solar panels.


Supplier Arrangements

Effective June 1, 2016, SREP entered into a 3-year channel agreement with a company called Sunspark pursuant to which SolarMax agreed to purchase 150MW of solar panels over a three year period for an estimated total commitment of $80m ($0.56 per watt) with a minimum annual obligation of 30MW ($16m per year).


The Company’s agreement with Sunspark covers purchases by both its United States and China operations. Sunspark, which was founded in 2015 and is the US subsidiary of YiHeng Science and Technology Co. Limited., is a domestic manufacturer of solar panels and has an affiliate that manufactures solar panels in China. After Sunspark was established, it became an approved vendor under the Sunrun agreement.


Sunspark also sub-leases 9,240 sq. ft of warehouse space from SolarMax and pays rent directly to SMX Property LLC (owned by the Co-founders) which is used to offset SolarMax’s rent due to SMXP.



In April 2017, the Company, through one of its PRC subsidiaries purchased 50MW megawatts under this agreement and met the minimum commitment for the first year. The Company did not meet the minimum commitment in the second year and Sunspark agreed to temporarily suspend the Company’s purchase obligations in 2018 and renegotiate them in 2019. We are not sure if this was due to lack of volume or problems with Sunspark’s products.



2015 Lawsuit:




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Deal vote / q1 closing of transaction 

Lockup expirations

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