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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-37511

 

Sunrun Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

26-2841711

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

595 Market Street, 29th Floor

San Francisco, California 94105

(Address of principal executive offices and Zip Code)

(415) 580-6900

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

As of November 7, 2016, the number of shares of the registrant’s common stock outstanding was 103,816,524.

 

 

 

 


Table of Contents

 

 

 

 

 

Page

 

Item 1

 

 

Financial Statements (Unaudited)

 

2

 

 

Consolidated Balance Sheets

 

2

 

 

Consolidated Statements of Operations

 

4

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

5

 

 

Consolidated Statements of Cash Flows

 

6

 

 

Notes to Consolidated Financial Statements

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

Item 4.

 

Controls and Procedures

 

39

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

39

Item 1A.

 

Risk Factors

 

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

Item 5.

 

Other Information

 

64

Item 6.

 

Exhibits

 

64

 

 

Signatures

 

65

 

 

 

1


Sunrun Inc.

Consolidated Balance Sheets

(In Thousands, Except Share Par Values)

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

207,477

 

 

$

203,864

 

Restricted cash

 

 

11,944

 

 

 

9,203

 

Accounts receivable (net of allowances for doubtful accounts of $931 and $1,641 as

   of September 30, 2016 and December 31, 2015, respectively)

 

 

51,031

 

 

 

60,275

 

State tax credits receivable

 

 

 

 

 

9,198

 

Inventories

 

 

85,941

 

 

 

71,258

 

Prepaid expenses and other current assets

 

 

12,589

 

 

 

5,917

 

Total current assets

 

 

368,982

 

 

 

359,715

 

Restricted cash

 

 

6,117

 

 

 

8,094

 

Solar energy systems, net

 

 

2,461,506

 

 

 

1,992,021

 

Property and equipment, net

 

 

52,861

 

 

 

44,866

 

Intangible assets, net

 

 

19,551

 

 

 

22,705

 

Goodwill

 

 

87,543

 

 

 

87,543

 

Prepaid tax asset

 

 

323,676

 

 

 

190,146

 

Other assets

 

 

35,932

 

 

 

29,502

 

Total assets (1)

 

$

3,356,168

 

 

$

2,734,592

 

Liabilities and total equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

88,669

 

 

$

104,133

 

Distributions payable to noncontrolling interests and redeemable noncontrolling interests

 

 

9,817

 

 

 

8,144

 

Accrued expenses and other liabilities

 

 

57,363

 

 

 

49,146

 

Deferred revenue, current portion

 

 

67,553

 

 

 

59,726

 

Deferred grants, current portion

 

 

14,374

 

 

 

13,949

 

Capital lease obligations, current portion

 

 

11,127

 

 

 

8,951

 

Long-term non-recourse debt, current portion

 

 

12,573

 

 

 

4,722

 

Lease pass-through financing obligation, current portion

 

 

5,177

 

 

 

3,710

 

Total current liabilities

 

 

266,653

 

 

 

252,481

 

Deferred revenue, net of current portion

 

 

582,276

 

 

 

559,066

 

Deferred grants, net of current portion

 

 

208,952

 

 

 

220,784

 

Capital lease obligations, net of current portion

 

 

15,582

 

 

 

15,042

 

Recourse debt

 

 

244,000

 

 

 

197,000

 

Long-term non-recourse debt, net of current portion

 

 

558,900

 

 

 

333,042

 

Lease pass-through financing obligation, net of current portion

 

 

138,121

 

 

 

153,188

 

Other liabilities

 

 

11,356

 

 

 

7,144

 

Deferred tax liabilities

 

 

334,127

 

 

 

190,146

 

Total liabilities (1)

 

 

2,359,967

 

 

 

1,927,893

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

150,903

 

 

 

147,139

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value—authorized, 200,000 shares as of

   September 30, 2016 and December 31, 2015; no shares issued and outstanding

   as of September 30, 2016 and December 31, 2015

 

 

 

 

 

 

Common stock, $0.0001 par value—authorized, 2,000,000 shares as of

   September 30, 2016 and December 31, 2015; issued and outstanding, 103,438 and

   101,282 shares as of September 30, 2016 and December 31, 2015, respectively

 

 

10

 

 

 

10

 

Additional paid-in capital

 

 

660,710

 

 

 

642,229

 

Accumulated other comprehensive loss

 

 

(5,187

)

 

 

(921

)

Accumulated deficit

 

 

(24,594

)

 

 

(87,249

)

Total stockholders’ equity

 

 

630,939

 

 

 

554,069

 

Noncontrolling interests

 

 

214,359

 

 

 

105,491

 

Total equity

 

 

845,298

 

 

 

659,560

 

Total liabilities, redeemable noncontrolling interests and total equity

 

$

3,356,168

 

 

$

2,734,592

 

 


2


(1)

The Company’s consolidated assets as of September 30, 2016 and December 31, 2015 include $1,881,912 and $1,363,615, respectively, in assets of variable interest entities, or “VIEs”, that can only be used to settle obligations of the VIEs. Solar energy systems, net, as of September 30, 2016 and December 31, 2015 were $1,756,040 and $1,305,420, respectively; cash as of September 30, 2016 and December 31, 2015 were $104,054 and $44,407, respectively; restricted cash as of September 30, 2016 and December 31, 2015 were $1,554 and $757, respectively; accounts receivable, net as of September 30, 2016 and December 31, 2015 were $18,485 and $12,965, respectively; prepaid expenses and other current assets as of September 30, 2016 and December 31, 2015 were $242 and $66, respectively and other assets as of September 30, 2016 and December 31, 2015 were $1,537 and $0, respectively. The Company’s consolidated liabilities as of September 30, 2016 and December 31, 2015 include $603,841 and $540,464, respectively, in liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accounts payable as of September 30, 2016 and December 31, 2015 of $18,904 and $11,025, respectively; distributions payable to noncontrolling interests and redeemable noncontrolling interests as of September 30, 2016 and December 31, 2015 of $9,767 and $8,063, respectively; accrued expenses and other liabilities as of September 30, 2016 and December 31, 2015 of $475 and $175, respectively; deferred revenue as of September 30, 2016 and December 31, 2015 of $408,490 and $374,736, respectively; deferred grants as of September 30, 2016 and December 31, 2015 of $110,125 and $115,726, respectively; and long-term non-recourse debt as of September 30, 2016 and December 31, 2015 of $56,080 and $30,739, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

 

 

3


Sunrun Inc.

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases and incentives

 

$

43,150

 

 

$

31,650

 

 

$

123,084

 

 

$

88,416

 

Solar energy systems and product sales

 

 

68,883

 

 

 

50,950

 

 

 

210,230

 

 

 

116,551

 

Total revenue

 

 

112,033

 

 

 

82,600

 

 

 

333,314

 

 

 

204,967

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operating leases and incentives

 

 

40,770

 

 

 

28,723

 

 

 

117,478

 

 

 

77,167

 

Cost of solar energy systems and product sales

 

 

57,264

 

 

 

46,468

 

 

 

176,376

 

 

 

106,422

 

Sales and marketing

 

 

40,192

 

 

 

45,382

 

 

 

127,096

 

 

 

104,284

 

Research and development

 

 

2,458

 

 

 

2,240

 

 

 

7,294

 

 

 

7,019

 

General and administrative

 

 

21,331

 

 

 

21,486

 

 

 

68,193

 

 

 

61,469

 

Amortization of intangible assets

 

 

1,051

 

 

 

1,051

 

 

 

3,154

 

 

 

2,644

 

Total operating expenses

 

 

163,066

 

 

 

145,350

 

 

 

499,591

 

 

 

359,005

 

Loss from operations

 

 

(51,033

)

 

 

(62,750

)

 

 

(166,277

)

 

 

(154,038

)

Interest expense, net

 

 

13,957

 

 

 

8,475

 

 

 

38,535

 

 

 

24,038

 

Loss on early extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

431

 

Other expenses (income), net

 

 

42

 

 

 

87

 

 

 

(460

)

 

 

1,405

 

Loss before income taxes

 

 

(65,032

)

 

 

(71,312

)

 

 

(204,352

)

 

 

(179,912

)

Income tax expense (benefit)

 

 

9,936

 

 

 

903

 

 

 

13,146

 

 

 

(5,312

)

Net loss

 

 

(74,968

)

 

 

(72,215

)

 

 

(217,498

)

 

 

(174,600

)

Net loss attributable to noncontrolling interests and

   redeemable noncontrolling interests

 

 

(91,846

)

 

 

(69,447

)

 

 

(280,153

)

 

 

(161,377

)

Net income (loss) attributable to

   common stockholders

 

$

16,878

 

 

$

(2,768

)

 

$

62,655

 

 

$

(13,223

)

Less: Deemed dividend to convertible preferred

   stockholders

 

 

 

 

 

(24,890

)

 

 

 

 

 

(24,890

)

Net income (loss) available to

   common stockholders

 

$

16,878

 

 

$

(27,658

)

 

$

62,655

 

 

$

(38,113

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share available to

   common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

(0.41

)

 

$

0.61

 

 

$

(0.96

)

Diluted

 

$

0.16

 

 

$

(0.41

)

 

$

0.60

 

 

$

(0.96

)

Weighted average shares used to compute net

   income (loss) per share available to

   common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

102,707

 

 

 

67,732

 

 

 

101,988

 

 

 

39,612

 

Diluted

 

 

105,092

 

 

 

67,732

 

 

 

104,698

 

 

 

39,612

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


Sunrun Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands)

(Unaudited)

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income (loss) attributable to common

   stockholders

 

$

16,878

 

 

$

(2,768

)

 

$

62,655

 

 

$

(13,223

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivatives, net

   of income taxes

 

 

421

 

 

 

(4,690

)

 

 

(5,212

)

 

 

(3,621

)

Less: Interest expense on derivatives

   recognized into earnings, net of income taxes

 

 

(301

)

 

 

(570

)

 

 

(946

)

 

 

(926

)

Comprehensive income (loss)

 

$

17,600

 

 

$

(6,888

)

 

$

58,389

 

 

$

(15,918

)

 

 

 

5


Sunrun Inc.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Nine months ended September 30,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(217,498

)

 

$

(174,600

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Noncash losses

 

 

3,432

 

 

 

2,545

 

Depreciation and amortization, net of amortization of deferred grants

 

 

73,570

 

 

 

51,059

 

Bad debt expense

 

 

722

 

 

 

1,158

 

Interest on lease pass-through financing obligations

 

 

9,051

 

 

 

9,425

 

Noncash tax expense (benefit)

 

 

13,146

 

 

 

(5,312

)

Noncash interest expense

 

 

8,024

 

 

 

5,349

 

Stock-based compensation expense

 

 

14,026

 

 

 

10,427

 

Reduction in lease pass-through financing obligations

 

 

(14,149

)

 

 

(16,059

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

9,183

 

 

 

(5,999

)

Inventories

 

 

(14,573

)

 

 

(27,993

)

Prepaid and other assets

 

 

(5,135

)

 

 

3,039

 

Accounts payable

 

 

(22,220

)

 

 

37,605

 

Accrued expenses and other liabilities

 

 

8,014

 

 

 

5,568

 

Deferred revenue

 

 

7,176

 

 

 

31,856

 

Net cash used in operating activities

 

 

(127,231

)

 

 

(71,932

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Payments for the costs of solar energy systems, leased and to be leased

 

 

(530,295

)

 

 

(408,861

)

Purchases of property and equipment

 

 

(10,397

)

 

 

(8,416

)

Business acquisition, net of cash acquired

 

 

(5,000

)

 

 

(14,575

)

Net cash used in investing activities

 

 

(545,692

)

 

 

(431,852

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from state tax credits, net of recapture

 

 

9,081

 

 

 

4,975

 

Proceeds from recourse debt

 

 

354,400

 

 

 

279,000

 

Repayment of recourse debt

 

 

(307,400

)

 

 

(192,224

)

Proceeds from non-recourse debt

 

 

249,820

 

 

 

150,000

 

Repayment of non-recourse debt

 

 

(18,113

)

 

 

(8,938

)

Payment of debt fees

 

 

(13,614

)

 

 

(14,751

)

Proceeds from lease pass-through financing obligations

 

 

14,242

 

 

 

73,300

 

Repayments of lease pass-through financing obligations

 

 

 

 

 

(88,918

)

Contributions received from noncontrolling interests and redeemable noncontrolling interests

 

 

422,207

 

 

 

215,724

 

Distributions paid to noncontrolling interests and redeemable noncontrolling interests

 

 

(27,749

)

 

 

(20,248

)

Proceeds from exercises of stock options, net of withholding taxes on restricted stock units

   and issuance of shares in connection with the Employee Stock Purchase Plan

 

 

4,704

 

 

 

3,188

 

Proceeds received and (offering costs paid) related to initial public offering

 

 

(437

)

 

 

223,541

 

Payment of capital lease obligations

 

 

(9,668

)

 

 

(2,670

)

Change in restricted cash

 

 

(937

)

 

 

(7,343

)

Net cash provided by financing activities

 

 

676,536

 

 

 

614,636

 

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

3,613

 

 

 

110,852

 

Cash, beginning of period

 

 

203,864

 

 

 

152,154

 

Cash, end of period

 

$

207,477

 

 

$

263,006

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

17,776

 

 

$

7,740

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash investing and financing activities

 

 

 

 

 

 

 

 

Costs of solar energy systems and property and equipment included in accounts payable and

   accrued expenses

 

$

22,871

 

 

$

8,447

 

Distributions payable to noncontrolling interests and redeemable noncontrolling interests

 

$

9,817

 

 

$

7,224

 

Vehicles acquired under capital leases

 

$

12,637

 

 

$

13,160

 

Noncash purchase consideration on acquisition of business

 

$

 

 

$

18,718

 

Deemed dividend on Series D and E preferred shares

 

$

 

 

$

24,890

 

Deferred offering costs not yet paid

 

$

 

 

$

1,463

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

6


 

Sunrun Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Note 1. Organization

Sunrun Inc. (“Sunrun” or the “Company”) was originally formed in 2007 as a California limited liability company and was converted into a Delaware corporation in 2008. The Company is engaged in the design, development, installation sale, ownership and maintenance of residential solar energy systems (“Projects”) in the United States.

Sunrun acquires customers directly and through relationships with various solar and strategic partners (“Partners”). The Projects are constructed either by Sunrun or by Sunrun’s Partners and are owned by the Company. Sunrun’s customers enter into a power purchase agreement (“PPA”) or a lease (each, a “Customer Agreement”) which typically has a term of 20 years. Sunrun monitors, maintains and insures the Projects. The Company also sells solar energy systems and products, such as panels and racking, to customers.

The Company has formed various subsidiaries (“Funds”) to finance the development of Projects. These Funds, structured as limited liability companies, obtain financing from outside investors and purchase or lease Projects from Sunrun under master purchase or master lease agreements. The Company currently utilizes three legal structures in its investment Funds, which are referred to as: (i) lease pass-throughs, (ii) partnership-flips and (iii) joint venture (“JV”) inverted leases.

Sunrun acquired Clean Energy Experts, LLC (“CEE”), a consumer demand and solar lead generation company, in April 2015, to support the growth of the business, including reducing costs of obtaining customer leads externally. As a result of the acquisition, the Company also sells a portion of solar leads generated to customers.

The Company completed its initial public offering in August 2015 and its common stock is listed on the NASDAQ Global Select Market under the symbol “RUN”.

 

 

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2015. The unaudited consolidated financial statements are prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2016 or other future periods.

The consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries, including Funds, in which the Company has a controlling financial interest. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as variable interest entities (“VIEs”), through arrangements that do not involve controlling financial interests. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810 (“ASC 810”) Consolidation, the Company consolidates any VIE of which it is the primary beneficiary. The primary beneficiary, as defined in ASC 810, is the party that has (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb the losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company evaluates its relationships with its VIEs on an ongoing basis to determine whether it continues to be the primary beneficiary. The consolidated financial statements reflect the assets and liabilities of VIEs that are consolidated. All intercompany transactions and balances have been eliminated in consolidation.

7


 

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation. In addition, during 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-03, Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangement. The impact of the Company’s adoption of the ASUs on the prior period consolidated balance sheet was as follows (in thousands):

 

 

 

December 31, 2015

 

 

 

As Previously Reported

 

 

Adoption of ASU

 

 

As Reclassified

 

Prepaid expenses and other current assets

 

$

6,696

 

 

$

(779

)

 

$

5,917

 

Other assets

 

 

32,277

 

 

 

(2,775

)

 

 

29,502

 

Long-term non-recourse debt, current portion

 

 

5,408

 

 

 

(686

)

 

 

4,722

 

Recourse debt

 

 

194,975

 

 

 

2,025

 

 

 

197,000

 

Long-term non-recourse debt, net of current

   portion

 

 

337,935

 

 

 

(4,893

)

 

 

333,042

 

 

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company regularly makes significant estimates and assumptions, including, but not limited to, the estimates that affect the collectability of accounts receivable, the valuation of inventories, the useful lives and estimated residual values of solar energy systems, the useful lives of property and equipment, the valuation and useful lives of intangible assets, the fair value of assets acquired and liabilities assumed in business combinations, the effective interest rate used to amortize lease pass-through financing obligations, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, the fair value of debt instruments disclosed and the redemption value of redeemable noncontrolling interests. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Actual results may differ from such estimates.

Segment Information

The Company has one operating segment with one business activity, providing solar energy services and products to customers. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer, who manages operations on a consolidated basis for purposes of allocating resources. When evaluating performance and allocating resources, the CODM reviews financial information presented on a consolidated basis.

Revenues from external customers (including, but not limited to homeowners) for each group of similar products and services are as follows (in thousands):

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Operating leases

 

$

34,144

 

 

$

23,688

 

 

$

92,451

 

 

$

63,735

 

Incentives

 

 

9,006

 

 

 

7,962

 

 

 

30,633

 

 

 

24,681

 

Operating leases and incentives

 

 

43,150

 

 

 

31,650

 

 

 

123,084

 

 

 

88,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Solar energy systems

 

 

27,585

 

 

 

9,890

 

 

 

93,655

 

 

 

22,724

 

Products

 

 

41,298

 

 

 

41,060

 

 

 

116,575

 

 

 

93,827

 

Solar energy systems and product sales

 

 

68,883

 

 

 

50,950

 

 

 

210,230

 

 

 

116,551

 

Total revenue

 

$

112,033

 

 

$

82,600

 

 

$

333,314

 

 

$

204,967

 

 

Fair Value of Financial Instruments

The Company defines fair value as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses valuation techniques to measure

8


 

fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. The FASB establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3—Inputs that are unobservable, significant to the measurement of the fair value of the assets or liabilities and are supported by little or no market data.

The Company’s financial instruments include cash, receivables, accounts payable, accrued expenses, distributions payable to noncontrolling interests, derivatives, and recourse and non-recourse debt.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606), to replace the existing revenue recognition criteria for contracts with customers and to establish the disclosure requirements for revenue from contracts with customers. The core principle of this standard is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This ASU is effective for the Company for annual reporting periods beginning after December 15, 2017 including the interim reporting periods within that fiscal year. Early adoption is permitted. Adoption of this ASU is either retrospective to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company is currently evaluating this guidance and the impact it may have on the Company’s consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, to specify that inventory should be subsequently measured at the lower of cost or net realizable value, which is the ordinary selling price less any completion, transportation and disposal costs. This ASU is effective for interim and annual periods beginning after December 15, 2016. Adoption of this ASU is prospective. The Company is currently evaluating this guidance and the impact it may have on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The accounting for lessors is largely unchanged. However, the new guidance now defines what qualifies as sales-type and direct financing leases, as well as the related accounting. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a modified retrospective approach. The Company is currently evaluating this guidance and the impact it may have on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It will also allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. This ASU is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating this guidance and the impact it may have on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology with a current expected credit losses model. The amendment applies to entities which hold financial assets and net investment in leases that are not accounted for at fair value through net income as well as loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a modified retrospective approach,

9


 

with certain aspects requiring a prospective approach. The Company is currently evaluating this guidance and the impact it may have on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is applied using a modified retrospective approach. The Company is currently evaluating this guidance and the impact it may have on the Company’s consolidated financial statements.

 

 

Note 3. Fair Value Measurement

At September 30, 2016 and December 31, 2015, the carrying value of receivables, accounts payable, accrued expenses and distributions payable to noncontrolling interests approximates fair value due to their short-term nature. The carrying values and fair values of debt instruments are as follows (in thousands):

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Lines of credit

 

$

406,800

 

 

$

406,800

 

 

$

197,000

 

 

$

197,000

 

Syndicated term loans

 

 

191,375

 

 

 

191,375

 

 

 

169,344

 

 

 

169,344

 

Bank term loans

 

 

79,046

 

 

 

78,921

 

 

 

30,739

 

 

 

32,692

 

Note payable

 

 

35,653

 

 

 

35,238

 

 

 

32,781

 

 

 

32,568

 

Solar asset-backed notes

 

 

102,599

 

 

 

108,739

 

 

 

104,900

 

 

 

110,103

 

Total

 

$

815,473

 

 

$

821,073

 

 

$

534,764

 

 

$

541,707

 

At September 30, 2016, the fair value of the Company’s lines of credit, syndicated term loans and bank term loans due in July 2021 and September 2022 approximates their carrying values because their interest rates are variable rates that approximate rates currently available to the Company. At December 31, 2015, the fair value of the Company’s line of credit and syndicated term loans approximates their carrying values because their interest rates are variable rates that approximate rates currently available to the Company. At September 30, 2016 and December 31, 2015, the fair value of the Company’s bank term loan due in April 2022, note payable and solar asset-backed notes are based on rates currently offered for debt with similar maturities and terms. The Company’s fair value of the debt instruments fell under the Level 3 hierarchy. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market.

The Company determines the fair value of its interest rate swaps using a discounted cash flow model which incorporates an assessment of the risk of non-performance by the interest rate swap counterparty and an evaluation of the Company’s credit risk in valuing derivative instruments. The valuation model uses various inputs including contractual terms, interest rate curves, credit spreads and measures of volatility.

The Company determines the fair value of its warrants issued using the Black-Scholes option-pricing model. The significant unobservable input used in the fair value measurement of the warrant liability was the expected volatility of the Company. Generally, increases (decreases) in the expected volatility of the Company would result in a directionally similar impact to the measurement of the Company’s warrants.

At September 30, 2016 and December 31, 2015, financial instruments measured at fair value on a recurring basis, based upon the fair value hierarchy are as follows (in thousands):

 

 

 

September 30, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

 

$

7,881

 

 

$

 

 

$

7,881

 

Warrants

 

 

 

 

 

 

 

 

69

 

 

 

69

 

Total

 

$

 

 

$

7,881

 

 

$

69

 

 

$

7,950

 

 

10


 

 

 

December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

 

$

921

 

 

$

 

 

$

921

 

Warrants

 

 

 

 

 

 

 

 

557

 

 

 

557

 

Total

 

$

 

 

$

921

 

 

$

557

 

 

$

1,478

 

 

 

Note 4. Inventories

Inventories consist of the following (in thousands):

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Raw materials

 

$

80,984

 

 

$

62,967

 

Work-in-process

 

 

4,957

 

 

 

8,291

 

Total

 

$

85,941

 

 

$

71,258

 

 

 

Note 5. Solar Energy Systems, net

Solar energy systems, net consists of the following (in thousands):

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Solar energy system equipment costs

 

$

2,301,601

 

 

$

1,846,103

 

Inverters

 

 

238,637

 

 

 

177,202

 

Initial direct costs

 

 

106,556

 

 

 

68,280

 

Total solar energy systems

 

 

2,646,794

 

 

 

2,091,585

 

Less: Accumulated depreciation and amortization

 

 

(277,634

)

 

 

(212,671

)

Add: Construction-in-progress

 

 

92,346

 

 

 

113,107

 

Total solar energy systems, net

 

$

2,461,506

 

 

$

1,992,021

 

 

All solar energy systems, construction-in-progress and inverters have been leased to or are subject to signed Customer Agreements with customers. The Company recorded depreciation expense related to solar energy systems of $24.5 million and $19.3 million for the three months ended September 30, 2016 and 2015, respectively, and $67.4 million and $51.3 million for the nine months ended September 30, 2016 and 2015, respectively. The depreciation expense was reduced by the amortization of deferred grants of $3.7 million and $3.5 million for the three months ended September 30, 2016 and 2015, respectively, and $11.1 million and $10.6 million for the nine months ended September 30, 2016 and 2015, respectively.

 

 

11


 

Note 6. Indebtedness

As of September 30, 2016, debt consisted of the following (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused

 

 

Annual

 

 

 

 

 

 

 

 

Carrying Values, net of

 

 

Borrowing

 

 

Contractual

 

Interest

 

 

Maturity

 

 

debt discount

 

 

Capacity

 

 

Interest Rate

 

Rate

 

 

Date

 

 

Current

 

 

Long Term

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Recourse debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank line of credit

 

$

 

 

$

244,000

 

 

$

244,000

 

 

$

3,406

 

 

Varies (1)

 

3.70% - 5.75%

 

 

April 2018

Total recourse debt

 

$

 

 

$

244,000

 

 

$

244,000

 

 

$

3,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recourse debt: