Sunrun Inc. - FORM 10-Q - November 13, 2015

Attached files

file	filename
EX-31.2 - EX-31.2 - Sunrun Inc.	run-ex312_10.htm
EX-32.1 - EX-32.1 - Sunrun Inc.	run-ex321_7.htm
EX-31.1 - EX-31.1 - Sunrun Inc.	run-ex311_9.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2015

o	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, 29^th 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 x NO o

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 x NO o

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	x	(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 o NO x

As of November 10, 2015, the number of shares of the registrant’s common stock outstanding was 101,081,981.

TABLE OF CONTENTS

	PART I – FINANCIAL INFORMATION	Page
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive Loss	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

	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	63
Item 6.	Exhibits	63
	Signatures	64

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SUNRUN INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share values)

	September 30, 2015			December 31, 2014
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	263,006		$	152,154
Restricted cash		8,076			2,534
Accounts receivable (net of allowances for doubtful accounts of $1,200 and $703 as of September 30, 2015 and December 31, 2014, respectively)		53,717			43,189
Grants receivable		9,198			5,183
Inventories		51,907			23,914
Prepaid expenses and other current assets		8,375			9,560
Deferred tax assets, current		4,632			3,048
Total current assets		398,911			239,582
Restricted cash		7,813			6,012
Solar energy systems, net		1,837,047			1,480,223
Property and equipment, net		34,743			22,195
Intangible assets, net		23,756			13,111
Goodwill		87,555			51,786
Prepaid tax asset		170,000			109,381
Other assets		23,201			13,342
Total assets(1)	$	2,583,026		$	1,935,632
Liabilities and total equity
Current liabilities:
Accounts payable	$	97,908		$	51,166
Distributions payable to noncontrolling interests and redeemable noncontrolling interests		7,224			6,764
Accrued expenses and other liabilities		45,636			25,445
Deferred revenue, current portion		52,590			44,398
Deferred grants, current portion		13,980			13,754
Capital lease obligation, current portion		6,441			1,593
Long-term debt, current portion		1,803			2,602
Solar asset-backed notes, current portion		2,967			—
Lease pass-through financing obligation, current portion		2,837			5,161
Total current liabilities		231,386			150,883
Deferred revenue, net of current portion		524,950			467,726
Deferred grants, net of current portion		224,689			226,801
Capital lease obligation, net of current portion		11,406			5,761
Line of credit		133,294			48,597
Long-term debt, net of current portion		224,021			188,052
Solar asset-backed notes, net of current portion		106,731			—
Lease pass-through financing obligation, net of current portion		124,160			180,224
Other liabilities		4,810			2,424
Deferred tax liabilities		174,631			112,597
Total liabilities(1)		1,760,078			1,383,065
Redeemable noncontrolling interests		176,705			135,948
Stockholders’ equity:
Convertible preferred stock, $0.0001 par value—authorized, 200,000 and 57,028 shares as of September 30, 2015 and December 31, 2014, respectively; issued and outstanding, 0 and 54,841 shares as of September 30, 2015 and December 31, 2014, respectively; aggregate liquidation value of $0 and $305,883 as of September 30, 2015 and December 31, 2014, respectively		—		5
Common stock, $0.0001 par value—authorized, 2,000,000 and 119,547 shares as of September 30, 2015 and December 31, 2014, respectively; issued and outstanding, 100,807 and 24,249 shares as of September 30, 2015 and December 31, 2014, respectively		10		2
Additional paid-in capital		636,517			383,860
Accumulated other comprehensive loss		(2,695	)	—
Accumulated deficit		(72,226	)		(59,003	)
Total stockholders’ equity		561,606			324,864
Noncontrolling interests		84,637			91,755
Total equity		646,243			416,619
Total liabilities, redeemable noncontrolling interests and total equity	$	2,583,026		$	1,935,632

(1)

The Company’s consolidated assets as of September 30, 2015 and December 31, 2014 include $1,317,653 (unaudited) and $986,878, 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, 2015 and December 31, 2014 were $1,232,009 (unaudited) and $942,655, respectively; cash and cash equivalents as of September 30, 2015 and December 31, 2014 were $68,890 (unaudited) and $29,099, respectively; restricted cash as of September 30, 2015 and December 31, 2014 were $742 (unaudited) and $593, respectively; accounts receivable, net as of September 30, 2015 and December 31, 2014 were $15,882 (unaudited) and $14,351; respectively; prepaid expenses and other current assets as of September 30, 2015 and December 31, 2014 were $130 (unaudited) and $180, respectively. The Company’s consolidated liabilities as of September 30, 2015 and December 31, 2014 include $519,813 (unaudited) and $474,348, respectively, in liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accounts payable as of September 30, 2015 and December 31, 2014 of $15,364 (unaudited) and $9,057, respectively; distributions payable to noncontrolling interests and redeemable noncontrolling interests as of September 30, 2015 and December 31, 2014 of $7,174 (unaudited) and $6,426, respectively; accrued expenses and other liabilities as of September 30, 2015 and December 31, 2014 of $188 (unaudited) and $340, respectively; deferred revenue as of September 30, 2015 and December 31, 2014 of $347,832 (unaudited) and $301,792, respectively; deferred grants as of September 30, 2015 and December 31, 2014 of $117,735 (unaudited) and $123,351, respectively; and long-term debt as of September 30, 2015 and December 31, 2014 of $31,520 (unaudited) and $33,382, respectively.

SUNRUN INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share values)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Revenue:
Operating leases and incentives	$	31,650		$	21,612		$	88,416		$	63,040
Solar energy systems and product sales		50,950			34,464			116,551			75,378
Total revenue		82,600			56,076			204,967			138,418
Operating expenses:
Cost of operating leases and incentives		28,723			19,112			77,167			51,367
Cost of solar energy systems and product sales		46,468			30,235			106,422			66,043
Sales and marketing		45,382			23,445			104,284			53,207
Research and development		2,240			2,036			7,019			5,962
General and administrative		21,486			17,700			61,469			50,387
Amortization of intangible assets		1,051			575			2,644			1,693
Total operating expenses		145,350			93,103			359,005			228,659
Loss from operations		(62,750	)		(37,027	)		(154,038	)		(90,241	)
Interest expense, net		8,475			7,433			24,038			19,757
Loss on early extinguishment of debt		—			—			431			—
Other expenses		87			657			1,405			2,503
Loss before income taxes		(71,312	)		(45,117	)		(179,912	)		(112,501	)
Income tax expense (benefit)		903			—			(5,312	)		(10,043	)
Net loss		(72,215	)		(45,117	)		(174,600	)		(102,458	)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests		(69,447	)		(29,903	)		(161,377	)		(58,292	)
Net loss attributable to common stockholders	$	(2,768	)	$	(15,214	)	$	(13,223	)	$	(44,166	)
Deemed dividend to convertible preferred stockholders		(24,890	)		—			(24,890	)		—
Net loss available to common stockholders	$	(27,658	)	$	(15,214	)	$	(38,113	)	$	(44,166	)

Net loss per share available to common shareholders—basic and diluted	$	(0.41	)	$	(0.64	)	$	(0.96	)	$	(1.98	)
Weighted average shares used to compute net loss per share available to common stockholders—basic and diluted		67,732			23,943			39,612			22,282

SUNRUN INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income (loss) attributable to common stockholders	$	(2,768	)	$	(15,214	)	$	(13,223	)	$	(44,166	)
Other comprehensive income:
Unrealized loss on derivatives, net of tax benefit of $904 and $0 for the three months and nine months ended September 30, 2015		(4,690	)		—			(3,621	)		—
Less interest expense on derivatives recognized into earnings		(570)			—			(926)			—
Comprehensive loss	$	(6,888	)	$	(15,214	)	$	(15,918	)	$	(44,166	)

SUNRUN INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine months Ended September 30,
	2015			2014
Operating activities:
Net loss	$	(174,600	)	$	(102,458	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Noncash losses and impairments		2,545			—
Depreciation and amortization, net of amortization of deferred grants		51,059			35,443
Bad debt expense		1,158			356
Interest on lease pass-through financing		9,425			7,042
Noncash tax benefit		(5,312	)		(10,043	)
Noncash interest expense		5,349			1,784
Stock—based compensation expense		10,427			6,037
Reduction in lease pass—through financing obligations		(16,059	)		(8,337	)
Changes in operating assets and liabilities:
Accounts receivable		(5,999	)		(6,008	)
Inventories		(27,993	)		(4,928	)
Prepaid and other assets		3,039			4,317
Accounts payable		37,605			10,173
Accrued expenses and other liabilities		5,568			7,545
Deferred revenue		31,856			63,040
Net cash provided by (used in) operating activities		(71,932	)		3,963

Investing activities:
Payments for the costs of solar energy systems, leased and to be leased		(408,861	)		(296,810	)
Purchases of property and equipment		(8,416	)		(6,185	)
Acquisitions of businesses, net of cash acquired		(14,575	)		(36,384	)
Net cash used in investing activities		(431,852	)		(339,379	)

Financing activities:
Proceeds from grants and state tax credits		4,975			72
Proceeds from issuance of debt		318,000			13,546
Repayment of debt		(199,860	)		(3,683	)
Payment of debt fees		(14,751	)		(285	)
Proceeds from solar asset-backed notes		111,000			—
Repayment of solar asset-backed notes		(1,302	)		—
Proceeds from issuance of convertible preferred stock, net of issuance costs		—			143,393
Proceeds from lease pass-through financing obligations		73,300			119,596
Repayment of lease pass-through financing obligations		(88,918	)		—
Contributions received from noncontrolling interests and redeemable noncontrolling interests		215,724			144,480
Distributions paid to noncontrolling interests and redeemable noncontrolling interests		(20,248	)		(26,294	)
Proceeds from exercises of stock options		3,188			2,404
Proceeds from initial public offering, net of offering costs		223,541			—
Payment of capital lease obligation		(2,670	)		(843	)
Change in restricted cash		(7,343	)		(1,016	)
Net cash provided by financing activities		614,636			391,370

Net increase in cash and cash equivalents		110,852			55,954
Cash and cash equivalents, beginning of period		152,154			99,699
Cash and cash equivalents, end of period	$	263,006		$	155,653

Supplemental disclosures of cash flow information
Cash paid for interest	$	7,740	$	9,926

Supplemental disclosures of noncash investing and financing activities
Costs of solar energy systems included in accounts payable	$	8,447	$	1,068
Distributions payable to noncontrolling interests and redeemable noncontrolling interests	$	7,224	$	5,803
Vehicles acquired under capital leases	$	13,160	$	2,195
Noncash purchase consideration on acquisition of business	$	18,718	$	76,964
Deemed dividend on Series D and E preferred shares	$	24,890	$	—
Deferred offering costs not yet paid	$	1,463	$	—
Deferred offering costs prepaid in prior year	$	760	$	—

SUNRUN INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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. As a result of the acquisition of Mainstream Energy Corporation, its fulfillment business AEE Solar and its racking business SnapNrack (collectively, “MEC”) completed in February 2014, the Company also sells solar energy systems and products 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.

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”.

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 (the “SEC”) regarding interim financial reporting and, in the opinion of management, include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations, and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. As such, these unaudited consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the prospectus dated August 4, 2015 filed with the SEC pursuant to Rule 424 promulgated under the Securities Act of 1933, as amended. The results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results expected for the year ending December 31, 2015 or for any other interim periods or any other period.

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 that could potentially be significant to 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.

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 valuation of the Company’s common stock, the determination of valuation allowances associated with deferred tax assets, 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 for each group of similar products and services are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Operating leases	$	23,688	$	17,302	$	63,735	$	46,719
Incentives		7,962		4,310		24,681		16,321
Operating leases and incentives		31,650		21,612		88,416		63,040
Solar energy systems		9,890		6,474		22,724		14,567
Products		41,060		27,990		93,827		60,811
Solar energy systems and product sales		50,950		34,464		116,551		75,378
Total revenue	$	82,600	$	56,076	$	204,967	$	138,418

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 fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. 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 and cash equivalents, receivables, accounts payable, accrued expenses, distributions payable to noncontrolling interests, derivatives, borrowings on the line of credit, long-term debt and solar asset-backed notes.

Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (“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, and early adoption is

permitted. Adoption of the 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 assessing the impact of this guidance on its consolidated financial statements.

In November 2014, the FASB issued ASU 2014-16 Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity. This guidance requires issuers and investors to consider all of a hybrid instrument’s stated and implied substantive terms and features, including any embedded derivative features being evaluated for bifurcation. The guidance eliminates the “chameleon approach”, under which all embedded features except the feature being analyzed are considered. The guidance is effective for the year beginning after December 15, 2015 and for interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company believes the adoption of this guidance will have no impact on its consolidated financial statements.

In November 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements and provide certain disclosures when there is substantial doubt about the entity’s ability to continue as a going concern. This guidance applies to all entities and is effective for annual periods beginning after December 15, 2015, and interim periods thereafter, with early adoption permitted. The Company believes the adoption of this guidance will have no impact on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02 Amendments to the Consolidation Analysis, which provides consolidation guidance and changes the way reporting enterprises evaluate consolidation for limited partnerships, investment companies and similar entities, as well as variable interest entities. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2015. The Company is currently evaluating this guidance and the impact it may have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs, to simplify the presentation of debt issuance costs. Prior to ASU 2015-03, issuance costs were presented as an asset on the balance sheet. Under ASU 2015-03, debt issuance costs related to a recognized debt liability are required to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The Company is currently evaluating this guidance and the impact it may have on its 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. However, the ASU does not apply to inventory measured using the last-in-first-out or retail methods. The ASU is effective for interim and annual periods beginning after December 15, 2016. Adoption of the ASU is prospective. The Company is currently evaluating this guidance and the impact it may have on its consolidated financial statements.

3.	Acquisitions

Clean Energy Experts, LLC

In April 2015, the Company acquired Clean Energy Experts, LLC (“CEE”), a consumer demand and solar lead generation company, for $25.0 million in cash and 1.9 million shares of common stock. Of this amount, $15.0 million in cash was paid and 1.4 million shares were issued in April 2015. The remaining $10.0 million in cash and 500,000 shares are due in two equal installments: $5.0 million which was paid and 250,000 shares were issued in October 2015 and the second installment is due in April 2016. The fair value of assets acquired and liabilities assumed was based upon a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. A portion of the purchase price was set aside in escrow for indemnification of potential liabilities, including potential tax liabilities.

An additional $9.1 million in cash and 600,000 shares of common stock may be issued on April 1, 2017, subject to the achievement of certain sales targets as well as continued employment of certain key employees acquired in the transaction, which will be recorded as compensation expense over a two-year period unless and until the Company

assesses that the achievement of sales targets is not probable. The acquisition is expected to enhance the Company’s efficient and consistent access to high-quality leads in existing and new markets.

The Company has included the results of operations of the acquired business in the consolidated statements of operations from the acquisition date. The assets acquired and liabilities assumed in the CEE acquisition have been recorded based on their fair value at the acquisition date. Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired and is not deductible for tax purposes. Goodwill recorded is primarily attributable to the acquired assembled workforce and the synergies expected to arise after the CEE acquisition. Transaction costs related to the acquisition were expensed as incurred.

The following table summarizes the fair value of assets acquired and liabilities assumed (in thousands):

Cash and cash equivalents	$	424
Accounts receivable		639
Intangible assets		13,290
Accounts payable and accrued liabilities		(1,247	)
Deferred tax liability		(5,158	)
Indentifiable assets and liabilities assumed		7,948
Goodwill		35,769
Total	$	43,717

The fair value of acquired intangible assets and their estimated useful life are as follows (in thousands, except estimated useful life):

	Fair Value		Estimated Useful Life
Developed technology	$	5,910	5
Customer relationships		4,390	8
Trade names		2,990	8
Total	$	13,290

For the three and nine months ended September 30, 2015, the contribution of the acquired business to the Company’s total revenues was $7.0 million and $11.1 million, respectively, as measured from the date of the acquisition. The portion of total expenses and net income associated with the acquired business was not separately identifiable due to the integration with the Company’s operations.

4.	Fair Value Measurements

At September 30, 2015 and December 31, 2014, 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, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
Line of credit	$	133,294	$	133,294	$	48,597	$	48,597
Non-bank term loans		—		—		3,138		3,853
Syndicated term loans		162,079		162,079		124,571		124,571
Bank term loan		31,520		34,917		33,382		35,653
Note payable		32,225		32,166		29,563		28,900
Solar asset-backed notes		109,698		113,178		—		—
Total	$	468,816	$	475,634	$	239,251	$	241,574

At September 30, 2015 and December 31, 2014, the fair value of the Company’s lines of credit and the 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, 2015, the fair value of the Company’s bank term loan, note payable and asset-backed notes are based on rates currently offered for debt with similar maturities and terms. At December 31, 2014, the fair value of the Company’s non-bank term loan, bank term loan, and note payable 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 volatility used in the fair value measurement of the warrant liability was 33.40% which was the significant unobservable input. Prior to 2015, the Company did not have derivative financial instruments. At September 30, 2015, financial instruments measured at fair value on a recurring basis, based upon the fair value hierarchy are as follows (in thousands):

	September 30, 2015
	Level 1		Level 2		Level 3		Total
Derivative liabilities:
Interest rate swaps	$	—	$	2,695	$	—	$	2,695
Warrants		—		—		427		427
Total	$	—	$	2,695	$	427	$	3,122

5.	Inventories

Inventories consist of the following (in thousands):

	September 30, 2015		December 31, 2014
Raw materials	$	49,779	$	21,531
Work-in-process		2,128		2,383
Total	$	51,907	$	23,914

6.	Solar Energy Systems, net

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

	September 30, 2015			December 31, 2014
Solar energy system equipment costs	$	1,723,605		$	1,406,478
Inverters		162,203			123,910
Initial direct costs		58,246			36,279
Total solar energy systems		1,944,054			1,566,667
Less: accumulated depreciation and amortization		(193,776	)		(143,028	)
Add: construction-in-progress		86,769			56,584
Total solar energy systems, net	$	1,837,047		$	1,480,223

All solar energy systems, construction-in-progress, and inverters have been leased to or are subject to a signed Customer Agreement with customers. The Company recorded depreciation expense related to solar energy systems of $19.3 million and $51.3 million for the three and nine months ended September 30, 2015, respectively, and $14.2 million and $39.7 million for the three and nine months ended September 30, 2014, respectively. The depreciation expense was reduced by the amortization of deferred grants of $3.5 million and $10.6 million for the three and nine months ended September 30, 2015, respectively, and $3.5 million and $10.4 million for the three and nine months ended September 30, 2014, respectively.

7.	Goodwill and Intangible Assets, net

The change in the carrying value of goodwill is as follows (in thousands):

Balance—December 31, 2014	$	51,786
Acquisition of CEE (Note 3)		35,769
Balance—September 30, 2015	$	87,555

Intangible assets, net as of September 30, 2015 consist of the following (in thousands):

								Weighted
								average
			Accumulated			Carrying		remaining life
	Cost		amortization			value		(in years)
Backlog	$	200	$	(200	)	$	—		—
Customer relationships		14,660		(2,193	)		12,467		7.6
Developed technology		6,820		(894	)		5,926		4.4
Trade names		6,990		(1,627	)		5,363		5.5
Total	$	28,670	$	(4,914	)	$	23,756

Intangible assets, net as of December 31, 2014 consist of the following (in thousands):

Weighted

average

Accumulated

Carrying

remaining life

Cost

amortization