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EX-32.2 - EX-32.2 - Vivint Solar, Inc.vslr-ex322_8.htm
EX-32.1 - EX-32.1 - Vivint Solar, Inc.vslr-ex321_9.htm
EX-31.2 - EX-31.2 - Vivint Solar, Inc.vslr-ex312_7.htm
EX-31.1 - EX-31.1 - Vivint Solar, Inc.vslr-ex311_6.htm
EX-10.2 - EX-10.2 - Vivint Solar, Inc.vslr-ex102_146.htm
EX-10.1 - EX-10.1 - Vivint Solar, Inc.vslr-ex101_12.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2017

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

Commission File Number: 001-36642

 

VIVINT SOLAR, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

45-5605880

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1800 West Ashton Blvd.

Lehi, Utah 84043

(Address of principal executive offices) (Zip Code)

(877) 404-4129

(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, 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

 

  (Do not check if a small reporting company)

  

Small 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 13(a) of the Exchange Act. 

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 1, 2017, 114,762,517 shares of the registrant’s common stock were outstanding.

 

 

 

 

 


 

Vivint Solar, Inc.

Quarterly Report on Form 10-Q

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements

 

2

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

 

2

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

 

3

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

 

5

 

 

Notes to Condensed Consolidated Financial Statements

 

6

Item 2.

 

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

 

27

Item 3.

 

Quantitative and Qualitative Disclosure About Market Risk

 

41

Item 4.

 

Controls and Procedures

 

41

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

42

Item 1A.

 

Risk Factors

 

42

Item 6.

 

Exhibits

 

70

 

 

 

 

 

 

 

Signatures

 

71

 

 

 

1


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

Vivint Solar, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except par value and footnote 1)

(Unaudited)

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

101,755

 

 

$

96,586

 

Accounts receivable, net

 

29,517

 

 

 

12,658

 

Inventories

 

19,802

 

 

 

11,285

 

Prepaid expenses and other current assets

 

29,519

 

 

 

46,683

 

Total current assets

 

180,593

 

 

 

167,212

 

Restricted cash and cash equivalents

 

45,593

 

 

 

26,853

 

Solar energy systems, net

 

1,622,561

 

 

 

1,458,355

 

Property and equipment, net

 

17,040

 

 

 

23,199

 

Intangible assets, net

 

1,002

 

 

 

1,420

 

Prepaid tax asset, net

 

482,446

 

 

 

419,474

 

Other non-current assets, net

 

36,889

 

 

 

29,843

 

TOTAL ASSETS(1)

$

2,386,124

 

 

$

2,126,356

 

LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

42,315

 

 

$

46,630

 

Accounts payable—related party

 

476

 

 

 

191

 

Distributions payable to non-controlling interests and redeemable non-controlling interests

 

11,664

 

 

 

16,176

 

Accrued compensation

 

23,199

 

 

 

20,003

 

Current portion of long-term debt

 

13,454

 

 

 

6,252

 

Current portion of deferred revenue

 

32,283

 

 

 

19,911

 

Current portion of capital lease obligation

 

4,571

 

 

 

5,163

 

Accrued and other current liabilities

 

25,044

 

 

 

19,364

 

Total current liabilities

 

153,006

 

 

 

133,690

 

Long-term debt, net of current portion

 

882,672

 

 

 

750,728

 

Deferred revenue, net of current portion

 

33,680

 

 

 

34,379

 

Capital lease obligation, net of current portion

 

2,294

 

 

 

5,476

 

Deferred tax liability, net

 

491,834

 

 

 

395,218

 

Other non-current liabilities

 

13,999

 

 

 

10,355

 

Total liabilities(1)

 

1,577,485

 

 

 

1,329,846

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

Redeemable non-controlling interests

 

127,833

 

 

 

129,676

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value—1,000,000 authorized, 114,763 shares issued and

   outstanding as of September 30, 2017; 1,000,000 authorized, 110,245 shares

   issued and outstanding as of December 31, 2016

 

1,148

 

 

 

1,102

 

Additional paid-in capital

 

554,420

 

 

 

542,348

 

Accumulated other comprehensive income

 

6,027

 

 

 

7,631

 

Retained earnings

 

29,186

 

 

 

5,217

 

Total stockholders’ equity

 

590,781

 

 

 

556,298

 

Non-controlling interests

 

90,025

 

 

 

110,536

 

Total equity

 

680,806

 

 

 

666,834

 

TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY

$

2,386,124

 

 

$

2,126,356

 

 

(1)

The Company’s assets as of September 30, 2017 and December 31, 2016 include $1,479.2 million and $1,303.5 million consisting of assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, of $1,434.7 million and $1,273.8 million as of September 30, 2017 and December 31, 2016; cash and cash equivalents of $28.0 million and $23.2 million as of September 30, 2017 and December 31, 2016; accounts receivable, net, of $9.6 million and $4.0 million as of September 30, 2017 and December 31, 2016; other non-current assets, net of $5.8 million and $1.8 million as of September 30, 2017 and December 31, 2016; and prepaid expenses and other current assets of $1.2 million and $0.8 million as of September 30, 2017 and December 31, 2016. The Company’s liabilities as of September 30, 2017 and December 31, 2016 included $55.3 million and $64.2 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to non-controlling interests and redeemable non-controlling interests of $11.7 million and $16.2 million as of September 30, 2017 and December 31, 2016; deferred revenue of $37.7 million and $41.7 million as of September 30, 2017 and December 31, 2016; accrued and other current liabilities of $4.5 million as of September 30, 2017 and December 31, 2016; and other non-current liabilities of $1.5 million and $1.9 million as of September 30, 2017 and December 31, 2016. For further information see Note 12—Investment Funds.

See accompanying notes to condensed consolidated financial statements

 

2


 

Vivint Solar, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases and incentives

$

45,909

 

 

$

33,394

 

 

$

119,711

 

 

$

80,033

 

Solar energy system and product sales

 

29,230

 

 

 

7,868

 

 

 

81,537

 

 

 

13,363

 

Total revenue

 

75,139

 

 

 

41,262

 

 

 

201,248

 

 

 

93,396

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue—operating leases and incentives

 

34,731

 

 

 

39,268

 

 

 

103,564

 

 

 

115,566

 

Cost of revenue—solar energy system and product sales

 

22,168

 

 

 

6,468

 

 

 

63,664

 

 

 

10,606

 

Sales and marketing

 

9,808

 

 

 

8,617

 

 

 

28,037

 

 

 

32,078

 

Research and development

 

896

 

 

 

842

 

 

 

2,687

 

 

 

2,218

 

General and administrative

 

19,379

 

 

 

19,022

 

 

 

60,259

 

 

 

60,006

 

Amortization of intangible assets

 

139

 

 

 

342

 

 

 

418

 

 

 

762

 

Impairment of goodwill

 

 

 

 

 

 

 

 

 

 

36,601

 

Total operating expenses

 

87,121

 

 

 

74,559

 

 

 

258,629

 

 

 

257,837

 

Loss from operations

 

(11,982

)

 

 

(33,297

)

 

 

(57,381

)

 

 

(164,441

)

Interest expense

 

16,148

 

 

 

9,361

 

 

 

47,707

 

 

 

22,539

 

Other expense (income), net

 

195

 

 

 

(434

)

 

 

1,186

 

 

 

(95

)

Loss before income taxes

 

(28,325

)

 

 

(42,224

)

 

 

(106,274

)

 

 

(186,885

)

Income tax expense (benefit)

 

9,375

 

 

 

(2,959

)

 

 

23,932

 

 

 

10,245

 

Net loss

 

(37,700

)

 

 

(39,265

)

 

 

(130,206

)

 

 

(197,130

)

Net loss attributable to non-controlling interests and redeemable

   non-controlling interests

 

(44,605

)

 

 

(55,961

)

 

 

(155,383

)

 

 

(194,978

)

Net income available (loss attributable) to common stockholders

$

6,905

 

 

$

16,696

 

 

$

25,177

 

 

$

(2,152

)

Net income available (loss attributable) per share to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.06

 

 

$

0.15

 

 

$

0.22

 

 

$

(0.02

)

Diluted

$

0.06

 

 

$

0.15

 

 

$

0.21

 

 

$

(0.02

)

Weighted-average shares used in computing net income available

   (loss attributable) per share to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

114,505

 

 

 

108,692

 

 

 

112,554

 

 

 

107,516

 

Diluted

 

119,465

 

 

 

113,344

 

 

 

117,825

 

 

 

107,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


 

Vivint Solar, Inc.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income available (loss attributable) to common stockholders

$

6,905

 

 

$

16,696

 

 

$

25,177

 

 

$

(2,152

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on cash flow hedging instruments

   (net of tax effect of $(331), $286, $(1,076) and $286)

 

(497

)

 

 

429

 

 

 

(1,612

)

 

 

429

 

Less: Interest expense on derivatives recognized into

   earnings (net of tax effect of $62, $0, $5, and $0)

 

94

 

 

 

 

 

 

8

 

 

 

 

Total other comprehensive (loss) income

 

(403

)

 

 

429

 

 

 

(1,604

)

 

 

429

 

Comprehensive income (loss)

$

6,502

 

 

$

17,125

 

 

$

23,573

 

 

$

(1,723

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

Vivint Solar, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Nine Months Ended

 

 

September 30,

 

 

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

$

(130,206

)

 

$

(197,130

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

44,671

 

 

 

32,376

 

Amortization of intangible assets

 

418

 

 

 

762

 

Impairment of goodwill

 

 

 

 

36,601

 

Deferred income taxes

 

98,493

 

 

 

124,912

 

Stock-based compensation

 

9,501

 

 

 

6,145

 

Loss on solar energy systems and property and equipment

 

5,024

 

 

 

4,576

 

Non-cash interest and other expense

 

7,355

 

 

 

4,963

 

Reduction in lease pass-through financing obligation

 

(3,545

)

 

 

(3,279

)

Losses (gains) on interest rate swaps

 

1,193

 

 

 

(258

)

Excess tax detriment from stock-based compensation

 

 

 

 

(1,280

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

(16,859

)

 

 

(8,444

)

Inventories

 

(8,517

)

 

 

(5,891

)

Prepaid expenses and other current assets

 

16,289

 

 

 

98

 

Prepaid tax asset, net

 

(62,972

)

 

 

(122,313

)

Other non-current assets, net

 

(5,921

)

 

 

(4,255

)

Accounts payable

 

874

 

 

 

664

 

Accounts payable—related party

 

120

 

 

 

(1,480

)

Accrued compensation

 

1,500

 

 

 

8,334

 

Deferred revenue

 

11,673

 

 

 

3,396

 

Accrued and other liabilities

 

6,235

 

 

 

(2,377

)

Net cash used in operating activities

 

(24,674

)

 

 

(123,880

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Payments for the cost of solar energy systems

 

(211,225

)

 

 

(318,273

)

Payments for property and equipment

 

(672

)

 

 

(2,697

)

Proceeds from disposals of solar energy systems and property and equipment

 

1,952

 

 

 

693

 

Change in restricted cash and cash equivalents

 

(18,740

)

 

 

(8,434

)

Proceeds from state tax credits

 

2,216

 

 

 

 

Purchase of intangible assets

 

 

 

 

(291

)

Net cash used in investing activities

 

(226,469

)

 

 

(329,002

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from investment by non-controlling interests and redeemable non-controlling interests

 

162,291

 

 

 

237,148

 

Distributions paid to non-controlling interests and redeemable non-controlling interests

 

(33,774

)

 

 

(22,230

)

Proceeds from long-term debt

 

306,750

 

 

 

500,257

 

Payments on long-term debt

 

(164,935

)

 

 

(224,400

)

Payments for debt issuance and deferred offering costs

 

(13,677

)

 

 

(16,774

)

Proceeds from lease pass-through financing obligation

 

2,467

 

 

 

1,417

 

Principal payments on capital lease obligations

 

(3,413

)

 

 

(4,357

)

Proceeds from issuance of common stock

 

603

 

 

 

2,645

 

Net cash provided by financing activities

 

256,312

 

 

 

473,706

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

5,169

 

 

 

20,824

 

CASH AND CASH EQUIVALENTS—Beginning of period

 

96,586

 

 

 

92,213

 

CASH AND CASH EQUIVALENTS—End of period

$

101,755

 

 

$

113,037

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Accrued distributions to non-controlling interests and redeemable non-controlling interests

$

(4,512

)

 

$

5,092

 

Change in fair value of interest rate swaps

$

(3,868

)

 

$

973

 

Costs of solar energy systems included in changes in accounts payable, accounts payable—related

   party, accrued compensation and accrued and other liabilities

$

(1,901

)

 

$

503

 

Vehicles acquired under capital leases

$

715

 

 

$

1,868

 

Receivable for state tax credits recorded as a reduction to solar energy system costs

$

82

 

 

$

1,364

 

Sale-leaseback of property under build-to-suit agreements

$

 

 

$

(28,456

)

Costs of lessor-financed tenant improvements

$

 

 

$

7,850

 

Property acquired under build-to-suit agreements

$

 

 

$

2,896

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

Vivint Solar, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Organization

Vivint Solar, Inc. and its subsidiaries are collectively referred to as the “Company.” The Company primarily offers solar energy to residential customers through long-term customer contracts, such as power purchase agreements (“PPAs”) and legal-form leases (“Solar Leases”). The Company also offers its customers the option to purchase solar energy systems (“System Sales”) through third-party loan offerings or a cash purchase. The Company enters into customer contracts primarily through a sales organization that uses a direct-to-home sales model. The long-term customer contracts under PPAs and Solar Leases are typically for 20 years and require the customer to make monthly payments to the Company.

The Company has formed various investment funds and entered into long-term debt facilities to monetize the recurring customer payments under its long-term customer contracts and the investment tax credits, accelerated tax depreciation and other incentives associated with residential solar energy systems. The Company uses the cash received from the investment funds, long-term debt facilities and cash generated from operations, including System Sales, to finance a portion of the Company’s variable and fixed costs associated with installing solar energy systems.

2.

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“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 dated as of March 16, 2017. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2017 or for any other interim period or other future year.

The unaudited condensed consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities (“VIEs”). This approach focuses on determining whether the Company has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and whether the Company has the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. All of these determinations involve significant management judgments and estimates. The Company has determined that it is the primary beneficiary in the operational VIEs in which it has an equity interest. The Company evaluates its relationships with the VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. For additional information, see Note 12—Investment Funds.

Use of Estimates

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect the Company’s principles of consolidation; U.S. federal investment tax credits (“ITCs”); revenue recognition; solar energy systems, net; the impairment analysis of long-lived assets; stock-based compensation; the provision for income taxes; the valuation of derivative financial instruments; the recognition and measurement of loss contingencies; and non-controlling interests and redeemable non-controlling interests. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates.


6


 

Stock-Based Compensation

Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09, which simplifies several aspects of the accounting for share-based payment transactions. The resulting changes were as follows:

 

All excess tax benefits and tax deficiencies resulting from stock-based compensation are now recognized as income tax expense or benefit in the condensed consolidated income statements, and excess tax benefits are now recognized regardless of whether the benefit reduces taxes payable in the current period;

 

Excess tax benefits are now classified along with other tax cash flows as an operating activity on the condensed consolidated statements of cash flows;

 

The Company elected to recognize forfeitures as they occur beginning on January 1, 2017;

 

The Company may withhold up to the maximum statutory tax rate for each employee without triggering liability accounting; and

 

Cash paid by the Company when directly withholding shares for tax withholding purposes is now classified as a financing activity on the condensed consolidated statements of cash flows.

Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures were adopted using a modified retrospective transition method by means of a cumulative-effect adjustment, resulting in a net $1.2 million reduction to retained earnings as of January 1, 2017.

Amendments related to the presentation of employee taxes paid on the statements of cash flows when an employer withholds shares for tax withholding purposes was adopted using the retrospective method, but had no impact on prior periods.

Amendments related to the recognition of excess tax benefits and tax deficiencies in the condensed consolidated income statements and the presentation of excess tax benefits on the condensed consolidated statements of cash flows were adopted prospectively. No prior periods were adjusted.

In the second quarter of 2017, the Company adopted ASU 2017-09, which clarifies when changes to equity awards require the use of modification accounting guidance. This update clarifies that if the fair value, vesting conditions and classification of an award remain the same after modification, then modification accounting is not required. This guidance was adopted prospectively and no prior periods were adjusted. The adoption of this ASU had no material effect on the condensed consolidated financial statements.

Inventory

Effective January 1, 2017, the Company adopted ASU 2015-11, which simplifies the measurement of inventory by changing the measurement principle for inventories valued under the first-in, first-out (“FIFO”) or weighted-average methods from the lower of cost or market to the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this ASU prospectively and no prior periods were adjusted. The adoption of this ASU had no material effect on the condensed consolidated financial statements.

Liquidity

In order to grow, the Company requires cash to finance the deployment of solar energy systems. As of the date of this filing, the Company will require additional sources of cash beyond current cash balances, and currently available financing facilities to fund long-term planned growth. If the Company is unable to secure additional financing when needed, or upon desirable terms, the Company may be unable to finance installation of customers’ systems in a manner consistent with past performance, cost of capital could increase, or the Company may be required to significantly reduce the scope of operations, any of which would have a material adverse effect on its business, financial condition, results of operations and prospects. While the Company believes additional financing is available and will continue to be available to support current levels of operations, the Company believes it has the ability and intent to reduce operations to the level of available financial resources for at least the next 12 months from the date of this report, if necessary.


7


 

Recent Accounting Pronouncements

New Revenue Guidance

From March 2016 through December 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-20, ASU 2016-12, ASU 2016-11, ASU 2016-10 and ASU 2016-08. These updates all clarify aspects of the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which represents comprehensive reform to revenue recognition principles related to customer contractsThe effective date of these updates for the Company is January 1, 2018. Adoption of this ASU is either full 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 considering adopting the standard using the full retrospective method, but no final decision has been made. The Company continues to evaluate the impact of the new standard on its accounting policies, processes and system requirements.

Under the current accounting guidance, the Company accounts for PPAs and Solar Leases as operating leases. The Company has determined that these agreements do not meet the definition of a lease under ASC 842, Leases, and will be accounted for in accordance with Topic 606. The Company is still evaluating the impact of Topic 606 with respect to the PPA revenue stream. The Company currently accounts for certain Solar Leases, rebates and incentives as minimum lease payments under ASC 840, Leases. For the Company’s Solar Leases, the Company has preliminarily concluded that the impact of adopting Topic 606 will be immaterial. Revenue from all of the Company’s Solar Leases will now be recognized on a straight-line basis over the contractual term; currently a significant majority of Solar Leases are recognized on a straight-line basis. The Company has also preliminarily concluded that there will be no change related to revenue recognition for rebates and incentives.

The Company has evaluated the accounting for incremental costs of obtaining a contract, which under current accounting policies are capitalized as initial direct costs and amortized over the lease term. The Company has preliminarily concluded that it will continue to capitalize the costs of obtaining a PPA, Solar Lease or System Sale contract, which are primarily comprised of sales commissions. For PPA and Solar Lease contracts, the amortization period will remain the life of the related contract, which is 20 years. For System Sales, the capitalized costs of obtaining a contract will continue to be recognized when the related solar energy system is interconnected to the local power grid and granted permission to operate. This will result in minimal changes to the Company’s condensed consolidated financial statements.

The Company has analyzed the impact of Topic 606 on System Sales, photovoltaic installation and software products, and has preliminarily concluded that it will not have a material impact on the condensed consolidated financial statements.

The Company has assessed the impact of Topic 606 as it relates to the sales of ITCs through its lease pass-through fund arrangement. The Company has preliminarily concluded that revenue related to the sale of ITCs through its lease pass-through arrangement will be recognized when the related solar energy systems are placed in service. Currently, the Company recognizes this revenue evenly over the five-year ITC recapture period. This earlier recognition of the ITC lease pass-through revenue is anticipated to be material to fiscal 2016 and could increase the revenue recognized in fiscal 2016 by approximately $12 million and will reduce revenue in fiscal 2017 by approximately $5 million.

New Lease Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update primarily changes the recognition by lessees of lease assets and liabilities for leases currently classified as operating leases. Lessor accounting remains largely unchanged. This update is effective in fiscal years beginning after December 15, 2018 for public business entities and early adoption is permitted. The amendments are required to be applied using a modified retrospective approach. Due to the Company’s determination that its PPAs and Solar Leases do not meet the definition of a lease pursuant to ASC 842, Leases, the Company is currently considering early adopting ASC 842 to coincide with the adoption of ASC 606, however a decision to early adopt is not final. The Company has operating leases that will be affected by this update and the Company is still evaluating the full impact on its condensed consolidated financial statements and related disclosures. The impact is not expected to be significant to the Company’s condensed consolidated financial statements.


8


 

Other Recent Accounting Pronouncements

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update makes targeted improvements to accounting for hedge activities by easing certain documentation and assessment requirements and eliminating the requirement to separately measure and report hedge ineffectiveness. This update is effective for annual periods beginning after December 15, 2018 for public business entities and early adoption is permitted. The amendments in this update should be applied using a modified retrospective transition method by recording a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating this update but currently does not anticipate it will have a material impact on its condensed consolidated financial statements and related disclosures. The Company plans to early adopt the new standard effective January 1, 2018.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This update clarifies that transfers between cash and restricted cash are not part of the entity’s operating, investing and financing activities, and details of those transfers are not reported as cash flow activities in the statements of cash flows. This update is effective for annual periods beginning after December 15, 2017 for public business entities. The amendments in this update should be applied using the retrospective transition method. The Company is evaluating this update but currently anticipates it will have a material impact on its condensed consolidated financial statements and related disclosures as changes in restricted cash will no longer be presented as cash flows from investing activities.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This update will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective for annual periods beginning after December 15, 2017 for public business entities. The amendments in this update should be applied using a modified retrospective approach. The Company has evaluated this update and currently anticipates it will have a material impact on its condensed consolidated financial statements and related disclosures as the Company will no longer record prepaid tax assets on the condensed consolidated balance sheets and will record the income tax consequences of intra-entity transfers through income tax expense on the condensed consolidated statements of operations. As of September 30, 2017, the prepaid tax asset, net is $482.4 million and it is anticipated that the vast majority of this amount will be written off to retained earnings upon adoption. Once adopted, the ongoing income tax impacts of these intra-entity transfers will be reported as income tax expense.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update clarifies how certain cash flows should be classified with the objective of reducing the existing diversity in practice. This update is effective for annual periods beginning after December 15, 2017 for public business entities. The amendments in this update should be applied using a retrospective transition method and must all be applied in the same period. The Company is evaluating the impact of this update on its condensed consolidated financial statements and related disclosures.

3.

Fair Value Measurements

The Company measures and reports its cash equivalents at fair value. The following tables set forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

September 30, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

12,283

 

 

$

 

 

$

12,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

1,834

 

 

$

 

 

$

1,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

14,317

 

 

$

 

 

$

14,317

 

Time deposits

 

 

 

 

100

 

 

 

 

 

 

100

 

Total financial assets

$

 

 

$

14,417

 

 

$

 

 

$

14,417

 

 

9


 

The interest rate swaps (Level 2) were valued using a discounted cash flow model which incorporates an assessment of the risk of non-performance by the interest rate swap counterparties and the Company. The valuation model uses various observable inputs including contractual terms, interest rate curves, credit spreads and measures of volatility. Time deposits (Level 2) approximate fair value due to their short-term nature (30 days) and, upon renewal, the interest rate is adjusted based on current market rates. The Company did not realize gains or losses related to financial assets for any of the periods presented.

The carrying values and fair values of the Company’s long-term debt were as follows (in thousands):

 

September 30, 2017

 

 

December 31, 2016

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Floating-rate long-term debt

$

710,918

 

 

$

710,918

 

 

$

771,852

 

 

$

771,852

 

Fixed-rate long-term debt

 

202,749

 

 

 

241,314

 

 

 

 

 

 

 

Total

$

913,667

 

 

$

952,232

 

 

$

771,852

 

 

$

771,852

 

The Company’s outstanding principal balance of long-term debt is carried at cost. The Company estimated the fair values of its floating-rate debt facilities to approximate their carrying values as interest accrues at floating rates based on market rates. The Company’s fixed-rate debt facilities (Level 2) were valued using quoted prices for corporate debt with similar terms.

4.

Inventories

Inventories consisted of the following (in thousands):

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Solar energy systems held for sale

$

19,097

 

 

$

10,540

 

Photovoltaic installation devices and software products

 

705

 

 

 

745

 

Total inventories

$

19,802

 

 

$

11,285

 

Solar energy systems held for sale are solar energy systems under construction that have yet to be interconnected to the power grid and that will be sold to customers. Solar energy systems held for sale are stated at the lower of cost, on a FIFO basis, or net realizable value. Photovoltaic installation devices and software products are stated at the lower of cost, on an average cost basis, or net realizable value.

5.

Solar Energy Systems

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

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

System equipment costs

$

1,392,886

 

 

$

1,238,968

 

Initial direct costs related to solar energy systems

 

318,658

 

 

 

261,318

 

 

 

1,711,544

 

 

 

1,500,286

 

Less: Accumulated depreciation and amortization

 

(114,728

)

 

 

(73,793

)

 

 

1,596,816

 

 

 

1,426,493

 

Solar energy system inventory

 

25,745

 

 

 

31,862

 

Solar energy systems, net

$

1,622,561

 

 

$

1,458,355

 

 

Solar energy system inventory represents the solar components and materials used in the installation of solar energy systems prior to being installed on customers’ roofs. As such, no depreciation is recorded related to this line item. The Company recorded depreciation and amortization expense related to solar energy systems of $14.5 million and $11.1 million for the three months ended September 30, 2017 and 2016. The Company recorded depreciation and amortization expense related to solar energy systems of $41.0 million and $29.1 million for the nine months ended September 30, 2017 and 2016. 

10


 

6.

Property and Equipment

Property and equipment, net consisted of the following (in thousands):

 

 

 

Estimated

 

September 30,

 

 

December 31,

 

 

 

Useful Lives

 

2017

 

 

2016

 

Vehicles acquired under capital leases

 

3-5 years

 

$

16,029

 

 

$

20,384

 

Leasehold improvements

 

1-12 years

 

 

15,041

 

 

 

14,694

 

Furniture and computer and other equipment

 

3 years

 

 

6,501

 

 

 

6,270

 

 

 

 

 

 

37,571

 

 

 

41,348

 

Less: Accumulated depreciation and amortization

 

 

 

 

(20,531

)

 

 

(18,149

)

Property and equipment, net

 

 

 

$

17,040

 

 

$

23,199

 

 

The Company recorded depreciation and amortization related to property and equipment of $1.9 million and $3.0 million for the three months ended September 30, 2017 and 2016. The Company recorded depreciation and amortization expense related to property and equipment of $6.4 million and $8.2 million for the nine months ended September 30, 2017 and 2016.

The Company leases fleet vehicles that are accounted for as capital leases and are included in property and equipment, net. Of total property and equipment depreciation and amortization, depreciation on vehicles under capital leases of $0.7 million and $1.5 million was capitalized in solar energy systems, net for the three months ended September 30, 2017 and 2016. The Company capitalized depreciation on vehicles under capital leases of $2.7 million and $4.8 million in solar energy systems, net for the nine months ended September 30, 2017 and 2016.

7.

Intangible Assets and Goodwill

Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Cost:

 

 

 

 

 

 

 

Internal-use software

$

1,314

 

 

$

1,314

 

Developed technology

 

522

 

 

 

522

 

Trademarks/trade names

 

201

 

 

 

201

 

Customer relationships

 

164

 

 

 

164

 

Total carrying value

 

2,201

 

 

 

2,201

 

Accumulated amortization:

 

 

 

 

 

 

 

Internal-use software

 

(763

)

 

 

(434

)

Developed technology

 

(241

)

 

 

(191

)

Trademarks/trade names

 

(74

)

 

 

(59

)

Customer relationships

 

(121

)

 

 

(97

)

Total accumulated amortization

 

(1,199

)

 

 

(781

)

Total intangible assets, net

$

1,002

 

 

$

1,420

 

 

The Company recorded amortization expense of $0.1 million and $0.3 million for the three months ended September 30, 2017 and 2016, which was included in amortization of intangible assets. The Company recorded amortization expense of $0.4 million and $0.8 million for the nine months ended September 30, 2017 and 2016.


11


 

Goodwill Impairment

The Company’s market capitalization decreased significantly during the first quarter of 2016 from $1.0 billion as of December 31, 2015 to $283.0 million as of March 31, 2016 in conjunction with the Company’s determination to terminate an agreement and plan of merger with SunEdison, Inc. (“SunEdison”) and SEV Merger Sub Inc. The Company considered this significant decrease in market capitalization to be an indicator of impairment and the Company performed a goodwill impairment test as of March 31, 2016. The impairment test determined that there was no implied value of goodwill, which resulted in an impairment charge of $36.6 million. This charge was recorded in impairment of goodwill for the nine months ended September 30, 2016.

8.

Accrued Compensation

Accrued compensation consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Accrued payroll

$

14,594

 

 

$

12,558

 

Accrued commissions

 

8,605

 

 

 

7,445

 

Total accrued compensation

$

23,199

 

 

$

20,003

 

 

9.

Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

Accrued unused commitment fees and interest

$

7,287

 

 

$

3,827

 

Current portion of lease pass-through financing obligation

 

4,910

 

 

 

4,833

 

Accrued professional fees

 

4,114

 

 

 

3,222

 

Sales, use and property taxes payable

 

2,897

 

 

 

1,785

 

Accrued inventory

 

1,695

 

 

 

2,117

 

Current portion of deferred rent

 

924

 

 

 

1,155

 

Other accrued expenses

 

3,217

 

 

 

2,425

 

Total accrued and other current liabilities

$

25,044

 

 

$

19,364

 

 


12


 

10.

Debt Obligations

Debt obligations consisted of the following as of September 30, 2017 (in thousands, except interest rates):

 

Principal

 

 

Unamortized Debt

 

 

 

 

 

 

 

 

 

 

Unused

 

 

 

 

 

 

 

 

Borrowings

 

 

Issuance Costs

 

 

Net Carrying Value

 

 

Borrowing

 

 

Interest

 

 

Maturity

 

Outstanding

 

 

Current

 

 

Long-term

 

 

Current

 

 

Long-term

 

 

Capacity

 

 

Rate

 

 

Date

2017 Term loan facility

$

201,446

 

 

$

(174

)

 

$

(5,088

)

 

$

6,510

 

 

$

189,674

 

 

$

 

 

 

6.0

%

 

January 2035

2016 Term loan facility(1)

 

291,293

 

 

 

(149

)

 

 

(8,131

)

 

 

4,969

 

 

 

278,044

 

 

 

 

 

 

4.2

 

 

August 2021

Subordinated HoldCo facility

 

198,125

 

 

 

(39

)

 

 

(3,812

)

 

 

1,961

 

 

 

192,313

 

 

 

 

 

 

9.3

 

 

March 2020

Credit agreement

 

1,303

 

 

 

(2

)

 

 

(146

)