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 (“SEC”) 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 audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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 three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2020 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 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 14—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, 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.
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’ solar energy 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.
The impact of COVID-19 has resulted in changes to the capital markets, which have negatively affected the Company’s liquidity position. The timing and type of funding the Company expected to obtain as part of its planned business processes has been disrupted. As a result, the Company has initiated other funding alternatives to allow the Company to continue business activities for at least the next 12 months from the date of this filing. These funding alternatives may prove to be more expensive, less favorable options than previously expected. The Company expects to obtain additional capital needed to resume growth and normal operations and provide the capital to satisfy its liquidity needs beyond one year. However, there continues to be significant uncertainty about the duration and long-term effects of COVID-19 and it is possible the effects of COVID-19 may further impact the Company’s liquidity and its ability to operate as it has historically. The Company may also continue to be limited in its ability to contact customers and install new solar energy systems. There is also a risk that the Company’s alternative fund-raising activities are unsuccessful.
Management has taken actions to mitigate the negative impacts of COVID-19, and to alleviate some risk to the Company’s liquidity. These actions include, but are not limited to, cost reduction initiatives such as decreasing a significant portion of its workforce through furloughs and layoffs, salary reductions, temporarily closing warehouses and sales offices, eliminating expenditures, and deferring cash tax payments through the CARES Act. However, these efforts may not prove to be sufficient given the present uncertainties about the duration and severity of the COVID-19 pandemic.
Performance Obligation—Solar Energy System and Product Sales
For certain System Sales, the Company provides limited post-sale services to monitor the productivity of the solar energy system for 20 years after it has been placed into service. The Company allocates a portion of the transaction price to the monitoring services by estimating the standalone selling price that the Company would charge for these services if offered separately from the sale of the solar energy system. As of March 31, 2020 and December 31, 2019, the Company had allocated deferred revenue of $5.3 million and $4.7 million to monitoring services that will be recognized over the term of the monitoring services.
Measurement of Credit Losses on Financial Instruments
The Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”) on January 1, 2020. The objective of this update is to provide users of financial statements with more useful information by changing the incurred loss methodology for recognizing credit losses to a more forward-looking methodology that reflects expected credit losses. Under Topic 326, the Company’s accounts receivable and certain contract assets are considered financial assets measured at an amortized cost basis and will be presented at the net amount expected to be collected using this updated methodology. Utilizing the Company’s historical default rate and reviewing current economic conditions, the Company estimated the allowance for credit losses that would be required. The Company applied Topic 326 through a modified retrospective approach with a cumulative-effect adjustment of approximately $0.3 million to retained earnings as of January 1, 2020. The Company evaluates its allowance for credit losses at each reporting period and adjusts as necessary in accordance with principles of Topic 326. When evaluating its allowance for credit losses as of March 31, 2020, the Company considered the impact COVID-19 will have its financial assets based on information available to the Company. For the three months ended March 31, 2020, the Company recorded additional reserves of $0.7 million related to Topic 326.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional temporary expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or other rates affected by reference rate reform if certain criteria are met. This ASU is effective now through December 31, 2022. The Company has long-term debt facilities and hedging instruments that are linked to LIBOR and currently anticipates using certain of the optional expedients available under this ASU. The Company is still evaluating the impact of this update on its condensed consolidated financial statements and related disclosures.