VIVINT SOLAR, INC., 10-K filed on 3/5/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Mar. 01, 2019
Jun. 29, 2018
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Trading Symbol VSLR    
Entity Registrant Name Vivint Solar, Inc.    
Entity Central Index Key 0001607716    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer No    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Small Business true    
Entity Emerging Growth Company true    
Entity Ex Transition Period true    
Entity Shell Company false    
Entity Filer Category Accelerated Filer    
Entity Common Stock, Shares Outstanding   120,193,303  
Entity Public Float     $ 168.4
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 219,591 $ 108,452
Accounts receivable, net 14,207 19,665
Inventories 13,257 22,597
Prepaid expenses and other current assets 31,201 34,049
Total current assets 278,256 184,763
Restricted cash and cash equivalents 71,305 46,486
Solar energy systems, net 1,938,874 1,673,532
Property and equipment, net 10,730 15,078
Prepaid tax asset, net   505,883
Other non-current assets, net 28,090 38,187
TOTAL ASSETS [1] 2,327,255 2,463,929
Current liabilities:    
Accounts payable 45,929 40,899
Distributions payable to non-controlling interests and redeemable non-controlling interests 7,846 16,437
Accrued compensation 25,520 20,992
Current portion of long-term debt 12,155 13,585
Current portion of deferred revenue 30,199 41,846
Current portion of capital lease obligation 1,921 4,166
Accrued and other current liabilities 42,860 29,675
Total current liabilities 166,430 167,600
Long-term debt, net of current portion 1,203,282 925,964
Deferred revenue, net of current portion 13,524 29,200
Capital lease obligation, net of current portion 505 1,599
Deferred tax liability, net 437,120 342,382
Other non-current liabilities 24,610 13,674
Total liabilities [1] 1,845,471 1,480,419
Commitments and contingencies (Note 17)
Redeemable non-controlling interests 119,572 122,444
Stockholders' equity:    
Common stock, $0.01 par value—1,000,000 authorized, 120,114 shares issued and outstanding as of December 31, 2018; 1,000,000 authorized, 115,099 shares issued and outstanding as of December 31, 2017 1,201 1,151
Additional paid-in capital 574,248 559,788
Accumulated other comprehensive (loss) income (7,223) 6,905
(Accumulated deficit) retained earnings (279,631) 213,107
Total stockholders' equity 288,595 780,951
Non-controlling interests 73,617 80,115
Total equity 362,212 861,066
TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY $ 2,327,255 $ 2,463,929
[1] The Company’s consolidated assets as of December 31, 2018 and 2017 include $1,835.8 million and $1,516.2 million consisting of assets of variable interest entities (“VIEs”) that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, of $1,752.3 million and $1,486.0 million as of December 31, 2018 and 2017; cash and cash equivalents of $62.4 million and $17.3 million as of December 31, 2018 and 2017; accounts receivable, net, of $6.6 million and $5.1 million as of December 31, 2018 and 2017; other non-current assets, net of $10.9 million and $6.8 million as of December 31, 2018 and 2017; restricted cash and cash equivalents of $2.4 million and $0 as of December 31, 2018 and 2017; and prepaid expenses and other current assets of $1.3 million and $1.0 million as of December 31, 2018 and 2017. The Company’s consolidated liabilities as of December 31, 2018 and 2017 included $80.8 million and $58.4 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include long-term debt of $55.0 million and $0 as of December 31, 2018 and 2017; deferred revenue of $12.0 million and $36.0 million as of December 31, 2018 and 2017; distributions payable to non-controlling interests and redeemable non-controlling interests of $7.8 million and $16.4 million as of December 31, 2018 and 2017; accrued and other current liabilities of $4.9 million and $4.5 million as of December 31, 2018 and 2017; and other non-current liabilities of $1.0 million and $1.4 million as of December 31, 2018 and 2017. For further information see Note 12—Investment Funds.
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 1,000,000,000 1,000,000,000
Common stock, shares issued 120,114,000 115,099,000
Common stock, shares outstanding 120,114,000 115,099,000
Total assets [1] $ 2,327,255 $ 2,463,929
Solar energy systems, net 1,938,874 1,673,532
Cash and cash equivalents 219,591 108,452
Accounts receivable, net 14,207 19,665
Other non-current assets, net 28,090 38,187
Restricted cash and cash equivalents 71,305 46,486
Prepaid expenses and other current assets 31,201 34,049
Total liabilities [1] 1,845,471 1,480,419
Distributions payable to non-controlling interests and redeemable non-controlling interests 7,846 16,437
Accrued and other current liabilities 42,860 29,675
Other non-current liabilities 24,610 13,674
Variable Interest Entities    
Total assets 1,835,834 1,516,190
Solar energy systems, net 1,752,271 1,486,023
Cash and cash equivalents 62,350 17,280
Accounts receivable, net 6,593 5,143
Other non-current assets, net 10,888 6,792
Restricted cash and cash equivalents 2,443 0
Prepaid expenses and other current assets 1,289 952
Total liabilities 80,760 58,382
Long-term debt 55,000 0
Deferred revenue 12,000 36,000
Distributions payable to non-controlling interests and redeemable non-controlling interests 7,846 16,437
Accrued and other current liabilities 4,860 4,478
Other non-current liabilities $ 1,023 $ 1,444
[1] The Company’s consolidated assets as of December 31, 2018 and 2017 include $1,835.8 million and $1,516.2 million consisting of assets of variable interest entities (“VIEs”) that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, of $1,752.3 million and $1,486.0 million as of December 31, 2018 and 2017; cash and cash equivalents of $62.4 million and $17.3 million as of December 31, 2018 and 2017; accounts receivable, net, of $6.6 million and $5.1 million as of December 31, 2018 and 2017; other non-current assets, net of $10.9 million and $6.8 million as of December 31, 2018 and 2017; restricted cash and cash equivalents of $2.4 million and $0 as of December 31, 2018 and 2017; and prepaid expenses and other current assets of $1.3 million and $1.0 million as of December 31, 2018 and 2017. The Company’s consolidated liabilities as of December 31, 2018 and 2017 included $80.8 million and $58.4 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include long-term debt of $55.0 million and $0 as of December 31, 2018 and 2017; deferred revenue of $12.0 million and $36.0 million as of December 31, 2018 and 2017; distributions payable to non-controlling interests and redeemable non-controlling interests of $7.8 million and $16.4 million as of December 31, 2018 and 2017; accrued and other current liabilities of $4.9 million and $4.5 million as of December 31, 2018 and 2017; and other non-current liabilities of $1.0 million and $1.4 million as of December 31, 2018 and 2017. For further information see Note 12—Investment Funds.
v3.10.0.1
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Revenue:    
Operating leases and incentives $ 174,066 $ 150,862
Solar energy system and product sales 116,255 117,166
Total revenue 290,321 268,028
Cost of revenue:    
Cost of revenue—operating leases and incentives 164,920 141,305
Cost of revenue—solar energy system and product sales 83,375 88,977
Total cost of revenue 248,295 230,282
Gross profit 42,026 37,746
Operating expenses:    
Sales and marketing 58,950 38,696
Research and development 1,867 3,340
General and administrative 93,703 79,957
Total operating expenses 154,520 121,993
Loss from operations (112,494) (84,247)
Interest expense, net 65,308 64,264
Other (income) expense, net (4,538) 352
Loss before income taxes (173,264) (148,863)
Income tax expense (benefit) 106,299 (157,333)
Net (loss) income (279,563) 8,470
Net loss attributable to non-controlling interests and redeemable non-controlling interests (263,971) (200,628)
Net (loss attributable) income available to common stockholders $ (15,592) $ 209,098
Net (loss attributable) income available per share to common stockholders:    
Basic $ (0.13) $ 1.85
Diluted $ (0.13) $ 1.77
Weighted-average shares used in computing net (loss attributable) income available per share to common stockholders:    
Basic 117,565 113,132
Diluted 117,565 118,268
v3.10.0.1
Consolidated Statements of Comprehensive (Loss) Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Statement Of Income And Comprehensive Income [Abstract]    
Net (loss) income available to common stockholders $ (15,592) $ 209,098
Other comprehensive loss:    
Unrealized losses on cash flow hedging instruments (net of tax effect of $(606) and $(562) in 2018 and 2017) (1,705) (843)
Less: Interest income on derivatives recognized into earnings (net of tax effect of $5,860 and $78 in 2018 and 2017) 15,741 117
Total other comprehensive loss (17,446) (726)
Comprehensive (loss) income $ (33,038) $ 208,372
v3.10.0.1
Consolidated Statements of Comprehensive (Loss) Income (Parenthetical) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Statement Of Income And Comprehensive Income [Abstract]    
Unrealized losses on cash flow hedging instruments, tax $ (606) $ (562)
Interest expense on derivatives recognized into earnings, tax $ 5,860 $ 78
v3.10.0.1
Consolidated Statements of Redeemable Non-Controlling Interests and Equity - USD ($)
shares in Thousands, $ in Thousands
Total
Redeemable Non-Controlling Interests
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive (Loss) Income
Retained Earnings (Accumulated Deficit)
Total Stockholders Equity
Non-Controlling Interests
Balance at Dec. 31, 2016 $ 666,834 $ 129,676 $ 1,102 $ 542,348 $ 7,631 $ 5,217 $ 556,298 $ 110,536
Balance (in Shares) at Dec. 31, 2016     110,245          
Cumulative-effect adjustment from adoption of new ASUs 806     2,014   (1,208) 806  
Stock-based compensation expense 12,917     12,917     12,917  
Issuance of common stock, net 637   $ 49 588     637  
Issuance of common stock, net (in shares)     4,854          
Contributions from non-controlling interests and redeemable non-controlling interests 148,666 65,062           148,666
Distributions to non-controlling interests and redeemable non-controlling interests (39,984) (7,566)           (39,984)
Acquisition of redeemable non-controlling interests 1,921 (3,203)   1,921     1,921  
Total other comprehensive loss (726)       (726)   (726)  
Net (loss) income attributable available to stockholders 69,995         209,098 209,098 (139,103)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests   (61,525)            
Balance at Dec. 31, 2017 $ 861,066 122,444 $ 1,151 559,788 6,905 213,107 780,951 80,115
Balance (in Shares) at Dec. 31, 2017 115,099   115,099          
Cumulative-effect adjustment from adoption of new ASUs $ (473,828)       3,318 (477,146) (473,828)  
Stock-based compensation expense 13,163     13,163     13,163  
Issuance of common stock, net 1,347   $ 50 1,297     1,347  
Issuance of common stock, net (in shares)     5,015          
Contributions from non-controlling interests and redeemable non-controlling interests 221,388 79,354           221,388
Distributions to non-controlling interests and redeemable non-controlling interests (36,328) (9,813)           (36,328)
Total other comprehensive loss (17,446)       (17,446)   (17,446)  
Net (loss) income attributable available to stockholders (207,150) (72,413)       (15,592) (15,592) (191,558)
Balance at Dec. 31, 2018 $ 362,212 $ 119,572 $ 1,201 $ 574,248 $ (7,223) $ (279,631) $ 288,595 $ 73,617
Balance (in Shares) at Dec. 31, 2018 120,114   120,114          
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net (loss) income $ (279,563) $ 8,470
Adjustments to reconcile net (loss) income to net cash used in operating activities:    
Depreciation and amortization 69,634 61,164
Deferred income taxes 106,862 (52,828)
Stock-based compensation 13,163 12,917
Loss on solar energy systems and property and equipment 7,400 6,858
Non-cash interest and other expense 17,006 9,422
Reduction in lease pass-through financing obligation (4,433) (4,515)
(Gains) losses on interest rate swaps (148) 359
Changes in operating assets and liabilities:    
Accounts receivable, net 5,458 (7,007)
Inventories 9,340 (11,312)
Prepaid expenses and other current assets 2,805 10,864
Prepaid tax asset, net   (86,409)
Other non-current assets, net (7,828) (5,502)
Accounts payable 1,898 (285)
Accrued compensation 4,762 495
Deferred revenue (926) 16,756
Accrued and other liabilities 8,915 6,699
Net cash used in operating activities (45,655) (33,854)
CASH FLOWS FROM INVESTING ACTIVITIES:    
Payments for the cost of solar energy systems (331,716) (276,651)
Payments for property and equipment (766) (672)
Proceeds from disposals of solar energy systems and property and equipment 3,379 2,428
Proceeds from state tax credits   3,720
Net cash used in investing activities (329,103) (271,175)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Proceeds from investment by non-controlling interests and redeemable non-controlling interests 300,742 213,728
Distributions paid to non-controlling interests and redeemable non-controlling interests (54,732) (47,289)
Proceeds from long-term debt 984,425 356,750
Payments on long-term debt (700,143) (172,495)
Payments for offering costs (21,209) (13,917)
Proceeds from lease pass-through financing obligation 3,609 3,581
Principal payments on capital lease obligations (3,323) (4,467)
Proceeds from issuance of common stock 1,347 637
Net cash provided by financing activities 510,716 336,528
NET INCREASE IN CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED AMOUNTS 135,958 31,499
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED AMOUNTS—Beginning of period 154,938 123,439
CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED AMOUNTS—End of period 290,896 154,938
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:    
Cash paid for interest, net 42,928 51,127
Cash recovered from income taxes, net (11,194) (33,245)
NONCASH INVESTING AND FINANCING ACTIVITIES:    
Accrued distributions to non-controlling interests and redeemable non-controlling interests (8,591) 261
Costs of solar energy systems included in changes in accounts payable, accounts payable—related party, accrued compensation and accrued and other liabilities 8,503 610
Vehicles acquired under capital leases 1,622 874
Solar energy system sales    
NONCASH INVESTING AND FINANCING ACTIVITIES:    
Receivable for tax credit recorded as a reduction to solar energy system costs $ 7 $ 102
v3.10.0.1
Organization
12 Months Ended
Dec. 31, 2018
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Organization

1.Organization

Vivint Solar, Inc. and its subsidiaries are collectively referred to as the “Company.” The Company most commonly 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 through a sales organization that primarily 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 investment tax credits (“ITCs”), 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.

v3.10.0.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

2.Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying 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”) and reflect the accounts and operations of the Company, its subsidiaries in which the Company has a controlling financial interest and the investment funds formed to fund the purchase of solar energy systems under long-term customer contracts, which are consolidated as variable interest entities (“VIEs”). 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. 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 regarding these VIEs, see Note 12—Investment Funds.

Certain prior period amounts have been reclassified to conform to current year presentation. These reclassifications did not have a significant impact on the consolidated financial statements. On the consolidated balance sheets, intangible assets, net are now included within other non-current assets, net, and accounts payable—related party, which are not material, are now included within accounts payable. See Note 16—Related Party Transactions for additional information on related party transactions. On the consolidated statements of operations, amortization of intangible assets is now included within general and administrative expenses. On the consolidated statements of cash flows, amortization of intangible assets is now included within depreciation and amortization, the change in accounts payable—related party is now included within the change in accounts payable, the purchase of intangible assets is now included within payments for property and equipment, and the change in restricted cash has been removed as a result of adopting Accounting Standards Update (“ASU”) 2016-18.

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, 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.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Cash equivalents consist principally of time deposits and money market accounts with high quality financial institutions.

Restricted Cash

The Company’s guaranty agreements with certain of its fund investors require the maintenance of minimum cash balances of $10.0 million. For additional information, see Note 12—Investment Funds. As of December 31, 2018, the Company also had $61.3 million in required reserves outstanding in separate collateral accounts in accordance with the terms of its various debt obligations. For additional information, see Note 10—Debt Obligations. These minimum cash balances are classified as restricted cash.

The Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (“ASU 2016-18”), effective January 1, 2018. This update clarified that transfers between cash and restricted cash are not reported as cash flow activities in the statements of cash flows. As such, restricted cash amounts are included with cash and cash equivalents in the beginning-of-period and end-of-period total amounts on the statements of cash flows. The Company applied this update retrospectively, which resulted in an adjustment to the beginning-of-period and end-of-period total amounts on the consolidated statement of cash flows for the year ended December 31, 2017 to include restricted cash balances from those periods.

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 the 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.

Accounts Receivable, Net

Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. Accounts receivable also include unbilled accounts receivable, which is composed of the monthly PPA power generation not yet invoiced and the monthly bill rate of Solar Leases as of the end of the reporting period. The Company estimates its allowance for doubtful accounts based upon the collectability of the receivables in light of historical trends and adverse situations that may affect customers’ ability to pay. Revisions to the allowance are recorded as an adjustment to bad debt expense or as a reduction to revenue when collectability is not reasonably assured. After appropriate collection efforts are exhausted, specific accounts receivable deemed to be uncollectible would be charged against the allowance in the period they are deemed uncollectible. Recoveries of accounts receivable previously written-off are recorded as credits to bad debt expense. The Company had an allowance for doubtful accounts of $5.2 million and $3.6 million as of December 31, 2018 and 2017.

Inventories

Inventories include solar energy systems under construction that have yet to be interconnected to the power grid and that will be sold to customers. Inventory is stated at the lower of cost, on a first-in, first-out (“FIFO”) basis, or net realizable value. Upon interconnection to the power grid, solar energy system inventory is removed using the specific identification method. Inventories also include components related to photovoltaic installation products and are stated at the lower of cost, on an average cost basis, or net realizable value. The Company evaluates its inventory reserves on a quarterly basis and writes down the value of inventories for estimated excess and obsolete inventories based on assumptions about future demand and market conditions. See Note 4—Inventories.

Concentrations of Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The associated concentration risk for cash and cash equivalents is mitigated by banking with creditworthy institutions. At certain times, amounts on deposit exceed Federal Deposit Insurance Corporation insurance limits. Approximately 39% of accounts receivable, net as of December 31, 2018 was due from three third-party loan providers that offer financing to System Sales customers. The Company does not require collateral or other security to support accounts receivable. The Company is not dependent on any single customer outside of the third-party loan providers.


The Company purchases solar panels, inverters and other system components from a limited number of suppliers. Three suppliers accounted for approximately 97% of the solar photovoltaic module purchases for the year ended December 31, 2018. Three suppliers accounted for approximately 99% of the Company’s inverter purchases for the year ended December 31, 2018. If these suppliers fail to satisfy the Company’s requirements on a timely basis or if the Company fails to develop, maintain and expand its relationship with these suppliers, the Company could suffer delays in being able to deliver or install its solar energy systems, experience a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.

Megawatts installed in California accounted for approximately 38% and 31% of total megawatts installed for the years ended December 31, 2018 and 2017. Megawatts installed in the Northeastern United States accounted for approximately 32% and 35% of total megawatts installed for the years ended December 31, 2018 and 2017. Future operations could be affected by changes in the economic conditions in these and other geographic areas, by changes in materials costs, by changes in the demand for renewable energy generated by solar energy systems or by changes or eliminations of solar energy related government incentives.

Fair Value of Financial Instruments

Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined 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. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

 

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

 

Level II—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 III—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company’s financial instruments measured on a recurring basis consist of Level II assets. See Note 3—Fair Value Measurements.

Investment Tax Credits (ITCs)

The Company applies for and receives ITCs under Section 48(a) of the Internal Revenue Code. The amount of the ITC is equal to 30% of the basis of eligible solar property. The Company receives all ITCs for solar energy systems that are not sold to customers or placed in its investment funds. The Company accounts for its ITCs as a reduction of income tax expense in the year in which the credits arise. The Company receives minimal allocations of ITCs for solar energy systems placed in its investment funds as the majority of such credits are allocated to the fund investors. Some of the Company’s investment funds obligate it to make certain fund investors whole for losses that the investors may suffer in certain limited circumstances resulting from the disallowance or recapture of ITCs as a result of the Internal Revenue Service’s (the “IRS”) assessment of the fair value of such systems. The Company has concluded that the likelihood of a recapture event related to these assessments is remote and consequently has not recorded any liability in the consolidated financial statements for any potential recapture exposure.

Solar Energy Systems, Net

The Company sells energy to customers through PPAs or leases solar energy systems to customers through Solar Leases. The Company has determined that these contracts should be accounted for as operating leases and, accordingly, the related solar energy systems are stated at cost, less accumulated depreciation and amortization. The Company also sells solar energy systems to customers through System Sales. Systems that are sold to customers are not part of solar energy systems, net.

Solar energy systems, net is comprised of system equipment costs and initial direct costs related to solar energy systems subject to PPAs or Solar Leases. System equipment costs include components such as solar panels, inverters, racking systems and other electrical equipment, as well as costs for design and installation activities once a long-term customer contract has been executed. Initial direct costs related to solar energy systems consist of sales commissions and other direct customer acquisition expenses. System equipment costs and initial direct costs are capitalized and recorded within solar energy systems, net.


Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the respective assets as follows: 

 

  

Useful Lives

System equipment costs

  

30 years

Initial direct costs related to solar energy systems

  

Lease term (20 years)

System equipment costs are depreciated and initial direct costs are amortized once the respective systems have been installed, interconnected to the power grid and received permission to operate. The determination of the useful lives of assets included within solar energy systems involves significant management judgment. As of December 31, 2018 and 2017, the Company had recorded costs of $2,134.8 million and $1,803.2 million in solar energy systems, of which $1,999.3 million and $1,717.3 million related to systems that had been interconnected to the power grid, with accumulated depreciation and amortization of $195.9 million and $129.6 million.

Property and Equipment, Net

The Company’s property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Vehicles leased under capital leases are depreciated over the life of the lease term, which is typically three to five years. The estimated useful lives of computer equipment, furniture, fixtures and purchased software are three years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. The estimated useful lives of leasehold improvements currently range from one to 12 years. Repairs and maintenance costs are expensed as incurred. Major renewals and improvements that extend the useful lives of existing assets would be capitalized and depreciated over their estimated useful lives.

Intangible Assets

The Company capitalizes costs incurred in the development of internal-use software during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life. The Company tests these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The Company recorded amortization for internal-use software of $0.4 million for each of the years ended December 31, 2018 and 2017.

Other finite-lived intangible assets, which consist of developed technology acquired in business combinations, trademarks/trade names and customer relationships are initially recorded at fair value and presented net of accumulated amortization. These intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company amortizes trademarks/trade names over 10 years and developed technology over eight years. The Company’s customer relationships intangible asset was amortized over five years and became fully amortized in the year ended December 31, 2018. See Note 7—Intangible Assets.

Impairment of Long-Lived Assets

The carrying amounts of the Company’s long-lived assets, including solar energy systems, property and equipment and finite-lived intangible assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated. Factors that the Company considers in deciding when to perform an impairment review include significant negative industry or economic trends, and significant changes or planned changes in the Company’s use of the assets. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the new shorter useful life. 


Other Non-Current Assets

Other non-current assets primarily consist of the long-term portion of lease incentive assets, prepaid insurance, advances receivable due from sales representatives, a straight-line lease asset, debt issuance costs and long-term refundable rent deposits. Lease incentives represent cash payments made by the Company to customers in order to finalize long-term customer contracts. The Company has acquired insurance policies to mitigate the risk of ITC recapture. The insurance premiums are being amortized on a straight-line basis over the policy period. The Company provides advance payments of compensation to direct-sales personnel under certain circumstances. The advance is repaid as a reduction of the direct-sales personnel’s future compensation. The Company has established an allowance related to advances to direct-sales personnel who have terminated their employment agreement with the Company. These are non-interest-bearing advances. For Solar Lease agreements, the Company recognizes revenue on a straight-line basis over the lease term and records an asset that represents future customer payments expected to be received. Debt issuance costs represent costs incurred in connection with obtaining revolving debt financings and are deferred and amortized utilizing the straight-line method, which approximates the effective-interest method, over the term of the related financing.

Distributions Payable to Non-Controlling Interests and Redeemable Non-Controlling Interests

As discussed in Note 12—Investment Funds, the Company and fund investors have formed various investment funds that the Company consolidates as the Company has determined that it is the primary beneficiary in the operational VIEs in which it has an equity interest. These VIEs are required to pay cumulative cash distributions to their respective fund investors. The Company accrues amounts payable to fund investors in distributions payable to non-controlling interests and redeemable non-controlling interests.

Deferred Revenue

Deferred revenue primarily includes cash received in advance of revenue recognition related to System Sales and rebate incentives. A portion of the cash received for System Sales is attributable to administrative services and is deferred over the period that the administrative services are provided. The majority of the cash received for System Sales is deferred until the solar energy systems are interconnected to the local power grids and receive permission to operate. Rebate incentives are received from utility companies and various government agencies and are recognized as revenue over the related lease term of 20 years. See “Revenue Recognition” for additional information regarding revenue.

Workmanship Accruals and Warranties

The Company typically warrants solar energy systems sold to customers for periods of one to ten years against defects in design and workmanship, and for periods of one to ten years that installations will remain watertight. The manufacturers’ warranties on the solar energy system components, which are typically passed through to the customers, have typical product warranty periods of 10 to 20 years and a limited performance warranty period of 25 years. The Company warrants its photovoltaic installation devices for six months to one year against defects in materials or installation workmanship.

The Company generally assesses a loss contingency accrual for installation workmanship and provides for the estimated cost at the time that installation is completed. The Company assesses the workmanship accruals regularly and adjusts the amounts as necessary based on actual experience and changes in future estimates. The current portion of this accrual is recorded as a component of accrued and other current liabilities and was $2.6 million and $1.4 million as of December 31, 2018 and 2017. The non-current portion of this accrual is recorded as a component of other non-current liabilities and was $3.9 million and $2.1 million as of December 31, 2018 and 2017.

Derivative Financial Instruments

The Company maintains interest rate swaps as required by the terms of its debt agreements. See Note 10—Debt Obligations. The interest rate swaps related to the Solar Asset Backed Notes, Series 2018-2 are designated as cash flow hedges. Changes in the fair value of these cash flow hedges are recorded in other comprehensive (loss) income (“OCI”) and will subsequently be reclassified to interest expense over the life of the related debt facility as interest payments are made. As interest payments for the associated debt agreement and derivatives are recognized, the Company includes the effect of these payments in cash flows from operating activities within the consolidated statements of cash flows. The interest rate swaps related to the Aggregation Facility are not designated as hedge instruments and any changes in fair value are accounted for in other (income) expense, net. Derivative instruments may be offset under their master netting arrangements. See Note 11—Derivative Financial Instruments.


The Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), effective January 1, 2018. This update made targeted improvements to accounting for hedging activities by simplifying certain documentation and assessment requirements and eliminating the requirement to separately measure and report hedge ineffectiveness. The Company applied this update using a modified retrospective method to eliminate the separate measurement of hedge ineffectiveness by recording a cumulative-effect adjustment to retained earnings as of January 1, 2018. The net amount the Company recorded to retained earnings as a result of adopting ASU 2017-12 was approximately $1.8 million.

Comprehensive (Loss) Income

Comprehensive (loss) income includes unrealized losses on the Company’s cash flow hedges for the years ended December 31, 2018 and 2017.

Revenue Recognition

The Company adopted ASU 2014-09, Revenue from Contracts with Customers, and its various updates (“Topic 606”) effective January 1, 2018 using the modified retrospective method with a cumulative adjustment to retained earnings as of January 1, 2018. As such, only the results for the year ended December 31, 2018 presented in the Company’s consolidated statements of operations have been reported using the new revenue standard. The Company has applied Topic 606 to all customer contracts not completed by the initial date of application.

As noted above, the Company adopted Topic 606 on a modified retrospective basis. However, if the Company adjusted the comparative period to reflect the adoption of Topic 606, the following adjustments would have been made to the consolidated statement of operations for the year ended December 31, 2017 (in thousands, except per share data):

 

As Previously

 

 

 

 

 

 

 

 

 

 

Reported

 

 

Adjustment

 

 

As Adjusted

 

Revenue

$

268,028

 

 

$

(7,721

)

 

$

260,307

 

Income tax benefit

 

(157,333

)

 

 

(2,094

)

 

 

(159,427

)

Net income available to common shareholders

 

209,098

 

 

 

(5,627

)

 

 

203,471

 

Diluted earnings per share

 

1.77

 

 

 

(0.05

)

 

 

1.72

 

Additionally, the following adjustments would have been made to the consolidated balance sheet as of December 31, 2017 (in thousands):

 

As Previously

 

 

 

 

 

 

 

 

 

 

Reported

 

 

Adjustment

 

 

As Adjusted

 

Current portion of deferred revenue

$

41,846

 

 

$

(7,707

)

 

$

34,139

 

Deferred revenue, net of current portion

 

29,200

 

 

 

(18,690

)

 

 

10,510

 

Deferred tax liability, net

 

342,382

 

 

 

7,160

 

 

 

349,542

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

213,107

 

 

 

(19,237

)

 

 

193,870

 

The Company recognizes revenue according to the following steps: (1) identification of the contract with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract and (5) recognition of revenue when, or as, the Company satisfies a performance obligation. The Company’s revenue is composed of operating leases and incentives, and solar energy system and product sales as captioned in the consolidated statements of operations. Operating leases and incentives revenue includes PPA and Solar Lease revenue, solar renewable energy certificates (“SRECs”) sales and rebate incentives. Solar energy system and product sales revenue includes System Sales, which may include structural upgrades in sales contracts and SREC sales related to sold systems, and the sale of photovoltaic installation products. Revenue is recorded net of any sales tax collected.


Operating Leases and Incentives Revenue

The Company enters into PPAs with residential customers, under which the customer agrees to purchase all of the power generated by the solar energy system for the term of the contract, which is 20 years. The agreement includes a fixed price per kilowatt hour with a fixed annual price escalation percentage. Customers have not historically been charged for installation or activation of the solar energy system. For all PPAs, the Company assesses the probability of collectability on a customer-by-customer basis through a credit review process that evaluates their financial condition and ability to pay. The Company has determined that PPAs should be accounted for as operating leases. As PPA customer payments are dependent on power generation, they are considered contingent rentals and are excluded from future minimum annual lease payments. PPA revenue is recognized based on the actual amount of power generated at rates specified under the contracts.

The Company also offers solar energy systems to customers pursuant to Solar Leases in certain markets. The customer agreements are structured as Solar Leases due to local regulations that can be read to prohibit the sale of electricity pursuant to the Company’s standard PPA. Pursuant to Solar Leases, the customers’ monthly payments are a pre-determined amount calculated based on the expected solar energy generation by the system and typically have included an annual fixed percentage price escalation over the period of the contracts, which is 20 years. The Company provides its Solar Lease customers a performance guarantee, under which the Company agrees to refund certain payments at the end of each year to the customer if the solar energy system does not meet a guaranteed production level in the prior 12-month period. The guaranteed production levels have varying terms. Dependent on the level of the production guarantee, the Company either (1) recognizes revenue on the contracted payments on a straight-line basis over the initial term of the lease, or (2) recognizes the monthly lease payments as revenue and records a solar energy performance guarantee liability due to the contingent nature of the lease payments. A significant majority of Solar Leases are recognized on a straight-line basis. Solar energy performance guarantee liabilities were $0.2 million and $0.1 million as of December 31, 2018 and 2017. Solar energy performance guarantees are recognized as contra-revenue in the period in which the liabilities are recorded.

At times the Company makes nominal cash payments to customers in order to facilitate the finalization of long-term customer contracts and the installation of related solar energy systems. These cash payments are considered lease incentives that are deferred and recognized over the term of the contract as a reduction of revenue.

The Company currently accounts for PPAs, Solar Leases, and associated rebates and incentives as minimum lease payments from operating leases under ASC 840, Leases. However, the Company has determined that these agreements do not meet the definition of a lease under ASC 842, Leases, and these agreements will be accounted for in accordance with Topic 606 after the adoption of ASC 842. The revenue associated with these contracts with customers is currently shown together on the consolidated statement of operations as revenue from operating leases and incentives. The Company will adopt ASC 842 effective January 1, 2019. The Company has determined that under Topic 606 there will be no change from current revenue recognition practices for its PPA revenue stream. For the Company’s Solar Leases, the Company has concluded that the impact of adopting Topic 606 will be immaterial. Revenue from all of the Company’s Solar Leases will be recognized on a straight-line basis over the contractual term; currently a significant majority of Solar Leases are already recognized on a straight-line basis. The Company has also concluded that there will be no material change related to the timing of revenue recognition for rebates and incentives.

Future minimum annual lease receipts due from customers under Solar Leases as of December 31, 2018 are as follows (in thousands):

Years Ending December 31,

 

 

 

2019

$

7,551

 

2020

 

7,770

 

2021

 

7,995

 

2022

 

8,227

 

2023

 

8,466

 

Thereafter

 

132,668

 

Total minimum lease payments

$

172,677

 

The Company applies for and receives SRECs in certain jurisdictions for power generated by solar energy systems it has installed. When SRECs are granted, the Company typically sells them to other companies directly, or to brokers, to assist them in meeting their own mandatory emission reduction or conservation requirements. The Company recognizes revenue related to the sale of these certificates upon delivery, assuming the other revenue recognition criteria discussed above are met. Total SREC revenue was $44.1 million and $33.8 million for the years ended December 31, 2018 and 2017.


Solar Energy System and Product Sales

The Company has analyzed the impact of Topic 606 on System Sales and other product sales and has concluded that the revenue recognition associated with these product sales did not change in the consolidated financial statements. The Company will continue to show this revenue stream as solar energy system and product sales in the consolidated statement of operations. The Company’s principal performance obligation for System Sales is to design and install a solar energy system that is interconnected to the local power grid and granted permission to operate to the customer. When the solar energy system has been granted permission to operate, the customer retains all of the significant risks and rewards of ownership of the solar energy system. 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 in service. The Company collects cash during the installation process and recognizes revenue for System Sales and other product sales at the placed in-service date or product delivery date less any revenue allocated to monitoring services. The Company allocates a portion of the transaction price to the monitoring services by estimating the fair market price that the Company would charge for these services if offered separately from the sale of the solar energy system. As of December 31, 2018 and 2017, the Company had allocated deferred revenue of $3.3 million and $2.1 million to monitoring services that will be recognized over the term of the monitoring services. All costs to obtain and fulfill contracts associated with System Sales and other product sales are expensed as a cost of revenue when the Company has fulfilled its performance obligation and the products have been placed into service or delivered to the customer.

Lease Pass-Through Arrangement

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 concluded that revenue related to the sale of ITCs through its lease pass-through arrangement is recognized when the related solar energy systems are placed in service as the Company has completed its performance obligation to transfer ITCs to the fund investors at that time. The fund investors contributed cash to the investment fund during the installation process as payment for the ITCs. The transaction price for the ITCs was estimated using the tax credit rate of 30% multiplied by the fair market value of the solar energy systems that were placed into service in the lease pass-through fund. All of the related solar energy systems were placed in service and all related revenue would have been recognized prior to September 30, 2016 under Topic 606. Prior to the adoption of Topic 606, the Company recognized this revenue evenly over the five-year ITC recapture period. Under Topic 606, this earlier recognition of the ITC lease pass-through revenue decreased revenue for the year ended December 31, 2018 by $7.7 million and would have decreased revenue for the year ended December 31, 2017 by $7.7 million. As all ITC sales revenue would have been recognized prior to September 30, 2016 under Topic 606, there is no deferred revenue related to ITC sales recorded after the adoption date of January 1, 2018, and there would have been no deferred revenue as of December 31, 2017. As shown above, the cumulative adjustment related to ITC revenue recognized into retained earnings, net of tax, as of January 1, 2018 was $19.2 million.

Cost of Revenue

Cost of Revenue—Operating Leases and Incentives

Cost of revenue—operating leases and incentives includes the depreciation of the cost of solar energy systems under long-term customer contracts and the amortization of the related capitalized initial direct costs. It also includes allocated indirect material and labor costs related to the processing; account creation; design; installation; interconnection and servicing of solar energy systems that are not capitalized, such as personnel costs not directly associated to a solar energy system installation; warehouse rent and utilities; and fleet vehicle executory costs. The cost of operating leases and incentives also includes allocated facilities and information technology costs. The cost of revenue for the sales of SRECs is limited to broker fees which are paid in connection with certain SREC transactions.

Cost of Revenue—Solar Energy System and Product Sales

Cost of revenue—solar energy system and product sales consists of direct and allocated indirect material and labor costs for System Sales, photovoltaic installation products and structural upgrades. Indirect material and labor costs are ratably allocated to System Sales and include costs related to the processing; account creation; design; installation; interconnection and servicing of solar energy systems, such as personnel costs not directly associated to a solar energy system installation; warehouse rent and utilities; and fleet vehicle executory costs. The cost of solar energy system and product sales also includes allocated facilities and information technology costs. Costs of solar energy system sales are recognized in conjunction with the related revenue upon the solar energy system passing an inspection by the responsible governmental department after completion of system installation and interconnection to the local power grid.

Advertising Costs

Advertising costs are expensed when incurred and are included in sales and marketing expenses in the consolidated statements of operations. The Company’s advertising costs were $3.6 million and $2.3 million for the years ended December 31, 2018 and 2017.

Vivint Related Party Expenses

The Company has historically relied on the technical support of Vivint, Inc. (“Vivint”) to run its business. The Company used certain of Vivint’s information technology and infrastructure until transitioning off in July 2017. The Company has entered into a sales dealer agreement with Vivint, pursuant to which each company will act as a non-exclusive dealer for the other party to market. The fees under these agreements were allocated to the Company on a basis that was considered to reasonably reflect the utilization of the services provided to, or the benefit obtained by, the Company. For additional information, see Note 16—Related Party Transactions.

Other (Income) Expense, Net

For the year ended December 31, 2018, other (income) expense, net primarily includes changes in fair value for the Company’s interest rate swaps not designated as hedges and a payment received as an initial distribution on one of the Company’s legal proceedings. For the year ended December 31, 2017, other (income) expense, net primarily includes changes in fair value for the ineffective portions of the cash flow hedges and the interest rate swaps not designated as hedges. Changes in the fair value of the Company’s interest rate swaps are recorded in other (income) expense, net each reporting period when the interest rate swaps are marked to market.

Provision for Income Taxes

The Company accounts for income taxes under an asset and liability approach. Deferred income taxes are classified as long-term and reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards, and other tax credits measured by applying currently enacted tax laws. A valuation allowance is provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. As required by ASC 740, the Company recognizes the effect of tax rate and law changes on deferred taxes in the reporting period in which the legislation is enacted.

The Company sells solar energy systems to the investment funds for income tax purposes. As the investment funds are consolidated by the Company, the gain on the sale of the solar energy systems is eliminated in the consolidated financial statements. However, this gain is recognized for tax reporting purposes. The Company adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), effective January 1, 2018 using the modified retrospective method. With the adoption of ASU 2016-16, the Company now accounts for the income tax consequences of these intra-entity transfers, both current and deferred, as a component of income tax expense and deferred tax liability, net during the period in which the transfers occur. Prior to the adoption of ASU 2016-16, any tax expense incurred related to these intra-entity sales was deferred and amortized over the estimated useful life of the underlying solar energy systems, which was estimated to be 30 years. Accordingly, the Company had recorded a prepaid tax asset, net, of $505.9 million as of December 31, 2017, which was removed as of January 1, 2018 by recording a cumulative adjustment to retained earnings of $493.1 million and to deferred tax liability, net of $12.8 million. As the Company used the modified retrospective method to apply ASU 2016-16, only the current periods presented in the Company’s consolidated statements of operations have been reported using the new accounting standard.

The adoption of ASU 2016-16 had the following effect on the Company’s consolidated statement of operations for the year ended December 31, 2018 (in thousands, except per share data):

 

Year Ended December 31, 2018

 

 

Pre-Adoption

 

 

Effect of

 

 

 

 

 

 

Accounting

 

 

Adoption

 

 

As Reported

 

Income tax expense

$

39,041

 

 

$

67,258

 

 

$

106,299

 

Net loss

 

(212,305

)

 

 

(67,258

)

 

 

(279,563

)

Net loss attributable to common shareholders

 

51,666

 

 

 

(67,258

)

 

 

(15,592

)

Basic earnings per share

 

0.44

 

 

 

(0.57

)

 

 

(0.13

)

Diluted earnings per share

 

0.42

 

 

 

(0.55

)

 

 

(0.13

)

The Company adopted ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), effective January 1, 2018. As permitted by ASU 2018-02, the Company has elected to reclassify the income tax effects of the Tax Cuts and Jobs Act (the “TCJA”) on items within accumulated other comprehensive income (“AOCI”) to retained earnings. The Company applied the amendments in this update in the period of adoption. The total amount the Company reclassified to retained earnings as a result of adopting ASU 2018-02 was approximately $1.5 million. After applying this update, the Company had no stranded tax effects remaining in AOCI.


The Company determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company uses a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within income tax expense (benefit).

Stock-Based Compensation Expense

Stock-based compensation expense for equity instruments issued to employees is measured based on the grant-date fair value of the awards. The fair value of each restricted stock unit award and performance share unit award is determined as the closing price of the Company’s stock on the date of grant. The fair value of each time-based employee stock option is estimated on the date of grant using the Black-Scholes-Merton stock option pricing valuation model. The Company recognizes compensation costs using the accelerated attribution method for all employee stock-based compensation awards over the requisite service period of the awards, which is generally the awards’ vesting period.

Stock-based compensation expense for equity instruments issued to non-employees is recognized based on the estimated fair value of the equity instrument. The fair value of the non-employee awards is subject to remeasurement at each reporting period until services required under the arrangement are completed, which is the vesting date. 

Post-Employment Benefits

The Company sponsors a 401(k) Plan that covers all of the Company’s eligible employees. The Company did not provide a discretionary company match to employee contributions during any of the periods presented.

Non-Controlling Interests and Redeemable Non-Controlling Interests

Non-controlling interests and redeemable non-controlling interests represent fund investors’ interests in the net assets of certain consolidated investment funds, which have been entered into by the Company in order to finance the costs of solar energy systems under long-term customer contracts. The Company has determined that the provisions in the contractual arrangements represent substantive profit-sharing arrangements, which gives rise to the non-controlling interests and redeemable non-controlling interests. The Company has further determined that the appropriate methodology for attributing income and loss to the non-controlling interests and redeemable non-controlling interests each period is a balance sheet approach referred to as the hypothetical liquidation at book value (“HLBV”) method. Under the HLBV method, the amounts of income and loss attributed to the non-controlling interests and redeemable non-controlling interests in the consolidated statements of operations reflect changes in the amounts the fund investors would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements of these structures, assuming the net assets of these funding structures were liquidated at recorded amounts. The fund investors’ non-controlling interest in the results of operations of these funding structures is determined as the difference in the non-controlling interests’ and redeemable non-controlling interests’ claims under the HLBV method at the start and end of each reporting period, after considering any capital transactions, such as contributions or distributions, between the fund and the fund investors.

Attributing income and loss to the non-controlling interests and redeemable non-controlling interests under the HLBV method requires the use of significant assumptions and estimates to calculate the amounts that fund investors would receive upon a hypothetical liquidation. Changes in these assumptions and estimates can have a significant impact on the amount that fund investors would receive upon a hypothetical liquidation. The use of the HLBV methodology to allocate income to the non-controlling and redeemable non-controlling interest holders may create volatility in the Company’s consolidated statements of operations as the application of HLBV can drive changes in net income available and loss attributable to non-controlling interests and redeemable non-controlling interests from quarter to quarter.

The Company classifies certain non-controlling interests with redemption features that are not solely within the control of the Company outside of permanent equity on its consolidated balance sheets. Estimated redemption value is calculated as the discounted cash flows subsequent to the expected flip date of the respective investment funds. Redeemable non-controlling interests are reported using the greater of their carrying value at each reporting date as determined by the HLBV method or their estimated redemption value in each reporting period. Estimating the redemption value of the redeemable non-controlling interests requires the use of significant assumptions and estimates. Changes in these assumptions and estimates can have a significant impact on the calculation of the redemption value.

Loss Contingencies

The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. The Company considers the likelihood of loss or impairment of an asset, or the incurrence of a liability, as well as the Company’s ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to determine whether an accrual is required, an accrual should be adjusted or a range of possible loss should be disclosed.

Segment Information

The Company’s chief operating decision maker is its chief executive officer. The chief executive officer reviews financial information for purposes of allocating resources and evaluating financial performance. The Company has one business activity, providing solar energy services and products to customers. Accordingly, the Company has a single operating and reporting segment.

Recent Accounting Pronouncements

During 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-20, ASU 2018-11 and ASU 2018-10, which clarify aspects of the guidance in ASU 2016-02, Leases (Topic 842). The objective of ASU 2016-02 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. The amendments are required to be applied using a modified retrospective approach. However, ASU 2018-11 provides an additional transition method under which an entity will apply the updates in ASU 2016-02 as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. Under this additional transition method, periods ending prior to January 1, 2019 will be presented in accordance with ASC 840, and periods ending after January 1, 2019 will be presented in accordance with ASC 842. The Company will adopt this standard effective January 1, 2019 and plans to utilize the transition method permitted by ASU 2018-11. As discussed above with regard to the Company’s policies for revenue recognition, the Company’s PPAs and Solar Leases will no longer be considered leases under Topic 842 and will be accounted for under ASC 606. The Company does not expect that change to have a material effect on the timing and pattern of revenue recognition for PPAs and Solar Leases. Upon adoption of Topic 842, the Company will no longer capitalize initial direct costs. Instead, the Company will capitalize costs to obtain a contract which meet the “incremental” criteria defined in Topic 606. These costs will be amortized over the period of benefit to sales and marketing expense on the consolidated statements of operations. The Company has operating leases in which it is the lessee that will be affected by this update and the Company is still evaluating the full impact on its consolidated financial statements and related disclosures. The impact is not expected to be significant to the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update expands the scope of Topic 718 to include share-based payments to nonemployees. Under current guidance, the measurement date for nonemployee equity awards is not established until the nonemployee’s performance is complete. This update states that the measurement date for nonemployee equity awards will now be established at the grant date. This amendment is effective for annual periods beginning after December 15, 2018 and is applied through a modified retrospective method with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company has outstanding nonemployee equity awards that will be affected by this update. The Company currently marks all nonemployee awards to market at each reporting period and has determined that the impact of adopting this ASU is immaterial.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This update clarifies that entities should capitalize implementation costs incurred in cloud computing arrangements that are service contracts. Entities expense the capitalized costs over the term of the hosting arrangement. The service element of a hosting arrangement that is a service contract is not affected by this update, meaning service costs will continue to be expensed as incurred. This amendment is effective for fiscal periods beginning after December 15, 2019 for public business entities. The amendments in this update should be applied prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company is evaluating the impact of this update and currently anticipates using the prospective transition method.

v3.10.0.1
Fair Value Measurements
12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements

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 included on the consolidated balance sheets measured on a recurring basis by level within the fair value hierarchy (in thousands):

 

December 31, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

130

 

 

$

 

 

$

130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

11,146

 

 

$

 

 

$

11,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

14,028

 

 

$

 

 

$

14,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

1,280

 

 

$

 

 

$

1,280

 

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. During 2018, the Company settled the interest rate swaps associated with its 2016 Term Loan Facility and Aggregation Facility. The settlement of the interest rate swaps on the 2016 Term Loan Facility, which were designated as hedges, resulted in a $22.5 million realized gain that was recorded as a reduction to interest expense. The settlement of the interest rate swaps on the Aggregation Facility, which were not designated as hedges, resulted in a $2.0 million realized gain that was recorded as other income. The Company has since opened new interest rate swaps for its Aggregation Facility, which are not designated as hedges, the fair value of which is represented in financial liabilities above. During the year ended December 31, 2018 the Company also opened interest rate swaps for its Solar Asset Backed Notes, Series 2018-2, which are designated as hedges, the fair value of which is represented in financial liabilities above.

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

 

December 31, 2018

 

 

December 31, 2017

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Floating-rate long-term debt

$

587,358

 

 

$

587,358

 

 

$

757,044

 

 

$

757,044

 

Fixed-rate long-term debt

 

653,031

 

 

 

673,917

 

 

 

199,063

 

 

 

238,618

 

Total

$

1,240,389

 

 

$

1,261,275

 

 

$

956,107

 

 

$

995,662

 

  

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 (Level 2) 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 the fixed rate debt facilities that are publicly traded, or quoted prices for corporate debt with similar terms for debt facilities that are not publicly traded.

v3.10.0.1
Inventories
12 Months Ended
Dec. 31, 2018
Inventory Disclosure [Abstract]  
Inventories

4.Inventories

Inventories consisted of the following (in thousands):

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

Solar energy systems held for sale

$

12,321

 

 

$

21,971

 

Photovoltaic installation products

 

936

 

 

 

626

 

Total inventories

$

13,257

 

 

$

22,597

 

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 products are stated at the lower of cost, on an average cost basis, or net realizable value.

v3.10.0.1
Solar Energy Systems
12 Months Ended
Dec. 31, 2018
Solar Energy Systems Disclosure [Abstract]  
Solar Energy Systems

5.Solar Energy Systems

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

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

System equipment costs

$

1,667,440

 

 

$

1,437,419

 

Initial direct costs related to solar energy systems

 

435,084

 

 

 

336,136

 

 

 

2,102,524

 

 

 

1,773,555

 

Less: Accumulated depreciation and amortization

 

(195,890

)

 

 

(129,640

)

 

 

1,906,634

 

 

 

1,643,915

 

Solar energy system inventory

 

32,240

 

 

 

29,617

 

Solar energy systems, net

$

1,938,874

 

 

$

1,673,532

 

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 $66.3 million and $55.8 million for the years ended December 31, 2018 and 2017.

v3.10.0.1
Property and Equipment
12 Months Ended
Dec. 31, 2018
Property Plant And Equipment [Abstract]  
Property and Equipment

6.Property and Equipment

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

 

 

Estimated

 

December 31,

 

 

December 31,

 

 

 

Useful Lives

 

2018

 

 

2017

 

Leasehold improvements

 

1-12 years

 

$

10,560

 

 

$

15,071

 

Vehicles acquired under capital leases

 

3-5 years

 

 

6,907

 

 

 

15,113

 

Furniture and computer and other equipment

 

3 years

 

 

3,816

 

 

 

6,492

 

 

 

 

 

 

21,283

 

 

 

36,676

 

Less: Accumulated depreciation and amortization

 

 

 

 

(10,553

)

 

 

(21,598

)

Property and equipment, net

 

 

 

$

10,730

 

 

$

15,078

 

The Company recorded depreciation and amortization expense related to property and equipment of $4.8 million and $8.4 million for the years ended December 31, 2018 and 2017.

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 $2.0 million and $3.6 million was capitalized in solar energy systems, net for the years ended December 31, 2018 and 2017.

Future minimum lease payments for vehicles under capital leases as of December 31, 2018 were as follows (in thousands):

Years Ending December 31,

 

 

 

 

2019

 

$

2,069

 

2020

 

 

466

 

2021

 

 

24

 

2022

 

 

32

 

2023

 

 

 

Thereafter

 

 

 

Total minimum lease payments

 

 

2,591

 

Less: interest

 

 

165

 

Present value of capital lease obligations

 

 

2,426

 

Less: current portion

 

 

1,921

 

Long-term portion

 

$

505

 

 

v3.10.0.1
Intangible Assets
12 Months Ended
Dec. 31, 2018
Goodwill And Intangible Assets Disclosure [Abstract]  
Intangible Assets

7.Intangible Assets

Net intangible assets are included in other non-current assets, net and consisted of the following (in thousands):

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

Cost:

 

 

 

 

 

 

 

Internal-use software

$

1,020

 

 

$

1,314

 

Developed technology

 

522

 

 

 

522

 

Trademarks/trade names

 

201

 

 

 

201

 

Customer relationships

 

 

 

 

164

 

Total carrying value

 

1,743

 

 

 

2,201

 

Accumulated amortization:

 

 

 

 

 

 

 

Internal-use software

 

(781

)

 

 

(872

)

Developed technology

 

(324

)

 

 

(258

)

Trademarks/trade names

 

(99

)

 

 

(79

)

Customer relationships

 

 

 

 

(130

)

Total accumulated amortization

 

(1,204

)

 

 

(1,339

)

Total intangible assets, net

$

539

 

 

$

862

 

The Company recorded amortization expense of $0.5 million and $0.6 million for the years ended December 31, 2018 and 2017, which is included within general and administrative expense on the consolidated statements of operations.

As of December 31, 2018, expected amortization expense for the unamortized intangible assets was as follows (in thousands):

Years Ending December 31,

 

 

 

2019

$

208

 

2020

 

161

 

2021

 

130

 

2022

 

20

 

2023

 

20

 

Thereafter

 

 

Total

$

539

 

 

v3.10.0.1
Accrued Compensation
12 Months Ended
Dec. 31, 2018
Accrued Compensation Disclosure [Abstract]  
Accrued Compensation

8.Accrued Compensation

Accrued compensation consisted of the following (in thousands):

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

Accrued payroll

$

16,352

 

 

$

13,064

 

Accrued commissions

 

9,168

 

 

 

7,928

 

Total accrued compensation

$

25,520

 

 

$

20,992

 

 

v3.10.0.1
Accrued and Other Current Liabilities
12 Months Ended
Dec. 31, 2018
Payables And Accruals [Abstract]  
Accrued and Other Current Liabilities

9.Accrued and Other Current Liabilities

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

 

December 31,

 

 

December 31,

 

 

2018

 

 

2017

 

Accrued unused commitment fees and interest

$

14,102

 

 

$

7,445

 

Accrued professional fees

 

6,150

 

 

 

3,977

 

Current portion of lease pass-through financing obligation

 

5,038

 

 

 

4,931

 

Accrued inventory

 

4,380

 

 

 

4,122

 

Accrued workers' compensation

 

4,033

 

 

 

1,446

 

Sales, use and property taxes payable

 

3,132

 

 

 

3,046

 

Workmanship accrual

 

2,630

 

 

 

1,359

 

Current portion of deferred rent

 

951

 

 

 

937

 

Other accrued expenses

 

2,444

 

 

 

2,412

 

Total accrued and other current liabilities

$

42,860

 

 

$

29,675

 

 

v3.10.0.1
Debt Obligations
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Debt Obligations

10.Debt Obligations

Debt obligations consisted of the following as of December 31, 2018 (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

Solar asset backed notes, Series 2018-1(1)

$

462,826

 

 

$

(74

)

 

$

(9,172

)

 

$

3,655

 

 

$

449,925

 

 

$

 

 

 

5.1

%

 

October 2028

Solar asset backed notes, Series 2018-2(2)(3)

 

342,833

 

 

 

(6

)

 

 

(7,388

)

 

 

294

 

 

 

335,145