10-Q 1 scty-10q_20150930.htm 10-Q scty-10q_20150930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

x

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

For the quarterly period ended September 30, 2015

or

¨

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

For the transition period from              to             

Commission File Number: 001-35758

 

SolarCity Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

02-0781046

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3055 Clearview Way

San Mateo, California

 

94402

(Address of principal executive offices)

 

(Zip Code)

(650) 638-1028

(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 Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x     No   ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   x     No   ¨

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

 

Large accelerated filer

 

x

 

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨

 

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).     Yes   ¨     No   x

The number of shares outstanding of the registrant’s common stock as of September 30, 2015 was 97,588,595.

 

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The discussion in this quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are any statements that look to future events and consist of, among other things, our business strategies; anticipated future financial results; expected trends in certain financial and operating metrics; our belief that the aggregate megawatt, or MW, production capacity of our systems is an indicator of the growth rate of our solar energy systems business; the calculation of estimated nominal contracted payments remaining, and certain other metrics based on forward-looking projections; projections on growth in the markets that we operate and our growth rates; pricing trends, including our ability to achieve economies of scale in both installation and capital costs; our ability to successfully integrate acquired businesses, operations and personnel; our ability to achieve manufacturing economies of scale and associated cost reductions; our expectations regarding the Riverbend Agreement and the development and construction of the Riverbend facility, including expected capital and operating expenses and the performance of our manufacturing operations; our belief that adequate surplus capacity of non-tariff solar panels is available to suit our future needs and the costs of solar energy system components; our beliefs regarding future regulations and policies affecting our business, such as net energy metering policies; projections relating to our use of and reliance on U.S. Treasury grants and federal, state and local incentives and tax attributes; our regulatory status as a non-utility; our ability to continue to meet the regulatory requirements of a public company; domestic and international expansion, including throughout Mexico and Central America, and hiring plans; product development efforts and customer preferences; the fair market value of our solar energy systems, including amounts potentially payable to our fund investors as a result of decreased fair market value determinations by the U.S. Treasury Department; the life and durability of our solar systems and equipment, anticipated contract renewals and warranty obligations; the success of our sales and marketing efforts; our internal control environment; pending litigation; the payment of future dividends; and our belief as to the sufficiency of our existing cash and cash equivalents, funds available under our secured credit facilities and funds available under existing financing funds to meet our working capital and operating resource requirements for the next 12 months.

The forward-looking statements are contained principally in, but not limited to, the sections titled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “may,” “believe,” “will,” “could,” “anticipate,” “would,” “might,” “potentially,” “estimate,” “continue,” “plan,” “expect,” “intend,” and similar expressions or the negative of these terms or other comparable terminology that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report on Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of a number of factors, including those set forth below in “Risk Factors,” and in our other reports filed with the U.S. Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We undertake no obligation to revise or publically release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

 

3


PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

SolarCity Corporation

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Par Values)

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

372,750

 

 

$

504,383

 

Short-term investments

 

 

45,616

 

 

 

138,311

 

Restricted cash

 

 

20,312

 

 

 

20,875

 

Accounts receivable (net of allowances for doubtful accounts of $3,610 and $1,941 as of

   September 30, 2015 and December 31, 2014, respectively)

 

 

38,572

 

 

 

22,708

 

Rebates receivable (net of reserves of $2,523 and $7,860 as of September 30, 2015 and

   December 31, 2014, respectively)

 

 

15,044

 

 

 

30,021

 

Inventories

 

 

309,190

 

 

 

217,223

 

Deferred income tax asset

 

 

30,500

 

 

 

13,149

 

Prepaid expenses and other current assets

 

 

103,624

 

 

 

55,729

 

Total current assets

 

 

935,608

 

 

 

1,002,399

 

Solar energy systems, leased and to be leased - net

 

 

3,869,719

 

 

 

2,796,796

 

Property, plant and equipment - net

 

 

243,843

 

 

 

75,464

 

Build-to-suit lease asset under construction

 

 

238,050

 

 

 

26,450

 

Goodwill and intangible assets - net

 

 

527,418

 

 

 

539,557

 

MyPower customer notes receivable, net of current portion

 

 

362,840

 

 

 

34,544

 

MyPower deferred costs

 

 

162,810

 

 

 

13,147

 

Other assets

 

 

172,055

 

 

 

97,854

 

Total assets(1)

 

$

6,512,343

 

 

$

4,586,211

 

Liabilities and equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

296,196

 

 

$

237,809

 

Distributions payable to noncontrolling interests and redeemable noncontrolling interests

 

 

12,336

 

 

 

8,552

 

Current portion of deferred U.S. Treasury grant income

 

 

15,336

 

 

 

15,330

 

Accrued and other current liabilities

 

 

242,434

 

 

 

152,408

 

Customer deposits

 

 

5,095

 

 

 

10,560

 

Current portion of deferred revenue

 

 

100,381

 

 

 

86,238

 

Current portion of long-term debt

 

 

44,471

 

 

 

11,781

 

Current portion of solar bonds

 

 

10,797

 

 

 

820

 

Current portion of solar bonds issued to related parties

 

 

165,340

 

 

 

330

 

Current portion of solar asset-backed notes

 

 

14,259

 

 

 

13,574

 

Current portion of financing obligation

 

 

31,690

 

 

 

29,689

 

Total current liabilities

 

$

938,335

 

 

 

567,091

 

Deferred revenue, net of current portion

 

 

885,726

 

 

 

557,408

 

Long-term debt, net of current portion

 

 

833,154

 

 

 

287,621

 

Solar bonds, net of current portion

 

 

34,333

 

 

 

2,593

 

Solar bonds issued to related parties, net of current portion

 

 

200

 

 

 

200

 

Convertible senior notes

 

 

796,000

 

 

 

796,000

 

Solar asset-backed notes, net of current portion

 

 

410,779

 

 

 

304,393

 

Long-term deferred tax liability

 

 

32,298

 

 

 

13,194

 

Financing obligation, net of current portion

 

 

64,211

 

 

 

73,379

 

Deferred U.S. Treasury grant income, net of current portion

 

 

386,121

 

 

 

397,486

 

Build-to-suit lease liability

 

 

238,050

 

 

 

26,450

 

Other liabilities and deferred credits

 

 

271,594

 

 

 

218,024

 

Total liabilities(1)

 

 

4,890,801

 

 

 

3,243,839

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests in subsidiaries

 

 

313,302

 

 

 

186,788

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value - authorized, 1,000,000 shares as of September 30, 2015 and

   December 31, 2014; issued and outstanding, 97,589 and 96,521 shares as of September 30,

   2015 and December 31, 2014, respectively

 

 

10

 

 

 

10

 

Additional paid-in capital

 

 

1,136,121

 

 

 

1,003,992

 

Accumulated deficit

 

 

(321,318

)

 

 

(258,360

)

Total stockholders' equity

 

 

814,813

 

 

 

745,642

 

Noncontrolling interests in subsidiaries

 

 

493,427

 

 

 

409,942

 

Total equity

 

 

1,308,240

 

 

 

1,155,584

 

Total liabilities and equity

 

$

6,512,343

 

 

$

4,586,211

 

4


 

(1)

SolarCity Corporation’s, or the Company’s, consolidated assets as of September 30, 2015 and December 31, 2014 include $2,506,342 and $1,672,370, respectively, being assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets include solar energy systems, leased and to be leased-net, of $2,405,158 and $1,581,459 as of September 30, 2015 and December 31, 2014, respectively; property, plant and equipment-net, of $23,056 and $24,286 as of September 30, 2015 and December 31, 2014, respectively; cash and cash equivalents of $37,636 and $27,820 as of September 30, 2015 and December 31, 2014, respectively; inventory, of $1,146 and $614 as of September 30, 2015 and December 31, 2014, respectively; restricted cash, current, of $531 and $106 as of September 30, 2015 and December 31, 2014, respectively; accounts receivable, net, of $17,578 and $6,769 as of September 30, 2015 and December 31, 2014, respectively; prepaid expenses and other current assets of $2,706 and $1,839 as of September 30, 2015 and December 31, 2014, respectively; rebates receivable of $9,261 and $25,397 as of September 30, 2015 and December 31, 2014, respectively; and other assets of $9,270 and $4,080 as of September 30, 2015 and December 31, 2014, respectively. The Company’s consolidated liabilities as of September 30, 2015 and December 31, 2014 include $19,340 and $27,808, respectively, being liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to noncontrolling interests in subsidiaries and redeemable noncontrolling interests in subsidiaries of $12,336 and $8,552 as of September 30, 2015 and December 31, 2014, respectively; accounts payable of $2,404 and $2,748 as of September 30, 2015 and December 31, 2014, respectively; customer deposits of $2,572 and $6,405 as of September 30, 2015 and December 31, 2014, respectively; accrued liabilities and other payables of $2,028 and $969 as of September 30, 2015 and December 31, 2014, respectively; and current portion of long-term debt of $0 and $9,134 as of September 30, 2015 and December 31, 2014, respectively.

See further description in Note 7, VIE Arrangements.

See accompanying notes.

 

5


SolarCity Corporation

Condensed Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases and solar energy systems incentives

 

$

85,059

 

 

$

52,178

 

 

$

218,113

 

 

$

124,431

 

Solar energy systems and components sales

 

 

28,798

 

 

 

6,165

 

 

 

66,026

 

 

 

58,792

 

Total revenue

 

 

113,857

 

 

 

58,343

 

 

 

284,139

 

 

 

183,223

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases and solar energy systems incentives

 

 

46,015

 

 

 

25,728

 

 

 

115,667

 

 

 

62,533

 

Solar energy systems and components sales

 

 

42,554

 

 

 

6,640

 

 

 

78,101

 

 

 

57,057

 

Total cost of revenue

 

 

88,569

 

 

 

32,368

 

 

 

193,768

 

 

 

119,590

 

Gross profit

 

 

25,288

 

 

 

25,975

 

 

 

90,371

 

 

 

63,633

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

129,284

 

 

 

56,472

 

 

 

329,115

 

 

 

159,093

 

General and administrative

 

 

69,423

 

 

 

39,608

 

 

 

168,288

 

 

 

111,006

 

Research and development

 

 

17,652

 

 

 

4,235

 

 

 

42,173

 

 

 

9,158

 

Total operating expenses

 

 

216,359

 

 

 

100,315

 

 

 

539,576

 

 

 

279,257

 

Loss from operations

 

 

(191,071

)

 

 

(74,340

)

 

 

(449,205

)

 

 

(215,624

)

Interest expense - net

 

 

25,862

 

 

 

16,321

 

 

 

64,880

 

 

 

37,192

 

Other expense - net

 

 

16,851

 

 

 

2,961

 

 

 

21,723

 

 

 

4,293

 

Loss before income taxes

 

 

(233,784

)

 

 

(93,622

)

 

 

(535,808

)

 

 

(257,109

)

Income tax (provision) benefit

 

 

(482

)

 

 

23,506

 

 

 

(1,128

)

 

 

23,315

 

Net loss

 

 

(234,266

)

 

 

(70,116

)

 

 

(536,936

)

 

 

(233,794

)

Net loss attributable to noncontrolling interests and

   redeemable noncontrolling interests

 

 

(215,193

)

 

 

(89,352

)

 

 

(473,978

)

 

 

(181,315

)

Net (loss) income attributable to stockholders

 

$

(19,073

)

 

$

19,236

 

 

$

(62,958

)

 

$

(52,479

)

Net (loss) income attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(19,073

)

 

$

19,236

 

 

$

(62,958

)

 

$

(52,479

)

Diluted

 

$

(19,073

)

 

$

19,236

 

 

$

(62,958

)

 

$

(52,479

)

Net (loss) income per share attributable to common

   stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.20

)

 

$

0.21

 

 

$

(0.65

)

 

$

(0.57

)

Diluted

 

$

(0.20

)

 

$

0.19

 

 

$

(0.65

)

 

$

(0.57

)

Weighted-average shares used to compute net (loss)

   income per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

97,384,949

 

 

 

93,323,687

 

 

 

97,027,412

 

 

 

92,335,789

 

Diluted

 

 

97,384,949

 

 

 

99,380,397

 

 

 

97,027,412

 

 

 

92,335,789

 

 

See accompanying notes.

6


SolarCity Corporation

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(536,936

)

 

$

(233,794

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

118,091

 

 

 

66,602

 

Non cash interest and other expense

 

 

12,554

 

 

 

8,607

 

Stock-based compensation, net of amounts capitalized

 

 

61,010

 

 

 

45,660

 

Loss on extinguishment of long-term debt

 

 

1,093

 

 

 

1,504

 

Deferred income taxes

 

 

(102

)

 

 

(23,696

)

Non-cash reduction in financing obligation

 

 

(36,431

)

 

 

(36,407

)

Loss on disposal of property, plant and equipment and construction in progress

 

 

92

 

 

 

1,227

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

(19,814

)

 

 

(3,834

)

Accounts receivable

 

 

(15,623

)

 

 

722

 

Rebates receivable

 

 

14,977

 

 

 

(6,182

)

Inventories

 

 

(91,624

)

 

 

(66,325

)

Prepaid expenses and other current assets

 

 

(42,305

)

 

 

(15,186

)

MyPower deferred costs

 

 

(150,267

)

 

 

 

Other assets

 

 

(12,769

)

 

 

(12,092

)

Accounts payable

 

 

56,695

 

 

 

80,651

 

Accrued and other liabilities

 

 

110,356

 

 

 

(17,283

)

Customer deposits

 

 

(5,465

)

 

 

(560

)

Deferred revenue

 

 

10,151

 

 

 

128,054

 

Net cash used in operating activities

 

 

(526,317

)

 

 

(82,332

)

Investing activities:

 

 

 

 

 

 

 

 

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

 

 

(1,134,929

)

 

 

(793,713

)

Purchase of property, plant and equipment

 

 

(147,784

)

 

 

(13,420

)

Investment in promissory notes receivable and other advances

 

 

(1,189

)

 

 

(15,750

)

Purchases of short-term investments

 

 

(44,592

)

 

 

(46,543

)

Proceeds from sales and maturities of short-term investments

 

 

136,560

 

 

 

9,600

 

Acquisition of business, net of cash acquired

 

 

(9,509

)

 

 

1,874

 

Payments to acquire redeemable noncontrolling interest in a subsidiary

 

 

 

 

 

(450

)

Net cash used in investing activities

 

 

(1,201,443

)

 

 

(858,402

)

 

7


 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

Financing activities:

 

 

 

 

 

 

 

 

Investment fund financings, bank and other borrowings:

 

 

 

 

 

 

 

 

Borrowings under long-term debt

 

 

783,123

 

 

 

256,090

 

Repayments of long-term debt

 

 

(211,976

)

 

 

(246,726

)

Proceeds from issuance of solar bonds

 

 

41,594

 

 

 

 

Proceeds from issuance of solar bonds issued to related parties

 

 

165,010

 

 

 

 

Proceeds from issuance of solar asset-backed notes

 

 

119,790

 

 

 

263,551

 

Repayments of borrowings under solar asset-backed notes

 

 

(13,859

)

 

 

(3,962

)

Payment of deferred purchase consideration

 

 

(3,747

)

 

 

(957

)

Proceeds from financing obligation

 

 

26,398

 

 

 

30,124

 

Repayments of financing obligation

 

 

(5,136

)

 

 

(6,557

)

Repayment of capital lease obligations

 

 

(3,223

)

 

 

(1,153

)

Proceeds from investment by noncontrolling interests and redeemable

   noncontrolling interests in subsidiaries

 

 

754,916

 

 

 

428,061

 

Distributions paid to noncontrolling interests and redeemable noncontrolling

   interests in subsidiaries

 

 

(67,154

)

 

 

(107,254

)

Proceeds from U.S. Treasury grants

 

 

 

 

 

342

 

Net cash provided by financing activities before equity and convertible notes issuances

 

 

1,585,736

 

 

 

611,559

 

Equity issuances:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible senior notes

 

 

 

 

 

488,713

 

Purchase of capped call options

 

 

 

 

 

(57,600

)

Proceeds from exercise of stock options

 

 

10,391

 

 

 

17,498

 

Net cash provided by equity issuances

 

 

10,391

 

 

 

448,611

 

Net cash provided by financing activities

 

 

1,596,127

 

 

 

1,060,170

 

Net (decrease) increase in cash and cash equivalents

 

 

(131,633

)

 

 

119,436

 

Cash and cash equivalents, beginning of period

 

 

504,383

 

 

 

577,080

 

Cash and cash equivalents, end of period

 

$

372,750

 

 

$

696,516

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

34,418

 

 

$

15,583

 

Cash paid during the period for taxes, net of refunds

 

$

257

 

 

$

1,881

 

 

See accompanying notes.

 

 

 

8


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements

 

 

1. Organization

SolarCity Corporation, or the Company, was incorporated as a Delaware corporation on June 21, 2006. The Company is engaged in the design, manufacture, installation and sale or lease of solar energy systems to residential and commercial customers, or sale of electricity generated by solar energy systems to customers. The Company’s headquarters are located in San Mateo, California.

 

 

2. Summary of Significant Accounting Policies and Procedures

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. In accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 810, Consolidation, the Company consolidates any variable interest entity, or VIE, of which it is the primary beneficiary. The Company and fund investors form VIEs in the ordinary course of business in order to facilitate funding and monetization of solar energy systems. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company does not consolidate a VIE in which it has a majority ownership interest when the Company is not considered the primary beneficiary. The Company has determined that it is the primary beneficiary of a number of VIEs (see Note 7, VIE Arrangements). The Company evaluates its relationships with all 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.

The Company and its subsidiaries’ fiscal quarters and years are the same as calendar quarters and years except for one subsidiary, Silevo, LLC, or Silevo, which continues to have fiscal quarters based on 13-week periods and fiscal years based on 52-week periods. Silevo’s third fiscal quarter of 2015 began on June 28, 2015 and ended on September 26, 2015, and this timing difference and the related activity did not materially impact the condensed consolidated financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

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. Management regularly makes significant estimates and assumptions regarding the selling price of undelivered elements for revenue recognition purposes, the collectability of accounts and rebates receivable, the valuation of inventories, the labor costs for long-term contracts used as a basis for determining the percentage of completion for such contracts, the fair values and residual values of solar energy systems subject to leases, the accounting for business combinations, the fair values and useful lives of acquired tangible and intangible assets, the fair value of debt assumed under business combinations, the fair value of contingent consideration payable under business combinations, the fair value of short-term investments, the useful lives of solar energy systems, property, plant and equipment, the determination of accrued warranty, the determination of accrued liability for solar energy systems performance guarantees, the determination of lease pass-through financing obligations, the discount rates used to determine the fair values of investment tax credits, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, asset impairment, the valuation of build-to-suit lease assets, the fair value of interest rate swaps and other items. Management 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.

Short-Term Investments

The Company’s short-term investments are comprised of corporate debt securities and asset-backed securities. The Company classifies short-term investments as available-for-sale and carries them at fair value, with any unrealized gains or losses recognized as other comprehensive income or loss in the condensed consolidated balance sheets. The specific identification method is used to determine the cost of any securities disposed of, with any realized gains or losses recognized as other income or expense in the

9


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

 

condensed consolidated statements of operations. Short-term investments are anticipated to be used for current operations and are, therefore, classified as current assets even though their maturities may extend beyond one year. The Company periodically reviews short-term investments for impairment. In the event a decline in value is determined to be other-than-temporary, an impairment loss is recognized. When determining if a decline in value is other-than-temporary, the Company takes into consideration the current market conditions and the duration and severity of and the reason for the decline, as well as the likelihood that it would need to sell the security prior to a recovery of par value.

As of September 30, 2015, short-term investments were comprised of $38.7 million of corporate debt securities and $6.9 million of asset-backed securities. The costs of these securities approximated their fair values, and there were no material gross realized or unrealized gains, gross realized or unrealized losses or impairment losses recognized for the three and nine months ended September 30, 2015. As of September 30, 2015, all short-term investments were scheduled to mature within the next twelve months.

Interest Rate Swaps

The Company enters into fixed-for-floating interest rate swap agreements to reduce the potential impact of future changes in interest rates on certain variable rate debt. All interest rate swaps are recognized at fair value on the condensed consolidated balance sheets within other assets or other liabilities and deferred credits, with any changes in fair value recognized as other income or expense in the condensed consolidated statements of operations. The Company has not designated any interest rate swaps as hedging instruments. As of and for the periods ended September 30, 2015, the Company had interest rate swaps outstanding as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Gross Losses

 

 

 

Aggregate

 

 

Gross

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Notional

 

 

Liability at

 

 

September 30,

 

 

September 30,

 

 

 

Amount

 

 

Fair Value

 

 

2015

 

 

2015

 

Interest rate swaps

 

$

356,812

 

 

$

12,570

 

 

$

12,253

 

 

$

12,570

 

Fair Value of Financial Instruments

ASC 820, Fair Value Measurements, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

ASC 820 requires that the valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes inputs that may be used to measure fair value as follows:

 

·

Level 1—Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

 

·

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices 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 assets or liabilities.

 

·

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of September 30, 2015, the Company’s assets and liabilities carried at fair value on a recurring basis included cash equivalents, short-term investments, interest rate swaps and contingent consideration, as follows (in thousands):

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

34,756

 

 

$

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 

 

$

38,708

 

 

$

 

Asset-backed securities

 

$

 

 

$

6,908

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

 

$

12,570

 

 

$

 

Contingent consideration

 

$

 

 

$

 

 

$

121,749

 

 

10


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

 

The Company classified its money market funds within Level 1 because their fair values are based on their quoted market prices. The Company classified its corporate debt securities, asset-backed securities and interest rate swaps within Level 2 because their fair values are determined using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates, to determine their fair values. The Company classified its contingent consideration within Level 3 because their fair values are determined using unobservable probability estimates and unobservable estimated discount rates applicable to the acquisition to determine the fair value. During the nine months ended September 30, 2015, there were no transfers between the levels of the fair value hierarchy.

The contingent consideration is dependent on the achievement of specified production milestones for the acquired business. The fair value of the contingent consideration is directly proportional to the estimated probabilities of achievement of these milestones. As of September 30, 2015, the estimated probabilities ranged from 90% to 95%, the estimated discount rates ranged from 5.0% to 7.0%, $42.9 million was included under accrued and other current liabilities on the condensed consolidated balance sheets and $78.8 million was included under other liabilities and deferred credits on the condensed consolidated balance sheets.

The following table summarizes the activity of the Level 3 contingent consideration balance in the nine months ended September 30, 2015 (in thousands):

 

Balance - beginning of the period

 

$

117,197

 

Change in fair value recorded in other expense - net

 

 

4,552

 

Balance - end of the period

 

$

121,749

 

 

The Company’s financial instruments that are not re-measured at fair value include accounts receivable, customer notes receivable, rebates receivable, accounts payable, customer deposits, distributions payable to noncontrolling interests and redeemable noncontrolling interests, the participation interest, solar asset-backed notes, convertible senior notes, Solar Bonds and long-term debt. The carrying values of these financial instruments other than customer notes receivable, the participation interest, solar asset-backed notes, convertible senior notes, Solar Bonds and long-term debt approximated their fair values due to the fact that they were short-term in nature at September 30, 2015 and December 31, 2014 (Level 1).

The Company estimates the fair value of convertible senior notes based on their last actively traded prices (Level 1). The Company estimates the fair value of customer notes receivable, the participation interest, solar asset-backed notes, Solar Bonds and long-term debt based on rates currently offered for instruments with similar maturities and terms (Level 3).

The following table presents the estimated fair values and the carrying values of the participation interest, solar asset-backed notes and convertible senior notes (in thousands):

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Participation interest

 

$

15,648

 

 

$

14,435

 

 

$

15,556

 

 

$

14,102

 

Solar asset-backed notes

 

$

425,038

 

 

$

431,342

 

 

$

317,967

 

 

$

328,313

 

Convertible senior notes

 

$

796,000

 

 

$

630,330

 

 

$

796,000

 

 

$

752,176

 

The Company has estimated the fair values of customer notes receivable, Solar Bonds and long-term debt to approximate their carrying values based on rates currently offered for instruments with similar maturities and terms.

Customer Notes Receivable

In determining the allowance and credit quality for customer loans under MyPower, the Company identifies significant customers with known disputes or collection issues and also considers its historical level of credit losses and current economic trends that might impact the level of future credit losses. Customer notes receivable that are individually impaired are charged-off as a write-off of allowance for losses. As of September 30, 2015, there were no significant customers with known disputes or collection issues, and the amount of potentially uncollectible amounts was insignificant. Accordingly, the Company did not establish an allowance for losses against customer notes receivable. In addition, there were no material non-accrual or past due customer notes receivable as of September 30, 2015.

11


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

 

Deferred Revenue and Deferred Costs under MyPower Contracts

For solar energy systems sold under a MyPower contract, the Company has determined that the arrangement consideration is not currently fixed or determinable. In making this determination, the Company considered (i) the MyPower arrangement is unique and the Company does not have company-specific or market history for similar financing arrangements with similar asset classes over an extended term; (ii) customer preferences and satisfaction during the life of these long-term contracts, including as a result of technological advances in solar energy systems over time, may change, and the Company may be incented to offer future inducements or concessions to ensure customers remain satisfied during the life of these long-term contracts; and (iii) possible future decreases in the retail prices of electricity from utilities or from other renewable energy sources that may make the purchase of the solar energy systems less economically attractive and may cause the Company to amend the terms of its contracts to ensure continued performance and remain competitive. Accordingly, the Company initially defers the revenue associated with the sale of a solar energy system under a MyPower contract when it delivers the system that has passed inspection by the utility or the authority having jurisdiction. In instances where there are multiple deliverables in a single MyPower contract, the Company allocates the arrangement consideration to the various elements in the contract based on the relative selling price method. Then, the Company recognizes revenue for the system over the term of the contract as cash payments are received for the loan’s principal and interest. The deferred revenue is included in the condensed consolidated balance sheets under the current portion of deferred revenue for the portion expected to be recognized as revenue in the next 12 months, and the non-current portion is included under deferred revenue, net of current portion. The Company records a note receivable when the customer secures the loan from a subsidiary of the Company to finance the purchase.

MyPower deferred revenue activity was as follows (in thousands):

 

 

 

As of and for the

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

Balance - beginning of the period

 

$

33,651

 

MyPower systems delivered under executed contracts

 

 

319,239

 

MyPower revenue recognized within solar energy systems and components sales

 

 

(15,327

)

Balance - end of the period

 

$

337,563

 

Of the balance outstanding as of September 30, 2015, $4.1 million is included in the condensed consolidated balance sheet under current portion of deferred revenue. The balances in the table above do not include $28.5 million allocated to remote monitoring service revenue and $5.3 million allocated to accrued sales taxes.

The costs associated with solar energy systems sold under MyPower contracts, including the costs of acquisition of solar energy systems component, personnel costs associated with system installations and costs to originate the contracts such as sales commissions, referral fees and some incremental contract administration costs, are initially capitalized as deferred costs. Subsequently these costs are recognized as a component of cost of revenue from solar energy systems and components sales for the costs associated with system components and installation, or as a component of operating expenses for costs associated with contract origination, generally in proportion to the reduction of the MyPower loan’s outstanding principal over 30 years. The deferred cost is included in the condensed consolidated balance sheets under prepaid expenses and other current assets for the portion expected to be recognized in the condensed consolidated income statement in the next twelve months, and the non-current portion is included under other assets. MyPower deferred costs activity was as follows (in thousands):

 

 

 

As of and for the

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

Balance - beginning of the period

 

$

13,571

 

MyPower systems delivered under executed contracts(1)

 

 

158,098

 

Recognized in cost of revenue within solar energy systems and components sales

 

 

(6,734

)

Recognized in operating expenses

 

 

(248

)

Balance - end of the period

 

$

164,687

 

 

(1)

Included in MyPower systems delivered under executed contracts was $20.4 million of MyPower contract origination costs incurred in the nine months ended September 30, 2015.

12


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

 

Of the balance outstanding as of September 30, 2015, $1.9 million is included in the condensed consolidated balance sheet under prepaid and other current assets.

 

Warranties

The Company generally provides a warranty on the installation and components of the solar energy systems that it sells, including sales under MyPower contracts, of typically between 10 to 30 years. The manufacturer’s warranty on the solar energy systems’ components, which is typically passed-through to customers, ranges from 1 to 25 years. However, for the solar energy systems under lease contracts or power purchase agreements, the Company does not accrue a warranty liability because it owns those solar energy systems. Instead, any repair costs on those solar energy systems are expensed when they are incurred.

The changes in the accrued warranty balance, recorded as a component of accrued and other current liabilities on the condensed consolidated balance sheets, consisted of the following (in thousands):

 

 

 

 

 

 

 

 

As of and for the

 

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

Balance - beginning of the period

 

$

8,607

 

Change in estimate

 

 

(3,158

)

Increase in liability (including $18,535 related to MyPower contracts)

 

 

19,950

 

Less warranty claims

 

 

(231

)

Balance - end of the period

 

$

25,168

 

 

Solar Energy Systems Performance Guarantees

The Company guarantees certain specified minimum solar energy production output for certain solar energy systems leased or sold to customers generally for a term up to 30 years. The Company monitors the solar energy systems to ensure that these outputs are being achieved. The Company evaluates if any amounts are due to its customers and makes any payments periodically as specified in the customer contracts. As of September 30, 2015 and December 31, 2014, the Company had recorded liabilities of $2.8 million and $1.6 million, respectively, under accrued and other current liabilities in the condensed consolidated balance sheets, relating to these guarantees based on the Company’s assessment of its current exposure.

Comprehensive Income (Loss)

The Company accounts for comprehensive income (loss) in accordance with ASC 220, Comprehensive Income. Under ASC 220, the Company is required to report comprehensive income (loss), which includes net income (loss) as well as other comprehensive income (loss). There were no significant other comprehensive income (losses) and no significant differences between comprehensive loss as defined by ASC 220 and net loss as reported in the condensed consolidated statements of operations, for the periods presented.

Segment Information

Operating segments are defined as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the executive team, which is comprised of the Chief Executive Officer, Chief Technology Officer, Chief Revenue Officer, Chief Operating Officer and Chief Financial Officer. Based on the financial information presented to and reviewed by the executive team in deciding how to allocate resources and in assessing the performance of the Company, the Company has determined that it has a single operating and reporting segment: solar energy products and services. The Company’s principal operations, revenue and decision-making functions are located in the United States.

Basic and Diluted Net Income (Loss) Per Share

The Company’s basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

13


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

 

The diluted net income (loss) per share attributable to common stockholders is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method or the if-converted method, as applicable. In periods when the Company incurred a net loss attributable to common stockholders, stock options, restricted stock units and convertible senior notes are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive.

Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers, to replace the existing revenue recognition criteria for contracts with customers and to establish the disclosure requirements for revenue from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to defer the effective date of ASU No. 2014-09 to interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASUs is either retrospective to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company is currently assessing the impact of the ASUs on its condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern, to provide guidance within GAAP requiring management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and requiring related disclosures. The ASU is effective for annual periods ending after December 15, 2016. The Company believes that the ASU will have no impact on its condensed consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, to amend the criteria for consolidation of certain legal entities. The ASU is effective for interim and annual periods beginning after December 15, 2015. Adoption of the ASU is either retrospective to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company is currently assessing the impact of the ASU on its condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, to require debt issuance costs to be presented as an offset against debt outstanding as opposed to an asset. The ASU is effective for interim and annual periods beginning after December 15, 2015. Adoption of the ASU is retrospective to each prior period presented. Upon adoption of the ASU, the Company will offset its debt issuance costs, which were $29.6 million as of September 30, 2015, against debt outstanding.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, to specify that inventory should be subsequently measured at the lower of cost or net realizable value, which is the ordinary selling price less any completion, transportation and disposal costs. However, the ASU does not apply to inventory measured using the last-in-first-out or retail methods. The ASU is effective for interim and annual periods beginning after December 15, 2016. Adoption of the ASU is prospective. The Company does not anticipate that the adoption of the ASU will have a material impact on its condensed consolidated financial statements.

 

 

3. Acquisition

Ilioss

On August 7, 2015, the Company acquired all of the outstanding shares of ILIOSSON, S.A. de C.V., or Ilioss, a designer and marketer of commercial and industrial solar energy systems in Mexico. Historically, Ilioss subcontracted the installation of its solar energy systems and sold them to financing companies along with the related customer power purchase agreements. The Company expects to vertically integrate Ilioss’ operations and expand throughout Mexico.

The purchase consideration was comprised of $9.7 million payable in cash. Additionally, the Company would pay earn-outs comprising of: (i) $5.0 million in cash upon the successful achievement of a commercial battery storage deployment milestone on or before June 30, 2016 and (ii) additional cash consideration based on the number of megawatts deployed by Ilioss in Mexico from the acquisition date through December 31, 2019. The terms of the earn-out payments require the sellers to remain employed to receive the earn-out payments. No amounts would be payable for any earn-outs not achieved. The Company has determined that these earn-out payments are compensation for post-acquisition services, and the Company will, therefore, recognize the amounts as they are earned.

14


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

 

The following table summarizes the preliminary assessment of the fair values of the assets acquired and the liabilities assumed as of the acquisition date (in thousands). The Company is in the process of completing the valuation of the assets acquired and the liabilities assumed. Accordingly, the preliminary fair values reflected in the following table are subject to change.

 

Cash

 

$

145

 

Accounts receivable

 

 

241

 

Prepaid and other assets

 

 

307

 

Property, plant and equipment

 

 

18

 

Accounts payable and other liabilities

 

 

(1,015

)

Deferred revenue

 

 

(553

)

Deferred tax liabilities

 

 

(1,855

)

Intangible assets

 

 

6,420

 

Total identifiable net assets at fair value

 

 

3,708

 

Goodwill

 

 

5,945

 

Total purchase consideration

 

$

9,653

 

 

The goodwill recognized was primarily attributable to Ilioss’ assembled workforce and their knowledge and experience with the Mexican solar energy market that would enable the Company to grow its presence there. The full amount of the goodwill is not deductible for tax purposes.

The following table summarizes the acquired intangible assets as of the acquisition date:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Average

 

 

 

Fair Value

 

 

Useful Life

 

 

 

(in thousands)

 

 

(in years)

 

Customer relationships

 

$

6,190

 

 

 

6

 

Non-compete agreements

 

 

230

 

 

 

3

 

Total

 

$

6,420

 

 

 

 

 

 

Pro forma financial information and the historical revenue and earnings of the acquiree are not presented as they were not material to the condensed consolidated statements of operations.

 

 

4. Goodwill and Intangible Assets

The Company is in the process of completing the valuation of certain assets and liabilities from the Ilioss acquisition discussed in Note 3, Acquisition, including the gross amounts of certain intangible assets presented in the table below amounting to $6.4 million. Such amounts are preliminary and subject to change. There were no material changes recorded in the nine months ended September 30, 2015 related to the amounts reported in the Company’s Form 10-K for the year ended December 31, 2014, except for the periodic amortization of the intangible assets.

15


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

 

Intangible Assets

The following is a summary of intangible assets as of September 30, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

useful life

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

(in years)

 

 

Gross

 

 

amortization

 

 

Net

 

Developed technology - Silevo

 

 

10

 

 

$

115,000

 

 

$

(11,720

)

 

$

103,280

 

Developed technology - Zep Solar

 

 

7

 

 

 

60,100

 

 

 

(15,510

)

 

 

44,590

 

Trademarks and trade names

 

 

7

 

 

 

24,700

 

 

 

(6,374

)

 

 

18,326

 

Marketing database

 

 

5

 

 

 

17,427

 

 

 

(7,213

)

 

 

10,214

 

PowerSaver agreement

 

 

10

 

 

 

17,077

 

 

 

(3,534

)

 

 

13,543

 

Non-compete agreements

 

 

5

 

 

 

7,189

 

 

 

(2,897

)

 

 

4,292

 

Customer relationships

 

 

6

 

 

 

6,190

 

 

 

(226

)

 

 

5,964

 

Other

 

 

6

 

 

 

10,028

 

 

 

(4,684

)

 

 

5,344

 

Total

 

 

8.26

 

 

$

257,711