0001488139-18-000089.txt : 20181102 0001488139-18-000089.hdr.sgml : 20181102 20181102131858 ACCESSION NUMBER: 0001488139-18-000089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 90 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181102 DATE AS OF CHANGE: 20181102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Ameresco, Inc. CENTRAL INDEX KEY: 0001488139 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION SPECIAL TRADE CONTRACTORS [1700] IRS NUMBER: 043512838 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-34811 FILM NUMBER: 181156347 BUSINESS ADDRESS: STREET 1: 111 SPEEN STREET CITY: FRAMINGHAM STATE: MA ZIP: 01701 BUSINESS PHONE: 508-661-2200 MAIL ADDRESS: STREET 1: 111 SPEEN STREET CITY: FRAMINGHAM STATE: MA ZIP: 01701 10-Q 1 amrc930201810-qq318.htm 10-Q Document

 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
 
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: 001-34811
Ameresco, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3512838
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
111 Speen Street, Suite 410
Framingham, Massachusetts
 
01701
(Address of Principal Executive Offices)
 
(Zip Code)
(508) 661-2200
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
Accelerated Filer  þ
Non-accelerated filer  o
Smaller reporting company o
Emerging growth company o
 
(Do not check if a smaller reporting company)
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuent to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Shares outstanding as of October 29, 2018
Class A Common Stock, $0.0001 par value per share
27,976,565
Class B Common Stock, $0.0001 par value per share
18,000,000
 
 



AMERESCO, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
AMERESCO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
September 30,
 
December 31,
 
2018
 
2017
 
(Unaudited)
 
 
ASSETS
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
64,539

 
$
24,262

Restricted cash
13,461

 
15,751

Accounts receivable, net
90,378

 
85,121

Accounts receivable retainage, net
14,401

 
17,484

Costs and estimated earnings in excess of billings
66,471

 
104,852

Inventory, net
8,128

 
8,139

Prepaid expenses and other current assets
13,123

 
14,037

Income tax receivable
13,684

 
6,053

Project development costs
16,776

 
11,379

Total current assets
300,961

 
287,078

Federal ESPC receivable
272,953

 
248,917

Property and equipment, net
6,649

 
5,303

Energy assets, net
442,018

 
356,443

Goodwill
58,853

 
56,135

Intangible assets, net
2,315

 
2,440

Other assets
30,706

 
27,635

 Total assets
$
1,114,455

 
$
983,951

 
 
 
 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
 
Current portions of long-term debt and capital lease liabilities
$
24,397

 
$
22,375

Accounts payable
119,969

 
135,881

Accrued expenses and other current liabilities
28,067

 
23,260

Billings in excess of cost and estimated earnings
32,516

 
19,871

Income taxes payable
6,348

 
755

Total current liabilities
211,297

 
202,142

Long-term debt and capital lease liabilities, less current portions and net of deferred financing fees
226,252

 
173,237

Federal ESPC liabilities
262,484

 
235,088

Deferred income taxes, net
3,453

 
584

Deferred grant income
6,774

 
7,188

Other liabilities
25,404

 
18,754

Commitments and contingencies (Note 7)

 


 
 
 
 
Redeemable non-controlling interests
14,585

 
10,338



1


The accompanying notes are an integral part of these condensed consolidated financial statements.
AMERESCO, INC.
CONSOLIDATED BALANCE SHEETS — (Continued)
(in thousands, except share amounts)
 
September 30,
 
December 31,
 
2018
 
2017
 
(Unaudited)
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2018 and December 31, 2017
$

 
$

Class A common stock, $0.0001 par value, 500,000,000 shares authorized, 30,057,605 shares issued and 27,972,108 shares outstanding at September 30, 2018, 29,406,315 shares issued and 27,533,049 shares outstanding at December 31, 2017
3

 
3

Class B common stock, $0.0001 par value, 144,000,000 shares authorized, 18,000,000 shares issued and outstanding at September 30, 2018 and December 31, 2017
2

 
2

Additional paid-in capital
121,660

 
116,196

Retained earnings
258,213

 
235,844

Accumulated other comprehensive loss, net
(4,101
)
 
(5,626
)
Less - treasury stock, at cost, 2,085,497 shares at September 30, 2018 and 1,873,266 shares at December 31, 2017
(11,571
)
 
(9,799
)
Total stockholders’ equity
364,206

 
336,620

Total liabilities, redeemable non-controlling interests and stockholders’ equity
$
1,114,455

 
$
983,951

The accompanying notes are an integral part of these condensed consolidated financial statements.














2


AMERESCO, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
205,375

 
$
204,744

 
$
569,767

 
$
506,019

Cost of revenues
159,213

 
163,377

 
445,356

 
403,320

Gross profit
46,162

 
41,367

 
124,411

 
102,699

Selling, general and administrative expenses
28,866

 
27,027

 
84,871

 
80,164

Operating income
17,296

 
14,340

 
39,540

 
22,535

Other expenses, net
3,244

 
1,668

 
10,754

 
5,232

Income before provision for income taxes
14,052

 
12,672

 
28,786

 
17,303

Income tax provision
3,351

 
3,881

 
1,879

 
4,296

Net income
10,701

 
8,791

 
26,907

 
13,007

Net (income) loss attributable to redeemable non-controlling interests

 
(298
)
 
(516
)
 
673

Net income attributable to common shareholders
$
10,701

 
$
8,493

 
$
26,391

 
$
13,680

Net income per share attributable to common shareholders:
 

 
 
 
 
 
 
Basic
$
0.23

 
$
0.19

 
$
0.58

 
$
0.30

Diluted
$
0.23

 
$
0.19

 
$
0.57

 
$
0.30

Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
45,854

 
45,524

 
45,599

 
45,500

Diluted
46,944

 
45,771

 
46,509

 
45,664

The accompanying notes are an integral part of these condensed consolidated financial statements.





3


AMERESCO, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
 
Three Months Ended September 30,
 
2018
 
2017
Net income
$
10,701

 
$
8,791

Other comprehensive income (loss):
 
 
 
Unrealized gain from interest rate hedges, net of tax benefit of $181 and $3, respectively
125

 
62

Foreign currency translation adjustments
(163
)
 
185

Total other comprehensive income (loss)
(38
)
 
247

Comprehensive income
10,663

 
9,038

Comprehensive (income) attributable to redeemable non-controlling interests

 
(298
)
Comprehensive income attributable to common shareholders
$
10,663

 
$
8,740

 
 
 
 
 
Nine Months Ended September 30,
 
2018
 
2017
Net income
$
26,907

 
$
13,007

Other comprehensive income (loss):
 
 
 
Unrealized gain (loss) from interest rate hedges, net of tax benefit of $590 and $150, respectively
1,686

 
(67
)
Foreign currency translation adjustments
(161
)
 
567

Total other comprehensive income
1,525

 
500

Comprehensive income
28,432

 
13,507

Comprehensive (income) loss attributable to redeemable non-controlling interests
(516
)
 
673

Comprehensive income attributable to common shareholders
$
27,916

 
$
14,180

The accompanying notes are an integral part of these condensed consolidated financial statements.






4


AMERESCO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE NON-CONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018
(in thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Redeemable
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
 
Total
 
 
Non-Controlling
 
Class A Common Stock
 
Class B Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Treasury Stock
 
Stockholders’
 
 
Interests
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Shares
 
Amount
 
Equity
Balance, December 31, 2017
 
$
10,338

 
27,533,049

 
$
3

 
18,000,000

 
$
2

 
$
116,196

 
$
235,844

 
$
(5,626
)
 
1,873,266

 
$
(9,799
)
 
$
336,620

Cumulative impact from the adoption of ASU No. 2014-09 (Note 2)
 

 

 

 

 

 

 
(4,454
)
 

 

 

 
(4,454
)
Cumulative impact from the adoption of ASU No. 2017-12 (Note 2)
 

 

 

 

 

 

 
432

 
(486
)
 

 

 
(54
)
Exercise of stock options
 

 
625,215

 

 

 

 
4,114

 

 

 

 

 
4,114

Stock-based compensation expense
 

 

 

 

 

 
1,137

 

 

 

 

 
1,137

Employee Stock Purchase Plan
 

 
26,075

 

 

 

 
213

 

 

 

 

 
213

Open market purchase of common shares
 

 
(212,231
)
 

 

 

 

 

 

 
212,231

 
(1,772
)
 
(1,772
)
Unrealized gain from interest rate hedge, net
 

 

 

 

 

 

 

 
2,172

 

 

 
2,172

Foreign currency translation adjustment
 

 

 

 

 

 

 

 
(161
)
 

 

 
(161
)
Contributions from redeemable non-controlling interests
 
4,038

 

 

 

 

 

 

 

 

 

 

Distributions to redeemable non-controlling interests
 
(307
)
 

 

 

 

 

 

 

 

 

 

Net income
 
516

 

 

 

 

 

 
26,391

 

 

 

 
26,391

Balance, September 30, 2018
 
$
14,585

 
27,972,108

 
$
3

 
18,000,000

 
$
2

 
$
121,660

 
$
258,213

 
$
(4,101
)
 
2,085,497

 
$
(11,571
)
 
$
364,206

The accompanying notes are an integral part of these condensed consolidated financial statements.


5


AMERESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
26,907

 
$
13,007

Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
Depreciation of energy assets
19,699

 
15,822

Depreciation of property and equipment
1,573

 
1,931

Amortization of deferred financing fees
1,587

 
1,194

Amortization of intangible assets
771

 
1,082

Provision for bad debts
483

 
68

Loss (gain) on disposal / sale of assets
300

 
(104
)
Net gain from derivatives
(367
)
 
(206
)
Stock-based compensation expense
1,137

 
976

Deferred income taxes
3,914

 
(2,139
)
Unrealized foreign exchange (gain) loss
486

 
(1,494
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,073

 
22,599

Accounts receivable retainage
3,008

 
308

Federal ESPC receivable
(111,982
)
 
(119,093
)
Inventory, net
10

 
3,503

Costs and estimated earnings in excess of billings
28,704

 
(24,403
)
Prepaid expenses and other current assets
5,241

 
(2,271
)
Project development costs
(6,984
)
 
(4,028
)
Other assets
(1,371
)
 
225

Accounts payable, accrued expenses and other current liabilities
(16,552
)
 
4,772

Billings in excess of cost and estimated earnings
11,166

 
(4,283
)
Other liabilities
194

 
(255
)
Income taxes payable
(2,038
)
 
2,357

Cash flows from operating activities
(32,041
)
 
(90,432
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(2,961
)
 
(1,922
)
Purchases of energy assets
(44,059
)
 
(68,736
)
Proceeds from sale of assets of a business

 
2,777

Acquisitions, net of cash received
(62,687
)
 
(2,409
)
Cash flows from investing activities
(109,707
)
 
(70,290
)
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


6


 
 
 
 
 
 
 
 
 
 
 
 
AMERESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
(in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from financing activities:
 

 
 

Payments of financing fees
(3,667
)
 
(2,024
)
Proceeds from exercises of options and ESPP
4,327

 
1,559

Repurchase of common stock
(1,772
)
 
(3,029
)
Proceeds (payments) from senior secured credit facility, net
(900
)
 
12,847

Proceeds from long-term debt financings
78,914

 
48,885

Proceeds from Federal ESPC projects
113,570

 
122,340

Proceeds for energy assets from Federal ESPC
2,269

 

Proceeds from sale-leaseback financings
5,145

 
30,611

Contributions from redeemable non-controlling interests, net
3,731

 
1,358

Payments on long-term debt
(22,825
)
 
(40,228
)
Cash flows from financing activities
178,792

 
172,319

Effect of exchange rate changes on cash
(124
)
 
322

Net increase in cash, cash equivalents, and restricted cash
36,920

 
11,919

Cash, cash equivalents, and restricted cash, beginning of period
60,105

 
52,826

Cash, cash equivalents, and restricted cash, end of period
$
97,025

 
$
64,745

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
9,618

 
$
8,152

Cash paid for income taxes
$
2,018

 
$
4,432

Non-cash Federal ESPC settlement
$
82,536

 
$
66,830

Accrued purchases of energy assets
$
7,698

 
$
9,414

Conversion of revolver to term loan
$
25,000

 
$


The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the total of the same such amounts shown above:

 
Nine Months Ended September 30,

 
2018
 
2017
Cash and cash equivalents
 
$
64,539

 
$
29,559

Short-term restricted cash
 
13,461

 
15,789

Long-term restricted cash included in other assets
 
19,025

 
19,397

Total cash and cash equivalents, and restricted cash
 
$
97,025

 
$
64,745


The accompanying notes are an integral part of these condensed consolidated financial statements.



7

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)



1. DESCRIPTION OF BUSINESS
Ameresco, Inc. (including its subsidiaries, the “Company”) was organized as a Delaware corporation on April 25, 2000. The Company is a provider of energy efficiency solutions for facilities throughout North America and Europe. The Company provides solutions, both services and products, that enable customers to reduce their energy consumption, lower their operating and maintenance costs and realize environmental benefits. The Company’s comprehensive set of solutions includes upgrades to a facility’s energy infrastructure and the construction and operation of small-scale renewable energy plants. It also sells certain photovoltaic (“PV”) equipment worldwide. The Company operates in the United States, Canada and Europe.
The Company is compensated through a variety of methods, including: 1) direct payments based on fee-for-services contracts (utilizing lump-sum or cost-plus pricing methodologies); 2) the sale of energy from the Company’s energy assets and the sale of energy assets; and 3) direct payment for PV equipment and systems.
The condensed consolidated financial statements as of September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017, are unaudited, pursuant to certain rules and regulations of the Securities and Exchange Commission, and include, in the opinion of the Company, normal recurring adjustments necessary for a fair presentation in conformity with accounting principles generally accepted in the United States (“GAAP”) of the results for the periods indicated, which, however, are not necessarily indicative of results which may be expected for the full year. The December 31, 2017 consolidated balance sheet data was derived from audited financial statements, but certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The interim condensed consolidated financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2017, and notes thereto, included in the Company’s annual report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 7, 2018.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company, its subsidiaries in which the Company has a controlling financial interest and three investment funds formed to fund the purchase and operation of solar energy systems, which are consolidated with the Company as variable interest entities (“VIE”). 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. For all periods presented, the Company has determined that it is the primary beneficiary in all of its operational VIEs. The Company evaluates its relationships with the VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. Gains and losses from the translation of all foreign currency financial statements are recorded in accumulated other comprehensive loss, net, within stockholders’ equity. The Company prepares its financial statements in conformity with GAAP.
Use of Estimates
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates and assumptions used in these condensed consolidated financial statements relate to management’s estimates of final construction contract profit in accordance with accounting for long-term contracts, allowance for doubtful accounts, inventory reserves, realization of project development costs, fair value of derivative financial instruments, accounting for business acquisitions, stock-based awards, impairment of long-lived assets, income taxes, self insurance reserves and potential liability in conjunction with certain commitments and contingencies. Actual results could differ from those estimates.
The Company is self-insured for employee health insurance. The maximum exposure in fiscal year 2018 under the plan is $100 per covered participant, after which reinsurance takes effect. The liability for unpaid claims and associated expenses, including incurred but not reported claims, is determined by management and reflected in the Company’s consolidated balance sheets in accrued expenses and other current liabilities. The liability is calculated based on historical data, which considers both


8

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

the frequency and settlement amount of claims. The Company’s estimated accrual for this liability could be different than its ultimate obligation if variables such as the frequency or amount of future claims differ significantly from management’s assumptions.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on deposit, overnight repurchase agreements and amounts invested in highly liquid money market funds. Cash equivalents consist of short term investments with original maturities of three months or less. The Company maintains accounts with financial institutions and the balances in such accounts, at times, exceed federally insured limits. This credit risk is divided among a number of financial institutions that management believes to be of high quality. The carrying amount of cash and cash equivalents approximates its fair value measured using level 1 inputs per the fair value hierarchy as defined in Note 8.
Restricted Cash
Restricted cash consists of cash and cash equivalents held in an escrow account in association with construction draws for energy savings performance contracts (“ESPC”), construction of energy assets, operations and maintenance (“O&M”) reserve accounts and cash collateralized letters of credit as well as cash required under term loans to be maintained in debt service reserve accounts until all obligations have been indefeasibly paid in full. These accounts are primarily invested in highly liquid money market funds. The carrying amount of the cash and cash equivalents in these accounts approximates its fair value measured using level 1 inputs per the fair value hierarchy as defined in Note 8. Restricted cash also includes funds held for clients, which represent assets that, based upon the Company’s intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds to third parties, primarily utility service providers, relating to the Company’s enterprise energy management services. As of September 30, 2018 and December 31, 2017, the Company classified the non-current portion of restricted cash of $19,025 and $20,092, respectively, in other assets on its consolidated balance sheets.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable. Bad debts are written off against the allowance when identified.
Changes in the allowance for doubtful accounts are as follows:
 
Nine Months Ended September 30,
 
2018

2017
Allowance for doubtful accounts, beginning of period
$
3,315

 
$
7,836

Charges to costs and expenses
483

 
68

Account write-offs and other
(361
)
 
(4,088
)
Allowance for doubtful accounts, end of period
$
3,437

 
$
3,816

During the year ended ended December 31, 2016, the Company reserved for certain assets related to a customer who declared bankruptcy. Of this amount, $2,394 was recorded as an allowance for doubtful accounts in accounts receivable, net. During 2017 a settlement was reached with this customer and the Company has no additional exposure for the remaining receivables.
Accounts Receivable Retainage
Accounts receivable retainage represents amounts due from customers, but where payments are withheld contractually until certain construction milestones are met. Amounts retained typically range from 5% to 10% of the total invoice. The Company classifies as a current asset those retainages that are expected to be billed in the next twelve months. No amounts were determined to be uncollectible as of September 30, 2018 and December 31, 2017.
Inventory
Inventories, which consist primarily of PV solar panels, batteries and related accessories, are stated at the lower of cost (“first-in, first-out” method) or net realizable value (determined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation). Provisions have been made to reduce the carrying value of inventory to the net realizable value.


9

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Prepaid Expenses
Prepaid expenses consist primarily of short-term prepaid expenditures that will amortize within one year.
Federal ESPC Receivable
Federal ESPC receivable represents the amount to be paid by various federal government agencies for work performed and earned by the Company under specific ESPCs. The Company assigns certain of its rights to receive those payments to third-party investors that provide construction and permanent financing for such contracts. Upon completion and acceptance of the project by the government, typically within 24 to 36 months of construction commencement, the assigned ESPC receivable from the government and corresponding ESPC liability are eliminated from the Company’s condensed consolidated financial statements.
Project Development Costs
The Company capitalizes as project development costs only those costs incurred in connection with the development of energy projects, primarily direct labor, interest costs, outside contractor services, consulting fees, legal fees and travel, if incurred after a point in time where the realization of related revenue becomes probable. Project development costs incurred prior to the probable realization of revenue are expensed as incurred. The Company classifies as a current asset those project development efforts that are expected to proceed to construction activity in the twelve months that follow. The Company periodically reviews these balances and writes off any amounts where the realization of the related revenue is no longer probable. Project development costs of $3,921 and $1,524 were included in other long-term assets as at September 30, 2018 and December 31, 2017, respectively.
Property and Equipment
Property and equipment consists primarily of office and computer equipment, and is recorded at cost. Major additions and improvements are capitalized as additions to the property and equipment accounts, while replacements, maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Depreciation and amortization of property and equipment are computed on a straight-line basis over the following estimated useful lives:
Asset Classification
 
Estimated Useful Life
Furniture and office equipment
 
Five years
Computer equipment and software costs
 
Three to five years
Leasehold improvements
 
Lesser of term of lease or five years
Automobiles
 
Five years
Land
 
Unlimited
Gains or losses on disposal of property and equipment are reflected in selling, general and administrative expenses in the consolidated statements of income (loss).
Energy Assets
Energy assets consist of costs of materials, direct labor, interest costs, outside contract services, deposits and project development costs incurred in connection with the construction of small-scale renewable energy plants that the Company owns. These amounts are capitalized and amortized to cost of revenues in the Company’s consolidated statements of income (loss) on a straight line basis over the lives of the related assets or the terms of the related contracts.
The Company capitalizes interest costs relating to construction financing during the period of construction. Capitalized interest is included in energy assets, net in the Company’s consolidated balance sheets. Capitalized interest is amortized to cost of revenues in the Company’s consolidated statements of income (loss) on a straight line basis over the useful life of the associated energy asset. There was $638 and $925 of interest capitalized for the three months ended September 30, 2018 and 2017, respectively. There was $2,376 and $3,452 of interest capitalized for the nine months ended September 30, 2018 and 2017, respectively.
Routine maintenance costs are expensed in the current year’s consolidated statements of income (loss) to the extent that they do not extend the life of the asset. Major maintenance, upgrades and overhauls are required for certain components of the Company’s assets. In these instances, the costs associated with these upgrades are capitalized and are depreciated over the shorter of the remaining life of the asset or the period until the next required major maintenance or overhaul.


10

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Included in energy assets are capital lease assets and accumulated depreciation of capital lease assets.
The Company evaluates its long-lived assets for impairment as events or changes in circumstances indicate the carrying value of these assets may not be fully recoverable. Examples of such triggering events applicable to the Company’s assets include a significant decrease in the market price of a long-lived asset or asset group or a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group.
The Company evaluates recoverability of long-lived assets to be held and used by estimating the undiscounted future cash flows before interest associated with the expected uses and eventual disposition of those assets. When these comparisons indicate that the carrying value of those assets is greater than the undiscounted cash flows, the Company recognizes an impairment loss for the amount that the carrying value exceeds the fair value.
From time to time, the Company has applied for and received cash grant awards from the U.S. Treasury Department (the “Treasury”) under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the “Act”). The Act authorized the Treasury to make payments to eligible persons who place in service qualifying renewable energy projects. The grants are paid in lieu of investment tax credits. All of the cash proceeds from the grants were used and recorded as a reduction in the cost basis of the applicable energy assets. If the Company disposes of the property, or the property ceases to qualify as specified energy property, within five years from the date the property is placed in service, then a prorated portion of the Section 1603 payment must be repaid.
The Company did not receive any Section 1603 grants during the nine months ended September 30, 2018 or September 30, 2017. No further Section 1603 grant payments are expected to be received as the program has expired.
For tax purposes, the Section 1603 payments are not included in federal and certain state taxable income and the basis of the property is reduced by 50% of the payment received. Deferred grant income of $6,774 and $7,188 recorded in the accompanying consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively, represents the benefit of the basis difference to be amortized to income tax expense over the life of the related property.
Deferred Financing Fees
Deferred financing fees relate to the external costs incurred to obtain financing for the Company. Deferred financing fees are amortized over the respective term of the financing using the effective interest method, with the exception of the Company’s revolving credit facility and construction loans, as discussed in Note 13, for which deferred financing fees are amortized on a straight-line basis over the term of the agreement. Deferred financing fees are presented on the consolidated balance sheets as a reduction to long-term debt and capital lease liabilities.
Goodwill and Intangible Assets
The Company has classified as goodwill the amounts paid in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. The Company has recorded intangible assets related to customer contracts, customer relationships, non-compete agreements, trade names and technology, each with defined useful lives. The Company assesses the impairment of goodwill and intangible assets that have indefinite lives on an annual basis (December 31st) and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
Goodwill is reviewed for impairment annually and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill requires significant judgment. The Company regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and projections of future results. The Company estimates the reporting units fair value and compares it with the carrying value of the reporting unit, including goodwill. If the fair value is greater than the carrying value of its reporting unit, no impairment is recorded. Fair value is determined using both an income approach and a market approach. The estimates and assumptions used in the Company’s calculations include revenue growth rates, expense growth rates, expected capital expenditures to determine projected cash flows, expected tax rates and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, the Company’s projections of future operating activity and its weighted-average cost of capital. If the fair value is less than the carrying value, an impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The impairment charge would be recorded to earnings in the consolidated statements of income (loss). Judgment is required in determining whether an event has occurred that may impair the value of goodwill or identifiable intangible assets.


11

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Acquired intangible assets other than goodwill that are subject to amortization include customer contracts and customer relationships, as well as software/technology, trade names and non-compete agreements. The intangible assets are amortized over periods ranging from one to fifteen years from their respective acquisition dates. The Company evaluates its intangible assets for impairment consistent with, and part of, their long-lived assets evaluation, as discussed in Energy Assets above.
See Note 5 for additional disclosures.
Other Assets
Other assets consist primarily of notes and contracts receivable due to the Company from various customers and non-current restricted cash. Other assets also include, the fair value of derivatives determined to be assets, the non-current portion of project development costs, accounts receivable retainages, sale-leaseback deferred loss and deferred contract costs.
Asset Retirement Obligations
The Company recognizes a liability for the fair value of required asset retirement obligations (“AROs”) when such obligations are incurred. The liability is estimated on a number of assumptions requiring management’s judgment, including equipment removal costs, site restoration costs, salvage costs, cost inflation rates and discount rates and is credited to its projected future value over time. The capitalized asset is depreciated using the convention of depreciation of plant assets. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement cost incurred is recognized as an operating gain or loss in the consolidated statements of income (loss). As of September 30, 2018 and December 31, 2017, the Company had no ARO liabilities recorded.
Federal ESPC Liabilities
Federal ESPC liabilities, for both projects and energy assets, represent the advances received from third-party investors under agreements to finance certain ESPC projects with various federal government agencies.
For projects related to the construction or installation of certain energy savings equipment or facilities developed for the government customer, upon completion and acceptance of the project by the government, typically within 24 to 36 months of construction commencement, the ESPC receivable from the government and corresponding ESPC liability is eliminated from the Company’s consolidated balance sheet. Until recourse to the Company ceases for the ESPC receivables transferred to the investor, upon final acceptance of the work by the government customer, the Company remains the primary obligor for financing received.
For small-scale energy assets developed for the government customer that the Company owns and operates, upon final acceptance of the work by the government customer, the Company remains the primary obligor for financing received and the liability is eliminated from the Company’s consolidated balance sheet as contract payments assigned by the customer are transferred to the investor.
Sale-Leaseback
During the first quarter of 2015, the Company entered into an agreement with an investor which gives the Company the option to sell and contemporaneously lease back solar photovoltaic (“solar PV”) projects. In September 2016, the Company amended this agreement to increase the investor’s commitment up to a maximum combined funding amount of $100,000 through June 30, 2017 on certain projects. In May 2017, the Company amended this agreement to extend the end date of the agreement to June 30, 2018. Additionally, the Company sold and contemporaneously leased back one solar PV project to another investor, not a party to the master lease agreement, under a new agreement during the nine months ended September 30, 2017. During the third quarter of 2018, the Company entered into an agreement with an investor which gives the Company the option to sell and contemporaneously lease back solar photovoltaic (“solar PV”) projects through August 2019 up to a maximum funding amount of $100,000. During the three and nine months ended September 30, 2018 the Company entered into two sale-leaseback agreements. See below for a summary of solar PV project sales in prior year under our sale-leaseback agreements under this facility:



12

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Quarter Ended
 
# Solar PV Projects Sold (actual #’s)_
 
Sale Price
 
Deferred Gain Recorded
 
Deferred Loss Recorded
 
Capital Lease Asset/Liability Recorded
 
Initial Lease Term (years)
 
Minimum Lease Payment
 
Maximum Lease Payment
September 30, 2018
 
2
 
$
5,145

 
$
611

 
$

 
$
2,591

 
20
 
$
1

 
$
738

September 30, 2017
 
3
 
$
9,157

 
$
642

 
$

 
$
4,114

 
20
 
$
13

 
$
231


As part of these agreements, the Company was a party to master lease agreements that provides for the sale of solar PV projects to a third-party investor and the simultaneous leaseback of the projects, which the Company then operates and maintains, recognizing revenue through the sale of the electricity and solar renewable energy credits generated by these projects. In sale-leaseback arrangements, the Company first determines whether the solar PV project under the sale-leaseback arrangement is “integral equipment.” A solar PV project is determined to be integral equipment when the cost to remove the project from its existing location, including the shipping and reinstallation costs of the solar PV project at the new site, including any diminution in fair value, exceeds 10% of the fair value of the solar PV project at the time of its original installation. When the leaseback arrangement expires, the Company has the option to purchase the solar PV project for the then fair market value or, in certain circumstances, renew the lease for an extended term. All solar PV projects sold to date under the sale-leaseback program have been determined by the Company not to be integral equipment as the cost to remove the project from its existing location would not exceed 10% of its original fair value.
For solar PV projects that the Company has determined not to be integral equipment, the Company then determines if the leaseback should be classified as a capital lease or an operating lease. All solar PV projects sold to date under the sale-leaseback program have been determined by the Company to be capital leases. For leasebacks classified as capital leases, the Company initially records a capital lease asset and capital lease obligation in its consolidated balance sheet equal to the lower of the present value of the Company’s future minimum leaseback payments or the fair value of the solar PV project. For capital leasebacks, the Company defers any gain or loss, representing the excess or shortfall of cash received from the investor compared to the net book value of the asset in the Company’s consolidated balance sheet at the time of the sale. The Company records the long term portion of any deferred gain or loss in other liabilities and other assets, respectively, and the current portion of any deferred gain and loss in accrued expenses and other current liabilities and prepaid expenses and other current assets, respectively, in its consolidated balance sheet and amortizes the deferred amounts over the lease term in cost of revenues in its consolidated statements of income (loss). Net amortization expense in cost of revenues related to deferred gains and losses was $(48) and $(25) of net gains for the three months ended September 30, 2018 and 2017, respectively. Net amortization expense in cost of revenues related to deferred gains and losses was $(153) and $(49) of net gains for the nine months ended September 30, 2018 and 2017, respectively.
A summary of amounts related to sale leasebacks in the Company’s consolidated balance sheets is as follows:
 
September 30,
 
December 31,
 
2018
 
2017
Capital lease assets, net
$
38,782

 
$
36,676

Deferred loss, short-term, net
115

 
118

Deferred loss, long-term, net
1,946

 
2,054

Total deferred loss
$
2,061

 
$
2,172

Capital lease liabilities, short-term
4,838

 
4,157

Capital lease liabilities, long-term
31,897

 
30,712

Total capital lease liabilities
$
36,735

 
$
34,869

Deferred gain, short-term, net
344

 
338

Deferred gain, long-term, net
5,935

 
5,835

Total deferred gain
$
6,279

 
$
6,173

Other Liabilities
Other liabilities consist primarily of deferred revenue related to multi-year operation and maintenance contracts which expire at various dates through 2033. Other liabilities also include the fair value of derivatives and the long term portion of sale-leaseback deferred gains.


13

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

See Note 9 for additional disclosures.
Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606) using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded an adjustment to retained earnings on January 1, 2018 due to the cumulative impact of adopting Topic 606. See Note 3 "Revenue from Contracts with Customers" for the required disclosures related to the impact of adopting this standard and a discussion of the Company's updated policies related to revenue recognition discussed below.
The Company derives revenues from energy efficiency and renewable energy products and services. Energy efficiency products and services include the design, engineering, and installation of equipment and other measures to improve the efficiency, and control the operation, of a facility’s energy infrastructure. Renewable energy products and services include the construction of small-scale plants that produce electricity, gas, heat or cooling from renewable sources of energy, the sale of such electricity, gas, heat or cooling from plants that the Company owns, and the sale and installation of solar energy products and systems. Below is a description of the Company’s primary lines of business.
Projects - The Company’s principal service relates to energy efficiency projects, which entails the design, engineering and installation of, and assisting with the arranging of financing for an ever-increasing array of innovative technologies and techniques to improve the energy efficiency, and control the operation, of a building’s energy- and water- consuming systems. In certain projects, the Company also designs and constructs for a customer a central plant or cogeneration system providing power, heat and/or cooling to a building, or a small-scale plant that produces electricity, gas, heat or cooling from renewable sources of energy.
Under Topic 606 requirements, the Company recognizes revenue from the installation or construction of projects over time using the cost-based input method. The Company uses the total costs incurred on the the project relative to the total expected costs to satisfy the performance obligation.
When the estimate on a contract indicates a loss, or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire estimated loss in the period the loss becomes known.
Operations & Maintenance (“O&M”) - After an energy efficiency or renewable energy project is completed, the Company often provides ongoing O&M services under a multi-year contract. These services include operating, maintaining and repairing facility energy systems such as boilers, chillers and building controls, as well as central power and other small-scale plants. For larger projects, the Company frequently maintains staff on-site to perform these services.
Maintenance revenue is recognized using the input method to recognize revenue. In most cases, O&M fees are fixed annual fees. Because the Company is on-site to perform O&M services, the services are typically a distinct series of promises, and those services have the same pattern of transfer to the customer (i.e., evenly over time), the Company records the revenue on a straight-line basis. Some O&M service contract fees are billed on time expended. In those cases, revenue is recorded based on the time expended in that month.
Energy Assets - The Company’s service offerings also includes the sale of electricity, processed renewable gas fuel, heat or cooling from the portfolio of assets that the Company owns and operates. The Company has constructed and is currently designing and constructing a wide range of renewable energy plants using landfill gas (“LFG”), wastewater treatment biogas, solar, biomass, other bio-derived fuels, wind and hydro sources of energy. Most of the Company’s renewable energy projects to date have involved the generation of electricity from solar PV and LFG or the sale of processed LFG. The Company purchases the LFG that otherwise would be combusted or vented, processes it, and either sells it or uses it in its energy plants. The Company has also designed and built, as well as owns, operates and maintains, plants that take biogas generated in the anaerobic digesters of wastewater treatment plants and turns it into renewable natural gas that is either used to generate energy on-site or that can be sold through the nation’s natural gas pipeline grid. Where the Company owns and operates energy producing assets, the Company typically enters into a long-term power purchase agreement (“PPA”) for the sale of the energy. Many of the Company’s energy assets also produce environmental attributes, commonly referred to as renewable energy credits (“RECs”). In most cases, the Company sells RECs under separate agreements with third parties other than the PPA customer.
The Company recognizes revenues from the sale and delivery of the energy output from renewable energy plants, over time as produced and delivered to the customer, in accordance with specific PPA contract terms. REC revenue is recognized at a


14

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

point in time, when the RECs are transferred to the customer in accordance with the transfer protocols of the REC market that the Company operates in. In those cases where RECs are sold to the same customer as the energy output, the Company records revenue monthly for both the energy output and the REC output, as generated and delivered to the customer.  =
Other - The Company’s service and product offerings also include integrated-PV and consulting and enterprise energy management services.
The Company recognizes revenues from delivery of engineering, consulting services and enterprise energy management services over time. For the sale of solar materials, revenue is recognized at a point in time when the Company has transferred physical control of the asset to the customer upon shipment.
To the extent a contract is deemed to have multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract.
Billings in excess of cost and estimated earnings represents advanced billings on certain construction contracts. Costs and estimated earnings in excess of billings represent certain amounts under customer contracts that were earned and billable but not invoiced.
Cost of Revenues
Cost of revenues include the cost of labor, materials, equipment, subcontracting and outside engineering that are required for the development and installation of projects, as well as preconstruction costs, sales incentives, associated travel, inventory obsolescence charges, amortization of intangible assets related to customer contracts and, if applicable, costs of procuring financing. A majority of the Company’s contracts have fixed price terms; however, in some cases the Company negotiates protections, such as a cost-plus structure, to mitigate the risk of rising prices for materials, services and equipment.
Cost of revenues also include the costs of maintaining and operating the small-scale renewable energy plants that the Company owns, including the cost of fuel (if any) and depreciation charges.
Income Taxes
The Company provides for income taxes based on the liability method. The Company provides for deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities calculated using the enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return.
The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on a quarterly basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions.
The Company’s liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the examination process.
The Company considers matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; the Company has no plans to appeal or litigate any aspect of the tax position; and the Company believes that it is highly unlikely that the taxing authority would examine or re-examine the related tax position. The Company also accrues for potential interest and penalties related to unrecognized tax benefits in income tax expense.
The Company has presented all deferred tax assets and liabilities as net and noncurrent on its consolidated balance sheet as of September 30, 2018 and December 31, 2017, respectively.
See Note 6 for additional information on the Company’s income taxes. 


15

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Foreign Currency
The local currency of the Company’s foreign operations is considered the functional currency of such operations. All assets and liabilities of the Company’s foreign operations are translated into U.S. dollars at period-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the period. Translation adjustments are accumulated as a separate component of stockholders’ equity. Foreign currency translation gains and losses are reported in the consolidated statements of comprehensive income (loss). Foreign currency transaction gains and losses are reported in the consolidated statements of income (loss).
Financial Instruments
Financial instruments consist of cash and cash equivalents, restricted cash, accounts and notes receivable, long-term contract receivables, accounts payable, accrued expenses, capital lease assets and liabilities, contingent considerations, short- and long-term, borrowings interest rate swaps, and commodity swaps. Because of their short maturity, the carrying amounts of cash and cash equivalents, restricted cash, accounts and notes receivable, accounts payable, accrued expenses, contingent considerations, and short-term borrowings approximate fair value.
Fair Value Measurements
The Company follows the guidance related to fair value measurements for all of its non-financial assets and non-financial liabilities, except for those recognized at fair value in the financial statements at least annually. These assets include goodwill and long-lived assets measured at fair value for impairment assessments, and non-financial assets and liabilities initially measured at fair value in a business combination.
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts and notes receivable, long-term contract receivables, interest rate swaps, commodity swaps, hybrid instruments, accounts payable, accrued expenses, capital lease assets and liabilities, contingent considerations, and short-term and long-term borrowings. Because of their short maturity, the carrying amounts of cash and cash equivalents, restricted cash, accounts and notes receivable, accounts payable, accrued expenses, and short-term borrowings approximate fair value. The carrying value of long-term variable-rate debt approximates fair value. Fair value of the Company’s debt is based on quoted market prices or on rates available to the Company for debt with similar terms and maturities, which are level two inputs of the fair value hierarchy, as defined in Note 8.    
The Company accounts for its interest rate and commodity swaps as derivative financial instruments in accordance with the related guidance. Under this guidance, derivatives are carried on the Company’s consolidated balance sheets at fair value. The fair value of the Company’s interest rate swaps are determined based on observable market data in combination with expected cash flows for each instrument.
The consideration for the Company’s acquisitions often includes future payments that are contingent upon the occurrence of a particular event. The Company records a contingent consideration obligation for such contingent consideration payments at fair value on the acquisition date. The Company estimates the acquisition date fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and the likelihood of making related payments. Each period the Company revalues the contingent consideration obligations associated with the acquisition to fair value and records changes in the fair value as contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of revenue and expense estimates and changes in assumed probability with respect to the attainment of certain financial and operational metrics, among others. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense recorded in any given period. However, contingent considerations related to certain holdbacks and completion payments are considered short-term in nature. These amounts are recorded at full value and are only revalued if one of those underlying assumptions changes.
The Company accounts for its hybrid instruments as embedded derivatives in accordance with related guidance. Under this guidance, the embedded derivative is bifurcated from its host contract and recorded on the Company’s consolidated balance sheets at fair value. The fair value of the Company’s embedded derivatives are determined based on observable market data.
See Note 8 for additional information related to fair value measurements.


16

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Stock-Based Compensation Expense
Stock-based compensation expense results from the issuance of shares of restricted common stock and grants of stock options to employees, directors, outside consultants and others. The Company recognizes the costs associated with restricted stock option grants, and employee stock purchases made via the Company’s Employee Stock Purchase Plan (the “ESPP”) using the fair value recognition provisions of accounting standards codification (“ASC”) 718, Compensation - Stock Compensation (“ASC 718”) on a straight-line basis over the vesting period of the awards. Certain option grants have performance conditions that must be achieved prior to vesting and are expensed based on the expected achievement at each reporting period. Stock-based compensation expense is also recognized in association with employee stock purchases related to the Company’s employee stock purchase plan.
Stock-based compensation expense is recognized based on the grant-date fair value. The Company estimates the fair value of the stock-based awards, including stock options, using the Black-Scholes option-pricing model. Determining the fair value of stock-based awards requires the use of highly subjective assumptions, including the fair value of the common stock underlying the award, the expected term of the award and expected stock price volatility.
The assumptions used in determining the fair value of stock-based awards represent management’s estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors change, and different assumptions are employed, the stock-based compensation could be materially different in the future. The risk-free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant, with maturities approximating the expected life of the stock options.
The Company has no history of paying dividends. Additionally, as of each of the grant dates, there was no expectation that the Company would pay dividends over the expected life of the options. The expected life of the awards is estimated using historical data and management’s expectations. The Company uses historical volatility as the expected volatility assumption required in the Black-Scholes model.
The Company is required to recognize compensation expense for only the portion of options that are expected to vest. If there are any modifications or cancellations of the underlying invested securities or the terms of the stock option, it may be necessary to accelerate, increase or cancel any remaining unamortized stock-based compensation expense. As a result of the adoption of ASU 2016-09 during fiscal 2017, no significant changes were made to the Company’s accounting for forfeitures. Upon adoption the Company recorded a $4,000 deferred tax asset and corresponding credit to retained earnings for excess tax benefits that had not previously been recognized because the related tax deductions had not reduced taxes payable.
For the three months ended September 30, 2018 and 2017, the Company recorded stock-based compensation expense, including expense related to the ESPP, of $390 and $326, respectively, in connection with the stock-based payment awards. For the nine months ended September 30, 2018 and 2017, the stock-based compensation expense was $1,137 and $976, respectively. The compensation expense is allocated between cost of revenues and selling, general and administrative expenses in the accompanying consolidated statements of income (loss) based on the salaries and work assignments of the employees holding the options. As of September 30, 2018, there was $3,119 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 2.2 years.
No awards to individuals who were not either an employee or director of the Company occurred during the nine months ended September 30, 2018 or during the year ended December 31, 2017.


17

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Share Repurchase Program
In April 2016, the Company’s Board of Directors authorized the repurchase of up to $10,000 of the Company’s Class A common stock from time to time on the open market in privately negotiated transactions. In February 2017, the Company’s Board of Directors authorized an increase in the Company’s share repurchase authorization to $15,000 of the Company's Class A common stock from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased will be determined by the Company's management based on its evaluation of market conditions and other factors. Any repurchased shares will be available for use in connection with its stock plans and for other corporate purposes. The repurchase program has and will be funded using the Company's working capital and borrowings under its revolving line of credit. The Company accounts for share repurchases using the cost method. Under this method, the cost of the share repurchase is recorded entirely in treasury stock, a contra equity account. During the three months ended September 30, 2018, the Company did not repurchase any shares of common stock. During the nine months ended September 30, 2018, the Company repurchased 212 shares of common stock in the amount of $1,772, net of fees of $9. During the year ended December 31, 2017, the Company repurchased 575 shares of common stock in the amount of $3,412, net of fees of $23.
Derivative Financial Instruments
In the normal course of business, the Company utilizes derivatives contracts as part of its risk management strategy to manage exposure to market fluctuations in interest and commodity rates. These instruments are subject to various credit and market risks. Controls and monitoring procedures for these instruments have been established and are routinely reevaluated. Credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract. The measure of credit exposure is the replacement cost of contracts with a positive fair value. The Company seeks to manage credit risk by entering into financial instrument transactions only through counterparties that the Company believes to be creditworthy.
Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates and commodity prices and rates. The Company seeks to manage market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken. As a matter of policy, the Company does not use derivatives for speculative purposes. The Company considers the use of derivatives with all financing transactions to mitigate risk.
The Company recognizes cash flows from derivative instruments as operating activities in the consolidated statements of cash flows. The effective portion of changes in fair value on interest rate swaps designated as cash flow hedges are recognized in the Company’s consolidated statements of comprehensive income (loss). Changes in fair value on derivatives not designated as hedges are recognized in the Company’s consolidated statements of income (loss).
In June 2018, the Company entered into a term loan agreement, discussed in Note 13, that contained an interest make-whole provision. In August 2018, the Company signed a joinder to the above agreement, which added another series of notes to the term loan that also contained an interest make-whole provision. The Company determined that these provisions fulfill the requirements of an embedded derivative instrument that must be bifurcated from its host agreement. The fair value of this hybrid instrument was determined based on available market data using appropriate valuation models, considering all of the rights and obligations of the instrument, and recorded as a liability on the Company’s balance sheet in connection with the derivative liability and a corresponding debt discount. The instrument is revalued periodically and the changes in fair value are recognized as either gains or losses in earnings in the Company’s consolidated statements of income (loss).
In the third quarter of 2018, the Company adopted Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, effective January 1, 2018. This standard eliminates the requirement to measure and report a hedge’s ineffectiveness separately in earnings going forward and requires a cumulative-effect adjustment to eliminate the separate measure of ineffectiveness to accumulated other comprehensive income for all designated hedges at the time of adoption. As such, the Company recognized an increase to retained earnings and accumulated other comprehensive loss of $432 to remove the cumulative effect of hedging ineffectiveness previously recognized in earnings through 2017. The Company also recognized a decrease in other expenses, net and an increase in accumulated other comprehensive loss of $54 to remove the cumulative effect of hedging ineffectiveness previously recognized in earnings through 2018.
See Notes 8 and 9 for additional information on the Company’s derivative instruments.


18

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Earnings Per Share
Basic earnings per share is calculated using the Company’s weighted-average outstanding common shares, including vested restricted shares. When the effects are not anti-dilutive, diluted earnings per share is calculated using the weighted-average outstanding common shares; the dilutive effect of convertible preferred stock, under the “if converted” method; and the treasury stock method with regard to warrants and stock options; all as determined under the treasury stock method.
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
2018
 
2017
 
 
2018
 
2017
Net income attributable to common shareholders
$
10,701

 
$
8,493

 
 
$
26,391

 
$
13,680

Basic weighted-average shares outstanding
45,854

 
45,524

 
 
45,599

 
45,500

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options
1,090

 
247

 
 
910

 
164

Diluted weighted-average shares outstanding
46,944

 
45,771

 
 
46,509

 
45,664

For the three months ended September 30, 2018 and 2017, the total number of shares of common stock related to stock options excluded from the calculation of dilutive shares, as the effect would be anti-dilutive, were 758 and 2,627, respectively. For the nine months ended September 30, 2018 and 2017, the total number of shares of common stock related to stock options excluded from the calculation of dilutive shares, as the effect would be anti-dilutive, were 1,273 and 2,605, respectively.
Variable Interest Entities
Certain contracts are executed jointly through partnership and joint venture arrangements with unrelated third parties. The arrangements are often formed for the single business purpose of executing a specific project and allow the Company to share risks and/or secure specialty skills required for project execution.
        The Company evaluates each partnership and joint venture at inception to determine if it qualifies as a VIE under ASC 810, Consolidation. A variable interest entity is an entity used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors who are not required to provide sufficient financial resources for the entity to support its activities without additional subordinated financial support. Upon the occurrence of certain events outlined in ASC 810, the Company reassesses its initial determination of whether the partnership or joint venture is a VIE.
        The Company also evaluates whether it is the primary beneficiary of each VIE and consolidates the VIE if the Company has both (a) the power to direct the economically significant activities of the entity and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company considers the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining whether it qualifies as the primary beneficiary. The Company also considers all parties that have direct or implicit variable interests when determining whether it is the primary beneficiary. When the Company is determined to be the primary beneficiary, the VIE is consolidated. As required by ASC 810, management's assessment of whether the Company is the primary beneficiary of a VIE is continuously performed. See Note 10 for additional disclosures.
Redeemable Non-Controlling Interests
In each of September 2015, June 2017 and June 2018, the Company formed an investment fund with a different third party investor which granted the applicable investor ownership interests in the net assets of certain of the Company’s renewable energy project subsidiaries. The Company currently has three such investment funds each with a different third party investor.
In September 2015, the Company formed an investment fund with a third party investor which granted the investor ownership interests in the net assets of certain of the Company’s renewable energy project subsidiaries. In June 2017, the Company formed a second investment fund with a third party investor which granted the investor ownership interests in the net assets of certain of the Company’s renewable energy project subsidiaries. In June 2018, the Company formed a third investment fund with a third party investor which granted the investor ownership interests in the net assets of certain of the Company’s renewable energy project subsidiaries. The Company entered into these agreements in order to finance the costs of constructing energy assets which are under long-term customer contracts. The Company has determined that these entities qualify as VIEs and that it is the primary beneficiary in the operational partnerships for accounting purposes. Accordingly, the Company will


19

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

consolidate the assets and liabilities and operating results of the entities in its consolidated financial statements. The Company will recognize the investors’ share of the net assets of the subsidiaries as redeemable non-controlling interests in its consolidated balance sheet.
The Company has determined that the provisions in the contractual arrangements represent substantive profit-sharing arrangements. The Company has further determined that the appropriate methodology for attributing income and loss to the 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 redeemable non-controlling interests in the consolidated statements of income (loss) reflect changes in the amounts the investors would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements, assuming the net assets of this funding structure were liquidated at recorded amounts. The investors’ non-controlling interest in the results of operations of this funding structure is determined as the difference in the non-controlling interest’s claim under the HLBV method at the start and end of each reporting period, after taking into account any capital transactions, such as contributions or distributions, between the Company’s subsidiaries and the investors. The use of the HLBV methodology to allocate income to the redeemable non-controlling interest holders may create volatility in the Company’s consolidated statements of income (loss) as the application of HLBV can drive changes in net income available and loss attributable to the redeemable non-controlling interests from quarter to quarter.
The Company classified the 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. The redeemable non-controlling interests will be reported using the greater of their carrying value at each reporting date as determined by the HLBV method or the estimated redemption values in each reporting period.
See Note 10 for additional disclosures.
Recent Accounting Pronouncements
Derivatives and Hedging
In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods. Early adoption is permitted. The Company adopted ASU 2017-12 during the third quarter of 2018. Upon adoption, the Company recognized an increase to retained earnings and an accumulated other comprehensive loss of $432 to remove the cumulative effect of hedging ineffectiveness previously recognized in earnings, as of January 1, 2018, for contracts designated as hedging instruments that were outstanding at the beginning of the third quarter 2018. The Company also recognized a decrease in other expenses, net and an increase in accumulated other comprehensive loss of $54 to remove the cumulative effect of hedging ineffectiveness previously recognized in earnings through 2018.
In August 2018, the FASB issues ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2018-13 on its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company will adopt the guidance in the first quarter of 2019, electing to adopt the guidance using the modified retrospective approach. The Company is in the process of its preliminary evaluation, and assessing the impact on the consolidated financial statements, with an anticipated completion date of December 31, 2018. As of September 30, 2018, the Company has made significant progress in assessing the impact of the ASU on the Company’s financial statements and ensuring that all leases are being identified and considered under the new standard. As part of this assessment, the Company is


20

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

also evaluating the impact the adoption of this ASU will have on its systems and its controls and procedures. The Company will implement targeted changes to its internal reporting process to facilitate the gathering the data needed for the new disclosure requirement. The Company will also implement updates to its control processes and procedures, as necessary, based on changes resulting from the new standard.
In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. ASU 2018-01 is effective in the same period 2016-02 is adopted. The Company is currently evaluating and assessing the the impact on the consolidated financial statements of the adoption of ASU 2016-02, which is expected to be completed as of December 31, 2018.
In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which narrowly amends and clarifies aspects of 2016-02. ASU 2018-10 is effective in the same period 2016-06 is adopted. The Company is currently evaluating and assessing the the impact on the consolidated financial statements of the adoption of ASU 2016-02, which is expected to be completed as of December 31, 2018.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional transition option when adopting 2016-02 and a practical expedient concerning the separation of components of a contract. The additional transition option allows the Company to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. Prior periods will still be required to include all existing disclosure requirements in accordance with ASC Topic 840. ASU 2018-11 is effective in the same period 2016-10 is adopted. The Company is currently evaluating and assessing the the impact on the consolidated financial statements of the adoption of ASU 2016-02, which is expected to be completed as of December 31, 2018.
Stock Based Compensation Expense
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This new guidance amends the scope of modification accounting for share-based payment awards. ASU 2017-09 provide guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company adopted these requirements on January 1, 2018. The adoption had no impact on 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, which expands the scope of current stock compensation recognition standards to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 will become effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity's adoption date of ASU 2014-09 (Topic 606), which the Company adopted on January 1, 2018. The Company adopted ASU 2018-07 during the second quarter of 2018. The adoption had no impact on the Company’s consolidated financial statements, as the Company currently has not issued share-payments to non-employees.
Consolidated Statements of Cash Flow
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates diversity in practice in how certain cash receipts and cash payments are presented and classified in the consolidated statements of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company adopted these requirements on January 1, 2018. The adoption had no impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 23), Restricted Cash. ASU 2016-18 requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The guidance should be applied using a retrospective transition method for each period presented. The Company has adopted this guidance as of January 1, 2018 and the consolidated statement of cash flow has been prepared to conform with ASU 2016-18 for all periods presented.
Accumulated Other Comprehensive Income


21

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

In February 2018, the Financial Accounting Standard Board (“FASB”) issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to allow entities to reclassify the income tax effects of tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact ASU 2018-02 on its consolidated financial statements.
Business Combinations
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance to entities to assist with evaluating when a set of transferred assets and activities (collectively, the “set”) is a business and provides a screen to determine when a set is not a business. Under the new guidance, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a prospective basis to any transactions occurring within the period of adoption. Early adoption is permitted for interim or annual periods in which the financial statements have not been issued. The Company adopted the guidance effective January 1, 2018, and its adoption did not have a significant impact on the Company’s financial position or financial statement disclosures.

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

Adoption
 
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, (Topic 606) using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net decrease to beginning retained earnings of $4,454 on January 1, 2018 due to the cumulative impact of adopting Topic 606, as detailed below.

 
January 1, 2018
 
As Reported
 
606 Adjustments
 
Adjusted Balances
 
Assets:
 
 
 
 
 
 
 
 
 
Costs and estimated earnings in excess of billings
 
$
104,852

 
 
$
(9,194
)
 
 
$
95,658

 
Prepaid expenses and other current assets
 
14,037

 
 
4,343

 
 
18,380

 
Deferred income taxes, net
 

 
 
1,003

 
 
1,003

 
Liabilities:
 
 
 
 
 
 
 
 
 
Accrued expenses and other current liabilities

 
23,260

 
 
1,190

 
 
24,450

 
Deferred income taxes, net
 
584

 
 
(584
)
 
 

 
Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Retained earnings
 
235,844

 
 
(4,454
)
 
 
231,390

 


22

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

In accordance with Topic 606, the disclosure of the impact of adoption to the Company’s condensed consolidated statements of income (loss) and balance sheets was as follows:

 
 
Impact of changes in accounting policies
 
 
Three Months Ended September 30, 2018
Nine Months Ended September 30, 2018
 
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
Revenues
 
$
205,375

 
$
206,048

 
$
(673
)
$
569,767

 
$
568,985

 
$
782

Cost of revenues
 
159,213

 
157,476

 
1,737

445,356

 
441,973

 
3,383

Gross profit
 
46,162

 
48,572

 
(2,410
)
124,411

 
127,012

 
(2,601
)
Operating expenses:
 
 

 
 

 
 

 
 
 
 
 
Selling, general and administrative expenses
 
28,866

 
28,866

 

84,871

 
84,871

 

Operating income
 
17,296

 
19,706

 
(2,410
)
39,540

 
42,141

 
(2,601
)
Other expenses, net
 
3,244

 
3,244

 

10,754

 
10,754

 

Income before provision for income taxes
 
14,052

 
16,462

 
(2,410
)
28,786

 
31,387

 
(2,601
)
Income tax provision
 
3,351

 
3,493

 
(142
)
1,879

 
2,040

 
(161
)
Net income
 
10,701

 
12,969

 
(2,268
)
26,907

 
29,347

 
(2,440
)
Net income attributable to redeemable non-controlling interests
 

 

 

(516
)
 
(516
)
 

Net income attributable to common shareholders
 
$
10,701

 
$
12,969

 
$
(2,268
)
$
26,391

 
$
28,831

 
$
(2,440
)
Basic income per share
 
$
0.23

 
$
0.28

 
$
(0.05
)
$
0.58

 
$
0.63

 
$
(0.05
)
Diluted income per share
 
$
0.23

 
$
0.28

 
$
(0.05
)
$
0.57

 
$
0.62

 
$
(0.05
)
 
September 30, 2018
 
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
Assets:
 
 
 
 
 
 
Costs and estimated earnings in excess of billings
 
$
66,471

 
$
74,886

 
$
(8,415
)
Prepaid expenses and other current assets
 
13,123

 
12,196

 
927

Liabilities:
 
 
 
 
 
 
Accrued expenses and other current liabilities

 
28,067

 
26,910

 
1,157

Deferred income taxes, net
 
3,453

 
5,202

 
(1,749
)
Shareholders' Equity:
 
 
 
 
 
 
Retained earnings
 
258,213

 
265,110

 
(6,897
)
The impact in revenue recognition due to the adoption of Topic 606 is primarily from the timing of revenue recognition for uninstalled materials, amortization of contract acquisition costs over the contract term, and timing of revenue recognition from renewable energy credits. See Note 2 for a summary of the Company’s significant policies for revenue recognition.


23

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Disaggregation of Revenue
The following table provides information about disaggregated revenue by line of business, reportable segments, and geographical region for the three and nine months ended September 30, 2018.
 
US Regions
 
U.S. Federal
 
Canada
 
Non-Solar DG
 
All Other
 
Total
Line of Business
Three Months Ended September 30, 2018
Project revenue
$
77,345

 
$
49,762

 
$
9,206

 
$
1,268

 
$
4,074

 
$
141,655

O&M revenue
4,432

 
10,733

 
15

 
2,006

 

 
17,186

Energy assets
4,064

 
1,507

 
921

 
18,790

 
222

 
25,504

Other
561

 
376

 
1,462

 
74

 
18,557

 
21,030

Total revenues
$
86,402

 
$
62,378

 
$
11,604

 
$
22,138

 
$
22,853

 
$
205,375

Nine months ended September 30, 2018
Project revenue
$
223,662

 
$
135,037

 
$
21,459

 
$
3,368

 
$
8,844

 
$
392,370

O&M revenue
12,396

 
29,477

 
34

 
6,260

 

 
48,167

Energy assets
12,844

 
3,416

 
2,304

 
50,405

 
821

 
69,790

Other
969

 
447

 
4,669

 
143

 
53,212

 
59,440

Total revenues
$
249,871

 
$
168,377

 
$
28,466

 
$
60,176

 
$
62,877

 
$
569,767

 
 
 
 
 
 
 
 
 
 
 
 
Geographical Regions

Three Months Ended September 30, 2018
United States
$
86,402

 
$
62,378

 
$
419

 
$
22,138

 
$
17,445

 
$
188,782

Canada

 

 
11,185

 

 
33

 
11,218

Other

 

 

 

 
5,375

 
5,375

Total revenues
$
86,402

 
$
62,378

 
$
11,604

 
$
22,138

 
$
22,853

 
$
205,375

Nine months ended September 30, 2018
United States
$
249,871

 
$
168,377

 
$
1,587

 
$
60,176

 
$
51,336

 
$
531,347

Canada

 

 
26,879

 

 
261

 
27,140

Other

 

 

 

 
11,280

 
11,280

Total revenues
$
249,871

 
$
168,377

 
$
28,466

 
$
60,176

 
$
62,877

 
$
569,767


Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
 
 
January 1, 2018
 
September 30, 2018
 
Accounts receivable, net
 
$
85,121

 
$
90,378

 
Accounts receivable retainage, net
 
17,484

 
14,401

 
Contract Assets:
 
 
 
 
 
Costs and estimated earnings in excess of billings
 
95,658

 
66,471

 
Contract Liabilities:
 
 
 
 
 
Billings in excess of cost and estimated earnings
 
27,248

 
39,533

 

Accounts receivable retainage represents amounts due from customers, but where payments are withheld contractually until certain construction milestones are met. Amounts retained typically range from 5% to 10% of the total invoice. The


24

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Company classifies as a current asset those retainages that are expected to be billed in the next twelve months. Unbilled revenue, presented as costs and estimated earnings in excess of billings, represent amounts earned and billable that were not invoiced at the end of the fiscal period.
Contract assets represent the Company’s rights to consideration in exchange for services transferred to a customer that have not been billed as of the reporting date. The Company’s rights to consideration are generally unconditional at the time its performance obligations are satisfied.
At the inception of a contract, the Company expects the period between when it satisfies its performance obligations, and when the customer pays for the services, will be one year or less. As such, the Company has elected to apply the practical expedient which allows the Company to not adjust the promised amount of consideration for the effects of a significant financing component, when a financing component is present.
When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. Such deferred revenue typically results from billings in excess of costs incurred and advance payments received on project contracts. As of September 30, 2018, the Company classified $7,017 as a non-current liability, included in other liabilities on the consolidated balance sheets, for those performance obligations expected to be completed beyond the next twelve months.
The decrease in contract assets for the nine months ended September 30, 2018 was primarily due to billings of approximately $398,917, offset in part by revenue recognized of $344,768. The change in contract liabilities was primarily driven by the receipt of advance payments from customers, and related billings, exceeding reductions from recognition of revenue as performance obligations were satisfied. For the nine months ended September 30, 2018, the Company recognized revenue of $116,892, and billed customers $119,961, that was previously included in the beginning balance of contract liabilities. Changes in contract liabilities are also driven by reclassifications to or from contract assets as a result of timing of customer payments.
Contracts are often modified for a change in scope or other requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of the Company’s contract modifications are for goods or services that are not distinct from the existing performance obligations.  The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or decrease) on a cumulative catchup basis.
The Company elected to utilize the modified retrospective transition practical expedient which allows the Company to evaluate the impact of contract modifications as of the adoption date rather than evaluating the impact of the modifications at the time they occurred prior to the adoption date.

Performance obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. Performance obligations are satisfied as of a point in time or over time and are supported by contracts with customers. For most of the Company’s contracts, there are multiple promises of goods or services. Typically, the Company provides a significant service of integrating a complex set of tasks and components such as design, engineering, construction management, and equipment procurement for a project contract. The bundle of goods and services are provided to deliver one output for which the customer has contracted. In these cases, the Company considers the bundle of goods and services to be a single performance obligation. The Company may also promise to provide distinct goods or services within a contract, such as a project contract for installation of energy conservation measures and post-installation O&M services. In these cases the Company separates the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation.
Backlog - The Company’s remaining performance obligations (hereafter referred to as “backlog”) represent the unrecognized revenue value of the Company’s contract commitments. The Company’s backlog may vary significantly each reporting period based on the timing of major new contract commitments and the backlog may fluctuate with currency movements. In addition, our customers have the right, under some circumstances, to terminate contracts or defer the timing of the Company’s services and their payments to us. At September 30, 2018, the Company had backlog of


25

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

approximately $1,757,000. Approximately 26%, of our September 30, 2018 backlog is anticipated to be recognized as revenue in the next twelve months and the remaining, thereafter.
The Company has applied the practical expedient for certain revenue streams to exclude the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed.
Contract acquisition costs:
In connection with the adoption of Topic 606, the Company is required to account for certain acquisition cost over the life of the contract, consisting primarily of commissions when paid. Commission costs are incurred commencing at contract signing. Commission costs are allocated across all performance obligations and deferred and amortized over the contract term on a progress towards completion basis.
As of January 1, 2018, the Company capitalized $927 in commission costs related to contracts that were not completed. For contracts that have a duration of less than one year, the Company follows a practical expedient and expenses these costs when incurred. During the three and nine months ended September 30, 2018, the amortization of commission costs related to contracts were not material and have been included in the accompanying consolidated statements of income (loss). Additionally, no impairment charges in connection with the Company’s commission costs or project development costs were recorded during the period ended September 30, 2018.
The Company analyzed the impact of adoption of Topic 606 on the Company’s project development costs and determined no change in the Company’s accounting policy was required. In the three and nine months ended September 30, 2018, $7,561 and $13,571, respectively, of project development costs were recognized in the consolidated statement of income (loss) on projects that converted to customer contracts.

4. BUSINESS ACQUISITIONS AND RELATED TRANSACTIONS
The Company accounts for acquisitions using the acquisition method in accordance with ASC 805, Business Combinations. The purchase price for each has been allocated to the assets based on their estimated fair values at the date of each acquisition as set forth in the table below. The excess purchase price over the estimated fair value of the net assets, which are calculated using level 3 inputs per the fair value hierarchy as defined in Note 8, acquired has been recorded as goodwill. Intangible assets, if identified, have been recorded and are being amortized over periods ranging from one to fifteen years. See Note 5 for additional information.
Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions. Certain amounts below are provisional based on our best estimates using information available as of the reporting date. The Company is waiting for information to become available to finalize its valuation of certain elements of this transaction. Specifically, the assigned values for energy assets, intangibles, and goodwill are provisional in nature and subject to change upon the completion of the final valuation of such elements.
In January 2017, the Company acquired two solar PV projects currently under construction as well as associated construction loan agreements with a bank for use in providing non-recourse financing for these acquired solar PV projects currently under construction. The Company paid $2,409 to acquire the assets under construction, and assumed $5,635 of associated non-recourse financing. The pro-forma effects of this acquisition on our operations are not material.
During the nine months ended September 30, 2018, in order to expand its portfolio of energy assets, the Company acquired five solar projects from two developers for total consideration of $63,119, which included contingent consideration of $4,022 that will be paid upon final completion of the respective projects between the end of 2018 and throughout 2019. None of the contingent consideration has been paid to date. For all these projects, as of September 30, 2018, the Company has paid $59,097  to the developers of the projects. The Company also entered into a definitive agreement to acquire another solar project from one of the same developers. The total consideration for this solar project is $3,019. As of September 30, 2018, the Company has paid $916 to the developer of this project.
During the nine months ended September 30, 2018, the Company completed an acquisition of certain assets of Washington, DC based mechanical, electrical, plumbing, and fire protection design company, JVP Engineers, P.C. The consideration consisted of $2,326, of which, $1,901 has been paid to date. The remaining balance is attributed to a contingent consideration holdback contingent on the collection of certain receivables and will be be paid fifteen months from the completion of the


26

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

acquisition. No debt was assumed or cash acquired in the transaction. The pro-forma effects of this acquisition on our operations are not material.
During the nine months ended September 30, 2018, the Company completed an acquisition of certain assets of the Hawaii-based building science and design engineering consulting firm, Chelsea Group Limited. The consideration consisted of $1,691 of cash and potential contingent consideration of up to $2,000 based upon meeting certain future revenue targets over the next five years. The final purchase price is subject to a net working capital adjustment, dependent on the level of working capital at the acquisition date, that has not been finalized yet. The fair value of the contingent consideration was $555 as of the date of acquisition. No debt was assumed or cash acquired in the transaction. The pro-forma effects of this acquisition on our operations are not material.
A summary of the cumulative consideration paid and the allocation of the purchase price of all of the acquisitions in each respective year is as follows:
 
2018
 
2017
Accounts receivable
$
793

 
$

 
Prepaid expenses and other current assets
11

 
256

 
Property and equipment and energy assets
63,119

 
7,788

 
Intangibles
680

 

 
Goodwill
3,042

 

 
Accounts payable
(42
)
 

 
Purchase price
$
67,687

 
$
8,044

 
Total, net of cash received
$
67,687

 
$
8,044

 
Debt assumed
$

 
$
5,635

 
Total fair value of consideration
$
67,687

 
$
2,409

 
The results of the acquired assets since the dates of the acquisitions have been included in the Company’s operations as presented in the accompanying consolidated statements of income (loss), consolidated statements of comprehensive income (loss) and consolidated statements of cash flows.

5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying value of goodwill attributable to each reportable segment are as follows:
 
U.S. Regions
 
U.S. Federal
 
Canada
 
Non-solar DG
 
Other
 
Total
Balance, December 31, 2017
$
24,759

 
$
3,375

 
$
3,494

 
$

 
$
24,507

 
$
56,135

Goodwill acquired during the year
1,611

 
1,431

 

 

 

 
3,042

Currency effects

 

 
(96
)
 

 
(228
)
 
(324
)
Balance, September 30, 2018
$
26,370

 
$
4,806

 
$
3,398

 
$

 
$
24,279

 
$
58,853

Accumulated Goodwill Impairment Balance, December 31, 2017
$

 
$

 
$
(1,016
)
 
$

 
$

 
$
(1,016
)
Accumulated Goodwill Impairment Balance, September 30, 2018
$

 
$

 
$
(1,016
)
 
$

 
$

 
$
(1,016
)
The Company completed two acquisitions during the nine months ended September 30, 2018, which resulted in a $3,042 increase in goodwill.
Since the Company’s annual goodwill impairment test there have been no events that would have triggered a need for an interim impairment test.
Separable intangible assets that are not deemed to have indefinite lives are amortized over their useful lives. The Company annually assesses whether a change in the life over which the Company’s assets are amortized is necessary, or more frequently if events or circumstances warrant.



27

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

Acquired intangible assets other than goodwill that are subject to amortization include customer contracts, customer relationships, non-compete agreements, technology and trade names. Customer contracts are amortized ratably over the period of the acquired customer contracts ranging in periods from approximately one to five years. All other acquired intangible assets are amortized over periods ranging from approximately four to fifteen years, as defined by the nature of the respective intangible asset. The Company completed an acquisition during the nine months ended September 30, 2018 which resulted in a $500 increase in customer relationships, which will be amortized over an eight year period. The Company completed another acquisition during the nine months ended September 30, 2018 which resulted in a $180 increase in customer contracts, which will be amortized over a two year period.
The gross carrying amount and accumulated amortization of intangible assets are as follows:
 
As of September 30,
 
As of December 31,
 
2018
 
2017
Gross Carrying Amount
 
 
 
Customer contracts
$
7,888

 
$
7,786

Customer relationships
12,195

 
11,863

Non-compete agreements
3,029

 
3,052

Technology
2,737

 
2,751

Trade names
544

 
546

 
26,393

 
25,998

Accumulated Amortization
 
 
 
Customer contracts
7,708

 
7,786

Customer relationships
10,151

 
9,557

Non-compete agreements
3,028

 
3,048

Technology
2,665

 
2,642

Trade names
526

 
525

 
24,078

 
23,558

Intangible assets, net
$
2,315

 
$
2,440

Amortization expense related to customer contracts is included in cost of revenues in the consolidated statements of income (loss). Amortization expense related to all other acquired intangible assets is included in selling, general and administrative expenses in the consolidated statements of income (loss). Amortization expense for the three months ended September 30, 2018 and 2017 related to customer contracts was $0 and $8, respectively. Amortization expense for the nine months ended September 30, 2018 and 2017 related to customer contracts was $0 and $23, respectively. Amortization expense for the three months ended September 30, 2018 and 2017 related to all other acquired intangible assets was $269 and $358, respectively. Amortization expense for the nine months ended September 30, 2018 and 2017 related to all other acquired intangible assets was $771 and $1,059, respectively.

6. INCOME TAXES
The provision for income taxes was $3,351 and $3,881 for the three months ended September 30, 2018 and 2017, respectively. The provision for income taxes was $1,879 and $4,296 for the nine months ended September 30, 2018 and 2017, respectively. The estimated 2018 effective tax rate is 23.8% for the three months ended September 30, 2018 compared to a 30.6% estimated annual effective tax rate for the three months ended September 30, 2017. The estimated 2018 effective tax rate was 6.5% for the nine months ended September 30, 2018 compared to a 24.8% estimated annual effective tax rate for the nine months ended September 30, 2017.
The principal reason for the difference between the statutory rate and the estimated annual effective rate for 2018 were the effects of a $5,900 benefit of the 2017 Section 179D deduction, which was extended in February 2018 and treated as a discrete event in the year to date period, and the use of investment tax credits to which the Company is entitled from owned plants. The principal reason for the difference between the statutory rate and the estimated annual effective rate for 2017 were the effects of investment tax credits to which the Company is entitled from owned plants.


28

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

The investment tax credits and production tax credits to which the Company may be entitled fluctuate from year to year based on the cost of the renewable energy plants the Company places or expects to place in service and production levels at company owned facilities in that year. As part of the Bipartisan Budget Act signed into law on February 9, 2018 the Section 179D deduction for 2017 was retroactively extended. The Section 179D deduction expired on December 31, 2017.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
 
Gross Unrecognized Tax Benefits
Balance, December 31, 2017
$
600

Additions for prior year tax positions

Settlements with tax authorities

Reductions of prior year tax positions

Balance, September 30, 2018
$
600

At September 30, 2018 and December 31, 2017, the Company had approximately $600 of total gross unrecognized tax benefits. At September 30, 2018 and December 31, 2017, the Company had approximately $80 of total gross unrecognized tax benefits (net of the federal benefit on state amounts) representing the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.
The 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Legislation. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. As of December 31, 2017, the Company has substantially completed its accounting for the tax effects of the 2017 Tax Act.  If revisions are needed as new information becomes available, the final determination of the deemed re-measurement of the Company’s deferred assets and liabilities, the deemed mandatory repatriation or other applicable provisions of the Tax Legislation will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act.

7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company also is involved in a variety of claims and other legal proceedings generally incidental to its normal business activities. While the outcome of any of these proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any of these existing matters would have a material adverse effect on its financial condition or results of operations.
Commitments as a Result of Acquisitions
Related to the Company's acquisition of Energy Excel LLP (“EEX”)in the second quarter of 2014, the former owners of EEX, who are now employees of the Company, may be entitled to receive up to 4,500 GBP ($5,861 converted as of September 30, 2018) in additional consideration, accounted for as compensation for post-combination services, if the acquired business meets certain financial performance milestones through December 31, 2018. No amounts were accrued as of September 30, 2018 and December 31, 2017, respectively, as milestones are not considered likely to be achieved.
During the nine months ended September 30, 2018, the Company completed an acquisition which provided for a $425 cash consideration holdback contingent upon the Company collecting certain acquired receivables. The contingent



29

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

consideration will be paid fifteen months from the completion of the acquisition and is recorded in the other liabilities line on the consolidated balance sheets.
During the nine months ended September 30, 2018, the Company completed an acquisition which provided for a revenue earn-out contingent upon the acquired business meeting certain cumulative revenue targets over the next five years. The Company evaluated financial forecasts of the acquired business and concluded that the fair value of this earn-out is approximately $555, which is recorded in the other liabilities on the consolidated balance sheets. The contingent consideration will be paid yearly, commencing in 2020, if any of the cumulative revenue targets are achieved and the fair value of the earn-out will be periodically re-evaluated and adjustments will be recorded as needed.
During the nine months ended September 30, 2018, the Company completed the acquisition of five solar projects that included contingent consideration of $4,022 that will be paid upon final completion of the respective projects between the end of 2018 and throughout 2019.
 
8. FAIR VALUE MEASUREMENT
The Company recognizes its financial assets and liabilities at fair value on a recurring basis (at least annually). Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Three levels of inputs that may be used to measure fair value are as follows:
Level 1:  Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2:  Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:  Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following table presents the input level used to determine the fair values of the Company’s financial instruments measured at fair value on a recurring basis:
 
 
 
Fair Value as of
 
 
 
September 30,
 
December 31,
 
Level
 
2018
 
2017
Assets:
 
 
 
 
 
Interest rate swap instruments
2
 
$
1,494

 
$
233

Commodity swap instruments
2
 
34

 

Total assets
 
 
$
1,528

 
$
233

Liabilities:
 
 
 
 
 
Interest rate swap instruments
2
 
$
1,548

 
$
3,529

Commodity swap instruments
2
 
46

 

Interest make-whole provisions
2
 
1,488

 

Contingent revenue earn-out
3
 
555

 

Total liabilities
 
 
$
3,637

 
$
3,529

The fair value of the Company’s interest rate swaps was determined using a cash flow analysis on the expected cash flow of the contract in combination with observable market-based inputs, including interest rate curves and implied volatilities. As part of this valuation, the Company considered the credit ratings of the counterparties to the interest rate swaps to determine if a credit risk adjustment was required.
The fair value of the Company’s commodity swaps was determined using a cash flow analysis on the expected cash flow of the contract in combination with observable forward price inputs obtained from a third-party pricing source. As part of this



30

AMERESCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
(in thousands, except per share amounts)

valuation, the Company considered the credit ratings of the counterparties to the commodity swaps to determine if a credit risk adjustment was required.
The fair value of the Company’s make-whole provisions were determined by comparing them against the rates of similar debt instruments under similar terms without a make-whole provision obtained from various highly rated third-party pricing sources.
The fair value of the Company’s contingent revenue earn-out was determined by evaluating the acquired company’s future financial forecasts and evaluating which, if any, of the cumulative revenue targets are likely to be met.  The Company has classified contingent consideration related to certain acquisitions within Level 3 of the fair value hierarchy because the fair value is derived using significant unobservable inputs, which include discount rates and probability-weighted cash flows. The Company determined the fair value of its contingent consideration obligations based on a probability-weighted income approach derived from financial performance estimates and probability assessments of the attainment of certain targets. The Company establishes discount rates to be utilized in its valuation models based on the cost to borrow that would be required by a market participant for similar instruments. In determining the probability of attaining certain technical, financial and operation targets, the Company utilizes data regarding similar milestone events from our own experience, while considering the inherent difficulties and uncertainties in developing a product. On a quarterly basis, the Company reassesses the probability factors associated with the financial, operational and technical targets for its contingent consideration obligations. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.
        The key assumptions as of September 30, 2018 related to the contingent consideration from the acquisition of certain assets used in the model include: discount rate of 18% for purposes of discounting the low and base case scenarios associated with achievement of the financial based earn-out. The probabilities assigned to these scenarios were 50% for both the low and base case scenarios. An increase or decrease in the probability of achievement of any scenario could result in a significant increase or decrease to the estimated fair value of the contingent consideration liability.

The fair value of financial instruments is determined by reference to observable market data and other valuation techniques, as appropriate. At September 30, 2018 and December 31, 2017 the fair value of the Company’s long-term debt was estimated using discounted cash flows analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements which are considered to be level two inputs. There have been no transfers in or out of level two for the nine months ended September 30, 2018 and the year ended December 31, 2017. Based on the analysis performed, the fair value and the carrying value of the Company’s long-term debt, excluding capital leases, are as follows:
 
As of September 30, 2018
 
As of December 31, 2017
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Long-term debt value (Level 2)
$
213,632

 
$
213,877