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As filed with the Securities and Exchange Commission on June 27, 2019

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Sunnova Energy International Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   4931   30-1192746
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

20 East Greenway Plaza, Suite 475

Houston, Texas 77046

(281) 985-9904

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Walter A. Baker

Executive Vice President, General Counsel and Secretary

Sunnova Energy International Inc.

20 East Greenway Plaza, Suite 475

Houston, Texas 77046

(281) 985-9904

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Joshua Davidson

Travis J. Wofford

Baker Botts L.L.P.

910 Louisiana Street

Houston, TX 77002

(713) 229-1234

 

David P. Oelman

E. Ramey Layne

Vinson & Elkins L.L.P.

1001 Fannin Street

Houston, TX 77002

(713) 758-2222

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☒

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee

Common Stock, $0.0001 par value per share

  $100,000,000   $12,120

 

 

 

(1)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes the aggregate offering price of additional shares that the underwriters have the right to purchase to cover over-allotments, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated June 27, 2019.

            Shares of Common Stock

 

LOGO

 

 

This is an initial public offering of shares of common stock of Sunnova Energy International Inc.

Prior to this offering, there has been no public market for shares of our common stock. The initial public offering price of our common stock is expected to be between $         and $         per share. We have applied to list our common stock on The New York Stock Exchange (the “NYSE”) under the symbol “NOVA.”

To the extent that the underwriters sell more than                  shares of common stock, we have granted the underwriters a 30-day option to purchase up to an additional                  shares from us at the public offering price less underwriting discounts and commissions.

We are an “emerging growth company” as defined under the federal securities laws and, as such, are subject to reduced public company reporting requirements.

See “Risk Factors” beginning on page 17 to read about risks you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

    

Price to
Public

      

Underwriting
Discounts and
Commissions(1)

      

Proceeds to
Issuer

 

Per share

   $          $          $    

Total

   $                      $                      $                

 

(1)

See the section titled “Underwriting” for additional information regarding compensation payable to the underwriters.

The underwriters have reserved up to              shares of common stock, or 5% of the shares offered by this prospectus, for sale at the initial public offering price in a directed share program, to our directors, officers, employees and certain other persons associated with us. See the section titled “Underwriting.”

The underwriters expect to deliver the shares of common stock against payment therefor on or about                 , 2019.

 

BofA Merrill Lynch   J.P. Morgan   Goldman Sachs & Co. LLC
  Credit Suisse  
KeyBanc Capital Markets   Baird   Roth Capital Partners

The date of this prospectus is                  , 2019


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LOGO


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LOGO


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LOGO


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TABLE OF CONTENTS

 

FOUNDER’S NOTE

     ii  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     17  

CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

     63  

MARKET AND INDUSTRY DATA

     65  

USE OF PROCEEDS

     66  

DIVIDEND POLICY

     67  

CAPITALIZATION

     68  

DILUTION

     72  

SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL DATA

     74  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     79  

INDUSTRY OVERVIEW

     114  

BUSINESS

     119  

MANAGEMENT

     137  

EXECUTIVE COMPENSATION

     145  

CORPORATE REORGANIZATION

     153  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     155  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     161  

DESCRIPTION OF CAPITAL STOCK

     164  

SHARES ELIGIBLE FOR FUTURE SALE

     170  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK

     172  

INVESTMENT IN SUNNOVA ENERGY INTERNATIONAL INC. BY EMPLOYEE BENEFIT PLANS

     177  

UNDERWRITING

     179  

LEGAL MATTERS

     187  

EXPERTS

     187  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     187  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

We have not, and the underwriters have not, authorized anyone to provide any information or make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

For investors outside of the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Cautionary Language Regarding Forward-Looking Statements.”

 

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LOGO

 

Sunnova Energy International Inc.

20 Greenway Plaza, Suite 475

Houston, TX 77046

sunnova.com

A Letter from Our Founder

I founded Sunnova over six years ago with the goal of offering consumers a better energy service at a better price. From humble origins in a downtown Houston apartment, we have grown Sunnova into one of the leading residential solar and energy storage service providers in the United States.

Driven by technological change, consumer choice and the demand for sustainable energy, we are witnessing a profound paradigm shift to cleaner, cheaper and more reliable energy solutions. We are proud to pioneer this change and to revolutionize Houston from its past as the epicenter of traditional energy into its future as a global capital for new energy.

Within a rapidly shifting energy landscape, Sunnova is a lead architect for what the new energy system will be for the 21st century consumer. This transformation is here—today—and Sunnova is powering a clean, affordable and reliable energy reality.

Powering Energy Independence

Our company mission is simple: to power energy independence. Sunnova believes that competition and consumer choice must serve as the bedrock for the new energy system. For too long, the centralized generation and distribution model has restricted consumer choice. Consumers now demand more from their energy providers: more options, more value and more control over the environmental impact of their energy consumption. As one of the leading residential solar and energy storage providers, Sunnova is dedicated to supporting consumers with integrated energy solutions that provide greater control, that are more resilient in the face of storms and natural disasters and that serve as an environmentally-conscious energy choice.

When coupled with other significant advances in home energy management systems and demand control technologies, our integrated energy solutions will provide consumers with greater control over their energy needs.

Powering Change

We are in the midst of immense change in the global energy, information and transportation industries. A consumer awakening is now challenging the centralized power model. The advent of ground-breaking technologies is dramatically reshaping the old-line, industrial-age system to adapt to the changing energy needs of the 21st century consumer. Beyond advancements in solar or energy storage or any individual technology, the confluence of multiple technologies is creating an entirely new way of providing energy service in a more decentralized fashion.

When I started Sunnova, I knew we were going to drive an energy revolution to positively impact the way people source and use energy. We remain firm in our conviction that the emergence of distributed solar and energy storage technologies is one of the most significant game changers of our lifetime, and we are thrilled to be at the forefront of harnessing these changes to create a cleaner and sustainable new energy future for good.

 

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Powering the Future

What sets Sunnova apart can be summarized in one word: focus. We remain focused on our customers by giving them unparalleled service; we remain focused on providing consumers choice through our unique regional dealer model and we remain focused on executing our mission.

We are proud of our accomplishments and momentum, and even more excited about what lies ahead. Today, less than 3% of the 84 million single-family homes in the United States have rooftop solar, presenting an immense opportunity for Sunnova to expand existing and build new, lasting relationships with tens of thousands of new customers. As our business impact grows, so too will our positive social and environmental impact. Last year alone, production from Sunnova systems displaced over 300,000 metric tons of carbon emissions.

At Sunnova, we see ourselves as a global energy company—a company that will deliver opportunities to people throughout the world and change the way consumers energize their lives. We will endeavor to lead this dramatic change through a relentless focus on serving our customers, our dealers and our stockholders. With a local focus and a global vision, Sunnova aims to create a reliable energy future that will transform the world for the better. We strongly believe that we can do well and do good, and we look forward to continuing this remarkable journey with you.

Join us as we power energy independence.

LOGO

John Berger

Founder, CEO and Chairman

 

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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Cautionary Language Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of Sunnova Energy Corporation, our accounting predecessor, and the related notes included elsewhere in this prospectus, before making an investment decision. The information presented in this prospectus assumes (i) a public offering price of $             per share of common stock (the midpoint of the price range set forth on the cover of this prospectus) and (ii) unless otherwise indicated, that the underwriters do not exercise their option to purchase additional shares of common stock. Unless the context otherwise requires, the terms “Registrant,” “Sunnova,” “the company,” “we,” “us” and “our” in this prospectus refer to (i) Sunnova Energy Corporation and its consolidated subsidiaries when used in a historical context for any period presented and (ii) Sunnova Energy International Inc. and its consolidated subsidiaries after giving effect to the transactions described under “Corporate Reorganization.”

Sunnova Energy International Inc.

Our Business

We are a leading residential solar and energy storage service provider, serving more than 63,000 customers in more than 20 U.S. states and territories. Our goal is to be a leading provider of clean, affordable and reliable energy for consumers, and we operate with a simple mission: to power energy independence. We were founded to deliver customers a better energy service at a better price, and through our solar and solar plus energy storage service offerings we are disrupting the traditional energy landscape and the way the 21st century customer generates and consumes electricity.

We have a differentiated residential solar dealer model in which we work hand-in-hand with local dealers who originate, design and install our customers’ solar energy and energy storage systems on our behalf. Our unique focus on our dealer model enables us to leverage our dealers’ specialized knowledge, connections and experience in local markets to drive customer origination while providing our dealers with access to high quality products and technical oversight and expertise. This structure provides operational flexibility and lower fixed costs relative to our peers, furthering our competitive advantage.

We offer customers products to power their homes with affordable solar energy. We are able to offer savings to our solar-only customers compared to utility-based retail rates with little to no up-front expense to the customer, and we are able to provide energy resiliency and reliability to our solar plus energy storage customers. Our solar service agreements take the form of a lease, power purchase agreement (a “PPA”) or loan. The initial term of our solar service agreements is typically 25 years, or in the case of standalone energy storage services, 10 years. Service is an integral part of our agreements and includes operations and maintenance, monitoring, repairs and replacements, equipment upgrades, onsite power optimization for the customer (for both supply and demand), the ability to efficiently switch power sources among the solar panel, grid and battery, as appropriate, and diagnostics. During the life of the contract we have the opportunity to integrate related and evolving home servicing and monitoring technologies to upgrade the flexibility and reduce the cost of our customers’ energy supply.

In addition to providing ongoing service as a standard component of our solar service agreements, we also offer ongoing energy services to customers who purchased their solar energy system through unaffiliated third parties. Under these arrangements, we agree to provide such monitoring, maintenance and repair services to



 

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these customers for the life of the service contract that they sign with us. We believe the quality and scope of our comprehensive energy service offerings, whether to customers that obtained their solar energy system through us or through another party, is a key differentiator between us and our competitors.

We commenced operations in January 2013 and began providing solar energy services under our first solar energy system in April 2013. Since then, our brand, innovation and focused execution have driven significant growth in our market share and in the number of customers on our platform. We operate one of the largest fleets of residential solar energy systems in the United States, comprising more than 455 megawatts of generation capacity and serving more than 63,000 customers.

Market Opportunity

The number of residential solar energy systems in the United States is expected to increase from approximately 2.2 million in 2018 to an estimated 5.4 million in 2024, representing a 16% compounded annual growth rate (“CAGR”). Even in light of this rapid growth, the residential solar market remains significantly under-penetrated, reaching less than 3% of the 84 million single-family, detached homes in the United States.

The following trends have increased solar energy demand from homeowners in a growing number of markets, and are expected to continue to do so:

 

   

Rising utility-based electricity rates;

 

   

Declining cost of a residential solar system;

 

   

Availability of financing for residential solar service providers at an attractive cost of capital;

 

   

Declining cost of energy storage due to improvements in technology;

 

   

Increasing consumer demand for energy storage systems to provide temporary power during power outages due to natural disasters;

 

   

Increasing consumer demand for environmentally-friendly products, including power sourced from renewable energy; and

 

   

Governmental policies and incentives, such as net metering, federal tax credits, accelerated depreciation, renewable portfolio standards (“RPS”) on utilities and solar renewable energy certificates (“SRECs”).

Our Customer Value Proposition

Our customer value proposition includes:

 

   

A better energy service at a better price. Our residential solar service agreements offer customers low-cost, clean solar energy along with comprehensive customer service and system maintenance over the lifetime of their contract with us. We generally price our solar service agreements lower than utility-provided electricity, offering customers the opportunity to reduce their overall electric utility bill. The initial price or energy rate is fixed (often coupled with a price escalator at the customer’s option), providing predictable prices over the entire 25-year term of the solar service agreements. We believe this provides the customer valuable protection against unpredictable increases in utility rates. We also offer energy storage solutions to those customers who are looking



 

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for energy resiliency and reliability. In addition, we monitor, maintain and service the system over the life of the contract, ensuring that customers benefit from a better energy service, generally at a better price over the life of their relationship with us.

 

   

Best-in-class customer service. All Sunnova solar service agreements include comprehensive servicing solutions designed to ensure maximum performance and a high-quality customer experience. Our solar service agreements provide remote monitoring, timely maintenance and warranty coverage and services for the entire contract term. The majority of our solar service agreements contain a production guarantee to help customers capture the savings they expect. Our digital monitoring platforms allow customers to monitor the performance of their systems, and we have a staff of bilingual, well-trained professionals on-call to respond to customer questions and concerns. We believe that our customer service is a critical component of our value proposition and we pride ourselves on the experience we provide. In addition to the customers that we service and finance through lease, loans and PPAs, we also offer service-only contracts to customers who have non-Sunnova solar energy systems installed, but do not have the benefit of a comprehensive service relationship. We believe this focus on service differentiates us from other solar providers and facilitates long-term, active relationships with our customers.

 

   

Greater resiliency and independence from the grid. Our energy storage systems increase customers’ independence from the centralized utility and provide on-site backup power when there is a grid outage due to storms, wildfires, other natural disasters and other power failures. In addition, variable electricity prices, known as time-of-use rates, can make it more profitable to sell solar energy to the grid rather than consume it, allowing customers to save money. This combination of increased energy resilience and independence from the grid is a strong incentive for customers to adopt solar and energy storage.

 

   

Reliable, clean power. Our solar and energy storage services allow customers to reduce their environmental footprint by buying clean, affordable and reliable energy. In addition to being a more sustainable energy option than centralized grid-provided energy predominantly powered by fossil fuels, our service offerings are also well-positioned to meet the evolving needs of energy consumers.

 

   

Flexible financing solutions. We offer an array of financing solutions to provide solar and storage services to customers at minimal or no upfront cost. Our solar and solar plus energy storage contracts include leases, PPAs and loans. These flexible solutions allow us to tailor our offerings to meet customers’ needs: we can offer them a fixed payment plan per month to provide predictability, or a contract where monthly payments vary with solar production levels. All of our financing options are Sunnova-branded, and we manage all billing and collections in-house.

Our Competitive Strengths

Our key competitive strengths include:

 

   

Focus on long-term customer relationships. We serve as the primary point of contact for our customers over the duration of their solar service agreements. This direct, long-term relationship with customers drives our focused efforts to provide excellent customer service both directly and through our dealers by providing them with access to high quality components and system designs. We believe that by providing an excellent customer experience from the outset, we are well-positioned to meet the evolving needs of our energy consumers, including energy storage systems today and the potential ability to integrate home automation, electric vehicle charging and other home technology solutions in the future.



 

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Local dealer model provides operational flexibility and lower fixed costs. We believe our network of more than 75 local, independent dealers as of March 31, 2019 provides us with competitive advantages in originating new customer contracts and servicing systems. Our dealer model facilitates our entry into new markets by enabling us to develop relationships with existing local businesses and leveraging their local knowledge and sourcing new sales leads. Similarly, we can quickly refocus our origination efforts and capital deployment strategy to different markets in response to changing dynamics and regulatory developments. We believe our differentiated dealer model enables us to have lower fixed costs and reduced fixed overhead expenses relative to our peers who bear the burden of local market origination, as well as sales, marketing and installation costs, although use of our dealer model means we do not have direct control over certain costs related to our business.

 

   

Mutually beneficial partnership with our dealers. Attracting the best dealers in the business to partner with us has been one of our principal goals since we began operating. We have successfully developed and built our dealer network by offering a compelling value proposition. We have a suite of branding, marketing and technology tools and products to support our dealers’ origination efforts at attractive unit economics. In turn, our dealers benefit from being able to sell a Sunnova-branded solar service agreement that is backed by our best-in-class customer service and proven financing track record. We also have multi-year exclusivity arrangements with several key dealers, under which these dealers will generally not sell solar energy systems for any other company. For certain other dealers, substantially all of the solar service agreements originated by such dealers are Sunnova agreements, although they are under no exclusivity arrangement. We instill trust in our dealers and do not compete with them in their local markets.

 

   

Stable and diversified business model. Our business model is underpinned by contracted cash flows, geographic diversification and proven technology. Our assets are supported by long-term contracted cash flows, with most of our solar service agreements having an initial term of 25 years and in some cases a 10-year renewal option. Our stringent customer credit approval policies have resulted in limited defaults in customer payments on our solar service agreements. As of March 31, 2019, our customers had, at the time of signing the solar service agreement, an average FICO score of 737. In addition, we believe our diversification across geographies and equipment manufacturers contributes to the overall stability of our business. As of March 31, 2019, approximately 29%, 26% and 14% of our solar energy systems were located in New Jersey, California, and Puerto Rico, respectively, with our total reach spanning more than 20 U.S. states and territories, reducing the adverse impact on our business of adverse climate, regulatory or economic conditions in any one jurisdiction. Additionally, we have a broad range of suppliers for our solar energy and energy storage system components, which tends to reduce warranty concentration and component and supply risk.

 

   

Demonstrated access to diversified funding sources. We have financed the capital investment required for solar energy system and energy storage system installations from a broad range of sources and investors, including large institutional investors, private equity sponsors and limited foreign investment. Our relationships with, and access to, these investors have allowed us to raise more than $3.0 billion of committed capital since our inception in indebtedness, tax equity and preferred equity. Our diversified access to capital and long-term relationships with multiple funding sources have enabled us to retain significant assets on our balance sheet, without the need to sell assets to raise cash. We believe that our strong balance sheet and access to capital provides us with a competitive advantage. However, we may not be able to access sources of capital due to general market conditions, market perception of our business or the renewable energy industry as a whole.



 

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Focused and experienced management team. Our CEO and founder has always led our company with a focused and consistent goal of providing reliable and affordable solar energy through best-in-class customer service. Our management team’s long-term focus and commitment underpin everything we do. In addition, our management team has substantial experience in the renewable energy and power sectors and was among the pioneers of the distributed solar industry, providing the team a strong understanding of dealer networks and the associated benefits of the dealer network model. Our CEO and founder has founded two prior successful residential solar businesses, and our management team has multi-disciplinary experience in sales, marketing, legal and project finance with an average of over 20 years in management roles across a variety of both public and private companies. We believe that our combination of experience and focus on our mission and customers provides us with a lasting competitive advantage.

Our Growth Strategies

Our chief objective is to be a primary provider of clean, affordable and reliable energy for consumers. In order to accomplish this objective, we intend to:

 

   

Accelerate growth in underpenetrated markets and expand our geographic footprint. We believe the total market opportunity for residential solar services remains significantly under-penetrated, reaching less than 3% of the 84 million single-family, detached homes in the United States. The flexibility and reach of our dealer model, coupled with our scalable technology platform, allow us to increase market penetration and enter new markets quickly and efficiently. We plan to strengthen our existing relationships and identify new dealers to accelerate our growth. We will seek to enter new markets and geographies over time, both in the United States and internationally, where climate, demand for residential solar energy, and regulatory policies position solar energy as an economically compelling alternative to centralized electric utilities.

 

   

Further strengthen our dealer relationships with support platform and technology suite. Our operations desk supports our dealer network and is used to sell additional complementary services to our customer base and directly facilitate sales for our dealers. Additionally, our cloud-based technology suite standardizes and simplifies the design, installation and customer contract processes, and ongoing training and field support provides cost-efficient operations. Finally, dealers are able to leverage our economies of scale to procure equipment through our supply chain relationships.

 

   

Continued deployment of energy storage systems to customers. We believe that integrated energy storage systems enhance the reliability, resiliency and predictability of home solar energy in certain markets, increasing the overall value proposition to consumers. We expect customer demand for Sunnova SunSafe, our solar plus energy storage product, to increase over time. We also expect continued requests by our customers that we retrofit their existing solar energy systems with energy storage service to provide resiliency.

 

   

Broaden and enhance service offerings. In addition to providing ongoing monitoring and service as a standard component of our solar service agreements, we also offer our service-only product, Sunnova Protect, as a standalone product to consumers who have obtained their solar energy systems through unaffiliated third parties. Of the approximate 2.2 million homes that utilize solar energy systems, we estimate that approximately 900,000 are not covered by a service plan. We believe there is significant market demand for long-term protection plans for customers who have chosen to finance or purchase systems rather than lease them, and we will strive to capture a significant share of this market. We believe the quality and scope of our service offerings through



 

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Sunnova Protect fulfill the need for active, comprehensive management to monitor system function and optimize performance. We plan to expand our energy product and industry-leading service offerings in the home to provide further cost savings to our customers and optimize the performance of existing solar energy systems.

Risk Factors

Investing in our common stock involves risks that relate to, among other things, our business, our dealers, market factors, governmental policies and regulation, competition, the pace of technological innovations, the credit risk of our customers, our ability to raise financing and the level of our indebtedness. See “Risk Factors.”

Corporate Information

Our principal executive offices are located at 20 East Greenway Plaza, Suite 475, Houston, TX 77046, and our telephone number is (281) 985-9904. Our website address is www.sunnova.com. Information contained on, or that can be accessed through, our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only.

The Sunnova design logo, “Sunnova” and our other registered or common law trademarks, service marks or trade names appearing in this prospectus are the property of Sunnova Energy Corporation. Other trademarks and trade names referred to in this prospectus are the property of their respective owners. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

Our Corporate Structure

Sunnova Energy Corporation was incorporated in Delaware on October 22, 2012. Sunnova Energy International Inc., the issuer in this offering, was incorporated in Delaware on April 1, 2019 to enable Sunnova Energy Corporation to implement a holding company organizational structure, to be effected by a merger conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, as described below. We refer to this transaction as the “Merger.”

Prior to the Merger, Sunnova Energy International Inc. will be a direct, wholly-owned subsidiary of Sunnova Energy Corporation, and Sunnova Merger Sub Inc., a Delaware corporation which we refer to as “Merger Sub,” will be a direct, wholly-owned subsidiary of Sunnova Energy International Inc. Merger Sub was organized for the sole purpose of implementing the Merger. Immediately prior to or contemporaneously with the completion of this offering, Merger Sub will merge with and into Sunnova Energy Corporation, with Sunnova Energy Corporation continuing as the surviving corporation. Each issued and outstanding share of common stock of Sunnova Energy Corporation will be converted into one share of common stock of Sunnova Energy International Inc., and each issued and outstanding share of preferred stock of Sunnova Energy Corporation will be converted into one share of preferred stock of Sunnova Energy International Inc., as described below. The separate corporate existence of Merger Sub will cease, and all of the issued and outstanding shares of Sunnova Energy International Inc. owned by Sunnova Energy Corporation will be automatically canceled and retired. As a result of the Merger, each stockholder of Sunnova Energy Corporation will become a stockholder of Sunnova



 

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Energy International Inc., holding the same proportional equity interests as immediately prior to the Merger, and Sunnova Energy Corporation will become a direct, wholly-owned subsidiary of Sunnova Energy International Inc.

We will consummate a 1 for              reverse stock split of our issued and outstanding common stock (the “Reverse Stock Split”) effective immediately prior to the consummation of this offering.

Additionally, in connection with the offering, our Series A common stock will be redesignated as our common stock and all              shares of our Series B common stock (giving effect to the Reverse Stock Split) will convert into                  shares of our common stock (the “Common Stock Conversion”).

Furthermore, immediately prior to or contemporaneously with the completion of this offering,              shares of our Series A convertible preferred stock and              shares of our Series C convertible preferred stock, which represent all of the outstanding shares of our Series A convertible preferred stock and Series C convertible preferred stock (giving effect to the Reverse Stock Split) , will convert into              shares of our common stock pursuant to the terms of our existing amended and restated certificate of incorporation (the “Preferred Stock Conversion” and, collectively with the Common Stock Conversion, the “Capital Stock Conversions”). We refer to these transactions, collectively with the Reverse Stock Split and the Merger, as the “Corporate Reorganization.” For more information on the Corporate Reorganization, please read “Corporate Reorganization.”

Furthermore, we expect that, immediately prior to or contemporaneously with the completion of this offering:

 

   

Energy Capital Partners, as the holder of a $15.0 million subordinated convertible note due December 31, 2019 (the “2019 subordinated convertible note”), will exercise its right to convert the principal amount of the 2019 subordinated convertible note plus any accrued and unpaid interest as of the date of conversion into approximately              shares of Series A convertible preferred stock, and

 

   

a $15.0 million subordinated convertible note due September 30, 2021 (the “2021 subordinated convertible note” and, together with the 2019 subordinated convertible note, the “subordinated convertible notes”), which our board of directors has authorized for issuance and we expect to be issued in June 2019 (the “Subordinated Convertible Note Issuance”), plus any accrued and unpaid interest as of the date of conversion, will automatically convert immediately prior to the offering into approximately              shares of Series C convertible preferred stock,

which Series A convertible preferred stock and Series C convertible preferred stock will in turn, collectively, convert into an aggregate of approximately              shares of common stock in the Preferred Stock Conversions (collectively, the “Subordinated Convertible Note Conversion”). For more information on the subordinated convertible notes, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Arrangements—Convertible Notes.”

In addition, we expect that, immediately following the completion of this offering, and assuming gross proceeds to us from this offering of at least $225.0 million, the holders of the senior convertible notes due March 2021 (the “senior convertible notes”), of which $44.9 million aggregate principal amount are currently outstanding, will exercise their right to convert all their notes into an aggregate              shares of common stock at an assumed conversion price equal to $             per share (which price is based on the mid-point of the price range set forth on the cover of this prospectus) (any such conversion, the “Senior Convertible Note Conversion and together with the Corporate Reorganization, the Subordinated Note Issuance and the Subordinated Note Conversion, the “Recapitalization Transactions”), plus a cash payment equal to accrued and unpaid cash and pay-



 

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in-kind interest to the date of conversion. To the extent any holders do not convert their notes, we will be obligated to redeem such notes at a price equal to par, plus a cash payment equal to accrued and unpaid cash and pay-in-kind interest to the date of redemption, together with an amount of cash equal to the IPO redemption premium. If the gross proceeds of this offering are less than $225 million, we will not be obligated (but may elect) to redeem more than 50% of any notes which the holders do not elect to convert, as long as the 2019 subordinated convertible note has converted into common stock in connection with this offering. For more information on the senior convertible notes, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Arrangements—Convertible Notes.”

The following charts summarize our organizational structure and equity ownership immediately prior to and immediately following the consummation of this offering. These charts are provided for illustrative purposes only and do not represent all legal entities affiliated with, or obligations of, our company.

Prior to the Offering and the Corporate Reorganization

 

 

LOGO



 

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Following the Offering and the Corporate Reorganization

 

LOGO

Emerging Growth Company

We are an emerging growth company within the meaning of the Jumpstart Our Business Startups Act, or “JOBS Act.” As an emerging growth company, we may take advantage of certain exemptions from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), certain requirements related to the disclosure of executive compensation in this prospectus and in our periodic reports and proxy statements and the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments.

We intend to take advantage of these exemptions until we are no longer an emerging growth company. We will cease to be an “emerging growth company” upon the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more, (ii) the date on which we are deemed to be a “large accelerated filer” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (iii) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities, and (iv) the last day of the fiscal year following the fifth anniversary of this offering. We are irrevocably opting out of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards.

See “Risk Factors—Risks Related to This Offering and Our Common Stock—We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors,” for certain risks related to our status as an emerging growth company.



 

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THE OFFERING

 

Common stock offered to the public

                shares (            shares, if the underwriters exercise in full their option to purchase additional shares of our common stock).

 

Underwriters’ option

We have granted the underwriters a 30-day option to purchase up to                additional shares of our common stock.

 

Common stock to be outstanding immediately after this offering and the Recapitalization Transactions(1)

                shares (            shares, if the underwriters exercise in full their option to purchase additional shares of our common stock).

 

Use of proceeds

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be approximately $         million (or approximately $         if the underwriters exercise in full their option to purchase additional shares of our common stock), based upon the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds to us from this offering, including upon exercise of the underwriters’ option to purchase additional shares, for general corporate purposes, including working capital, capital expenditures and repayment of indebtedness. See the section titled “Use of Proceeds” for additional information.

 

Directed share program

The underwriters have reserved up to             shares of common stock, or up to 5% of the shares offered by this prospectus, for sale at the initial public offering price through a directed share program to our directors, officers, employees and certain other persons associated with us. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they make will reduce the number of shares available to the general public. For additional information, see “Underwriting.”

 

Proposed NYSE trading symbol

“NOVA”

 

Risk Factors

Please read “Risk Factors” for a discussion of risks that you should consider before investing in our common stock.

 

(1)

Excludes the following:

 

   

             shares of our common stock issuable upon the exercise of outstanding options to purchase shares of our common stock; and

 

   

             shares of our common stock reserved for future issuance under our 2019 Long-Term Incentive Plan, which will become effective prior to the completion of this offering.



 

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Except as otherwise indicated and except as set forth in our historical financial statements included in this prospectus and information derived therefrom, all information in this prospectus assumes:

 

   

the 1 for              Reverse Stock Split will occur prior to the completion of this offering;

 

   

the Merger will occur prior to the completion of this offering;

 

   

the Capital Stock Conversions will occur immediately prior to or contemporaneously with the completion of this offering;

 

   

the Subordinated Convertible Note Conversion will occur immediately prior to or contemporaneously with the completion of this offering;

 

   

(a) the Senior Convertible Note Conversion will occur in full immediately following the completion of this offering, based on a conversion price equal to $         per share assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover of this prospectus) and (b) that no warrants will be issued in lieu of the Senior Convertible Note Conversion or in connection with any redemption of the senior convertible notes that may occur in connection with this offering as described in “Certain Relationships and Related Party Transactions—Debt Financings—Senior Convertible Notes”;

 

   

the filing and effectiveness of our new amended and restated certificate of incorporation and the adoption and effectiveness of our new amended and restated bylaws, each of which will occur immediately prior to or contemporaneously with the completion of this offering;

 

   

no exercise of outstanding stock options subsequent to the date hereof; and

 

   

no exercise by the underwriters of their option to purchase up to                 additional shares of our common stock from us.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATIONAL DATA

Sunnova Energy International Inc. was incorporated on April 1, 2019 and does not have any historical financial results. The following table shows summary historical financial data of our accounting predecessor, Sunnova Energy Corporation.

The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Corporate Reorganization” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results. The summary consolidated financial data in this section are not intended to replace the consolidated financial statements and related notes thereto included elsewhere in this prospectus and are qualified in their entirety by the consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

    

Three Months Ended
March 31,

   

Year Ended December 31,

 
    

2019

   

2018

   

2018

   

2017

 
     (Unaudited)        
     (in thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

        

Revenue

   $ 26,715     $ 19,784     $ 104,382     $ 76,856  

Operating expenses:

        

Cost of revenue—depreciation

     9,653       7,845       34,710       25,896  

Cost of revenue—other

     652       412       2,007       1,444  

Operations and maintenance

     2,254       2,340       14,035       4,994  

General and administrative

     18,681       16,356       67,430       54,863  

Other operating expense (income)

     (18     (16     (70     14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     31,222       26,937       118,112       87,211  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (4,507     (7,153     (13,730     (10,355

Interest expense, net

     29,167       3,790       45,132       56,650  

Interest expense, net—affiliates

     1,822       2,493       9,548       23,177  

Other income

     —         —         (1     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (35,496     (13,436     (68,409     (90,182

Income tax

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (35,496     (13,436     (68,409     (90,182

Net income attributable to redeemable noncontrolling interests

     3,018       774       5,837       903  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to stockholders

   $ (38,514   $ (14,210   $ (74,246   $ (91,085
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to stockholders—basic and diluted(1)

   $ (2.52   $ (2.07   $ (6.74   $ (6.02

Weighted average shares used to compute net loss per share attributable to stockholders—basic and diluted

     20,146,724       20,144,224       20,144,275       20,140,638  


 

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Three Months Ended

March 31,

   

Year Ended

December 31,

 
   

2019

   

2018

   

2018

   

2017

 
    (Unaudited, in thousands)  

Cash Flow Data:

       

Net cash used in operating activities

  $ (24,430   $ (19,220   $ (11,570   $ (48,967

Net cash used in investing activities

  $ (92,680   $ (84,310   $ (348,849   $ (289,133

Net cash provided by financing activities

  $ 109,351     $ 145,791     $ 365,687     $ 369,893  

Other Financial Data:(2)

       

Adjusted EBITDA

  $ 8,068     $ 4,620     $ 41,119     $ 23,404  

Interest income from customer notes receivable

  $ 2,328     $ 1,133     $ 6,147     $ 3,003  

Principal proceeds from customer notes receivable

  $ 3,757     $ 1,526     $ 7,715     $ 2,816  

Adjusted Operating Cash Flows

  $ (18,046   $ (15,164   $ 8,416     $ (44,543

Adjusted Operating Expense

  $ 18,647     $ 15,164     $ 63,264     $ 53,452  

Adjusted Operating Expense per weighted average customer

  $ 301     $ 317     $ 1,185     $ 1,378  

 

(1)

See Note 15, Basic and Diluted Net Loss per Share, to our accounting predecessor’s consolidated annual financial statements and Note 13, Basic and Diluted Net Loss per Share, to our accounting predecessor’s unaudited condensed consolidated financial statements.

(2)

Adjusted EBITDA, Adjusted Operating Cash Flows, Adjusted Operating Expense and Adjusted Operating Expense per weighted average customer are not financial measures calculated or presented in accordance with generally accepted accounting principles in the United States (“GAAP”). See “—Non-GAAP Reconciliation” for information regarding our use of these non-GAAP financial measures and reconciliations of each such measure to its most directly comparable GAAP equivalent.

 

    

As of March 31,

2019

    

As of December 31,

 
    

2018

    

2017

 
     (Unaudited)         
     (in thousands)  

Consolidated Balance Sheet Data:

        

Total current assets

   $ 85,954      $ 89,533      $ 81,277  

Property and equipment, net

   $ 1,399,299      $ 1,328,457      $ 1,113,073  

Total assets

   $ 1,769,463      $ 1,665,085      $ 1,328,788  

Long-term debt, net (including current portion)

   $ 1,067,882      $ 959,895      $ 831,325  

Total liabilities

   $ 1,202,132      $ 1,078,286      $ 919,014  

Total stockholders’ equity

   $ 473,315      $ 501,119      $ 371,184  

Non-GAAP Reconciliation:

Adjusted EBITDA. We define Adjusted EBITDA as net income/net loss plus net interest expense, depreciation and amortization expense, income tax expense, financing deal costs, disaster losses and related charges, net, legal settlements, and excluding the effect of certain non-recurring items that we do not consider to be indicative of our ongoing operating performance such as, but not limited to, costs of the initial public offering and other non-cash items such as asset retirement obligations (“AROs”) accretion expense and non-cash compensation expense.

Adjusted EBITDA is a non-GAAP financial measure that we use as a performance measure. We believe that investors and securities analysts also use Adjusted EBITDA in evaluating our operating performance. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted EBITDA is net income/loss. The presentation of Adjusted EBITDA should not be construed to suggest that our future results will be unaffected by non-cash or non-recurring items. In addition, our calculation of Adjusted EBITDA is not necessarily comparable to Adjusted EBITDA as calculated by other companies.



 

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We believe Adjusted EBITDA is useful to management, investors and analysts in providing a measure of core financial performance adjusted to allow for comparisons of results of operations across reporting periods on a consistent basis. These adjustments are intended to exclude items that are not indicative of the ongoing operating performance of the business. Adjusted EBITDA is also used by our management for internal planning purposes, including our consolidated operating budget, and by our board of directors in setting performance-based compensation targets. Adjusted EBITDA should not be considered an alternative to but viewed in conjunction with GAAP results, as we believe it provides a more complete understanding of ongoing business performance and trends than GAAP measures alone. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

 

    

Three Months Ended
March 31,

    

Year Ended
December 31,

 
    

2019

    

2018

    

2018

    

2017

 
     (Unaudited, in thousands except per customer data)  

Reconciliation of Net Loss to Adjusted EBITDA:

           

Net loss

   $ (35,496    $ (13,436    $ (68,409    $ (90,182

Interest expense, net

     29,167        3,790        45,132        56,650  

Interest expense, net—affiliates

     1,822        2,493        9,548        23,177  

Depreciation expense

     11,012        8,964        39,290        29,482  

Amortization expense

     5        33        133        133  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     6,510        1,844        25,694        19,260  

Non-cash compensation expense

     387        726        3,410        1,495  

Asset retirement obligation accretion expense

     313        211        1,183        704  

Financing deal costs

     119        1,523        1,902        336  

Disaster losses and related charges, net

     —          316        8,217        1,034  

Initial public offering costs

     739        —          563        —    

Legal settlements

     —          —          150        575  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 8,068      $ 4,620      $ 41,119      $ 23,404  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Operating Cash Flow. We define Adjusted Operating Cash Flow as net cash used in operating activities plus principal proceeds from customer notes receivable and distributions to redeemable noncontrolling interests less payments to dealers for exclusivity and other bonus arrangements and inventory purchases.

Adjusted Operating Cash Flow is a non-GAAP financial measure we use as a liquidity measure. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of liquidity. The GAAP measure most directly comparable to Adjusted Operating Cash Flow is net cash used in operating activities. We believe Adjusted Operating Cash Flow is a supplemental financial measure useful to management, analysts, investors, lenders and rating agencies as an indicator of our ability to internally fund origination activities, service or incur additional debt and service our contractual obligations. We believe investors and analysts will use Adjusted Operating Cash Flow to evaluate our liquidity and ability to service our contractual obligations. However, Adjusted Operating Cash Flow has limitations as an analytical tool because it does not account for all future expenditures and financial obligations of the business or reflect unforeseen circumstances that may impact our future cash flows, all of which could have a material effect on our financial condition and results from operations. In addition, our calculations of Adjusted Operating Cash Flow are not necessarily comparable to liquidity measures presented by other companies. Investors should not rely on these measures as a substitute for any GAAP measure, including net cash used in operating activities.



 

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Three Months Ended
March 31,

   

Year Ended

December 31,

 
    

2019

   

2018

   

2018

   

2017

 
     (Unaudited, in thousands)  

Reconciliation of Net Cash Used in Operating Activities to Adjusted Operating Cash Flows:

        

Net cash used in operating activities

   $ (24,430   $ (19,220   $ (11,570   $ (48,967

Principal proceeds from customer notes receivable

     3,757       1,526       7,715       2,816  

Distributions to redeemable noncontrolling interests

     (3,652     (339     (2,017     (294

Payments to dealers for exclusivity and other bonus arrangements

     2,000       —         —         —    

Inventory purchases

     4,279       2,869       14,288       1,902  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Cash Flows

   $ (18,046   $ (15,164   $ 8,416     $ (44,543
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Expense. We define Adjusted Operating Expense as total operating expense less depreciation and amortization expense, non-cash compensation expense, asset retirement obligation accretion expense, financing deal costs, disaster losses and related charges, net, initial public offering costs and legal settlements.

Adjusted Operating Expense is a non-GAAP financial measure we use as a performance measure. We believe investors and securities analysts will also use Adjusted Operating Expense in evaluating our performance. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted Operating Expense is total operating expenses. We believe Adjusted Operating Expense is a supplemental financial measure useful to management, analysts, investors, lenders and rating agencies as an indicator of the efficiency of our operations between reporting periods. Adjusted Operating Expense should not be considered an alternative to but viewed in conjunction with GAAP total operating expenses, as we believe it provides a more complete understanding of our performance than GAAP measures alone. Adjusted Operating Expense has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP, including total operating expenses.

 

    

Three Months Ended
March 31,

    

Year Ended

December 31,

 
    

2019

    

2018

    

2018

    

2017

 
     (Unaudited, in thousands except per customer data)  

Reconciliation of Operating Expense to Adjusted Operating Expense:

           

Operating expense

   $ 31,222      $ 26,937      $ 118,112      $ 87,211  

Depreciation expense

     (11,012      (8,964      (39,290      (29,482

Amortization expense

     (5      (33      (133      (133

Non-cash compensation expense

     (387      (726      (3,410      (1,495

Asset retirement obligation accretion expense

     (313      (211      (1,183      (704

Financing deal costs

     (119      (1,523      (1,902      (336

Disaster losses and related charges, net

     (—        (316      (8,217      (1,034

Initial public offering costs

     (739      (—        (563      (—  

Legal settlements

     (—        (—        (150      (575
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Operating Expense

   $ 18,647      $ 15,164      $ 63,264      $ 53,452  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Operating Expense per weighted average customer

   $ 301      $ 317      $ 1,185      $ 1,378  
  

 

 

    

 

 

    

 

 

    

 

 

 


 

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Operational Metrics

We regularly review a number of metrics, including the following key operational metrics, to evaluate and manage the ongoing operations of the business, measure our performance against peers and competitors, identify key competitive trends affecting our industry, and inform strategic decisions on future growth strategy. For additional information about our key operational metrics, including their definitions, calculation and limitations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operational Metrics.”

 

    

As of March 31,
2019

    

As of December 31,

 
    

2018

    

2017

 
     (Unaudited, in millions except per customer data)  

Estimated total gross customer value

   $ 1,771      $ 1,675      $ 1,276  

Estimated gross customer value per customer

   $ 27,846      $ 27,778      $ 27,921  

 

    

Three Months Ended
March 31,
2019

    

Year Ended

December 31,

 
    

2018

    

2017

 
     (Unaudited, in millions except per customer data)  

Estimated net system value

   $ 25      $ 124      $ 106  

Estimated net system value per new customer

   $ 7,639      $ 8,509      $ 8,308  

 

    

Three Months Ended
March 31,

    

Year Ended
December 31,

 
    

2019

    

2018

    

2018

    

2017

 
     (Unaudited)  

Weighted average number of customers

     62,000        47,800        53,400        38,800  


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before deciding to invest in our common stock. If any of the following risks actually occur, they may materially and adversely affect our business, financial condition, cash flows and results of operations. In this event, the trading price of our common stock could decline, and you could lose all or part of your investment in us. We may experience additional risks and uncertainties not currently known to us; or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows and results of operations.

Risks Related to Our Business

Historically, we have incurred operating losses, and we may be unable to achieve or sustain profitability in the future.

We incurred operating losses of $4.5 million, $10.4 million and $13.7 million and net losses of $35.5 million, $90.2 million and $68.4 million for the three months ended March 31, 2019 and for the years ended December 31, 2017 and 2018, respectively. These historical operating losses were due to a number of factors, including increased expenses to fund our growth and related financing needs. We expect to incur significant expenses as we finance the expansion of our operations and implement additional internal systems and infrastructure to support our growth. In addition, as a public company, we will incur significant additional legal, accounting and other expenses that we did not incur as a private company. We do not know whether our revenue will grow rapidly enough to absorb these costs. Our ability to achieve profitability depends on a number of factors, including:

 

   

growing our customer base and originating new solar service agreements on economic terms;

 

   

maintaining or lowering our cost of capital;

 

   

reducing operating costs by optimizing our operations and maintenance processes;

 

   

maximizing the benefits of our dealer network;

 

   

finding additional tax equity investors and other sources of institutional capital; and

 

   

the continued availability of various governmental incentives for the solar industry.

Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

Certain of our key operational metrics, including estimated gross customer value and estimated net system value, are based on various assumptions and estimates that we make over an extended period of time. Actual experience may vary materially from these estimates and assumptions and therefore undue reliance should not be placed on these metrics.

Our key operational metrics include a number of assumptions and estimates that we make over an extended period of time (up to 35 years) and that may not prove accurate. In calculating estimated gross customer value, we estimate projected monthly customer payments over the remaining life of our solar service agreements, which are typically 25 years in length with an opportunity for customers to renew for up to an additional 10 years, and from the future sale of related SRECs. These estimated future cash flows depend on various factors including but not limited to solar service agreement type, contracted rates, customer loss rates, expected sun

 

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hours and the projected production capacity of the solar equipment installed. Additionally, in calculating estimated gross customer value we also estimate cash distributions to redeemable noncontrolling interests and operating, maintenance and administrative expenses associated with the solar service agreements, including expenses related to accounting, reporting, audit, insurance, maintenance and repairs over the remaining life of our solar service agreements.

In calculating estimated renewal gross customer value, which is a component of estimated gross customer value, we use all of the estimates listed above and follow established industry convention in assuming that 100% of our solar leases and PPAs are renewed for an additional five years at 90% of the contractual price in effect at expiration of the initial term of the solar leases or PPA and for an additional five years at 90% of the contractual price in effect at expiration of the first renewal term. Because all of our customers have many years remaining on their solar service agreements and many factors will affect a customer’s decision whether to renew as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperational Metrics,” it is very uncertain what percentage of our customers will actually renew their solar service agreements as opposed to exercising a purchase option (in the case of the PPAs) or requesting removal of the system, whether such renewal would be for one or both five-year renewal periods, and what the rates of such renewals and purchases would be. We are therefore not projecting that all customers will renew or that they will renew at 90% of the contractual price at the expiration of the prior term. We are presenting this information solely for illustrative purposes and as a comparison to similar information published by our peers. To illustrate the way in which actual results may change, we present sensitivities around the rates paid by customers in the renewed contracts, although these sensitivities may not capture the actual rates paid upon renewal and we do not show sensitivities for fewer than 100% of customers renewing their agreements.

Furthermore, in calculating estimated gross customer value and estimated net system value, we discount our future net cash flows at 6% based on industry practice and the interest rate on certain recent securitizations. This discount rate might not be the most appropriate discount rate based on interest rates in effect from time to time and industry or company-specific risks associated with these cash flows, and the appropriate discount rate for these estimates may change in the future due to the level of inflation, rising interest rates, our cost of capital, customer default rates and consumer demand for solar energy systems, among other things. We also assume customer losses of 0% in calculating these metrics, even though we expect to have some minimal level of customer losses over the life of our contracts. To illustrate the way in which actual results may change, we present sensitivities around the discount rate and the rate of customer losses, although these sensitivities may not capture the most appropriate discount rate or the rate of customer losses that we will experience.

PricewaterhouseCoopers LLP has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to these operational metrics or their components. The estimates discussed above are based on a combination of assumptions that may prove to be inaccurate over time. Such inaccuracies could be material, particularly given that the estimates relate to cash flows up to 35 years in the future.

Our growth strategy depends on the continued origination of solar service agreements by us and our dealers.

Our growth strategy depends on the continued origination of solar service agreements by us and our dealers. We may be unable to originate additional solar service agreements and related solar energy systems and energy storage systems in the numbers or at the pace we currently expect for a variety of reasons, including, among other things, the following:

 

   

demand for solar energy systems and energy storage systems failing to develop sufficiently or taking longer than expected to develop;

 

   

residential solar energy technology being available at economically attractive prices as a result of factors that are outside of our control, including utility prices not rising as quickly as anticipated;

 

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issues related to identifying, engaging, contracting, compensating and maintaining relationships with dealers and the negotiation of dealer agreements;

 

   

issues related to financing, construction, permitting, the environment, governmental approvals and the negotiation of solar service agreements;

 

   

a reduction in government incentives or adverse changes in policy and laws for the development or use of solar energy, including net metering, SRECs and tax credits;

 

   

other government or regulatory actions that could impact our business model;

 

   

negative developments in public perception of the solar energy industry; and

 

   

competition from other solar companies and energy technologies, including the emergence of alternative renewable energy technologies.

If the challenges of originating solar service agreements and related solar energy systems and energy storage systems increase, our pool of available opportunities may be limited, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.

If sufficient additional demand for residential solar energy systems does not develop or takes longer to develop than we anticipate, our ability to originate solar service agreements may decrease.

The distributed residential solar energy market is at a relatively early stage of development in comparison to fossil fuel-based electricity generation. If additional demand for distributed residential solar energy systems fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to originate additional solar service agreements and related solar energy systems to grow our business. In addition, demand for solar energy systems in our targeted markets may not develop to the extent that we anticipate. As a result, we may be unsuccessful in broadening our customer base through origination of solar service agreements and related solar energy systems and energy storage systems within our current markets or in new markets we may enter.

Many factors may affect the demand for solar energy systems, including the following:

 

   

availability, substance and magnitude of solar support programs including government targets, subsidies, incentives, renewable portfolio standards and residential net metering rules;

 

   

the relative pricing of other conventional and non-renewable energy sources, such as natural gas, coal, oil and other fossil fuels, wind, utility-scale solar, nuclear, geothermal, and biomass;

 

   

performance, reliability and availability of energy generated by solar energy systems compared to conventional and other non-solar renewable energy sources;

 

   

availability and performance of energy storage technology, the ability to implement such technology for use in conjunction with solar energy systems and the cost competitiveness such technology provides to customers as compared to costs for those customers reliant on the conventional electrical grid; and

 

   

general economic conditions and the level of interest rates.

The residential solar energy industry is constantly evolving, which makes it difficult to evaluate our prospects. We cannot be certain if historical growth rates reflect future opportunities or whether growth

 

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anticipated by us will be realized. The failure of distributed residential solar energy to achieve, or its being significantly delayed in achieving, widespread adoption could have a material adverse effect on our business, financial condition and results of operations.

If we fail to manage our operations and growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges.

We have experienced significant growth in recent periods measured by our number of customers and we intend to continue our efforts to expand our business within existing and new markets. This growth has placed, and any future growth may place, a strain on our management, operational and financial infrastructure. Our growth requires our management to devote a significant amount of time and effort to maintain and expand our relationships with customers, dealers and other third parties, attract new customers and dealers, arrange financing for our growth and manage our expansion into additional markets.

In addition, our current and planned operations, personnel, information technology and other systems and procedures might be inadequate to support our future growth and may require us to make additional unanticipated investments in our infrastructure. Our success and ability to further scale our business will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner.

If we cannot manage our operations and growth, we may be unable to meet our expectations regarding growth, opportunity and financial targets, take advantage of market opportunities, execute our business strategies, meet our tax equity financing commitments or respond to competitive pressures. This could also result in declines in quality or customer satisfaction, increased costs, difficulties in introducing new offerings or other operational difficulties. Any failure to effectively manage our operations and growth could adversely impact our reputation, business, financial condition, cash flows and results of operations.

A material reduction in the retail price of electricity charged by electric utilities or other retail electricity providers would harm our business, financial condition and results of operations.

Decreases in the retail price of electricity from electric utilities or from other retail electric providers, including other renewable energy sources such as larger-scale solar energy systems, could make our offerings less economically attractive. The price of electricity from utilities could decrease as a result of:

 

   

the construction of a significant number of new power generation plants, whether generated by natural gas, nuclear power, coal, or renewable energy;

 

   

the construction of additional electric transmission and distribution lines;

 

   

a reduction in the price of natural gas or other natural resources as a result of increased supply due to new drilling techniques or other technological developments, a relaxation of associated regulatory standards, or broader economic or policy developments;

 

   

less demand for electricity due to energy conservation technologies and public initiatives to reduce electricity consumption or to recessionary economic conditions; and

 

   

development of competing energy technologies that provide less expensive energy.

A reduction in electric utilities’ rates or changes to peak hour pricing policies or rate design (such as the adoption of a fixed or flat rate) could also make our offerings less competitive with the price of electricity from the electrical grid. If the cost of energy available from electric utilities or other providers were to decrease relative to solar energy generated from residential systems or if similar events impacting the economics of our offerings were to occur, we may have difficulty attracting new customers or existing customers may default or

 

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seek to terminate, cancel or otherwise avoid the obligations under their solar service agreements. For example, large utilities in California have started transitioning customers to time-of-use rates and also have adopted a shift in the peak period for time-of-use rates to later in the day. Unless grandfathered under a different rate, residential customers with solar energy systems are required to take service under time-of-use rates with the later peak period. Moving utility customers to time-of-use rates or the shift in the timing of peak rates for utility-generated electricity to include times of day when solar energy generation is less efficient or non-operable could also make our offerings less competitive. Time-of-use rates could also result in higher costs for our customers whose electricity requirements are not fully met by our offerings during peak periods.

Additionally, the price of electricity from utilities may grow less quickly than the escalator feature in certain of our solar service agreements, which could also make our systems less competitive with the price of electricity from the electrical grid and result in a material adverse effect on our business, financial condition and results of operations.

Our growth is dependent on our dealer network, and our failure to retain or replace existing dealers or to grow our dealer network could adversely impact our business. In addition, one of our dealers currently accounts for approximately half of our recently added customers.

Our dealer network is an integral component of our business strategy and serves as the means by which we are able to originate solar service agreements and related solar energy systems and energy storage systems in existing and prospective markets. Poor performance by our dealers in originating solar service agreements could have a material adverse effect on our business, financial condition and results of operations. We have in the past had disputes and litigation with certain of our dealers over their performance.

As we grow, particularly in new jurisdictions, we will need to expand our dealer network. We are subject to significant competition for the recruitment and retention of dealers from our competitors, and we may not be able to recruit new or replacement dealers in the future. We compete for our dealers with other solar service providers primarily based on the amount and timing of payments for originating solar service agreements, financial ability and our suite of technology tools.

Most of our dealers are not restricted in their ability to work with our competitors and are not obligated to continue working with us. In the past, some of our dealers have chosen to work with competitors of ours or terminated their relationships with us, and dealers may reduce or terminate their work with us in the future. The departure of a significant number of our dealers for any reason, or the failure to replace departing dealers in the event of such departures, could reduce our potential origination opportunities and could have a material adverse effect on our business, financial condition and results of operations. As we develop and expand our Sunnova Protect services, dealers may view us as a competitor and choose to end their relationship with us.

Additionally, dependence on any one dealer or small group of dealers further concentrates our exposure to risks related to termination of the dealer arrangement, poor service provided by such dealer, the deterioration in financial condition of the dealer and other risks inherent in such a relationship. For the three months ended March 31, 2019 and the years ended December 31, 2018 and December 31, 2017, Trinity Solar, Inc. accounted for approximately 40%, 52% and 29% of our originations for such periods, respectively. Although we have recently entered into a four-year exclusivity agreement with Trinity Solar, pursuant to which Trinity Solar may only originate solar service agreements for us, there are various exceptions to this obligation. For a discussion of exclusivity arrangements with certain of our dealers, please see “BusinessOur Relationships with Our Dealers.”

If we or our dealers fail to hire and retain a sufficient number of employees and service providers in key functions, our growth and our ability to timely complete customer projects and successfully manage customer accounts would be constrained.

To support our growth, we and our dealers need to hire, train, deploy, manage and retain a substantial number of skilled employees, engineers, installers, electricians, and sales and project finance specialists.

 

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Competition for qualified personnel in our industry has increased substantially, particularly for skilled personnel involved in the installation of solar energy systems. We and our dealers also compete with the homebuilding and construction industries for skilled labor. These industries are cyclical and when participants in these industries seek to hire additional workers, it puts upward pressure on our and our dealers’ labor costs. Companies with whom our dealers compete to hire installers may offer compensation or incentive plans that certain installers may view as more favorable. As a result, our dealers may be unable to attract or retain qualified and skilled installation personnel. The further unionization of our industry’s labor force or the homebuilding and construction industries’ labor forces could also increase our dealers’ labor costs. Shortages of skilled labor could significantly delay a project or otherwise increase our dealers’ costs. Further, we need to continue to increase the training of our customer service team to provide high-end account management and service to homeowners before, during and following the point of installation of our solar energy systems. Identifying and recruiting qualified personnel and training them requires significant time, expense and attention. It can take several months before a new customer service team member is fully trained and productive at the standards that we have established. If we are unable to hire, develop and retain talented customer service or other personnel, we may not be able to grow our business.

We need to obtain substantial additional financing arrangements to provide working capital and growth capital, and if financing is not available to us on acceptable terms when needed, our ability to continue to grow our business would be materially adversely impacted.

Distributed residential solar power is a capital-intensive business that relies heavily on the availability of debt and equity financing sources to fund solar energy system purchase, design, engineering and other capital expenditures. From our inception to March 31, 2019, we have raised over $3.0 billion in indebtedness, tax equity and preferred equity.

Our future success depends on our ability to raise capital from third-party investors and commercial sources, such as banks and other lenders, on competitive terms to help finance the deployment of our solar energy systems. We seek to minimize our cost of capital in order to improve profitability and maintain the price competitiveness of the electricity produced by, the payments for and the cost of our solar energy systems. We rely on access to capital, including through tax equity financing and indebtedness in the form of debt facilities and asset-backed securities, to cover the costs related to bringing our solar energy and energy storage systems in service, although our customers ultimately bear responsibility for those costs pursuant to our solar service agreements.

To meet the capital needs of our growing business, we will need to obtain additional debt or equity financing from current and new investors. If any of our current debt or equity investors decide not to invest in us in the future for any reason, or decide to invest at levels that are inadequate to support our anticipated needs or materially change the terms under which they are willing to provide future financing, we will need to identify new investors and financial institutions to provide financing and negotiate new financing terms. In addition, our ability to obtain additional financing through the asset-backed securities market or other secured debt markets is subject to our having sufficient assets eligible for securitization as well as our ability to obtain appropriate credit ratings. If we are unable to raise additional capital in a timely manner, our ability to meet our capital needs and fund future growth may be limited.

Delays in obtaining financing could cause delays in expansion in existing markets or entering into new markets and hiring additional personnel. Any future delays in capital raising could similarly cause us to delay deployment of a substantial number of solar energy systems for which we have signed solar service agreements with customers. Our future ability to obtain additional financing depends on banks’ and other financing sources’ continued confidence in our business model and the renewable energy industry as a whole. It could also be impacted by the liquidity needs of such financing sources themselves. We face intense competition from a variety of other companies, technologies and financing structures for such limited investment capital. If we are unable to continue to offer a competitive investment profile, we may lose access to these funds or they may only

 

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be available to us on terms that are less favorable than those received by our competitors. For example, if we experience higher customer default rates than we currently experience, it could be more difficult or costly to attract future financing. Any inability to secure financing could lead us to cancel planned installations, impair our ability to accept new customers or increase our borrowing costs, any of which would have a material adverse effect on our business, financial condition and results of operations.

Our ability to provide our solar service offerings to homeowners on an economically viable basis depends in part on our ability to finance these systems with tax equity investors that depend on particular tax and other benefits.

Historically, there have been a limited number of investors that generate sufficient profits and possess the requisite financial sophistication to benefit from the tax benefits that our tax equity vehicles provide and a lack of depth in this market may limit our ability to complete such tax equity financing. Potential investors seeking tax-advantaged financing must remain satisfied that the structures we offer qualify for the tax benefits associated with solar energy systems available to these investors, which depends both on the investors’ assessment of tax law and the absence of any unfavorable interpretations of that law. Changes in existing law and interpretations by the Internal Revenue Service (the “IRS”) and the courts could reduce the willingness of tax equity investors to invest in tax equity vehicles associated with these solar energy system investments or cause these investors to require a larger allocation of customer payments. We are not certain that this type of financing will continue to be available to us, as the legal and regulatory landscape may shift in a manner that reduces or eliminates the attractiveness of such financing opportunities. For example, a step down of Section 48(a) ITC credits is scheduled to occur from 2020 to 2023. Additionally, we may be unable to identify investors that are interested in engaging in this type of financing with us. As of March 31, 2019, we had raised four tax equity vehicles to which investors such as banks and other large financial investors have committed to invest approximately $234.5 million. The undrawn committed capital for these tax equity vehicles as of March 31, 2019 is approximately $56.3 million. We plan to continue to form new tax equity vehicles as long as existing tax law and regulations make such financing attractive. See “Risks Related to Regulations—Our business currently depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or our ability to monetize them could adversely impact our business.”

The contractual terms in certain of our tax equity vehicle documents impose conditions on our ability to draw on financing commitments from the tax equity investors, including if an event occurs that could reasonably be expected to have a material adverse effect on the tax equity vehicle or on us. The terms and conditions of our tax equity vehicles can vary and may require us to alter our products, services or product mix. If we do not satisfy such conditions due to events related to our business or a specific tax equity vehicle or developments in our industry or otherwise, and as a result we are unable to draw on existing commitments, it could have a material adverse effect on our business, financial condition, results of operations and liquidity. In addition to our inability to draw on the investors’ commitments, we may incur financial penalties for non-performance, including delays in the installation process and interconnection to the power grid of solar energy systems and other factors. Based on the terms of the tax equity vehicle agreements, we will either reimburse a portion of the tax equity investor’s capital or pay the tax equity investor a non-performance fee.

Under the terms of certain of our tax equity vehicles, we may be required to make payments to the tax equity investors if certain tax benefits that are allocated to such tax equity investors are not realized as expected. Our financial condition may be adversely impacted if a tax equity vehicle is required to make any tax-related payments.

Our tax equity vehicles require that, prior to a date which is at least five years after the last project was placed in service, the tax equity investor receives substantially all of the non-cash value attributable to the systems; however, we receive a majority of the cash distributions. In the event the tax equity investor has tax liability as a result of its investment and the cash distributions payable to the tax equity investor are not sufficient

 

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to pay such tax liability, the amount of distributions payable to us will be reduced. The amounts of potential tax liability (and the potential for a reduced distribution to us) depend on the tax benefits that accrue to such investors from the tax equity vehicles’ activities and may be impacted by changes in tax law.

Additionally, we may have payment obligations to our tax equity investors under indemnity obligations contained in those financings. See “Risks Related to Taxation—If the IRS makes a determination that the fair market value of our solar energy systems is materially lower than what we have reported in our tax equity vehicles’ tax returns, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors and/or the U.S. government. Such determinations could have a material adverse effect on our business and financial condition” and “Risks Related to Taxation—If our solar energy systems either cease to be qualifying property or undergo certain changes in ownership within five years of the applicable placed in service date, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors and/or the U.S. government. Such recapture could have a material adverse effect on our business and financial condition.”

Due to uncertainties associated with estimating the timing and amounts of cash distributions and allocations of tax benefits to such investors, we cannot determine the potential impact on our cash flows under current or future arrangements. Any significant reductions in the cash we expect to receive from these structures could adversely affect our financial condition.

We enter into securitization structures and warehouse financings that may limit our ability to access the cash of our subsidiaries and that include acceleration events that, if triggered, could adversely impact our financial condition.

Since April 2017, we have pooled and transferred eligible solar energy systems and the related asset receivables into four special purpose entities, which sold solar asset-backed and solar loan-backed notes to institutional investors, the proceeds of which were distributed to us. We intend to monetize additional solar energy systems in the future through contributions to new special purposes entities for cash. There is a risk that the institutional investors that have purchased the notes issued by these special purpose entities will be unwilling to make further investments in our solar energy systems at attractive prices. Although the creditors of these special purpose entities have no recourse to our other assets except as expressly set forth in the terms of the notes, the special purpose entities are typically required to maintain a liquidity reserve account, a reserve account for inverter replacements as well as, in certain cases, reserve accounts to finance purchase option/withdrawal right exercises or storage system replacement for the benefit of the lenders under the applicable series of notes, each of which are funded from initial deposits or cash flows to the levels specified therein.

The securitization structures and warehouse financings include certain other features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the pool of assets to meet contractual requirements, the insufficiency of which triggers an early repayment of the indebtedness. We refer to this as “early amortization”, which may be based on, among other things, a debt service coverage ratio falling or remaining below certain levels. In the event of an early amortization, the notes issuer would be required to repay the affected indebtedness using available collections received from the asset pool. An early amortization event would impair our liquidity and may require us to utilize other available contingent liquidity or rely on alternative funding sources, which may not be available at the time. Certain of the securitizations and warehouse financings also contain a “cash trap” feature, which requires excess cash flow to be held in an account based on, among other things, a debt service coverage ratio falling or remaining below certain levels. If the cash trap conditions are not cured within a specified period, then the cash in the cash trap account must be applied to repay the indebtedness. If the cash trap conditions are timely cured, the cash is either released back to the borrower or used to repay the indebtedness at the borrower’s option. The indentures of our securitizations also typically contain customary events of default for solar securitizations that may entitle the noteholders to take various actions, including the acceleration of amounts due and foreclosure on the issuer’s assets. Any significant payments that we may be required to make as a result of these arrangements could adversely affect our financial condition. See “Management’s Discussion And Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources—Financing Arrangements.”

 

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Servicing our existing debt requires a significant amount of cash. We may not have sufficient cash flow from our business to timely pay our interest and principal obligations and may be forced to take other actions to satisfy our payment obligations.

As of March 31, 2019, our total indebtedness, including through debt facilities and asset-backed securities issued by our subsidiaries and special purpose vehicles, after giving effect to the offering and the Recapitalization Transactions, was approximately $         million and the unused borrowing capacity under our credit facilities was approximately $         million. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations sufficient to service our debt and make necessary capital expenditures to operate our business. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as slowing or ceasing the origination of new solar service agreements, selling assets, restructuring debt or obtaining additional debt and equity capital on terms that may be onerous or highly dilutive. Our ability to timely repay or otherwise refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Furthermore, we and our subsidiaries expect to incur additional debt in the future, subject to the restrictions contained in our debt instruments. Increases in our existing debt obligations would further heighten the debt related risk discussed above. In addition, we may not be able to enter into new debt instruments on acceptable terms or at all. If we were unable to satisfy financial covenants and other terms under existing or new instruments, or obtain waivers or forbearance from our lenders, or if we were unable to obtain refinancing or new financings for our working capital, equipment and other needs on acceptable terms if and when needed, our business would be adversely affected.

We are exposed to the credit risk of our customers.

Our customers purchase solar energy or lease solar energy systems from us pursuant to one of two types of long-term contracts: a power purchase agreement or a solar lease. The power purchase agreement and solar lease terms are typically for 25 years. In addition, under our loan agreements the customer finances the purchase of a solar energy system, and we agree to operate and maintain the solar energy system throughout the 25-year term of the agreement. Our solar service agreements require the customer to make monthly payments to us throughout the term of the contract, unless prepaid. Because we have long-term, contractual relationships with our customers, we are subject to the credit risk of our customers and screen our customers based upon their credit rating in an attempt to mitigate the risk of customer default. As of March 31, 2019, the average FICO score of our customers was 737 at the time of signing the solar service agreement. The accuracy of independent third-party information provided to the credit reporting agency cannot be verified. A FICO score purports only to be a measurement of the relative degree of risk a borrower represents to a lender, i.e., that a borrower with a higher score may be less likely to default in payment than a borrower with a lower score.

As of March 31, 2019, approximately 1.0% of our customers were in default under their solar service agreements. However, as we grow our business, the risk of customer defaults may increase as credit scores are dynamic and may deteriorate over a 25-year period. During an economic downturn, the risk of customer defaults may increase. In addition, our customers may assign their solar service agreements to other customers who have lower credit scores or we may enter into new solar service agreements in the future with customers who have lower credit scores than our current customers. In addition, future developments, including competition from other renewables, could decrease the attractiveness of our current contracts. Although our solar service agreements grant us the ability to terminate the agreement with the customer and repossess the defaulting customers’ solar energy system in certain circumstances, enforcement of these rights under the solar service agreement may be difficult, expensive and time-consuming.

 

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Restrictive covenants in certain of our debt agreements could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests.

Our debt agreements impose operating and financial restrictions on us. These restrictions limit our ability and that of our subsidiaries to, among other things:

 

   

incur additional indebtedness;

 

   

make investments or loans;

 

   

create liens;

 

   

consummate mergers and similar fundamental changes;

 

   

make restricted payments;

 

   

make investments in unrestricted subsidiaries;

 

   

enter into transactions with affiliates; and

 

   

use the proceeds of asset sales.

We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under certain of our debt agreements. The restrictions contained in the covenants could:

 

   

limit our ability to plan for, or react to, market conditions, to meet capital needs or otherwise to restrict our activities or business plan; and

 

   

adversely affect our ability to finance our operations, enter into acquisitions or divestitures to engage in other business activities that would be in our interest.

A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition tests could result in a default under our debt agreements that, if not cured or waived, could result in acceleration of all indebtedness outstanding thereunder and cross-default rights under our other debt. In addition, in the event of an event of default under one of the credit facilities, the affected lenders could foreclose on the collateral securing such credit facility and require repayment of all borrowings outstanding thereunder. If the amounts outstanding under the credit facilities or any of our other indebtedness were to be accelerated, our assets may not be sufficient to repay in full the amounts owed to the lenders or to our other debt holders.

Rising interest rates may adversely impact our business.

Rising interest rates will increase our cost of capital. Our future success depends on our ability to raise capital from investors and obtain secured lending to help finance the deployment of our solar service agreements. As a result, rising interest rates may have an adverse impact on our ability to offer attractive pricing on our solar service agreements to our customers.

The majority of our cash flows to date have been from solar service agreements that have been monetized under various tax equity fund structures and secured lending arrangements. One of the components of this monetization is the present value of the payment streams from customers who enter into these long-term solar service agreements. If the rate of return required by capital providers, including debt providers, rises as a

 

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result of a rise in interest rates, it will reduce the present value of the customer payment stream and consequently reduce the total value derived from this type of monetization. Any measures that we could take to mitigate the impact of rising interest rates on our ability to secure third-party financing could ultimately have an adverse impact on the value proposition that we offer our customers or our profitability.

Our business has benefited from the declining cost of solar energy system components, and our business may be harmed to the extent that declines in the cost of such components stabilize or that such costs increase in the future.

Our business has benefited from the declining cost of solar energy system components and to the extent such costs stabilize or decline at a slower rate, or, in fact, increase, our future growth rate may be negatively impacted. The declining cost of solar energy system components and the raw materials necessary to manufacture them has been a key driver in the price of solar energy systems we own, the prices charged for electricity and customer adoption of solar energy. Solar energy system component and raw material prices may not continue to decline at the same rate as they have over the past several years or at all. In addition, growth in the solar industry and the resulting increase in demand for solar energy system components and the raw materials necessary to manufacture them may also put upward pressure on prices. An increase of solar energy system components and raw materials prices could slow our growth and cause our business and results of operations to suffer. Further, the cost of solar energy system components and raw materials has increased and could increase in the future due to tariff penalties, duties, the loss of or changes in economic governmental incentives or other factors. See “—Risks Related to Regulations—Increases in the cost of imported solar energy systems due to tariffs imposed by the U.S. government could have a material adverse effect on our business, financial condition and results of operations.”

We do not directly control certain costs related to our business, which could put us at a disadvantage relative to companies who have a vertically integrated business model.

We do not have direct control over the costs our suppliers charge for the components of our solar energy systems and energy storage systems, or the costs to our dealers of installing and marketing such products. This may lead us to charge higher prices for our solar energy systems and energy storage systems than our competitors with a vertically integrated business model, causing us to be unable to maintain or increase market share.

We may be unsuccessful in introducing new service and product offerings, including our distributed energy storage services and energy storage management systems.

We intend to introduce new offerings of services and products to both new and existing customers in the future, including battery-based distributed energy storage services and energy storage management systems, home automation products and additional home technology solutions. We may be unsuccessful in significantly broadening our customer base through the addition of these services and products within our current markets or in new markets we may enter. Additionally, we may not be successful in generating substantial revenue from any additional services and products we may introduce in the future and may decline to initiate new product and service offerings.

We face competition from centralized electric utilities, retail electric providers, independent power producers and renewable energy companies.

The solar energy and renewable energy industries are both highly competitive and continually evolving as participants strive to distinguish themselves within their markets and compete with large centralized electric utilities. We believe that our primary competitors are the centralized electric utilities that supply electricity to our potential customers. We compete with these centralized electric utilities primarily based on price (cents per kWh), predictability of future prices (by providing pre-determined annual price escalations), and the ease by which customers can switch to electricity generated by our solar energy systems. If we cannot offer compelling value to our customers based on these factors, then our business may not grow.

 

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Centralized electric utilities generally have substantially greater financial, technical, operational and other resources than we do. As a result, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or services or respond more quickly to evolving industry standards and changes in market conditions than we can. Centralized electric utilities could also offer other value-added products or services that could help them to compete with us even if the cost of electricity they offer is higher than ours. In addition, a majority of utilities’ sources of electricity is non-solar, which may allow utilities to sell electricity more cheaply than electricity generated by our solar energy systems. Centralized electric utilities could also offer customers the option of purchasing electricity obtained from renewable energy resources, including solar, which would compete with our offerings.

We also compete with retail electric providers and independent power producers that are not regulated like centralized electric utilities but that have access to the centralized utilities’ electricity transmission and distribution infrastructure pursuant to state, territorial and local pro-competition and consumer choice policies. These retail electric providers and independent power producers are able to offer customers electricity supply-only solutions that are competitive with our solar energy system options on both price and usage of renewable energy technology while avoiding the long-term agreements and physical installations that our current business model requires. This may limit our ability to acquire new customers, particularly those who wish to avoid long-term agreements or have an aesthetic or other objection to putting solar panels on their roofs.

We also compete with solar companies with vertically integrated business models, including sales, financing, engineering, manufacturing, installation, maintenance and monitoring services. If the integrated approach of our competitors is successful, it may limit our ability to originate solar energy systems. Many of our vertically integrated competitors are larger than we are. As a result, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or services or respond more quickly to evolving industry standards and changes in market conditions than we can. Solar companies with vertically integrated business models could also offer other value-added products or services that could help them to compete with us.

In addition, we compete with other solar companies who sell or finance products directly to consumers, inclusive of programs like Property-Assessed Clean Energy financing programs established by local governments. For example, we face competition from solar installation businesses that seek financing from external parties or utilize competitive loan products or state and local programs.

We also compete with solar companies with business models that are similar to our own, some of which are marketed to potential customers by our dealers. Some of these competitors specialize in the distributed residential solar energy market, and some may provide energy at lower costs than we do. Some of our competitors offer or may offer similar services and products as we do, such as solar leases, power purchase agreements and direct outright sales of and consumer loan products for solar energy systems. Many of our competitors also have significant brand name recognition and have extensive knowledge of our target markets.

We also compete with solar companies that offer community solar products and utility companies that provide renewable power purchase programs. Some customers might choose to subscribe to a community solar project or renewable subscriber programs instead of installing a solar energy system on their home, which could affect our sales. Additionally, some utility companies (and some utility-like entities, such as community choice aggregators in California) have generation portfolios that are increasingly renewable in nature. In California, for example, due to recent legislation, utility companies and community choice aggregators in that state are required to have generation portfolios comprised of 60% renewable energy by 2030, and state regulators are planning for utility companies and community choice aggregators to sell 100% greenhouse gas free electricity to retail customers by 2045. As utility companies offer increasingly renewable portfolios to retail customers, those customers might be less inclined to install a solar energy system at their home, which could adversely affect our growth.

 

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We have historically provided our services only to residential customers and do not currently intend to expand to commercial, industrial or governmental customers. We compete with companies who sell solar energy systems and services in the commercial, industrial and government markets, in addition to the residential market, in the United States and foreign markets. There is intense competition in the residential solar energy sector in the markets in which we operate. As new entrants continue to enter into these markets, we may be unable to grow or maintain our operations and we may be unable to compete with companies that earn revenue in both the residential market and non-residential markets. Further, because we provide our services exclusively to residential customers, we have a less diverse market presence and are more exposed to potential adverse changes in the residential market than our competitors that sell solar energy systems and services in the commercial, industrial, government and utility markets.

As the solar industry grows and evolves, we will also face new competitors and technologies who are not currently in the market. Our industry is characterized by low technological barriers to entry and well-capitalized companies, including utilities and integrated energy companies, could choose to enter the market and compete with us. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors will limit our growth and will have a material adverse effect on our business, financial condition and results of operations.

Developments in technology or improvements in distributed solar energy generation and related technologies or components may materially adversely affect demand for our offerings.

Significant developments in technology, such as advances in distributed solar power generation, energy storage solutions such as batteries, energy storage management systems, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other forms of distributed or centralized power production may materially and adversely affect demand for our offerings and otherwise affect our business. Future technological advancements may result in reduced prices to consumers or more efficient solar energy systems than those available today, either of which may result in current customer dissatisfaction. We may not be able to adopt these new technologies as quickly as our competitors or on a cost-effective basis.

Due to the length of our solar service agreements, the solar energy system deployed on a customer’s residence may be outdated prior to the expiration of the term of the related solar service agreement, reducing the likelihood of renewal of our solar service agreement at the end of the applicable term and possibly increasing the occurrence of customers seeking to terminate or cancel their solar service agreements or defaults. If current customers become dissatisfied with the price they pay for their solar energy system under our solar service agreements relative to prices that may be available in the future or if customers become dissatisfied by the output generated by their solar energy systems relative to future system production capabilities, or both, this may lead to customers seeking to terminate or cancel their solar service agreements or higher rates of customer default and have an adverse effect on our business, financial condition and results of operations. Additionally, recent technological advancements may impact our business in ways we do not currently anticipate. Any failure by us to adopt or have access to new or enhanced technologies or processes, or to react to changes in existing technologies, could result in product obsolescence or the loss of competitiveness of and decreased consumer interest in our solar energy services, which could have a material adverse effect on our business, financial condition and results of operations.

The value of our solar energy systems at the end of the associated term of the lease or power purchase agreement may be lower than projected, which may adversely affect our financial performance and valuation.

We depreciate the costs of our solar energy systems over their estimated useful life of 35 years. At the end of the initial term (typically 25 years) of the solar lease or power purchase agreement, customers may choose to purchase their solar energy systems, ask us to remove the system at our cost or renew their solar lease or power purchase agreement. Homeowners may choose to not renew or purchase for any reason, such as pricing, decreased energy consumption, relocation of residence, switching to a competitor product or technological

 

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obsolescence of the system. We are also contractually obligated to remove, store and reinstall the solar energy systems, typically for a nominal fee, if customers need to replace or repair their roofs. Furthermore, it is difficult to predict how future environmental regulations may affect the costs associated with the removal, disposal or recycling of our solar energy systems. If the residual value of the systems is less than we expect at the end of the customer contract, after giving effect to any associated removal and redeployment costs, we may be required to accelerate the recognition of all or some of the remaining unamortized costs. This could materially impair our future results of operations.

We and our dealers depend on a limited number of suppliers of solar energy system components and technologies to adequately meet demand for our solar energy systems. Due to the limited number of suppliers in our industry, the acquisition of any of these suppliers by a competitor or any shortage, delay, price change, imposition of tariffs or duties or other limitation in our or our dealers’ ability to obtain components or technologies we use could result in sales and installation delays, cancellations and loss of customers.

We rely on our dealers to install solar energy systems and energy storage systems, each of whom has direct supplier arrangements. Our dealers purchase solar panels, inverters, energy storage systems and other system components and instruments from a limited number of suppliers, approved by us, making us susceptible to quality issues, shortages and price changes. For the three months ended March 31, 2019, Hanwha Q-Cells supplied approximately 72% of our solar photovoltaic panels installed and no other supplier represented more than 10% of our solar photovoltaic panels installed. In 2018, the solar photovoltaic panel suppliers representing over 10% of our solar photovoltaic panels installed were Hanwha Q-Cells and Trina Solar Limited, who represented 52% and 22% of our solar photovoltaic panels installed, respectively. For the three months ended March 31, 2019 and for the year ended December 31, 2018, Enphase Energy, Inc. and SolarEdge accounted for more than 80% of our inverter purchases, and LG Chem Ltd. and Tesla, Inc. accounted for substantially all our battery purchases. If one or more of the suppliers that we and our dealers rely upon to meet anticipated demand ceases or reduces production due to its financial condition, acquisition by a competitor or otherwise, is unable to increase production as industry demand increases or is otherwise unable to allocate sufficient production to us and our dealers, it may be difficult to quickly identify alternative suppliers or to qualify alternative products on commercially reasonable terms and our ability and the ability of our dealers to satisfy this demand may be adversely affected. There are a limited number of suppliers of solar energy system components, instruments and technologies. While we believe there are other sources of supply for these products available, a dealer’s need to transition to a new supplier may result in additional costs and delays in originating solar service agreements and deploying our related solar energy systems or energy storage systems, which in turn may result in additional costs and delays in our acquisition of such solar service agreements and related solar energy systems or energy storage systems. These issues could have a material adverse effect on our business, financial condition and results of operations.

There have also been periods of industry-wide shortages of key components and instruments, including batteries and converters, in times of rapid industry growth. The manufacturing infrastructure for some of these components has a long lead-time, requires significant capital investment and relies on the continued availability of key commodity materials, potentially resulting in an inability to meet demand for these components. The solar industry is currently experiencing rapid growth and, as a result, shortages of key components or instruments, including solar panels, may be more likely to occur, which in turn may result in price increases for such components. Even if industry-wide shortages do not occur, suppliers may decide to allocate key components or instruments with high demand or insufficient production capacity to more profitable customers, customers with long-term supply agreements or customers other than us, our dealers or other third parties from whom we may originate solar energy systems and our ability to originate solar service agreements and related solar energy systems may be reduced as a result.

 

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Increases in the cost of our solar energy systems due to tariffs imposed by the U.S. government could have a material adverse effect on our business, financial condition and results of operations.

China is a major producer of solar cells and other solar products. Certain solar cells, modules, laminates and panels from China are subject to various U.S. antidumping and countervailing duty rates, depending on the exporter supplying the product, imposed by the United States government as a result of determinations that the United States was materially injured as a result of such imports being sold at less than fair value and subsidized by the Chinese government. While historically our dealers have purchased a number of these products from manufacturers in China, currently such purchases are immaterial and sourced from manufacturers in other jurisdictions. If these alternative sources are no longer available on competitive terms in the future, we and our dealers may seek to purchase these products from manufacturers in China. In addition, tariffs on solar cells, modules and inverters in China may put upwards pressure on prices of these products in other jurisdictions from which our dealers currently purchase equipment, which could reduce our ability to offer competitive pricing to potential customers.

The antidumping and countervailing duties discussed above are subject to annual review and may be increased or decreased. Furthermore, under Section 301 of the Trade Act of 1974, the United States Trade Representative imposed tariffs on $200 billion worth of imports from China, including inverters and certain AC modules and non-lithium-ion batteries, effective September 24, 2018. The tariffs are currently set at 10% but may be raised by the United States Trade Representative in the future. Since these tariffs impact the purchase price of the solar products, these tariffs raise the cost associated with purchasing these solar products from China and reduce the competitive pressure on providers of solar cells not subject to these tariffs.

In addition, on January 22, 2018, the President of the United States announced, effective February 7, 2018, the imposition of a global 30% ad valorem tariff, with certain qualifications and exceptions, on certain imported solar cells and modules, which steps down by five percentage points each year over the next three years and then phases out in 2022. Since such actions increase the cost of imported solar products, to the extent we or our dealers use imported solar products or domestic producers are able to raise their prices for their solar products, the overall cost of the solar energy systems will increase, which could reduce our ability to offer competitive pricing in certain markets.

We cannot predict what additional actions the United States may adopt with respect to tariffs or other trade regulations or what actions may be taken by other countries in retaliation for such measures. If additional measures are imposed or other negotiated outcomes occur, our ability or the ability of our dealers to purchase these products on competitive terms or to access specialized technologies from other countries could be further limited, which could adversely affect our business, financial condition and results of operations.

Warranties provided by the manufacturers of equipment for our assets and maintenance obligations of our dealers may be limited by the ability of a supplier and/or dealer to satisfy its warranty or performance obligations or by the expiration of applicable time or liability limits, which could reduce or void the warranty protections, or may be limited in scope or magnitude of liabilities, and thus the warranties and maintenance obligations may be inadequate to protect us.

We agree to maintain the solar energy systems and energy storage systems installed on our customers’ homes during the length of the term of our solar service agreements, which is typically 25 years. We are exposed to any liabilities arising from the systems’ failure to operate properly and are generally under an obligation to ensure that each system remains in good condition during the term of the agreement. We are the beneficiary of the panel manufacturers’ warranty coverage, typically of 10 years for material and workmanship and 25 years for performance, the inverter manufacturers’ warranty coverage, typically from 10 to 25 years and the energy storage manufacturers’ warranty coverage, typically of 10 years. Furthermore, our dealers provide warranties as to their workmanship. In the event that such warranty providers or dealers file for bankruptcy, cease operations or otherwise become unable or unwilling to fulfill their warranty or maintenance obligations, we may not be

 

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adequately protected by such warranties or maintenance obligations. Even if such warranty or maintenance providers or dealers fulfill their obligations, the warranty or maintenance obligations may not be sufficient to protect us against all of our losses. In addition, our warranties are of limited duration, ranging from one year, in the case of certain system and transformer warranties, to 25 years, in the case of certain panel performance warranties, after the date each equipment item is delivered or commissioned, although the useful life of our solar energy systems is 35 years. These warranties are subject to liability and other limits. If we seek warranty protection and a warranty provider is unable or unwilling to perform its warranty obligations, or if a dealer is unable or unwilling to perform its maintenance obligations, whether as a result of its financial condition or otherwise, or if the term of the warranty or maintenance obligation has expired or a liability limit has been reached, there may be a reduction or loss of protection for the affected assets, which could have a material adverse effect on our business, financial condition and results of operations.

Our failure to accurately predict future liabilities related to material quality or performance expenses could result in unexpected volatility in our financial condition. Because of the long estimated useful life of our solar energy systems, we have been required to make assumptions and apply judgments regarding a number of factors, including our anticipated rate of warranty claims, and the durability, performance and reliability of our solar energy systems. We have made these assumptions based on the historic performance of similar systems or on accelerated life cycle testing. Our assumptions could prove to be materially different from the actual performance of our systems, causing us to incur substantial expense to repair or replace defective solar energy systems in the future or to compensate customers for systems that do not meet their performance guarantees. Equipment defects, serial defects or operational deficiencies also would reduce our revenue from solar service agreements because the customer payments under such agreements are dependent on system production or would require us to make refunds under performance guarantees. Any widespread product failures or operating deficiencies may damage our market reputation and adversely impact our financial results. For further discussion of these potential charges and related proposals, see “Management’s Discussion And Analysis of Financial Condition and Results of Operations—Components of Results of Operations.”

Our operating results and our ability to grow may fluctuate from quarter to quarter and year to year, which could make our future performance difficult to predict and could cause our operating results for a particular period to fall below expectations.

Our quarterly and annual operating results and our ability to grow are difficult to predict and may fluctuate significantly in the future. We have experienced seasonal and quarterly fluctuations in the past and expect to experience such fluctuations in the future. In addition to the other risks described in this “Risk Factors” section, the following factors could cause our operating results to fluctuate:

 

   

expiration or initiation of any governmental rebates or incentives;

 

   

significant fluctuations in customer demand for our solar energy services, solar energy systems and energy storage systems;

 

   

our dealers’ ability to complete installations in a timely manner;

 

   

the availability and costs of suitable financing;

 

   

the amount, timing of sales and potential decreases in value of solar renewable energy certificates (“SRECs”);

 

   

our ability to continue to expand our operations and the amount and timing of expenditures related to this expansion;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;

 

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changes in our pricing policies or terms or those of our competitors, including centralized electric utilities;

 

   

actual or anticipated developments in our competitors’ businesses, technology or the competitive landscape; and

 

   

natural disasters or other weather or meteorological conditions.

For these or other reasons, the results of any prior quarterly or annual periods should not be relied upon as indications of our future performance.

The solar energy systems we own or may originate have a limited operating history and may not perform as we expect.

We expect that many of the solar energy systems that we currently own or that we may originate in the future will not have commenced operations, have recently commenced operations or otherwise have a limited operating history. Of the solar energy systems we owned as of December 31, 2018, 23%, 21% and 24% were placed into service in 2016, 2017 and 2018, respectively. The ability of our solar energy systems to perform as we expect will also be subject to risks inherent in newly constructed renewable energy assets, including breakdowns and outages, latent defects, equipment that performs below our expectations, system failures and outages. As a result, our assumptions and estimates regarding the performance of these solar energy systems are, and will be, made without the benefit of a meaningful operating history, which may impair our ability to accurately assess the potential profitability of the solar energy systems and, in turn, our results of operations, financial condition and cash flows.

The cost of maintenance or repair of solar energy systems or energy storage systems throughout the term of the associated solar service agreement, or the removal of solar energy systems at the end of the term of the associated solar service agreement, may be higher than projected today and adversely affect our financial performance and valuation.

If we incur repair and maintenance costs on our solar energy systems or energy storage systems after the individual component warranties have expired, and if they then fail or malfunction, we will be liable for the expense of repairing these systems without a chance of recovery from our suppliers. In addition, we typically bear the cost of removing the solar energy systems at the end of the term of the solar lease or power purchase agreement if the customer does not renew his or her agreement or elect to purchase the system at the end of its term. Furthermore, it is difficult to predict how future environmental regulations may affect the costs associated with the repair, removal, disposal or recycling of our solar energy systems. This could materially impair our future operating results.

Problems with performance of our solar energy systems may cause us to incur expenses, may lower the value of our solar energy systems and may damage our market reputation and adversely affect our business.

Our long-term solar leases and loan agreements contain a performance guarantee in favor of the customer. Solar service agreements with performance guarantees require us to provide a bill credit (or in limited cases, refund money) to the customer if the solar energy system fails to generate the minimum amount of electricity, as specified in the solar service agreement, in a given term, beginning with the first three year period after execution of the solar service agreement and annually thereafter. We may also suffer financial losses associated with such credit and refunds if significant performance guarantee payments are triggered. For a description of our performance guarantee obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Revenue.

 

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We and our dealers are subject to risks associated with installation and other contingencies.

Our dealers design and install solar energy systems and energy storage systems on our behalf. Because the solar service agreement is entered into between us and the customer, we may be liable to our customers for any damage our dealers cause to our customers’ homes, belongings or property during the installation of our solar energy systems and energy storage systems or otherwise.

For example, dealers may penetrate our customers’ roofs during the installation process, and we may incur liability for the failure to adequately weatherproof such penetrations following the completion of installation of solar energy systems. In addition, because our solar energy systems and energy storage systems are high-voltage energy systems, we may incur liability for a dealer’s failure to comply with electrical standards and manufacturer recommendations. Furthermore, prior to obtaining permission to operate our solar energy systems and energy storage systems, the systems must pass various inspections. Any delay in passing, or inability to pass, such inspections, would adversely affect our results of operations. Because our profit on a particular solar service agreement and related solar energy system and energy storage system, if applicable, is based in part on assumptions as to the ongoing cost of the related solar energy system and energy storage system, if applicable, cost overruns, delays or other execution issues may cause us to not achieve our expected results or cover our costs for that solar service agreement and related solar energy system and energy storage systems, if applicable.

Product liability claims against us or accidents could result in adverse publicity and potentially significant monetary damages.

It is possible that our solar energy systems or energy storage systems could injure our customers or other third parties, or that our systems could cause property damage as a result of product malfunctions, defects, improper installation, fire or other causes. Any product liability claim we face could be expensive to defend and may divert management’s attention. The successful assertion of product liability claims against us could result in potentially significant monetary damages, potential increases in insurance expenses, penalties or fines, subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of solar energy systems or energy storage systems. In addition, product liability claims, injuries, defects or other problems experienced by other companies in the residential solar industry could lead to unfavorable market conditions to the industry as a whole and may have an adverse effect on our ability to expand our portfolio of solar service agreements and related solar energy systems or energy storage systems, thus affecting our business, financial condition and results of operations.

Inflation could result in decreased value from future contractual payments and higher expenses for labor and equipment, which, in turn, could adversely impact our reputation, business, financial condition, cash flows and results of operations.

Any future increase in inflation may adversely affect our costs, including our dealers’ cost of labor and equipment, and may result in a decrease in value in our future contractual payments. Many of our solar service agreements, which generally have a term of 25 years, do not contain any pricing escalators. The pricing escalators we do have may not keep pace with inflation, which would result in the agreement yielding decreased value over time. These factors could adversely impact our reputation, business, financial condition, cash flows and results of operations.

We are not able to insure against all potential risks and we may become subject to higher insurance premiums.

We are exposed to numerous risks inherent in the operation of solar energy systems and energy storage systems, including equipment failure, manufacturing defects, natural disasters such as hurricanes, fires and earthquakes, terrorist attacks, sabotage, vandalism and environmental risks. Furthermore, components of our solar energy systems and energy storage systems, such as panels, inverters and batteries, could be damaged by

 

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severe weather, such as tsunamis, hurricanes, tornadoes, hailstorms or lightning. If our solar energy systems or energy storage systems are damaged in the event of a natural disaster beyond our control, losses could be outside the scope of insurance policies or exceed insurance policy limits, and we could incur unforeseen costs that could harm our business and financial condition. We may also incur significant additional costs in taking actions in preparation for, or in reaction to, such events.

Our insurance policies also cover legal and contractual liabilities arising out of bodily injury, personal injury or property damage to third parties, and are subject to policy limits. We also maintain coverage for physical damage to our solar energy assets.

However, such policies do not cover all potential losses and coverage is not always available in the insurance market on commercially reasonable terms. In addition, we may have disagreements with our insurers on the amount of our recoverable damages and the insurance proceeds received for any loss of, or any damage to, any of our assets may be claimed by lenders under our financing arrangements or otherwise may not be sufficient to restore the loss or damage without a negative impact on our results of operations. Furthermore, the receipt of insurance proceeds may be delayed, requiring us to use cash or incur financing costs in the interim. To the extent we experience covered losses under our insurance policies, the limit of our coverage for potential losses may be decreased or the insurance rates we have to pay increased. Furthermore, the losses that are insured through commercial insurance are subject to the credit risk of those insurance companies. While we believe our commercial insurance providers are currently creditworthy, we cannot assure you that such insurance companies will remain so in the future.

We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. The insurance coverage we do obtain may contain large deductibles or fail to cover certain risks or all potential losses. In addition, our insurance policies are subject to annual review by our insurers and may not be renewed on similar or favorable terms, including coverage, deductibles or premiums, or at all. If a significant accident or event occurs for which we are not fully insured, or we suffer losses due to one or more of our insurance carriers defaulting on their obligations or contesting their coverage obligations, it could have a material adverse effect on our business, financial condition and results of operations.

We typically bear the risk of loss and the cost of maintenance, repair and removal on solar energy systems that are owned by our subsidiaries and included in securitization and tax equity vehicles.

We typically bear the risk of loss and are generally obligated to cover the cost of maintenance, repair and removal for any solar energy system that we sell to subsidiaries and include in securitization and tax equity vehicles. At the time we enter into a tax equity or securitization transaction, we enter into a maintenance services agreement where we agree to operate and maintain the system for a fixed fee that is calculated to cover our future expected maintenance costs. If our solar energy systems require an above-average amount of repairs or if the cost of repairing systems were higher than our estimate, we would need to perform such repairs without additional compensation. If our solar energy systems are damaged as the result of a natural disaster beyond our control, losses could exceed or be excluded from, our insurance policy limits, and we could incur unforeseen costs that could harm our business and financial condition. We may also incur significant costs for taking other actions in preparation for, or in reaction to, such events. We purchase property insurance with industry standard coverage and limits approved by an investor’s third-party insurance advisors to hedge against such risk, but such coverage may not cover our losses.

Certain of our solar energy systems are located in, and we conduct business in, Puerto Rico, and both the weakness in the fiscal health of the government and the Puerto Rico Electric Power Authority (“PREPA”) and the damage caused by Hurricane Maria create uncertainty that may adversely impact us.

Puerto Rico is a significant market for our business, representing 14% of our solar energy systems as of March 31, 2019 and December 31, 2018 and has suffered from economic difficulties in recent years. As a result

 

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of the continued weakness of the Puerto Rico economy, liquidity constraints and a lack of market access, the credit ratings of the Puerto Rico government’s general obligation bonds and guaranteed bonds, as well as the ratings of most of the Puerto Rico public corporations, including PREPA, have been lowered to non-investment grade by Moody’s, S&P, and Fitch Ratings.

In September 2017, Hurricanes Irma and Maria made landfall in Puerto Rico, causing catastrophic damage to Puerto Rico’s infrastructure, homes and businesses, including its communication systems and transportation networks, and disrupting the markets in which we operate. Following Hurricane Maria, all of Puerto Rico was left without electrical power and other basic utility and infrastructure services (such as water, communications, ports and other transportation networks) were severely curtailed. Many of our solar energy systems located in Puerto Rico were damaged in the hurricanes. Further, Puerto Rico’s electrical grid, which is necessary to operate solar energy systems that were not paired with energy storage systems, was damaged. There was intermittent or reduced electrical grid operation during the fourth quarter of 2017 and the first quarter of 2018. During this period, many of our systems produced reduced levels or no power and therefore generated reduced or no revenue and cash receipts, even where solar energy systems remained functional. Although power has been restored, many residents left Puerto Rico following the storm and many are continuing to leave. In many cases, Puerto Rico residents who have abandoned their properties suspended payments to us under their solar service agreements.

Although Puerto Rico had already suffered from economic difficulties in recent years, the hurricanes caused a significant disruption to the island’s economic activity. The continued weakness of the Puerto Rico economy has strained the fiscal health of the government, which may create uncertainty that may adversely impact us. Furthermore, the future financial condition and prospects of PREPA are uncertain, which could negatively impact the availability and the reliability of Puerto Rico’s electrical grid and adversely impact our operations on the island.

While we do not currently contract directly with the Puerto Rico government or PREPA, continued weakness in the Puerto Rico economy or the failure of the Puerto Rico government to manage its fiscal challenges in an orderly manner could result in policy decisions that we do not anticipate and that may directly or indirectly adversely impact our business, financial condition and results of operations.

Certain legislation in Puerto Rico, including potential tax increases, may increase our cost of conducting business in Puerto Rico and could adversely impact our business.

Puerto Rico has enacted certain measures that could increase the cost of solar energy systems. In 2015, the Puerto Rico government increased the sales and use tax on repair and maintenance services on tangible personal property that are not capital expenditures, such as the repair and maintenance of solar energy systems, from 7% to 11.5%. As of October 1, 2015, most services became subject to a 4% or 11.5% sales and use tax, as applicable, subject to limited exceptions. The tax increase may impose greater costs on our future and current customers, which may hinder our future origination efforts and adversely impact our business, financial condition, results of operations and future growth. Future changes in Puerto Rico tax law could affect our tax position and adversely impact our business.

We are subject to administrative proceedings instituted by the Puerto Rico Energy Bureau.

The Puerto Rico Energy Bureau has instituted administrative proceedings regarding customer complaints about our Puerto Rican operations, the operations of some of our dealers in Puerto Rico, and certain Sunnova policies and procedures relating to contract disclosures and invoice disputes in Puerto Rico. While the Puerto Rico Energy Bureau’s Notice of Non-Compliance is currently seeking changes to certain of our policies and procedures, we are unable to determine whether they will seek monetary or other penalties against us in the future. In addition, the United States Better Business Bureau is investigating our overall accreditation status due to these proceedings. We are currently listed as not accredited and are unable to determine what impact, if any, such revocation will have on our long-term business prospects.

 

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Our business is concentrated in certain markets, putting us at risk of region-specific disruptions.

As of March 31, 2019, approximately 29%, 26% and 14% of our solar energy systems were located in New Jersey, California, and Puerto Rico, respectively. In addition, we expect much of our near-term future growth to occur in these same markets, further concentrating our customer base and operational infrastructure. Accordingly, our business and results of operations are particularly susceptible to adverse economic, regulatory, political, weather and other conditions in such markets and in other markets that may become similarly concentrated. See “ —We are not able to insure against all potential risks and we may become subject to higher insurance premiums” and —Certain of our solar energy systems are located in, and we conduct business in, Puerto Rico, and weakness in the fiscal health of the government and PREPA, the damage caused by Hurricane Maria, and the potential tax increases that may increase our cost of conducting business in Puerto Rico create uncertainty that may adversely impact us. In addition, we are subject to administrative proceedings instituted by the Puerto Rico Energy Bureau. Any of these conditions, even if only in one such market, could have a material adverse effect on our business, financial condition and results of operations. In addition, all of our current solar energy systems are located in the United States and its territories, which makes us particularly susceptible to adverse changes in U.S. tax laws. See “Risks Related to Taxation—Recent tax legislation and future changes in law could adversely affect our business.” For a discussion of expenses related to Hurricane Maria and the California wildfires in October 2017 and November 2018, see “Management’s Discussion And Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Operations and Maintenance Expense.”

Dealer and marketplace confidence in our liquidity and long-term business prospects is important for building and maintaining our business.

Our financial condition, operating results and business prospects may suffer materially if we are unable to establish and maintain confidence about our liquidity and business prospects among dealers, consumers and within our industry. Our dealer network is an integral component of our business strategy and serves as the means by which we are able to rapidly and successfully expand within existing and prospective markets. Dealers and other third parties will be less likely to enter into dealer agreements with us or originate new solar service agreements if they are uncertain that we will be able to make payments on time, that our business will succeed or that our operations will continue for many years.

Our solar energy systems and energy storage systems require ongoing maintenance and support. If we were to reduce operations, even years from now, buyers of our solar energy systems and energy storage systems from years earlier might have difficulty having us provide or arrange repairs or other services to our and their systems, which remain our responsibility under the terms of our solar service agreements. As a result, consumers may be less likely to enter into solar service agreements with us if they are uncertain that our business will succeed or that our operations will continue for many years.

Accordingly, in order to build and maintain our business, we must maintain confidence among dealers, customers and other parties in our liquidity and long-term business prospects. We may not succeed in our efforts to build this confidence.

Damage to our brand and reputation, or change or loss of use of our brand, could harm our business and results of operations.

We depend significantly on our reputation for high-quality products, excellent customer service and the brand name “Sunnova” to attract new customers and grow our business. If we fail to continue to deliver our solar energy systems or energy storage systems within the planned timelines, if our offerings do not perform as anticipated or if we damage any of our customers’ properties or delay or cancel projects, our brand and reputation could be significantly impaired. Future technological improvements may allow us to offer lower prices or offer new technology to new customers; however, technical limitations in our current solar energy systems and

 

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energy storage systems may prevent us from offering such lower prices or new technology to our existing customers. The inability of our current customers to benefit from technological improvements could cause our existing customers to lower the value they perceive our existing products offer and impair our brand and reputation.

In addition, given the sheer number of interactions our personnel or dealers operating on our behalf have with customers and potential customers, it is inevitable that some customers’ and potential customers’ interactions with our company or dealers operating on our behalf will be perceived as less than satisfactory. This has led to instances of customer complaints, some of which have affected our digital footprint on rating websites and social media platforms. If we cannot manage our hiring and training processes to avoid or minimize these issues to the extent possible, our reputation may be harmed and our ability to attract new customers would suffer.

In addition, if we were to no longer use, lose the right to continue to use, or if others use, the “Sunnova” brand, we could lose recognition in the marketplace among customers, suppliers and dealers, which could affect our business, financial condition, results of operations and would require financial and other investment, and management attention in new branding, which may not be as successful.

The installation and operation of solar energy systems and energy storage systems depends heavily on suitable solar and meteorological conditions. If meteorological conditions are unexpectedly unfavorable, the electricity production from our solar energy systems may be substantially below our expectations and our ability to timely deploy new systems may be adversely impacted.

The energy produced and the revenue and cash receipts generated by a solar energy system depend on suitable solar, atmospheric and weather conditions, all of which are beyond our control. Our economic model and projected returns on our systems require achievement of certain production results from our systems and, in some cases, we guarantee these results to our consumers. If the systems underperform for any reason, our business could suffer. For example, the amount of revenue we recognize in a given period from our power purchase agreements and the amount of our obligations under the performance guarantees of our solar service agreements are dependent in part on the amount of energy generated by solar energy systems under such solar service agreements. As a result, revenue derived from our standard power purchase agreements is impacted by seasonally shorter daylight hours in winter months. In addition, the ability of our dealers to install solar energy systems and energy storage systems is impacted by weather. For example, the ability to install solar energy systems and energy storage systems during the winter months in the Northeastern United States is limited. Such solar, atmospheric and weather conditions can delay the timing of when solar energy systems and energy storage systems can be installed and when we can originate and begin to generate revenue from solar energy systems. This may increase our expenses and decrease revenue and cash receipts in the relevant periods. Furthermore, prevailing weather patterns could materially change in the future, making it harder to predict the average annual amount of sunlight striking each location where we install a solar energy system and energy storage systems. This could make our solar energy systems less economical overall or make individual systems less economical. Any of these events or conditions could harm our business, financial condition and results of operations.

The loss of one or more members of our senior management or key employees may adversely affect our ability to implement our strategy.

We depend on our experienced management team, and the loss of one or more key executives could have a negative impact on our business. In particular, we are dependent on the services of our founder and Chief Executive Officer, William J. Berger. We also depend on our ability to retain and motivate key employees and attract qualified new employees. None of our key executives are bound by employment agreements for any specific term. We may be unable to replace key members of our management team and key employees if we lose their services. Integrating new employees into our team could prove disruptive to our operations, require substantial resources and management attention and ultimately prove unsuccessful. An inability to attract and retain sufficient managerial personnel who have critical industry experience and relationships could limit or

 

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delay our strategic efforts, which could have a material adverse effect on our business, financial condition and results of operations.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and officers.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the listing requirements of the NYSE and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns which could harm our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future which will increase our costs and expenses.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee.

Our inability to protect our intellectual property could adversely affect our business. We may also be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

Any failure to protect our proprietary rights adequately could result in our competitors offering similar residential solar technology or energy storage services more quickly than anticipated, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue which would adversely affect our business prospects, financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. We rely on intellectual property laws, primarily a combination of copyright and trade secret laws in the United States, as well as license agreements and other contractual provisions, to protect our proprietary technology and brand. We cannot be certain that our agreements and other contractual provisions will not be breached, including a breach involving the use or disclosure of our trade secrets or know-how, or that adequate remedies will be available in the event of any breach. In addition, our trade secrets may otherwise become known or lose trade secret protection.

We cannot be certain that our products and our business do not or will not violate the intellectual property rights of a third party. Third parties, including our competitors, may own patents or other intellectual property rights that cover aspects of our technology or business methods. Such parties may claim we have misappropriated, misused, violated or infringed third-party intellectual property rights, and, if we gain greater recognition in the market, we face a higher risk of being the subject of claims that we have violated others’ intellectual property rights. Any claim that we violated a third party’s intellectual property rights, whether with or without merit, could be time-consuming, expensive to settle or litigate and could divert our management’s attention and other resources, all of which could adversely affect our business, results of operations, financial condition and cash flows. If we do not successfully settle or defend an intellectual property claim, we could be liable for significant monetary damages and could be prohibited from continuing to use certain technology, business methods, content or brands. To avoid a prohibition, we could seek a license from third parties, which could require us to pay significant royalties, increasing our operating expenses. If a license is not available at all or not available on commercially reasonable terms, we may be required to develop or license a non-violating alternative, either of which could adversely affect our business, results of operations, financial condition and cash flows.

 

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We currently use or plan to use software that is licensed under “open source,” “free” or other similar licenses that may subject us to liability or require us to release the source code of our proprietary software to the public.

We currently use open source software that is licensed under “open source,” “free” or other similar licenses. Open source software is made available to the general public on an “as-is” basis under the terms of a non-negotiable license. If we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we offer our services that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or alterations under the terms of the particular open source license. We do not plan to integrate our proprietary software with this open source software in ways that would require the release of the source code of our proprietary software to the public. However, our use and distribution of open source software may entail greater risks than use of third-party commercial software. Our authorized developers may contribute to this open source software community, but they will be prohibited from providing any proprietary process or proprietarily developed source code of ours. Open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, if we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar offerings with lower development effort and time. We may also face claims alleging noncompliance with open source license terms or infringement or misappropriation of proprietary software.

These claims could result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our software, any of which would have a negative effect on our business and operating results. In addition, if the license terms for open source software that we use change, we may be forced to re-engineer our technology platform or incur additional costs.

Although we monitor our use of open source software to avoid subjecting our technology platform to unintended conditions, few courts have interpreted open source licenses, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our business. We cannot guarantee that we have incorporated open source software in our software in a manner that will not subject us to liability, or in a manner that is consistent with our current policies and procedures.

We may be subject to interruptions or failures in our information technology systems.

We rely on information technology systems and infrastructure to support our business. Any of these systems may be susceptible to damage or interruption due to fire, floods, power loss, telecommunication failures, usage errors by employees, computer viruses, cyberattacks or other security breaches or similar events. A compromise of our information technology systems or those with which we interact could harm our reputation and expose us to regulatory actions and claims from customers and other persons, any of which could adversely affect our business, financial condition, cash flows and results of operations. If our information systems are damaged, fail to work properly or otherwise becomes unavailable, we may incur substantial costs to repair or replace them, and we may experience a loss of critical information, customer disruption and interruptions or delays in our ability to perform essential functions.

Disruptions to our solar monitoring systems could negatively impact our revenues and increase our expenses.

Our ability to accurately charge our customers for the energy produced by our solar energy systems primarily depends on the cellular connection for the related monitoring system, which we are responsible for maintaining, functioning so that we may receive data regarding the solar energy systems’ production from their residences. We could incur significant expenses or disruptions of our operations in connection with failures of our solar monitoring systems, including failures of such connections, that would prevent us from accurately monitoring solar energy production. In addition, sophisticated hardware and operating system software and

 

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applications that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of our solar energy systems or energy storage systems. The costs to us to eliminate or alleviate viruses and bugs, or any problems associated with failures of our cellular connections could be significant. We have in the past experienced periods where some of our cellular connections have been unavailable and, as a result, we have been forced to estimate the production of their solar energy systems. Such estimates may prove inaccurate and could cause us to underestimate the power being generated by our solar energy systems and undercharge our customers, thereby harming our results of operations.

Any unauthorized access to, or disclosure or theft of personal information we gather, store or use could harm our reputation and subject us to claims or litigation.

We receive, store and use personal information of our customers, including names, addresses, e-mail addresses, credit information, credit card and financial account information and other housing and energy use information. We also store information of our dealers, including employee, financial and operational information. We rely on the availability of data collected from our customers and our dealers in order to manage our business and market our offerings. We take certain steps in an effort to protect the security, integrity and confidentiality of the personal information we collect, store or transmit, but there is no guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. We also rely on third-party suppliers or vendors to host certain of the systems we use. Although we take precautions to provide for disaster recovery, our ability to recover systems or data may be expensive and may interfere with our normal operations. Also, although we obtain assurances from such third parties that they will use reasonable safeguards to secure their systems, we may be adversely affected by unavailability of their systems or unauthorized use or disclosure or our data maintained in such systems. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we, our suppliers or vendors and our dealers may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures.

Cyberattacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in critical systems, disruption of our customers’ operations, loss or damage to our data delivery systems, unauthorized release of confidential or otherwise protected information, corruption of data, and increased costs to prevent, respond to or mitigate cybersecurity events. In addition, certain cyber incidents, such as advanced persistent threats, may remain undetected for an extended period.

Unauthorized use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of our suppliers, vendors or dealers by an unauthorized party or through employee or contractor error, theft or misuse, or otherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal information were to occur, our operations could be seriously disrupted and we could be subject to demands, claims and litigation by private parties, and investigations, related actions, and penalties by regulatory authorities.

In addition, we could incur significant costs in notifying affected persons and entities and otherwise complying with the multitude of federal, state and local laws and regulations relating to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to, or use or disclosure of, such information could harm our reputation, substantially impair our ability to expand our portfolio of solar service agreements and related solar energy systems and energy storage systems and have an adverse impact on our business, financial condition and results of operations.

 

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Our business is subject to complex and evolving U.S. laws and regulations regarding privacy and data protection (“data protection laws”). Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, increased cost of operations or otherwise harm our business.

The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. New data protection laws, including recent California legislation which affords California consumers an array of new rights, including the right to be informed about what kinds of personal data companies have collected and why it was collected, pose increasingly complex compliance challenges and potentially elevate our costs. Complying with varying jurisdictional requirements could increase the costs and complexity of compliance, and violations of applicable data protection laws can result in significant penalties. Any failure, or perceived failure, by us to comply with applicable data protection laws could result in proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. As noted above, we are also subject to the possibility of security and privacy breaches, which themselves may result in a violation of these laws.

We may become involved in the future in legal proceedings that could adversely affect our business.

We may, from time to time, be involved in litigation and claims, such as those relating to employees, customers, our dealers or other third parties with whom we contract, including consumer claims and class action lawsuits. In the ordinary course of business, we have disputes with dealers and customers. In general, litigation claims or regulatory proceedings can be expensive and time consuming to bring or defend against, may result in the diversion of management attention and resources from our business and business goals and could result in injunctions or other equitable relief, settlements, penalties, fines or damages that could significantly affect our results of operations and the conduct of our business. It is impossible to predict with certainty whether any resulting liability would have a material adverse effect on our financial position, results of operations or cash flows.

We intend to expand our operations to include international activities, which will subject us to a number of risks.

Our long-term strategic plans include international expansion, including expansion into jurisdictions that have characteristics similar to those in which we currently operate. Risks inherent to international operations include the following:

 

   

the inability to work successfully with dealers with local expertise to originate international solar service agreements;

 

   

multiple, conflicting and changing laws and regulations, including export and import laws and regulations, economic sanctions laws and regulations, tax laws and regulations, environmental regulations, labor laws and other government requirements, approvals, permits and licenses;

 

   

laws and legal systems that are less developed or less predictable than those in the United States;

 

   

changes in general economic and political conditions in the jurisdictions where we operate, including changes in government incentives relating to power generation and solar electricity;

 

   

political and economic instability, including wars, acts of terrorism, political unrest, boycotts, curtailments of trade and other business restrictions;

 

   

difficulties and costs in recruiting and retaining individuals skilled in international business operations;

 

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international business practices that may conflict with U.S. customs or legal requirements, including anti-bribery and corruption regulations;

 

   

financial risks, such as longer sales and payment cycles and greater difficulty collecting accounts receivable or executing self-help remedies, if necessary;

 

   

deficient or unreliable records relating to real property ownership;

 

   

potentially lower margins due to a lower average income level;

 

   

fluctuations in currency exchange rates relative to the U.S. dollar; and

 

   

the inability to obtain, maintain or enforce intellectual property rights, including inability to apply for or register material trademarks in foreign countries, which could make it easier for competitors to capture increased market position.

Doing business in foreign markets requires us to be able to respond to rapid changes in market, legal, and political conditions in these countries. The success of our business will depend, in part, on our ability to succeed in differing legal, regulatory, economic, social and political environments. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business.

Our future operations may subject us to risks associated with currency fluctuations.

Our future international operations may subject us to risks relating to currency fluctuations. Foreign currencies periodically experience rapid and/or large fluctuations in value against the U.S. dollar. A weakened U.S. dollar could increase the cost of procurement of raw materials, by our suppliers, from foreign jurisdictions and operating expenses in foreign locations, which could have a material adverse effect on our business and results of operations. Our planned international expansion further subjects us to currency risk.

Since the price at which we originate solar energy systems from our dealers is generated in U.S. dollars, we are mostly insulated from currency fluctuations. However, since suppliers of our dealers often incur a significant amount of their costs by purchasing raw materials and generating operating expenses in foreign currencies, if the value of the U.S. dollar depreciates significantly or for a prolonged period of time against these other currencies this may cause those suppliers to raise the prices they charge us and our dealers, which in turn could harm our business and results of operations. Although the value of the U.S. dollar has been high relative to other currencies in recent periods, there is no guarantee that this trend will continue.

Our actual financial results may differ materially from any guidance we may publish from time to time.

We may, from time to time, provide guidance regarding our future performance that represents our management’s estimates as of the date such guidance is provided. Any such guidance would be based upon a number of assumptions with respect to future business decisions (some of which may change) and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies (many of which are beyond our control). Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions that inform such guidance will not materialize or will vary significantly from actual results. Our ability to meet any forward-looking guidance is impacted by a number of factors including, but not limited to, the number of our solar energy systems sold versus leased, changes in installation costs, the availability of additional financing on acceptable terms, changes in the retail prices of traditional utility-generated electricity, the availability of rebates, tax credits and other incentives, changes in policies and regulations including net metering and interconnection limits or caps, the availability of solar panels, inverters, batteries and other raw materials, as well as the other risks to our business that are described in this “Risk Factors” section. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date such guidance is provided. Actual results may vary from such guidance and

 

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the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data is forecast. In light of the foregoing, investors should not place undue reliance on our financial guidance and should carefully consider any guidance we may publish in context.

Terrorist or cyberattacks against centralized utilities could adversely affect our business.

Assets owned by utilities such as substations and related infrastructure have been physically attacked in the past and will likely be attacked in the future. These facilities are often protected by limited security measures, such as perimeter fencing. Any such attacks may result in interruption to electricity flowing on the grid and consequently interrupt service to our solar energy systems that are not combined with an energy storage system, which could adversely affect our operations. Furthermore cyberattacks, whether by individuals or nation states, against utility companies could severely disrupt their business operations and result in loss of service to customers, which would adversely affect our operations.

Risks Related to Regulations

We are not currently regulated as an electric public utility under applicable law but may be subject to regulation as an electric utility in the future.

We are not currently regulated as an electric public utility in the United States under applicable national, state or other local regulatory regimes where we conduct business. As a result, we are not currently subject to the various federal, state and local standards, restrictions and regulatory requirements applicable to centralized public utilities. Any federal, state or local regulations that cause us to be treated as an electric utility, or to otherwise be subject to a similar regulatory regime of commission-approved operating tariffs, rate limitations, and related mandatory provisions, could place significant restrictions on our ability to operate our business and execute our business plan by prohibiting, restricting or otherwise regulating our sale of electricity. If we were subject to the same state or federal regulatory authorities as centralized electric utilities in the United States and its territories or if new regulatory bodies were established to oversee our business in the United States and its territories or in foreign markets we enter, then our operating costs would materially increase or we might have to change our business in ways that could have a material adverse effect on our business, financial condition and results of operations.

While we are not regulated as extensively as an electric public utility, we are subject to certain utility-like regulations in New York and Puerto Rico. In New York, distributed energy providers are subject to regulation by the New York Public Service Commission (the “NYPSC”) with respect to customer interactions (including contracting and marketing) and are required to comply with the NYPSC’s Uniform Business Practices. In connection with approving the Uniform Business Practices, the NYPSC also established an oversight framework under which it could impose other regulatory requirements on distributed energy providers. In Puerto Rico, we are regulated as an electric power company under applicable Puerto Rico Energy Bureau regulations in connection with the sale and invoicing of energy generated by distributed generation systems having an aggregate capacity of more than 1 megawatt (“MW”). Among other requirements, these regulations impose certain filing, certification, reporting and annual fee requirements upon us, but do not currently subject the companies to centralized utility-like regulation or require the Puerto Rico Energy Bureau’s approval of their charges. In California, the California Public Utilities Commission (“CPUC”) issued an order approving several consumer protection measures for solar customers, including the development of a “solar information packet” that, once finalized, will provide consumers with information regarding the selection of a contractor, solar financing, bill savings estimates, net energy metering and electric rates, low-income options, and related matters. The CPUC order also requires the investor-owned utilities in California to adopt procedures to verify during the interconnection process that the customer received the information packet and that the solar provider is licensed, and to collect and report on complaints regarding solar providers. If we become subject to new, additional regulatory requirements in New York or Puerto Rico, or other jurisdictions adopt regulatory requirements similar to New York or Puerto Rico, then our operating costs would materially increase or we might have to change our business in ways that could have a material adverse effect on our business, financial condition and results of operations.

 

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Electric utility policies and regulations, including those affecting electric rates, may present regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for electricity from our solar energy systems and adversely impact our ability to originate new solar service agreements.

Federal, state and local government regulations and policies concerning the electric utility industry, utility rates and rate structures and internal policies and regulations promulgated by electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies often relate to electricity pricing. Policies and regulations that promote renewable energy and distributed energy generation have been challenged by centralized electric utilities and questioned by those in government and others arguing for less governmental spending and involvement in the energy market. To the extent that such views are reflected in government policies and regulations, the changes in such policies and regulations could adversely affect our business, financial condition and results of operations.

In the United States, governmental authorities and state public service commissions that determine utility rates, rate structures and the terms and conditions of electric service continuously modify these regulations and policies. These regulations and policies could result in a significant reduction in the potential demand for electricity from our solar energy systems and could deter customers from entering into solar service agreements with us.

With regard to rates, customers with residential solar energy systems may currently pay or be subject in the future to increased charges due to increased rates or changes in rate design and structures. Utilities in certain jurisdictions may assess fees which apply only to customers with distributed generation systems, including residential solar energy systems or impose charges on solar customers which are significantly higher than comparable charges billed to non-solar customers.

These fees may include demand, stand-by or departing load charges or monthly minimum charges. Certain jurisdictions may permit utilities to change their rate design and structures which could result in charges that would disproportionately impact customers with solar energy systems. For example, a reduction in the number of tiers of residential rates could result in increased charges for lower-demand customers, including many solar customers, by moving them to a new rate tier with higher rates. It could also result in lower charges for higher-demand customers, who may then become less incentivized to consider solar energy to meet their electricity needs. Similarly, a change in rate design to recover more costs from fixed charges as opposed to variable charges (i.e. “decoupled” rates, by which the utility’s revenue requirement is “decoupled” from its level of electricity sales in designing rates) may have the same effect. Additionally, depending on the region, electricity generated by solar energy systems competes most effectively with the most expensive retail rates for electricity from the electrical grid, rather than the less expensive average price of electricity. Modifications to the centralized electric utilities’ peak hour pricing policies or rate design could make our current product offerings less competitive with the price of electricity from the electrical grid. A shift in the timing of peak rates for utility-generated electricity to include times of day when solar energy generation is less efficient or non-operable could make our solar energy systems less competitive and reduce demand for our product offerings. Time-of-use rates could also result in higher costs for solar customers whose electricity requirements are not fully met by the solar energy system during peak periods.

Utilities in California, New Jersey and Puerto Rico, among other states and jurisdictions, have proposed or received approval by state regulators for such rate measures as described in this risk factor. Any such changes affecting rates could increase our customers’ cost to use our solar energy systems and make our service and product offerings less desirable, thereby harming our business, financial condition and results of operations. The imposition of any such rate measures could limit the ability of distributed residential solar power companies to compete with the price of electricity generated by centralized electric utilities, which may reduce the number of solar energy systems installed in those jurisdictions. Additionally, any such unaccounted for increases in the fees or charges applicable to existing customer agreements may increase the cost of energy to those customers and result in an increased rate of defaults, terminations or cancellations under our solar service agreements. In

 

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addition, changes to government or internal utility regulations and policies that favor centralized electric utilities could reduce our competitiveness and cause a significant reduction in demand for our product offerings.

Any of the foregoing results could limit our ability to expand our portfolio of solar service agreements and related solar energy systems and energy storage systems, or harm our business, financial condition and results of operations.

We rely on net metering and related policies to offer competitive pricing to our customers in most of our current markets, and changes to net metering policies may significantly reduce demand for electricity from residential solar energy systems.

Net metering is one of several key policies that have enabled the growth of distributed generation solar energy systems in the United States, providing significant value to customers for electricity generated by their residential solar energy systems but not directly consumed on-site. Net metering allows a homeowner to pay his or her local electric utility for power usage net of production from the solar energy system or other distributed generation source. Homeowners receive a credit for the energy that an interconnected solar energy system generates in excess of that needed by the home to offset energy purchases from the centralized utility made at times when the solar energy system is not generating sufficient energy to meet the customer’s demand. In many markets, this credit is equal to the residential retail rate for electricity and in other markets, such as Hawaii and Nevada, the rate is less than the retail rate and may be set, for example, as a percentage of the retail rate or based upon a valuation of the excess electricity. In some states and utility territories, customers are also reimbursed by the centralized electric utility for net excess generation on a periodic basis.

Net metering programs have been subject to legislative and regulatory scrutiny in some states and territories including, but not limited to, New Jersey, California, Puerto Rico and Guam. These jurisdictions, by statute, regulation, administrative order or a combination thereof, have recently adopted or are considering new restrictions and additional changes to net metering programs either on a state-wide basis or within specific utility territories. Many of these measures were introduced and supported by centralized electric utilities. These measures vary by jurisdiction and may include a reduction in the rates or value of the credits that customers are paid or receive for the power that they deliver back to the electrical grid, caps or limits on the aggregate installed capacity of generation in a state or utility territory eligible for net metering, expiration dates for and phasing out of net metering programs, replacement of net metering programs with alternative programs that may provide less compensation, and limits on the capacity size of individual distributed generation systems which can qualify for net metering. Net metering and related policies concerning distributed generation have also received attention from federal legislators and regulators.

In New Jersey, the Board of Public Utilities (“BPU”) has the option under state law of limiting participation in the retail rate net metering program if the aggregate capacity of owned and operating systems reaches 5.8% of total annual kilowatt hours (“kwH”) sold in the state. As of December 31, 2018, that threshold had not yet been reached. On September 22, 2017, the BPU opened a generic proceeding to review the state of the solar market in New Jersey and solicit input from stakeholders in the industry and convene public hearings across the state. The BPU held hearings and received public comments, but no rule or policy changes have been proposed by the BPU.

In California, the Public Utilities Commission (“CPUC”) issued an order in 2016 retaining retail-based net metering credits for residential customers of California’s major utilities as part of Net Energy Metering 2.0 (“NEM 2.0”). Under NEM 2.0, new distributed generation customers receive the retail rate for electricity exported to the grid, less certain non-bypassable charges. Customers under NEM 2.0 also are subject to interconnection charges and time-of-use rates. Existing customers who receive service under the prior net metering program, as well as new customers under the NEM 2.0 program, are grandfathered for a period of 20 years. It is expected that the CPUC will revisit future net metering policies again in 2019. Proceedings on distributed energy policy and utility rates before the CPUC could also result in changes that affect customers with distributed generation systems.

 

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In Puerto Rico, legislation enacted in April 2019 would require the Public Service Regulatory Board’s Energy Bureau to undertake a study of net metering to be completed within five years and may result in revisions to the net metering rules based on the study’s findings. Meanwhile, “true” net metering will continue to apply, meaning that the credit for energy exported by net metering clients will equal the value of such energy under the rate applicable to those clients, and accordingly, their charges will be based on their net consumption. Customers subject to this regime would be grandfathered for a period of 20 years from the date of their net metering agreements.

Net metering customers may be impacted by transition charges and other requirements contemplated in the recently submitted May 3, 2019 Definitive Restructuring Support Agreement (“DRSA”) between PREPA and its creditors, which is currently pending before the United States District Court for the District of Puerto Rico. If approved by the court and implemented as proposed, these transition charges will be assessed on all customers at a rate of 2.768 c/kWh, which is set to increase periodically until eventually reaching 4.552 c/kWh in fiscal year 2044. For customers that are grandfathered prior to the DRSA’s September 20, 2020 implementation date, the transition charge will equal the transition charge rate multiplied by the customer’s average net consumption over the previous 24 months, after accounting for a three month lag time. For non-grandfathered customers, the monthly transition charge will equal the greater of either (i) the transition charge rate multiplied by the monthly average of the customer’s gross consumption over the past 24 months or (ii) the transition charge rate multiplied by the customer’s net consumption in the given month. Non-grandfathered customers also will be required to comply with certain notice requirements, and non-grandfathered customers will also be responsible for the costs associated with installing a revenue grade meter to measure “behind the meter” generation.

In Guam, the Consolidated Commission on Utilities (“CCU”) adopted a resolution on September 25, 2018 recommending that retail rate net metering be replaced with a “buy all/sell all” or similar program that provides for compensation to homeowners at a lower, avoided cost rate. The CCU’s resolution provides for a five-year grandfathering period for current net metering customers. The CCU’s resolution is under consideration by the Guam Public Utilities Commission (“GPUC”), who has the authority to approve or reject the CCU’s recommendations. The GPUC held a public hearing in March 2019, and the matter remains pending before the GPUC.

In other jurisdictions, replacing net metering with a “value of distributed energy,” “feed-in,” or “sell-all/buy-all” tariff is also being considered or has been adopted. Under a “value of distributed energy” tariff, the customer would be compensated at a rate that accounts for the electricity, capacity, environmental, and other attributes provided by distributed generation to the grid and the electricity market. Under a “feed-in” or “sell-all/buy-all” tariff, all of the system’s generation is exported to the grid and purchased by the utility at an established rate, and the customer is required to purchase all of its electricity requirements from the utility at the retail rate. In New York, the New York Public Service Commission issued an order in March 2017 adopting a “value of distributed energy” policy, but grandfathering existing net metering customers and continuing net metering for new residential customers interconnected before January 1, 2020 for a period of 20 years. Residential customers otherwise still eligible for net metering may also elect to be compensated under a “value of distributed energy” tariff. Compensation that will be provided to those customers that opt in to a “value of solar” tariff varies and may not favorably compare to that provided by net metering.

Net metering and related policies concerning distributed generation have also received attention from federal legislators and regulators. Changes in federal law, including those made by statute, regulation, rule or order, could negatively affect net metering or other related policies which otherwise promote and support solar energy and enhance the economic viability of distributed residential solar.

If net metering caps in certain jurisdictions are reached while they are still in effect, if the value of the credit that customers receive for net metering is significantly reduced, if net metering is discontinued or replaced by a different regime which values solar energy at a lower rate, or if other limits or restrictions on net metering are imposed, current and future customers may be unable to recognize the same level of cost savings associated with net metering. The absence of favorable net metering policies or of net metering entirely, or the imposition of

 

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new charges that only or disproportionately impact customers that use net metering would likely significantly limit customer demand for distributed residential solar energy systems and the electricity they generate and result in an increased rate of defaults, terminations or cancellations under customer agreements. Our ability to lease, finance and sell our solar energy systems and services or sell the electricity generated from our solar energy systems may be adversely impacted by the failure to expand existing limits on the amount of net metering in states that have implemented it, the failure to adopt a net metering policy where it currently is not in place or reductions in the amount or value of credit that customers receive through net metering. This could adversely impact our ability to expand our portfolio of solar service agreements and related solar energy systems, our business, financial condition and results of operations.

Additionally, distributed residential solar customers in certain jurisdictions may be subject to higher charges from centralized electric utilities than non-solar customers and such charges should be evaluated together with the net metering policies in place. If such charges are imposed, the cost savings associated with switching to solar energy may be significantly reduced and our ability to expand our portfolio of solar service agreements and related solar energy systems and compete with centralized electric utilities could be impacted.

For further discussion of these potential charges and related proposals, see “—Electric utility policies and regulations, including those affecting electric rates, may present regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for electricity from our solar energy systems and adversely impact our ability to originate new solar service agreements.”

Our business currently depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or our ability to monetize them could adversely impact our business.

Our business depends in part on current government policies that promote and support solar energy and enhance the economic viability of distributed residential solar. Revenues from SRECs constituted approximately 25% and 29% of our revenues for the three months ended March 31, 2019 and for the year ended December 31, 2018, respectively. U.S. federal, state and local governments have established various incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives come in various forms, including rebates, tax credits and other financial incentives such as payments for renewable energy credits associated with renewable energy generation, exclusion of solar energy systems from property tax assessments or other taxes and system performance payments. However, these programs may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption rates increase. The financial value of certain incentives decreases over time. The value of SRECs in a market tends to decrease over time as the supply of SREC-producing solar energy systems installed in that market increases. If we overestimate the future value of these incentives, it could adversely impact our business, results of operations and financial results. See “Business—Governmental Incentives.

A loss or reduction in such incentives could decrease the attractiveness of new solar energy systems to customers, which could adversely impact our business and our access to capital. We also enter into hedges related to expected production of SRECs through forward contracts that require us to physically deliver the SRECs upon settlement. These arrangements may, depending on the instruments used and the level of additional hedges involved, limit any potential upside from SREC production increases. We may be exposed to potential economic loss should a counterparty be unable or unwilling to perform their obligations under the terms of a hedging agreement. In addition, we are exposed to risks related to changes in interest rates and may engage in hedging activities to mitigate related volatility. We may fail to properly hedge these SRECs, or may fail to do so economically, which may also adversely affect our results of operations.

The economics of purchasing a solar energy system and energy storage system are also improved by eligibility for accelerated depreciation, also known as the modified accelerated cost recovery system (“MACRS”), which allows for the depreciation of equipment according to an accelerated schedule set forth by the IRS. This accelerated schedule allows a taxpayer, such as us and investors in tax equity financing

 

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arrangements, to recognize the depreciation of tangible solar property on a five-year basis even though the useful life of such property is generally greater than five years. We benefit from accelerated depreciation on the solar energy systems and energy storage systems we own. To the extent that these policies are changed in a manner that reduces the incentives that benefit our business, we may experience reduced revenues and reduced economic returns, experience increased financing costs and encounter difficulty obtaining financing.

The federal government currently provides business investment tax credits under Section 48 and residential energy credits under Section 25D of the U.S. Internal Revenue Code of 1986, as amended (the “Code.”) Section 48(a) of the Code allows taxpayers to claim an investment tax credit equal to 30% of the qualified expenditures for certain commercially owned solar energy systems that began construction before 2020 (the “Section 48(a) ITC”). The Section 48(a) ITC percentage is scheduled to decrease to 26% of the basis of a solar energy system that began construction during 2020, 22% for 2021 and 10% if construction begins after 2021 or if the solar energy system is placed into service after 2023. In June 2018, the IRS provided guidance as to when construction is considered to begin for such purposes, including a safe harbor that may apply when a taxpayer pays or incurs (or in certain cases, a contractor of the taxpayer pays or incurs) 5% or more of the costs of a system before the end of the applicable year. We would be able to claim the Section 48(a) ITC when available for solar energy systems we originate under solar lease agreements or power purchase agreements based on our ownership of the solar energy system at the time it is placed in service. Section 25D of the Code allows an individual to claim a 30% federal tax credit with respect to a residential solar energy system that is owned by the homeowner (the “Section 25D Credit”). As a result, the Section 25D Credit is claimed by customers who purchase solar energy systems. This 30% rate is currently scheduled to be reduced to 26% for systems placed in service during 2020 and to 22% for systems placed in service during 2021. This credit is scheduled to expire effective January 1, 2022. The Section 25D Credit reduces the cost of consumer ownership of solar energy systems, such as under the loan program.

The Section 48(a) ITC has been a significant driver of the financing supporting the adoption of residential solar energy systems in the United States, and the Section 25D Credit has been a significant driver of consumer demand for ownership of solar energy systems. The scheduled reduction in, or expiration of, these tax credits will likely impact the attractiveness of residential solar and could harm our business. For example, we expect the expiration of the Section 25D Credit will increase the cost of consumer ownership of solar energy systems, such as under the loan program. In addition, as we approach the scheduled decrease in the Section 48(a) ITC, delays in obtaining interconnection approval from the local utility as a result of changes to regulations, policies or interconnection process or other reasons may result in the loss of our ability to obtain the higher 30% Section 48(a) ITC for systems installed in the months and weeks approaching the end of 2019, which would be harmful to our business.

The scheduled reduction in the Section 48(a) ITC could adversely impact our financing structures that monetize a substantial portion of such Section 48(a) ITC and provide financing for our solar energy systems. To the extent we have a reduced ability to raise tax equity as a result of this reduction or an inability to continue to monetize such benefits in our financing arrangements, the rate of growth of installations of our residential solar energy systems and our ability to maintain such systems could be negatively impacted. In addition, future changes in existing law and interpretations by the IRS or the courts with respect to certain matters, including but not limited to, treatment of the Section 48(a) ITC and our financing arrangements, and the taxation of business entities including the deductibility of interest expense could affect the amount that tax equity investors are willing to invest, which could reduce our access to capital. See “Business—Governmental Incentives.

In addition, the tax legislation that was signed into law on December 22, 2017, commonly known as the “Tax Cuts and Jobs Act” (the “2017 Tax Act”) contains several provisions that may significantly impact the attractiveness of tax benefits to tax equity investors. See “Risks Related to Taxation—Recent tax legislation and future changes in law could adversely affect our business.” The 2017 Tax Act reduces the highest marginal corporate tax rate from 35% to 21%, which causes MACRS to have less value to investors and may result in investors having less interest in Section 48(a) ITCs. The 2017 Tax Act also added a base erosion and anti-abuse tax (“BEAT”) provision that

 

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imposes a minimum tax on certain multinational corporations, and only 80% of the value of such corporation’s Section 48(a) ITCs can be applied to reduce such corporation’s BEAT liability. Beginning in 2026, no amount of Section 48(a) ITCs can be applied to offset BEAT liability. The BEAT provision generally applies to corporations that are part of a group with at least $500 million of applicable annual gross receipts and that make certain payments to related foreign persons. Accordingly, the BEAT provision could reduce the incentive for certain investors to invest in tax equity financing arrangements and could materially impact financing sources in the solar industry. Any such impact could materially and adversely affect our business.

Applicable authorities may adjust or decrease incentives from time to time or include provisions for minimum domestic content requirements or other requirements to qualify for these incentives. Reductions in, eliminations or expirations of or additional application requirements for, governmental incentives could adversely impact our results of operations and ability to compete in our industry by increasing our cost of capital, causing distributed residential solar power companies to increase the prices of their energy and solar energy systems and reducing the size of our addressable market. In addition, this would adversely impact our ability to attract investment partners and lenders and our ability to expand our portfolio of solar service agreements and related solar energy systems.

Our business depends in part on the regulatory treatment of third-party owned solar energy systems.

Our lease and PPA agreements are third-party ownership arrangements. Retail sales of electricity by third parties such as us face regulatory challenges in some states and jurisdictions, including states and jurisdictions that we intend to enter where the laws and regulatory policies have not historically embraced competition to the service provided by the vertically integrated centralized electric utility. Some of the principal challenges pertain to whether third-party owned solar energy systems qualify for the same levels of rebates or other non-tax incentives available for customer-owned solar energy systems, whether third-party owned solar energy systems are eligible at all for these incentives and whether third-party owned solar energy systems are eligible for net metering and the associated significant cost savings. Furthermore, in some states and utility territories third parties are limited in the way that they may deliver solar to their customers. In jurisdictions such as Arizona, Kentucky, North Carolina and Utah and in Los Angeles, California, laws have been interpreted to prohibit the sale of electricity pursuant to power purchase agreements, leading distributed residential solar energy system providers to use solar leases in lieu of PPAs, in addition to customer ownership. These regulatory constraints may, for example, give rise to various property tax issues. See “Risks Related to Taxation.” Changes in law and reductions in, eliminations of or additional requirements for, benefits such as rebates, tax incentives and favorable net metering policies decrease the attractiveness of new solar energy systems to distributed residential solar power companies and the attractiveness of solar energy systems to customers, which could reduce our acquisition opportunities. Such a loss or reduction could also adversely impact our access to capital and reduce our willingness to pursue solar energy systems due to higher operating costs or lower revenues from leases and PPAs.

Technical and regulatory limitations regarding the interconnection of solar energy systems to the electrical grid may significantly reduce our ability to sell electricity from our solar energy systems in certain markets or delay interconnections and customer in-service dates, harming our growth rate and customer satisfaction.

Technical and regulatory limitations regarding the interconnection of solar energy systems to the electrical grid may curb or slow our growth in key markets. Utilities throughout the country follow different rules and regulations regarding interconnection, and regulators or utilities have or could cap or limit the amount of solar energy that can be interconnected to the grid. Our systems do not provide power to homeowners until they are interconnected to the grid.

With regard to interconnection limits, the Federal Energy Regulatory Commission, in promulgating the first form of small generator interconnection procedures, recommended limiting customer-sited intermittent generation resources, such as our solar energy systems, to a certain percentage of peak load on a given electrical feeder circuit. Similar limits have been adopted by many states as a de facto standard and could constrain our

 

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ability to market to customers in certain geographic areas where the concentration of solar installations exceeds this limit.

Furthermore, in certain areas, we benefit from policies that allow for expedited or simplified procedures related to connecting solar energy systems and energy storage systems to the electrical grid. We also are required to obtain interconnection permission for each solar energy system from the local utility. In many states and territories, by statute, regulations or administrative order, there are standardized procedures for interconnecting distributed residential solar energy systems and related energy storage systems to the electric utility’s local distribution system. However, approval from the local utility could be delayed as a result of a backlog of requests for interconnection, or the local utility could seek to limit the number of customer interconnections or the amount of solar energy on the grid. In some states, such as New Jersey and Massachusetts, certain utilities such as municipal utilities or electric cooperatives are exempt from certain interconnection requirements. If expedited or simplified interconnection procedures are changed or cease to be available, or if interconnection approvals from the local utility are delayed, or if the local utility seeks to limit interconnections, this could decrease the attractiveness of new solar energy systems and energy storage systems to distributed residential solar power companies, including us, and the attractiveness of solar energy systems and energy storage systems to customers. Delays in interconnections could also harm our growth rate and customer satisfaction scores. Such limitations or delays could also adversely impact our access to capital and reduce our willingness to pursue solar energy systems and energy storage systems due to higher operating costs or lower revenues from solar service agreements. Such limitations would negatively impact our business, results of operations, future growth and cash flows.

As adoption of solar distributed generation rises, along with the increased operation of utility-scale solar generation (such as in key markets including California), the amount of solar energy being contributed to the electrical grid may surpass the capacity anticipated to be needed to meet aggregate demand. Some centralized public utilities claim that in less than five years, solar generation resources may reach a level capable of producing an over-generation situation, which may require some existing solar generation resources to be curtailed to maintain operation of the electrical grid. In the event that such an over-generation situation was to occur, this could also result in a prohibition on the addition of new solar generation resources. The adverse effects of such a curtailment or prohibition without compensation could adversely impact our business, results of operations, future growth and cash flows.

We and our dealers are subject to risks associated with construction, regulatory compliance and other contingencies.

We utilize our growing dealer network to market, design, construct and install solar energy systems and energy storage systems in each of the markets in which we operate. The marketing and installation of solar energy systems and energy storage systems is subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to consumer protection, building, fire and electrical codes, professional codes, safety, environmental protection, utility interconnection and metering, and related matters. We also rely on certain of our dealers and third-party contractors to obtain and maintain permits and professional licenses, including as contractors, and other authorizations from various regulatory authorities and abide by their respective conditions and requirements in many of the jurisdictions in which we operate. A failure by us to obtain necessary permits or encounter delays in obtaining or renewing such permits, or to use properly licensed dealers and third-party contractors could adversely affect our operations in those jurisdictions. Furthermore, we may become subject to similar regulatory requirements in some jurisdictions in which we operate. It is difficult and costly to track the requirements of every authority with jurisdiction over our operations and our solar energy systems. Separately, we are subject to regulations and potential liability under the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act related to the disposal of wastes generated in connection with our operations. Regulatory authorities may impose new government regulations or utility policies, change existing government regulations or utility policies, may seek expansive interpretations of existing regulations or policies pertaining to our services or solar energy systems and

 

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energy storage systems or may initiate associated investigations or enforcement actions or impose penalties or reject solar energy systems and energy storage systems. Any of these factors may result in regulatory and/or civil litigation, significant additional expenses to us or our customers or cause delays in our or our dealers’ ability to originate solar service agreement or install or interconnect solar energy systems and energy storage systems or cause other harm to our business. As a result, this could cause a significant reduction in demand for our services and solar energy systems and energy storage systems or otherwise adversely affect our business, financial condition and results of operations.

Compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties, operational delays and adverse publicity.

The installation and ongoing operations and maintenance of solar energy systems and energy storage systems requires individuals hired by us, our dealers or third-party contractors, potentially including our employees, to work at heights with complicated and potentially dangerous electrical systems. The evaluation and modification of buildings as part of the installation process requires these individuals to work in locations that may contain potentially dangerous levels of asbestos, lead, mold or other materials known or believed to be hazardous to human health. There is substantial risk of serious injury or death if proper safety procedures are not followed. Our operations are subject to regulation under the U.S. Occupational Safety and Health Act (“OSHA”), the U.S. Department of Transportation (“DOT”) regulations and equivalent state and local laws. Changes to OSHA or DOT requirements, or stricter interpretation or enforcement of existing laws or regulations, could result in increased costs. If we fail to comply with applicable OSHA or DOT regulations, even if no work-related serious injury or death occurs, we may be subject to civil or criminal enforcement and be required to pay substantial penalties, incur significant capital expenditures or suspend or limit operations. Because individuals hired by us or on our behalf to perform installation and ongoing operations and maintenance of our solar energy systems and energy storage systems, including our dealers and third-party contractors, are compensated on a per project basis, they are incentivized to work more quickly than installers that are compensated on an hourly basis. While we have not experienced a high level of injuries to date, this incentive structure may result in higher injury rates than others in the industry and could accordingly expose us to increased liability. Individuals hired by or on behalf of us may have workplace accidents and receive citations from OSHA regulators for alleged safety violations, resulting in fines. Any such accidents, citations, violations, injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and adversely affect our business.

A failure to comply with laws and regulations relating to interactions by us or our dealers with current or prospective residential customers could result in negative publicity, claims, investigations and litigation, and adversely affect our financial performance.

Our business substantially focuses on solar service agreements and transactions with residential customers. We and our dealers must comply with numerous federal, state and local laws and regulations that govern matters relating to interactions with residential consumers, including those pertaining to consumer protection, marketing and sales, privacy and data security, consumer financial and credit transactions, mortgages and refinancings, home improvement contracts, warranties and various means of customer solicitation. These laws and regulations are dynamic and subject to potentially differing interpretations, and various federal, state and local legislative and regulatory bodies may initiate investigations, expand current laws or regulations, or enact new laws and regulations, regarding these matters. Changes in these laws or regulations or their interpretation could dramatically affect how we and our dealers do business, acquire customers, and manage and use information collected from and about current and prospective customers and the costs associated therewith. We and our dealers strive to comply with all applicable laws and regulations relating to interactions with residential customers. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or the practices of us or our dealers.

 

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Although we require our dealers to meet our consumer compliance requirements and provide regular training to help them do so, we do not control our dealers and their suppliers or their business practices. Accordingly, we cannot guarantee that they follow ethical business practices such as fair wage practices and compliance with environmental, safety and other local laws. A lack of demonstrated compliance could lead us to seek alternative dealers or suppliers, which could increase our costs and have a negative effect on our business and prospects for growth. Violation of labor or other laws by our dealers or suppliers or the divergence of a dealer or supplier’s labor or other practices from those generally accepted as ethical in the United States or other markets in which we do or intend to do business could also attract negative publicity for us and harm our business.

Violations of anti-bribery, anti-corruption and/or international trade laws to which we are subject could have a material adverse effect on our business operations, financial position, and results of operations.

We are subject to laws concerning our business operations and marketing activities in the United States and its territories where we conduct business. Further, we are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. We currently only operate in the United States and its territories. However, in the future we may conduct business outside of the United States and operate in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our entry into new jurisdictions through internal growth or acquisitions requires substantial government contact where norms can differ from U.S. standards. Additionally, we regularly interact with domestic municipalities and municipal-owned centralized electric utilities. We will consider our interactions with these domestic governmental bodies when designing our policies and procedures and conducting training designed to facilitate compliance with domestic and international anti-bribery laws. Although we believe these policies and procedures will mitigate the risk of violations of such laws, our employees, dealers and agents may take actions in violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.

Violations of export control and/or economic sanctions laws and regulations to which we are subject could have a material adverse effect on our business operations, financial position, and results of operations.

Our products may be subject to export control regulations, including the Export Administration Regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security. We are also subject to foreign assets control and economic sanctions regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, which restrict or prohibit our ability to transact with certain foreign countries, individuals, and entities. We currently only operate in the United States and its territories. However, export control regulations may restrict our ability to exchange technical information with foreign manufacturers and suppliers, and economic sanctions regulations may restrict our ability to source from certain suppliers. In addition, in the future we may conduct business outside of the United States. We will consider these scenarios when designing our policies and procedures and conducting training designed to facilitate compliance with U.S. export control and economic sanctions laws and regulations. Although we believe these policies and procedures will mitigate the risk of violations of such laws, our employees, dealers and agents may take actions in violation of our policies or these laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.

 

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Risks Related to This Offering and Our Common Stock

We do not intend to pay, and our credit facilities currently prohibit us from paying, cash dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We do not plan to declare dividends on shares of our common stock in the foreseeable future. Additionally, we are currently prohibited from making any cash dividends pursuant to the terms of certain of our credit facilities. Consequently, your only opportunity to achieve a return on your investment in us will be if you sell your common stock at a price greater than you paid for it. There is no guarantee that the price of our common stock that will prevail in the market will ever exceed the price that you pay in this offering. Please see “Dividend Policy.”

The market price of our common stock could be materially adversely affected by sales of substantial amounts of our common stock in the public markets, including sales by Energy Capital Partners.

Immediately following this offering, Energy Capital Partners will beneficially own approximately    % of our common stock, or    % if the underwriters’ option to purchase additional shares is exercised in full. After the expiration of the 180-day lockup with the underwriters, Energy Capital Partners and its affiliates will be able to sell their shares in the public markets. Any such sales, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock or could impair our ability to obtain capital through an offering of equity securities.

An active, liquid and orderly trading market for our common stock does not exist and may not develop, and the price of our common stock may be volatile and may decline in value.

Prior to this offering, our common stock was not traded on any market. An active, liquid and orderly trading market for our common stock may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. The initial public offering price will be negotiated between us and representatives of the underwriters, based on numerous factors which we discuss in “Underwriting,” and may not be indicative of the market price of our common stock after this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in this offering.

The market price of our common stock may also be influenced by many factors, some of which are beyond our control, including:

 

   

public reaction to our press releases, announcements and filings with the SEC;

 

   

our operating and financial performance;

 

   

fluctuations in broader securities market prices and volumes, particularly among securities of technology and solar companies;

 

   

changes in market valuations of similar companies;

 

   

departures of key personnel;

 

   

commencement of or involvement in litigation;

 

   

variations in our quarterly results of operations or those of other technology and solar companies;

 

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changes in general economic conditions, financial markets or the technology and solar industries;

 

   

announcements by us or our competitors of significant acquisitions or other transactions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

speculation in the press or investment community;

 

   

actions by our stockholders;

 

   

the failure of securities analysts to cover our common stock after this offering or changes in their recommendations and estimates of our financial performance;

 

   

future sales of our common stock; and

 

   

the other factors described in these “Risk Factors.”

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our common stock, our common stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts currently covering our common stock ceases coverage of us, the trading price for our common stock would be negatively impacted. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our common stock performance, or if our operating results fail to meet the expectations of analysts, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline.

We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have utilized, and we plan in future filings with the SEC to continue to utilize, the modified disclosure requirements available to emerging growth companies. As a result, holders of our common stock may not have access to certain information they may deem important.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

 

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We could remain an “emerging growth company” until the earliest of (1) the last day of the fiscal year following the fifth anniversary of this offering, (2) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion, (3) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if we become a seasoned issuer and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (4) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our common stock price may be more volatile.

If we fail to comply with the reporting requirements under the Exchange Act or maintain adequate internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, it could result in late or non-compliant filings or inaccurate financial reporting and have a negative impact on the price of our common stock or our business.

Effective internal controls are necessary for us to provide timely, reliable financial reporting and prevent fraud. Our accounting predecessor was not a public company and was not required to comply with the reporting requirements of the Exchange Act, or with the standards adopted by the Public Company Accounting Oversight Board in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal controls over financial reporting. As a public company, we will be required to report our financial results on the timeline and in the form prescribed by the Exchange Act and to evaluate and report on our internal control over financial reporting. This will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting.

Though we will be required to disclose material changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company, which may be more than five full years following this offering. We cannot assure you that we will not in the future have material weaknesses or significant deficiencies. Material weaknesses and significant deficiencies may exist when we report on the effectiveness of our internal control over financial reporting as required by reporting requirements under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, after the completion of this offering.

The process of documenting and further developing our internal controls to become compliant with Section 404 will take a significant amount of time and effort to complete and will require significant attention of management. Completing implementation of new controls, documentation of our internal control system and financial processes, remediation of control deficiencies, and management testing of internal controls will require substantial effort by us. We may experience higher than anticipated operating expenses, as well as increased independent auditor and other fees and expenses during the implementation of these changes and thereafter.

Certain of our directors have significant duties with, and spend significant time serving, entities that may compete with us in seeking business opportunities and, accordingly, may have conflicts of interest in allocating time or pursuing business opportunities.

Certain of our directors, who are responsible for managing the direction of our operations and acquisition activities, hold positions of responsibility with other entities whose businesses are similar to our business. The existing positions held by these directors may give rise to fiduciary or other duties that are in

 

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conflict with the duties they owe to us. These directors may become aware of business opportunities that may be appropriate for presentation to us as well as to the other entities with which they are or may become affiliated. Due to these existing and potential future affiliations, they may present potential business opportunities to other entities prior to presenting them to us, which could cause additional conflicts of interest. They may also decide that certain opportunities are more appropriate for other entities with which they are affiliated, and as a result, they may elect not to present those opportunities to us. These conflicts may not be resolved in our favor. For additional discussion of our directors’ business affiliations and the potential conflicts of interest of which our stockholders should be aware, see “Certain Relationships and Related Party Transactions.”

Control of our common stock by current stockholders is expected to remain significant.

Currently, our key stockholders directly and indirectly beneficially own a majority of our outstanding common stock, and they will continue to own a substantial amount of our outstanding common stock following this offering. As a result, these affiliates have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws and the approval of any business combination. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving an offer premium for their shares. Please see “Security Ownership of Certain Beneficial Owners and Management” and “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

So long as the key stockholders continue to control a significant amount of our common stock, they will continue to be able to strongly influence all matters requiring stockholder approval, regardless of whether or not other stockholders believe that a potential transaction is in their own best interests. In any of these matters, the interests of the key stockholders may differ or conflict with the interests of our other stockholders. In addition, certain of the keys stockholders may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. Certain of the key stockholders and may acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue. Moreover, this concentration of stock ownership may also adversely affect the trading price of our common stock to the extent investors perceive a disadvantage in owning stock of a company with controlling stockholders.

Provisions of our charter documents and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to or contemporaneously with the completion of this offering will authorize our board of directors to issue preferred stock without stockholder approval and, relatedly, may have the effect of delaying or preventing an acquisition of us or a merger in which we are not the surviving company and may otherwise prevent or slow changes in our board of directors and management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), which will apply to us from the closing of this offering. In addition, some provisions of our certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including:

 

   

limitations on the removal of directors;

 

   

limitations on the ability of our stockholders to call special meetings;

 

   

establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders;

 

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providing that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws; and

 

   

establishing advance notice and certain information requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

These provisions could discourage an acquisition of us or other change in control transactions and thereby negatively affect the price that investors might be willing to pay in the future for our common stock. See “Anti-Takeover Provisions” to read about a description of capital stock takeover defenses.

Our amended and restated certificate of incorporation that will become effective immediately prior to or contemporaneously with the completion of this offering designates the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district courts of the United States of America as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

Our amended and restated certificate of organization that will become effective immediately prior to or contemporaneously with the completion of this offering will provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (1) any derivative action or proceeding brought on our or our stockholders’ behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers, employees, agents and stockholders to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, (4) any action as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the State of Delaware, or (5) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware. Our new amended and restated certificate of incorporation will also provide that, to the fullest extent permitted by applicable law, the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive forum provision.

Notwithstanding the foregoing, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring an interest in any shares of our capital stock shall be deemed to have notice of and to have consented to the forum provisions in our amended and restated certificate of incorporation. These choice-of-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that he, she or it believes to be favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors. For example, the Court of Chancery of the State of Delaware recently determined that a provision stating that U.S. federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable.

Future sales of our common stock in the public market, or the perception that such sales may occur, could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.

We may raise additional capital through the issuance of equity or debt in the future. In that event, the ownership of our existing stockholders would be diluted, and the value of the stockholders’ equity in common

 

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stock could be reduced. If we raise more equity capital from the sale of common stock, institutional or other investors may negotiate terms more favorable than the current prices of our common stock. If we issue debt securities, the holders of the debt would have a claim to our assets that would be prior to the rights of stockholders until the debt is paid. Interest on these debt securities would increase costs and could negatively impact operating results.

In accordance with Delaware law and the provisions of our amended and restated certificate of incorporation that will become effective immediately prior to or contemporaneously with the completion of this offering, we may issue preferred stock that ranks senior in right of dividends, liquidation or voting to our common stock. The issuance by us of such preferred stock may (i) reduce or eliminate the amount of cash available for payment of dividends to our holders of common stock, (ii) diminish the relative voting strength of the total shares of common stock outstanding as a class, or (iii) subordinate the claims of our holders of common stock to our assets in the event of our liquidation.

Our amended and restated certificate of incorporation that will become effective immediately prior to or contemporaneously with the completion of this offering does not provide stockholders the pre-emptive right to buy shares from us. As a result, stockholders will not have the automatic ability to avoid dilution in their percentage ownership of us.

In connection with this offering, we intend to file a registration statement with the SEC on Form S-8 providing for the registration of shares of our common stock issued or reserved for issuance under our equity incentive plan. Subject to the satisfaction of vesting conditions and the expiration of lock-up agreements, shares registered under the registration statement on Form S-8 will be available for resale immediately in the public market without restriction.

We cannot predict the size of future issuances of our common stock or securities convertible into common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock.

The underwriters of this offering may waive or release parties to the lock-up agreements entered into in connection with this offering, which could adversely affect the price of our common stock.

We, Energy Capital Partners and its affiliates, certain other investors and each of our directors and executive officers have entered into lock-up agreements with respect to their common stock, pursuant to which they are subject to certain resale restrictions for a period of 180 days following the date of this prospectus. The underwriters, at any time and without notice, may release all or any portion of the common stock subject to the foregoing lock-up agreements. If the restrictions under the lock-up agreements are waived, then common stock will be available for sale into the public markets, which could cause the market price of our common stock to decline and impair our ability to raise capital.

Investors in this offering will experience immediate and substantial dilution of $        per share.

Based on an assumed initial public offering price of $        per share of common stock (the midpoint of the price range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution of $        per share in the as adjusted net tangible book value per share of common stock from the initial public offering price, and our as adjusted net tangible book value as of March 31, 2019 after giving effect to this offering and the Recapitalization Transactions, would be $        per share. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. See “Dilution” for additional information.

 

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We will have broad discretion to determine how to use the funds raised in this offering. We may use them in ways that may not enhance our operating results or the price of our common stock.

We estimate we will receive net proceeds of $        million from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Our management will have broad discretion over the use of proceeds that we receive from this offering, and we could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return, if at all. Our use of these proceeds may differ substantially from our current plans, as described under “Use of Proceeds.” If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected results of operations, which could cause our common stock price to decline.

The NYSE does not require publicly listed companies like us to immediately comply with certain of its corporate governance requirements.

We have applied to list our common stock on the NYSE. We will rely on the phase-in rules of the SEC and the NYSE with respect to the independence of our nomination and corporate governance, compensation and audit committees. These rules permit us to have an audit committee that has one member that is independent by the date that our common stock first trades on the NYSE, a majority of members that are independent within 90 days of the effectiveness of the registration statement of which this prospectus forms a part and all members that are independent within one year of the effective date. Similarly, the rules permit us to have nominating and corporate governance and compensation committees that have one member that is independent by the date that our common stock first trades on the NYSE, a majority of members that are independent within 90 days of the listing date and all members that are independent within one year of the listing date. Additionally, we have 12 months from the date of listing to satisfy the requirement that a majority of the board of directors be independent. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

Risks Related to Taxation

In addition to reading the following risk factors, if any shareholder is a non-U.S. investor, see “Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock for a more complete discussion of certain expected U.S. federal income tax consequences of owning and disposing of our common stock.

Our ability to use net operating loss carryforwards and tax credit carryforwards to offset future income taxes is subject to limitation, and the amount of such carryforwards may be subject to challenge or reduction.

As of December 31, 2018, we had approximately $656.2 million of U.S. federal net operating loss carryforwards (“NOL”), a portion of which will begin to expire in 2032, and approximately $226.4 million of U.S. federal tax credit carryforwards, which begin to expire in 2033. Utilization of our NOLs and tax credit carryforwards depends on many factors, including our future income, which cannot be assured. In addition, Section 382 of the Code generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income by a corporation that has undergone an “ownership change” (as determined under Section 382). An ownership change generally occurs if one or more stockholders (or groups of stockholders) that are each deemed to own at least 5% of our stock increase their ownership percentage by more than 50 percentage points over their lowest ownership percentage during a rolling three-year period. Similar rules under Section 383 of the Code impose an annual limitation on the amount of tax credit carryforwards, including carryforwards of Section 48(a) ITCs, that may be used to offset U.S. federal income taxes.

We have experienced an ownership change under Sections 382 and 383 of the Code in the past. We do not expect to experience such an ownership change as a result of this offering, but this offering may contribute to a later ownership change when combined with any subsequent transactions. Thus, our ability to utilize NOLs and

 

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tax credit carryforwards existing at the time of this offering may be subject to limitation under Sections 382 and 383 of the Code. The application of such limitations may cause U.S. federal income taxes to be paid by us earlier than they otherwise would be paid if such limitations were not in effect and could cause such NOLs and tax credit carryforwards to expire unused, in each case reducing or eliminating the benefit of such NOLs and tax credit carryforwards. To the extent we are not able to offset our future taxable income with our NOLs or offset future taxes with our tax credits carryforwards, this would adversely affect our operating results and cash flows if we have taxable income in the future. These same risks can arise in the context of state income and franchise tax given that many states conform to federal law and rely on federal authority for determining state NOLs.

Furthermore, the IRS or other tax authorities could successfully challenge one or more tax positions we take, such as the classification of assets under the income tax depreciation rules, the characterization of expenses for income tax purposes, the extent to which sales, use or goods and services tax applies to operations in a particular state or the availability of property tax exemptions with respect to our solar energy systems, which could reduce the NOLs we generate and/or are able to use.

Our tax positions are subject to challenge by the relevant tax authority.

Our federal and state tax positions may be challenged by the relevant tax authority. The process and costs, including potential penalties for nonpayment of disputed amounts, of contesting such challenges, administratively or judicially, regardless of the merits, could be material. Future tax audits or challenges by tax authorities to our tax positions may result in a material increase in our estimated future income tax or other tax liabilities, which would negatively impact our financial condition.

For example, many of our solar energy systems are located in states or territories that exempt such assets from state, territorial and local sales and property taxes. We believe that these systems are and should continue to be exempt from certain state, territorial and local sales and property taxes; however, some of our solar energy systems are located in certain jurisdictions where the applicability of these exemptions to solar energy systems is the subject of ongoing litigation and possible legislative change, or else the jurisdiction’s law is uncertain regarding the effect on property and sales tax exemptions of certain complex business reorganizations undergone by us and our subsidiaries. As such, some tax authorities could challenge the availability of these exemptions. If our solar energy systems are determined to be subject to state, territorial or local sales or property taxes, it could negatively impact our financial condition.

Recent tax legislation and future changes in law could adversely affect our business.

The 2017 Tax Act significantly changed the Code, including the taxation of U.S. corporations, by, among other things, reducing the U.S. corporate income tax rate, accelerating the expensing of certain capital expenditures, adopting elements of a territorial tax system, and introducing certain anti-base erosion provisions. Further, the 2017 Tax Act generally (i) limits our annual deductions for interest expense to no more than 30% of our “adjusted taxable income” (plus 100% of our business interest income) for the year, and (ii) permits us to offset only 80% (rather than 100%) of our taxable income with any NOLs we generate after 2017 with an indefinite carryforward.

The 2017 Tax Act is unclear in certain respects and will require interpretations and implementing regulations by the IRS, and the legislation could be subject to potential amendments and technical corrections, any of which could lessen or increase certain adverse impacts of the legislation. As states elect to conform (or else have rolling conformity) to the Code, such interpretations, regulations, amendments, and corrections (including those promulgated by state authorities) could likewise affect our state income and franchise tax obligations. Any of the foregoing changes arising from the 2017 Tax Act, as well as other changes in law not mentioned herein, could adversely impact our business. Furthermore, any future changes in law could affect our tax position and adversely impact our business.

 

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If the IRS makes a determination that the fair market value of our solar energy systems is materially lower than what we have reported in our tax equity vehicles’ tax returns, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors and/or the U.S. government. Such determinations could have a material adverse effect on our business and financial condition.

The basis of our solar energy systems that we report in our tax equity vehicles’ tax returns to claim the Section 48(a) ITC is based on the appraised fair market value of our solar energy systems. Scrutiny by the IRS continues with respect to fair market value determinations industry-wide. We are not aware of any audits or results of audits related to our appraisals or fair market value determinations of any of our tax equity vehicles. If as part of an examination the IRS were to review the fair market value that we used to establish our basis for claiming Section 48(a) ITCs and determine that the Section 48(a) ITCs previously claimed should be reduced, we would owe certain of our tax equity vehicles or our tax equity investors an amount equal to 30% of the investor’s share of the difference between the fair market value used to establish our basis for claiming Section 48(a) ITCs and the adjusted fair market value determined by the IRS, plus any costs and expenses associated with a challenge to that fair market value, plus a gross up to pay for additional taxes. We could also be subject to tax liabilities, including interest and penalties, based on our share of claimed Section 48(a) ITCs. To date, we have not been required to make such payments under any of our tax equity vehicles. We have obtained insurance coverage with respect to certain losses that may be incurred should the Section 48(a) ITCs previously claimed with respect to our tax equity vehicles be reduced. Any such losses could be outside the scope of these insurance policies or exceed insurance policy limits, and we could incur unforeseen costs that could harm our business and financial condition.

If our solar energy systems either cease to be qualifying property or undergo certain changes in ownership within five years of the applicable placed in service date, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors and/or the U.S. government. Such recapture could have a material adverse effect on our business and financial condition.

The Section 48(a) ITCs are subject to recapture under the Code if a solar energy system either ceases to be qualifying property or undergoes certain changes in ownership within five years of its placed in service date. The amount of Section 48(a) ITCs subject to recapture decreases by 20% of the claimed amount on each anniversary of a solar energy system’s placed in service date. If such a recapture event were to occur, we could owe certain of our tax equity vehicles or our tax equity investors an amount equal to such vehicles’ or investors’ share of the Section 48(a) ITCs that were recaptured. We could also be subject to tax liabilities, including interest and penalties, based on our share of recaptured Section 48(a) ITCs. To date, none of the Section 48(a) ITCs claimed with respect to our solar energy systems have been recaptured. Any such recapture could have a material adverse effect on our business and financial condition.

 

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CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

These statements generally relate to future events or our future financial or operating performance. Actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. In some cases, you can identify these statements because they contain words such as “may,” “will,” “likely,” “should,” “expect,” “anticipate,” “could,” “contemplate,” “target,” “anticipate,” “future,” “plan,” “believe,” “intend,” “goal,” “seek,” “estimate,” “project,” “target,” “predict,” “potential,” “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

federal, state and local statutes, regulations and policies;

 

   

determinations of the IRS of the fair market value of our solar energy systems;

 

   

the price of centralized utility-generated electricity and electricity from other sources and technologies;

 

   

technical and capacity limitations imposed by operators of the power grid;

 

   

the availability of tax rebates, credits and incentives, including changes to the rates of, or expiration of, federal tax credits;

 

   

our need and ability to raise capital to finance the installation and acquisition of distributed residential solar energy systems, refinance existing debt or otherwise meet our liquidity needs;

 

   

our expectations concerning relationships with third parties, including the attraction, retention and continued existence of our dealers;

 

   

our ability to retain or upgrade current customers, further penetrate existing markets or expand into new markets;

 

   

our investment in our platform and new product offerings and the demand for and expected benefits of our platform and product offerings;

 

   

the ability of our solar energy systems, energy storage assets or other product offerings to operate or deliver energy for any reason, including if interconnection or transmission facilities on which we rely become unavailable;

 

   

our ability to maintain our brand and protect our intellectual property and customer data;

 

   

our ability to manage the cost of solar energy systems, energy storage systems and our service offerings;

 

   

the willingness of and ability of our dealers and suppliers to fulfill their respective warranty and other contractual obligations;

 

   

our expectations regarding litigation and administrative proceedings;

 

   

our ability to renew or replace expiring, cancelled or terminated solar service agreements at favorable rates or on a long-term basis;

 

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the increased expenses associated with being a public company; and

 

   

our anticipated uses of net proceeds from this offering.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

Forward-looking statements are based on management’s current expectations and assumptions, and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, actual results could differ materially from those indicated in these forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates as well as from independent industry publications and research, surveys and studies conducted by third parties, including the U.S. Energy Information Administration, the National Renewable Energy Laboratory, Wood Mackenzie Power & Renewables, EnergySage Inc., Deloitte Touche Tohmatsu Limited, the U.S. Census Bureau, the Solar Energy Industries Association, Lazard Financial Advisory, and Bloomberg New Energy Finance Limited (“BNEF”) or other publicly available information. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information and such information involves a number of assumptions and limitations. We have not commissioned, nor are we affiliated with, any of the independent industry sources we cite. While we believe our internal company research is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source. Estimates of historical growth rates in the markets where we operate are not necessarily indicative of future growth rates in such markets. While we are not aware of any misstatements regarding the market, industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Cautionary Language Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering at the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares of our common stock in full.

We intend to use the net proceeds to us from this offering, including upon exercise of the underwriters’ option to purchase additional shares, for general corporate purposes, including working capital, operating expenses, capital expenditures and repayment of indebtedness.

The timing and amount of our actual application of the net proceeds from this offering will be based on many factors, including our cash flows from operations and the growth of our business. Pending the use of proceeds to us from this offering as described above, we intend to invest the net proceeds from this offering in short-term and long-term interest-bearing obligations, including government and investment-grade debt securities and money market funds.

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $         million, assuming the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each one million increase or decrease in the number of shares of our common stock offered by us would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $         million, assuming the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not expect to pay any dividends on our capital stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. In addition, the terms of our credit agreement contain restrictions on payments of dividends, and we may also enter into other credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our capital stock.

 

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CAPITALIZATION

The following table sets forth our predecessor’s cash and capitalization as of March 31, 2019, as follows:

 

   

on an actual basis as of March 31, 2019;

 

   

on an as adjusted basis, giving effect to (i) the Corporate Reorganization (including the Reverse Stock Split), as if such transactions had occurred on March 31, 2019, (ii) the Subordinated Convertible Note Issuance and the Subordinated Convertible Note Conversion in full assuming a conversion price equal to $             per share and (iii) the Senior Convertible Note Conversion in full assuming a conversion price equal to $             per share; and

 

   

on a further adjusted basis to reflect (i) the adjustments set forth above; (ii) the sale by us of                  shares of our common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (iii) the application of such estimated net proceeds from this offering as discussed in “Use of Proceeds.”

 

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The as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our predecessor’s consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

    

As of March 31, 2019

 
    

Actual(1)

   

As
Adjusted

    

As Further
Adjusted(2)

 
     (in thousands, except share and
per share amounts)
 

Cash

   $ 43,858     $                    $                
  

 

 

   

 

 

    

 

 

 

Long-term debt(3):

       

Senior convertible notes(4)

   $ 44,882     $ —        $ —    

Subordinated convertible notes(4)(5)

     16,995       —          —    

Asset-backed securitizations(6)(7)

     620,251       

Warehouse credit facilities(6)(7)

     267,742       

Secured term loans(6)(8)

     147,128       
  

 

 

   

 

 

    

 

 

 

Total long-term debt

     1,096,998       

Redeemable noncontrolling interests(9)

     94,016       

Stockholders’ equity:

       

Series A convertible preferred stock, par value $0.01 per share: 110,000,000 shares authorized, 104,819,659 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted and as further adjusted

     1,048       —          —    

Series C convertible preferred stock, par value $0.01 per share: 40,000,000 shares authorized, 30,344,827 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted and as further adjusted

     303       —          —    

Series A common stock, par value $0.01 per share: 180,000,000 shares authorized, 20,093,529 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted and as further adjusted

     201       —          —    

Series B common stock, par value $0.01 per share: 20,000,000 shares authorized, 55,695 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted and as further adjusted

     1       —          —    

Common stock, par value $0.0001 per share: no shares authorized, issued and outstanding, actual;              shares authorized and              shares issued and outstanding, as adjusted; and             shares authorized and              shares issued and outstanding, as further adjusted

     —         

Additional paid-in capital—convertible preferred stock

     700,864       —          —    

Additional paid-in capital—common stock

     85,609       

Accumulated deficit

     (314,711     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ equity

     473,315       
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 1,664,329     $                    $                
  

 

 

   

 

 

    

 

 

 

 

(1)

Sunnova Energy International Inc. was incorporated on April 1, 2019 and does not have any historical financial operating results. The data in this table has been derived from the audited historical consolidated financial statements included in this prospectus of Sunnova Energy Corporation, our accounting predecessor.

 

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(2)

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash, additional paid-in capital, and total stockholders’ equity by approximately $             million and increase or decrease the number of shares of common stock issuable upon the Subordinated Convertible Note Conversion and the Senior Convertible Note Conversion in full following the initial public offering, assuming the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each one million increase or decrease in the number of shares of our common stock offered by us would increase or decrease, as applicable, our cash, additional paid-in capital, and total stockholders’ equity by approximately $             million and increase or decrease the number of shares of common stock issuable upon the Subordinated Convertible Note Conversion and the Senior Convertible Note Conversion in full following the initial public offering, assuming the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us.

(3)

Includes current portion of long-term debt and excludes deferred financing costs and debt discounts.

(4)

These debt facilities are recourse debt.

(5)

In June 2019, we expect to issue $15.0 million aggregate principal amount of subordinated convertible notes due 2021 to certain of our existing stockholders. The subordinated convertible notes will be converted into shares of our common stock in the Recapitalization Transactions.

(6)

These debt facilities are non-recourse debt.

(7)

In June 2019, another of our subsidiaries issued $139.7 million, $14.9 million and $13.0 million in aggregate principal amount of Class A, Class B and Class C, respectively, of Series 2019-A solar loan-backed notes, bearing interest at an annual rate of 3.75%, 4.49% and 5.32%, respectively, each with a maturity date of June 2046. A portion of the proceeds from such issuance was used to repay outstanding borrowings totaling $             under a warehouse credit facility and repay approximately $             of outstanding borrowings under a secured revolving credit facility. Additionally in June 2019, one of our subsidiaries issued an additional $6.4 million aggregate principal amount of RAYS notes in an asset-backed securitization private placement. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Arrangements”.

(8)

In June 2019, we expect to repay $5.0 million of outstanding borrowings under a collateral-based financing agreement, in connection with the amendment and restatement of that agreement to, among other things, (i) extend the maturity date to January 2021, (ii) decrease the applicable margin for related LIBOR loans to 2.50% and (iii) change the debt covenant regarding the ratio of consolidated EBITDA to debt service to be calculated based on collections from customers and other cash receipts and disbursements (instead of consolidated EBITDA). For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Arrangements”.

(9)

Reflects tax equity investors’ interests in the tax-equity entities. See Note 12, Redeemable Noncontrolling Interests, to our accounting predecessor’s consolidated annual financial statements and Note 11, Redeemable Noncontrolling Interests, to our accounting predecessor’s unaudited condensed consolidated financial statements.

If the holders of our subordinated convertible notes and senior convertible notes do not exercise their right to convert any shares of our common stock and we redeem all of the subordinated convertible notes and senior convertible notes, then our as further adjusted cash, additional paid-in capital, total stockholders’ equity, total capitalization and shares outstanding as of March 31, 2019, would be $              million, $              million, $              million, $              million and                  , respectively.

 

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If the underwriters exercise their option to purchase additional shares of our common stock in full, as further adjusted cash, additional paid-in capital, total stockholders’ equity, total capitalization and shares outstanding as of March 31, 2019, would be $                  million, $                  million, $                  million, $                  million and                  , respectively.

See the section titled “Prospectus Summary—The Offering” for a description of the shares of our capital stock that are or are not reflected as outstanding shares on an as adjusted basis in the table above.

 

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DILUTION

If you purchase shares of our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the as further adjusted net tangible book value per share of our common stock immediately after this offering. Dilution in as further adjusted net tangible book value per share to investors purchasing shares of our common stock in this offering represents the difference between the amount per share paid by investors purchasing shares of our common stock in this offering and the as further adjusted net tangible book value per share of our common stock immediately after completion of this offering.

Our historical net tangible book value as of March 31, 2019 was $428.8 million, or $21.28 per share. Historical net tangible book value per share represents our tangible assets (total assets less intangible assets) less total liabilities and redeemable non-controlling interests divided by the number of shares of outstanding common stock.

Our as adjusted net tangible book value as of March 31, 2019 was $             million, or $             per share. Our as adjusted net tangible book value per share represents the amount of our historical tangible book value as of March 31, 2019, after giving effect to the Recapitalization Transactions (including the Reverse Stock Split), which will occur immediately prior to or contemporaneously with the completion of this offering, and the Senior Convertible Note Conversion, which we are assuming will occur immediately after the completion of this offering.

After giving effect to the sale by us of shares of our common stock in this offering at the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our as further adjusted net tangible book value as of March 31, 2019 would have been $             million, or $             per share. This represents an immediate increase in as adjusted net tangible book value of $             per share to our existing stockholders and an immediate dilution of $             per share to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $                

As adjusted net tangible book value per share as of March 31, 2019 (after giving effect to the Recapitalization Transactions (including the Reverse Stock Split)(a)

   $                   

Increase in as adjusted net tangible book value per share attributable to investors purchasing shares of our common stock in this offering

   $       

As further adjusted net tangible book value per share of our common stock immediately after the completion of this offering (after giving effect to the Recapitalization Transactions (including the Reverse Stock Split)(b)

      $    
     

 

 

 

Dilution in as adjusted net tangible book value per share to investors purchasing shares of our common stock in this offering

      $    
     

 

 

 

 

(a)

To the extent that less than all of the senior convertible notes are converted into shares of common stock, each decrease of $1.0 million of principal amount of senior convertible notes converted into shares of common stock will result in a decrease of                  shares of common stock outstanding upon completion of this offering and an increase of our as adjusted net tangible book value as of March 31, 2019 of approximately $             or $             per share of common stock.

(b)

If the initial public offering price were to increase or decrease by $1.00 per share, then dilution in as adjusted net tangible book value per share to new investors in this offering would equal $             or $            , respectively.

 

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The following table presents, as of March 31, 2019, after giving effect to (i) the Recapitalization Transactions (including the Reverse Stock Split) and (ii) the sale by us of shares of our common stock in this offering at the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, the difference between the existing stockholders and the investors purchasing shares of our common stock in this offering with respect to the number of shares of our common stock purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

    

Shares Purchased

   

Total Consideration

   

Average
Price Per
Share

 
    

Number

    

Percent

   

Amount

    

Percent

 

Existing stockholders

                                                                 $                

Investors purchasing shares of our common stock in this offering

                                   $    
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

        100   $          100   $    
  

 

 

    

 

 

   

 

 

    

 

 

   

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our common stock. If the underwriters exercise their option to purchase additional shares of our common stock in full, our existing stockholders would own     % and the investors purchasing shares of our common stock in this offering would own     % of the total number of shares of our common stock outstanding immediately after completion of this offering, after giving effect to the Recapitalization Transactions (including the Reverse Stock Split).

See the section titled “Prospectus Summary—The Offering” for a description of the shares of our capital stock that are or are not reflected as outstanding shares on an as adjusted basis in the table and discussion above.

To the extent that any outstanding options to purchase our common stock are exercised or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL DATA

Sunnova Energy International Inc. was incorporated on April 1, 2019 and does not have any historical financial results. The following table shows selected historical financial data of our accounting predecessor, Sunnova Energy Corporation.

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. The consolidated statements of operations data for each of the three months ended March 31, 2019 and 2018 and the years ended December 31, 2018 and 2017, are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and related notes thereto included elsewhere in this prospectus and are qualified in their entirety by the consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

    

Three Months Ended
March 31,

   

Year Ended December 31,

 
    

2019

   

2018

   

2018

   

2017

 
     (Unaudited)              
     (in thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

        

Revenue

   $ 26,715     $ 19,784     $ 104,382     $ 76,856  

Operating expenses:

        

Cost of revenue—depreciation

     9,653       7,845       34,710       25,896  

Cost of revenue—other

     652       412       2,007       1,444  

Operations and maintenance

     2,254       2,340       14,035       4,994  

General and administrative

     18,681       16,356       67,430       54,863  

Other operating expense (income)

     (18     (16     (70     14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     31,222       26,937       118,112       87,211  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (4,507     (7,153     (13,730     (10,355

Interest expense, net

     29,167       3,790       45,132       56,650  

Interest expense, net—affiliates

     1,822       2,493       9,548       23,177  

Other income

     —         —         (1     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (35,496     (13,436     (68,409     (90,182

Income tax

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (35,496     (13,436     (68,409     (90,182

Net income attributable to redeemable noncontrolling interests

     3,018       774       5,837       903  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders—basic and diluted

   $ (38,514   $ (14,210   $ (74,246   $ (91,085
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to stockholders—basic and diluted(1)

   $ (2.52   $ (2.07   $ (6.74   $ (6.02

Weighted average shares used to compute net loss per share attributable to stockholders—basic and diluted

     20,146,724       20,144,224       20,144,275       20,140,638  

 

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Three Months Ended
March 31,

   

Year Ended

December 31,

 
    

2019

   

2018

   

2018

   

2017

 
     (Unaudited, in thousands)  

Cash Flow Data:

        

Net cash used in operating activities

   $ (24,430   $ (19,220   $ (11,570   $ (48,967

Net cash used in investing activities

   $ (92,680   $ (84,310   $ (348,849   $ (289,133

Net cash provided by financing activities

   $ 109,351     $ 145,791     $ 365,687     $ 369,893  

Other Financial Data:(2)

        

Adjusted EBITDA

   $ 8,068     $ 4,620     $ 41,119     $ 23,404  

Interest income from customer notes receivable

   $ 2,328     $ 1,133     $ 6,147     $ 3,003  

Principal proceeds from customer notes receivable

   $ 3,757     $ 1,526     $ 7,715     $ 2,816  

Adjusted Operating Cash Flows

   $ (18,046   $ (15,164   $ 8,416     $ (44,543

Adjusted Operating Expense

   $ 18,647     $ 15,164     $ 63,264     $ 53,452  

Adjusted Operating Expense per weighted average customer

   $ 301     $ 317     $ 1,185     $ 1,378  

 

(1)

See Note 15, Basic and Diluted Net Loss per Share, to our accounting predecessor’s consolidated annual financial statements. and Note 13, Basic and Diluted Net Loss per Share, to our accounting predecessor’s unaudited condensed consolidated financial statements.

(2)

Adjusted EBITDA, Adjusted Operating Cash Flows, Adjusted Operating Expense and Adjusted Operating Expense per weighted average customer are not financial measures calculated or presented in accordance with generally accepted accounting principles in the United States (“GAAP”). See “—Non-GAAP Reconciliation” for information regarding our use of these non-GAAP financial measures and reconciliations of each such measure to its most directly comparable GAAP equivalent.

 

    

As of March 31,
2019

    

As of December 31,

 
    

2018

    

2017

 
     (Unaudited)         
     (in thousands)  

Consolidated Balance Sheet Data:

        

Total current assets

   $ 85,954      $ 89,533      $ 81,277  

Property and equipment, net

   $ 1,399,299      $ 1,328,457      $ 1,113,073  

Total assets

   $ 1,769,463      $ 1,665,085      $ 1,328,788  

Long-term debt, net (including current portion)

   $ 1,067,882      $ 959,895      $ 831,325  

Total liabilities

   $ 1,202,132      $ 1,078,286      $ 919,014  

Total stockholders’ equity

   $ 473,315      $ 501,119      $ 371,184  

Non-GAAP Reconciliation:

Adjusted EBITDA. We define Adjusted EBITDA as net income/net loss plus net interest expense, depreciation and amortization expense, income tax expense, financing deal costs, disaster losses and related charges, net, legal settlements, and excluding the effect of certain non-recurring items that we do not consider to be indicative of our ongoing operating performance such as, but not limited to, costs of the initial public offering and other non-cash items such as asset retirement obligations (“AROs”) accretion expense and non-cash compensation expense.

Adjusted EBITDA is a non-GAAP financial measure that we use as a performance measure. We believe that investors and securities analysts also use Adjusted EBITDA in evaluating our operating performance. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted EBITDA is net income/loss. The presentation of Adjusted EBITDA should not be construed to suggest that our future results will be unaffected by non-cash or non-recurring items. In addition, our calculation of Adjusted EBITDA is not necessarily comparable to Adjusted EBITDA as calculated by other companies.

 

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We believe Adjusted EBITDA is useful to management, investors and analysts in providing a measure of core financial performance adjusted to allow for comparisons of results of operations across reporting periods on a consistent basis. These adjustments are intended to exclude items that are not indicative of the ongoing operating performance of the business. Adjusted EBITDA is also used by our management for internal planning purposes, including our consolidated operating budget, and by our board of directors in setting performance-based compensation targets. Adjusted EBITDA should not be considered an alternative to but viewed in conjunction with GAAP results, as we believe it provides a more complete understanding of ongoing business performance and trends than GAAP measures alone. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

 

    

Three Months Ended
March 31,

   

Year Ended
December 31,

 
    

2019

   

2018

   

2018

   

2017

 
     (Unaudited, in thousands except per customer
data)
 

Reconciliation of Net Loss to Adjusted EBITDA:

        

Net loss

   $ (35,496   $ (13,436   $ (68,409   $ (90,182

Interest expense, net

     29,167       3,790       45,132       56,650  

Interest expense, net—affiliates

     1,822       2,493       9,548       23,177  

Depreciation expense

     11,012       8,964       39,290       29,482  

Amortization expense

     5       33       133       133  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     6,510       1,844       25,694       19,260  

Non-cash compensation expense(1)

     387       726       3,410       1,495  

Asset retirement obligation accretion expense

     313       211       1,183       704  

Financing deal costs

     119       1,523       1,902       336  

Disaster losses and related charges, net

     —         316       8,217       1,034  

Initial public offering costs

     739       —         563       —    

Legal settlements

     —         —         150       575  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 8,068     $ 4,620     $ 41,119     $ 23,404  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amount includes non-cash effect of equity-based compensation plans of $0.3 million and $0.7 million for the three months ended March 31, 2019 and 2018 and $3.0 million and $1.5 million for the years ended December 31, 2018 and 2017, respectively, and partial forgiveness of a loan to an executive officer used to purchase our capital stock of $0.1 million for the three months ended March 31, 2019 and $0.4 million for the year ended December 31, 2018.

Adjusted Operating Cash Flow. We define Adjusted Operating Cash Flow as net cash used in operating activities plus principal proceeds from customer notes receivable and distributions to redeemable noncontrolling interests less payments to dealers for exclusivity and other bonus arrangements and inventory purchases.

Adjusted Operating Cash Flow is a non-GAAP financial measure we use as a liquidity measure. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of liquidity. The GAAP measure most directly comparable to Adjusted Operating Cash Flow is net cash used in operating activities. We believe Adjusted Operating Cash Flow is a supplemental financial measure useful to management, analysts, investors, lenders and rating agencies as an indicator of our ability to internally fund origination activities, service or incur additional debt and service our contractual obligations. We believe investors and analysts will use Adjusted Operating Cash Flow to evaluate our liquidity and ability to service our contractual obligations. However, Adjusted Operating Cash Flow has limitations as an analytical tool because it does not account for all future expenditures and financial obligations of the business or reflect unforeseen circumstances that may impact our future cash flows, all of which could have a material effect on our financial condition and results from operations. In addition, our calculations of Adjusted Operating Cash Flow are not

 

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necessarily comparable to liquidity measures presented by other companies. Investors should not rely on these measures as a substitute for any GAAP measure, including net cash used in operating activities.

 

    

Three Months Ended
March 31,

   

Year Ended

December 31,

 
    

2019

   

2018

   

2018

   

2017

 
     (Unaudited, in thousands)  

Reconciliation of Net Cash Used in Operating Activities to Adjusted Operating Cash Flows:

        

Net cash used in operating activities

   $ (24,430   $ (19,220   $ (11,570   $ (48,967

Principal proceeds from customer notes receivable

     3,757       1,526       7,715       2,816  

Distributions to redeemable noncontrolling interests

     (3,652     (339     (2,017     (294

Payments to dealers for exclusivity and other bonus arrangements

     2,000       —         —         —    

Inventory purchases

     4,279       2,869       14,288       1,902  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Cash Flows

   $ (18,046   $ (15,164   $ 8,416     $ (44,543
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Expense. We define Adjusted Operating Expense as total operating expense less depreciation and amortization expense, non-cash compensation expense, asset retirement obligation accretion expense, financing deal costs, disaster losses and related charges, net, initial public offering costs and legal settlements.

Adjusted Operating Expense is a non-GAAP financial measure we use as a performance measure. We believe investors and securities analysts will also use Adjusted Operating Expense in evaluating our performance. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted Operating Expense is total operating expenses. We believe Adjusted Operating Expense is a supplemental financial measure useful to management, analysts, investors, lenders and rating agencies as an indicator of the efficiency of our operations between reporting periods. Adjusted Operating Expense should not be considered an alternative to but viewed in conjunction with GAAP total operating expenses, as we believe it provides a more complete understanding of our performance than GAAP measures alone. Adjusted Operating Expense has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP, including total operating expenses.

 

    

Three Months

Ended March 31,

   

    Year Ended    

    December 31,    

 
    

2019

   

2018

   

2018

   

2017

 
     (Unaudited, in thousands except per customer data)  

Reconciliation of Operating Expense to Adjusted Operating Expense:

        

Operating expense

   $ 31,222     $ 26,937     $ 118,112     $ 87,211  

Depreciation expense

     (11,012     (8,964     (39,290     (29,482

Amortization expense

     (5     (33     (133     (133

Non-cash compensation expense

     (387     (726     (3,410     (1,495

Asset retirement obligation accretion expense

     (313     (211     (1,183     (704

Financing deal costs

     (119     (1,523     (1,902     (336

Disaster losses and related charges, net

     (—       (316     (8,217     (1,034

Initial public offering costs

     (739     (—       (563     (—  

Legal settlements

     (—       (—       (150     (575
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Expense

   $ 18,647     $ 15,164     $ 63,264     $ 53,452  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Expense per weighted average customer

   $ 301     $ 317     $ 1,185     $ 1,378  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Operational Metrics

We regularly review a number of metrics, including the following key operational metrics, to evaluate and manage the ongoing operations of the business, measure our performance against peers and competitors, identify key competitive trends affecting our industry, and inform strategic decisions on future growth strategy. For additional information about our key operating metrics, including their definitions and limitations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operational Metrics.”

 

    

As of March 31,
2019

    

As of December 31,

 
    

2018

    

2017

 
     (Unaudited, in millions except per
customer data)
 

Estimated total gross customer value

   $ 1,771      $ 1,675      $ 1,276  

Estimated gross customer value per customer

   $ 27,846      $ 27,778      $ 27,921  

 

    

Three Months Ended
March 31, 2019

    

Year Ended

December 31,

 
    

2018

    

2017

 
     (Unaudited, in millions except per
customer data)
 

Estimated net system value

   $ 25      $ 124      $ 106  

Estimated net system value per new customer

   $ 7,639      $ 8,509      $ 8,308  

 

    

Three Months Ended
March 31,

    

Year Ended
December 31,

 
    

2019

    

2018

    

2018

    

2017

 
     (Unaudited)  

Weighted average number of customers

     62,000        47,800        53,400        38,800  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the historical financial condition and results of operations of our accounting predecessor should be read in conjunction with “Selected Consolidated Financial Data” and the audited consolidated financial statements and unaudited condensed consolidated financial statements of our accounting predecessor and the related notes thereto included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed under “Cautionary Language Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus. Unless the context otherwise requires, the terms “Registrant,” “Sunnova,” “the company,” “we,” “us” and “our” refer to (i) Sunnova Energy Corporation and its consolidated subsidiaries when used in a historical context for any period presented and (ii) Sunnova Energy International Inc. and its consolidated subsidiaries after giving effect to the transactions described under “Corporate Reorganization.”

Company Overview

We are a leading residential solar and energy storage service provider, serving more than 63,000 customers in more than 20 U.S. states and territories. Our goal is to be a leading provider of clean, affordable and reliable energy for consumers, and we operate with a simple mission: to power energy independence. We were founded to deliver customers a better energy service at a better price, and through our solar and solar plus energy storage service offerings we are disrupting the traditional energy landscape and the way the 21st century customer generates and consumes electricity.

We have a differentiated residential solar dealer model in which we work hand-in-hand with local dealers who originate, design and install our customers’ solar energy and energy storage systems on our behalf. Our unique focus on our dealer model enables us to leverage our dealers’ specialized knowledge, connections and experience in local markets to drive customer origination while providing our dealers with access to high quality products and technical oversight and expertise. This structure provides operational flexibility and lower fixed costs relative to our peers, furthering our competitive advantage.

The services we provide are integral to our customers’ value proposition. These include operations and maintenance, monitoring, repairs and replacements, equipment upgrades, onsite power optimization for the customer (for both supply and demand), the ability to efficiently switch power sources among the solar panel, grid and energy storage system, as appropriate, and diagnostics.

We offer customers products to power their homes with affordable solar energy. We are able to offer savings to our solar-only customers compared to utility-based retail rates with little to no up-front expense to the customer, and we are able to provide energy resiliency and reliability to our solar plus energy storage customers. Our solar service agreements take the form of a lease, power purchase agreement (“PPA”) or loan. The initial term of our solar service agreements is typically 25 years, or in the case of standalone energy storage services, 10 years. Service is an integral part of our agreements and includes operations and maintenance, monitoring, repairs and replacements, equipment upgrades, onsite power optimization for the customer (for both supply and demand), the ability to efficiently switch power sources among the solar panel, grid and battery, as appropriate, and diagnostics. During the life of the contract we have the opportunity to integrate related and evolving home servicing and monitoring technologies to upgrade the flexibility and reduce the cost of our customers’ energy supply.

In the case of leases and PPAs, we also currently receive tax benefits and other incentives from federal, state and local governments, a portion of which we finance through tax equity, non-recourse debt structures and

 

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hedging arrangements in order to fund our upfront costs, overhead and growth investments. We have an established track record of attracting capital from diverse sources. Since inception, we have raised more than $3.0 billion in total capital commitments from equity, debt and tax equity investors.

In addition to providing ongoing service as a standard component of our solar service agreements, we also offer ongoing energy services to customers who purchased their solar energy system through unaffiliated third parties. Under these arrangements, we agree to provide such monitoring, maintenance and repair services to these customers for the life of the service contract that they sign with us. We believe the quality and scope of our comprehensive energy service offerings, whether to customers that obtained their solar energy system through us or through another party, is a key differentiator between us and our competitors.

We commenced operations in January 2013 and began providing solar energy services under our first solar energy system in April 2013. Since then, our brand, innovation and focused execution have driven significant growth in our market share and in the number of customers on our platform. We operate one of the largest fleets of residential solar energy systems in the United States, comprising more than 455 megawatts of generation capacity and serving more than 63,000 customers.

Securitizations

We securitize qualifying solar energy systems and related solar service agreements into special purpose entities who issue solar asset-backed notes to institutional investors as a source of long-term financing. We also securitize the cash flows generated by the membership interests in certain of our indirect, wholly-owned subsidiaries that are the managing member of a tax equity fund that owns a pool of solar energy systems and related solar service agreements that were originated by one of our wholly-owned subsidiaries. We do not securitize the ITC incentives associated with the solar energy systems as part of these arrangements. The cash flows generated by these solar energy systems are used to service the quarterly or semi-annual principal and interest payments on the notes and satisfy the expenses and reserve requirements of the special purpose entities, with any remaining cash distributed to their sole members, who are typically our indirect wholly-owned subsidiaries. In connection with these securitizations, certain of our affiliates receive a fee for managing and servicing the solar energy systems pursuant to management, servicing, facility administration and asset management agreements. The special purpose entities are also typically required to maintain a liquidity reserve account and a reserve account for inverter replacements and, in certain cases, reserve accounts for financing fund purchase option/withdrawal right exercises or storage system replacement for the benefit of the lenders under the applicable series of notes, each of which are funded from initial deposits or cash flows to the levels specified therein. The creditors of these special purpose entities have no recourse to our other assets except as expressly set forth in the terms of the notes. We issued $254.8 million and $262.7 million in solar asset-backed notes in 2017 and 2018, respectively, and issued $133.1 million in solar asset-backed notes in 2019 through March 31, 2019. For additional information on our securitizations, see “—Liquidity and Capital Resources—Financing Arrangements”, Note 7, Long-Term Debt, to our accounting predecessor’s consolidated annual financial statements and Note 7, Long-Term Debt, to our accounting predecessor’s unaudited condensed consolidated financial statements.

Tax Equity Funds

Our ability to offer long-term solar service agreements depends in part on our ability to finance the installation of the solar energy systems by co-investing with tax equity investors such as large banks who value the resulting customer receivables and Section 48(a) ITCs, accelerated tax depreciation and other incentives related to the solar energy systems primarily through structured investments known as “tax equity.” Tax equity investments are generally structured as non-recourse project financings known as “tax equity funds.” In the context of distributed generation solar energy, tax equity investors make an upfront advance payment to a sponsor through a tax equity fund in exchange for a share of the tax attributes and cash flows emanating from an underlying portfolio of solar energy systems. In these tax equity funds, the U.S. federal tax attributes offset taxes

 

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that otherwise would have been payable on the investors’ other operations. The terms and conditions of each tax equity fund vary significantly by investor and by fund. We continue to negotiate with financial investors to create additional tax equity funds.

In general, our tax equity funds are structured using the “partnership flip” structure. Under partnership flip structures, we and our tax equity investors contribute cash into a partnership company. The partnership uses this cash to acquire long-term solar service agreements and solar energy systems developed by us and sells energy from such systems to customers or directly leases the solar energy systems to customers. We assign these solar service agreements, solar energy systems and related incentives to our tax equity funds in accordance with the criteria of the specific funds. Upon such assignment and the satisfaction of certain conditions precedent, we are able to draw down on the tax equity fund commitments. The conditions precedent to funding vary across our tax equity funds but generally require that we have entered into a solar service agreement with the customer, that the customer meets certain credit criteria, that the solar energy system is expected to be eligible for the Section 48(a) ITC, that we have a recent appraisal from an independent appraiser establishing the fair market value of the system and that the property is in an approved state or territory. All of the capital contributed by our tax equity investors into the tax equity funds is, depending on the tax equity fund structure, either paid to us to acquire solar energy systems or distributed to us following our contribution of solar energy systems to the tax equity fund. Some tax equity investors have additional criteria that are specific to those tax equity funds. Once received by us, these proceeds are generally used for working capital or capital expenditures to develop and deliver solar energy systems. Each tax equity investor receives a minimum target rate of return, typically on an after-tax basis, which varies by tax equity fund. Prior to a date certain based on the expiration of the Section 48(a) ITC recapture period for the last project to be placed in service, the tax equity investor receives substantially all of the non-cash value attributable to the systems, which includes accelerated depreciation and Section 48(a) ITCs, and a scheduled cash distribution; however, we receive a majority of the cash distributions, which are typically paid quarterly. After such date, we receive substantially all of the cash. Under the partnership flip structure, in part owing to the allocation of depreciation benefits to the investor, the investor’s pre-tax return is much lower than the investor’s after-tax return.

We have determined that we are the primary beneficiary in these partnership flip structures for accounting purposes. Accordingly, we consolidate the assets and liabilities and operating results of these partnerships in our consolidated financial statements. We recognize the tax equity investors’ share of the net assets of the tax equity funds as non-controlling interests and redeemable non-controlling interests in our consolidated balance sheets. These income or loss allocations, reflected on our consolidated statement of operations, may create significant volatility in our reported results of operations, including potentially changing net loss to net income, or vice versa, from quarter to quarter.

We typically have an option to acquire, and our tax equity investors may have an option to withdraw and require us to purchase, all of the equity interests that our tax equity investor holds in the tax equity funds approximately six years after the last solar energy system in each tax equity fund is operational. If we or our tax equity investors exercise this option, we are typically required to pay at least the fair market value of the tax equity investor’s equity interest. Following such exercise, we would receive 100% of the customer payments for the remainder of the term of the solar service agreements.

We received commitments of $167.5 million and $17.0 million in 2017 and 2018, respectively, and received commitments of $50.0 million in 2019 through March 31, 2019, through the use of tax equity funds, of which an aggregate of $169.3 million has been funded as of March 31, 2019. On May 25, 2019 and June 10, 2019, we received non-binding indications of interest for up to $150.0 million and $185.7 million, respectively, of additional tax equity funds from certain affiliates of the underwriters. There can be no guarantee that we will execute definitive documentation relating to these facilities or that these facilities will close. For additional information on these partnerships, see Note 12, Redeemable Noncontrolling Interests, to our accounting predecessor’s consolidated annual financial statements and Note 11, Redeemable Noncontrolling Interests, to our accounting predecessor’s unaudited condensed consolidated financial statements.

 

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Key Financial and Operational Metrics

We regularly review a number of metrics, including the following key operational and financial metrics, to evaluate our business, measure our performance and liquidity, identify trends affecting our business, formulate our financial projections and make strategic decisions.

Operational Metrics

We regularly review a number of metrics, including the following key operational metrics, to evaluate and manage the ongoing operations of the business, measure our performance against peers and competitors, identify key competitive trends affecting our industry, and inform strategic decisions on future growth strategy.

Number of Customers. We define number of customers to include each customer that is party to an in-service solar service agreement. For our leases, PPAs and loan agreements, in-service means the related solar energy system and, if applicable, energy storage system, must have met all the requirements to begin operation and be interconnected to the electrical grid. For our Sunnova Protect services, in-service means the customer’s system must have met the requirements to have the service activated. We do not include in our number of customers any customer under a lease, PPA or loan agreement for whom we have terminated the contract and removed the solar energy system. We also do not include in our number of customers any customer of our Sunnova Protect services that has been in default under his or her solar service agreement in excess of six months. We track the total number of customers as an indicator of our historical growth and our rate of growth from period to period.

 

    

As of
March 31,
2019

    

As of
December 31,

 
    

2018

    

2017

 
    

(Unaudited)

 

Number of customers

     63,600        60,300        45,700  

Weighted Average Number of Customers. We calculate the weighted average number of customers based on the number of months a given customer is in-service during a given measurement period. The weighted average customer count reflects the number of customers at the beginning of a period, plus the total number of new customers added in the period adjusted by a factor that accounts for the partial period nature of those new customers. For purposes of this calculation, we assume all new customers added during a month were added in the middle of that month. We track the weighted average customer count in order to accurately reflect the contribution of the appropriate number of customers to key financial metrics over the measurement period.

 

    

Three Months Ended
March 31,

    

Year Ended
December 31,

 
    

2019

    

2018

    

2018

    

2017

 
     (Unaudited)  

Weighted average number of customers (excluding loan agreements)

     55,300        44,900        49,200        37,000  

Weighted average number of customers with loan agreements

     6,700        2,900        4,200        1,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of customers

     62,000        47,800        53,400        38,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Estimated gross customer value

We calculate estimated gross customer value as the sum of estimated contracted gross customer value and estimated renewal gross customer value, as defined below. We use estimated gross customer value to measure the approximate value of our existing customer base in making strategic and financial decisions, and we believe estimated gross customer value can serve as a useful tool for investors and analysts in comparing the remaining value of our customer contracts to peers.

 

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Estimated contracted gross customer value as of a specific measurement date represents the sum of the present value of the remaining estimated future net cash flows we expect to receive from existing customers during the initial contract term of our solar leases and PPAs, which are typically 25 years in length, plus the present value of future net cash flows we expect to receive from the sale of related SRECs, either under existing contracts or in future sales, plus the carrying value of outstanding customer loans on our balance sheet. From these aggregate estimated initial cash flows, we subtract the present value of estimated net cash distributions to redeemable noncontrolling interests and estimated operating, maintenance and administrative expenses associated with the solar service agreements. These estimated future cash flows reflect the projected monthly customer payments over the life of our solar service agreements and depend on various factors including but not limited to solar service agreement type, contracted rates, expected sun hours and the projected production capacity of the solar equipment installed. For the purpose of calculating this metric, we discount all future cash flows at 6%.

The anticipated operating, maintenance and administrative expenses included in the calculation of estimated contracted gross customer value include, among other things, expenses related to accounting, reporting, audit, insurance, maintenance and repairs. In the aggregate, we estimate these expenses are $20 per kilowatt per year initially, with 2% annual increases for inflation. We do not include maintenance and repair costs for inverters and similar equipment as those are largely covered by the applicable product and dealer warranties for the life of the product, but we do include additional cost for energy storage systems, which are only covered by a 10-year warranty. Expected distributions to tax equity investors vary among the different tax equity funds and are based on individual tax equity fund contract provisions.

Estimated renewal gross customer value as of a specific measurement date represents the sum of the present value of future net cash flows we would receive from customers during two five-year renewal terms of our leases and PPAs, plus the present value of future net cash flows we expect to receive from the sale of related SRECs, either under existing contracts or in future sales. From these aggregate estimated renewal cash flows we subtract the present value of estimated net cash distributions to redeemable noncontrolling interests and the estimated operating, maintenance and administrative expenses associated with the solar service agreements (as described above). For the purpose of calculating this metric, we discount all future cash flows at 6%. To calculate estimated renewal gross customer value, we use the established industry convention, which assumes 100% of solar leases and PPAs are renewed, due to the expected useful life of the system and costs to the customer associated with an election to purchase or remove the equipment. We further assume that these contracts are renewed at 90% of the contractual price in effect at expiration of the term of the solar service agreement. Because the customer has two renewal options of five years each, for the second renewal period we assume a contractual price of 90% of the price in the first renewal period. Our loan agreements do not contain a renewal feature, and therefore are not included in estimated renewal gross customer value.

Because all of our customers have many years remaining on their solar service agreements and many factors will affect a customer’s decision to renew, it is difficult to predict what percentage of our customers will actually renew their solar service agreement as opposed to exercising a purchase option (in the case of the PPAs) or requesting removal of the system, whether such renewal would be for one or both five-year renewal periods, and what the rates of such renewals and purchases would be. We are therefore not predicting that all customers will renew or that they will renew at 90% of the contractual price at the expiration of the prior term but are presenting this information for illustrative purposes only and as a comparison to information published by our peers. We would note the life expectancy of the equipment extends beyond the initial term of the solar service agreement such that customers could continue to receive energy from the solar energy systems at the end of the initial term should they choose to do so. We also note the other options available to customers will be to purchase the solar energy system from us at the end of the term or to have us remove the solar energy system, each of which will have its associated costs for the customer and corresponding revenues to us.

Estimated gross customer value per customer is calculated by dividing the estimated gross customer value by our number of customers, in each case as of a specific measurement date. The table below shows the

 

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calculation of estimated gross customer value, estimated contracted gross customer value and estimated renewal gross customer value as of March 31, 2019 and December 31, 2018 and 2017, calculated using a 6% discount rate.

 

    

As of March 31,
2019

    

As of December 31,

 
    

2018

    

2017

 
     (Unaudited, in millions)  

Estimated contracted gross customer value

   $ 1,568      $ 1,476      $ 1,127  

Estimated renewal gross customer value

     203        199        149  
  

 

 

    

 

 

    

 

 

 

Estimated total gross customer value

   $ 1,771      $ 1,675      $ 1,276  
  

 

 

    

 

 

    

 

 

 

 

    

As of March 31,
2019

    

As of December 31,

 
    

2018

    

2017

 
     (Unaudited)  

Estimated gross customer value per customer

   $ 27,846      $ 27,778      $ 27,921  

Operational Metrics Sensitivity Analysis

The calculation of estimated gross customer value and associated operational metrics requires us to make a number of assumptions regarding future revenues and costs which may not prove accurate. Accordingly, we present below a sensitivity analysis with a range of assumptions. We consider a discount rate of 6% to be appropriate based on industry practice and recent transactions that demonstrate a portfolio of residential solar service agreements is an asset class that can be securitized successfully on a long-term basis, with a coupon of less than 6%. The appropriate discount rate for these estimates may change in the future due to the level of inflation, rising interest rates, our cost of capital and consumer demand for solar energy systems. In addition, the tables below provide a range of estimated gross customer value amounts if different cumulative customer loss and renewal assumptions were used (with renewal contractual price of contracts expressed as a percentage of the customer’s current rate). We are presenting this information for illustrative purposes only and as a comparison to information published by our peers.

Estimated contracted gross customer value

 

    

As of March 31, 2019

 
    

Discount rate

 

Cumulative customer loss rate

  

4%

    

6%

    

8%

 
     (Unaudited, in millions)  

5%

   $ 1,795      $ 1,545      $ 1,354  

0%

   $ 1,827      $ 1,568      $ 1,373  

Estimated renewal gross customer value

 

    

As of March 31, 2019

 
    

Discount rate

 

Rate of renewed contract

  

4%

    

6%

    

8%

 
     (Unaudited, in millions)  

80%

   $ 290      $ 172      $ 103  

90%

   $ 343      $ 203      $ 121  

100%

   $ 398      $ 235      $ 140  

 

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Estimated gross customer value

 

    

As of March 31, 2019

 
    

Discount rate

 

Rate of renewed contract

  

4%

    

6%

    

8%

 
     (Unaudited, in millions)  

80%

   $ 2,117      $ 1,740      $ 1,476  

90%

   $ 2,170      $ 1,771      $ 1,494  

100%

   $ 2,225      $ 1,803      $ 1,513  

Estimated net system value

Estimated net system value represents the total discounted future net cash flows expected to be received with respect to new customers during a specified period. We use the methodology for determining estimated gross customer value set forth above as a starting point to calculate our estimated net system value, as described below.

Estimated net system value represents the sum of estimated gross customer value, plus expected or received utility and up-front governmental incentives, to the extent not included in such estimated gross customer value, plus expected or received contributions from tax equity fund investors for redeemable non-controlling interests in tax equity vehicles, as each relates to new customers placed in service within a specified period. From these aggregate estimated values, we subtract payments made or expected to be made to our dealers associated with customer solar energy systems.

We believe estimated net system value can be a useful tool in providing an estimate of all sources of cash flow, net of certain expenses, not just from customers but also from incentives, tax equity and dealers (but before debt financing proceeds), attributable to new customers during the reported period. As such, we believe estimated net system value supplements estimated gross customer value by providing a measure of the present value of all cash generated by our new solar energy systems subject to solar service agreements over the reported period. Our systems origination and installations have been and will continue to be impacted by seasonality, particularly in the first and fourth quarters, resulting from decreased sales through the holiday season and weather-related installation delays.

 

    

Three Months Ended
March 31, 2019

    

Year Ended
December 31,

 
    

2018

    

2017

 
     (Unaudited, in millions, except per customer
data)
 

Estimated net system value

   $ 25      $ 124      $ 106  

Estimated net system value per new customer

   $ 7,639      $ 8,509      $ 8,308  

Estimated contracted gross customer value, estimated renewal gross customer value, estimated gross customer value, estimated gross customer value per customer, estimated net system value and estimated net system value per new customer amounts are presented as of specific dates. These estimates are forward-looking numbers based on management’s beliefs and assumptions and on information currently available. Although we believe we have a reasonable basis for each of these estimates, we caution you that these estimates are based on a combination of assumptions that may prove to be inaccurate over time. Such inaccuracies could be material, particularly given that the estimates relate to cash flows up to 35 years in the future and given the various factors described under the section of this prospectus captioned “Risk Factors,” including, but not limited to, amendments to and decreases in the rates of our solar service agreements, decreases in the number of customers who live in states with higher utility rates, non-payment of obligated amounts by the tax equity investors and our SREC counterparties, declines in utility rates for residential electricity, underperformance of the solar energy systems, payment defaults by our customers, cancellations of solar service agreements, solar energy system transfers, competition from other distributed solar energy companies, development in the distributed solar energy

 

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market and the energy market more broadly, technological innovation, macroeconomic conditions, developments in the regulatory environment, inflation, reliability of inverters and other equipment, the level of government incentives and changes in market prices for SRECs. Any of these factors could cause our actual results to differ materially from our calculations.

Furthermore, other companies may calculate these metrics differently than we do now or in the future, which would reduce their usefulness as a comparative measure.

Estimated contracted gross customer value, estimated renewal gross customer value, estimated gross customer value, estimated gross customer value per customer, estimated net system value and estimated net system value per new customer amounts included in this document have been prepared by, and are the responsibility of, management. PricewaterhouseCoopers LLP has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to the accompanying estimated contracted gross customer value, estimated renewal gross customer value, estimated gross customer value, estimated gross customer value per customer, estimated net system value and estimated net system value per new customer and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this document relates to our previously issued consolidated financial statements. It does not extend to the estimated contracted gross customer value, estimated renewal gross customer value, estimated gross customer value, estimated gross customer value per customer, estimated net system value and estimated net system value per new customer and should not be read to do so.

Non-GAAP Financial Measures

Adjusted EBITDA. We define Adjusted EBITDA as net income/net loss plus net interest expense, depreciation and amortization expense, income tax expense, financing deal costs, disaster losses and related charges, net, legal settlements, and excluding the effect of certain non-recurring items that we do not consider to be indicative of our ongoing operating performance such as, but not limited to, costs of the initial public offering and other non-cash items such as asset retirement obligations (“AROs”) accretion expense and non-cash compensation expense.

Adjusted EBITDA is a non-GAAP financial measure that we use as a performance measure. We believe that investors and securities analysts also use Adjusted EBITDA in evaluating our operating performance. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted EBITDA is net income/loss. The presentation of Adjusted EBITDA should not be construed to suggest that our future results will be unaffected by non-cash or non-recurring items. In addition, our calculation of Adjusted EBITDA is not necessarily comparable to Adjusted EBITDA as calculated by other companies.

 

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We believe Adjusted EBITDA is useful to management, investors and analysts in providing a measure of core financial performance adjusted to allow for comparisons of results of operations across reporting periods on a consistent basis. These adjustments are intended to exclude items that are not indicative of the ongoing operating performance of the business. Adjusted EBITDA is also used by our management for internal planning purposes, including our consolidated operating budget, and by our board of directors in setting performance-based compensation targets. Adjusted EBITDA should not be considered an alternative to but viewed in conjunction with GAAP results, as we believe it provides a more complete understanding of ongoing business performance and trends than GAAP measures alone. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

 

    

Three Months Ended
March 31,

   

Year Ended
December 31,

 
    

2019

   

2018

   

2018

   

2017

 
    

(Unaudited, in thousands except per customer
data)

 

Reconciliation of Net Loss to Adjusted EBITDA:

        

Net loss

   $ (35,496   $ (13,436   $ (68,409   $ (90,182

Interest expense, net

     29,167       3,790       45,132       56,650  

Interest expense, net—affiliates

     1,822       2,493       9,548       23,177  

Depreciation expense

     11,012       8,964       39,290       29,482  

Amortization expense

     5       33       133       133  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     6,510       1,844       25,694       19,260  

Non-cash compensation expense(1)

     387       726       3,410       1,495  

Asset retirement obligation accretion expense

     313       211       1,183       704  

Financing deal costs

     119       1,523       1,902       336  

Disaster losses and related charges, net

     —         316       8,217       1,034  

Initial public offering costs

     739       —         563       —    

Legal settlements

     —         —         150       575  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 8,068     $ 4,620     $ 41,119     $ 23,404  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amount includes non-cash effect of equity-based compensation plans of $0.3 million and $0.7 million for the three months ended March 31, 2019 and 2018 and $3.0 million and $1.5 million for the years ended December 31, 2018 and 2017, respectively, and partial forgiveness of a loan to an executive officer used to purchase our capital stock of $0.1 million for the three months ended March 31, 2019 and $0.4 million for the year ended December 31, 2018.

Adjusted Operating Cash Flow. We define Adjusted Operating Cash Flow as net cash used in operating activities plus principal proceeds from customer notes receivable and distributions to redeemable noncontrolling interests less payments to dealers for exclusivity and other bonus arrangements and inventory purchases.

Adjusted Operating Cash Flow is a non-GAAP financial measure we use as a liquidity measure. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of liquidity. The GAAP measure most directly comparable to Adjusted Operating Cash Flow is net cash used in operating activities. We believe Adjusted Operating Cash Flow is a supplemental financial measure useful to management, analysts, investors, lenders and rating agencies as an indicator of our ability to internally fund origination activities, service or incur additional debt and service our contractual obligations. We believe investors and analysts will use Adjusted Operating Cash Flow to evaluate our liquidity and ability to service our contractual obligations. However, Adjusted Operating Cash Flow has limitations as an analytical tool because it does not account for all future expenditures and financial obligations of the business or reflect unforeseen circumstances that may impact our future cash flows, all of which could have a material effect on our financial condition and results from operations. In addition, our calculations of Adjusted Operating Cash Flow are not

 

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necessarily comparable to liquidity measures presented by other companies. Investors should not rely on these measures as a substitute for any GAAP measure, including net cash used in operating activities.

 

    

Three Months Ended
March 31,

   

Year Ended

December 31,

 
    

2019

   

2018

   

2018

   

2017

 
     (Unaudited, in thousands)  

Reconciliation of Net Cash Used in Operating Activities to Adjusted Operating Cash Flows:

        

Net cash used in operating activities

   $ (24,430   $ (19,220   $ (11,570   $ (48,967

Principal proceeds from customer notes receivable

     3,757       1,526       7,715       2,816  

Distributions to redeemable noncontrolling interests

     (3,652     (339     (2,017     (294

Payments to dealers for exclusivity and other bonus arrangements

     2,000       —         —         —    

Inventory purchases

     4,279       2,869       14,288       1,902  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Cash Flows

   $ (18,046   $ (15,164   $ 8,416     $ (44,543
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Expense. We define Adjusted Operating Expense as total operating expenses less depreciation and amortization expense, non-cash compensation expense, asset retirement obligation accretion expense, financing deal costs, disaster losses and related charges, net, initial public offering costs and legal settlements.

Adjusted Operating Expense is a non-GAAP financial measure we use as a performance measure. We believe investors and securities analysts will also use Adjusted Operating Expense in evaluating our performance. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted Operating Expense is total operating expenses. We believe Adjusted Operating Expense is a supplemental financial measure useful to management, analysts, investors, lenders and rating agencies as an indicator of the efficiency of our operations between reporting periods. Adjusted Operating Expense should not be considered an alternative to but viewed in conjunction with GAAP total operating expenses, as we believe it provides a more complete understanding of our performance than GAAP measures alone. Adjusted Operating Expense has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP, including total operating expenses.

 

    

Three Months
Ended March 31,

   

Year Ended
December 31,

 
    

2019

   

2018

   

2018

   

2017

 
     (Unaudited, in thousands except per customer
data)
 

Reconciliation of Operating Expense to Adjusted Operating Expense:

        

Operating expense

   $ 31,222     $ 26,937     $ 118,112     $ 87,211  

Depreciation expense

     (11,012     (8,964     (39,290     (29,482

Amortization expense

     (5     (33     (133     (133

Non-cash compensation expense

     (387     (726     (3,410     (1,495

Asset retirement obligation accretion expense

     (313     (211     (1,183     (704

Financing deal costs

     (119     (1,523     (1,902     (336

Disaster losses and related charges, net

     (—       (316     (8,217     (1,034

Initial public offering costs

     (739     (—       (563     (—  

Legal settlements

     (—       (—       (150     (575
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Expense

   $ 18,647     $ 15,164     $ 63,264     $ 53,452  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Expense per weighted average customer

   $ 301     $ 317     $ 1,185     $ 1,378  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Significant Factors and Trends Affecting Our Business

Our results of operations and our ability to grow our business over time could be impacted by a number of factors and trends that affect our industry generally, as well as new offerings of services and products that we may acquire or seek to acquire in the future.

Financing Availability. Our future growth depends in significant part on our ability to raise capital from third-party investors on competitive terms to help finance the origination of our solar energy systems under our solar service agreements. We have historically used debt, such as asset-backed securitizations and warehouse facilities, tax equity, preferred equity and other financing strategies to help fund our operations. From our inception to March 31, 2019, we have raised over $3.0 billion in indebtedness, tax equity funds and preferred equity. With respect to tax equity, there are a limited number of potential tax equity investors and the competition for this investment capital is intense. The principal tax credit on which tax equity investors in our industry rely is the Section 48(a) ITC. The amount for the Section 48(a) ITC is equal to 30% of the value of eligible solar property. By statute, the Section 48(a) ITC percentage is scheduled to decrease to 26% on January 1, 2020, 22% on January 1, 2021 and 10% on January 1, 2022. This reduction in the Section 48(a) ITC will likely reduce our ability to use tax equity financing in the future. Our ability to raise capital from third-party investors is also affected by general economic conditions, the state of the capital markets, inflation levels and concerns about our industry or business.

Cost of Solar Energy Systems. Although the solar panel market has seen an increase in supply, upward pressure on prices may occur due to growth in the solar industry, regulatory policy changes, tariffs and duties and an increase in demand. As a result of these developments, we will likely pay higher prices on imported solar modules, making it less economical for us to serve certain markets. For additional detail regarding changing price dynamics, see “Risk Factors—Risks Related to Regulations—Increases in the cost of solar energy systems due to tariffs imposed by the U.S. government could have a material adverse effect on our business, financial condition and results of operations” and “Risk Factors—Risks Related to Our Business—Our business has benefited from the declining cost of solar energy system components, and our business may be harmed to the extent that declines in the cost of such components stabilize or that such costs increase in the future.”

Energy Storage Systems. Our energy storage systems increase our customers’ independence from the centralized utility and provide on-site backup power when there is a grid outage due to storms, wildfires, other natural disasters and general power failures caused by supply or transmission issues. In addition, at times it can be more economic to consume less energy from the grid or, alternatively, to export solar energy back to the grid. Recent technological advancements for energy storage systems allow the system to adapt to pricing and utility rate shifts by controlling the inflows and outflows of power, allowing customers to increase the value of their solar plus storage system. The energy storage system charges during the day, making the energy it stores available to the home when needed. It also features software that can customize power usage for the individual customer, providing backup power, optimizing solar energy consumption vs. grid consumption or preventing export to the grid as appropriate. The software is tailored based on utility regulation, economic indicators and grid conditions. The combination of energy control, increased energy resilience and independence from the grid is strong incentive for customers to adopt solar and energy storage. As energy storage systems and their related software features become more advanced, we expect to see increased adoption of energy storage systems.

Government Regulations, Policies and Incentives. Our growth strategy depends in significant part on government policies and incentives that promote and support solar energy and enhance the economic viability of distributed residential solar. These incentives come in various forms, including net metering, eligibility for accelerated depreciation such as MACRS, SRECs, tax abatements, rebate and renewable target incentive programs and tax credits, particularly the federal tax credits. The sale of SRECs has constituted a significant portion of our revenue historically. A change in the value of SRECs or changes in other policies or a loss or reduction in such incentives could decrease the attractiveness of distributed residential solar to us, our dealers and our customers in applicable markets, which could reduce our customer acquisition opportunities. Such a loss

 

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or reduction could also reduce our willingness to pursue certain customer acquisitions due to decreased revenue or income under our solar service agreements. Additionally, such a loss or reduction may also impact the terms of and availability of third-party financing. If any of these government regulations, policies or incentives are adversely amended, delayed, eliminated, reduced, retroactively changed or not extended beyond their current expiration dates or there is a negative impact from the recent federal law changes or proposals, our operating results and the demand for, and the economics of, distributed residential solar energy may decline, which could harm our business. For additional detail about these government regulations, policies and incentives, see “Industry Overview—Policies and Incentives” and “Business—Government Regulations.” For more information about the risks associated with these government policies and incentives, see “Risk Factors—Risks Related to Regulations.”

Components of Results of Operations

Revenue. We recognize revenue from contracts with customers as our performance obligations are satisfied at a transaction price reflecting an amount of consideration based upon an estimated rate of return. This rate of return is expressed as the solar rate per kWh in the customer contract. The amount of revenue recognized does not equal customer cash payments because performance obligations are satisfied ahead of cash receipt or evenly as the Company provides continuous access on a stand-ready basis to the solar energy system. The differences between revenue recognition and cash payments received are reflected in accounts receivable, other assets or deferred revenue, as appropriate.

PPAs. We have determined solar service agreements under which customers purchase electricity from us, including our Easy Pay Monthly Agreement and our Easy Save Simple Agreement, should be accounted for as revenue from contracts with customers. Revenue is recognized based upon the amount of electricity delivered as determined by remote monitoring equipment at solar rates specified under the contracts. The PPAs generally have a term of 25 years with an opportunity for customers to renew for up to an additional 10 years, via two 5-year renewal options.

Lease Agreements. We are the lessor under lease agreements for solar energy systems and energy storage systems, which are accounted for as revenue from contracts with customers. We recognize revenue on a straight-line basis over the contract term as we satisfy our obligation to provide continuous access to the solar energy system. The lease agreements generally have a term of 25 years with an opportunity for customers to renew for up to an additional 10 years, via two 5-year renewal options.

We provide customers under our lease agreements a performance guarantee that each solar energy system will achieve a certain specified minimum solar energy production output. The specified minimum solar energy production output may not be achieved due to natural fluctuations in the weather or equipment failures from exposure and wear and tear outside of our control, among other factors. The amount of guaranteed output is determined based on a number of different factors, including (a) the specific site information relating to the tilt of the panels, azimuth (a horizontal angle measured clockwise in degrees from a reference direction) of the panels, size of the system, and shading on site; (b) the calculated amount of available irradiance (amount of energy for a given flat surface facing a specific direction) based on historical average weather data and (c) the calculated amount of energy output of the solar energy system. While actual irradiance levels can significantly change year over year due to natural fluctuations in the weather, we expect the levels to average out over the term of a 25-year solar lease and to approximate the levels used in determining the amount of the performance guarantee.

If the solar energy system does not produce the guaranteed production amount, we may be required to provide a bill credit or refund a portion of the previously remitted customer payments, where the bill credit or repayment is calculated as the product of (a) the shortfall production amount and (b) the dollar amount (guaranteed rate) per kWh that is fixed throughout the term of the contract. These bill credits or remittances of a customer’s payments, if needed, are payable in January following the end of the first three years of the solar energy system is placed in service date and then every annual period thereafter (see Note 16, Commitments and

 

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Contingencies, to our accounting predecessor’s consolidated annual financial statements and Note 14, Commitments and Contingencies, to our accounting predecessor’s unaudited condensed consolidated financial statements).

Loan Agreements. We recognize payments received from customers under the loan agreements (a) as revenue, to the extent attributable to payments for operations and maintenance services provided by us, which are recognized on a straight-line basis over the term of the contract; (b) as interest income, to the extent attributable to earned interest on the contract; and (c) as a reduction of a note receivable included in current and long-term assets, to the extent attributable to a return of principal (whether scheduled or prepaid) on the contract. Similar to our lease agreements, we have provided customers under our loan agreements a performance guarantee that each solar energy system will achieve a certain specified minimum solar energy production output, which is a significant proportion of its expected output.

Solar Renewable Energy Certificates. Each SREC represents one MWh (1,000 kWh) generated by a solar energy system. SRECs are measured and issued to the owner of the solar energy system based on meter readings of actual production. SRECs are sold to utilities in order to meet renewable portfolio standards and can be sold with or without the actual electricity associated with the renewable-based generation source. SRECs generated from solar energy systems owned by us, as opposed to those owned by our customers, are accounted for as governmental incentives with no costs incurred to obtain them and are not considered output of the underlying solar energy systems. We classify SRECs as inventory held until sold and delivered to third parties. As we did not incur costs to obtain these governmental incentives, the inventory carrying value for the SRECs was $0 as of March 31, 2019 and December 31, 2018 and 2017. We enter into economic hedges with major financial institutions related to expected production of SRECs through forward contracts to partially mitigate the risk of decreases in SREC market rates. The contracts require us to physically deliver the SRECs upon settlement. We recognize the related revenue upon the transfer of the SRECs to the counterparty. The costs related to the sales of SRECs are limited to fees for brokered transactions. Accordingly, the sale of SRECs in a period favorably impacts our operating results for that period.

Cost of Revenue—Depreciation. Cost of revenue—depreciation is comprised of depreciation on solar energy systems under lease agreements and PPAs that have been placed in service.

Cost of Revenue—Other. Cost of revenue—other is comprised of other items deemed to be a cost of providing the service of selling power to customers or potential customers, such as certain costs to service loan agreements and costs for filing under the Uniform Commercial Code to maintain title, title searches, credit checks on potential customers at the time of initial contract and other similar costs, typically directly related to the volume of customers and potential customers. As discussed in “—Key Financial and Operational Metrics—Operational Metric—Number of Customers” and “—Components of Results of Operations—Revenue,” revenue is earned from customers at the time the solar energy system is placed in service and the contract is in service.

Operations and Maintenance Expense. Operations and maintenance expense represents costs for maintaining and servicing the solar energy systems, property insurance and property taxes. In addition, operations and maintenance expense includes impairments due to disaster losses, losses on disposals and other impairments net of insurance proceeds recovered under our business interruption insurance coverage for disasters, such as Hurricane Maria, which occurred in Puerto Rico in September 2017.

General and Administrative Expense. General and administrative expenses represent costs for our employees, such as salaries, bonuses, benefits and all other employee-related costs, including stock-based compensation, professional fees related to legal, accounting, human resources, finance, training, information technology and software services, marketing and communications, travel and rent and other office-related expenses. General and administrative expenses also include depreciation on assets not classified as solar energy systems, including furniture, fixtures, computer equipment and leasehold improvements and accretion expense on AROs. We capitalize a portion of general and administrative expense, such as payroll-related costs, that is

 

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related to employees who are directly involved in the design, construction, installation and testing of the solar energy systems but not directly associated with a particular asset. We also capitalize a portion of general and administrative expense, such as payroll-related costs, that is related to employees who are directly associated with and devote time to internal computer software projects, to the extent of the time spent directly on the application and development stage of such software project.

Interest Expense, Net. Interest expense, net represents interest, net of capitalized interest, on our borrowings under our various debt and credit facilities and amortization of deferred financing costs. These items are discussed in Note 7, Long-Term Debt, to our accounting predecessor’s consolidated annual financial statements and Note 7, Long-Term Debt, to our accounting predecessor’s unaudited condensed consolidated financial statements. Interest income represents interest income from the notes receivable under our loan program. These notes receivable are discussed in Note 6, Notes Receivable, to our accounting predecessor’s consolidated annual financial statements and Note 6, Notes Receivable, to our accounting predecessor’s unaudited condensed consolidated financial statements. In addition, interest income represents income on short term investments with financial institutions.

Interest Expense, Net—Affiliates. Interest expense, net—affiliates represents interest expense on our debt facilities, including the amortization of the debt discounts, held by our affiliates. These credit and debt facilities relate to our term debt, which was fully repaid and terminated in April 2017, senior secured notes issued in April 2017, which was partially repaid in late 2017, and our convertible notes issued in August 2017 and March 2018. These items are discussed in Note 7, Long-Term Debt, to our accounting predecessor’s consolidated annual financial statements and Note 7, Long-Term Debt, to our accounting predecessor’s unaudited condensed consolidated financial statements.

Income Tax Provision. We account for income taxes under ASC Topic 740, Income Taxes. As such, deferred tax assets and liabilities are determined based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally, we must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. We have provided a full valuation allowance on our deferred tax assets because we believe it is more likely than not that our deferred tax assets will not be realized. We evaluate the recoverability of our deferred tax assets on a quarterly basis. Currently, there is no provision for income taxes as we have incurred losses to date.

 

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Results of Operations—Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The following table sets forth our unaudited condensed consolidated statements of operations data for the periods indicated.

 

    

Three Months Ended
March 31,

   

 

 
    

2019

   

2018

   

Change

 
     (Unaudited, in thousands)  

Revenue

   $ 26,715     $ 19,784     $ 6,931  

Operating expenses:

      

Cost of revenue—depreciation

     9,653       7,845       1,808  

Cost of revenue—other

     652       412       240  

Operations and maintenance

     2,254       2,340       (86

General and administrative

     18,681       16,356       2,325  

Other operating income

     (18     (16     (2
  

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     31,222       26,937       4,285  
  

 

 

   

 

 

   

 

 

 

Operating loss

     (4,507     (7,153     2,646  

Interest expense, net

     29,167       3,790       25,377  

Interest expense, net—affiliates

     1,822       2,493       (671
  

 

 

   

 

 

   

 

 

 

Loss before income tax

     (35,496     (13,436     (22,060

Income tax

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net loss

     (35,496     (13,436     (22,060

Net income attributable to redeemable noncontrolling interests

     3,018       774       2,244  
  

 

 

   

 

 

   

 

 

 

Net loss attributable to stockholders

   $ (38,514   $ (14,210   $ (24,304
  

 

 

   

 

 

   

 

 

 

Revenue.

 

    

Three Months Ended
March 31,

        
    

2019

    

2018

    

Change

 
     (Unaudited, in thousands)  

Revenue under PPAs

   $ 9,612      $ 7,288      $ 2,324  

Revenue under solar leases

     9,638        7,237        2,401  

Solar renewable energy certificate revenue

     6,592        4,964        1,628  

Loan agreement revenue

     371        178        193  

Other revenue

     502        117        385  
  

 

 

    

 

 

    

 

 

 

Total

   $ 26,715      $ 19,784      $ 6,931  
  

 

 

    

 

 

    

 

 

 

Revenue increased by $6.9 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily as a result of an increased number of systems in service. The weighted average number of customers (excluding customers with loan agreements) increased from approximately 44,900 at March 31, 2018 to approximately 55,300 at March 31, 2019. Excluding SREC revenue and revenue under our loan agreements, on a weighted average number of customers basis, revenue increased from $326 per customer for the three months ended March 31, 2018 to $357 per customer for the same period in 2019 (10% increase). The year over year difference in revenue per customer was affected by (a) the market mix of portfolio and relative yields in those markets, (b) weather variability and (c) the impact of Hurricane Maria on Puerto Rico revenues (for which billing was largely curtailed for approximately two months beginning in September 2017 and then gradually increased over time until billing was materially resumed by August 2018) which are relatively

 

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higher per customer. SREC revenue increased by $1.6 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily as a result of an increase in the number of solar energy systems being placed in service, which resulted in additional SREC production. Including loan and SREC revenue, on a weighted average number of customers basis, revenues increased from $414 per customer for the three months ended March 31, 2018 to $432 per customer for the same period in 2019 (4% increase). The fluctuations in SREC revenue from period to period are affected by the total number of systems, weather seasonality and hedge and spot prices associated with the timing of the sale of SRECs.

Cost of Revenue—Depreciation.

 

    

Three Months Ended
March 31,

    

 

 
    

2019

    

2018

    

Change

 
     (Unaudited, in thousands)  

Cost of revenue—depreciation

   $ 9,653      $ 7,845      $ 1,808  

Cost of revenue—depreciation increased by $1.8 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This increase was primarily driven by an increase in the weighted average number of customers (excluding customers with loan agreements) from approximately 44,900 at March 31, 2018 to approximately 55,300 at March 31, 2019. On a weighted average number of customers basis, cost of revenue—depreciation remained unchanged at $175 per customer for the three months ended March 31, 2018 compared to the same period in 2019.

Cost of Revenue—Other.

 

    

Three Months Ended
March 31,

        
    

2019

    

2018

    

Change

 
     (Unaudited, in thousands)  

Cost of revenue—other

   $ 652      $ 412      $ 240  

Cost of revenue—other increased by $0.2 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This increase was primarily driven by increases in costs related to energy storage systems of $0.2 million as a result of the introduction of the new product offering in late 2018.

Operations and Maintenance Expense.

 

    

Three Months Ended
March 31,

        
    

2019

    

2018

    

Change

 
     (Unaudited, in thousands)  

Operations and maintenance

   $ 2,254      $ 2,340      $ (86

Operations and maintenance expense decreased by $0.1 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This decrease was primarily driven by a decrease in the monthly average cost per customer for operations and maintenance expense, excluding net disaster losses, from $48 per customer for the three months ended March 31, 2018 to $41 per customer for the same period in 2019, or approximately a 15% decrease. The decrease in operations and maintenance expense per customer was primarily due to lower repairs and maintenance expense due to a shift in service strategy from primarily using external labor to primarily using internal labor and due to lower impairments and losses on disposals. This decrease is partially offset by higher property insurance, storage costs and property taxes.

 

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General and Administrative Expense.

 

    

Three Months Ended
March 31,

    

 

 
    

2019

    

2018

    

Change

 
     (Unaudited, in thousands)  

General and administrative

   $ 18,681      $ 16,356      $ 2,325  

General and administrative expense increased by $2.3 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increases of: $0.9 million of consultants, contractors and professional fees, $0.7 million of initial public offering costs, $0.6 million of payroll and employee related expenses due to the hiring of personnel to support growth, $0.3 million of marketing and communications expenses and $0.3 million of travel and entertainment expenses. This increase is partially offset by a decrease of $1.4 million of financing deal costs. General and administrative expense includes payroll and employee related expenses of $8.3 million and $7.7 million for the three months ended March 31, 2019 and 2018, respectively, of which $2.1 million and $1.7 million, respectively, relates to employees who directly support our customers, including our customer service call center, billing and collections and operations support for repairs of solar energy systems.

Interest Expense, Net.

 

    

Three Months Ended
March 31,

    

Change

 
    

2019

    

2018

 
     (Unaudited, in thousands)  

Interest expense, net

   $ 29,167      $ 3,790      $ 25,377  

Interest expense, net increased by $25.4 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This increase was primarily due to a $16.2 million increase in unrealized loss on swaps, a $3.9 million increase in realized loss on swaps, a $3.8 million increase in amortization of deferred financing costs due to accelerated amortization from early pay-offs and retirement of debt in March 2019 and a $2.6 million increase in interest expense due to an increase in the principal debt balance after entering into new financing arrangements in August 2018 and November 2018.

Loan interest income was $2.3 million for the three months ended March 31, 2019 as compared to $1.1 million for the three months ended March 31, 2018. This increase was primarily due to the increase in the weighted average number of customers with loan agreements from approximately 2,900 at March 31, 2018 to approximately 6,700 at March 31, 2019. On a weighted average number of customers basis, loan interest income decreased from $391 per customer for 2018 to $347 per customer for 2019 (11% decrease) due to the fact that interest for the first 18 months on systems placed in service starting in July 2017 are based on 70% of the total amount financed under the loan, as the other 30% is interest free prior to the due date of the 30% prepayment typically due on the 18th month; while interest on systems placed in service in prior periods was based on the entire financed amount.

Interest Expense, Net—Affiliates.

 

    

Three Months Ended
March 31,

    

Change

 
    

2019

    

2018

 
     (Unaudited, in thousands)  

Interest expense, net—affiliates

   $ 1,822      $ 2,493      $ (671

Interest expense, net—affiliates decreased by $0.7 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to a decrease in interest expense due to a decrease in the principal debt balance between the periods.

 

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Income Tax.

We do not have income tax expense due to a full valuation allowance recorded for the three months ended March 31, 2019 and 2018. See “—Components of Our Results of OperationsIncome Tax Provision.

Net Income Attributable to Redeemable Noncontrolling Interests.

Net income attributable to redeemable noncontrolling interests relating to third-party interests in the net assets of certain consolidated subsidiaries increased by $2.2 million in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the addition of a tax equity fund in January 2019.

Results of Operations—Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table sets forth our consolidated statements of operations data for the periods indicated.

 

    

Year Ended
December 31,

   

 

 
  

2018

   

2017

   

Change

 
     (in thousands)  

Revenue

   $ 104,382     $ 76,856     $ 27,526  

Operating expenses:

      

Cost of revenue—depreciation

     34,710       25,896       8,814  

Cost of revenue—other

     2,007       1,444       563  

Operations and maintenance

     14,035       4,994       9,041  

General and administrative

     67,430       54,863       12,567  

Other operating expense (income)

     (70     14       (84
  

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     118,112       87,211       30,901  
  

 

 

   

 

 

   

 

 

 

Operating loss

     (13,730     (10,355     (3,375

Interest expense, net

     45,132       56,650       (11,518

Interest expense, net—affiliates

     9,548       23,177       (13,629

Other income

     (1     —         (1
  

 

 

   

 

 

   

 

 

 

Loss before income tax

     (68,409     (90,182     21,773  

Income tax

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net loss

     (68,409 )       (90,182     21,773  

Net income attributable to redeemable noncontrolling interests

     5,837       903       4,934  
  

 

 

   

 

 

   

 

 

 

Net loss attributable to stockholders

   $ (74,246   $ (91,085   $ 16,839  
  

 

 

   

 

 

   

 

 

 

Revenue.

 

    

Year Ended

December 31,

    

Change

 
    

2018

    

2017

 
     (in thousands)  

Revenue under PPAs

   $ 38,950      $ 29,171      $ 9,779  

Revenue under solar leases

     33,079        21,866        11,213  

Solar renewable energy certificate revenue

     30,630        24,833        5,797  

Loan agreement revenue

     933        479        454  

Other revenue

     790        507        283  
  

 

 

    

 

 

    

 

 

 

Total

   $ 104,382      $ 76,856      $ 27,526  
  

 

 

    

 

 

    

 

 

 

 

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Revenue increased by $27.5 million in the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily as a result of an increased number of systems being placed in service in 2018 and a full year of revenue recognized in 2018 for systems placed in service in 2017 versus only a portion recognized in 2017. The weighted average number of customers (excluding customers with loan agreements) increased from approximately 37,000 at December 31, 2017 to approximately 49,200 at December 31, 2018. Excluding SREC revenue and revenue under our loan agreements, on a weighted average number of customers basis, revenue increased from $1,393 per customer for 2017 to $1,480 per customer for 2018 (6% increase). The year over year difference in revenue per customer was affected by (a) the market mix of portfolio and relative yields in those markets, (b) weather variability and (c) the impact of Hurricane Maria on Puerto Rico revenues (for which billing was largely curtailed for approximately two months beginning in September 2017) which are relatively higher per customer. SREC revenue increased by $5.8 million in the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily as a result of an increase in the number of solar energy systems being placed in service, which resulted in additional SREC production. Including loan and SREC revenue, on a weighted average number of customers basis, revenues decreased from $1,981 per customer for 2017 to $1,955 per customer for 2018 (1% decrease). The fluctuations in SREC revenue from period to period are affected by the total number of systems, weather seasonality and hedge and spot prices associated with the timing of the sale of SRECs.

Cost of Revenue—Depreciation.

 

    

Year Ended
December 31,

    

Change

 
    

2018

    

2017

 
     (in thousands)  

Cost of revenue—depreciation

   $ 34,710      $ 25,896      $ 8,814  

Cost of revenue—depreciation increased by $8.8 million in the year ended December 31, 2018 compared to the year ended December 31, 2017. This increase was primarily driven by an increase in the weighted average number of customers (excluding customers with loan agreements) from approximately 37,000 at December 31, 2017 to approximately 49,200 at December 31, 2018, plus a full year of costs recognized in 2018 for systems placed in service in 2017 versus only a partial year of such expenses related to the period in which the assets were in service in 2017. On a weighted average number of customers basis, cost of revenue—depreciation increased from $700 per customer in 2017 to $705 per customer in 2018, or a 1% increase.

Cost of Revenue—Other.

 

    

Year Ended

December 31,

    

Change

 
     2018      2017  
     (in thousands)  

Cost of revenue—other

   $ 2,007      $ 1,444      $ 563  

Cost of revenue—other increased by $0.6 million in the year ended December 31, 2018 compared to the year ended December 31, 2017. This increase was primarily driven by an increase in costs related to repairs and maintenance, production guarantees and parts and supplies as a result of the increase in the weighted average number of customers with loan agreements from approximately 1,800 at December 31, 2017 to approximately 4,200 at December 31, 2018.

Operations and Maintenance Expense.

 

    

Year Ended
December 31,

        
    

2018

    

2017

    

Change

 
     (in thousands)  

Operations and maintenance expense

   $ 14,035      $ 4,994      $ 9,041  

 

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Operations and maintenance expense increased by $9.0 million in the year ended December 31, 2018 compared to the year ended December 31, 2017. This increase was primarily driven by an increase in the monthly average cost per customer for operations and maintenance expense, excluding net disaster losses, from $146 per customer for 2017 to $188 per customer for 2018, or approximately a 29% increase. The increase in operations and maintenance expense was also due to an increase in the weighted average number of customers (excluding customers with loan agreements) from approximately 37,000 at December 31, 2017 to approximately 49,200 at December 31, 2018, resulting in more service orders in 2018. The operations and maintenance expense per customer increased primarily due to higher repairs and maintenance expense, impairments and loss on disposals, meter replacement costs, higher equipment costs and higher percentage of cases completed with third-party labor in 2018 (thus increasing the average cost per closed case). In addition, operations and maintenance expense includes impairments of $5.8 million and $0.8 million for 2018 and 2017, respectively, due to disaster losses related primarily to Hurricane Maria, which occurred in September 2017, and other natural disasters, such as California wildfires in October 2017 and November 2018 and a typhoon in Saipan in October 2018. Operations and maintenance expense is net of both the insurance proceeds related to property damage, as estimated or completed in the periods, and the insurance proceeds related to business interruption. A significant quantity of Hurricane Maria charges occurred during the fourth quarter of 2018, as the completion of the repairs and completion of the analyses for what solar energy systems were recoverable and not recoverable took an extensive amount of time, well over a year for many of the assets and customers. See Note 4, Disaster Losses, to our accounting predecessor’s consolidated annual financial statements for further discussion of operations and maintenance expense related to natural disasters.

General and Administrative Expense.

 

    

Year Ended
December 31,

        
    

2018

    

2017

    

Change

 
     (in thousands)  

General and administrative expense

   $ 67,430      $ 54,863      $ 12,567  

General and administrative expense increased by $12.6 million in the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increases of: $3.5 million of payroll and employee related expenses due to the hiring of personnel to support growth, $1.3 million of legal and settlements expense due to dealer litigation and various other general legal matters, $1.6 million of financing deal costs (primarily related to $1.5 million of costs written off in March 2018 for a financing facility as it did not materialize), $1.0 million of depreciation of property and equipment (excluding solar energy systems), $0.6 million of initial public offering costs and $0.6 million of disaster losses and related charges due to Hurricane Maria in Puerto Rico in September 2017. General and administrative expense includes payroll and employee related expenses of $32.6 million and $29.1 million for the years ended December 31, 2018 and 2017, respectively, of which $6.9 million and $5.9 million, respectively, relates to employees who directly support our customers, including our customer service call center, billing and collections and operations support for repairs of solar energy systems.

Interest Expense, Net.

 

    

Year Ended
December 31,

 
    

2018

    

2017

    

Change

 
     (in thousands)  

Interest expense, net

   $ 45,132      $ 56,650      $ (11,518

Interest expense, net decreased by $11.5 million in the year ended December 31, 2018 compared to the year ended December 31, 2017. This decrease was primarily due to a $20.3 million increase in realized gain on swaps primarily due to the settlement of swaps related to repayments on subsidiary debt in November 2018 and a $5.5 million decrease in amortization of deferred financing costs due to accelerated amortization from early

 

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pay-offs of debt in April 2017. This decrease was offset by an increase of $17.5 million in interest expense due to higher levels of outstanding debt in 2018.

Loan interest income was $6.1 million for the year ended December 31, 2018 as compared to $3.0 million for the year ended December 31, 2017. This increase was primarily due to the increase in the weighted average number of customers with loan agreements from approximately 1,800 at December 31, 2017 to approximately 4,200 at December 31, 2018. On a weighted average number of customers basis, loan interest income decreased from $1,668 per customer for 2017 to $1,464 per customer for 2018 (12% decrease) due to the fact that interest for the first 18 months on systems placed in service starting in July 2017 are based on 70% of the total amount financed under the loan, as the other 30% is interest free prior to the due date of the 30% prepayment typically due on the 18th month; while interest on systems placed in service in prior periods was based on the entire financed amount.

Interest Expense, Net—Affiliates.

 

    

Year Ended
December 31,

 
    

2018

    

2017

    

Change

 
     (in thousands)  

Interest expense, net—affiliates

   $ 9,548      $ 23,177      $ (13,629

Interest expense, net—affiliates decreased by $13.6 million in the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to a decrease of $9.0 million in amortization of debt discounts as AP5H debt was paid down in April 2017 and a decrease in interest expense of $4.8 million due to a decrease in the principal debt balance between the periods.

Income Tax.

We do not have income tax expense due to a full valuation allowance recorded for the years ended December 31, 2018 and 2017. See “—Components of Our Results of Operations—Income Tax Provision.

Net Income Attributable to Redeemable Noncontrolling Interests.

Net income attributable to redeemable noncontrolling interests relating to third-party interests in the net assets of certain consolidated subsidiaries increased by $4.9 million in the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to the addition of two tax equity funds in December 2017 and a full year of income on assets placed in service in 2017.

Liquidity and Capital Resources

As of March 31, 2019, we had total cash of $79.3 million, of which $43.9 million was unrestricted. For a discussion of our restricted cash, see Note 2, Significant Accounting Policies, Restricted Cash, to our accounting predecessor’s consolidated annual financial statements.

We seek to maintain diversified and cost-effective funding sources to finance and maintain our operations, fund capital expenditures, including customer acquisitions, and satisfy obligations arising from our indebtedness. Historically, our primary sources of liquidity included non-recourse and recourse debt, investor asset-backed securitizations, and cash generated from operations. Our business model requires substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar energy systems. We will seek to raise additional required capital from new and existing tax equity investors, additional borrowings and other potential financing vehicles.

The solar energy systems that are in service are expected to generate a positive return rate over the customer agreement, typically 25 years. Typically, once residential solar energy systems commence operations,

 

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they do not require significant additional capital expenditures to maintain operating performance. However, in order to grow, we are currently dependent on financing from outside parties. We believe that, following the completion of this offering, we will have sufficient cash, investment fund commitments and securitization commitments