2016
ANNUAL REPORT
FOLLOW US ONLINE:
sunrun.com
“ “e take a long-term view on the““inevitability of solar...we continue to
““believe the long-term annual growth
rate of residential solar is 20 perc““
April 5, 2017
Dear Shareholders,
Recently, Sunrun celebrated our 10th anniversary. When
Ed and I pioneered residential solar as a service in 2007,
we could not have anticipated the impact, growth and
success of our business.
We take a long-term view on the inevitability of solar.
According to GTM Research’s U.S. Solar Market Insight
2016 Year-in-Review report, in 2016, for the first time,
solar added more electric generating capacity than any
other source (beating out both wind and natural gas). Just
look at Sunrun’s growth this past year: we outpaced the
industry in 2016, growing at 39 percent from 2015 (more
than double the industry growth rate) by deploying 282
MW. As of December 31, 2016, we had approximately
134,000 customers who save 20% on average relative to
their utility bills and have created $1 billion in net earning
assets (or value) for us. As we grow our customer base,
improving unit economics will have even more impact
on the value each incremental customer generates. We
continue to believe the long-term annual growth rate of
residential solar is 20 percent.
As part of this growth, we are proud to have contributed
to making the solar industry a major jobs creator. The
sector employed more than 260,000 workers in the U.S.
in 2016, a 25 percent increase from 2015. Twice as many
people are employed in the solar industry than the coal
industry and that number grew seventeen times faster
than overall employment in the U.S. in 2016.1
In addition to the employment benefits that solar offers,
rooftop solar is one of the best opportunities we have to
create a lower cost, more reliable modern infrastructure.
The U.S. is on a path to replace an estimated 70 percent of
grid infrastructure that is nearing the end of its useful life.
Utilities are spending billions of dollars to add capacity
to our grid – while our actual electricity demand is flat –
and rooftop solar can help reduce that spend. A recent
study conducted by Crossborder Energy suggests that
solar homes can lower power rates for all consumers by
reducing utility infrastructure costs. Using a case study in
Arizona, each typical home solar system would save utili-
ties $750 in future annual infrastructure costs and $1,500
annually when combined with storage. This could add up
to more than $1.2 billion dollars in savings for utilities and
consumers over 20 years in Arizona even if no new home
solar systems are installed.2 You can read more on this
topic in my blog post at www.sunrun.com/value.
1 National Solar Jobs Census 2016, The Solar Foundation, available at: SolarJobsCensus.org. Includes data for the period
October 31, 2015 to November 1, 2016.
2 Based on 84,600 residential photovoltaic systems in Arizona as of December 31, 2016 as reported by EIA Form 826 (Monthly
Electric Utility Sales and Revenue Report with State Distributions.
addition to the employment benefits that solar offers,
““create a lower cost, more reliable modern infrastr““
“
““rooftop solar is one of the best opportunities we have to
“
PROOF POINTS
legislature is currently considering legislation to restore
net metering throughout the state.
In 2016, we executed effectively against the market
opportunity in front of us and grew MW deployed by 39
percent, a rate more than double the industry growth
rate. We have maintained steady access to capital and
maintained a conservative, mostly non-recourse capital
structure, have offered a portfolio of products customers
want – leases, loans and cash sales – and have leveraged
our multi-channel approach to reach the most customers.
Our success is due to four key pillars which underpin our
market opportunity and investment thesis. Furthermore,
recent developments support these key pillars.
First, the residential solar opportunity in front of us is
massive and increasing. Annual electricity sales to resi-
dential customers exceed $175 billion based on EIA
data and we can offer cleaner power to many of those
customers at lower costs. Fewer than 2 percent of single-
family homes have solar today, but in markets where the
economics first made sense, consumers have clearly
picked solar – in Hawaii, for instance, solar penetration
has exceeded 30 percent which bodes well for the adop-
tion levels that are possible elsewhere.
Second, the overall regulatory environment remains
conducive for growth on a bipartisan basis. Through
the bi-partisan extension in late 2015, the federal invest-
ment tax credit for solar was extended through 2022,
with commence construction language. Net metering
policies, which exist in 42 states, have been adopted or
expanded 150 times over the last three decades. Even
in Nevada, where there was regulatory disruption at
the end of 2015, the Commission voted unanimously in
December to restore net metering in the Sierra Pacific
utility territory of Northern Nevada, up to a 6 MW cap.
Decision-makers heard loud and clear that consumers
want access to rooftop solar in Nevada. The Nevada
Third, each customer represents significant value to us
and our investors. In 2016, we deployed systems that
represented an average project value of $4.48 per watt
for the year, above our all-in average creation costs of
$3.61 per watt for the year, generating $213 million in net
present value (NPV) and adding to a fleet with net earning
assets of over $1 billion, or over $9 per share. The market
reaffirmed our strong customer value when we raised $100
million in project cash equity from National Grid, with esti-
mated proceeds of 95-100 percent of contracted project
value which uses a 6 percent unlevered discount rate.
Finally, we have a winning business model. Sunrun
employs a multi-channel model which enables cost-effi-
cient and broad reach. We are able to leverage our central-
ized infrastructure and technology to maximize economies
of scale while growing in a capital efficient manner. We
can take advantage of the growth in smaller and medium
scale installers by partnering with them.
Our partnership with National Grid, one of the largest
investor-owned utilities, demonstrates external validation
of our business model. This partnership has three prongs:
1) a joint marketing agreement that will initially target
approximately 100,000 single family homes in downstate
New York; 2) a national collaborative grid services pilot,
and 3) a $100 million direct investment by National Grid in
a partnership that will own approximately 200 MW of our
rooftop solar systems across the U.S.
In 2016, we deployed 282 MW, including 77 MW in Q4.
We saw creation costs decline 16 percent from Q1 to Q4
2016, down to $3.41 per watt in Q4, and we expect that
our average costs will continue to improve in 2017. We
have maintained a steady course to maximize net present
value, generating $67 million in NPV in Q4 2016.
Generating NPV is only part of the picture in generating
cash – we’ve consistently been able to monetize this NPV
upfront at attractive rates through the tax equity, bank debt
and securitization markets and, most recently, project cash
equity through our partnership with National Grid. Our tax
equity pipeline remains robust, with closed transactions
and executed terms sheets that provide us runway well
into Q4 of 2017. Our current pipeline of backleverage and
project cash equity provides us runway into Q3 of 2017.
THE YEAR AHEAD
Consumer demand for rooftop solar and a modern grid
remains strong. Recent events support the inevitability of
solar. The addition of home energy storage to our product
offerings was met with incredible demand. We have
already sold over 1,000 BrightBox™ storage offerings. This
year we plan to focus on four main priorities.
Our first priority is to be the nation’s leading local home
solar provider by maintaining a consistent multi-channel
strategy to deliver maximum cost efficiencies and success
in each market we operate in, all while remaining focused
on our customers.
Secondly, we plan to grow sustainably in existing and
new markets by leveraging our low-cost capabilities for
new market entry, targeting multiple market entries during
2017. Less than 2 percent of U.S. households have adopted
solar thus far, and we continue to believe the long-term
annual growth rate of residential solar is 20 percent.
Innovation will remain a priority for us this year as well.
We will continue to innovate Brilliant Home Energy
through BrightBox™, our Solar + Storage offering, along
with evaluating advanced ways to deliver even more
value to customers by helping them optimize their total
use of energy.
For our final priority, we are collaborating on energy poli-
cies of the future by working with stakeholders to demon-
strate the value Distributed Energy Resources can bring
to the grid. Our joint venture with National Grid is only one
piece of the puzzle.
These priorities will keep us driving toward a planet run by
the sun. I can’t wait to see what the next 10 years hold for
myself, the Sunrun team, and the modern grid.
Power forward,
Lynn Jurich
CEO
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:2)(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2016
OR
(cid:3)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-37511
Sunrun Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
595 Market Street, 29th Floor
San Francisco, California
(Address of principal executive offices)
26-2841711
(I.R.S. Employer
Identification No.)
94105
(Zip Code)
Registrant’s telephone number, including area code: (415) 580-6900
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.0001 Per Share; Common Stock traded on the NASDAQ
Global Select Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:3) NO (cid:2)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES (cid:3) NO (cid:2)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES (cid:2) NO (cid:3)
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the Registrant was required to submit and post such files). YES (cid:2) NO (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. (cid:2)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
(cid:3)
Accelerated filer
Non-accelerated filer
(cid:3) (Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES (cid:3) NO (cid:2)
(cid:2)
(cid:3)
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the
shares of common stock on The NASDAQ Stock Market on, June 30, 2016 (the last business day of the Registrant’s most recently completed second
fiscal quarter) was approximately $307.8 million.
The number of shares of Registrant’s Common Stock outstanding as of March 6, 2017 was 104,639,279.
Portions of the information called for by Part III of this Form 10-K is hereby incorporated by reference from the definitive Proxy Statements for our
annual meeting of stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2016.
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Table of Contents
PART I
Item 1. Business ......................................................................................................................................
Item 1A. Risk Factors.................................................................................................................................
Item 1B. Unresolved Staff Comments........................................................................................................
Item 2. Properties ....................................................................................................................................
Legal Proceedings .......................................................................................................................
Item 3.
Item 4. Mine Safety Disclosures ..............................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ..........................................................................................................................
Item 6. Selected Financial Data...............................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .......
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................................
Item 8.
Financial Statements and Supplementary Data ..........................................................................
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .....
Item 9A. Controls and Procedures .............................................................................................................
Item 9B. Other Information.........................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance...........................................................
Item 11. Executive Compensation .............................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.........................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence ...........................
Item 14. Principal Accounting Fees and Services .....................................................................................
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69
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PART IV
Item 15. Exhibits, Financial Statement Schedules.....................................................................................
118
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Annual Report on Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. Forward-
looking statements generally relate to future events or our future financial or operating performance. In some
cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,”
“expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,”
“predicts,” “potential” or “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 Annual
Report on Form 10-K include, but are not limited to, statements about:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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our ability to finance solar energy systems through financing arrangements with fund or other
investors;
our ability and intent to establish new investment funds;
our dependence on the availability of rebates, tax credits and other financial incentives;
determinations by the Internal Revenue Service or the U.S. Treasury Department of the fair market
value of our solar energy systems;
the retail price of utility-generated electricity or electricity from other energy sources;
regulatory and policy development and changes;
our ability to maintain an adequate rate of revenue growth;
our industry’s continued ability to cut costs associated with solar service offerings;
our strategic partnerships and expected benefits of such partnerships;
the sufficiency of our cash, investment fund commitments and available borrowings to meet our
anticipated cash needs;
our need to raise capital and finance our operations from new and existing investors;
the potential impact of interest rates on our interest expense;
our business plan and our ability to effectively manage our growth;
our ability to further penetrate existing markets, expand into new markets and our expectations
regarding market growth (including, but not limited to, expected cancellation rates);
our expectations concerning relationships with third parties, including the attraction and retention of
qualified channel partners;
the impact of seasonality on our business;
our investment in research and development;
our expectations regarding certain performance objectives; and
the calculation of certain of our key financial and operating metrics and accounting policies.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including
those described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover,
we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is
not possible for our management to predict all risks, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements we may make. In light of these risks, uncertainties and
assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may
not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-
looking statements.
1
You should not rely upon forward-looking statements as predictions of future events. Although we believe
that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the
future results, levels of activity, performance or events and circumstances reflected in the forward-looking
statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any
forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these
statements to actual results or to changes in our expectations, except as required by law.
You should read this Annual Report on Form 10-K and the documents that we reference in this Annual
Report on Form 10-K and have filed with the Securities and Exchange Commission (the “SEC”) as exhibits to this
Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance,
and events and circumstances may be materially different from what we expect.
2
Item 1. Business.
Overview
PART I
Sunrun’s (the “Company”) mission is to provide homeowners with clean, affordable solar energy and a best-
in-class customer experience. In 2007, we pioneered the residential solar service model, creating a hassle-free,
low-cost solution for homeowners seeking to lower their energy bills. By removing the high initial cost and
complexity that used to define the residential solar industry, we have fostered the industry’s rapid growth and
exposed an enormous market opportunity. Our relentless drive to increase the accessibility of solar energy is
fueled by our enduring vision: to create a planet run by the sun.
We provide clean, solar energy to homeowners at a significant savings to traditional utility energy. After
inventing the residential solar service model and recognizing its enormous market potential, we have built the
infrastructure and capabilities necessary to rapidly acquire and serve customers in a low-cost and scalable
manner. Today, our scalable operating platform provides us with a number of unique advantages. First, we are
able to drive distribution by marketing our solar service offerings through multiple channels, including our diverse
partner network and direct-to-consumer operations. This multi-channel model supports broad sales and
installation capabilities, which together allow us to achieve capital-efficient growth. Second, we are able to provide
differentiated solutions to our customers that, combined with a great customer experience, we believe will drive
meaningful margin advantages for us over the long term as we strive to create the industry’s most valuable and
satisfied customer base.
Our core solar service offerings are provided through our lease and power purchase agreements (“PPAs”),
which we refer to as our “Customer Agreements” which provide homeowners with simple, predictable pricing for
solar energy that is insulated from rising retail electricity prices. While homeowners have the option to purchase a
solar energy system outright from us, most of our customers choose to buy solar as a service from us through our
solar service offerings and enjoy the flexibility and savings that come from purchasing solar energy without the
significant upfront investment of purchasing a solar energy system. With our solar service offerings, we install
solar energy systems on our customers’ homes and provide them the solar power produced by those systems for
a 20-year initial term. In addition, we monitor, maintain and insure the system at no additional cost during the term
of the contract. In exchange, we receive 20 years of predictable cash flows from high credit quality customers and
qualify for tax and other benefits. We finance portions of these tax benefits and cash flows through tax equity and
non-recourse debt structures in order to fund our upfront costs, overhead and growth investments. We develop
valuable customer relationships that can extend beyond this initial contract term and provide us an opportunity to
offer additional services in the future, such as our home battery storage service now being offered in Hawaii and
California markets. Since our founding, we have continued to invest in a platform of services and tools to enable
large scale operations for us and our partner network. The platform includes processes and software, as well as
fulfillment through AEE Solar, racking through SnapNrack and acquisition marketing through Clean Energy
Experts, LLC (“CEE”). We believe our platform empowers new market entrants and smaller industry participants
to profitably serve our large and underpenetrated market without making the significant investments in technology
and infrastructure required to compete effectively against established industry players by improving efficiencies
and driving down system-wide costs. Our platform provides the support for our multi-channel model, which drives
broad customer reach and capital-efficient growth.
Delivering a differentiated customer experience is core to our strategy. We emphasize a customized
solution, including a design specific to each customer’s home and pricing configurations that typically drive both
customer savings and value to us. We believe that our passion for engaging our customers, developing a trusted
brand, and providing a customized solar service offering resonates with our customers who are accustomed to a
traditional residential power market that is often overpriced and lacking in customer choice.
We have experienced substantial growth in our business and operations since our inception in 2007. As of
December 31, 2016, we operated the second largest fleet of residential solar energy systems in the United
States, with approximately 134,000 customers across 16 states, as well as the District of Columbia. We have
Columbia. We have
revised our definition of “customer” to represent residential homeowners (i) who have executed a Customer
r
3
Agreement or cash sales agreement with us and (ii) for whom we have internal confirmation that the applicable
Agreement or cash sales agreement with us and (ii) for whom we have internal confirmation that the applicable
solar energy system has met our installation requirements for size, equipment and design (“notice to proceed” or
r
“NTP”), net of cancellations. Our previous definition of customer included all executed Customer Agreements or
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cash sales agreements and not just those reaching NTP. Under the new definition of “customer,” as of December
r
31, 2015, we had approximately 96,000 customers. We have deployed an aggregate of 879 megawatts (“MW”) as
of December 31, 2016, and our Gross Earning Assets as of December 31, 2016 were approximately $1.8 billion.
Please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
f
Operations — Key Operating Metrics” for more details on how we calculate Megawatts Deployed and Gross
Earning Assets, including modifications made in how we calculate such metrics effective the fourth quarter of
f
2016.
We also have a long track record of attracting low-cost capital from diverse sources, including tax equity and
debt investors. Since inception through March 6, 2017, we have raised tax equity investment funds to finance the
previous and future installation of solar energy systems with an estimated value of $5.2 billion.
Our Multi-Channel Capabilities
Our unique, multi-channel capabilities offer consumers a compelling solar service through scalable, cost-
effective and consumer-friendly channels. Homeowners can access our products through three channels: direct-
to-consumer, solar partnerships and strategic partnerships.
Direct-to-Consumer
We sell solar service offerings and install solar energy systems for homeowners through our direct-to-
consumer channel. These solar energy systems are offered to homeowners either under a Customer Agreement,
or for purchase. This channel consists of an online lead generation function, a telesales and field sales team, a
direct-to-home sales force, a retail sales team and an industry-leading installation organization.
Solar Partnerships
We contract with diverse solar organizations that act as either exclusive or non-exclusive (depending on the
terms of their contract with us) distributors of our solar service offerings and subcontractors for the installation of
the related solar energy systems. Because of our commitment to these solar organizations and our vested
interest in their success, we refer to them as our “solar partners,” although the actual legal relationship is that of
an independent contractor. Our solar partners include:
•
•
•
Solar integrators: trained and trusted partners who originate customers for our solar service offerings
and, procure and install the solar energy systems on our customers’ homes on our behalf as our
subcontractors. Partnerships with solar integrators allow us to expand our brand, quickly enter new
markets and drive capital-efficient growth. We compensate our solar integrators on a per solar energy
system basis for generating Customer Agreements for us and installation work they perform for us.
Sales partners: sales and lead generation partners who provide us with high-quality leads and
customers at competitive prices. We compensate our sales partners on a per customer basis for the
sales and lead generation services they perform for us. All contracts are between the customer and us,
based on a price set by us.
Installation partners: trusted installation partners who procure and install a subset of our solar energy
systems as our subcontractors and allow us to more efficiently deploy a mix of in-house and
outsourced installation capabilities. We compensate our installation partners on a per solar energy
system basis for the procurement of materials and installation work they perform for us. Installation
partners are solely our subcontractors and do not enter into any agreements with our customers.
Our ability to connect specialized sales and installation firms on a single platform, which we license to our
solar partners at no cost, allows us to enjoy the benefits of vertical integration without the additional fixed cost
structure. This creates margin opportunities, system efficiencies and benefits from network effects in matching
these ecosystem participants.
4
Strategic Partnerships
Our strategic partnerships encompass relationships with new market entrants not previously engaged in
solar, including cable, consumer marketing, retail and specialized energy retail companies. Our strategic partners
find the residential solar market attractive, but recognize that significant barriers to entry make partnerships the
preferred method to reach solar homeowners. Through these strategic arrangements, we typically market our
solar service offerings to the strategic partner’s customer base and install the solar energy systems directly or
through one of our solar partners. We manage the customer experience and retain the value of the economic
relationship through the term of the homeowner’s contract and potential renewal period. We have executed
strategic partnerships in competitive processes that give us access to millions of potential customers. As our
industry grows, we believe that our unique platform and deep partnership experience position us to be the partner
of choice for new market entrants. We believe that these broad strategic relationships will help us drive down our
customer acquisition costs and make solar accessible to even more homeowners.
The combination of direct-to-consumer, solar partnerships and strategic partnerships offers distinct
advantages. The direct-to-consumer channel allows us to scale rapidly, drive incremental unit costs down over
the long term, and refine operational processes to share with our partners. Our solar partnerships and strategic
partnerships enable nimble market entry and exit, while allowing for capital efficient growth. Together, this multi-
channel strategy supported by our open platform allows us to reach more customers with our leading solar
service without compromising our ability to provide exceptional customer service.
Customer Agreements
Since we were founded in 2007, we have been selling solar energy to residential customers at prices
typically below utility rates through a variety of offerings, most commonly through our leases and power purchase
agreements which we refer to as our “Customer Agreements.” Our two forms of Customer Agreements work the
same way economically and have substantially the same contractual terms. However, under our lease
agreements, customers lease their solar energy systems from us, while under our power purchase agreements,
customers purchase the power produced by the solar energy system. Either directly or through a partner, we
construct a solar energy system on a customer’s home and sell the electricity generated by the system at set
prices through Customer Agreements which typically have an initial term of 20 years. Rates for both forms of our
Customer Agreements can be fixed for the duration of the contract or escalated at a pre-determined percentage,
annually. Upon installation, a system is interconnected to the local utility grid. The home’s energy usage is
provided by the solar energy system with any additional energy needs provided by the local utility. Unless the
solar energy system is connected to a battery, any excess solar energy that is not immediately used by our
customers is exported to the utility grid using a bi-directional utility net meter, and the customer generally receives
a credit for this excess power from their utility to offset future usage of utility-generated energy.
Although many of our homeowners choose to pay little-to-nothing upfront and instead receive a monthly bill,
some customers choose to prepay for some or all of the electricity produced by their systems, thereby reducing
their monthly bill. The amount of an upfront payment is customized for each customer and typically ranges from
$0 to $3,000 for customers paying monthly. Customers may also choose to fully prepay their 20-year contracts,
and the average cost of these prepaid contracts is approximately $16,500. The prepayment amount is based on
the estimated amount of the solar energy system’s output over the 20-year term of the Customer Agreement. If
the estimated production of the solar energy system is less than the actual production for a given year after the
first full year of the agreement, prepaid customers are refunded the difference at the end of each such year. If the
solar energy system’s energy production is in excess of the estimate, we allow customers to keep the excess
energy at no charge. After the initial term of the Customer Agreement, customers have the option to renew their
contracts for the remaining life of the solar energy system, typically at a 10% discount to then-prevailing power
prices, to purchase the system from us at its fair market value, or have us remove the system.
Regardless of the type of Customer Agreement our customers choose, we operate the system and agree to
monitor and maintain it in good condition at no cost to the customer. We offer an industry-leading performance
guarantee to ensure that our customers are receiving the energy they expect at the price they expect. Our
customers also receive up to a ten-year warranty for roof penetrations.
5
If a customer sells their home, the customer has the right to purchase the system or assign their Customer
Agreement to the new homeowner, provided the new homeowner meets our credit requirements and agrees to be
bound by the terms and conditions of the Customer Agreement. In connection with this service transfer, the
customer may prepay all or a portion of the remaining payments due under the Customer Agreement to lower the
monthly rate to be paid by the new homeowner. The amount of this prepayment may be reflected in the sales
price of the home. If the customer fails to purchase the system or assign the agreement to a new homeowner, we
may negotiate a Customer Agreement directly with the new homeowner on modified terms and/or look to the
original customer for any past due or lost payments. We have completed thousands of service transfers and, from
inception through December 31, 2016, the aggregate expected net present value of the Customer Agreements
once assigned represented approximately 99% of what it was prior to assignment.
Sales and Marketing
We sell our solar energy offerings through a scalable sales organization using both a direct-to-consumer
approach across online and offline channels and a diverse partner network that originates and/or installs our
systems. We market and sell our products using direct channels, partner channels, mass media, digital media,
canvassing, referral, retail, and field marketing. We sell to homeowners over the phone, in the field through
canvassing and in-home sales and through retail sales channels through our strategic partners. We also partner
with sales-only organizations that focus on direct-to-consumer marketing and sales on our behalf, typically with a
Sunrun-branded offering at point of sale, which further increases our brand and reach. We believe that a
customized, homeowner-focused selling process is important before, during and after the sale of our solar
services.
We train our sales team to customize their consultative presentation to the individual homeowner, based on
guidelines and principles outlined in our training materials. We are able to provide our sales team with real-time
data and pricing tools through our proprietary technology which is designed to generate a tailored product offering
with optimized pricing based on the actual characteristics of a homeowner’s home, including roof characteristics
and shading, as well as actual energy usage. This allows our sales team to differentially price homes in the same
geographic region quickly and effectively.
Competition
We believe that our primary competitors are the traditional utilities that supply electricity to our potential
customers. We compete with these traditional utilities primarily based on price (cents per kilowatt hour),
predictability of future prices (by providing pre-determined annual price escalations) and the ease by which
homeowners can switch to electricity generated by our solar energy systems.
We also compete with companies that are not regulated like traditional utilities but that have access to the
traditional utility electricity transmission and distribution infrastructure pursuant to state and local pro-competitive
and consumer choice policies and with solar companies with business models that are similar to ours. We believe
that we compete favorably with these companies based on our unique multi-channel approach and differentiated
customer experience.
We also face competition from purely finance-driven organizations that acquire homeowners and then
subcontract out the installation of solar energy systems, from installation businesses that seek financing from
external parties, from large construction companies and utilities and from sophisticated electrical and roofing
companies.
Research and Development
We believe continued investment in research and development is an important component of our on-going
efforts to improve and expand our platform of services and tools. Our research and development expenses were
$10.2 million in 2016, $9.7 million in 2015 and $8.4 million in 2014. These expenses include costs related to the
development, maintenance and research associated with our BrightPath software and our SnapNrack racking
equipment.
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Intellectual Property
As of December 31, 2016, we had 15 issued patents and 22 filed patent applications in the United States
and foreign countries relating to a variety of aspects of our solar solutions. Our issued United States patents will
expire 20 years from their respective filing dates, with the earliest expiring in 2029. We intend to file additional
patent applications as we innovate through our research and development efforts.
Government Regulation
Although we are not regulated as a public utility in the United States under applicable national, state or other
local regulatory regimes where we conduct business, we compete primarily with regulated utilities. As a result, we
have developed and are committed to maintaining a policy team to focus on the key regulatory and legislative
issues impacting the entire industry. We believe these efforts help us better navigate local markets through
relationships with key stakeholders and facilitate a deep understanding of the national and regional policy
environment.
To operate our systems, we obtain interconnection permission from the applicable local primary electric
utility. Depending on the size of the solar energy system and local law requirements, interconnection permission
is provided by the local utility directly to us and/or our homeowners. In almost all cases, interconnection
permissions are issued on the basis of a standard process that has been pre-approved by the local public utility
commission or other regulatory body with jurisdiction over net metering policies. As such, no additional regulatory
approvals are required once interconnection permission is given.
Our operations are subject to stringent and complex federal, state and local laws, including regulations
governing the occupational health and safety of our employees and wage regulations. For example, we are
subject to the requirements of the federal Occupational Safety and Health Act, as amended (“OSHA”), the
U.S. Department of Transportation (“DOT”), and comparable state laws that protect and regulate employee health
and safety.
Government Incentives
Federal, state and local government bodies provide incentives to owners, distributors, system integrators
and manufacturers of solar energy systems to promote solar energy in the form of rebates, tax credits and other
financial incentives such as system performance payments, payments for renewable energy credits associated
with renewable energy generation and exclusion of solar energy systems from property tax assessments. These
incentives enable us to lower the price we charge homeowners for energy from, and to lease, our solar energy
systems, helping to catalyze homeowner acceptance of solar energy as an alternative to utility-provided power.
The federal government currently offers a 30% investment tax credit (“Commercial ITC”) under
Section 48(a) of the Internal Revenue Code of 1986, as amended (the “Code”), for the installation of certain solar
power facilities owned for business purposes. The depreciable basis of a solar facility is also reduced by 50% of
the tax credit claimed. Similarly, the federal government currently offers a 30% investment tax credit under
Section 25D of the Internal Revenue Code (“Residential ITC”), for the installation of certain solar power facilities
owned by residential taxpayers. The Commercial ITC was set to step down to 10% and the Residential ITC was
set to expire at the end of 2016. In December 2015, Congress passed legislation extending both the Commercial
and Residential ITC for an additional five years with a ramp down from 30% to 26% for solar property
commencing construction in 2020 and then further to 22% for solar property commencing construction in 2021.
Current law provides that the Commercial ITC will be 10% for both (i) solar property commencing construction
after 2021 and (ii) solar property that commenced construction during or prior to 2021 but is placed in service after
2023, and the Residential ITC will expire after 2021.
More than half of the states, and many local jurisdictions, have established property tax incentives for renewable
energy systems that include exemptions, exclusions, abatements and credits. Many states also have adopted
procurement requirements for renewable energy production. Twenty-nine states and the District of Columbia have
adopted a renewable portfolio standard (and nine other states have some voluntary goal) that requires regulated
utilities to procure a specified percentage of total electricity delivered in the state from eligible renewable energy
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sources, such as solar energy systems, by a specified date. To prove compliance with such mandates, utilities must
surrender solar renewable energy credits (“SRECs”) to the applicable authority. Solar energy system owners such as
our investment funds often are able to sell SRECs to utilities directly or in SREC markets.
While there are numerous federal, state and local government incentives that benefit our business, some
adverse interpretations or determinations of new and existing laws can have a negative impact on our business.
For example, in the state of Arizona, the Arizona Department of Revenue has determined that a personal property
tax exemption on solar panels does not apply to solar panels that are leased (as opposed to owned), and has
subjected our leased solar panels to personal property taxes. While we are challenging that determination, an
adverse outcome will subject us and other solar companies to an increase in personal property taxes. If we pass
this additional tax on to our customers in the form of higher prices, it could reduce or eliminate entirely the savings
that these solar panels would otherwise provide to the customer. Although we are involved in ongoing litigation
challenging the Arizona personal property tax determination, there can be no assurances that this litigation will be
resolved in a manner that is favorable to us or other solar companies. If this litigation is not resolved in a manner
that is favorable to us and other solar companies, it will adversely impact our operations in Arizona, and if we
decide to pass the tax cost on to our customers, the price increase could adversely impact our ability to attract
new customers in Arizona if it reduces or eliminates the savings that the solar panels would otherwise provide.
Employees
As of December 31, 2016, we had approximately 3,020 employees. We also engage independent
contractors and consultants. None of our employees are covered by collective bargaining agreements. We have
not experienced any work stoppages.
Corporate Information
Our principal executive offices are located at 595 Market Street, 29th Floor, San Francisco, California
94105, and our telephone number is (415) 580-6900. Our website address is www.sunrun.com. Information
contained on, or that can be accessed through, our website does not constitute part of this Annual Report on
Form 10-K and inclusions of our website address in this Annual Report on Form 10-K are inactive textual
references only. We were formed in 2007 as a California limited liability company, and converted in 2008 into a
Delaware corporation.
The Sunrun design logo, “Sunrun” and our other registered or common law trademarks, service marks or
trade names appearing in this Annual Report on Form 10-K are the property of Sunrun Inc. Other trademarks and
trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended. The public may obtain these filings at the Securities and Exchange Commission (the SEC)
Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and
other information that we file with the SEC electronically. Copies of our reports on Form 10-K, Forms 10-Q, Forms
8-K, and amendments to those reports may also be obtained, free of charge, electronically on the investor
relations page on our website located at investors.sunrun.com as soon as reasonably practical after we file such
material with, or furnish it to, the SEC.
We also use the investor relations page on our website as a channel of distribution for important company
information. Important information, including press releases, analyst presentations and financial information
regarding us, as well as corporate governance information, is routinely posted and accessible on the investor
relations page on our website. Information on or that can be accessed through our website is not part of this
Annual Report on Form 10-K, and the inclusion of our website address is an inactive textual reference only.
8
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and
uncertainties described below, together with all of the other information in this Annual Report on Form 10-K,
including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and related notes, before making a decision to invest in our
common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks
actually occur, our business, financial condition, results of operations, cash flows and prospects could be
materially and adversely affected. In that event, the market price of our common stock could decline, and you
could lose part or all of your investment.
Risks Related to Our Business and Our Industry
We need to raise capital to finance the continued growth of our residential solar service business. If
capital is not available to us on acceptable terms, as and when needed, our business and prospects
would be materially and adversely impacted. In addition, our business is affected by general economic
conditions and related uncertainties affecting markets in which we operate. Volatility in current economic
conditions could adversely impact our business, including our ability to raise financing.
Our future success depends on our ability to raise capital from third parties to grow our business. To date,
we have funded our business principally through low-cost tax equity investment funds. If we are unable to
establish new investment funds when needed, or upon desirable terms, the growth of our solar service business
would be impaired. Changes in tax law could affect our ability to establish such tax equity investment funds or
impact the terms of existing or future funds.
The contract terms in certain of our existing investment fund documents contain various conditions with
respect to our ability to draw on financing commitments from the fund investors, including conditions that restrict
our ability to draw on such commitments if an event occurs that could reasonably be expected to have a material
adverse effect on the fund or, in some instances, us. If we were not able to satisfy such conditions due to events
related to our business, a specific investment fund, developments in our industry, including tax or regulatory
changes, or otherwise, and as a result, we were unable to draw on existing funding commitments, we could
experience a material adverse effect on our business, liquidity, financial condition, results of operations and
prospects. If any of the investors that currently invest in our investment funds were to decide not to invest in future
investment funds to finance our solar service offerings due to general market conditions, concerns about our
business or prospects or any other reason, or materially change the terms under which they were willing to
provide future financing, we would need to identify new investors to invest in our investment funds and our cost of
capital may increase.
In addition, our business and results of operations are materially affected by conditions in the global capital
markets and the economy. A general slowdown or volatility in current economic conditions, stemming from the
level of U.S. national debt, currency fluctuations, unemployment rates, the availability and cost of credit, the U.S.
housing market, inflation levels, negative interest rates, energy costs and concerns over a slow economic
recovery could adversely affect our business, including our ability to raise financing.
There can be no assurance that we will be able to continue to successfully access capital in a manner that
supports the growth of our business. Certain sources of capital may not be available in the future, and competition
for any available funding may increase. We cannot be sure that we will be able to maintain necessary levels of
funding without incurring high funding costs, unfavorable changes in the terms of funding instruments or the
liquidation of certain assets. If we are unable to continue to offer a competitive investment profile, we may lose
access to these funds or they may only be available on less favorable terms than those provided to our
competitors or currently provided to us. If we are unable to arrange new or alternative methods of financing on
favorable terms, our business, liquidity, financial condition, results of operations and prospects could be materially
and adversely affected.
9
The solar energy industry is an emerging market that is constantly evolving and may not develop to the
size or at the rate we expect.
The solar energy industry is an emerging and constantly evolving market opportunity. We believe the solar
energy industry will take several years to fully develop and mature, and we cannot be certain that the market will
grow at the rate we expect. For example, in 2016, we experienced increases in cancellations of our Customer
Agreements in certain markets. Any future growth of the solar energy market and the success of our solar service
offerings depend on many factors beyond our control, including recognition and acceptance of the solar service
market by consumers, the pricing of alternative sources of energy, a favorable regulatory environment, the
continuation of expected tax benefits and other incentives and our ability to provide our solar service offerings
cost-effectively. If the markets for solar energy do not develop at the rate we expect, our business may be
adversely affected.
Solar energy has yet to achieve broad market acceptance and depends in part on continued support in the
form of rebates, tax credits and other incentives from federal, state and local governments. If this support
diminishes, our ability to obtain external financing on acceptable terms, or at all, could be materially adversely
affected. These types of funding limitations could lead to inadequate financing support for the anticipated growth
in our business. Furthermore, growth in residential solar energy depends in part on macroeconomic conditions,
retail prices of electricity and homeowner preferences, each of which can change quickly. Declining
macroeconomic conditions, including in the job markets and residential real estate markets, could contribute to
instability and uncertainty among homeowners and impact their financial wherewithal, credit scores or interest in
entering into long-term contracts, even if such contracts would generate immediate and long-term savings.
Market prices of retail electricity generated by utilities or other energy sources could decline for a variety of
reasons, as discussed further below. Any such declines in macroeconomic conditions or changes in homeowner
preferences would adversely impact our business.
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 fund investors who seek particular tax and
other benefits.
Our solar service offerings have been eligible for federal investment tax credits (“ITCs”), U.S. Treasury
grants and other tax benefits. We have relied on, and will continue to rely on, tax equity investment funds, which
are financing structures that monetize a substantial portion of those benefits, in order to finance our solar service
offerings. If, for any reason, we were unable to continue to monetize those benefits through these arrangements,
we may be unable to provide and maintain our solar service offerings for homeowners on an economically viable
basis.
The availability of this tax-advantaged financing depends upon many factors, including:
•
•
•
•
our ability to compete with other solar energy companies for the limited number of potential fund
investors, each of which has limited funds and limited appetite for the tax benefits associated with
these financings;
the state of financial and credit markets;
changes in the legal or tax risks associated with these financings; and
non-renewal of these incentives or decreases in the associated benefits.
The federal government currently offers a 30% ITC (the “Commercial ITC”) under Section 48(a) of the
Internal Revenue Code of 1986, as amended (the “Code”), for the installation of certain solar power facilities
owned for business purposes. The depreciable basis of a solar facility is also reduced by 50% of the tax credit
claimed. Similarly, the federal government currently offers a 30% investment tax credit (“Residential ITC”) for the
installation of certain solar power facilities owned by residential taxpayers. The Commercial ITC was set to step
down to 10% and the Residential ITC was set to expire at the end of 2016. However in December 2015,
Congress passed legislation extending both the Commercial and Residential ITC for an additional five years with
a ramp down from 30% to 26% for solar property commencing construction in 2020 and then further to 22% for
10
solar property commencing construction in 2021. Current law provides that the Commercial ITC will be 10% for
both (i) solar property commencing construction after 2021 and (ii) solar property which commenced construction
during or prior to 2021 but which is placed in service after 2023, and the Residential ITC will expire after 2021.
Potential investors must remain satisfied that the funding structures that we offer will make the tax benefits
associated with solar energy systems available to these investors, which depends on the investors’ assessment
of the tax law, the absence of any unfavorable interpretations of that law and the continued application of existing
tax law and interpretations to our funding structures. Adverse changes in existing law or interpretations of existing
law by the Internal Revenue Service (the “IRS”) and the courts could reduce the willingness of investors to invest
in funds associated with these solar energy systems. Moreover, if tax rates are reduced, there will be less
appetite for tax benefits overall, which will reduce the pool of available funds, and certain benefits (such as
depreciation) will have less value, requiring additional cash to be paid to investors to meet return demands.
Accordingly, we cannot assure you that this type of financing will continue to be available to us. New investment
fund structures or other financing mechanisms may also become available, and if we are unable to take
advantage of these fund structures and financing mechanisms, we may be at a competitive disadvantage. If, for
any reason, we were unable to finance our solar service offerings through tax-advantaged structures or if we were
unable to realize or monetize Commercial ITCs or other tax benefits, we may no longer be able to provide our
solar service offerings to new homeowners on an economically viable basis, which would have a material adverse
effect on our business, financial condition and results of operations.
If the Internal Revenue Service or the U.S. Department of the Treasury makes determinations that the fair
market value of our solar energy systems is materially lower than what we have claimed, we may have to
pay significant amounts to our fund investors and our business, financial condition and prospects may
be materially and adversely affected.
We and our fund investors claim the Commercial ITC or the U.S. Treasury grant in amounts based on the
fair market value of our solar energy systems. We have obtained independent appraisals to determine the fair
market values we report for claiming Commercial ITCs and U.S. Treasury grants. The IRS and the U.S. Treasury
Department review these fair market values. With respect to U.S. Treasury grants, the U.S. Treasury Department
reviews the reported fair market value in determining the amount initially awarded, and the IRS and the U.S.
Treasury Department may also subsequently audit the fair market value and determine that amounts previously
awarded must be repaid to the U.S. Treasury Department or that excess awards constitute taxable income for
U.S. federal income tax purposes. With respect to Commercial ITCs, the IRS may review the fair market value on
audit and determine that the tax credits previously claimed must be reduced. If the fair market value is determined
in these circumstances to be less than what we reported, we may owe our fund investors an amount equal to this
difference, plus any costs and expenses associated with a challenge to that valuation. We could also be subject
to tax liabilities, including interest and penalties. If the IRS or the U.S. Treasury Department further disagrees now
or in the future with the amounts we reported regarding the fair market value of our solar energy systems, or if we
receive an adverse outcome with respect to the Department of the Treasury Inspector General investigation
discussed elsewhere in this “Risk Factors” section and in the section entitled “Item 1. Legal Proceedings”
elsewhere in this Annual Report on Form 10-K, it could have a material adverse effect on our business, financial
condition and prospects. For example, a hypothetical five percent downward adjustment in the fair market value of
the solar energy systems related to approximately $269.0 million in U.S. Treasury grants that we have received
since the beginning of the U.S. Treasury grant program through December 31, 2014, would obligate us to repay
approximately $14.0 million to our fund investors. Five of our investment funds are currently being audited by the
IRS, three of which involve a review of our fair market value determinations of our solar energy systems. In
addition, two of our investors are currently being audited by the IRS, and those audits also involve a review of the
fair market value determination of our solar energy systems. If these audits result in an adverse finding, we would
be subject to an indemnity obligation to these investors. Since the Company cannot determine how the IRS will
evaluate system values used in claiming ITCs, the Company is unable to reliably estimate the maximum potential
future payments that it could have to make under this obligation as of each balance sheet date.
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We have historically benefited from declining costs in our industry, and our business and financial
results may be harmed not only as a result of any increases in costs associated with our solar service
offerings but also any failure of these costs to continue to decline as we currently expect. If we do not
reduce our cost structure in the future, our ability to continue to be profitable may be impaired.
Declining costs related to raw materials, manufacturing and the sale and installation of our solar service
offerings has been a key driver in the pricing of our solar service offerings and, more broadly, homeowner
adoption of solar energy. While historically the prices of solar panels and raw materials have declined, the cost of
solar panels and raw materials could increase in the future, and such products’ availability could decrease, due to
a variety of factors, including trade barriers, export regulations, regulatory or contractual limitations, industry
market requirements and changes in technology and industry standards. Any such cost increases or decreases in
availability could slow our growth and cause our financial results and operational metrics to suffer. For example, in
the past, we and our solar partners purchased a significant portion of the solar panels used in our solar service
offerings from manufacturers based in China or containing components from China. The U.S. government has
recently imposed antidumping and countervailing duties on solar cells manufactured in China. In addition, we may
face other increases in our operating expenses, including increases in wages or other labor costs, as well as
marketing, sales or branding related costs. In addition, we are investing heavily in building our direct-to-consumer
capabilities after our 2014 acquisition of the residential sales and installation business of Mainstream Energy
Corporation, as well as its fulfillment business, AEE Solar, and its racking business, SnapNrack, which we refer to
collectively as Mainstream Energy Corporation (“MEC”). These investments included significantly increasing our
installation capacity through the opening of new branches, increasing our hiring in construction and in associated
management personnel, and increasing brand and sales and marketing expenses.
We may continue to make significant investments to drive growth in the future. Increases in any of these
costs could adversely affect our results of operations and financial condition and harm our business and
prospects. If we are unable to reduce our cost structure in the future, it could have a material adverse effect on
our ability to be profitable and on our business and prospects.
We rely on net metering and related policies to offer competitive pricing to homeowners in all of our
current markets, and changes to net metering policies may significantly reduce demand for electricity
from our solar service offerings.
As of December 31, 2016, a substantial majority of states have adopted net metering policies. Net metering
policies are designed to allow homeowners to serve their own load using on-site energy generation. Electricity
that is generated by a solar energy system and consumed on-site avoids a retail energy purchase from the
applicable utility, and excess electricity that is exported back to the electric grid generates a retail credit within a
homeowner’s monthly billing period. At the end of the monthly billing period, if the homeowner has generated
excess electricity within that month, the homeowner typically carries forward a credit for any excess electricity to
be offset against future utility energy purchases. At the end of an annual billing period or calendar year, utilities
either continue to carry forward a credit, or reconcile the homeowner’s final annual or calendar year bill using
different rates (including zero credit) for the exported electricity.
Utilities, their trade associations, and fossil fuel interests in the country are currently challenging net
metering policies, and seeking to either eliminate it, cap it, or impose charges on homeowners that have net
metering. For example, in October 2015 the Hawaii Public Utilities Commission issued an Order that eliminates
net metering for all new customers. In its place, the Commission created an interim tariff that sets a reduced rate
for the credit customers receive when they export power, and generally sets a path where all future solar energy
systems will no longer be able to export power to the broader electrical grid. All existing net metering customers
and customers who submitted net metering applications before October 12, 2015 are grandfathered indefinitely
under the old rules. We will continue to build and service these systems. In addition, in early 2016 we ceased new
installations in Nevada in response to the elimination of net metering by the Public Utilities Commission of Nevada
(“PUCN”). However, in September 2016, the PUCN issued an Order grandfathering in customers under the prior
net metering rules who had installed a solar energy system or had submitted a net metering application prior to
December 31, 2015. In addition, in December 2016, the PUCN issued an Order restoring net metering for
approximately 40% of new residential solar in northern Nevada. Sierra Pacific Power Company, the utility in
northern Nevada, has formally requested that the PUCN reconsider this decision.
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Some states set limits on the total percentage of a utility’s customers that can adopt net metering. For
example, New Hampshire, South Carolina and New Jersey have net metering caps. New York currently has no
cap but that policy could be subject to change in the future, and other states we serve now or in the future may
adopt net metering caps. If the net metering caps in these jurisdictions are reached without an extension of net
metering policies, homeowners in the future will not have access to the economic value proposition net metering
allows. For example, New Hampshire has commenced a regulatory proceeding to study net metering and
determine whether the policy should continue as is once the state’s newly-extended 100 MW cap is hit. If changes
to net metering policies occur without grandfathering to existing homeowners, as occurred recently in Nevada (but
was subsequently reversed), those existing homeowners could be negatively impacted, which could create a
default risk from those homeowners. Our ability to sell our solar service offerings may be adversely impacted by
the failure to extend existing limits to net metering or the elimination of currently existing net metering policies.
The failure to adopt a net metering policy where it currently is not in place would pose a barrier to entry in those
states. Additionally, the imposition of charges that only or disproportionately impact homeowners that have solar
systems, or the introduction of rate designs such as the “unbundled” rates mentioned above, would adversely
impact our business.
Electric utility statutes and regulations and changes to statutes or regulations may present technical,
regulatory and economic barriers to the purchase and use of our solar service offerings that may
significantly reduce demand for such offerings.
Federal, state and local government statutes and regulations concerning electricity heavily influence the
market for our solar service offerings. These statutes and regulations relate to electricity pricing, net metering,
incentives, taxation, competition with utilities, and the interconnection of homeowner-owned and third party-owned
solar energy systems to the electrical grid. These statutes and regulations are constantly evolving. Governments,
often acting through state utility or public service commissions, change and adopt different rates for residential
customers on a regular basis and these changes can have a negative impact on our ability to deliver savings to
homeowners.
Utilities, their trade associations, and fossil fuel interests in the country, each of which has significantly
greater economic and political resources than the residential solar industry, are currently challenging solar-related
policies to reduce the competitiveness of residential solar energy. Any adverse changes in solar-related policies
could have a negative impact on our business and prospects. For example, in early 2016, we ceased new
installations in Nevada as a result of the elimination of net metering (which was thereafter amended by the PUCN
to grandfather in customers who had installed a solar energy system or submitted a net metering application prior
to December 31, 2015) and are engaged in a lawsuit challenging that decision.
We face competition from traditional energy companies as well as solar energy companies.
The solar energy industry is highly competitive and continually evolving as participants strive to distinguish
themselves within their markets and compete with large utilities. We believe that our primary competitors are the
established utilities that supply energy to homeowners by traditional means. We compete with these utilities
primarily based on price, predictability of price, and the ease by which homeowners can switch to electricity
generated by our solar service offerings. If we cannot offer compelling value to homeowners based on these
factors, then our business and revenues will not grow. Utilities generally have substantially greater financial,
technical, operational and other resources than we do. As a result of their greater size, these competitors may be
able to devote more resources to the research, development, promotion and sale of their products or respond
more quickly to evolving industry standards and changes in market conditions than we can. Furthermore, these
competitors are able to devote substantially more resources and funding to regulatory and lobbying efforts.
Utilities could also offer other value-added products or services that could help them compete with us even if
the cost of electricity they offer is higher than ours. In addition, a majority of utilities’ sources of electricity are non-
solar, which may allow utilities to sell electricity more cheaply than us. Moreover, regulated utilities are
increasingly seeking approval to “rate-base” their own residential solar businesses. Rate-basing means that
utilities would receive guaranteed rates of return for their solar businesses. This is already commonplace for utility
scale solar projects and commercial solar projects. While few utilities to date have received regulatory permission
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to rate-base residential solar, our competitiveness would be significantly harmed should more utilities receive
such permission because we do not receive guaranteed profits for our solar service offerings.
We also face competition from other residential solar service providers. Some of these competitors have a
higher degree of brand name recognition, differing business and pricing strategies, and greater capital resources
than we have, as well as extensive knowledge of our target markets. If we are unable to establish or maintain a
consumer brand that resonates with homeowners, or competes with the pricing offered by our competitors, our
sales and market share position may be adversely affected as our growth is dependent on originating new
homeowners. We may also face competitive pressure from companies who offer lower priced consumer offerings
than us.
We also compete with companies that are not regulated like traditional utilities but that have access to the
traditional utility electricity transmission and distribution infrastructure. These energy service companies are able
to offer homeowners electricity supply-only solutions that are competitive with our solar service offerings on both
price and usage of solar energy technology while avoiding the long-term agreements and physical installations
that our current fund-financed business model requires. This may limit our ability to attract homeowners,
particularly those who wish to avoid long-term contracts or have an aesthetic or other objection to putting solar
panels on their roofs.
We also face competition from purely finance-driven nonintegrated competitors that subcontract out the
installation of solar energy systems, from installation businesses (including solar partners) that seek financing
from external parties, from large construction companies and from electrical and roofing companies. In addition,
local installers that might otherwise be viewed as potential solar partners may gain market share by being able to
be the first providers in new local markets. Some of these competitors may provide energy at lower costs than we
do. Finally, as declining prices for solar panels and related equipment has resulted in an increase in consumers
purchasing instead of leasing solar energy systems, we face competition from companies that offer consumer
loans for these solar panel purchases.
As the solar industry grows and evolves, we will continue to face existing competitors as well as new
competitors who are not currently in the market (including those resulting from the consolidation of existing
competitors) that achieve significant developments in alternative technologies or new products such as storage
solutions, loan products or other programs related to third-party ownership. Our failure to adapt to changing
market conditions, to compete successfully with existing or new competitors and to adopt new or enhanced
technologies could limit our growth and have a material adverse effect on our business and prospects.
Regulations and policies related to rate design could deter potential homeowners from purchasing our
solar service offerings, reduce the value of the electricity we produce, and reduce the savings that our
homeowners could realize from our solar service offerings.
All states regulate investor-owned utility retail electricity pricing. In addition, there are numerous publicly
owned utilities and electric cooperatives that establish their own retail electricity pricing through some form of
regulation or internal process. These regulations and policies could deter potential homeowners from purchasing
our solar service offerings. For example, utilities in states including Colorado, Arizona and New Hampshire are
seeking rate design changes to “unbundle” rates, and utilities in additional states such as New York may
potentially follow suit. This form of “unbundling” can include changing rates to charge lower volume-based rates –
the rates charged for kilowatt hours of electricity purchased by a residential customer – raising unavoidable fixed
charges that a homeowner is subject to when they purchase solar energy from third parties, and levying charges
on homeowners based on their point of maximum demand during a month (referred to as “demand charge”).
These forms of rate design would adversely impact our business by reducing the value of the electricity our solar
energy systems produce and reducing the savings homeowners receive by purchasing our solar service offerings.
These proposals could continue in other market states. In addition to changes in general rates charged to all
residential customers, utilities are increasingly seeking solar-specific charges (which may be fixed charges,
capacity-based charges, or other rate changes). Any of these changes could materially reduce the demand for
our products and could limit the number of markets in which our products are competitive with electricity provided
by the utilities. As an example, in December 2016, the Arizona Corporation Commission issued a decision to
eliminate net metering and reduce export rates for new solar customers. The specific rate changes applicable to
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Arizona solar customers may be determined in utility rate cases taking place in 2017. As another example, in
early 2016, we ceased new installations in Nevada in response to the elimination of net metering by the PUCN,
which decision was amended by the PUCN in September 2016 to grandfather in customers who had installed a
solar energy system or submitted a net metering application prior to December 31, 2015 under the prior net
metering rules. The PUCN also issued an Order in December 2016 restoring net metering by expanding the cap
for solar by 40% in northern Nevada however, the utility Sierra Pacific Power Company has formally requested
that the PUCN reconsider this decision.
Our business currently depends on the availability of utility rebates, tax credits and other financial
incentives in addition to other tax benefits. The expiration, elimination or reduction of these rebates and
incentives could adversely impact our business.
Our business depends on government policies that promote and support solar energy and enhance the
economic viability of owning solar energy systems. U.S. federal, state and local governmental bodies provide
incentives to owners, distributors, installers and manufacturers of solar energy systems to promote solar energy.
These incentives include ITCs, as discussed above, as well as other tax credits, rebates and other financial
incentives, such as system performance payments and payments for solar renewable energy credits (“SRECs”)
associated with solar energy generation. Some markets, such as New Jersey and Massachusetts, currently utilize
SRECs. SRECs can be volatile and could decrease over time as the supply of SREC-producing solar energy
systems installed in a particular market increases. We rely on the incentives listed above to lower our cost of
capital and to incent investors to invest in our funds, all of which enables us to lower the price we charge
homeowners for our solar service offerings. These incentives have had a significant impact on the development of
solar energy but they could change at any time, especially in light of the recent change in administration, as
further described below. These incentives may also expire on a particular date (as discussed above with respect
to the ITC), end when the allocated funding is exhausted, or be reduced, terminated or repealed without notice.
The financial value of certain incentives may also decrease over time.
The current administration’s proposed environmental and tax policies may create regulatory uncertainty in
the solar energy industry and may lead to a reduction or removal of various clean energy programs and initiatives
designed to curtail climate change. Such a reduction or removal of incentives could diminish the market for solar
energy. The current administration has also made public statements regarding reducing the corporate tax rate,
expensing capital costs and imposing a border adjustment tax on imported goods. A reduction in the corporate tax
rate and the expensing of capital costs could diminish the capacity of potential fund investors to benefit from tax
incentives, and could require additional cash to be distributed to such fund investors in lieu of tax benefits. In
addition, a border adjustment tax on imported goods could increase our cost inputs. In addition, the current
administration also made public statements regarding overturning or modifying policies of, or regulations enacted
by, the prior administration that placed limitations on coal and gas electric generation, mining and/or exploration.
Any effort to overturn federal and state laws, regulations or policies that are supportive of solar energy generation
or that remove costs or other limitations on other types of energy generation that compete with solar energy
projects could materially and adversely affect our business.
Our business model also relies on multiple tax exemptions offered at the state and local levels. For example,
solar energy systems are generally not considered in determining values for calculation of local and state real and
personal property taxes as a result of applicable property tax exemptions. If solar energy systems were not
excluded, the property taxes payable by homeowners would be higher, which could offset any potential savings
our solar service offerings could offer. For example, in the state of Arizona, the Arizona Department of Revenue
has determined that a personal property tax exemption on solar panels does not apply to solar panels that are
leased (as opposed to owned) and has subjected our leased solar panels to personal property taxes. While we
are challenging that determination, an adverse outcome will subject us and other solar companies to an increase
in personal property taxes. If we pass this additional tax on to our customers in the form of higher prices, it could
reduce or eliminate entirely the savings that these solar panels would otherwise provide to the homeowner.
Although we are involved in ongoing litigation challenging the Arizona personal property tax determination, there
can be no assurances that this litigation will be resolved in a manner that is favorable to us or other solar
companies. If this litigation is not resolved in a manner that is favorable to us and other solar companies, it will
adversely impact our operations in Arizona. If we decide to pass the tax cost on to our customers, such price
increase could adversely impact our ability to attract new customers in Arizona, and the savings that our current
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Arizona customers realize could be reduced or eliminated by the additional tax imposed, which will make our solar
service offerings less attractive to those customers and could increase the risk of default from those customers. In
addition, South Carolina counties do not currently assess property tax on residential solar energy systems,
although state law does not provide for an explicit exemption. In general, we rely on certain state and local tax
exemptions that apply to the sale of equipment, sale of power, or both. These state and local sales tax
exemptions can be changed by the state legislature and other regulators, and such a change, for example if
South Carolina were to begin assessing property tax on residential solar energy systems, could adversely impact
our business.
We are not currently regulated as a utility under applicable laws, but we may be subject to regulation as a
utility in the future or become subject to new federal and state regulations for any additional solar service
offerings we may introduce in the future.
Federal, state and municipal laws do not currently regulate us as a utility. As a result, we are not subject to
the various regulatory requirements applicable to U.S. utilities. However, any federal, state, local or otherwise
applicable regulations could place significant restrictions on our ability to operate our business and execute our
business plan by prohibiting or otherwise restricting our sale of electricity. These regulatory requirements could
include restricting our sale of electricity, as well as regulating the price of our solar service offerings. If we were
subject to the same regulatory authorities as utilities in the United States or if new regulatory bodies were
established to oversee our business, then our operating costs could materially increase.
Our business depends in part on the regulatory treatment of third-party owned solar energy systems.
Our Customer Agreements are third-party ownership arrangements. Sales of electricity by third parties face
regulatory challenges in some states and jurisdictions. These challenges pertain to issues such as whether third
party-owned systems qualify for the same levels of rebates or other non-tax incentives available for homeowner-
owned solar energy systems, whether third-party-owned systems are eligible at all for these incentives, and
whether third-party-owned systems are eligible for net metering and the associated significant cost savings.
Reductions in, or eliminations of, the current treatment of third-party arrangements could reduce demand for our
solar service offerings, adversely impact our access to capital and cause us to increase the price we charge
homeowners for energy.
Interconnection limits or circuit-level caps imposed by regulators may significantly reduce our ability to
sell electricity from our solar service offerings in certain markets or slow interconnections, harming our
growth rate and customer satisfaction scores.
Interconnection rules establish the circumstances in which rooftop solar will be connected to the electricity
grid. Interconnection limits or circuit-level caps imposed by regulators may curb our growth in key markets.
Utilities throughout the country have different rules and regulations regarding interconnection and some utilities
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. The vast majority of our current homeowners are
connected to the grid, and we expect most homeowners to continue to be connected to the grid in the future.
Interconnection regulations are based on claims from utilities regarding the amount of solar electricity that
can be connected to the grid without causing grid reliability issues or requiring significant grid upgrades. Although
recent rulings from the Hawaii Public Utilities Commission have helped resolve some problems, historically,
interconnection limits or circuit-level caps have slowed the pace of our installations in Hawaii. Similar
interconnection limits could slow our future installations in Hawaii or other markets, harming our growth rate and
customer satisfaction scores.
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We may be required to make payments or contribute assets to our investors upon the occurrence of
certain events, including one-time reset or true-up payments or upon the exercise of a redemption option
by one of our investors.
Our fund investors typically advance capital to us based on energy estimates. The models we use to
calculate prepayments in connection with certain of our investment funds will be updated for each investment fund
at a fixed date occurring after placement in service of all applicable solar energy systems or an agreed upon date
(typically within the first year of the applicable term) to reflect certain specified conditions as they exist at such
date including the ultimate system size of the equipment that was leased, how much it cost, and when it went into
service. In some cases, these true-up models will also incorporate any changes in law, which would include any
reduction in rates (and thus any reduction in the benefits of depreciation). As a result of this true up, applicable
payments are resized, and we may be obligated to refund a portion of the investor’s prepayments or to contribute
additional assets to the investment fund. In addition, certain of our fund investors have the right to require us to
purchase their interests in the investment funds after a set period of time, generally at a price equal to the greater
of a set purchase price or fair market value of the interests at the time of the repurchase. Any significant refunds,
capital contributions or purchases that we may be required to make could adversely affect our liquidity or financial
condition.
A material drop in the retail price of utility-generated electricity or electricity from other sources would
harm our business, financial condition and results of operations.
We believe that a homeowner’s decision to buy solar energy from us is primarily driven by a desire to lower
electricity costs. Decreases in the retail prices of electricity from utilities or other energy sources would harm our
ability to offer competitive pricing and could harm our business. The price of electricity from utilities could
decrease as a result of:
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the construction of a significant number of new power generation plants, including nuclear, coal,
natural gas or renewable energy technologies;
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 new drilling techniques
or other technological developments, a relaxation of associated regulatory standards, or broader
economic or policy developments;
energy conservation technologies and public initiatives to reduce electricity consumption; and
development of new energy technologies that provide less expensive energy.
A reduction in utility electricity prices would make the purchase of our solar service offerings less attractive.
If the retail price of energy available from utilities were to decrease due to any of these or other reasons, we
would be at a competitive disadvantage. As a result, we may be unable to attract new homeowners and our
growth would be limited.
It is difficult to evaluate our business and prospects due to our limited operating history.
Until 2014, we focused our efforts primarily on the sales, financing and monitoring of solar energy systems
for residential customers, with installation provided by our solar partners. In February 2014, we acquired MEC.
We have limited experience managing the fulfillment and racking lines of the MEC business, and we may not be
successful in maintaining or growing the revenue from these businesses. Further, we have limited experience, in
comparison to our solar partner model, in our direct-to-consumer business, and as a result, we may fail to grow as
quickly or achieve the revenue scale targeted in connection with such a model. We may also be unsuccessful in
expanding our customer base through installation of our solar service offerings within our current markets or in
new markets we may enter. Additionally, we cannot assure you that we will be successful in generating
substantial revenue from our current solar service offerings or from any additional solar service offerings we may
introduce in the future. Our limited operating history, combined with the rapidly evolving and competitive nature of
our industry, may not provide an adequate basis for you to evaluate our results of operations and business
prospects. In addition, we only have limited insight into emerging trends, such as alternative energy sources,
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commodity prices in the overall energy market, and legal and regulatory changes that impact the solar industry,
any of which could adversely impact our business, prospects and results of operations.
We have incurred losses and may be unable to achieve or sustain profitability in the future.
We have incurred net losses in the past and may continue to incur net losses as we increase our spending
to finance the expansion of our operations, expand our installation, engineering, administrative, sales and
marketing staffs, increase spending on our brand awareness and other sales and marketing initiatives, and
implement internal systems and infrastructure to support our growth. We do not know whether our revenue will
grow rapidly enough to absorb these costs and our limited operating history makes it difficult to assess the extent
of these expenses or their impact on our results of operations. Our ability to achieve profitability depends on a
number of factors, including but not limited to:
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growing our customer base;
finding investors willing to invest in our investment funds on favorable terms;
maintaining or further lowering our cost of capital;
reducing the cost of components for our solar service offerings;
growing and maintaining our channel partner network;
growing our direct-to-consumer business to scale; and
reducing our operating costs by lowering our customer acquisition costs and optimizing our design and
installation processes and supply chain logistics.
Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
Our results of operations may fluctuate from quarter to quarter, which could make our future performance
difficult to predict and could cause our results of operations for a particular period to fall below
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expectations, resulting in a decline in the price of our common stock.
Our quarterly results of operations are difficult to predict and may fluctuate significantly in the future. We
have experienced seasonal and quarterly fluctuations in the past and expect these fluctuations to continue.
However, given that we are an early-stage company operating in a rapidly changing industry, those fluctuations
may be masked by our recent growth rates and thus may not be readily apparent from our historical results of
operations. As such, our past quarterly results of operations may not be good indicators of likely future
performance.
In addition to the other risks described in this “Risk Factors” section, as well as the factors discussed in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, the following
factors could cause our results of operations and key performance indicators to fluctuate:
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the expiration or initiation of any governmental tax rebates or incentives;
significant fluctuations in homeowner demand for our solar service offerings or fluctuations in the
geographic concentration of installations of solar energy systems;
changes in financial markets, which could restrict our ability to access available financing sources;
seasonal or weather conditions that impact sales, energy production and system installations;
the amount and timing of operating expenses related to the maintenance and expansion of our
business, operations and infrastructure;
announcements by us or our competitors of new products or services, significant acquisitions, strategic
partnerships, joint ventures or capital-raising activities or commitments;
changes in our pricing policies or terms or those of our competitors, including utilities;
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changes in regulatory policy related to solar energy generation;
the loss of one or more key partners or the failure of key partners to perform as anticipated;
actual or anticipated developments in our competitors’ businesses or the competitive landscape;
actual or anticipated changes in our growth rate;
general economic, industry and market conditions; and
changes to our cancellation rate.
In the past, we have experienced seasonal fluctuations in sales and installations, particularly in the fourth
quarter. This has been the result of decreased sales through the holiday season and weather-related installation
delays. In addition, energy production is greater in the second and third quarters of the year, causing variability in
operating lease revenues throughout the year. Our incentives revenue is also highly variable due to associated
revenue recognition rules, as discussed in greater detail in the section titled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” Seasonal and other factors may also contribute to
variability in our sales of solar energy systems and product sales. 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. In addition,
our actual revenue or key operating metrics in one or more future quarters may fall short of the expectations of
investors and financial analysts. If that occurs, the trading price of our common stock could decline and you could
lose part or all of your investment.
Our actual financial results may differ materially from any guidance we may publish from time to time.
We have in the past and 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 is 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 deployment volume, cost, net
present value or any other 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 and other raw materials, as well as the other
risks to our business that are described in this 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 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.
If we fail to manage our recent and future 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, and we intend to continue to expand our business
within existing markets and in a number of new locations in the future. This growth has placed, and any future
growth may place, a significant strain on our management, operational and financial infrastructure. In particular,
we will be required to expand, train and manage our growing employee base and solar partners. Our
management will also be required to maintain and expand our relationships with homeowners, suppliers and other
third parties and attract new homeowners and suppliers, as well as to manage multiple geographic locations.
In addition, our current and planned operations, personnel, systems and procedures might be inadequate to
support our future growth and may require us to make additional unanticipated investment in our infrastructure,
including additional costs for the expansion of our employee base and our solar partners as well as marketing and
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branding costs. For example, our headcount was approximately 3,020 as of December 31, 2016. 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 growth, we may be unable to take advantage of market
opportunities, execute our business strategies or respond to competitive pressures. This could also result in
declines in quality or homeowner satisfaction, increased costs, difficulties in introducing new solar service
offerings or other operational difficulties. Any failure to effectively manage growth could adversely impact our
business and reputation.
Servicing our debt requires a significant amount of cash to comply with certain covenants and satisfy
payment obligations, and we may not have sufficient cash flow from our business to pay our substantial
debt and may be forced to take other actions to satisfy our obligations under our indebtedness, which
may not be successful.
We have substantial amounts of debt, including the working capital facility and the non-recourse debt
facilities entered into by our subsidiaries, as discussed in more detail in the section titled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial
statements. Specifically, as of December 31, 2016, we have a $244 million bank line of credit maturing in April
2018. 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 continue to generate cash flow from operations in the future
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 selling assets,
restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability
to timely repay or otherwise refinance our indebtedness (including, but not limited to, the bank line of credit
disclosed above) 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.
We expect to incur substantially more debt in the future, which could intensify the risks to our business.
We and our subsidiaries expect to incur additional debt in the future, subject to the restrictions contained in
our debt instruments. Our existing debt arrangements restrict our ability to incur additional indebtedness, including
secured indebtedness, and we may be subject to similar restrictions under the terms of future debt arrangements.
These restrictions could inhibit our ability to pursue our business strategies. Increases in our existing debt
obligations would further heighten the debt related risk discussed above.
Furthermore, there is no assurance that we will be able to enter into new debt instruments on acceptable
terms. 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.
The production and installation of solar energy systems depends heavily on suitable meteorological
conditions. If meteorological conditions are unexpectedly unfavorable, the electricity production from our
solar service offerings may be below our expectations, and our ability to timely deploy new systems may
be adversely impacted.
The energy produced and revenue and cash flows generated by a solar energy system depend on suitable
solar and weather conditions, both of which are beyond our control. Furthermore, components of our systems,
such as panels and inverters, could be damaged by severe weather or natural catastrophes, such as hailstorms,
tornadoes or earthquakes. In these circumstances, we generally would be obligated to bear the expense of
repairing the damaged solar energy systems that we own. Sustained unfavorable weather also could
unexpectedly delay the installation of our solar energy systems, leading to increased expenses and decreased
revenue and cash flows in the relevant periods. Weather patterns could change, making it harder to predict the
average annual amount of sunlight striking each location where our solar energy systems are installed. This could
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make our solar service offerings 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.
Our business is concentrated in certain markets, putting us at risk of region specific disruptions.
As of December 31, 2016, approximately half of our customers were in California. Accordingly, our business
and results of operations are particularly susceptible to adverse economic, regulatory, political, weather and other
conditions in this market and in other markets that may become similarly concentrated, in particular the east
coast, where we have seen significant growth in 2016. In addition, our corporate and sales headquarters are
located in San Francisco, California, an area that is at a heightened risk of earthquakes. We may not have
adequate insurance, including business interruption insurance, to compensate us for losses that may occur from
any such significant events, including damage to our solar energy systems. A significant natural disaster, such as
an earthquake, could have a material adverse impact on our business, results of operations and financial
condition. In addition, acts of terrorism or malicious computer viruses could cause disruptions in our or our solar
partners’ businesses or the economy as a whole. To the extent that these disruptions result in delays or
cancellations of installations or the deployment of our solar service offerings, our business, results of operations
and financial condition would be adversely affected.
Loan financing developments could adversely impact our business.
The third-party ownership structure, which we bring to market through our solar service offerings, continues
to be the predominant form of system ownership in the residential solar market in many states. However, with the
development of new loan financing products, we have seen a modest shift from leasing to outright purchases of
the solar energy system by the homeowner (i.e., a homeowner purchases the solar energy system outright
instead of leasing the system from us and paying us for the solar power produced by that system for a 20-year
initial term). Continued increases in third-party loan financing products and outright purchases could result in the
demand for long-term Customer Agreements to decline, which would require us to shift our product focus to
respond to the market trend and could have an adverse effect on our business. In 2016, 2015 and 2014, the
majority of our customers chose our solar service offerings as opposed to buying a solar energy system outright.
Our financial model is impacted by the volume of homeowners who choose our solar service offerings, and an
increase in the number of customers who choose to purchase solar energy systems (whether for cash or through
third-party financing) may harm our business and financial results.
The federal government currently offers a 30% Residential ITC for the installation of certain solar power
facilities owned by residential taxpayers. The Residential ITC was set to expire at the end of 2016. In December
2015, Congress passed legislation extending the Residential ITC for an additional five years with a ramp down
from 30% to 26% for solar property commencing construction in 2020 and then further to 22% for solar property
commencing construction in 2021. The Residential ITC is set to expire after 2021. Reductions in, eliminations of,
or expirations of, governmental incentives such as the Residential ITC could reduce the number of customers
who choose to purchase our solar energy systems.
Our growth depends in part on the success of our relationships with third parties, including our solar
partners.
A key component of our growth strategy is to develop or expand our relationships with third parties. For
example, we are investing resources in establishing strategic relationships with market players across a variety of
industries, including large retailers, to generate new customers. These programs may not roll out as quickly as
planned or produce the results we anticipated. A significant portion of our business depends on attracting and
retaining new and existing solar partners. Negotiating relationships with our solar partners, investing in due
diligence efforts with potential solar partners, training such third parties and contractors, and monitoring them for
compliance with our standards require significant time and resources and may present greater risks and
challenges than expanding a direct sales or installation team. If we are unsuccessful in establishing or maintaining
our relationships with these third parties, our ability to grow our business and address our market opportunity
could be impaired. Even if we are able to establish and maintain these relationships, we may not be able to
execute on our goal of leveraging these relationships to meaningfully expand our business, brand recognition and
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customer base. This would limit our growth potential and our opportunities to generate significant additional
revenue or cash flows.
We and our solar partners depend on a limited number of suppliers of solar panels and other system
components to adequately meet anticipated demand for our solar service offerings. Any shortage, delay
or component price change from these suppliers, or the acquisition of any of these suppliers by a
competitor, could result in sales and installation delays, cancellations and loss of market share.
We and our solar partners purchase solar panels, inverters and other system components and batteries
from a limited number of suppliers, making us susceptible to quality issues, shortages and price changes. If we or
our solar partners fail to develop, maintain and expand our relationships with these or other suppliers, we may be
unable to adequately meet anticipated demand for our solar service offerings, or we may only be able to offer our
systems at higher costs or after delays. If one or more of the suppliers that we or our solar partners rely upon to
meet anticipated demand ceases or reduces production, we may be unable to quickly identify alternate suppliers
or to qualify alternative products on commercially reasonable terms, and we may be unable to satisfy this
demand. The acquisition of a supplier by one of our competitors could limit our access to such components and
require significant redesigns of our solar energy systems or installation procedures and have a material adverse
effect on our business.
In particular, there are a limited number of suppliers of inverters, which are components that convert
electricity generated by solar panels into electricity that can be used to power the home. For example, once we
design a system for use with a particular inverter, if that type of inverter is not readily available at an anticipated
price, we may incur delays and additional expenses to redesign the system. Further, the inverters on our solar
energy systems generally carry only ten year warranties. If there is an inverter equipment shortage in a year when
a substantial number of inverters on our systems need to be replaced, we may not be able to replace the inverters
to maintain proper system functioning or may be forced to do so at higher than anticipated prices, either of which
would adversely impact our business.
There have also been periods of industry-wide shortage of key components, including solar panels, in times
of rapid industry growth. For example, new or unexpected changes in rooftop fire codes or building codes may
require new or different system components to satisfy compliance with such newly effective codes or regulations,
which may not be readily available for distribution to us or our suppliers. 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 and, as a result, could negatively impact our ability to install systems in a timely manner. Further, any
decline in the exchange rate of the U.S. dollar compared to the functional currency of our component suppliers
could increase our component prices. Any of these shortages, delays or price changes could limit our growth,
cause cancellations or adversely affect our operating margins, and result in loss of market share and damage to
our brand.
As the primary entity that contracts with homeowners, we are subject to risks associated with
construction, cost overruns, delays, customer cancellations, regulatory compliance and other
contingencies, any of which could have a material adverse effect on our business and results of
operations.
We are a licensed contractor in certain communities that we service, and we are ultimately responsible as
the contracting party for every solar energy system installation. We may be liable, either directly or through our
solar partners, to homeowners for any damage we cause to them, their home, belongings or property during the
installation of our systems. For example, we, either directly or through our solar partners, frequently penetrate
homeowners’ roofs during the installation process and may incur liability for the failure to adequately weatherproof
such penetrations following the completion of construction. In addition, because the solar energy systems we or
our solar partners deploy are high voltage energy systems, we may incur liability for any failure to comply with
electrical standards and manufacturer recommendations.
Completing the sale and installation of a solar energy system requires many different steps including a site
audit, completion of designs, permitting, installation, electrical sign-off and interconnection. Homeowners may
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cancel their Customer Agreement, subject to certain conditions, during this process until commencement of
installation, and we have experienced increased customer cancellations in certain markets during 2016. We or
our solar partners may face customer cancellations, delays or cost overruns which may adversely affect our or
our solar partners’ ability to ramp up the volume of sales or installations in accordance with our plans. These
cancellations, delays or overruns may be the result of a variety of factors, such as labor shortages or other labor
issues, defects in materials and workmanship, adverse weather conditions, transportation constraints,
construction change orders, site changes or roof conditions, geographic factors and other unforeseen difficulties,
any of which could lead to increased cancellation rates, reputational harm and other adverse effects. For
example, some customer orders are cancelled after a site visit if we determine that a customer needs to make
repairs to or install a new roof, or that there is excessive shading on their property. If we continue to experience
increased customer cancellations, our financial results will potentially be materially and adversely affected.
In addition, the installation of solar energy systems, energy-storage systems and other energy-related
products requiring building modifications are subject to oversight and regulation in accordance with national, state
and local laws and ordinances relating to building, fire and electrical codes, safety, environmental protection,
utility interconnection and metering, and related matters. We also rely on certain of our employees to maintain
professional licenses in many of the jurisdictions in which we operate, and our failure to employ properly licensed
personnel could adversely affect our licensing status in those jurisdictions. It is difficult and costly to track the
requirements of every individual authority having jurisdiction over our installations and to design solar energy
systems to comply with these varying standards. Any new government regulations or utility policies pertaining to
our systems may result in significant additional expenses to us and our homeowners and, as a result, could cause
a significant reduction in demand for our solar service offerings.
While we have a variety of stringent quality standards that we apply in the selection of our solar partners, we
do not control our suppliers and solar partners or their business practices. Accordingly, we cannot guarantee that
they follow our standards or 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
suppliers or contractors, which could increase our costs and result in delayed delivery or installation of our
products, product shortages or other disruptions of our operations. Violation of labor or other laws by our suppliers
and solar partners or the divergence of a supplier’s or solar partners’ labor or other practices from those generally
accepted as ethical in the United States or other markets in which we do business could also attract negative
publicity for us and harm our business, brand and reputation in the market.
We typically bear the risk of loss and the cost of maintenance, repair and removal on solar energy
systems that are owned or leased by our investment funds.
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 or lease to our investment funds. At the time we sell or lease a
solar energy system to an investment fund, 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, approximately half of which are located in California, 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.
Disruptions to our solar production metering solution could negatively impact our revenues and increase
our expenses.
Our ability to invoice homeowners for the energy produced by our solar energy systems and monitor solar
energy production for various purposes depends on the operation of our metering solution. We could incur
significant expense and disruption to our operations in connection with failures of our metering solution, including
meter hardware failures and failure of the cellular technology that we use to communicate with those meters.
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Many of our meters operate on either the 2G or 3G cellular data networks, which are expected to sunset before
the term of our contract with homeowners. Upgrading our metering solution may cause us to incur a significant
expense. Additionally, our meters communicate data through proprietary software, which we license from our
metering partners. Should we be unable to continue to license, on agreeable terms, the software necessary to
communicate with our meters, it could cause a significant disruption in our business and operations.
Problems with product quality or performance may cause us to incur warranty expenses and
performance guarantee expenses, may lower the residual value of our solar energy systems and may
damage our market reputation and cause our financial results to decline.
Homeowners who buy energy from us under leases or power purchase agreements are covered by
production guaranties and roof penetration warranties. As the owners of the solar energy systems, we or our
investment funds receive a warranty from the inverter and solar panel manufacturers, and, for those solar energy
systems that we do not install directly, we receive workmanship and material warranties as well as roof
penetration warranties from our solar partners. For example, in 2015 and 2014, we had to replace a significant
number of defective inverters, the cost of which was borne by the manufacturer. However, our customers were
without solar service for a period of time while the work was done, which impacted customer satisfaction.
Furthermore, one or more of our third-party manufacturers or solar partners could cease operations and no longer
honor these warranties, leaving us to fulfill these potential obligations to homeowners. Further, we provide a
performance guarantee with certain solar service offerings pursuant to which we compensate homeowners on an
annual basis if their system does not meet the electricity production guarantees set forth in their agreement with
us. Homeowners who buy energy from us under leases or power purchase agreements are covered by
production guarantees equal to the length of the term of these agreements, typically 20 years.
Because of our limited operating history, 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. 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 homeowners for systems that do not meet their production guarantees.
Product failures or operational deficiencies also would reduce our revenue from power purchase or lease
agreements because they are dependent on system production. Any widespread product failures or operating
deficiencies may damage our market reputation and adversely impact our financial results.
Product liability claims against us could result in adverse publicity and potentially significant monetary
damages.
If our solar service offerings, including our racking systems or other products, injured someone, we would be
exposed to product liability claims. Because solar energy systems and many of our other current and anticipated
products are electricity-producing devices, it is possible that consumers or their property could be injured or
damaged by our products, whether by product malfunctions, defects, improper installation or other causes. We
rely on third-party manufacturing warranties, warranties provided by our solar partners and our general liability
insurance to cover product liability claims and have not obtained separate product liability insurance. Any product
liability claim we face could be expensive to defend and divert management’s attention. The successful assertion
of product liability claims against us could result in potentially significant monetary damages that could require us
to make significant payments, as well as subject us to adverse publicity, damage our reputation and competitive
position and adversely affect sales of our systems and other products. 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 attract
homeowners, thus affecting our growth and financial performance.
The residual 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 20-year term of the Customer Agreement, customers may choose to purchase their solar energy
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systems, ask to remove the system at our cost or renew their Customer Agreements. Homeowners may choose
to not renew or purchase for any reason, such as pricing, decreased energy consumption, relocation of residence
or switching to a competitor product.
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 value in trade or renewal revenue is
less than we expect, after giving effect to any associated removal and redeployment costs, we may be required to
recognize all or some of the remaining unamortized costs. This could materially impair our future results of
operations.
We have guaranteed a minimum return to be received by an investor in one of our investment funds,
which could adversely affect our business and financial condition if we were required to make any
payments as a result of this guarantee.
We have guaranteed payments to the investor in one of our investment funds in the case that the investor
does not achieve a specified minimum internal rate of return in this fund. The amounts of potential future
payments under this guarantee depend on the amounts and timing of future distributions to the investor from
funds and the tax benefits that accrue to the investor from the fund’s activities which is assessed annually.
Because of uncertainties associated with estimating the timing and amounts of distributions to the investor, we
cannot determine the potential maximum future payments that we could have to make under this guarantee, in
particular in the face of potential changes in tax law. To date, we have not been required to make any payments
under this guarantee. We may agree to similar terms with other third-party fund investors in the future. Any
significant payments that we may be required to make under such guarantees, now or in the future, could
adversely affect our financial condition.
Damage to our brand and reputation or failure to expand our brand would harm our business and results
of operations.
We depend significantly on our brand and reputation for high-quality solar service offerings, engineering and
customer service to attract homeowners and grow our business. If we fail to continue to deliver our solar service
offerings within the planned timelines, if our solar service offerings do not perform as anticipated or if we damage
any homeowners’ properties or cancel projects, our brand and reputation could be significantly impaired. We also
depend greatly on referrals from homeowners for our growth. Therefore, our inability to meet or exceed
homeowners’ expectations would harm our reputation and growth through referrals. Further, we have focused
particular attention on expeditiously growing our direct sales force and our solar partners, leading us in some
instances to hire personnel or partner with third parties who we may later determine do not fit our company
culture. If we cannot manage our hiring and training processes to avoid potential issues related to expanding our
sales team or solar partners and maintain appropriate customer service levels, our business and reputation may
be harmed and our ability to attract homeowners would suffer. In addition, if we were unable to achieve a similar
level of brand recognition as our competitors, some of which currently have a broader brand footprint as a result
of a larger direct sales force, more resources and longer operational history, we could lose recognition in the
marketplace among prospective customers, suppliers and partners, which could affect our growth and financial
performance. Our growth strategy involves marketing and branding initiatives that will involve incurring significant
expenses in advance of corresponding revenues. We cannot assure you that such marketing and branding
expenses will result in the successful expansion of our brand recognition or increase our revenues.
A failure to hire and retain a sufficient number of employees and service providers in key functions would
constrain our growth and our ability to timely complete homeowners’ projects and successfully manage
homeowner accounts.
To support our growth, we need to hire, train, deploy, manage and retain a substantial number of skilled
employees, engineers, installers, electricians, sales and project finance specialists. Competition for qualified
personnel in our industry is increasing, particularly for skilled personnel involved in the installation of solar energy
systems. We may be unable to attract or retain qualified and skilled installation personnel or installation
companies to be our solar partners, which would have an adverse effect on our business. We and our solar
partners also compete with the homebuilding and construction industries for skilled labor. As these industries
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grow and seek to hire additional workers, our cost of labor may increase. The unionization of the industry’s labor
force could also increase our labor costs. Shortages of skilled labor could significantly delay a project or otherwise
increase our costs. Because our profit on a particular installation is based in part on assumptions as to the cost of
such project, cost overruns, delays or other execution issues may cause us to not achieve our expected margins
or cover our costs for that project. In addition, because we are headquartered in the San Francisco Bay Area, we
compete for a limited pool of technical and engineering resources that requires us to pay wages that are
competitive with relatively high regional standards for employees in these fields. Further, we need to continue to
expand upon 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 person is fully trained and productive at the standards that we
have established. If we are unable to hire, develop and retain talented customer service personnel, we may not
be able to realize the expected benefits of this investment or grow our business.
In addition, to support the growth and success of our direct-to-consumer channel, we need to recruit, retain
and motivate a large number of sales personnel on a continuing basis. We compete with many other companies
for qualified sales personnel, and it could take many months before a new salesperson is fully trained on our solar
service offerings. If we are unable to hire, develop and retain qualified sales personnel or if they are unable to
achieve desired productivity levels, we may not be able to compete effectively.
If we or our solar partners cannot meet our hiring, retention and efficiency goals, we may be unable to
complete homeowners’ projects on time or manage homeowner accounts in an acceptable manner or at all. Any
significant failures in this regard would materially impair our growth, reputation, business and financial results. If
we are required to pay higher compensation than we anticipate, these greater expenses may also adversely
impact our financial results and the growth of our business.
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 chief executive officer
and co-founder, Lynn Jurich, and our Chairman and co-founder, Edward Fenster. We also depend on our ability
to retain and motivate key employees and attract qualified new employees. Neither our founders nor our key
employees are bound by employment agreements for any specific term, and we may be unable to replace key
members of our management team and key employees in the event we lose their services. Integrating new
employees into our management 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 delay our strategic efforts, which
could have a material adverse effect on our business, financial condition and results of operations.
We may not realize the anticipated benefits of past or future acquisitions, and integration of these
acquisitions may disrupt our business and management.
We acquired MEC in February 2014 and Clean Energy Experts, LLC (“CEE”) in April 2015. We may in the
future acquire additional companies, project pipelines, products, or technologies or enter into joint ventures or
other strategic initiatives. We may not realize the anticipated benefits of past or future acquisitions, and any
acquisition has numerous risks that are not within our control. These risks include the following, among others:
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difficulty in assimilating the operations and personnel of the acquired company, especially given our
unique culture;
difficulty in effectively integrating the acquired technologies or products with our current products and
technologies;
difficulty in maintaining controls, procedures and policies during the transition and integration;
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disruption of our ongoing business and distraction of our management and employees from other
opportunities and challenges due to integration issues;
difficulty integrating the acquired company’s accounting, management information and other
administrative systems;
inability to retain key technical and managerial personnel of the acquired business;
inability to retain key customers, vendors and other business partners of the acquired business;
inability to achieve the financial and strategic goals for the acquired and combined businesses;
incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact
our results of operations;
significant post-acquisition investments which may lower the actual benefits realized through the
acquisition;
potential failure of the due diligence processes to identify significant issues with product quality, legal
and financial liabilities, among other things;
potential inability to assert that internal controls over financial reporting are effective; and
potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities,
which could delay or prevent such acquisitions.
Our failure to address these risks, or other problems encountered in connection with our past or future
acquisitions, could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause
us to incur unanticipated liabilities, and harm our business generally. Future acquisitions could also result in
dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses,
incremental expenses or the write-off of goodwill, any of which could harm our financial condition or results of
operations.
Mergers and acquisitions of companies are inherently risky, may not produce the anticipated benefits and
could adversely affect our business, financial condition or results of operations.
If we are unsuccessful in developing and maintaining our proprietary technology, including our
BrightPath software, our ability to attract and retain solar partners could be impaired, our competitive
position could be harmed and our revenue could be reduced.
Our future growth depends on our ability to continue to develop and maintain our proprietary technology that
supports our solar service offerings, including our design and proposal software, BrightPath. In addition, we rely,
and expect to continue to rely, on licensing agreements with certain third parties for aerial images that allow us to
efficiently and effectively analyze a homeowner’s rooftop for solar energy system specifications. In the event that
our current or future products require features that we have not developed or licensed, or we lose the benefit of
an existing license, we will be required to develop or obtain such technology through purchase, license or other
arrangements. If the required technology is not available on commercially reasonable terms, or at all, we may
incur additional expenses in an effort to internally develop the required technology. In addition, our BrightPath
software was developed, in part, with U.S. federal government funding. When new technologies are developed
with U.S. government funding, the government obtains certain rights in any resulting patents, including a
nonexclusive license authorizing the government to use the invention for non-commercial purposes. These rights
may permit the government to disclose our confidential information to third parties and to exercise “march-in”
rights to use or allow third parties to use our patented technology. We are also subject to certain reporting and
other obligations to the U.S. government in connection with funding for BrightPath. If we were unable to maintain
our existing proprietary technology, our ability to attract and retain solar partners could be impaired, our
competitive position could be harmed and our revenue could be reduced.
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Our business may be harmed if we fail to properly protect our intellectual property, and we may also be
required to defend against claims or indemnify others against claims that our intellectual property
infringes on the intellectual property rights of third parties.
We believe that the success of our business depends in part on our proprietary technology, including our
software, information, processes and know-how. We rely on copyright, trade secret and patent protections to
secure our intellectual property rights. Although we may incur substantial costs in protecting our technology, we
cannot be certain that we have adequately protected or will be able to adequately protect it, that our competitors
will not be able to utilize our existing technology or develop similar technology independently, that the claims
allowed with respect to any patents held by us will be broad enough to protect our technology or that foreign
intellectual property laws will adequately protect our intellectual property rights. Moreover, we cannot be certain
that our patents provide us with a competitive advantage. Despite our precautions, it may be possible for third
parties to obtain and use our intellectual property without our consent. Unauthorized use of our intellectual
property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely
affect our business. In the future, some of our products could be alleged to infringe existing patents or other
intellectual property of third parties, and we cannot be certain that we will prevail in any intellectual property
dispute. In addition, any future litigation required to enforce our patents, to protect our trade secrets or know-how
or to defend us or indemnify others against claimed infringement of the rights of third parties could harm our
business, financial condition and results of operations.
The Office of the Inspector General of the U.S. Department of Treasury has issued subpoenas to a
number of significant participants in the rooftop solar energy installation industry, including us. The
subpoena we received requires us to deliver certain documents in our possession relating to our
participation in the U.S. Treasury grant program. These documents have been delivered to the Office of
the Inspector General of the U.S. Department of Treasury, which is investigating the administration and
implementation of the U.S. Treasury grant program.
In July 2012, we and other companies that are significant participants in both the solar industry and the cash
grant program (under Section 1603 of the American Recovery and Reinvestment Act of 2009) received
subpoenas from the U.S. Department of Treasury’s Office of the Inspector General. Our subpoena requested,
among other things, documents that relate to our applications for U.S. Treasury grants and communications with
certain other solar service companies or certain firms that appraise solar energy property for U.S. Treasury grant
application purposes. The Inspector General is working with the Civil Division of the U.S. Department of Justice to
investigate the administration and implementation of the U.S. Treasury grant program, including possible
misrepresentations concerning the fair market value of the solar power systems submitted for grant under that
program made in grant applications by companies in the solar industry, including us. We produced documents
and testimony as requested by the Inspector General, and we intend to continue to cooperate fully with the
Inspector General and the Department of Justice. We are not able to predict how long this review will be on-going.
If, at the conclusion of the investigation, the Inspector General concludes that misrepresentations were made, the
Department of Justice could decide to bring a civil action to recover amounts it believes were improperly paid to
us. If it were successful in asserting this action, we could be required to pay damages and penalties for any funds
received based on such misrepresentations (which, in turn, could require us to make indemnity payments to
certain of our fund investors). Such consequences could have a material adverse effect on our business, liquidity,
financial condition and prospects. Additionally, the period of time necessary to resolve the investigation is
uncertain, and this matter could require significant management and financial resources that could otherwise be
devoted to the operation of our business.
We are subject to legal proceedings, regulatory inquiries and litigation, and we may be named in
additional legal proceedings, become involved in regulatory inquiries or be subject to litigation in the
future, all of which are costly, distracting to our core business and could result in an unfavorable
outcome, or a material adverse effect on our business, financial condition, results of operations, or the
trading price for our securities.
We are involved in legal proceedings and receive inquiries from government and regulatory agencies. For
example, in addition to the pending U.S. Department of the Treasury investigation discussed above, in connection
with its review of the Department of Treasury’s Section 1603 program, which allows taxpayers to receive cash
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grants for certain qualified renewable energy projects, the United States Senate Committee on Finance and the
House Committee on Ways and Means sent us an inquiry regarding our use of solar energy incentives, third-party
financing, and methods of determining cost basis for solar energy properties, to which we have responded. In the
event that we are involved in significant disputes or are the subject of a formal action by a regulatory agency, we
could be exposed to costly and time consuming legal proceedings that could result in any number of outcomes.
Although outcomes of such actions vary, any current or future claims or regulatory actions initiated by or against
us, whether successful or not, could result in significant costs, costly damage awards or settlement amounts,
injunctive relief, increased costs of business, fines or orders to change certain business practices, significant
dedication of management time, diversion of significant operational resources, or otherwise harm our business.
If we are not successful in our legal proceedings and litigation, we may be required to pay significant
monetary damages, which could hurt our results of operations. Lawsuits are time-consuming and expensive to
resolve and divert management’s time and attention. Although we carry general liability insurance, our insurance
may not cover potential claims or may not be adequate to indemnify us for all liability that may be imposed. We
cannot predict how the courts will rule in any potential lawsuit against us. Decisions in favor of parties that bring
lawsuits against us could subject us to significant liability for damages, adversely affect our results of operations
and harm our reputation.
A failure to comply with laws and regulations relating to our interactions with current or prospective
residential customers could result in negative publicity, claims, investigations, and litigation, and
adversely affect our financial performance.
Our business involves transactions with homeowners. We must comply with numerous federal, state and
local laws and regulations that govern matters relating to our interactions with homeowners, including those
pertaining to privacy and data security, consumer financial and credit transactions, home improvement contracts,
warranties and direct-to-home solicitation. These laws and regulations are dynamic and subject to potentially
differing interpretations, and various federal, state and local legislative and regulatory bodies may 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 do business, acquire customers, and manage
and use information we collect from and about current and prospective customers and the costs associated
therewith. We strive to comply with all applicable laws and regulations relating to our 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 our practices. Our noncompliance
with any such laws or regulations could also expose us to claims, proceedings, litigation and investigations by
private parties and regulatory authorities, as well as substantial fines and negative publicity, each of which may
materially and adversely affect our business. We have incurred, and will continue to incur, significant expenses to
comply with such laws and regulations, and increased regulation of matters relating to our interactions with
residential customers could require us to modify our operations and incur significant additional expenses, which
could have an adverse effect on 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 penalties, operational delays
and adverse publicity.
The installation of solar energy systems requires our employees and employees of our solar partners to
work with complicated and potentially dangerous electrical systems. The evaluation and installation of our energy-
related products require these employees to work in locations that may contain potentially dangerous levels of
asbestos, lead or mold or other substances. We also maintain large fleets of vehicles that these employees use in
the course of their work. 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”)
and equivalent state laws. Changes to OSHA requirements, or stricter interpretation or enforcement of existing
laws or regulations, could result in increased costs. If we fail to comply with applicable OSHA 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. Any 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.
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Rising interest rates will adversely impact our business.
Rising interest rates will increase our cost of capital. Our future success depends on our ability to raise
capital from fund investors and obtain secured lending to help finance the deployment of our solar service
offerings. Part of our business strategy is to seek to reduce our cost of capital through these arrangements to
improve our margins, offset future reductions in government incentives and maintain the price competitiveness of
our solar service offerings. Rising interest rates may have an adverse impact on our ability to offer attractive
pricing on our solar service offerings to homeowners.
The majority of our cash flows to date have been from solar service offerings under Customer Agreements
that have been monetized under various investment fund structures. One of the components of this monetization
is the present value of the payment streams from homeowners who enter into these Customer Agreements. If the
rate of return required by capital providers, including debt providers, rises as a result of a rise in interest rates, it
will reduce the present value of the homeowner payment stream and consequently reduce the total value derived
from this 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 homeowners.
We are exposed to the credit risk of homeowners and payment delinquencies on our accounts
receivables.
Our Customer Agreements are typically for 20 years and require the homeowner to make monthly payments
to us. Accordingly, we are subject to the credit risk of homeowners. As of December 31, 2016, the average FICO
score of our customers under a lease or power purchase agreement with a monthly payment schedule was
approximately 752, but this may decline to the extent FICO score requirements under future investment funds are
relaxed. While to date homeowner defaults have been immaterial, we expect that the risk of homeowner defaults
may increase as we grow our business. Due to the immaterial amount of homeowner defaults to date, our reserve
for this exposure is minimal, and our future exposure may exceed the amount of such reserves. If we experience
increased homeowner credit defaults, our revenues and our ability to raise new investment funds could be
adversely affected. If economic conditions worsen, certain of our homeowners may face liquidity concerns and
may be unable to satisfy their payment obligations to us on a timely basis or at all, which could have a material
adverse effect on our financial condition and results of operations.
Obtaining a sales contract with a potential customer does not guarantee that a potential customer will not
decide to cancel or that we will need to cancel due to a failed inspection, which could cause us to
generate no revenue from a product and adversely affect our results of operations.
Even after we secure a sales contract with a potential customer, we (either directly or through our solar
partners) must perform an inspection to ensure the home, including the rooftop, can support the solar energy
system. If the inspection finds repairs to the rooftop are required in order to support the solar energy system, and
a potential customer does not want to make such required repairs, we would lose that anticipated sale. In
addition, per the terms of our Customer Agreements, a customer maintains the ability to cancel before
commencement of installation, subject to certain conditions. Any delay or cancellation of an anticipated sale could
materially and adversely affect our financial results, as we may have incurred significant expense and generated
no revenue.
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.
We are subject to the reporting requirements of the Exchange Act, the listing requirements of the NASDAQ
Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations
has increased our legal and financial compliance costs, made some activities more difficult, time-consuming or
costly and increased 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 results of operations and
maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain
and improve our disclosure controls and procedures and internal control over financial reporting to meet this
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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 results of operations.
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 use “open source” software in our solutions, which may require that we release the source code of
certain software subject to open source licenses or subject us to possible litigation or other actions that
could adversely affect our business.
We utilize software that is licensed under so-called “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. We currently combine our proprietary software with open source software but not in a manner that we
believe requires the release of the source code of our proprietary software to the public. However, our use of
open source software may entail greater risks than use of third-party commercial software. 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 results of operations. In addition, if the license terms for
open source software that we use change, we may be forced to re-engineer our solutions, incur additional costs
or discontinue the use of these solutions if re-engineering cannot be accomplished on a timely basis. Although we
monitor our use of open source software to avoid subjecting our offerings 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 ability to use our proprietary software. We cannot
guarantee that we have incorporated or will incorporate 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.
Any security breach or unauthorized disclosure or theft of personal information we gather, store and use,
or other hacking and phishing attacks on our systems, could harm our reputation and subject us to
claims or litigation.
We receive, store and use personal information of homeowners, including names, addresses, e-mail
addresses, credit information and other housing and energy use information, as well as the personal information
of our employees. Unauthorized disclosure of such personal information, whether through breach of our systems
by an unauthorized party, employee theft or misuse, or otherwise, could harm our business. In addition, computer
malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become
more prevalent, have occurred on our systems in the past, and could occur on our systems in the future.
Inadvertent disclosure of such personal information, or if a third party were to gain unauthorized access to the
personal information in our possession, could result in claims or litigation arising from damages suffered by such
individuals. In addition, we could incur significant costs in complying with the multitude of federal, state and local
laws regarding the unauthorized disclosure of personal information. Our efforts to protect such personal
information may be unsuccessful due to software bugs or other technical malfunctions; employees, contractor, or
vendor error or malfeasance; or other threats that evolve. In addition, third parties may attempt to fraudulently
induce employees or users to disclose sensitive information. Although we have developed systems and
processes that are designed to protect the personal information we receive, store and use and to prevent or
detect security breaches, we cannot assure you that such measures will provide absolute security. Finally, any
perceived or actual unauthorized disclosure of such information could harm our reputation, substantially impair
our ability to attract and retain homeowners and have an adverse impact on our business.
31
If our products do not work as well as planned or if we are unsuccessful in developing and selling new
products or in penetrating new markets, our business, financial condition and results of operations could
be adversely affected.
Our success and ability to compete are dependent on the products which we have developed or may
develop in the future. There is a risk that the products that we have developed or may develop may not work as
intended, or that the marketing of the products may not be as successful as anticipated. For example, we
introduced our BrightBox energy storage system in Hawaii and California and completed the first installation in
Hawaii in May 2016. If BrightBox does not work as intended or if BrightBox is not adopted in the future at the rate
we expect, our business, financial condition and results of operations could be adversely affected. The
development of new products generally requires substantial investment and can require long development and
testing periods before they are commercially viable. We intend to continue to make substantial investments in
developing new products and it is possible that that we may not develop or acquire new products or product
enhancements that compete effectively within our target markets or differentiate our products based on
functionality, performance or cost and thus our new technologies and products may not result in meaningful
revenue. In addition, any delays in developing and releasing new or enhanced products could cause us to lose
revenue opportunities and potential customers. Any technical flaws in product releases could diminish the
innovative impact of our products and have a negative effect on customer adoption and our reputation. If we fail to
introduce new products that meet the demands of our customers or target markets or do not achieve market
acceptance, or if we fail to penetrate new markets, our business, financial conditions and results of operations
could be adversely affected.
We are obligated to maintain proper and effective internal controls over financial reporting. We may not
complete our analysis of our internal controls over financial reporting in a timely manner, or these
internal controls may not be determined to be effective, which may adversely affect investor confidence
in our company and, as a result, the value of our common stock.
We are required, pursuant to the Exchange Act, to furnish a report by management on, among other things,
the effectiveness of our internal controls over financial reporting. This assessment will need to include disclosure
of any material weaknesses identified by our management in our internal controls over financial reporting. When
we are no longer an emerging growth company, our management report on internal control over financial
reporting will need to be attested to by our independent registered public accounting firm. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements
due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
We may fail to establish and maintain effective internal control over financial reporting, in which case we
may not detect errors on a timely basis and our consolidated financial statements may be materially misstated. In
addition, we cannot guarantee that our internal control over financial reporting will prevent or detect all errors and
fraud. The risk of errors is increased in light of the complexity of our business and investment funds. For example,
we must deal with significant complexity in accounting for our fund structures and the resulting allocation of net
income (loss) between our stockholders and noncontrolling interests under the hypothetical liquidation at book
value (“HLBV”) method as well as the income tax consequences of these fund structures. As we enter into
additional investment funds, which may have contractual provisions different from those of our existing funds, the
analysis as to whether we consolidate these funds, the calculation under the HLBV method, and the analysis of
the tax impact could become increasingly complicated. This additional complexity could require us to hire
additional resources and increase the chance that we experience errors in the future.
Historically, in connection with the audits of our consolidated financial statements for the years ended
December 31, 2013 and 2012, we identified material weaknesses in our internal control over financial reporting
relating to certain aspects of our financial statement close process and our accounting for income taxes. A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial
statements will not be prevented or detected on a timely basis. These material weaknesses resulted from an
aggregation of deficiencies.
In addition, in the 2013 consolidated financial statements, we incorrectly accounted for our deferred tax
liabilities, prepaid tax asset and the related amortization as it related to income taxes incurred on intercompany
32
transactions. The foregoing resulted in the restatement of our 2012 consolidated financial statements.
Subsequent to the quarter ended March 31, 2015, we also identified and corrected an immaterial error related to
the accounting for taxes on intercompany transactions.
While we were able to determine in our management's report for fiscal 2016 that our internal control over
financial reporting is effective, we may not be able to complete our evaluation, testing and any required
remediation in a timely fashion in future fiscal years. During the evaluation and testing process, if we identify one
or more material weaknesses in our internal control over financial reporting that we are unable to remediate
before the end of the same fiscal year in which the material weakness is identified, we will be unable to assert that
our internal controls are effective. If we are unable to assert that our internal control over financial reporting is
effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which
would cause the price of our common stock to decline. In addition, we could become subject to investigations by
the NASDAQ Stock Market, the SEC or other regulatory authorities, which could require additional management
attention and which could adversely affect our business.
We may be adversely affected by changes in U.S. tax laws.
Congress and the current administration have indicated a desire to reform the U.S. corporate income tax. As
part of any tax reform, it is possible that the current corporate income tax rate may be reduced, and there may be
other potential changes including limiting or eliminating various other deductions, credits or tax preferences. A
reduction in the corporate income tax rate could reduce the value of certain benefits, such as depreciation, and
reduce capacity for other benefits, such as tax credits. Limitations on, or elimination of, such tax benefits could
significantly impact our ability to raise tax equity investment funds or impact the terms thereof, including the
amount of cash distributable to third parties. At this time, it is not possible to measure the potential impact on our
tax equity investment funds, the value of our deferred tax assets, business, prospects or results of operations that
might result upon enactment.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2016, we had U.S. federal net operating loss carryforwards of approximately $571.3
million and state net operating loss carryforwards of approximately $524.9 million, which begin expiring in varying
amounts in 2028 and 2024, respectively, if unused. Under Sections 382 and 383 of the Code if a corporation
undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards
and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may
be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5%
shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under
state tax laws. Any such limitations on our ability to use our net operating loss carryforwards and other tax assets
could adversely impact our business, financial condition and results of operations.
We may be required to record a charge to earnings if our goodwill or intangible assets become impaired.
We are required under generally accepted accounting principles to test goodwill for impairment at least
annually or when events or changes in circumstances indicate that the carrying amount may be impaired, and to
review our intangible assets for impairment when events or changes in circumstances indicate the carrying value
may not be recoverable. Factors that can lead to impairment of goodwill and intangible assets include significant
adverse changes in the business climate and actual or projected operating results, declines in the financial
condition of our business and sustained decrease in our stock price. As of December 31, 2016, our market
capitalization did not exceed our carrying value and we performed a step 1 analysis in accordance with ASU 350
Intangibles – Goodwill and Other and determined that our fair value exceeded our carrying value and thus we did
not have an impairment related to our goodwill. However, if we identify any factors that could indicate an
impairment, including a sustained decrease in our stock price, we may be required to record charges to earnings
if our goodwill becomes impaired.
r
33
Risks Related to Ownership of Our Common Stock
Our executive officers, directors and principal stockholders continue to have substantial control over us,
which will limit your ability to influence the outcome of important matters, including a change in control.
Each of our executive officers, directors and each of our stockholders who beneficially own 5% or more of
our outstanding common stock and their affiliates, in the aggregate, beneficially own approximately 54.3% of the
outstanding shares of our common stock, based on the number of shares outstanding as of December 31, 2016.
As a result, these stockholders, if acting together, will be able to influence or control matters requiring approval by
our stockholders, including the election of directors and the approval of mergers, acquisitions or other
extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which
you disagree and which may be adverse to your interests. This concentrated control may have the effect of
delaying or preventing a change in control of our company, could deprive our stockholders of an opportunity to
receive a premium for their capital stock and might ultimately affect the market price of our common stock.
The market price of our common stock has been and may continue to be volatile, and you could lose all
or part of your investment.
The trading price of our common stock has been volatile since our initial public offering, and is likely to
continue to be volatile. Factors that could cause fluctuations in the market price of our common stock include the
following:
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•
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price and volume fluctuations in the overall stock market from time to time;
volatility in the market prices and trading volumes of companies in our industry or companies that
investors consider comparable;
changes in operating performance and stock market valuations of other companies generally, or those
in our industry in particular;
sales of shares of our common stock by us or our stockholders;
failure of securities analysts to maintain coverage of us, changes in financial estimates by securities
analysts who follow us, or our failure to meet these estimates or the expectations of investors;
the financial projections we may provide to the public, any changes in those projections or our failure
to meet those projections;
announcements by us or our competitors of new products or services;
the public’s reaction to our press releases, other public announcements and filings with the SEC;
rumors and market speculation involving us or other companies in our industry;
actual or anticipated changes in our results of operations;
changes in tax and other incentives that we rely upon in order to raise tax equity investment funds;
changes in the regulatory environment and utility policies and pricing, including those that could reduce
the savings we are able to offer to customers;
actual or anticipated developments in our business, our competitors’ businesses or the competitive
landscape generally;
litigation involving us, our industry or both, or investigations by regulators into our operations or those
of our competitors;
announced or completed acquisitions of businesses or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our
business;
changes in accounting standards, policies, guidelines, interpretations or principles;
34
•
•
any significant change in our management; and
general economic conditions and slow or negative growth of our markets.
Further, in recent years the stock markets have experienced extreme price and volume fluctuations that
have affected and continue to affect the market prices of equity securities of many companies. These fluctuations
often have been unrelated or disproportionate to the operating performance of those companies. In addition, the
stock prices of many renewable energy companies have experienced wide fluctuations that have often been
unrelated to the operating performance of those companies. These broad market and industry fluctuations, as
well as general economic, political and market conditions such as recessions, government shutdowns, interest
rate changes, or international currency fluctuations, may cause the market price of our common stock to decline.
In the past, following periods of volatility in the overall market and the market price of a particular company’s
securities, securities class action litigation has often been instituted against these companies. We are party to
litigation which could result in substantial costs and a diversion of our management’s attention and resources.
Sales of a substantial number of shares of our common stock in the public market, including by our
existing stockholders, could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market, or the perception that
these sales might occur, could depress the market price of our common stock and could impair our ability to raise
capital through the sale of additional equity securities. We are unable to predict the effect that these sales and
others may have on the prevailing market price of our common stock.
In addition, certain of our stockholders can require us to register shares of our capital stock owned by them
for public sale in the United States. We have also filed a registration statement to register shares of our common
stock reserved for future issuance under our equity compensation plans. Subject to the satisfaction of applicable
exercise periods and applicable volume and restrictions that apply to affiliates, the shares of our common stock
issued upon exercise of outstanding options will become available for immediate resale in the public market upon
issuance.
Future sales of our common stock may make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate. These sales also could cause the market price of our common
stock to decline and make it more difficult for you to sell shares of our common stock.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended
and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law
contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition
deemed undesirable by our board of directors and therefore depress the trading price of our common stock.
Among other things, our amended and restated certificate of incorporation and amended and restated bylaws
include provisions:
•
•
•
•
•
•
creating a classified board of directors whose members serve staggered three-year terms;
authorizing “blank check” preferred stock, which could be issued by our board of directors without
stockholder approval and may contain voting, liquidation, dividend and other rights superior to our
common stock;
limiting the liability of, and providing indemnification to, our directors and officers;
limiting the ability of our stockholders to call and bring business before special meetings;
requiring advance notice of stockholder proposals for business to be conducted at meetings of our
stockholders and for nominations of candidates for election to our board of directors; and
controlling the procedures for the conduct and scheduling of board of directors and stockholder
meetings.
35
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or
changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the
Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our
outstanding capital stock from engaging in certain business combinations without approval of the holders of at
least two-thirds of our outstanding capital stock not held by such stockholder.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or
Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity for our
stockholders to receive a premium for their shares of our capital stock and could also affect the price that some
investors are willing to pay for our common stock.
Provisions contained in our amended and restated certificate of incorporation and amended and restated
bylaws limit the ability of our stockholders to call special meetings and prohibit stockholder action by
written consent.
Our amended and restated certificate of incorporation provides that our stockholders may not take action by
written consent. Instead, any such actions must be taken at an annual or special meeting of our stockholders. As
a result, our stockholders are not able to take any action without first holding a meeting of our stockholders called
in accordance with the provisions of our amended and restated bylaws, including advance notice procedures set
forth in our amended and restated bylaws. Our amended and restated bylaws further provide that special
meetings of our stockholders may be called only by a majority of our board of directors, the chairman of our board
of directors, our Chief Executive Officer or our President. As a result, our stockholders are not allowed to call a
special meeting. These provisions may delay the ability of our stockholders to force consideration of a stockholder
proposal, including a proposal to remove directors.
Provisions contained in our amended and restated certificate of incorporation and amended and restated
bylaws could preclude our stockholders from bringing matters before meetings of stockholders and delay
changes in our board of directors.
Our amended and restated bylaws provide advance notice procedures for stockholders seeking to bring
business before, or nominate candidates for election as directors at, our annual or special meetings of
stockholders. In addition, our amended and restated certificate of incorporation provides that stockholders may
remove directors only for cause. Any amendment of these provisions in our amended and restated bylaws or
amended and restated certificate of incorporation would require approval by holders of at least 66 2/3% of our
then outstanding capital stock. These provisions could preclude our stockholders from bringing matters before
annual or special meetings of stockholders and delay changes in our board of directors.
Our amended and restated bylaws provide that a state or federal court located within the State of
Delaware will be the sole and exclusive forum for substantially all disputes between us and our
stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes
with us or our directors, officers or employees.
Our amended and restated bylaws provide that, unless we consent to the selection of an alternative forum,
the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action
asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or to
our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General
Corporation Law or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or
federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction
over the indispensable parties names as defendants. The choice of forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or
other employees, which may discourage such lawsuits against us and our directors, officers and other employees.
Alternatively, if a court were to find the choice of forum provision contained in our amended and restated bylaws
to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such
action in other jurisdictions, which could harm our business, results of operations and financial condition.
36
If securities or industry analysts cease publishing research or reports about us, our business, our market
or our competitors, or if they adversely change their recommendations regarding our common stock, the
market price of our common stock and trading volume could decline.
The market for our common stock is influenced by the research and reports that securities or industry
analysts publish about us, our business, our market or our competitors. If any of the analysts who cover us
adversely change their recommendations regarding our common stock, or provide more favorable
recommendations about our competitors, the market price of our common stock would likely decline. If any of the
analysts who cover us cease coverage of our company or fail to regularly publish reports on us, we could lose
visibility in the financial markets, which in turn could cause the market price of our common stock and trading
volume to decline.
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future.
Consequently, investors may need to rely on sales of our common stock after price appreciation, which may
never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends
should not purchase shares of our common stock.
Additional stock issuances could result in significant dilution to our stockholders.
We may issue additional equity securities to raise capital, make acquisitions or for a variety of other
purposes. Additional issuances of our stock may be made pursuant to the exercise or conversion of new or
existing convertible debt securities, warrants, stock options or other equity incentive awards to new and existing
service providers. Any such issuances will result in dilution to existing holders of our stock. We rely on equity-
based compensation as an important tool in recruiting and retaining employees. The amount of dilution due to
equity-based compensation of our employees and other additional issuances could be substantial.
As an emerging growth company within the meaning of the Securities Act, we will utilize certain modified
disclosure requirements, and we cannot be certain if these reduced requirements will make our common
stock 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.” These exemptions include 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, 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 are utilizing, 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, our stockholders may not have access to
certain information they may deem important. We could remain an “emerging growth company” for up to five
years following the anniversary of our initial public offering, or until the earliest of (1) the last day of the first fiscal
year in which our annual gross revenue reaches or exceeds $1.0 billion, (2) the date that we become a “large
accelerated filer” as defined in the Exchange Act, which could occur as early as January 1, 2018 or (3) the date
on which we have issued more than $1.0 billion in non-convertible debt securities during the preceding three-year
period.
Item 1B. Unresolved Staff Comments.
Not applicable.
37
Item 2. Properties.
Our corporate headquarters and executive offices are located in San Francisco, California, where we
occupy approximately 56,000 square feet of office space. We also maintain 50 other locations, consisting
primarily of branch offices, warehouses, sales offices and design centers in eleven states.
We lease all of our facilities and we do not own any real property. We believe that our current facilities are
adequate to meet our ongoing needs. If we require additional space, we believe that we will be able to obtain
additional facilities on commercially reasonable terms.
Item 3. Legal Proceedings.
See Note 22, Commitments and Contingencies, to our consolidated financial statements included elsewhere
in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures.
Not applicable.
38
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Market Information
Our common stock began trading on the NASDAQ Global Select Market under the symbol “RUN” on August
5, 2015.
Holders of Record
As of March 6, 2017, there were approximately 210 holders of record of common stock. Certain shares are
held in “street” name and, accordingly, the number of beneficial owners of such shares is not known or included in
the foregoing number.
Price Range of Our Common Stock
The following table sets forth the reported high and low sales prices of our common stock since the first day
of public trading on August 5, 2015 for the indicated periods, as regularly quoted on the NASDAQ Global Select
Market:
Year Ended
December 31, 2016
Low
High
Year Ended
December 31, 2015
Low
High
First Quarter........................................................................$
Second Quarter...................................................................$
Third Quarter.......................................................................$
Fourth Quarter ....................................................................$
11.49 $
8.45 $
6.90 $
7.34 $
4.86 $
5.11 $
4.90 $
4.15 $
— $
— $
13.31 $
14.95 $
—
—
8.23
6.36
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. 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, our
credit agreements contain restrictions on payments of cash dividends.
39
Stock Price Performance Graph
The following stock performance graph compares our total stock return with the total return for (i) the
NASDAQ Composite Index and the (ii) the Guggenheim Solar ETF, which represents a peer group of solar
companies, for the period from August 5, 2015 (the date our common stock commenced trading on the NASDAQ
Global Select Market) through December 31, 2016. The figures represented below assume an investment of $100
in our common stock at the closing price of $10.77 on August 5, 2015 and in the NASDAQ Composite Index and
the Guggenheim Solar ETF on August 5, 2015 including the reinvestment of dividends into shares of common
stock. The comparisons in the table are required by the Securities and Exchange Commission, or “SEC”, and are
not intended to forecast or be indicative of possible future performance of our common stock. This graph shall not
be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that section, and shall not be
deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or
the Securities Act, whether made before or after the date hereof and irrespective of any general incorporation
language in any such filing.
$150.00
$140.00
$130.00
$120.00
$110.00
$100.00
$90.00
$80.00
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
8/1/2015
12/1/2015
4/1/2016
8/1/2016
12/1/2016
Sunrun Inc.
NASDAQ Composite Index
Guggenheim Solar ETF
Sunrun Inc. .......................................
NASDAQ Composite Index...............
Guggenheim Solar ETF ....................
Ticker
RUN
^IXIC
TAN
August 5,
2015
December 31,
2015
December 31,
2016
$
$
$
100.00
$
100.00 $
100.00 $
109.29 $
97.42 $
87.61 $
49.30
104.73
52.30
Item 6. Selected Consolidated Financial Data.
You should read the following selected consolidated financial data below in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial
statements, related notes and other financial information included elsewhere in this Annual Report on Form 10-K.
The selected consolidated financial data in this section is not intended to replace the consolidated financial
statements and are qualified in their entirety by the consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K.
40
The selected consolidated statements of operations data for the years ended December 31, 2016, 2015 and
2014, and the selected consolidated balance sheet data as of December 31, 2016 and 2015 are derived from our
audited consolidated financial statements included elsewhere in this Form 10-K. Our historical results are not
necessarily indicative of the results that may be expected in the future.
Year Ended December 31,
2016
2014
2015
(in thousands, except per share amounts)
Revenue:
Operating leases and incentives .............................................. $
Solar energy systems and product sales .................................
Total revenue.......................................................................
168,417 $
285,481
453,898
118,004 $
186,602
304,606
84,006
114,551
198,557
Operating expenses:
Cost of operating leases and incentives...................................
Cost of solar energy systems and product sales......................
Sales and marketing.................................................................
Research and development .....................................................
General and administrative.......................................................
Amortization of intangible assets..............................................
Total operating expenses ....................................................
Loss from operations.....................................................................
Interest expense, net.....................................................................
Loss on early extinguishment of debt............................................
Other expenses (income), net .......................................................
Loss before income taxes .............................................................
Income tax expense (benefit) ........................................................
Net loss .........................................................................................
Net loss attributable to noncontrolling interests
and redeemable noncontrolling interests ...................................
Net income (loss) attributable to common stockholders................ $
Less: Deemed dividend to convertible preferred stockholders.
Net income (loss) available to common stockholders ................... $
Net income (loss) per share available to common shareholders ..
Basic......................................................................................... $
Diluted ...................................................................................... $
Weighted average shares used to compute net income (loss)
per share attributable to common stockholders .........................
Basic.........................................................................................
Diluted ......................................................................................
159,858
239,381
162,781
10,199
92,377
4,206
668,802
(214,904)
53,244
—
(840)
(267,308)
35,993
(303,301)
111,784
168,751
145,477
9,657
84,442
3,695
523,806
(219,200)
33,236
431
1,338
(254,205)
(5,299)
(248,906)
(394,988)
(220,660)
91,687 $
—
91,687 $
(28,246) $
(24,890)
(53,136) $
72,898
100,802
78,723
8,386
68,098
2,269
331,176
(132,619)
27,521
4,350
3,043
(167,533)
(10,043)
(157,490)
(86,638)
(70,852)
—
(70,852)
0.90 $
0.87 $
(0.96) $
(0.96) $
(3.11)
(3.11)
102,367
104,964
55,091
55,091
22,795
22,795
41
Consolidated Balance Sheet Data:
Cash ................................................................................................................ $
Solar energy systems, net...............................................................................
Total assets .....................................................................................................
Long-term non-recourse debt, current portion.................................................
Recourse debt .................................................................................................
Long-term non-recourse debt, net of current portion.......................................
Redeemable noncontrolling interests ..............................................................
Total equity......................................................................................................
As of December 31,
2016
2015
(in thousands)
206,364 $
2,629,366
3,572,818
14,153
244,000
639,870
137,907
924,186
203,864
1,992,021
2,734,592
4,722
197,000
333,042
147,139
659,560
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual
Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those discussed below. Factors that could cause or contribute to
such differences include those identified below and those discussed in the section titled “Risk Factors” included
elsewhere in this Annual Report on Form 10-K.
We provide clean, solar energy to homeowners at a significant savings compared to traditional utility energy.
We have been selling solar energy to residential customers through a variety of offerings since we were founded
in 2007. We, either directly or through one of our solar partners, install a solar energy system on a customer’s
home and either sell the system to the homeowner or, as is more often the case, sell the energy generated by the
system to the homeowner pursuant to a lease or power purchase agreement (“PPA”) with no or low upfront costs.
We refer to these leases and PPAs as “Customer Agreements.” Following installation, a system is interconnected
to the local utility grid. The home’s energy usage is provided by the solar energy system, with any additional
energy needs provided by the local utility. Unless the solar energy system is connected to a battery, any excess
solar energy that is not immediately used by the homeowners is exported to the utility grid using a bi-directional
utility net meter, and the homeowner generally receives a credit for the excess energy from their utility to offset
future usage of utility-generated energy.
We offer our solar service offerings both directly to the homeowner and through our solar partners, which
include sales and installation partners, and strategic partners, which include retail partners. In addition, we sell
solar energy systems directly to customers for cash. We also sell solar energy panels and other products (such as
racking) to resellers. As of December 31, 2016, we provided our solar services to customers in 16 states, plus the
District of Columbia, and sold solar energy panels and other products to resellers throughout the United States.
Approximately half of our cumulative systems deployed are in California.
We compete mainly with traditional utilities. In the markets we serve, our strategy is to price the energy we sell
below prevailing local retail electricity rates. As a result, the price our customers pay to buy energy from us through
our solar service offerings varies depending on the state where the customer lives, the local traditional utility that
otherwise provides electricity to the customer, as well as the prices other solar energy companies charge in that
region. Even within the same neighborhood, site-specific characteristics drive meaningful variability in the revenue
and cost profiles of each home. Using our proprietary technology, we target homes with advantageous revenue and
cost characteristics, which means we are often able to offer pricing that allows customers to save more on their
energy bill while maintaining our ability to meet our targeted returns. For example, with the insights provided by our
technology, we can offer competitive pricing to customers with homes that have favorable characteristics, such as
roofs that allow for easy installation, high electricity consumption, or low shading, effectively passing through the cost
savings we are able to achieve on these installations to the homeowner.
42
Our ability to offer Customer Agreements depends in part on our ability to finance the purchase and
installation of the solar energy systems by monetizing the resulting customer cash flows and related investment
tax credits (“ITCs”), accelerated tax depreciation and other incentives from governments and local utilities. We
monetize these incentives under tax equity investment funds, which are generally structured as non-recourse
project financings. From inception to March 6, 2017, we have established 29 investment funds, which represent
financing for an estimated $5.2 billion in value of solar energy systems on a cumulative basis. We intend to
establish additional investment funds and may also use debt, equity and other financing strategies to fund our
growth.
In addition, completing the sale and installation of a solar energy system requires many different steps
including a site audit, completion of designs, permitting, installation, electrical sign-off and interconnection.
Homeowners may cancel their Customer Agreements with us, subject to certain conditions, during this process
until commencement of installation, and we have experienced increased customer cancellations in certain
markets during 2016. If we continue to experience increased customer cancellations, our financial results could
be materially and adversely affected.
Recent Developments
At the end of 2015, we began to slow our operations in Nevada as the result of proposed regulatory
changes, including elimination of net metering. In early 2016, we ceased our operations in Nevada in response to
the issuance of the final rules by the Public Utilities Commission of Nevada (“PUCN”). However, due to a
September 2016 PUCN Order, customers who had installed a solar energy system or submitted and had pending
a net metering application prior to December 31, 2015, were grandfathered in under the prior retail net metering
rates for a 20-year period. Additionally, in December 2016, the PUCN issued an Order restoring net metering by
expanding the cap for solar by 40% in northern Nevada. The utility Sierra Pacific Power Company has formally
requested that the PUCN reconsider this decision.
In December 2016, we entered into a strategic partnership with National Grid PLC (“National Grid”), which
includes a national collaborative grid services pilot and a $100 million direct investment by National Grid in a
partnership that will own approximately 200 MW of our rooftop solar systems across the U.S. The strategic
partnership also includes a joint marketing agreement that will initially target approximately 100,000 single family
homes in downstate New York.
Investment Funds
Our Customer Agreements provide for recurring customer payments, typically over 20 years, and the related
solar energy systems are generally eligible for ITCs, accelerated tax depreciation and other government or utility
incentives. Our financing strategy is to monetize these benefits at a low weighted average cost of capital. This low
cost of capital enables us to offer attractive pricing to our customers for the energy generated by the solar energy
system on their homes. Historically, we have monetized a portion of the value created by our Customer
Agreements and the related solar energy systems through investment funds. These assets are attractive to fund
investors due to the long-term, recurring nature of the cash flows generated by our Customer Agreements, the
high credit scores of our customers, the fact that energy is a non-discretionary good and our low loss rates. In
addition, fund investors can receive attractive after-tax returns from our investment funds due to their ability to
utilize ITCs, accelerated depreciation and certain government or utility incentives associated with the funds’
ownership of solar energy systems.
From inception to March 6, 2017, we have formed 29 investment funds. Of these 29 funds, 24 are currently
active and are described below. We have established different types of investment funds to implement our asset
monetization strategy. Depending on the nature of the investment fund, cash may be contributed to the
investment fund by the investor upfront or in stages based on milestones associated with the design, construction
or interconnection status of the solar energy systems. The cash contributed by the fund investor is used by the
investment fund to purchase solar energy systems. The investment funds either own or enter into a master lease
with a Sunrun subsidiary for the solar energy systems, Customer Agreements and associated incentives. We
receive on-going cash distributions from the investment funds representing a portion of the monthly customer
payments received. We use the upfront cash, as well as on-going distributions to cover our costs associated with
43
designing, purchasing and installing the solar energy systems. In addition, we also use debt, equity and other
financing strategies to fund our operations. The allocation of the economic benefits between us and the fund
investor and the corresponding accounting treatment varies depending on the structure of the investment fund.
We currently utilize three legal structures in our investment funds, which we refer to as: (i) lease pass-
throughs, (ii) partnership flips and (iii) joint venture (“JV”) inverted leases. We reflect lease pass-through
arrangements on our consolidated balance sheet as a lease pass-through financing obligation. We record the
investor’s interest in partnership flips or JV inverted leases (which we define collectively as “consolidated joint
ventures”) as noncontrolling interests or redeemable noncontrolling interests. These consolidated joint ventures
are usually redeemable at our option and, in certain cases, at the investor’s option. If redemption is at our option
or the consolidated joint ventures are not redeemable, we record the investor’s interest as a noncontrolling
interest and account for the interest using the hypothetical liquidation at book value (“HLBV”) method. If the
investor has the option to put their interest to us, we record the investor’s interest as redeemable noncontrolling
interest at the greater of the HLBV and the redemption value.
44
The table below provides an overview of our current investment funds (in millions, except number of funds
and MW Deployed):
Consolidated Joint Ventures
Lease Pass-
Through
Consolidation ........................ Owner entity
consolidated,
tenant entity not
consolidated
Partnership Flip
Single entity,
consolidated
JV Inverted Lease
Owner and tenant
Owner and tenant
entities
consolidated
entities
consolidated
Balance sheet classification.. Lease pass-
Redeemable
Redeemable
Noncontrolling
through financing
obligation
noncontrolling
interests and
noncontrolling
interests
noncontrolling
interests and
noncontrolling
interests
interests
Revenue from ITCs............... Recognized
None
None
None
annually over 5
years as the
recapture period
elapses
Method of calculating
investor interest..................
Effective interest
rate method
Greater of HLBV
or redemption
value
Greater of HLBV
or redemption
value
Pro rata
Liability balance as of
December 31, 2016 ........... $143.8
Noncontrolling interest
balance (redeemable or
otherwise) as of
December 31, 2016 ........... N/A
Number of funds (as of
December 31, 2016) .......... 5
MW Deployed (as of
December 31, 2016) .......... 129.5
Carrying value of solar
energy systems,
net (as of
December 31, 2016) .......... $444.4
Contributions from third-
party fund investors
(through
December 31, 2016) .......... $508.0
N/A
N/A
N/A
$300.5
$81.8
$6.8
1
4
14
448.9
139.0
20.7
$1,318.9
$518.1
$83.4
$1,101.6
$388.9
$86.3
For further information regarding our investment funds, including the associated risks, see “Risk Factors—
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 fund investors who seek particular tax and other benefits”, Note 11
Cash Equity Financing, Note 14, Lease Pass-Through Financing Obligations, Note 15, VIE Arrangements and
Note 16, Redeemable Noncontrolling Interests to our consolidated financial statements appearing elsewhere in
this Annual Report on Form 10-K.
s
45
Lease Pass-Through
Lease Pass-Through. In this investment fund structure, we and the fund investor form two entities which
facilitate the pass-through of the ITC or U.S. Treasury grants to the fund investors. In this structure we contribute
solar energy systems to an “owner” entity in exchange for interests in the owner entity, and the fund investors
contribute cash to a “tenant” entity in exchange for interests in the tenant entity.
Under our lease pass-through structure, in accordance with the provisions of Financial Accounting
Standards Board (“FASB”), Accounting Standards Codification Topic 810 (“ASC 810”) Consolidation, we have
determined that we are the primary beneficiary of the owner entity, and accordingly, we consolidate that entity.
We have also determined that we are not the primary beneficiary of the tenant entity, and accordingly, we do not
consolidate that entity.
In this investment fund structure, the investors make a series of large up-front payments as well as, in some
instances, subsequent smaller quarterly lease payments through their respective tenant entity to the
corresponding owner entity in exchange for the assignment of cash flows from Customer Agreements and certain
other benefits associated with the Customer Agreements and related solar energy systems. We account for the
payments from investors as borrowings by recording the proceeds received as lease pass-through financing
obligations. The financing obligation is reduced by recurring customer payments received under the Customer
Agreements assigned to the funds and, if applicable, any U.S. Treasury grants, the fair value of the ITCs
monetized and proceeds from the contracted resale of assigned solar renewable energy credits (“SRECs”), as
they are received by the investor over the term of the assignment agreement, which is approximately 20 years.
We account for these investment funds in our consolidated financial statements as if we are the lessor in the
arrangement with the customer, and we record on our consolidated financial statements activities arising from the
Customer Agreements and any related U.S. Treasury grants, ITCs, incentive rebates and SREC sales. The
interest charge on our lease pass-through financing obligations is imputed at the inception of the fund based on
the effective interest rate in the arrangement giving rise to the obligation and is updated prospectively as
appropriate.
In certain arrangements, we agree to defer a portion of the up-front payments by arranging a loan between
one of our indirectly wholly owned subsidiaries to a subsidiary of the investor’s tenant entity. There is a legal right
to offset the loan against the financing obligation if an event of default has occurred. Therefore, the lease pass-
through related to these types of arrangements is recorded net of the loan.
Consolidated Joint Ventures
Partnership Flips. Under partnership flip structures, we and our fund investors contribute cash into a
partnership entity. The partnership uses the cash to acquire solar energy systems developed by us and sells or
leases the energy produced under Customer Agreements. Each fund investor receives a rate of return, typically
on an after-tax basis, which varies by investment fund. Prior to the fund investor receiving its contractual rate of
return or for a time period specified in the contractual arrangements, the fund investor receives a significant
portion of the value attributable to customer payments, a majority of the accelerated tax depreciation and
substantially all of the ITCs. After the fund investor receives its contractual rate of return or after the specified time
period, we receive substantially all of the value attributable to the remaining customer payments and other
incentives.
Included within the Partnership Flips is the cash equity financing the Company entered into in December
2016. The Company pooled and transferred its interests in certain financing funds into a special purpose entity
(“SPE”) with a new investor. The Company did not recognize a gain or loss on the transfer of its interests in the
financing funds and continues to consolidate the financing funds. The SPE’s assets and cash flows are not
available to the other creditors of the Company, and the investor has no recourse to the Company’s other assets.
Under our partnership flip structures, we have determined that we control the variable interest entity (“VIE”),
and accordingly we consolidate the entity and record the investor’s interest as either noncontrolling interests or
redeemable noncontrolling interests in our consolidated balance sheets.
46
Inverted Leases. Under our inverted lease structure, we and the fund investor set up a multi-tiered
investment vehicle that is comprised of two partnership entities which facilitate the pass through of the tax
benefits to the fund investors. In this structure we contribute solar energy systems to an “owner” partnership entity
in exchange for interests in the owner partnership and the fund investors contribute cash to a “tenant” partnership
in exchange for interests in the tenant partnership, which in turn makes an investment in the owner partnership
entity in exchange for interests in the owner partnership. The owner partnership uses the cash contributions
received from the tenant partnership to purchase systems from us and/or fund installation of such systems. The
owner partnership leases the contributed solar energy systems to the tenant partnership under a master lease,
and the tenant partnership pays the owner partnership rent for those systems both upfront and on an ongoing
basis. The tenant partnership sells energy from the solar energy systems to customers pursuant to the terms of
the applicable Customer Agreements. Customer payments made to the tenant partnership are used to pay
expenses (including fees to us), make master lease rent payments and pay preferred return distributions to the
fund investor. The owner partnership distributes cash to us and the tenant partnership. As the tenant partnership
is an investor in the owner partnership, this allows the fund investors to receive a portion of the accelerated tax
depreciation and operating losses associated with the ownership of the assets. In this format, 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. Under our existing JV inverted lease structure, a substantial portion of the value generated by the
solar energy systems is provided to the fund investor for a specified period of time, which is generally based upon
the period of time corresponding to the expiry of the recapture period associated with the ITCs. After that point in
time, we receive substantially all of the value attributable to the long-term recurring customer payments and the
other incentives. Generally, under the terms of each agreement, the investors’ contributions include the value of
ITCs earned or grants to be received by the fund investor. Any other proceeds are allocated on a pro rata basis to
the fund investor and us in accordance with their ownership percentages.
We also have one JV inverted lease fund whereby we have a pro rata interest in the entity and we account
for the noncontrolling interest’s share of income on a pro rata basis. Accordingly, the noncontrolling interest of this
fund is carried on our balance sheet at the cumulative amount of capital contributions, reduced by cumulative
distributions paid to the investor, as well as the pro rata share of their income. Under our JV inverted lease
structure, we have determined that we control each VIE, and accordingly we consolidate the entity and record
investor’s interest as a noncontrolling interest or redeemable noncontrolling interest.
For all of our partnership flips and JV inverted leases, the redeemable noncontrolling interest is carried on
our balance sheet at the greater of the redemption value or the amount calculated under the HLBV method. The
HLBV method estimates the amount that, if the fund’s assets were hypothetically sold at their book value, the
investor would be entitled to receive according to the liquidation waterfall in the partnership agreement. For further
information, see the section entitled “Components of Statements of Operations — Net Income (Loss) Attributable
to Common Stockholders.”
Key Operating Metrics
We regularly review a number of metrics, including the following key operating metrics, to evaluate our
business, measure our performance, identify trends affecting our business, formulate financial projections and
make strategic decisions. Some of our key operating metrics are estimates that are based on our management’s
beliefs and assumptions and on information currently available to management. Although we believe that 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. Any inaccuracies could be material to our actual
results when compared to our calculations. Please see the section titled “Risk Factors” in this Annual Report on
Form 10-K for more information. 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.
During the fourth quarter of 2016, we reviewed our key operating metrics to ensure our reported metrics
remain aligned with how we currently operate our business. Based on our growing operating experience, unique
business model and industry trends, we modified our method for calculating Megawatts Booked and replaced
Estimated Retained Value and Estimated Nominal Contracted Payments Remaining with Gross Earning Assets.
We believe these changes will provide investors with improved indicators of performance and trends and are
better aligned with our current sales compensation and key operating objectives.
47
We now calculate Megawatts Booked to include only sold systems or systems subject to a Customer
Agreement for which we have internal confirmation that the applicable solar energy system has met our
installation requirements for size, equipment and design (“notice to proceed” or “NTP”), net of cancellations,
rather than the previous calculation that included all sold systems or systems subject to a Customer Agreement.
NTP typically also includes completion of a site assessment to confirm that shading, roof and electrical
requirements are met. Since NTP occurs closer to installation, we believe there is a meaningfully higher
realization of these systems as deployments, and it is less susceptible to reported seasonal fluctuations. As a
result of this modification, we have included a historical presentation of Megawatts Booked in the tables below for
periods prior to December 31, 2016 reflecting the updated methodology.
Similarly, we believe Gross Earning Assets (which includes only discounted cash flows for deployed
systems, rather than systems subject to a Customer Agreement) provides greater clarity and comparability
between periods than Estimated Retained Value and Estimated Nominal Contracted Payments Remaining, with
less variability due to cancellations that occur between the execution of a Customer Agreement and deployment.
We have presented Gross Earning Assets as of December 31, 2015 and 2016 below.
•
•
•
Megawatts Booked represents the aggregate megawatt production capacity of our solar energy
systems, whether sold directly to customers or subject to an executed Customer Agreement, for which
we have confirmation that the systems have reached NTP, net of cancellations.
d
d
Megawatts Deployed represents the aggregate megawatt production capacity of our solar energy
systems, whether sold directly to customers or subject to executed Customer Agreements, for which
we have (i) confirmation that the systems are installed on the roof, subject to final inspection or (ii) in
the case of certain system installations by our partners, accrued at least 80% of the expected project
cost.
Gross Earning Assets represents the net cash flows (discounted at 6%) we expect to receive during
the initial 20-year term of our Customer Agreements for systems that have been deployed as of the
measurement date, plus a discounted estimate of the value of the Customer Agreement renewal term
or solar energy system purchase at the end of the initial term. Consistent with industry standards, we
use a discount rate of 6%. We consider a discount rate of 6% to be appropriate and consistent with
recent market transactions that demonstrate that a portfolio of residential solar homeowner contracts is
an asset class that can be securitized successfully on a long-term basis, with a coupon of less than
5%. We calculate the Gross Earning Assets value of the purchase or renewal amount at the expiration
of the initial contract term assuming a 10-year renewal at a contract rate equal to 90% of the
customer’s contractual rate in effect at the end of the initial contract term. After the initial (typically 20-
year) contract term, our Customer Agreements provide customers the option to renew their contracts
for the remaining life of the solar energy system typically at a 10% discount to then-prevailing power
prices.
Gross Earning Assets excludes estimated cash distributions to investors in consolidated joint ventures
and estimated operating, maintenance and administrative expenses for systems deployed as of the
measurement date. In calculating Gross Earning Assets, we do not deduct customer payments we are
obligated to pass through to investors in lease pass-throughs as these amounts are reflected on our
balance sheet as long-term and short-term lease pass-through obligations, similar to the way that debt
obligations are presented. In determining our finance strategy, we use lease pass-throughs and long-
term debt in an equivalent fashion as the schedule of payments of distributions to lease pass-through
investors is more similar to the payment of interest to lenders than the internal rates of return (IRRs)
paid to investors in other tax equity structures.
o Gross Earning Assets Under Energy Contract represents the net cash flows during the initial
t
(typically 20 year) term of our Customer Agreements (less substantially all value from SRECs
prior to July 1, 2015), for systems deployed as of the measurement date.
o Gross Earning Assets Value of Purchase or Renewal is the forecasted net present value we
l
would receive upon or following the expiration of the initial Customer Agreement term (either in
the form of cash payments during any applicable renewal period or a system purchase at the
end of the initial term), for systems deployed as of the measurement date.
48
Gross Earning Assets is forecasted as of a specific date. It is forward-looking, and we use judgment in
developing the assumptions used to calculate it. Factors that could impact Gross Earning Assets
include, but are not limited to, customer payment defaults, or declines in utility rates or early termination
of a contract in certain circumstances, including prior to installation.
MW Booked (during the period) (1) ...................................................................
MW Deployed (during the period)....................................................................
For the Year Ended
December 31,
2016
285
282
2015
229
203
(1) MW Booked in 2016 excludes 6.5 MW due to Nevada exit. Refer to discussion above for details on the
change in methodology.
Cumulative Megawatts Deployed (end of period) (1) ........................................
As of December 31,
2016
879
2015
596
(1) The Cumulative Megawatts Deployed may not equal the sum of all MW deployed each year due to
rounding.
As of December 31,
2016
2015
(in thousands)
Gross Earning Assets Under Energy Contract ................................................ $
Gross Earning Assets Value of Purchase or Renewal ....................................
Gross Earning Assets ................................................................................. $
1,199,882 $
609,129
1,809,011 $
842,060
431,792
1,273,852
The tables below provide a range of Gross Earning Asset amounts if different default, discount and
purchase and renewal assumptions were used.
Gross Earning Assets Under Energy Contract:
Default rate
4%
As of December 31, 2016
Discount rate
6%
(in thousands)
5%
7%
8%
5% ..................................................... $ 1,383,868 $ 1,270,108 $ 1,169,513 $ 1,080,304 $ 1,000,967
0% ..................................................... $ 1,421,417 $ 1,303,825 $ 1,199,882 $ 1,107,739 $ 1,025,824
Gross Earning Assets Value of Purchase or Renewal:
Purchase or Renewal rate
4%
As of December 31, 2016
Discount rate
6%
(in thousands)
5%
7%
8%
811,183 $
80% ................................................... $
90% ................................................... $
930,069 $
100% ................................................. $ 1,048,954 $
655,394 $
751,479 $
847,564 $
531,225 $
609,129 $
687,033 $
431,934 $
495,295 $
558,656 $
352,283
403,974
455,664
49
Total Gross Earning Assets:
Purchase or Renewal rate
4%
As of December 31, 2016
Discount rate
6%
(in thousands)
5%
7%
8%
80% ................................................... $ 2,232,600 $ 1,959,220 $ 1,731,107 $ 1,539,672 $ 1,378,108
90% ................................................... $ 2,351,485 $ 2,055,305 $ 1,809,011 $ 1,603,034 $ 1,429,798
100% ................................................. $ 2,470,371 $ 2,151,389 $ 1,886,915 $ 1,666,395 $ 1,489,273
Components of Statements of Operations
Revenue
We generate revenue from (1) operating leases and incentives and (2) solar energy systems and product
sales commencing in 2014 as a result of the residential sales and installation business of Mainstream Energy
Corporation, its fulfillment business AEE Solar and its racking business SnapNrack (collectively, “MEC”)
acquisition. Product sales also include lead generation sales commencing in 2015 as a result of the acquisition of
Clean Energy Experts, LLC or “CEE acquisition”.
Operating Leases and Incentives
Operating leases and incentives revenue is primarily comprised of revenue from our Customer Agreements,
solar energy system rebate incentives and sales of SRECs generated by our solar energy systems to third
parties, as well as revenue associated with ITCs assigned to investment funds that are classified as lease pass-
through arrangements.
We classify and account for our Customer Agreements as operating leases. We recognize revenue from
these agreements either on a straight-line basis over the term of the agreements (in the case of leases) or as we
generate and sell energy to customers (in the case of PPAs). The term of these agreements is typically 20 years.
We consider the proceeds from solar energy system rebate incentives to be minimum lease payments under
our Customer Agreements and recognize such payments as revenue over the contract term on a straight-line
basis.
We also apply for and receive SRECs and sell them to third parties in certain jurisdictions for energy
generated by our solar energy systems. We recognize revenue related to the sale of SRECs to the extent the
cumulative value of delivered SRECs per contract exceeds any possible liquidated damages for non-delivery, if
any.
Finally, under our investment funds that are classified as lease pass-through arrangements, we allocate a
portion of the cash consideration received from the investors to the estimated fair value of the ITCs assigned to
such investment funds. The ITCs are subject to recapture under the Internal Revenue Code (“Code”) if the
underlying solar energy system either ceases to be a qualifying property or undergoes a change in ownership
within five years of its placed-in-service date. The recapture amount decreases on the anniversary of the
permission to operate (“PTO”) date. We recognize ITC revenue as the recapture provisions lapse, with one-fifth of
the estimated fair value of the assigned ITC recognized on each anniversary of the solar energy systems’ PTO
date over the following five years.
Our quarterly operating leases and incentives revenue has been and will continue to be impacted by
seasonality. Energy production is greater in the second and third quarters than in the first and fourth quarters,
causing variability in revenue recognized under PPAs. There are also seasonal fluctuations in sales and
installations, particularly in the fourth quarter, resulting from decreased sales through the holiday season and
weather-related installation delays. In addition, as described above, ITC revenue associated with lease pass-
50
through arrangements is recognized once annually on the anniversary of the PTO date and a high percentage of
our existing ITCs have PTO dates that occur in the fourth quarter.
Solar Energy Systems and Product Sales
Solar energy systems sales are comprised of revenue from the sale of solar energy systems directly to
homeowners. We generally recognize revenue from solar energy systems sold to homeowners when we install
the solar energy system and it passes inspection by the authority having jurisdiction, provided all other revenue
recognition criteria have been met.
Product sales revenue consists of revenue from the sale of solar panels, inverters, racking systems, other
solar-related equipment to resellers and customer leads to third parties, including our partners and other solar
providers. Product sales revenue is recognized at the time title is transferred, generally upon shipment. Customer
lead revenue is recognized at the time the lead is delivered.
Our quarterly solar energy systems and product sales revenue has and will continue to fluctuate due to a
variety of factors, including timing of installation and seasonal factors described above, as well as other factors
that may cause homeowners to opt to purchase solar energy systems rather than leasing them.
Operating Expenses
Operating expenses are classified by the related activity and assigned department of our personnel.
Personnel costs include salaries, bonuses, benefits and stock-based compensation. Corporate overhead costs
include information technology and facilities costs that are allocated based upon the estimated use by personnel
in the related classification below.
Cost of Operating Leases and Incentives
Operating leases and incentives cost of revenue is primarily comprised of depreciation of solar energy
systems, as reduced by amortization of U.S. Treasury grants and state tax credits, amortization of initial direct
costs (“IDCs”), and lease operations, monitoring and maintenance costs including associated personnel costs.
Other costs include allocated corporate overhead costs, which mainly includes personnel costs associated with
supply chain, logistics, operations management, safety and quality control, and vehicle depreciation costs.
Cost of Solar Energy Systems and Product Sales
Solar energy systems cost of revenue and non-lead generation product sales cost of revenue primarily
consists of direct and indirect material and personnel costs for solar energy systems installations and product
sales. Other costs include engineering and design costs, estimated warranty costs, freight costs, allocated
corporate overhead costs, which mainly includes personnel costs associated with supply chain, logistics,
operations management, safety and quality control, and vehicle depreciation costs. Cost of revenue for lead
generations consists of costs related to direct-response advertising activities associated with generating customer
leads.
Sales and Marketing
Sales and marketing expenses include personnel costs as well as advertising, promotional and other
marketing related expenses. Sales and marketing expenses also include lead generation costs and retail fees
paid to strategic partners, allocated corporate overhead costs, travel and professional services.
Research and Development
Research and development expenses include personnel costs, allocated corporate overhead costs, and
other costs related to the development of our BrightPath software suite as well as our racking equipment.
51
General and Administrative
General and administrative expenses include personnel costs related to accounting, finance, legal, human
resources and executive staff. General and administrative expenses also include professional services and
allocated corporate overhead costs.
Amortization of Intangible Assets
We acquired intangible assets in connection with the acquisition of MEC and CEE. Such intangible assets
are being amortized over their estimated useful lives, which range from five to ten years.
Non-operating Expenses
Interest Expense, net
Interest expense, net primarily consists of the interest charges associated with long term borrowing and
lease pass-through financing obligations. Our lines of credit, syndicated term loans and bank term loans due in
July 2021 and September 2022 are subject to variable interest rates, some of which are hedged using interest
rate swaps. Our notes payable, bank term loan due in April 2022 and solar asset-backed notes bear fixed interest
rates. The interest charge on our lease pass-through financing obligations is imputed at the inception of the
related transaction based on the effective interest rate in the arrangement giving rise to the obligation and
updated prospectively as appropriate. Interest expense also includes the amortization of deferred financing costs
associated with such borrowings, partially offset by a nominal amount of interest income generated from our cash
holdings in interest-bearing accounts. In the future we may incur additional indebtedness to fund our operations,
and our interest expense would correspondingly increase.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt consists of loss from early extinguishment of certain non-bank term
loans in 2015 and 2014.
Other Expenses (Income), Net
During 2016, other income primarily consisted of a gain due to the change in fair value of warrant derivatives
which were issued to former Series D and E preferred stockholders as an inducement to convert their shares of
convertible preferred stock into shares of common stock immediately prior to the closing of our initial public
offering. Prior to 2016, other expenses consist primarily of our portion of the net loss in an entity which was
accounted for under the equity method of accounting.
Income Tax Expense
We are subject to taxation in the United States, where all of our business is conducted. Our effective tax
rates differ from the statutory rate primarily due to noncontrolling and redeemable noncontrolling interest
adjustments and prepaid tax expense on intercompany gains.
The majority of our tax expense relates to an increase in our deferred tax liabilities related to partnerships.
Given our net operating loss carryforwards as of December 31, 2016, we do not expect to pay income tax,
including in connection with our 2016 income tax provision, until our net operating losses are fully utilized. As of
December 31, 2016, we had approximately $571.3 million of federal and $524.9 million of state net operating loss
carryforwards (“NOLs”), available to offset future taxable income, if any, which expire in varying amounts
beginning in 2028 and 2024 for federal and state purposes, respectively, if unused. It is possible that we will not
generate taxable income in time to use these NOLs before their expiration.
52
Net Income (Loss) Attributable to Common Stockholders
As discussed above under “—Investment Funds,” 19 of our 24 active investment funds are consolidated
joint ventures. We determine the net income (loss) attributable to common stockholders by deducting from net
loss, the net loss attributable to noncontrolling interests and redeemable noncontrolling interests in these funds.
The net loss attributable to noncontrolling interests and redeemable noncontrolling interests represents the fund
investors’ allocable share in the results of operations of these investment funds. For these funds, we have
determined that the provisions in the contractual arrangements represent substantive profit sharing arrangements,
where the allocations to the partners sometimes differ from the stated ownership percentages. We have further
determined that, for these arrangements, the appropriate methodology for attributing income and loss to the
noncontrolling interests and redeemable noncontrolling interests each period is a balance sheet approach using
the HLBV method.
Under the HLBV method, the amounts of income and loss attributed to the noncontrolling interests and
redeemable noncontrolling interests in the consolidated statements of operations reflect changes in the amounts
the fund investors would hypothetically receive at each balance sheet date under the liquidation provisions of the
contractual provisions of these funds, assuming the net assets of the respective investment funds were liquidated
at the carrying value determined in accordance with generally accepted accounting principles in the United States
(“GAAP”). The fund investors’ interest in the results of operations of these investment funds is initially determined
by calculating the difference in the noncontrolling interests and redeemable noncontrolling interests’ claim under
the HLBV method at the start and end of each reporting period, after taking into account any contributions and
distributions between the fund and the fund investors and subject to the redemption provisions in certain funds.
The redeemable noncontrolling interests balance is the greater of the carrying value calculated under the HLBV
method or the redemption value. Because the investor contributes cash into the fund to purchase solar energy
systems at fair market value which exceeds their carrying value, the noncontrolling interest balance is reduced
upon application of the HLBV method. As such, the HLBV method generally allocates more loss to the
noncontrolling interest in the first several years after fund formation. After the solar systems have been purchased
by the fund, the noncontrolling interest’s contributions decrease substantially. As ongoing distributions are
received by the noncontrolling interest, their losses under the HLBV method tend to reverse. While the application
of HLBV is performed consistently, the results of that application and its impact on the income or loss allocated
between us and the noncontrolling interests and redeemable noncontrolling interests depend on the respective
funds’ specific contractual liquidation provisions. The HLBV results are generally affected by the tax attributes
allocated to the fund investors including accelerated and bonus tax depreciation and ITCs or U.S. Treasury grants
in lieu of the ITCs, the amount of preferred returns that have been paid to the fund investors by the investment
funds, and the allocation of tax income or losses in a liquidation scenario.
The contractual liquidation provisions of our consolidated joint ventures (which include our partnership flips
and JV inverted leases) provide that the allocation percentages between us and the investor change, or “flip,”
under certain circumstances, such as upon the achievement of the fund investor’s targeted rate of return, the
passage of time, or the expiration of the recapture period associated with ITCs. Prior to the point at which the
allocation percentage flips, the investor is entitled to receive a majority of the value generated by the solar energy
systems. At the flip point, we become entitled to receive most of the value. The difference between our current
partnership flip structures and JV inverted lease structures that drives a significant impact on our results from the
application of the HLBV method is how the flip point is determined.
For investment funds that have a partnership flip structure, the flip point is tied to the achievement of the
fund investor’s targeted rate of return. The receipt of tax benefits by the fund investor count towards the
achievement of such target, which reduces the amount distributable to the fund investor in a hypothetical
liquidation under these funds’ contractual liquidation provisions. This results in a net loss attributable to the fund
investor over the periods in which these tax benefits are received as a result of our application of the HLBV
method.
For investment funds that have a JV inverted lease structure, the flip point is typically tied to the expiration of
the recapture period associated with ITCs. An investor in a fund with a JV inverted lease fund structure will
receive tax benefits similar to an investor in a fund that has adopted a partnership structure. However, unlike the
partnership flip structure, the receipt of tax benefits by the fund investor does not impact the amount distributable
53
to the fund investor in a hypothetical liquidation under these funds’ contractual liquidation provisions. At the flip
point, the fund investor’s claims on the net assets of the investment fund generally decreases. This results in a
net loss attributable to the fund investor in the period when the flip occurs as a result of our application of the
HLBV method. As discussed above under “—Investment Funds,” we also have one JV inverted lease whereby we
have a pro rata interest in the entity, and we account for the noncontrolling interest’s share of income on a pro
rata basis.
These differences are a result of the specific contractual provisions for each of our existing funds and are
not necessarily indicative of terms for our future partnership flip or JV inverted lease structures. Future investment
funds may contain different features than those that we currently employ, and as a result, the application of the
HLBV method and resulting allocation of net income or loss may be different from our existing funds.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with GAAP. GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We
base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances. In many instances, we could have reasonably used different accounting estimates, and
in other instances, changes in the accounting estimates are reasonably likely to occur from period-to-period.
Actual results could differ significantly from our estimates. Our future financial statements will be affected to the
extent that our actual results materially differ from these estimates. For further information on all of our significant
accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K.
We believe that assumptions and estimates associated with our principles of consolidation, revenue
recognition, impairment of long-lived assets, goodwill impairment analysis, provision for income taxes and
valuation of noncontrolling interests and redeemable noncontrolling interests have the greatest impact on our
consolidated financial statements. Therefore, we consider these to be our critical accounting policies and
estimates.
Principles of Consolidation
Our consolidated financial statements include our accounts and those of our subsidiaries in which we have a
controlling financial interest. The typical condition for a controlling financial interest is holding a majority of the
voting interests of an entity. However, a controlling financial interest may also exist in entities, such as VIEs,
through arrangements that do not involve controlling financial interests. We consolidate any VIE of which we are
the primary beneficiary, which is defined as the party that has (1) the power to direct the activities of a VIE that
most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive
benefits of the VIE that could potentially be significant to the VIE. We evaluate our relationships with our VIEs on
an ongoing basis to determine whether we continue to be the primary beneficiary. Our financial statements reflect
the assets and liabilities of VIEs that we consolidate. All intercompany transactions and balances have been
eliminated in consolidation. For further information regarding consolidation of our investment funds, see “—
Investment Funds” above.
Revenue Recognition
We sell the energy that our solar energy systems produce through Customer Agreements. We also derive a
portion of our revenue from solar energy system rebate incentives, sales of SRECs generated from our solar
energy systems and ITCs assigned to investment funds that are classified as lease pass-through arrangements.
Following the acquisition of MEC in February 2014, we began selling solar energy systems to homeowners,
as well as related products, such as solar panels, inverters, racking systems and other solar-related equipment to
resellers. Following the acquisition of CEE in April 2015, we began selling customer leads to third parties,
including our partners and other solar providers.
54
We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the sales price is fixed and determinable, and (iv) collection of the related
receivable is reasonably assured.
Operating Leases and Incentives Revenue. Operating leases and incentives revenue represent both
ongoing and advance payments received under the terms of the Customer Agreements, which typically have an
initial term of 20 years. Revenue from advance payments including prepayment options is deferred and begins to
be recognized when PTO is given by the local utility company or on the date daily operation commences if utility
approval is not required, provided all other revenue criteria are met.
We have determined that our Customer Agreements should be accounted for as operating leases after
evaluating the following lease classification criteria: (i) whether there is a transfer of ownership or bargain
purchase option at the end of the lease, (ii) whether the lease term is greater than 75% of the estimated economic
life, or (iii) whether the present value of minimum lease payments exceeds 90% of the fair value at lease
inception.
In the majority of our Customer Agreements, we charge a fixed fee per kilowatt hour based on the amount of
electricity the solar energy system actually produces, with an annual fixed percentage price escalation to address
the impact of inflation and utility rate increases over the period of the contract. In these cases, we consider the
customer payments to be contingent lease payments which are excluded from minimum lease payments used for
purposes of assessing the lease classification criteria above. Accordingly, we recognize these electricity
payments as earned, provided all other revenue recognition criteria discussed above are met.
We also offer Customer Agreements whereby the customers’ monthly payment is a pre-determined amount
calculated based on the expected solar energy generation and includes an annual fixed percentage price
escalation (to address the impact of inflation and utility rate increases) over the period of the contracts, which are
typically 20 years. We record operating lease revenue from minimum lease payments on a straight-line basis over
the life of the lease term, provided all other revenue recognition criteria are met.
We also apply for and receive upfront rebates and incentives offered by certain state and local governments
and local utility companies on behalf of our customers for solar facilities installed on certain of our customers’
premises. We consider these rebates to be minimum lease payments which are generally recognized on a
straight-line basis over the life of the lease term. The difference between the payments received and the revenue
recognized is recorded as deferred revenue on the consolidated balance sheet.
SREC revenue arises from the sale of environmental credits generated by solar energy systems. When we
enter into Customer Agreements, if the solar energy systems do not generate the amount of electricity required to
earn SRECs sold forward or if for any reason the electricity generated does not produce SRECs for a particular
state, depending on the terms of the contract, we may be required to make up the shortfall of SRECs through
purchases on the open market or make payments of liquidated damages. We recognize revenue related to the
sale of SRECs to the extent the cumulative value of delivered SRECs per contract exceeds any possible
liquidated damages for non-delivery, if any.
For lease pass-through structures, we monetize the ITCs associated with the systems subject to Customer
Agreements by assigning them to the investor together with the future associated customer payments. A portion
of the cash consideration received from the investor is allocated to the estimated fair value of the assigned ITCs.
The estimated fair value of the ITCs is determined by applying the expected internal rate of return to the investor
to the gross amount of the ITCs that may be claimed by the investor.
The ITCs are subject to recapture under the Code if the underlying solar energy system either ceases to be
a qualifying property or undergoes a change in ownership within five years of its placed in service date. The
recapture amount decreases by one-fifth on the anniversary of the placed in service date, which begins upon
PTO. As we have an obligation to ensure the solar energy system is in service and operational for a term of five
years to avoid any recapture of the ITCs, we recognize revenue as the recapture provisions lapse provided the
other revenue recognition criteria have been met. The monetized ITCs are initially recorded as deferred revenue
on the consolidated balance sheet, and subsequently, one-fifth of the monetized ITCs will be recognized as
55
operating leases and incentives revenue in the consolidated statements of operations on each anniversary of the
solar energy system’s PTO date over the following five years.
Solar Energy Systems and Product Sales. For solar energy systems sold to customers, we recognize
revenue, net of any applicable governmental sales taxes, when we install the solar facilities and it passes
inspection by the responsible city department, provided all other revenue recognition criteria are met. The
installation projects of our solar energy systems are typically completed in a short period of time.
Product sales revenue is recognized at the time the goods are shipped or when title is transferred. Shipping
and handling fees charged to customers are included in net sales. Shipping and handling costs incurred are
included in cost of solar energy systems and product sales. Taxes assessed by government authorities that are
directly imposed on revenue producing transactions are excluded from product sales revenue. Customer lead
revenue, included in product sales, is recognized at the time the lead is delivered. Prior to the acquisition of CEE
in April 2015, we did not sell customer leads to third parties.
Impairment of Long-Lived Assets
The carrying amounts of our long-lived assets, including solar energy systems and definite-lived intangible
assets, are periodically reviewed for impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated.
Factors that we consider in deciding when to perform an impairment review would include significant negative
industry or economic trends, and significant changes or planned changes in our use of the assets. Recoverability
of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash
flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the
amount of any impairment is measured as the difference between the carrying value and the fair value of the
impaired asset. If the useful life is shorter than originally estimated, we amortize the remaining carrying value over
the new shorter useful life.
Goodwill Impairment Analysis
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net
tangible and identifiable intangible assets acquired. Our goodwill balance is a result of the acquisition of MEC in
February 2014 and CEE in April 2015. We have determined that we operate as one reporting unit, and our
goodwill is recorded at the enterprise level. We perform our annual impairment test of goodwill on October 1 of
each year or whenever events or circumstances change or occur that would indicate that goodwill might be
impaired. When assessing goodwill for impairment, we use qualitative and, if necessary, quantitative methods.
We also consider our enterprise value and, if necessary, our discounted cash flow model, which involves
assumptions and estimates, including our future financial performance, weighted-average cost of capital and
interpretation of currently enacted tax laws. Circumstances that could indicate impairment and require us to
perform an impairment test include a significant decline in our financial results, a significant decline in our
enterprise value relative to our net book value, an unanticipated change in competition or our market share and a
significant change in our strategic plans.
As of October 1, 2016, due to the decline in our market capitalization from the 2015 annual impairment test,
we performed step one of the impairment test. As of October 1, 2016, we concluded that the fair value of the
Company exceeded its carrying value, as our market capitalization exceeded total stockholders’ equity.
We considered the continued decrease in our market capitalization from October 1, 2016 to December 31,
2016 to be an impairment indicator and we also performed the step one test for potential impairment as of
December 31, 2016. As of December 31, 2016, total stockholders’ equity exceeded our market capitalization. We
estimated the fair value of the Company using a combination of a market approach and an income approach,
giving equal weighting to both. Under the market approach, we utilized publicly traded comparable company
information to determine revenue multiples to value our Company. Under the income approach, we determined
the fair value based on our estimated future cash flows discounted by an estimated weighted average cost of
capital, reflecting the overall level of inherent risk and the rate of return an outside investor would expect to earn.
56
The cash flow forecast and related assumptions were derived from the most recent annual financial forecast for
which the planning process commenced in the fourth quarter of 2016. Based on the fair value analysis as of
December 31, 2016, we had an estimated fair value that exceeded its carrying value by approximately 8%.
Therefore, no impairment of goodwill has been recorded for the year ended December 31, 2016. However, if
factors exist that could indicate an impairment in the future, including a sustained decrease in our stock price, we
may be required to record charges to earnings if our goodwill becomes impaired.
Provision for Income Taxes
We account for income taxes under an asset and liability approach. Deferred income taxes reflect the
impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the
amounts recognized for income tax reporting purposes, net operating loss carryforwards and other tax credits
measured by applying currently enacted tax laws. A valuation allowance is provided when necessary to reduce
deferred tax assets to an amount that is more likely than not to be realized. As of December 31, 2016, we have
recorded a valuation allowance of $0.6 million for state tax credits.
We sell solar energy systems to the investment funds. As the investment funds are consolidated by us, the
gain on the sale of the solar energy systems is not recognized in the consolidated financial statements. However,
this gain is recognized for tax reporting purposes. Since these transactions are intercompany sales for book
purposes, any tax expense incurred related to these intercompany sales is deferred and recorded as a prepaid
tax asset and there is no recognition of a deferred tax asset. The prepaid tax asset is amortized over the
estimated useful life of the underlying solar energy systems which has been estimated to be 35 years.
We determine whether a tax position is more likely than not to be sustained upon examination, including
resolution of any related appeals or litigation processes, based on the technical merits of the position. We use a
two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence indicates that it is more likely than not
that the position will be sustained upon tax authority examination, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than
50% likely of being realized upon ultimate settlement.
Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the
provision for taxes in the consolidated statements of operations.
Noncontrolling Interests and Redeemable Noncontrolling Interests
Our noncontrolling interests and redeemable noncontrolling interests represent fund investors’ interests in
the net assets of certain investment funds, which we consolidate, that we have entered into in order to finance the
costs of solar energy facilities under operating leases. We have determined that the provisions in the contractual
arrangements of the investment funds represent substantive profit-sharing arrangements, which gives rise to the
noncontrolling interests and redeemable noncontrolling interests. We have further determined that for all but one
of these arrangements, the appropriate methodology for attributing income and loss to the noncontrolling interests
and redeemable noncontrolling interests each period is a balance sheet approach using the HLBV method.
Attributing income and loss to the noncontrolling interests and redeemable noncontrolling interests under the
HLBV method requires the use of significant assumptions to calculate the amounts that fund investors would
receive upon a hypothetical liquidation. Changes in these assumptions can have a significant impact on the
amount that fund investors would receive upon a hypothetical liquidation.
We classify certain noncontrolling interests with redemption features that are not solely within our control
outside of permanent equity on our consolidated balance sheets. Redeemable noncontrolling interests are
reported using the greater of their carrying value at each reporting date as determined by the HLBV method or
their estimated redemption value in each reporting period. Estimating the redemption value of the redeemable
noncontrolling interests requires the use of significant assumptions and estimates such as projected future cash
flows at the time the redemption feature can be exercised.
57
Results of Operations
The results of operations presented below should be reviewed in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
2016
2014
2015
(in thousands, except per share amounts)
Revenue:
Operating leases and incentives .............................................. $
Solar energy systems and product sales .................................
Total revenue.......................................................................
168,417 $
285,481
453,898
118,004 $
186,602
304,606
84,006
114,551
198,557
Operating expenses:
Cost of operating leases and incentives...................................
Cost of solar energy systems and product sales......................
Sales and marketing.................................................................
Research and development .....................................................
General and administrative.......................................................
Amortization of intangible assets..............................................
Total operating expenses ....................................................
Loss from operations.....................................................................
Interest expense, net.....................................................................
Loss on early extinguishment of debt............................................
Other expenses (income), net .......................................................
Loss before income taxes .............................................................
Income tax expense (benefit) ........................................................
Net loss .........................................................................................
Net loss attributable to noncontrolling interests
and redeemable noncontrolling interests ...................................
Net income (loss) attributable to common stockholders................ $
Less: Deemed dividend to convertible preferred stockholders.
Net income (loss) available to common stockholders ................... $
Net income (loss) per share available to common shareholders ..
Basic......................................................................................... $
Diluted ...................................................................................... $
Weighted average shares used to compute net income (loss)
per share attributable to common stockholders .........................
Basic.........................................................................................
Diluted ......................................................................................
159,858
239,381
162,781
10,199
92,377
4,206
668,802
(214,904)
53,244
—
(840)
(267,308)
35,993
(303,301)
111,784
168,751
145,477
9,657
84,442
3,695
523,806
(219,200)
33,236
431
1,338
(254,205)
(5,299)
(248,906)
(394,988)
(220,660)
91,687 $
—
91,687 $
(28,246) $
(24,890)
(53,136) $
72,898
100,802
78,723
8,386
68,098
2,269
331,176
(132,619)
27,521
4,350
3,043
(167,533)
(10,043)
(157,490)
(86,638)
(70,852)
—
(70,852)
0.90 $
0.87 $
(0.96) $
(0.96) $
(3.11)
(3.11)
102,367
104,964
55,091
55,091
22,795
22,795
58
Comparison of the Years Ended December 31, 2016 and 2015
Revenue
Year Ended
December 31,
2016
Operating leases ............................................................... $ 125,197
43,220
Incentives ..........................................................................
168,417
Operating leases and incentives ..................................
127,727
Solar energy systems........................................................
157,754
Products ............................................................................
285,481
Solar energy systems and product sales .....................
Total revenue .......................................................... $ 453,898
2015
(in thousands)
86,332
$
31,672
118,004
50,191
136,411
186,602
$ 304,606
Change
$
%
$
38,865
11,548
50,413
77,536
21,343
98,879
$ 149,292
45%
36%
43%
154%
16%
53%
49%
Operating Leases and Incentives. The $38.9 million increase in revenue from operating leases was primarily
due to both an increase in solar energy systems under Customer Agreements being placed in service in 2016 and
a full year of revenue recognized in 2016 for systems placed in service in 2015 versus only a portion recognized
in 2015. Revenue per megawatt production capacity remained consistent between 2015 and 2016. Revenue from
incentives increased by $11.5 million primarily due to an increase in ITC revenue, which relates to solar energy
systems in lease pass-through funds being placed in service in the prior year as we recognize revenue from the
monetization of these ITCs annually over five years on each anniversary of a solar energy system’s permission to
operate date.
Solar Energy Systems and Product Sales. Revenue from solar energy systems sales increased by $77.5
million compared to the prior year period due to increased sales and marketing efforts primarily with strategic
partners. Product sales increased by $21.3 million compared to the prior year period due to an increase in volume
of all products sold, including a $4.6 million increase in customer lead sales subsequent to the acquisition of CEE
in April 2015.
Operating Expenses
Year Ended
December 31,
2016
2015
(in thousands)
Change
$
%
Cost of operating lease and incentives ............................. $ 159,858 $ 111,784 $
168,751
Cost of solar energy systems and product sales ..............
145,477
Sales and marketing .........................................................
9,657
Research and development ..............................................
84,442
General and administrative expense.................................
3,695
Amortization of intangible assets ......................................
48,074
70,630
17,304
542
7,935
511
Total operating expenses ............................................. $ 668,802 $ 523,806 $ 144,996
239,381
162,781
10,199
92,377
4,206
43%
42%
12%
6%
9%
14%
28%
. The $48.1 million increase in cost of operating leases and
incentives was primarily due to the increase in solar energy systems placed in service in the period from
December 31, 2015 through December 31, 2016, plus a full year of costs recognized for systems placed in
service in 2015 versus only a partial year of such expenses related to the period in which the assets were in
service in 2015. This resulted in a $22.4 million increase in depreciation and amortization of solar energy system
equipment costs and initial direct costs, as well as an increase of $25.6 million in non-capitalizable costs,
associated with the increase in megawatt production.
59
The cost of operating leases and incentives was 95% of operating lease and incentives revenue during the
years ended December 31, 2016 and 2015. Leased systems installed by us bear an allocation of costs, such as
warehouse rent and utilities, information technology, administrative and product planning costs, that are expensed
during the construction and installation phase as these costs do not meet the criteria for capitalization under ASC
360 Property, Plant, and Equipment. These costs can fluctuate depending on the volume of megawatts installed
directly by us for systems under an operating lease, and are not necessarily proportional to the increase in
revenue generated by our entire fleet of leased systems. As such, the cost of operating leases and incentives as
a percentage of operating lease and incentives revenue can vary from period to period.
Cost of Solar Energy Systems and Product Sales. The $70.6 million increase in cost of solar energy
systems and product sales was due to an increase in the sales of solar energy systems which have a lower cost
of sales, compared to products.
Sales and Marketing Expense. The $17.3 million increase in sales and marketing expense was primarily
attributable to the expansion of our direct-to-consumer channel, which resulted in increased hiring of sales and
marketing personnel.
General and Administrative Expense. The $7.9 million increase in general and administrative expenses
primarily relates to an increase in legal and professional services and hiring of personnel to support the growth of
our business and ability to operate as a public company.
Amortization of Intangible Assets. The $0.5 million increase in amortization expense resulted from the
amortization of intangible assets acquired from the CEE acquisition in April 2015.
Non-Operating Expenses
Year Ended
December 31,
2016
2015
(in thousands)
Change
$
%
Interest expense, net......................................................... $
Loss on early extinguishment of debt................................
Other expenses (income), net...........................................
Total interest and other expenses, net......................... $
53,244 $
—
(840)
52,404 $
33,236 $
431
1,338
35,005 $
20,008
(431)
(2,178)
17,399
60%
(100)%
(163)%
50%
borrowings entered into in late 2015 and in 2016.
The increase in interest expense, net of $20.0 million was related to additional
Other Expenses. The decrease in other expenses of $2.2 million primarily relates to losses incurred related
to an entity which was recorded on an equity method basis of accounting in 2015 that was consolidated in 2016,
offset by a $0.6 million gain due to the change in fair value of warrant derivatives which were issued to former
Series D and E preferred stockholders as an inducement to convert their shares of convertible preferred stock into
shares of common stock immediately prior to the closing of our initial public offering.
Income Tax Expense (Benefit)
Income tax expense (benefit)............................................
$
35,993
2016
2015
(in thousands)
$
(5,299) $
Year Ended
December 31,
Change
$
%
41,292
779%
60
The tax expense at the statutory rate of 34.0% for the year ended December 31, 2016 was reduced by the
allocation of the losses to noncontrolling interests and redeemable noncontrolling interests of 50.2% and
increased by other miscellaneous items of 2.8%. The decrease was offset by the tax impact of intercompany
transactions of 5.6%. The statutory rate tax of 34.0% for the year ended December 31, 2015 was reduced by the
allocation of losses to noncontrolling interests and redeemable noncontrolling interests of 29.5% and by other
miscellaneous items of 2.4%.
The majority of our tax expense relates to an increase in our deferred tax liabilities related to partnerships,
depreciation expense and capitalized indirect costs. Given our net operating loss carryforwards as of
December 31, 2016, we do not expect to pay income tax, including in connection with our 2016 income tax
provision, until our net operating losses are fully utilized. As of the year ended December 31, 2016, our federal
and state net operating loss carryforwards were $571.3 million and $524.9 million, respectively. If not utilized, the
federal net operating loss will begin to expire in the year 2028 and the state net operating losses will begin to
expire in the year 2024.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
Year Ended
December 31,
2016
2015
(in thousands)
Change
$
%
Net loss attributable to noncontrolling interests
and redeemable noncontrolling interests ....................... $ (394,988) $ (220,660) $ (174,328)
79%
The increase in net loss attributable to noncontrolling interests and redeemable noncontrolling interests was
primarily a result of the addition of three investment funds since December 31, 2015, as well as the HLBV method
used in determining the amount of net income or loss attributable to noncontrolling interests and redeemable
noncontrolling interests, which generally allocates more loss to the noncontrolling interest in the first several years
after fund formation.
Comparison of the Years Ended December 31, 2015 and 2014
Revenue
Year Ended
December 31,
2015
Operating leases ............................................................... $
Incentives ..........................................................................
Operating leases and incentives ..................................
Solar energy systems........................................................
Products ............................................................................
Solar energy systems and product sales .....................
86,332
31,672
118,004
50,191
136,411
186,602
Total revenue .......................................................... $ 304,606
2014
(in thousands)
63,962
$
20,044
84,006
23,687
90,864
114,551
$ 198,557
Change
$
%
$
22,370
11,628
33,998
26,504
45,547
72,051
$ 106,049
35%
58%
40%
112%
50%
63%
53%
Operating Leases and Incentives. The $22.4 million increase in operating lease revenue was primarily due
to both an increase in solar energy systems under Customer Agreements being placed in service in 2015 and due
to a full year of revenue recognized in 2015 for systems placed in service in 2014 versus only a portion
recognized in 2014. During 2015 we added a 47% increase in megawatt production capacity. However, operating
lease revenue increased by only 35% for the year ended December 31, 2015, compared to the year ended
December 31, 2014, due to offsets to revenue for customer promotions in 2015. Revenue from incentives
increased by $11.6 million primarily due to an increase in ITC revenue, which relates to solar energy systems in
61
lease pass-through funds being placed in service in the prior year as we recognize revenue from the monetization
of these ITCs annually over five years on each anniversary of a solar energy system’s permission to operate date.
Solar Energy Systems and Product Sales. The $26.5 million increase in revenue from solar energy systems
sales was primarily due to higher sales volume from overall growth following our increased investment in sales
and marketing. Product sales increased by $45.5 million compared to the prior period primarily due to an increase
in the volume of all products sold, including a $16.9 million increase in customer lead sales subsequent to the
CEE acquisition in April 2015.
Operating Expenses
Year Ended
December 31,
2015
2014
(in thousands)
Change
$
%
Cost of operating lease and incentives ............................. $ 111,784 $
168,751
Cost of solar energy systems and product sales ..............
145,477
Sales and marketing .........................................................
9,657
Research and development ..............................................
84,442
General and administrative expense.................................
3,695
Amortization of intangible assets ......................................
38,886
67,949
66,754
1,271
16,344
1,426
Total operating expenses ............................................. $ 523,806 $ 331,176 $ 192,630
72,898 $
100,802
78,723
8,386
68,098
2,269
53%
67%
85%
15%
24%
63%
58%
. The $38.9 million increase in cost of operating leases and
incentives was primarily due to the increase in solar energy systems placed in service in the period from
December 31, 2014 through December 31, 2015, plus a full year of costs recognized for systems placed in
service in 2014 versus only a partial year of such expenses related to the period in which the assets were in
service in 2014. This resulted in a $15.8 million increase in depreciation and amortization of solar energy system
equipment costs and initial direct costs, as well as an increase of $13.2 million in non-capitalizable costs,
associated with building and maintaining solar energy systems subject to Customer Agreements.
The cost of operating leases and incentive increased to 95% of operating lease and incentives revenue
during the year ended December 31, 2015, from 87% during the year ended December 31, 2014. This increase
was due to an increase in megawatts installed directly by us, rather than installed by a solar partner, as a result of
our increased internal sales and marketing efforts and our acquisition of MEC in February 2014. Leased systems
installed by us bear an allocation of costs, such as warehouse rent and utilities, information technology,
administrative and product planning costs, that are expensed during the construction and installation phase as
these costs do not meet the criteria for capitalization under ASC 360 Property, Plant, and Equipment. These costs
can fluctuate depending on the volume of megawatts installed directly by us for systems under an operating
lease, and are not necessarily proportional to the increase in revenue generated by our entire fleet of leased
systems. As such, the cost of operating leases and incentives as a percentage of operating lease and incentives
revenue can vary from period to period.
Cost of Solar Energy Systems and Product Sales. The $67.9 million increase in cost of solar energy
systems and product sales represents an increase in material and personnel costs associated with solar energy
systems sold directly to customers as well as solar panels, inverters and other solar-related products sold to
resellers, including $15.8 million of costs associated with customer lead sales subsequent to the CEE acquisition
in April 2015.
Sales and Marketing Expense. The $66.8 million increase in sales and marketing expense was attributable
to the expansion of our direct-to-consumer channel as well as our continued efforts to grow our business by
entering new markets, increasing hiring of sales and marketing personnel and internal lead generation through
advertising and other channels.
62
Research and Development. The $1.3 million increase in research and development expenses primarily
resulted from an increase in fees paid to external consultants in connection with ongoing development of our
pricing and quoting platforms.
General and Administrative Expense. The $16.3 million increase in general and administrative expenses
primarily related to hiring of personnel and increased consulting and legal fees as a result of our acquisition of
CEE in 2015 and to support the growth of our business.
Amortization of Intangible Assets. The $1.4 million increase in amortization expense resulted from the
amortization of intangible assets acquired from the CEE acquisition in April 2015.
Non-Operating Expenses
Year Ended
December 31,
2015
2014
(in thousands)
Change
$
%
Interest expense, net......................................................... $
Loss on early extinguishment of debt................................
Other expenses, net..........................................................
Total interest and other expenses, net......................... $
33,236 $
431
1,338
35,005 $
27,521 $
4,350
3,043
34,914 $
5,715
(3,919)
(1,705)
91
21%
(90)%
(56)%
0%
imputed interest on additional lease pass-through obligations entered into in 2015 and additional interest expense
related to additional borrowings entered into in 2015 and in late 2014.
The increase in interest expense, net of $5.7 million was related to an increase in
Other Expenses. The decrease in other expenses of $1.7 million primarily relates to the change in fair value
of warrant derivatives which were issued to former Series D and E preferred stockholders as an inducement to
convert their shares of convertible preferred stock into shares of common stock immediately prior to the closing of
our initial public offering, partially offset by an increase in losses related to an entity which was recorded on an
equity method basis of accounting.
Income Tax Benefit
Year Ended
December 31,
2015
2014
(in thousands)
Change
$
%
Income tax benefit............................................................. $
(5,299) $
(10,043) $
4,744
47%
The tax expense at the statutory rate of 34.0% for the year ended December 31, 2015 was reduced by the
allocation of the losses to noncontrolling interests and redeemable noncontrolling interests of 29.5% and by other
miscellaneous items of 2.4%. The statutory rate tax of 34.0% for the year ended December 31, 2014 was reduced
by the allocation of losses to noncontrolling interests and redeemable noncontrolling interests of 17.6%, by the tax
impact of intercompany transactions of 9.4% and by other miscellaneous items of 1.0%.
63
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
Year Ended
December 31,
2015
2014
(in thousands)
Change
$
%
Net loss attributable to noncontrolling interests
and redeemable noncontrolling interests ....................... $ (220,660) $
(86,638) $ (134,022)
155%
The increase in net loss attributable to noncontrolling interests and redeemable noncontrolling interests was
primarily a result of the addition of three investment funds since December 31, 2014, as well as the HLBV method
used in determining the amount of net loss attributable to noncontrolling interests and redeemable noncontrolling
interests, which generally allocates more loss to the noncontrolling interest in the first several years after fund
formation.
64
Quarterly Results of Operations
The following table represents our unaudited consolidated statements of operations for each of the quarters
indicated. Our consolidated statements of operations for each of these quarters have been prepared on a basis
consistent within our audited financial statements included elsewhere in this Annual Report on Form 10-K and, in
the opinion of management, include all adjustments necessary for the fair presentation of our consolidated results
of operations for these quarters. You should read this information together with our annual consolidated financial
statements and the related notes included elsewhere in this Annual Report on Form 10-K. Our quarterly results of
operations are not necessarily indicative of our results for any future period.
December 31,
2016
September 30,
2016
June 30,
2016
Three Months Ended
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Revenue:
Operating leases and incentives .................... $
Solar energy systems and product sales .......
Total revenue ..........................................
45,333 $
75,251
120,584
43,150 $ 45,394 $ 34,540 $
64,203
68,883 77,144
98,743
112,033 122,538
29,588 $
70,051
99,639
31,650 $ 34,458 $ 22,308
27,369
50,950 38,232
49,677
82,600 72,690
Operating expenses:
Cost of operating leases and incentives ........
Cost of solar energy systems and product
sales............................................................
Sales and marketing ......................................
Research and development ...........................
General and administrative ............................
Amortization of intangible assets ...................
Total operating expenses........................
Loss from operations.............................................
Interest expense, net.............................................
Loss on early extinguishment of debt....................
Other expenses (income), net...............................
Loss before income taxes .....................................
Income tax expense (benefit)................................
Net loss .................................................................
Net loss attributable to noncontrolling interests
and redeemable noncontrolling interests ...........
Net income (loss) attributable to common
stockholders ....................................................... $
Net income allocated to participating
securities .....................................................
Less: Deemed dividend to convertible
preferred stockholders ................................
Net income (loss) available to common
stockholders ....................................................... $
Net income (loss) per share available to
common shareholders........................................
Basic .............................................................. $
Diluted ............................................................ $
Weighted average shares used to compute
net income (loss) per share available to
common stockholders ........................................
Basic ..............................................................
42,380
40,770 38,608
38,100
34,617
28,723 27,067
21,377
63,005
35,685
2,905
24,184
1,052
169,211
(48,627 )
14,709
—
(380 )
(62,956 )
22,847
(85,803 )
2,458
1,051
57,512
57,264 61,600
43,188
40,192 43,716
2,463
2,373
23,248
21,331 23,614
1,052
1,051
163,066 170,962 165,563
(66,820 )
(51,033 ) (48,424 )
11,515
13,957 13,063
—
—
(532 )
30
(77,803 )
(65,032 ) (61,517 )
—
3,210
(77,803 )
(74,968 ) (64,727 )
—
42
9,936
62,329
41,193
2,638
22,973
1,051
164,801
(65,162 )
9,198
—
(67 )
(74,293 )
13
(74,306 )
2,240
1,051
46,468 34,624
45,382 33,976
2,492
21,486 19,677
1,051
145,350 118,887
(46,197 )
(62,750 )
8,433
8,475
431
—
1,019
87
(71,312 ) (56,080 )
(6,215 )
(72,215 ) (49,865 )
903
25,330
24,926
2,287
20,306
542
94,768
(45,091 )
7,130
—
299
(52,520 )
—
(52,520 )
(114,835 )
(91,846 ) (97,370 )
(90,937 )
(59,283 )
(69,447 ) (57,405 )
(34,525 )
29,032 $
16,878 $ 32,643 $ 13,134 $
(15,023 ) $
(2,768 ) $
7,540 $ (17,995 )
—
—
—
—
—
—
—
—
—
—
—
(7,540 )
(24,890 )
—
—
—
29,032 $
16,878 $ 32,643 $ 13,134 $
(15,023 ) $
(27,658 ) $
— $ (17,995 )
0.28 $
0.27 $
0.16 $
0.32 $
0.16 $
0.31 $
0.13 $
0.13 $
(0.15 ) $
(0.15 ) $
(0.41 ) $
(0.41 ) $
— $
— $
(0.23 )
(0.23 )
103,504
102,707 101,969 101,273
101,034
67,732 26,215
79,268
Diluted ............................................................
105,761
105,092 104,768 104,219
101,034
67,732 26,215
79,268
Liquidity and Capital Resources
As of December 31, 2016, we had cash of $206.4 million, which consisted of cash held in checking and
savings accounts with financial institutions. We finance our operations mainly through a variety of financing fund
arrangements that we have formed with fund investors, borrowings, cash generated from our sources of revenue
and more recently, proceeds from secured credit facilities agreements with a syndicate of banks for up to $340.0
million in committed facilities and $57.5 million secured, non-recourse loan arrangements. Our principal uses of
cash are funding our business, including the costs of acquisition and installation of solar energy systems,
satisfaction of our obligations under our debt instruments and other working capital requirements. As of December
31, 2016, we have a $244 million bank line of credit maturing in April 2018. Our business model requires
substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar
65
energy systems. The solar energy systems that are operational are expected to generate a positive return rate
over the term of the Customer Agreement, typically 20 years. However, in order to grow, we will continue to be
dependent on financing from outside parties. If financing is not available to us on acceptable terms if and when
needed, we may be required to reduce planned spending, which could have a material adverse effect on our
operations. While there can be no assurances, we anticipate raising additional required capital from new and
existing investors. We believe our cash, investment fund commitments and available borrowings as further
described below will be sufficient to meet our anticipated cash needs for at least the next 12 months. The
following table summarizes our cash flows for the periods indicated:
2016
Year Ended December 31,
2015
(in thousands)
2014
Consolidated cash flow data:
Net cash used in operating activities.............................................. $
Net cash used in investing activities ..............................................
Net cash provided by issuance of common stock related to initial
public offering (offering costs paid) and preferred stock, net ......
Net cash provided by other financing activities ..............................
Net increase in cash.................................................................. $
(150,580) $
(745,112)
(105,266) $
(627,489)
(7,928)
(463,968)
(437)
898,629
2,500 $
222,078
562,387
51,710 $
143,393
380,958
52,455
Operating Activities
During 2016, we used $150.5 million in net cash in operating activities. The driver of our operating cash
inflow consists of payments received from customers. During 2016, we had an increase in deferred revenue of
approximately $10.3 million relating to upfront lease payments received from customers and solar energy system
incentive rebate payments received from various state and local utilities. This increase was offset by our operating
cash outflows of $132.2 million from our net loss excluding non-cash and non-operating items. Changes in
accounts payable resulted in a cash outflow of $40.3 million. Changes in working capital, other than deferred
revenue and accounts payable, resulted in a cash inflow of $11.7 million.
During 2015, we used $105.3 million in net cash from operating activities. The primary driver of our
operating cash inflow consists of payments received from customers. During 2015, we had an increase in
deferred revenue of approximately $47.7 million relating to upfront lease payments received from customers and
solar energy system incentive rebate payments received from various state and local utilities. This increase was
offset by our operating cash outflows of $159.3 million from our net loss excluding non-cash and non-operating
items. Net changes in working capital, other than deferred revenue, resulted in an inflow of cash of $6.3 million.
During 2014, we used $7.9 million in net cash from operations. During 2014, we had an increase in deferred
revenue of approximately $97.4 million relating to upfront lease payments received from customers and solar
energy system incentive rebate payments received from various state and local utilities and prepayment for future
deliveries of SRECs. The increase generated from deferred revenue was offset by our operating cash outflows of
$103.6 million from our net loss excluding non-cash and non-operating items. Net changes in working capital,
other than deferred revenue, resulted in an outflow of cash of $1.7 million.
Investing Activities
During 2016, we used $745.1 million in cash in investing activities. Of this amount, we used $727.6 million to
acquire and install solar energy systems and components under our long-term Customer Agreements, $12.5
million for the acquisition of office equipment, leasehold improvements and furniture and $5.0 million for additional
purchase consideration for the acquisition of CEE.
During 2015, we used $627.5 million in cash in investing activities. Of this amount, we used $594.9 million to
acquire and install solar energy systems and components under our long-term Customer Agreements. We used
$19.6 million to acquire the CEE business. We used $13.0 million for the acquisition of vehicles, office equipment,
leasehold improvements and furniture.
66
During 2014, we used $464.0 million in cash in investing activities. Of this amount, we used $412.3 million to
acquire and install solar energy systems and components under our long-term Customer Agreements. We also
used $15.3 million for the acquisition of vehicles, office equipment, leasehold improvements and furniture, and
spent approximately $36.4 million in cash for the acquisitions of businesses, which included the backlog
purchased in connection with a new installer partner relationship, as well as the MEC acquisition.
Financing Activities
During 2016, we generated $898.2 million from financing activities. This was primarily driven by $550.0
million in net proceeds from fund investors, $312.6 million in proceeds from non-recourse debt, net of
repayments, $47.0 million in proceeds from recourse debt, net of repayments, and $9.1 million from state tax
credits, net of recapture.
During 2015, we generated $784.5 million from financing activities. This was primarily driven by $287.2
million in net proceeds from fund investors, $147.8 million in proceeds from recourse debt, net of repayments,
$147.6 million in proceeds from non-recourse debt, net of repayments and $222.1 million in proceeds from our
initial public offering, net of offering costs.
During 2014, we generated $524.4 million in cash from financing activities. This was primarily driven by
$311.7 million in net proceeds from fund investors, $143.4 million, net of transaction costs, from the issuance of
convertible preferred stock, $47.5 million in proceeds from non-recourse debt, net of repayments and $25.2
million in proceeds from recourse debt, net of repayments.
Debt, Equity, and Financing Fund Commitments
Debt Instruments
For a discussion of the terms and conditions of debt instruments and changes thereof in the period, refer to
Note 11, Cash Equity Financing and Note 12, Indebtedness, to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
Equity Instruments
Conversion of preferred stock and issuance of additional shares and warrants. In July 2015, we entered into
a letter of intent to issue 1,250,764 warrants to purchase common stock subject to contingencies being met to the
former Series D and E preferred stockholders as an inducement to convert their shares of convertible preferred
stock into shares of common stock immediately prior to the closing of our initial public offering and waive any
potential anti-dilution adjustments resulting from the issuance of shares of common stock in our initial public
offering. The warrants were issued on September 30, 2015. The warrants are exercisable for three years from the
date of grant and have an exercise price of $22.50 per share. The warrants are recorded at fair value as
derivative liabilities and reported in other liabilities in the Company’s consolidated balance sheet.
Immediately prior to closing of our initial public offering, all 54,840,767 shares of our outstanding preferred
stock were automatically converted into shares of common stock.
Initial public offering. On August 10, 2015, we closed our initial public offering in which 17,900,000 shares of
common stock were sold at a public offering price of $14.00 per share, resulting in net proceeds of approximately
$220.9 million, after deducting underwriting discounts and commissions and $7.9 million in offering expenses
payable by us, and excluding the proceeds received by the selling stockholders who sold an aggregate of
417,732 shares of the total 17,900,000 shares sold in the initial public offering.
Investment Fund Commitments
As of December 31, 2016, we had undrawn committed capital of approximately $359.4 million which may
only be used to purchase and install solar energy systems. We intend to establish new investment funds in the
future, and we may also use debt, equity or other financing strategies to finance our business.
67
For a discussion of our cash equity financing, refer to Note 11, Cash Equity Financing, to our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K.
Contractual Obligations and Other Commitments
The following table summarizes our contractual obligations as of December 31, 2016:
Less Than
1 Year
1 to 3
Years
Payments Due by Period
3 to 5
Years
(in thousands)
More Than
5 Years
Total
Contractual Obligations:
Debt obligations (including future interest) ............. $
Distributions payable to noncontrolling interests
and redeemable noncontrolling interests (1) .........
Capital lease obligations (including accrued
interest)................................................................
Operating lease obligations ....................................
Total contractual obligations .............................. $
59,884 $ 388,680 $ 475,559 $ 129,333 $1,053,456
10,654
—
—
—
10,654
10,814 12,671
9,651 14,275
24,556
1,031
32,318
5,849
91,003 $ 415,626 $ 482,439 $ 131,916 $1,120,984
40
2,543
(1) The foregoing table does not include the amounts we could be required to expend beginning in 2018 under
our redemption obligations discussed above.
Off-Balance Sheet Arrangements
We include in our consolidated financial statements all assets and liabilities and results of operations of
investment fund arrangements that we have entered into. We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statement included
elsewhere in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to certain market risks in the ordinary course of our business. Our primary exposure
includes changes in interest rates because certain borrowings bear interest at floating rates based on LIBOR plus
a specified margin. We sometimes manage our interest rate exposure on floating-rate debt by entering into
derivative instruments to hedge all or a portion of our interest rate exposure in certain debt facilities. We do not
enter into any derivative instruments for trading or speculative purposes. Changes in economic conditions could
result in higher interest rates, thereby increasing our interest expense and operating expenses and reducing
funds available for capital investments, operations and other purposes. A hypothetical 10% increase in our
interest rates on our variable rate debt facilities would have increased our interest expense by $1.5 million and
$0.6 million for the year ended December 31, 2016 and 2015, respectively.
68
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .................................................................................. 70
Consolidated Balance Sheets ............................................................................................................................... 71
Consolidated Statements of Operations................................................................................................................ 73
Consolidated Statements of Comprehensive Income (Loss) ................................................................................ 74
Consolidated Statements of Redeemable Noncontrolling Interests and Stockholders’ Equity ............................. 75
Consolidated Statements of Cash Flows .............................................................................................................. 76
Notes to Consolidated Financial Statements ........................................................................................................ 77
69
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Sunrun Inc.
We have audited the accompanying consolidated balance sheets of Sunrun Inc. as of December 31, 2016
and 2015, and the related consolidated statements of operations, comprehensive income (loss), redeemable
noncontrolling interests and equity, and cash flows for each of the three years in the period ended December 31,
2016. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Sunrun Inc. at December 31, 2016 and 2015, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Francisco, California
March 8, 2017
70
Sunrun Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Par Values)
Assets
Current assets:
Cash......................................................................................................................................... $
Restricted cash ........................................................................................................................
Accounts receivable (net of allowances for doubtful accounts of $1,166 and $1,641
as of December 31, 2016 and 2015, respectively) ...............................................................
State tax credits receivable .......................................................................................................
Inventories.................................................................................................................................
Prepaid expenses and other current assets..............................................................................
Total current assets ..........................................................................................................
Restricted cash .........................................................................................................................
Solar energy systems, net.........................................................................................................
Property and equipment, net.....................................................................................................
Intangible assets, net ................................................................................................................
Goodwill ....................................................................................................................................
Prepaid tax asset ......................................................................................................................
Other assets..............................................................................................................................
Total assets (1).................................................................................................................... $
Liabilities and total equity
Current liabilities:
Accounts payable...................................................................................................................... $
Distributions payable to noncontrolling interests and redeemable noncontrolling interests.....
.
Accrued expenses and other liabilities......................................................................................
Deferred revenue, current portion .............................................................................................
Deferred grants, current portion ................................................................................................
Capital lease obligations, current portion ..................................................................................
Long-term non-recourse debt, current portion ..........................................................................
Lease pass-through financing obligation, current portion .........................................................
Total current liabilities......................................................................................................
Deferred revenue, net of current portion ...................................................................................
Deferred grants, net of current portion ......................................................................................
Capital lease obligations, net of current portion ........................................................................
Recourse debt...........................................................................................................................
Long-term non-recourse debt, net of current portion ................................................................
Lease pass-through financing obligation, net of current portion ...............................................
Other liabilities...........................................................................................................................
Deferred tax liabilities................................................................................................................
Total liabilities (1) ..............................................................................................................
Commitments and contingencies (Note 22) ....................................................................................
Redeemable noncontrolling interests ..............................................................................................
Stockholders’ equity:
Preferred stock, $0.0001 par value—authorized, 200,000 shares as of
December 31, 2016 and 2015; no shares issued and outstanding
as of December 31, 2016 and 2015.......................................................................................
Common stock, $0.0001 par value—authorized, 2,000,000 shares as of
December 31, 2016 and 2015; issued and outstanding, 104,321 and
101,282 shares as of December 31, 2016 and 2015, respectively ........................................
Additional paid-in capital ...........................................................................................................
Accumulated other comprehensive income (loss) ....................................................................
Retained earnings (accumulated deficit)...................................................................................
Total stockholders’ equity ...............................................................................................
Noncontrolling interests.............................................................................................................
Total equity ........................................................................................................................
Total liabilities, redeemable noncontrolling interests and total equity ....................... $
As of December 31,
2016
2015
206,364
11,882
$
$
$
60,258
13,713
67,326
9,802
369,345
6,117
2,629,366
48,471
18,499
87,543
378,541
34,936
3,572,818
66,018
10,654
59,261
70,849
8,011
10,015
14,153
5,823
244,784
583,401
226,893
12,965
244,000
639,870
137,958
5,457
415,397
2,510,725
203,864
9,203
60,275
9,198
71,258
5,917
359,715
8,094
1,992,021
44,866
22,705
87,543
190,146
29,502
2,734,592
104,133
8,144
49,146
59,726
13,949
8,951
4,722
3,710
252,481
559,066
220,784
15,042
197,000
333,042
153,188
7,144
190,146
1,927,893
137,907
147,139
—
—
10
668,076
437
4,438
672,961
251,225
924,186
3,572,818
$
10
642,229
(921)
(87,249)
554,069
105,491
659,560
2,734,592
71
(1)
The Company’s consolidated assets as of December 31, 2016 and 2015 include $2,065,232 and $1,363,615, respectively, in assets of
variable interest entities, or “VIEs”, that can only be used to settle obligations of the VIEs. Solar energy systems, net, as of
December 31, 2016 and 2015 were $1,920,330 and $1,305,420, respectively; cash as of December 31, 2016 and 2015 were $120,728
and $44,407, respectively; restricted cash as of December 31, 2016 and 2015 were $1,680 and $757, respectively; accounts
receivable, net as of December 31, 2016 and 2015 were $20,771 and $12,965, respectively; prepaid expenses and other current
assets as of December 31, 2016 and 2015 were $242 and $66, respectively and other assets as of December 31, 2016 and 2015 were
$1,481 and $0, respectively. The Company’s consolidated liabilities as of December 31, 2016 and 2015 include $617,011 and
$540,464, respectively, in liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accounts
payable as of December 31, 2016 and 2015 of $14,873 and $11,025, respectively; distributions payable to noncontrolling interests and
redeemable noncontrolling interests as of December 31, 2016 and 2015 of $10,654 and $8,063, respectively; accrued expenses and
other liabilities as of December 31, 2016 and 2015 of $782 and $175, respectively; deferred revenue as of December 31, 2016 and
2015 of $422,685 and $374,736, respectively; deferred grants as of December 31, 2016 and 2015 of $109,034 and $115,726,
respectively; and long-term non-recourse debt as of December 31, 2016 and 2015 of $58,983 and $30,739, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
72
Sunrun Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
Year Ended December 31,
2015
2014
2016
Revenue:
Operating leases and incentives ............................................... $
Solar energy systems and product sales...................................
Total revenue........................................................................
$
168,417
285,481
453,898
$
118,004
186,602
304,606
84,006
114,551
198,557
Operating expenses:
Cost of operating leases and incentives....................................
Cost of solar energy systems and product sales.......................
Sales and marketing..................................................................
Research and development.......................................................
General and administrative........................................................
Amortization of intangible assets...............................................
Total operating expenses .....................................................
Loss from operations ......................................................................
Interest expense, net ......................................................................
Loss on early extinguishment of debt .............................................
Other expenses (income), net ........................................................
Loss before income taxes...............................................................
Income tax expense (benefit) .........................................................
Net loss...........................................................................................
Net loss attributable to noncontrolling interests and
redeemable noncontrolling interests............................................
Net income (loss) attributable to common stockholders................. $
Less: Deemed dividend to convertible preferred stockholders..
Net income (loss) available to common stockholders .................... $
159,858
239,381
162,781
10,199
92,377
4,206
668,802
(214,904)
53,244
—
(840)
(267,308)
35,993
(303,301)
111,784
168,751
145,477
9,657
84,442
3,695
523,806
(219,200)
33,236
431
1,338
(254,205)
(5,299)
(248,906)
(394,988)
91,687
—
91,687
$
$
(220,660)
(28,246)
(24,890)
(53,136)
$
$
72,898
100,802
78,723
8,386
68,098
2,269
331,176
(132,619)
27,521
4,350
3,043
(167,533)
(10,043)
(157,490)
(86,638)
(70,852)
—
(70,852)
Net income (loss) per share available to common shareholders ...
Basic.......................................................................................... $
Diluted ....................................................................................... $
Weighted average shares used to compute net income (loss)
per share available to common stockholders ..............................
Basic..........................................................................................
Diluted .......................................................................................
0.90
0.87
$
$
(0.96)
(0.96)
$
$
(3.11)
(3.11)
102,367
104,964
55,091
55,091
22,795
22,795
73
Sunrun Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
Net income (loss) attributable to common stockholders ........... $
Other comprehensive income (loss):
Unrealized gain (loss) on derivatives, net of income taxes..
Less: Interest expense on derivatives recognized into
earnings, net of income taxes...........................................
Comprehensive income (loss) .................................................. $
Year Ended December 31,
2015
2014
2016
91,687
$
(28,246)
$
(70,852)
335
(2,442)
—
(1,023)
93,045
$
(1,521)
(29,167)
$
—
(70,852)
The accompanying notes are an integral part of these consolidated financial statements.
74
7
5
Balance - January 1, 2014.............................................. $
Conversion of Preferred Stock .......................................
Issuance of Series E convertible preferred stock,
net of issuance costs of $7,108 ...................................
Issuance of shares due to business acquisition .............
Exercise of stock options ................................................
Stock-based compensation ............................................
Contributions from noncontrolling interests and
redeemable noncontrolling interests............................
Distributions to noncontrolling interests
and redeemable noncontrolling interests.....................
Net loss...........................................................................
Balance - December 31, 2014 ........................................ $
Exercise of stock options ................................................
Issuance of restricted stock units, net of tax
withholdings .................................................................
Stock-based compensation ............................................
Contributions from noncontrolling interests and
redeemable noncontrolling interests............................
Distributions to noncontrolling interests
and redeemable noncontrolling interests.....................
Issuance of shares due to business acquisition .............
Inducement shares issued to Series D
and E preferred stockholders ......................................
Deemed dividend to Series D and E
convertible preferred stockholders ..............................
Conversion of convertible preferred
stock to common stock ................................................
Issuance of common stock in connection with
underwritten public offering, net of issuance costs......
Net loss...........................................................................
Other comprehensive loss, net of taxes .........................
Balance - December 31, 2015 ........................................ $
Exercise of stock options ................................................
Issuance of restricted stock units, net of tax
withholdings .................................................................
Shares issued in connection with
the Employee Stock Purchase Plan ............................
Stock-based compensation ............................................
Contributions from noncontrolling interests and
redeemable noncontrolling interests............................
Distributions to noncontrolling interests
and redeemable noncontrolling interests.....................
Offering costs in connection with underwritten
public offering ..............................................................
Issuance of shares due to business acquisition in 2015
Net income (loss)............................................................
Other comprehensive income, net of taxes ....................
Balance - December 31, 2016 ........................................ $
Sunrun Inc.
Consolidated Statements of Redeemable Noncontrolling Interests and Stockholders’ Equity
(In Thousands)
Redeemable
Noncontrolling
Interests
109,665
—
Preferred Stock
Common Stock
Shares
43,998
Amount
4
$
—
(36 )
Shares
10,412
36
Amount
1
$
—
Additional
Paid-In
Capital
$
153,129
—
Accumulated
Other
Comprehensive
Income (Loss)
—
—
$
Retained
Earnings
11,849
$
—
Total
Shareholders'
Equity
Noncontrolling
Interests
Total
Equity
$
164,983
—
$
57,728
—
$
222,711
—
—
—
—
—
10,879
—
—
—
88,837
—
(11,619 )
(50,935 )
135,948
—
—
—
54,841
—
$
1
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
$
—
12,763
1,038
—
—
—
—
24,249
1,210
182
—
—
—
1,650
1,668
—
—
—
—
—
—
—
—
(54,841 )
(5 )
54,841
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17,482
—
—
101,282
1,852
$
422
515
—
—
—
—
250
—
—
104,321
$
—
—
128,466
(12,924 )
—
—
—
—
—
(104,351 )
—
147,139
—
—
—
—
123,023
(13,605 )
—
—
(118,650 )
—
137,907
—
1
—
—
—
—
—
2
—
—
—
—
—
—
1
—
5
2
—
—
10
—
—
—
—
—
—
—
—
—
—
10
$
$
143,392
75,280
2,707
9,352
—
—
—
383,860
3,548
$
(103 )
16,002
—
—
19,148
23,348
(24,890 )
—
221,316
—
—
642,229
5,416
$
(381 )
2,432
18,817
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(70,852 )
(59,003 ) $
—
$
—
—
—
—
—
—
—
—
—
(921 )
(921 ) $
—
—
(28,246 )
—
(87,249 ) $
—
—
—
—
—
—
—
—
—
—
—
143,393
75,281
2,707
9,352
—
—
—
143,393
75,281
2,707
9,352
—
80,653
80,653
—
(70,852 )
324,864
$
3,548
(103 )
16,002
(10,923 )
(35,703 )
91,755
$
—
(10,923 )
(106,555 )
416,619
3,548
—
(103 )
16,002
—
147,238
147,238
—
19,148
23,349
(24,890 )
—
221,318
(28,246 )
(921 )
$
554,069
5,416
(17,193 )
—
(17,193 )
19,148
—
—
—
—
(116,309 )
—
105,491
—
$
23,349
(24,890 )
—
221,318
(144,555 )
(921 )
659,560
5,416
(381 )
—
(381 )
2,432
18,817
—
—
—
—
2,432
18,817
450,519
450,519
(28,447 )
(28,447 )
(437 )
—
—
—
668,076
$
$
—
—
—
1,358
437
$
—
—
91,687
—
4,438
$
(437 )
—
91,687
1,358
672,961
$
—
—
(276,338 )
—
251,225
$
(437 )
—
(184,651 )
1,358
924,186
The accompanying notes are an integral part of these consolidated financial statements
Sunrun Inc.
Consolidated Statements of Cash Flows
(In Thousands)
2016
Year Ended December 31,
2015
2014
(303,301 ) $
(248,906 ) $
(157,490 )
Operating activities:
Net loss........................................................................................................................................ $
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash losses, net .............................................................................................................
Depreciation and amortization, net of amortization of deferred grants.................................
Bad debt expense.................................................................................................................
Interest on lease pass-through financing obligations ...........................................................
Noncash tax expense (benefit).............................................................................................
Noncash interest expense ....................................................................................................
Stock-based compensation expense....................................................................................
Reduction in lease pass-through financing obligations ........................................................
Changes in operating assets and liabilities:
Accounts receivable ......................................................................................................
Inventories .....................................................................................................................
Prepaid and other assets...............................................................................................
Accounts payable ..........................................................................................................
Accrued expenses and other liabilities ..........................................................................
Deferred revenue...........................................................................................................
Net cash used in operating activities ......................................................................
Investing activities:
Payments for the costs of solar energy systems, leased and to be leased.................................
Purchases of property and equipment.........................................................................................
Business acquisition, net of cash acquired..................................................................................
Net cash used in investing activities.....................................................................................
Financing activities:
Proceeds from state tax credits, net of recapture........................................................................
Proceeds from recourse debt ......................................................................................................
Repayment of recourse debt .......................................................................................................
Proceeds from non-recourse debt ...............................................................................................
Repayment of non-recourse debt ................................................................................................
Payment of debt fees...................................................................................................................
Proceeds from issuance of convertible preferred stock, net of issuance costs ...........................
Proceeds from lease pass-through financing obligations, net .....................................................
Repayment of lease pass-through financing obligations .............................................................
Contributions received from noncontrolling interests and redeemable
noncontrolling interests.............................................................................................................
Distributions paid to noncontrolling interests and redeemable noncontrolling interests ..............
Acquisition of noncontrolling interests .........................................................................................
Proceeds from exercises of stock options, net of withholding taxes on restricted stock
units and issuance of shares in connection with the Employee Stock Purchase Plan .............
Proceeds received, net and (offering costs paid) related to initial public offering........................
Payment of capital lease obligations ...........................................................................................
Change in restricted cash............................................................................................................
Net cash provided by financing activities..............................................................................
3,880
104,105
1,355
12,081
35,993
13,441
18,723
(18,551 )
674
4,042
(4,799)
(40,336 )
11,819
10,294
(150,580 )
(727,568 )
(12,544 )
(5,000 )
(745,112 )
9,081
458,400
(411,400 )
335,666
(23,076 )
(13,741 )
—
16,047
—
573,542
(39,542 )
—
7,364
(437 )
(12,759 )
(953 )
898,192
3,516
71,373
1,998
11,959
(5,299 )
6,997
15,823
(16,780 )
(15,517 )
(47,344 )
(884 )
50,946
19,168
47,684
(105,266 )
(594,887 )
(13,027 )
(19,575 )
(627,489 )
4,685
495,985
(348,224 )
159,400
(11,774 )
(14,798 )
—
129,121
(88,918)
275,704
(28,737 )
—
3,548
222,078
(4,854 )
(8,751 )
784,465
4,350
49,541
546
10,204
(10,043 )
2,384
9,218
(12,323 )
(14,075 )
(3,788 )
(1,920 )
11,063
7,010
97,395
(7,928 )
(412,267 )
(15,317 )
(36,384 )
(463,968 )
1,579
49,224
(24,000 )
143,526
(96,054 )
(7,939 )
143,393
174,159
—
169,490
(31,967 )
(21 )
2,707
—
(1,181 )
1,435
524,351
52,455
99,699
152,154
Net increase in cash ....................................................................................................................
Cash, beginning of period............................................................................................................
Cash, end of period ..................................................................................................................... $
2,500
203,864
206,364 $
51,710
152,154
203,864 $
Supplemental disclosures of cash flow information
Cash paid for interest .................................................................................................................. $
26,191 $
11,954 $
11,101
Supplemental disclosures of noncash investing and financing activities
Costs of solar energy systems and property and equipment included in accounts
payable and accrued expenses................................................................................................ $
Distributions payable to noncontrolling interests and redeemable
noncontrolling interests............................................................................................................. $
18,547
10,654
$
$
Vehicles acquired under capital leases ....................................................................................... $
12,961 $
Noncash purchase consideration on acquisition of business ...................................................... $
Deemed dividend on Series D and E preferred shares ............................................................... $
Offering costs prepaid in prior year ............................................................................................. $
— $
— $
— $
15,850
8,144
$
$
21,556 $
18,718 $
24,890 $
760 $
14,074
6,764
5,666
76,964
—
—
The accompanying notes are an integral part of these consolidated financial statements.
76
Sunrun Inc.
Notes to Consolidated Financial Statements
Note 1. Organization
Sunrun Inc. (“Sunrun” or the “Company”) was originally formed in 2007 as a California limited liability
company, and was converted into a Delaware corporation in 2008. The Company is engaged in the design,
development, installation, sale, ownership and maintenance of residential solar energy systems (“Projects”) in the
United States.
Sunrun acquires customers directly and through relationships with various solar and strategic partners
(“Partners”). The Projects are constructed either by Sunrun or by Sunrun’s Partners and are owned by the
Company. Sunrun’s customers enter into a power purchase agreement (“PPA”) or a lease (each, a “Customer
Agreement”) which typically has a term of 20 years. Sunrun monitors, maintains and insures the Projects. As a
result of the acquisition of the residential sales and installation business of Mainstream Energy Corporation, its
fulfillment business AEE Solar and its racking business SnapNrack (collectively, “MEC”) completed in February
2014, the Company also sells solar energy systems and products, such as panels and racking, to customers.
The Company has formed various subsidiaries (“Funds”) to finance the development of Projects. These
Funds, structured as limited liability companies, obtain financing from outside investors and purchase or lease
Projects from Sunrun under master purchase or master lease agreements. The Company currently utilizes three
legal structures in its investment Funds, which are referred to as: (i) lease pass-throughs, (ii) partnership-flips and
(iii) joint venture (“JV”) inverted leases.
Sunrun acquired Clean Energy Experts, LLC (“CEE”), a consumer demand and solar lead generation
company, in April 2015, to support the growth of the business, including reducing costs of obtaining customer
leads externally. As a result of the acquisition, the Company also sells a portion of solar leads generated to
customers.
The Company completed its initial public offering in August 2015 and its common stock is listed on the
NASDAQ Global Select Market under the symbol “RUN”.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) and reflect the accounts and operations of the Company and its
subsidiaries, including Funds, in which the Company has a controlling financial interest. The typical condition for a
controlling financial interest ownership is holding a majority of the voting interests of an entity. However, a
controlling financial interest may also exist in entities, such as variable interest entities (“VIEs”), through
arrangements that do not involve controlling financial interests. In accordance with the provisions of Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 810 (“ASC 810”) Consolidation,
the Company consolidates any VIE of which it is the primary beneficiary. The primary beneficiary, as defined in
ASC 810, is the party that has (1) the power to direct the activities of a VIE that most significantly impact the VIE’s
economic performance and (2) the obligation to absorb the losses of the VIE or the right to receive benefits from
the VIE that could potentially be significant to the VIE. The Company evaluates its relationships with its VIEs on
an ongoing basis to determine whether it continues to be the primary beneficiary. The consolidated financial
statements reflect the assets and liabilities of VIEs that are consolidated. All intercompany transactions and
balances have been eliminated in consolidation.
77
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation. In addition,
during 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-03, Interest—Imputation of
Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15, Interest—
Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs
Associated with Line-of-Credit Arrangement. The impact of the Company’s adoption of the ASUs on the prior
period consolidated balance sheet was as follows (in thousands):
As Previously Reported Adoption of ASU As Reclassified
December 31, 2015
Prepaid expenses and other
current assets .......................................... $
Other assets ...............................................
Long-term non-recourse debt,
current portion .........................................
Recourse debt ............................................
Long-term non-recourse debt,
net of current portion ...............................
Use of Estimates
6,696 $
32,277
5,408
194,975
(779) $
(2,775)
(686)
2,025
5,917
29,502
4,722
197,000
337,935
(4,893)
333,042
The preparation of the consolidated financial statements requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
The Company regularly makes significant estimates and assumptions, including, but not limited to, the estimates
that affect the collectability of accounts receivable, the valuation of inventories, the useful lives of solar energy
systems, the useful lives of property and equipment, the valuation and useful lives of intangible assets, the fair
value of assets acquired and liabilities assumed in business combinations, the effective interest rate used to
amortize lease pass-through financing obligations, the fair value used to value solar energy systems, the
valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax
assets, the fair value of debt instruments disclosed and the redemption value of redeemable noncontrolling
interests. The Company bases its estimates on historical experience and on various other assumptions believed
to be reasonable. Actual results may differ from such estimates.
Segment Information
The Company has one operating segment with one business activity, providing solar energy services and
products to customers. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer,
who manages operations on a consolidated basis for purposes of allocating resources. When evaluating
performance and allocating resources, the CODM reviews financial information presented on a consolidated
basis.
Revenues from external customers (including, but not limited to homeowners) for each group of similar
products and services are as follows (in thousands):
Year Ended December 31,
2015
2014
2016
Operating leases ............................................................................ $
Incentives .......................................................................................
Operating leases and incentives ...............................................
Solar energy systems.....................................................................
Products .........................................................................................
Solar energy systems and product sales ..................................
Total revenue ....................................................................... $
125,197 $
43,220
168,417
127,727
157,754
285,481
453,898 $
86,332
31,672
118,004
50,191
136,411
186,602
304,606
$
$
63,962
20,044
84,006
23,687
90,864
114,551
198,557
78
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Cash
Cash consists of bank deposits held in checking and savings accounts. The Company considers all highly
liquid investments purchased with an original maturity of three months or less to be cash equivalents. The
Company has exposure to credit risk to the extent cash balances exceed amounts covered by federal deposit
insurance. The Company believes that its credit risk is not significant.
Restricted Cash
Restricted cash represents amounts related to replacement of solar energy system components and
obligations under certain financing transactions.
Accounts Receivable
Accounts receivable consist of amounts due from customers as well as state and utility rebates due from
government agencies and utility companies. Under arrangements with customers, the customers typically assign
incentive rebates to the Company.
Accounts receivable are recorded at net realizable value. The Company maintains allowances for the
applicable portion of receivables when collection becomes doubtful. The Company estimates anticipated losses
from doubtful accounts based upon the expected collectability of all accounts receivables, which takes into
account the number of days past due, collection history, identification of specific customer exposure, and current
economic trends. Once a receivable is deemed to be uncollectible, it is written off. In 2016, 2015 and 2014, the
Company recorded provision for bad debt expense of $1.4 million, $2.0 million and $0.5 million, respectively, and
wrote-off uncollectible receivables of $1.8 million, $1.1 million and $0.1 million, respectively.
Accounts receivable, net consists of the following (in thousands):
Customer receivables ..................................................................................... $
Customer deposits ..........................................................................................
Other receivables ............................................................................................
Rebates receivable .........................................................................................
Allowance for doubtful accounts .....................................................................
Total ........................................................................................................... $
50,811 $
5,793
856
3,964
(1,166)
60,258 $
46,169
10,150
4,376
1,221
(1,641)
60,275
December 31,
2016
2015
State Tax Credits Receivable
State tax credits receivable are recognized upon submission of the state income tax return.
Inventories
Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventories
consist of raw materials such as photovoltaic panels, inverters and mounting hardware as well as miscellaneous
electrical components that are sold as-is by the distribution operations and used in installations and work-in-
process. Work-in-process primarily relates to solar energy systems that will be sold to customers, which are
partially installed and have yet to pass inspection by the responsible city or utility department. For solar energy
systems where the Company performs the installation, the Company commences transferring component parts
from inventories to construction-in-progress, a component of solar energy systems, once a lease contract with a
lease customer has been executed and the component parts have been assigned to a specific project. Additional
costs incurred including labor and overhead are recorded within construction in progress.
79
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
The Company periodically reviews inventories for unusable and obsolete items based on assumptions about
future demand and market conditions. Based on this evaluation, provisions are made to write inventories down to
their market value.
Solar Energy Systems, net
The Company records solar energy systems leased to customers and solar energy systems that are under
installation as solar energy systems, net on its consolidated balance sheet. Solar energy systems, net is
comprised of system equipment costs and initial direct costs related to solar energy systems, less accumulated
depreciation and amortization. Depreciation on solar energy systems is calculated on a straight-line basis over the
estimated useful lives of the systems of 35 years. Prior to the fourth quarter of 2016, the Company calculated
depreciation on solar energy systems on a straight-line basis to their estimated residual values over the estimated
useful lives of systems, which was expected to be 20 years. The Company revised the estimated useful life of
solar energy systems in the fourth quarter of 2016, as the Company reviewed its assumptions and concluded that
customers are more likely to renew their lease rather than purchase the solar energy system at the end of the
lease term. The impact of the change in estimate was immaterial for current and future periods. The Company
periodically reviews its estimated useful life and recognizes changes in estimates by prospectively adjusting
depreciation expense. Inverters are depreciated over their estimated useful life of 10 years.
Solar energy systems under installation will be depreciated as solar energy systems leased to customers
when the respective systems are completed and interconnected.
Initial direct costs from the origination of Customer Agreements are capitalized and amortized over the initial
term of the related Customer Agreement and are included within solar energy systems, net in the consolidated
balance sheets. Amortization of these costs is recorded in cost of operating leases and incentives in the
accompanying consolidated statements of operations.
Property and Equipment, net
Property and equipment, net consists of leasehold improvements, furniture, computer hardware and
software, machinery and equipment and automobiles. All property and equipment are stated at historical cost net
of accumulated depreciation. Repairs and maintenance are expensed as incurred.
Property and equipment is depreciated on a straight-line basis over the following periods:
Leasehold improvements.............. Lesser of estimated useful life of the asset or lease term, which is typically 2 to
6 years
Furniture ....................................... 5 years
Computer hardware and software 3 years
Machinery and equipment ............ Lesser of 5 years or lease term
AAutomobiles .................................. Lease term
Capitalization of Software Costs
For costs incurred in the development of internal use software, the Company capitalizes costs incurred
during the application development stage. Costs related to preliminary project activities and post implementation
activities are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated
useful life. We capitalized additional costs of $4.9 million, $8.3 million and $7.3 million in 2016, 2015 and 2014,
respectively, associated with our software, including BrightPath.
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Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Intangible Assets, net
Finite-lived intangible assets are initially recorded at fair value and presented net of accumulated
amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives as follows:
Customer relationships ................. 6-10 years
Developed technology .................. 5 years
Trade names................................. 5-8 years
Impairment of Long-Lived Assets
The carrying amounts of the Company’s long-lived assets, including solar energy systems and intangible
assets subject to depreciation and amortization, are periodically reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the
useful life is shorter than originally estimated. Factors that are considered in deciding when to perform an
impairment review would include significant negative industry or economic trends and significant changes or
planned changes in the use of the assets. Recoverability of these assets is measured by comparison of the
carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its
remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the
difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than
originally estimated, the Company amortizes the remaining carrying value over the new shorter useful life. No
impairment of long-lived assets has been recorded for the years ended December 31, 2016, 2015 and 2014.
Business Combinations
Acquisitions of entities that meet the definition of a business are accounted for as business combinations in
accordance with ASC 805, Business Combinations. The Company records assets acquired and liabilities
assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over those
fair values is recorded as goodwill. Acquisition-related expenses are expensed as incurred.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities
assumed of MEC in February 2014 and CEE in April 2015. Goodwill is reviewed for impairment at least annually
or whenever events or changes in circumstances indicate that the carrying amount may be impaired. The
Company has determined that it operates as one reporting unit and the Company’s goodwill is recorded at the
enterprise level. The Company performs its annual impairment test of goodwill on October 1 of each fiscal year or
whenever events or circumstances change or occur that would indicate that goodwill might be impaired. When
assessing goodwill for impairment, the Company uses qualitative and if necessary, quantitative methods in
accordance with FASB ASC Topic 350, Goodwill. The Company also considers its enterprise value and if
necessary, discounted cash flow model, which involves assumptions and estimates, including the Company’s
future financial performance, weighted average cost of capital and interpretation of currently enacted tax laws.
Circumstances that could indicate impairment and require the Company to perform a quantitative
impairment test include a significant decline in the Company’s financial results, a significant decline in the
Company’s enterprise value relative to its net book value, an unanticipated change in competition or the
Company’s market share and a significant change in the Company’s strategic plans.
Deferred Revenue
Deferred revenue consists of amounts for which the criteria for revenue recognition have not yet been met
and includes a) amounts that are collected from customers, including upfront deposits and lease prepayments;
b) rebates and incentives received and receivables from utility companies and various local and state government
agencies; c) amounts related to investment tax credits (“ITC”) that the Company monetized in connection with its
lease-pass through financing obligations; and d) amounts received related to the sales of solar renewable energy
credits (“SRECs”).
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Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Deferred revenue consists of the following (in thousands):
Customer payments ........................................................................................ $
Rebates and incentives ...................................................................................
ITCs.................................................................................................................
SRECs.............................................................................................................
Total............................................................................................................ $
400,233 $
110,576
121,004
22,437
654,250 $
370,754
102,827
126,853
18,358
618,792
December 31,
2016
2015
Deferred Grants
Deferred grants consist of U.S. Treasury grants and state tax credits. The Company applied for a renewable
energy technologies income tax credit offered by one of the states in the form of a cash payment and deferred the
tax credit as a grant on the consolidated balance sheets. The Company records the grants as deferred grants and
recognizes the benefit on a straight-line basis over the estimated depreciable life of the associated assets as a
reduction in cost of operating leases and incentives. As described in the Solar Energy Systems, net section
above, the estimated depreciable life of the associated assets was revised from 20 to 35 years.
Warranty Accrual
The Company accrues warranty costs when revenue is recognized for solar energy systems sales, based
on the estimated future costs of meeting its warranty obligations. Warranty costs primarily consist of replacement
costs for supplies and labor costs for service personnel since warranties for equipment and materials are covered
by the original manufacturer’s warranty (other than a small deductible in certain cases). As such, the warranty
reserve is immaterial in all periods presented. The Company makes and revises these estimates based on the
number of solar energy systems under warranty, the Company’s historical experience with warranty claims,
assumptions on warranty claims to occur over a systems’ warranty period and the Company’s estimated
replacement costs.
Solar Energy Performance Guarantees
The Company guarantees to customers certain specified minimum solar energy production output for solar
facilities over the initial term of the Customer Agreements. The Company monitors the solar energy systems to
determine whether these specified minimum outputs are being achieved. If the Company determines that the
guaranteed minimum energy output is not achieved, it records a liability for the estimated amounts payable. The
liability, which is included as accrued expenses and other liabilities in the consolidated balance sheets is
immaterial in all periods presented.
Derivative Financial Instruments
The Company recognizes all derivative instruments on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other comprehensive loss if a derivative is
designated as part of a hedge transaction. The ineffective portion of the hedge, if any, is immediately recognized
in earnings and are included in other expenses (income), net in the consolidated statements of operations.
Beginning in 2015, the Company uses derivative financial instruments, primarily interest rate swaps, to
manage its exposure to interest rate risks on its syndicated term loans, which are recognized on the balance
sheet at their fair values. On the date that the Company enters into a derivative contract, the Company formally
documents all relationships between the hedging instruments and the hedged items, as well as its risk
management objective and strategy for undertaking each hedge transaction. Derivative instruments designated in
a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of
the derivative instrument on the balance sheet as either a freestanding asset or liability. Changes in the fair value
of a derivative that is designated and qualifies as an effective cash flow hedge are recorded in accumulated other
82
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
comprehensive loss, net of tax, until earnings are affected by the variability of cash flows of the hedged item. Any
derivative gains and losses that are not effective in hedging the variability of expected cash flows of the hedged
item or that do not qualify for hedge accounting treatment are recognized directly into income. At the hedge’s
inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in
cash flows of the derivative instrument have been highly effective in offsetting changes in the cash flows of the
hedged items and whether they are expected to be highly effective in the future. The Company discontinues
hedge accounting prospectively when (i) it determines that the derivative is no longer effective in offsetting
changes in the cash flows of a hedged item; (ii) the derivative expires or is sold, terminated, or exercised; or (iii)
management determines that designating the derivative as a hedging instrument is no longer appropriate. In all
situations in which hedge accounting is discontinued and the derivative remains outstanding, the derivative
instrument is carried at its fair market value on the balance sheet with the changes in fair value recognized in
current period earnings. The remaining balance in accumulated other comprehensive loss associated with the
derivative that has been discontinued is not recognized in the income statement unless it is probable that the
forecasted transaction will not occur. Such amounts are recognized in earnings when earnings are affected by the
hedged transaction.
The Company recognized warrants with former preferred stockholders as an inducement to convert their
shares of convertible preferred stock into shares of common stock immediately prior to the Company’s initial
public offering as derivative liabilities. Such liabilities were valued when the financial instruments were initially
issued, with the change in their respective fair values recorded as a gain or loss on revaluation within other
expenses (income), net in the Company’s statement of operations. The Company determines the fair value of its
warrant derivative liabilities using the Black-Scholes option-pricing model.
Fair Value of Financial Instruments
The Company defines fair value as the exchange price that would be received for an asset or an exit price
that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. The Company uses valuation
techniques to measure fair value that maximize the use of observable inputs and minimize the use of
unobservable inputs. The FASB establishes a three-tier fair value hierarchy for disclosure of fair value
measurements as follows:
•
•
•
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the
measurement date;
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or
liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the related assets or liabilities; and
Level 3—Inputs that are unobservable, significant to the measurement of the fair value of the assets or
liabilities and are supported by little or no market data.
The Company’s financial instruments include cash, receivables, accounts payable, accrued expenses,
distributions payable to noncontrolling interests, derivatives, and recourse and non-recourse debt.
Revenue Recognition
The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the sales price is fixed and determinable, and (iv) collection of the
related receivable is reasonably assured.
Operating leases and incentives
Operating leases and incentives revenue is primarily comprised of revenue from Customer Agreements,
revenue from solar energy system rebate incentives, revenue associated with ITCs assigned to investment funds
83
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
that are classified as lease pass-through arrangements and revenue from the sales of SRECs generated by the
Company’s solar energy systems to third parties.
The Company begins to recognize revenue on Customer Agreements when permission to operate (“PTO”)
is given by the local utility company or on the date daily operation commences if utility approval is not required.
The Company recognizes revenue on a straight-line basis over the initial term of the Customer Agreements
(typically 20 years) that have minimum lease payments, or as earned when the customers are billed based on the
actual electricity generated at a specific rate under the terms of the Customer Agreements.
The Company considers upfront rebate incentives received from states and utilities for solar energy systems
subject to Customer Agreements to be minimum lease payments. Rebate revenue is recognized on a straight-line
basis over the life of the initial contract term of the Customer Agreement beginning when a PTO letter is issued by
the local utility company or on the date daily operation commences if utility approval is not required.
The Company monetizes the ITCs associated with the leased systems on its lease pass-through financing
obligations by assigning them to the investor together with the future customer lease payments. A portion of the
cash consideration received from the investors is allocated to the estimated fair value of the assigned ITCs upon
the PTO dates of the leased systems, as discussed below. The estimated fair value of the ITCs is determined by
applying the expected internal rate of return to the investor on this structure to the gross amount of the ITCs that
may be claimed by the investor.
The ITCs are subject to recapture under the Code if the underlying solar energy system either ceases to be
a qualifying property or undergoes a change in ownership within five years of its placed in service date. The
recapture amount decreases by 20% on each anniversary of the PTO date. As the Company has an obligation to
ensure the solar energy systems is in service and operational for a term of five years to avoid any recapture of the
ITCs, the Company recognizes revenue as the recapture provisions lapse assuming the other aforementioned
revenue recognition criteria have been met. The portion of monetized ITCs are reclassified to deferred revenue
from lease pass-through financing obligation on the consolidated balance sheets when the leased systems are
granted PTO. Subsequently, one-fifth of the monetized ITCs are recognized as revenue in the consolidated
statements of operations on each anniversary of the solar energy systems’ PTO date over the following five
years.
SREC revenue arises from the sale of environmental credits generated by solar energy systems. SREC
revenue is recorded in operating leases and incentives revenue. We recognize revenue related to the sale of
SRECs to the extent the cumulative value of delivered SRECs per contract exceeds any possible liquidated
damages for non-delivery, if any.
The Company has determined that Customer Agreements are operating leases as opposed to capital leases
pursuant to ASC 840, Leases. The initial lease term of Customer Agreements is 20 years. Since the estimated
economic life of solar energy systems is estimated to be at least 35 years, the lease term is less than 75% of its
estimated economic life. Additionally, the Company evaluated the following lease classification criteria: (i) whether
there is a transfer of ownership or bargain purchase option at the end of the lease and (ii) whether the present
value of minimum lease payments exceeds 90% of the fair value at lease inception and determined that these
criteria were not met.
Solar energy systems and product sales
For solar energy systems sold to customers, the Company recognizes revenue when the solar energy
system passes inspection by the authority having jurisdiction, provided all other revenue recognition criteria have
been met. The Company’s installation projects are typically completed in a short period of time.
Product sales consist of solar panels, racking systems, inverters, other solar energy products sold to
resellers and customer leads. Product sales revenue is recognized at the time when title is transferred, generally
upon shipment. Shipping and handling fees charged to customers are included in net sales. Total shipping and
handling fees charged to customers was $2.6 million for the years ended December 31, 2016 and 2015 and $2.4
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Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
million for the year ended December 31, 2014. Volume discounts given to customers are recorded as a reduction
of revenue, since the Company does not receive goods or services in exchange for the discounts offered.
Customer lead revenue, included in product sales, is recognized at the time the lead is delivered.
Taxes assessed by government authorities that are directly imposed on revenue producing transactions are
excluded from product revenue.
Cost of Revenue
Operating leases and incentives
Cost of revenue for operating leases and incentives is primarily comprised of the (1) depreciation of the cost
of the solar energy systems, as reduced by amortization of deferred grants, (2) amortization of initial direct costs,
(3) lease operations, monitoring and maintenance costs including associated personnel costs, and (4) allocated
corporate overhead costs.
Solar energy systems and product sales
Cost of revenue for solar energy systems and non-lead generation product sales consist of direct and
indirect material and labor costs for solar energy systems installations and product sales. Also included are
engineering and design costs, estimated warranty costs, freight costs, allocated corporate overhead costs, vehicle
depreciation costs and personnel costs associated with supply chain, logistics, operations management, safety
and quality control. Cost of revenue for lead generations consists of costs related to direct-response advertising
activities associated with generating customer leads.
Research and Development Expense
Research and development expenses include personnel costs, allocated overhead costs, and other costs
related to the development of the Company’s BrightPath software suite as well as our racking equipment. These
expenses include costs related to the development, maintenance and research associated with our BrightPath
software and our SnapNrack racking equipment.
Advertising Costs
Advertising costs are expensed as incurred in the consolidated statements of operations. The Company
incurred advertising costs of $30.2 million, $34.8 million and $16.9 million for the years ended December 31,
2016, 2015 and 2014, respectively.
Stock-Based Compensation
The Company grants stock options and restricted stock units (“RSUs”) for its equity incentive plan and
employee stock purchase plan. Stock-based compensation to employees is measured based on the grant date
fair value of the awards and recognized over the period during which the employee is required to perform services
in exchange for the award (generally the vesting period of the award). The Company estimates the fair value of
stock options and employee stock purchase plans awards granted using the Black-Scholes option-valuation
model. Compensation cost is recognized over the vesting period of the applicable award using the straight-line
method for those options expected to vest.
The Company also grants RSUs to non-employees that vest upon the satisfaction of both performance and
service conditions. For RSUs granted to non-employees that vest upon the satisfaction of a performance
condition, the Company starts recognizing expense on the RSUs when the performance condition is met.
Noncontrolling Interests and Redeemable Noncontrolling Interests
Noncontrolling interests represent investors’ interests in the net assets of the Funds that the Company has
created to finance the cost of its solar energy systems subject to the Company’s Customer Agreements. The
85
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Company has determined that the contractual provisions in the funding arrangements represent substantive profit
sharing arrangements. The Company has further determined that the appropriate methodology for attributing
income and loss to the noncontrolling interests and redeemable noncontrolling interests each period is a balance
sheet approach referred to as the hypothetical liquidation at book value (“HLBV”) method.
Under the HLBV method, the amounts of income and loss attributed to the noncontrolling interests and
redeemable noncontrolling interests in the consolidated statements of operations reflect changes in the amounts
the investors would hypothetically receive at each balance sheet date under the liquidation provisions of the
contractual agreements of these arrangements, assuming the net assets of these funding structures were
liquidated at recorded amounts. The Company’s initial calculation of the investor’s noncontrolling interest in the
results of operations of these funding arrangements is determined as the difference in the noncontrolling interests’
claim under the HLBV method at the start and end of each reporting period, after taking into account any capital
transactions, such as contributions or distributions, between the Fund and the investors.
The Company classifies certain noncontrolling interests with redemption features that are not solely within
the control of the Company outside of permanent equity on its consolidated balance sheets. Redeemable
noncontrolling interests are reported using the greater of their carrying value as determined by the HLBV method
or their estimated redemption value at each reporting date.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the consolidated financial statements and tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are provided against deferred tax assets to the extent that it is more likely than not
that the deferred tax asset will not be realized. The Company is subject to the provisions of ASC 740, Income
Taxes, which establishes consistent thresholds as it relates to accounting for income taxes. It defines the
threshold for recognizing the benefits of tax return positions in the financial statements as “more likely than not” to
be sustained by the taxing authority and requires measurement of a tax position meeting the more-likely-than-not
criterion, based on the largest benefit that is more than 50% likely to be realized. Management has analyzed the
Company’s inventory of tax positions with respect to all applicable income tax issues for all open tax years (in
each respective jurisdiction).
The Company sells solar energy systems to the Funds. As the Funds are consolidated by the Company, the
gain on the sale of the solar energy systems is not recognized in the consolidated financial statements. However,
this gain is recognized for tax reporting purposes. Since these transactions are intercompany sales, any tax
expense incurred related to these intercompany sales is deferred and recorded as a prepaid tax asset and
amortized over the depreciable life of the underlying solar energy systems which has been estimated to be 35
years in accordance with ASC Topic 810.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the
normal course of business, the Company is subject to examination by federal, state and local jurisdictions, where
applicable. The statute of limitations for the tax returns varies by jurisdiction.
Concentrations of Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily
of cash and accounts receivable, which includes rebates receivable. The associated risk of concentration for cash
is mitigated by banking with institutions with high credit ratings. At certain times, amounts on deposit exceed
Federal Deposit Insurance Corporation insurance limits. The Company does not require collateral or other
security to support accounts receivable. To reduce credit risk, management performs periodic credit evaluations
and ongoing evaluations of its customers’ financial condition. Rebates receivable are due from various states and
local governments as well as various utility companies. The Company considers the collectability risk of such
amounts to be low. The Company is not dependent on any single customer. The Company’s customers under
Customer Agreements are primarily located in California, Hawaii, New Jersey, Arizona, New York and
86
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Massachusetts. The loss of a customer would not adversely impact the Company’s operating results or financial
position. The Company depends on a limited number of suppliers of solar panels and other system components.
During the year ended December 31, 2016 and 2015, the solar materials purchases from the top five suppliers
were approximately $184.9 million and $160.5 million, respectively.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606), to
s
replace the existing revenue recognition criteria for contracts with customers and to establish the disclosure
requirements for revenue from contracts with customers. The core principle of this standard is to recognize
revenue when promised goods or services are transferred to customers in an amount that reflects the
consideration that is expected to be received for those goods or services. The FASB has issued several updates
to the standard which (i) clarify the application of the principal versus agent guidance; (ii) clarify the guidance
relating to performance obligations and licensing; and (iii) clarify assessment of the collectability criterion,
presentation of sales taxes, measurement date for non-cash consideration and completed contracts at
transaction. This ASU is effective for the Company for annual reporting periods beginning after December 15,
2017 including the interim reporting periods within that fiscal year. Adoption of this ASU is either retrospective to
each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated
deficit as of the adoption date. The Company is evaluating whether certain that its Customer Agreements will no
longer meet the definition of a lease under ASU 842, Leases, and whether such arrangements would then need to
be accounted for under ASC 606. The Company is continuing to assess the impact of such a change, as well as
other potential impacts of the standard on its various revenue streams, including Customer Agreements. The
Company has a project plan in place to meet the requirements of this standard using internal resources by the
effective date. The Company has completed its initial assessment and is currently performing contract reviews
and developing a preliminary accounting policy.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, to specify that
inventory should be subsequently measured at the lower of cost or net realizable value, which is the ordinary
selling price less any completion, transportation and disposal costs. This ASU is effective for interim and annual
periods beginning after December 15, 2016. Early adoption is permitted. Adoption of this ASU is prospective. The
Company adopted this ASU at the beginning of the quarter ended December 31, 2016. The adoption of this ASU
did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 to replace existing lease guidance with ASC 842,
Leases. Entities are required to determine whether a contract is a lease or contains a lease at the inception of the
contract. Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-
term leases) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease,
measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to
use, or control the use of, a specified asset for the lease term. The accounting for lessors is largely unchanged.
This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal
years. Early adoption is permitted. Adoption of this ASU is applied using a modified retrospective approach. The
Company currently accounts for Customer Agreements pursuant to ASC 840, Leases. The Company is
evaluating whether the Customer Agreements will continue to meet the definition of a lease pursuant to ASC 842,
Leases, or whether such agreements will be accounted for in accordance with ASC 606, Revenue from Contracts
with Customers. The Company is continuing to assess all potential impacts of this standard, including the timing
of adoption and the potential application of the standard’s practical expedients.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. The new
guidance will require all income tax effects of awards to be recognized in the income statement when the awards
vest or are settled. It also provides the Company to make an accounting policy election to either estimate the
number of awards that are expected to vest or account for forfeitures as they occur. This ASU is effective for fiscal
years beginning after December 15, 2016 and interim periods within those fiscal years. Amendments related to
the timing of when excess tax benefits are recognized and the Company’s policy for accounting for forfeitures
should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to
equity at the beginning of the period in which the guidance is adopted. The Company will continue to estimate the
number of awards that are expected to vest. The Company will adopt the new ASU in the first quarter of 2017.
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Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Upon the adoption, deferred tax liabilities are expected to decrease by $3.3 million, with the cumulative-effect
adjustment to retained earnings as of January 1, 2017.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments,
which replaces the current incurred loss impairment methodology with a current expected credit losses model.
The amendment applies to entities which hold financial assets and net investment in leases that are not
accounted for at fair value through net income as well as loans, debt securities, trade receivables, net
investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets
not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years
beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted.
Adoption of this ASU is applied using a modified retrospective approach, with certain aspects requiring a
prospective approach. The Company is currently evaluating this guidance and the impact it may have on the
Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory,
which requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than
inventory when the transfer occurs. As a result, a reporting entity would recognize the tax expense from the sale
of assets in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of the transaction
are eliminated in the consolidated financial statements. Any deferred tax asset that arises in the buyer’s
jurisdiction would also be recognized at the time of the transfer. The ASU is effective for annual periods beginning
after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted but only in the
first interim period of a fiscal year. The ASU is applied on a modified retrospective basis generally through a
cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The
Company will early adopt the standard effective January 1, 2017. As the Company sells solar energy systems to
Funds, the Company will record the current tax effects of the gain on the sale as well as a deferred tax asset
related to the Company’s increased tax basis in the partnership as a result of the sale. As a result of the adoption,
the Company expects to reverse the net prepaid tax assets of $378.2 million previously recorded for the tax
deferral and recognize gross deferred tax assets of $378.5 million which will offset the deferred tax liability as of
January 1, 2017. The Company is in the process of evaluating whether any of the additional deferred tax assets
will require a valuation allowance.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash,
which require that a statement of cash flows to explain the change during the period in the total of cash, cash
equivalents and amounts generally described as restricted cash and restricted cash equivalents. This ASU is
effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early
adoption is permitted. Adoption of this ASU is applied using a retrospective approach. As a result, the Company
will no longer present transfers between cash and cash equivalents and restricted cash in the consolidated cash
flow statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying
the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Instead, under this
amendment, an entity shall perform its annual, or interim, goodwill impairment test by comparing the fair value of
the reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit’s fair value. The ASU is effective for annual or any interim
goodwill impairment tests beginning in fiscal years after December 15, 2019. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this
standard would only have an effect on the Company’s consolidated financial statements if it failed Step 1 of the
goodwill impairment test, which has not occurred to date.
Note 3. Acquisitions
Clean Energy Experts, LLC
In April 2015, the Company acquired Clean Energy Experts, LLC, a consumer demand and solar lead
generation company, for $25.0 million in cash and 1.9 million shares of common stock valued at $19.1 million, net
of settlement of a preexisting payable to CEE. Of this amount, $15.0 million in cash was paid and 1.4 million
88
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
shares were issued in April 2015. The remaining $10.0 million in cash and 500,000 shares were paid and issued
as follows: $5.0 million was paid and 250,000 shares were issued in October 2015 and $5.0 million was paid and
250,000 shares were issued in April 2016.
An additional $9.1 million in cash and 600,000 shares of common stock may be issued on April 1, 2017,
subject to the achievement of certain sales targets as well as continued employment of certain key employees
acquired in the transaction, which will be recorded as compensation expense (“CEE Compensation”) over a two-
year period unless and until the Company assesses that the achievement of sales targets is not probable. The
acquisition is expected to enhance the Company’s efficient and consistent access to high-quality leads in existing
and new markets.
The Company has included the results of operations of the acquired business in the consolidated
statements of operations from the acquisition date. The assets acquired and liabilities assumed in the CEE
acquisition have been recorded based on their fair value at the acquisition date. Goodwill represents the excess
of the purchase price over the net tangible and intangible assets acquired and is not deductible for tax purposes.
Goodwill recorded is primarily attributable to the acquired assembled workforce and the synergies expected to
arise after the CEE acquisition. Transaction costs related to the acquisition were expensed as incurred.
The following table summarizes the fair value of assets acquired and liabilities assumed (in thousands):
Cash........................................................................................................................................ $
Accounts receivable ................................................................................................................
Intangible assets .....................................................................................................................
Accounts payable and accrued liabilities ................................................................................
Deferred tax liability.................................................................................................................
Identifiable assets and liabilities assumed ..............................................................................
Goodwill ..................................................................................................................................
Total ................................................................................................................................... $
424
639
13,290
(1,247)
(5,146)
7,960
35,757
43,717
The fair value of acquired intangible assets and their estimated useful life are as follows (in thousands,
except estimated useful life):
Developed technology ................................................................................. $
Customer relationships ................................................................................
Trade names................................................................................................
Total ........................................................................................................ $
5,910
4,390
2,990
13,290
Fair Value
Estimated
Useful Life
(in years)
5
8
8
For the year ending December 31, 2015, the contribution of the acquired business to the Company’s total
revenues was $16.9 million, as measured from the date of the acquisition. The portion of total expenses and net
income associated with the acquired business was not separately identifiable due to the integration with the
Company’s operations.
89
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Note 4. Fair Value Measurement
At December 31, 2016 and 2015, the carrying value of receivables, accounts payable, accrued expenses,
and distributions payable to noncontrolling interests approximates fair value due to their short-term nature. The
carrying values and fair values of debt instruments are as follows (in thousands):
December 31, 2016
December 31, 2015
Carrying Value
Fair Value Carrying Value
Lines of credit................................... $
Syndicated term loans .....................
Bank term loan .................................
Note payable ....................................
Solar asset-backed notes ................
Total ............................................ $
489,200 $
189,989
81,307
36,232
101,295
898,023 $
489,200 $
189,989
80,542
35,396
102,869
897,996 $
197,000 $
169,344
30,739
32,781
104,900
534,764 $
Fair Value
197,000
169,344
32,692
32,568
110,103
541,707
loans due in July 2021 and September 2022 approximates their carrying values because their interest rates are
variable rates that approximate rates currently available to the Company. At December 31, 2015, the fair value of
the Company’s line of credit and syndicated term loans approximates their carrying values because their interest
rates are variable rates that approximate rates currently available to the Company. At December 31, 2016 and
2015, the fair value of the Company’s bank term loan due in April 2022, note payable and solar asset-backed
notes are based on rates currently offered for debt with similar maturities and terms. The Company’s fair value of
the debt instruments fell under the Level 3 hierarchy. These valuation techniques involve some level of
management estimation and judgment, the degree of which is dependent on the price transparency for the
instruments or market.
The Company determines the fair value of its interest rate swaps using a discounted cash flow model which
incorporates an assessment of the risk of non-performance by the interest rate swap counterparty and an
evaluation of the Company’s credit risk in valuing derivative instruments. The valuation model uses various inputs
including contractual terms, interest rate curves, credit spreads and measures of volatility.
The Company determines the fair value of its warrants issued using the Black-Scholes option-pricing model.
The key inputs used to determine value of the warrants was an estimated fair value of the Company’s common
stock of $5.31 per share, risk-free interest rate of 1.04%, expected volatility of 47.34%, the remaining contract life
of 1.55 years and expected dividend yield rate of 0.00%. The significant unobservable input used in the fair value
measurement of the warrant liability was the expected volatility of the Company. Generally, increases (decreases)
in the expected volatility of the Company would result in a directionally similar impact to the measurement of the
Company’s warrants.
At December 31, 2016 and 2015, financial instruments measured at fair value on a recurring basis, based
upon the fair value hierarchy are as follows (in thousands):
Derivative assets:
Interest rate swaps ............................................................ $
Total.............................................................................. $
—
—
$
$
1,632
1,632
$
$
—
—
$
$
1,632
1,632
Level 1 Level 2 Level 3
Total
December 31, 2016
Derivative liabilities:
Warrants ............................................................................ $
Total.............................................................................. $
—
—
$
$
—
—
$
$
20
20
$
$
20
20
90
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Derivative liabilities:
Interest rate swaps ............................................................ $
Warrants ............................................................................
Total.............................................................................. $
—
—
—
$
$
921
—
921
$
$
—
557
557
$
$
921
557
1,478
Level 1 Level 2 Level 3
Total
December 31, 2015
Note 5. Inventories
Inventories consist of the following (in thousands):
Raw materials .................................................................................................. $
Work-in-process...............................................................................................
Total ............................................................................................................ $
62,037
5,289
67,326
$
$
62,967
8,291
71,258
December 31,
2016
2015
Note 6. Solar Energy Systems, net
Solar energy systems, net consists of the following (in thousands):
December 31,
Solar energy system equipment costs............................................................. $
Inverters...........................................................................................................
Initial direct costs .............................................................................................
Total solar energy systems .........................................................................
Less: Accumulated depreciation and amortization ..........................................
Add: Construction-in-progress .........................................................................
Total solar energy systems, net .................................................................. $
$
2016
2,459,856
260,011
117,587
2,837,454
(303,305)
95,217
2,629,366
$
2015
1,846,103
177,202
68,280
2,091,585
(212,671)
113,107
1,992,021
All solar energy systems, construction-in-progress and inverters have been leased to or are subject to
signed Customer Agreements with customers. The Company recorded depreciation expense related to solar
energy systems of $93.4 million, $70.7 million and $54.7 million for the years ended December 31, 2016, 2015
and 2014, respectively. The depreciation expense was reduced by the amortization of deferred grants of $13.1
million, $14.2 million and $13.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Note 7. Property and Equipment, net
Property and equipment, net consists of the following (in thousands):
Machinery and equipment ............................................................................... $
Leasehold improvements, furniture, and computer hardware .........................
Vehicles ...........................................................................................................
Computer software ..........................................................................................
Total property and equipment.....................................................................
Less: Accumulated depreciation and amortization ..........................................
Total solar energy systems, net .................................................................. $
3,491
13,407
44,788
24,552
86,238
(37,767)
48,471
$
$
2,808
10,669
33,048
19,883
66,408
(21,542)
44,866
December 31,
2016
2015
91
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Depreciation and amortization expense was $18.8 million, $11.2 million and $6.4 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
The gross amount of assets under capital leases, primarily vehicles, was $46.2 million and $34.2 million as
of December 31, 2016 and 2015. Accumulated depreciation related to these assets was $16.3 million and $6.2
million as of December 31, 2016 and 2015, respectively. Depreciation expense related to these assets was $10.8
million, $4.9 million and $1.2 million as of December 31, 2016, 2015 and 2014, respectively.
Note 8. Goodwill and Intangible Assets, net
The goodwill and intangible assets were acquired as part of the acquisition of MEC and CEE acquisitions
referred to in Note 1, Organization.
The change in the carrying value of goodwill is as follows (in thousands):
Balance—January 1, 2015....................................................................................................... $
Acquisition of CEE (Note 3) .....................................................................................................
Balance—December 31, 2015 and 2016................................................................................. $
51,786
35,757
87,543
The Company performs its annual impairment test of goodwill on October 1 of each fiscal year or whenever
events or circumstances change or occur that would indicate that goodwill might be impaired. The Company has
determined that it has one reporting unit. The Company first assesses qualitative factors to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment test. If the qualitative step is not
passed, the Company performs a two-step impairment test whereby in step one, the Company must compare the
fair value of the Company with its carrying amount. If the carrying amount exceeds its fair value, the Company
performs the step two of the goodwill impairment test to determine the amount of impairment.
As of October 1, 2016, due to the decline in the Company’s market capitalization from the 2015 annual
impairment test, the Company performed step one of the impairment test. As of October 1, 2016, the Company
concluded that the fair value of the Company exceeded its carrying value, as the Company’s market capitalization
exceeded total stockholders’ equity.
The Company considered the continued decrease in market capitalization from October 1, 2016 to
December 31, 2016 to be an impairment indicator and the Company also performed the step one test for potential
impairment as of December 31, 2016. As of December 31, 2016, total stockholders’ equity exceeded the
Company’s market capitalization. The estimated fair value of the Company was estimated using a combination of
a market approach and an income approach, giving equal weighting to both. Under the market approach, the
Company utilizes publicly traded comparable company information to determine revenue multiples that are used
to value the Company. Under the income approach, the Company determines fair value based on estimated
future cash flows of the Company discounted by an estimated weighted average cost of capital, reflecting the
overall level of inherent risk of the Company and the rate of return an outside investor would expect to earn. The
forecast and related assumptions were derived from the most recent annual financial forecast for which the
planning process commenced in the fourth quarter of 2016. Based on the fair value analysis as of December 31,
2016, the Company had an estimated fair value which exceeded its carrying value by approximately 8%.
Therefore, no impairment of goodwill has been recorded for the year ended December 31, 2016.
92
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Intangible assets, net as of December 31, 2016 consist of the following (in thousands, except weighted
average remaining life):
Cost
Accumulated
amortization
Carrying
value
Customer relationships .................. $
Developed technology ...................
Trade names..................................
Total .......................................... $
14,660 $
6,820
6,990
28,470 $
(4,317) $
(2,600)
(3,054)
(9,971) $
10,343
4,220
3,936
18,499
Weighted
average
remaining life
(in years)
6.4
3.1
4.6
Intangible assets, net as of December 31, 2015 consist of the following (in thousands, except weighted
average remaining life):
Cost
Accumulated
amortization
Carrying
value
Customer relationships .................. $
Developed technology ...................
Trade names..................................
Total .......................................... $
14,660 $
6,820
6,990
28,470 $
(2,618) $
(1,235)
(1,912)
(5,765) $
12,042
5,585
5,078
22,705
Weighted
average
remaining life
(in years)
7.4
4.1
5.3
The Company recorded amortization of intangible assets expense of $4.2 million, $3.7 million and $2.3
million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, expected
amortization of intangible assets for each of the five succeeding fiscal years and thereafter is as follows (in
thousands):
2017......................................................................................................................................... $
2018.........................................................................................................................................
2019.........................................................................................................................................
2020.........................................................................................................................................
2021.........................................................................................................................................
Thereafter ................................................................................................................................
Total.................................................................................................................................... $
4,205
4,205
3,335
2,143
1,750
2,861
18,499
Note 9. Prepaid Expense and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
Prepaid expenses............................................................................................ $
Reimbursement receivable..............................................................................
State tax receivable.........................................................................................
Other current assets........................................................................................
Total............................................................................................................ $
6,285
3,160
347
10
9,802
$
$
5,134
337
427
19
5,917
December 31,
2016
2015
93
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Note 10. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
December 31,
2016
2015
Accrued employee compensation ................................................................... $
CEE Compensation expense ..........................................................................
CEE acquisition consideration ........................................................................
Accrued professional fees...............................................................................
Other accrued expenses .................................................................................
Total ........................................................................................................... $
22,758
7,948
—
4,073
24,482
59,261
$
$
21,353
—
5,000
3,480
19,313
49,146
Note 11. Cash Equity Financing
In December 2016, the Company pooled and transferred its interests in certain financing funds into a special
purpose entity (“SPE”) with a new investor. The Company has determined that the SPE is a variable interest
entity and that the Company is the primary beneficiary of the SPE by reference to the power and benefits criterion
under ASC 810, Consolidation. Accordingly, the Company consolidates the SPE in its consolidated financial
statements and accounts for the investor’s equity interest in the SPE as a noncontrolling interest (see
Note 15, VIE Arrangements). The Company did not recognize a gain or loss on the transfer of its interests in the
financing funds and continues to consolidate the financing funds. The SPE’s assets and cash flows are not
available to the other creditors of the Company, and the investor has no recourse to the Company’s other assets.
Note 12. Indebtedness
As of December 31, 2016, debt consisted of the following (in thousands, except percentages):
Carrying Values, net of
debt discount
Long Term
Current
Total
Unused
Borrowing
Capacity
Annual
Contractual
Interest Rate
Interest
Rate
Maturity
Date
Recourse debt:
Bank line of credit.......... $
Total recourse debt . $
Non-recourse debt:
Line of credit
(Aggregation Facility) .
Term Loan A .................
Bank term loan due in
September 2022.........
Bank term loan due in
April 2022 ...................
Solar asset-backed
notes ..........................
Term Loan and Term
Loan B........................
Bank term loan due in
July 2021....................
Note payable .................
Total non-recourse
debt ......................
Total debt .......... $
—
—
$ 244,000
$ 244,000
$ 244,000
$ 244,000
$
$
3,406
3,406
Varies (1)
3.96% - 5.75%
April 2018
—
616
245,200
146,387
245,200
147,003
9,300
5,000
Varies (2)
LIBOR + 2.75%
2.93% - 3.39%
December 2020
3.64% December 2021
1,074
21,249
22,323
—
LIBOR +2.25%
2.86% September 2022
1,331
26,565
27,896
3,730
97,565
101,295
—
—
4.50%
4.50%
April 2022
4.40% - Class A
5.38% - Class B
4.40%
5.38%
July 2024
July 2024
December 2020
and 2021
116
42,870
42,986
—
LIBOR + 5.00%
6.00%
7,286
—
23,802
36,232
31,088
36,232
1,032
—
Varies (3)
12.00%
6.25% - 9.94%
July 2021
12.00% December 2018
14,153
14,153
639,870
$ 883,870
654,023
$ 898,023
$
15,332
18,738
(1)
(2)
(3)
Loans under the facility bear interest at LIBOR + 3.25% or the Base Rate + 2.25%. The Base Rate is the
highest of the Federal Funds Rate + 0.50%, the Prime Rate, or LIBOR + 1.00%.
Loans under the facility bear interest at LIBOR + 2.50% for the initial three-year revolving availability period,
stepping up to LIBOR + 2.75% in the following two-year period.
Loans under the facility bear interest at LIBOR + 5.50% for contracted SRECs and LIBOR + 9.00% for
uncontracted SRECs.
94
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
As of December 31, 2015, debt consisted of the following (in thousands, except percentages):
Carrying Values, net of
debt discount
Long Term
Total
Current
Unused
Borrowing Contractual
Interest Rate
Capacity
Annual
Interest
Rate
Maturity
Date
Recourse debt:
Bank line of credit ........ $
Total recourse debt $
Non-recourse debt:
Term Loan A ................
Bank term loan due in
April 2022..................
Solar asset-backed
notes .........................
Term Loan B ................
Note payable................
Total non-recourse
debt .....................
Total debt ......... $
— $ 197,000 $ 197,000 $
— $ 197,000 $ 197,000 $
6,571
6,571
Varies (1)
3.67%
April 2018
589
146,625
147,214
5,600
LIBOR + 2.75%
3.07% December 2021
1,159
29,580
30,739
2,858
102,042
104,900
116
—
22,014
32,781
22,130
32,781
4,722
4,722 $ 530,042 $ 534,764 $
337,764
333,042
6.25%
6.25%
April 2022
4.40% - Class A
5.38% - Class B
LIBOR + 5.00%
12.00%
July 2024
4.40%
5.38%
July 2024
6.00% December 2021
12.00% December 2018
—
—
—
—
5,600
12,171
(1)
Loans under the facility bear interest at LIBOR + 3.25% or the Base Rate + 2.25%. The Base Rate is the
highest of the Federal Funds Rate + 0.50%, the Prime Rate, or LIBOR + 1.00%.
Bank Line of Credit
In April 2015, the Company entered into a syndicated working capital facility with banks for a total
commitment of up to $205.0 million. In June 2016, the Company entered into amendments to increase the
syndicated working capital facility commitment by an incremental $40.0 million, for a total commitment of up to
$245.0 million. In July 2016, the Company entered into an amendment to increase the syndicated working capital
facility by an incremental $5.0 million, for a total commitment of up to $250.0 million. The working capital facility is
secured by substantially all of the unencumbered assets of the Company, as well as ownership interests in certain
subsidiaries of the Company.
Under the terms of the working capital facility, the Company is required to meet various restrictive
covenants, including meeting certain reporting requirements, such as the completion and presentation of audited
consolidated financial statements. The Company is also required to maintain minimum unencumbered liquidity of
at least $25.0 million in the aggregate as of the last day of each calendar month. The Company is further required
to maintain a modified interest coverage ratio of 2.00 or greater, measured quarterly as of the last day of each
quarter. The Company was in compliance with all debt covenants as of December 31, 2016.
Syndicated Credit Facilities
In January 2016, certain subsidiaries of the Company entered into secured credit facilities agreements with
a syndicate of banks for up to $250.0 million in committed facilities. The facilities include a $220.0 million
aggregation facility (“Aggregation Facility”), a $23.0 million term loan (“Term Loan”) and a $7.0 million letter of
credit facility. The Aggregation Facility bears an interest rate of LIBOR + 2.50% in the initial three-year revolving
availability period, stepping up to LIBOR + 2.75% in the following two-year period. The Term Loan bears an
interest rate of LIBOR + 5.00% in the first three years, stepping up to LIBOR + 6.50% in the following two-year
period, with a LIBOR floor of 1.00% in all cases. The principal and accrued interest on any outstanding loans
mature on December 31, 2020. In May 2016, certain subsidiaries of the Company entered into amendments
which increased the committed Aggregation Facility by $90.0 million to $310.0 million. No other material
amendments were entered into in respect of these facilities.
95
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
The facilities are non-recourse to the Company and are secured by net cash flows of certain subsidiaries
from Customer Agreements, less certain operating, maintenance and other expenses which are available to the
borrowers after distributions to tax equity investors. The facilities contain customary covenants including the
requirement to maintain certain financial measurements and provide lender reporting. The credit facilities also
contain certain provisions in the event of default which entitle lenders to take certain actions including acceleration
of amounts due under the facilities. The Company was in compliance with all debt covenants as of December 31,
2016.
In December 2014, subsidiaries of the Company entered into secured credit facilities agreements with a
syndicate of banks for up to $195.4 million in committed facilities. These facilities include a $158.5 million senior
term loan (“Term Loan A”) and a $24.0 million subordinated term loan (“Term Loan B”). In addition, the credit
facilities also include a $5.0 million working capital revolver commitment and a $7.9 million senior secured
revolving letter of credit facility which draws are solely for the purpose of satisfying the required debt service
reserve amount if necessary. Term Loan A, the working capital revolver and the letter of credit bear interest at a
rate of LIBOR + 2.75% with a 25 basis point step up triggered on the fourth anniversary. Term Loan B bears
interest at a rate of LIBOR + 5.00% with a LIBOR floor of not less than 1.00%. Prepayments are permitted under
Term Loan A at par without premium or penalty, and under Term Loan B prepayment penalties range from 0% -
2%, depending on the timing of the prepayment.
One of the Company’s subsidiaries is the borrower under the Term Loan A agreement and another of the
Company’s subsidiaries is the borrower under the Term Loan B agreement. All obligations under Term Loan A,
the working capital revolver and letter of credit are collateralized by the subsidiary borrower’s membership
interests and assets in the Company’s investment Funds. All obligations under Term Loan B are collateralized by
the membership interest in the subsidiary borrower. The credit facilities also contain certain provisions in the
event of default, which entitle lenders to take actions, including acceleration of amounts due under the credit
facilities and acquisition of membership interests and assets that are pledged to the lenders under the terms of
the credit facilities.
The Company is required to maintain certain financial measurements and reporting covenants under the
terms of the credit facilities. The Company was in compliance with the credit facility covenants as of
December 31, 2016.
Bank Term Loans
In July 2016, a subsidiary of the Company entered into a $33.0 million secured credit agreement. The facility
is non-recourse to the Company and is secured by substantially all of the assets of the subsidiary, including its
rights in and the net cash flows from the generation of contracted and uncontracted solar renewable energy
credits (“SRECs”) by certain subsidiaries. The facility includes two tranches, one priced at LIBOR + 5.50% for
SRECs currently under purchase contracts with counterparties and another tranche priced at LIBOR + 9.00% for
uncontracted SRECs. Both tranches are subject to a LIBOR floor of 0.75%. During the initial six month
commitment period, amounts borrowed may be repaid and reborrowed. The loan matures in July 2021. The
facility contains customary covenants including the requirement to provide lender reporting. The Company
guarantees the delivery of SRECs on the subsidiary’s underlying contracts in the event of a delivery shortfall
pursuant to the SREC contracts with counterparties. The Company does not guarantee payments of principal or
interest on the loan. The credit facility also contains certain provisions in the event of default which entitles the
lender to take certain actions including acceleration of amounts due under the facilities. The Company was in
compliance with all debt covenants as of December 31, 2016.
In March 2016, a subsidiary of the Company entered into a $24.5 million secured, non-recourse loan
agreement. The loan will be repaid through cashflows from a lease pass-through arrangement previously entered
into by the Company. The loan matures in September 2022 and has an interest rate of LIBOR + 2.25%. The loan
agreement contains customary covenants including the requirement to maintain certain financial measurements
and provide lender reporting. The loan also contains certain provisions in the event of default which entitles the
lender to take certain actions including acceleration of amounts due under the loan. The Company was in
compliance with all debt covenants as of December 31, 2016.
96
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
In December 2013, a subsidiary of the Company entered into an agreement for a term loan of $38.0 million.
The loan matures in April 2022 and has a fixed interest rate of 4.50%. The proceeds of this term loan were
distributed to the members of this subsidiary, including the Company. The loan is secured by the assets and
related cash flow of this subsidiary and is non-recourse to the Company’s other assets. The Company was in
compliance with all debt covenants as of December 31, 2016.
Notes Payable
In December 2013, a subsidiary of the Company entered into a note purchase agreement with an investor
for the issuance of senior notes in exchange for proceeds of $27.2 million. The loan proceeds were distributed to
the Company for general corporate purposes. On the last business day of each quarter, commencing with
March 31, 2014, to the extent the Company’s subsidiary has insufficient funds to pay the full amount of the stated
interest of the outstanding loan balance, a payment-in-kind (“PIK”) interest rate of 12% is accrued and added to
the outstanding balance. As of December 31, 2016 and 2015 the portion of the outstanding loan balance that
related to PIK interest was $9.5 million and $6.3 million, respectively. The senior notes are secured by the assets
and related cash flows of certain of the Company’s subsidiaries and are non-recourse to the Company’s other
assets. The entire outstanding principal balance is payable in full on the December 2018 maturity date. The
Company was in compliance with all debt covenants as of December 31, 2016.
Solar Asset-Backed Notes
In July 2015, the Company entered into a securitization transaction pursuant to which the Company pooled
and transferred qualifying solar energy systems and related lease agreements secured by associated customer
contracts (“Solar Assets”) into a special purpose entity (“Issuer”), and issued $100.0 million in aggregate principal
of Solar Asset-Backed Notes, Series 2015-1, Class A, and $11.0 million in aggregate principal of Solar Asset-
Backed Notes, Class B, backed by these Solar Assets to certain investors (“Notes”). The Issuer is wholly owned
by the Company and is consolidated in the Company’s financial statements. Accordingly, the Company did not
recognize a gain or loss on the transfer of these assets. As of December 31, 2016 and 2015, these Solar Assets
had a carrying value of $181.8 million and $190.2 million, respectively, and are included under solar energy
systems, net, in the consolidated balance sheets. The Notes were issued at a discount of 0.08%.
The Company retained $7.3 million net of fees from proceeds from the Notes. In connection with the
transaction, the Company modified two lease pass-through arrangements with an investor. The lease pass-
through arrangements had been accounted for as a borrowing and any amounts outstanding from the
arrangements were reported as lease pass-through financing obligation as further explained in Note 14, Lease
Pass-Through Financing Obligations. The balance that was then outstanding under these arrangements was
$119.7 million. The Company partially repaid this obligation by paying the lease pass-through Fund investor an
aggregate amount of $88.9 million. The Company accounted for the modification of the lease pass-through
obligation as a modification of debt and did not record any gain or loss on the transaction.
The modified lease-pass through arrangements require the majority of the cash flows generated by the
Solar Assets to be passed on to the Issuer through monthly lease payments from the Fund investor. Those cash
flows are used to service the monthly Note principal and interest payments and satisfy the Issuer’s expenses, and
any residual cash flows are retained by the Fund investor and recorded as a reduction in the remaining financing
obligation. The Company recognizes revenue earned from the associated Customer Agreements in accordance
with the Company’s revenue recognition policy. The assets and cash flows generated by the Solar Assets are not
available to the other creditors of the Company, and the creditors of the Issuer, including the Note holders, have
no recourse to the Company’s other assets. The Company was in compliance with all debt covenants as of
December 31, 2016.
97
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
The scheduled maturities of debt, excluding debt discount, as of December 31, 2016 are as follows (in
thousands):
2017 ......................................................................................................................................... $
2018 .........................................................................................................................................
2019 .........................................................................................................................................
2020 .........................................................................................................................................
2021 .........................................................................................................................................
Thereafter ................................................................................................................................
Subtotal...............................................................................................................................
Less: Debt discount .................................................................................................................
Total .................................................................................................................................... $
16,107
306,113
27,168
29,139
411,623
119,957
910,107
(12,084)
898,023
Note 13. Derivatives
Interest Rate Swaps
The Company uses interest rate swaps to hedge variable interest payments due on certain of its term loans
and aggregation facility. These swaps allow the Company to incur fixed interest rates on these loans and receive
payments based on variable interest rates with the swap counterparty based on the one or three month LIBOR on
the notional amounts over the life of the swaps.
In January 2015, the Company purchased interest rate swaps which mature in October 2028. The interest
rate swap contracts were executed with four counterparties who were part of the lender group on the Company’s
syndicated term loans. In April 2016, the Company purchased an interest rate swap which matures in August
2022. The interest rate swap contract was executed with the lender on the Company’s bank term loan which
matures in September 2022. In November 2016, the Company purchased interest rate swaps which mature in
July 2034. The interest rate swap contracts were executed with two counterparties who were part of the lender
group on the Company’s syndicated aggregation facility. The swaps are forward starting with effective dates in
January 2019. As of December 31, 2016, the unrealized fair market value gain on the interest rate swaps was
$1.6 million as included in other assets in the consolidated balance sheet.
The interest rate swaps have been designated as cash flow hedges. In the year ended December 31, 2016,
the hedge relationships on the Company’s interest rate swaps have been assessed as highly effective as the
critical terms of the interest rate swaps match the critical terms of the underlying forecasted hedged transactions.
Accordingly, changes in the fair value of these derivatives are recorded as a component of accumulated other
comprehensive loss, net of income taxes. Changes in the fair value of these derivatives are subsequently
reclassified into earnings, and are included in interest expense, net, in the Company’s statements of operations in
the period that the hedged forecasted transactions affects earnings.
The Company recorded an unrealized gain of $0.3 million and an unrealized loss of $2.4 million for the
years ended December 31, 2016 and 2015, respectively, net of applicable tax expense of $0.2 million and $0.0
million, respectively. The Company recognized interest expense on derivatives into earnings of $1.0 million and
$1.5 million for the years ended December 31, 2016 and 2015, respectively, net of tax expense of $0.6 million
and $0.0 million, respectively. During the next twelve months, the Company estimates that an additional $1.3
million will be reclassified as an increase to interest expense. There were no undesignated derivative instruments
recorded by the Company as of December 31, 2016.
98
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
At December 31, 2016, the Company had the following designated derivative instruments classified as
derivative assets as reported in other liabilities in the Company’s balance sheet (in thousands, other than quantity
and interest rates):
Quantity
Type
Interest rate swaps......
Interest rate swap .......
Interest rate swaps......
Maturity
Dates
4 10/31/2028
8/31/2022
1
7/31/2034
3
Hedge
Interest
Rates
Notional
Amount
Fair
Market
Value
2.17%-2.18%
1.27%
2.48%-2.52%
$
$
$
125,471
17,390
85,174
$
$
$
630
343
752
Credit Risk
Adjustment
(123)
$
$
$
$
(11) $
$
41
Adjusted
Fair
Market
Value
507
332
793
Warrants
In July 2015, the Company entered into a letter of intent to issue warrants to purchase up to 1,250,764
shares of the Company’s common stock to the former Series D and E preferred stockholders as an inducement to
convert their shares of convertible preferred stock into shares of common stock immediately prior to the closing of
the Company’s initial public offering and waive any potential anti-dilution adjustments resulting from the issuance
of shares of the Company’s common stock in the Company’s initial public offering. The warrants were issued on
September 30, 2015. The warrants are exercisable for three years from the date of grant and have an exercise
price of $22.50 per share. The warrant derivatives are recorded at fair value as derivative liabilities as reported in
other liabilities in the Company’s consolidated balance sheet. The fair market value of the warrants on the
commitment date was $1.5 million. The warrants are remeasured at each reporting period with the changes in the
fair value presented in other expenses (income), net in the Company’s statement of operations.
At December 31, 2016, the fair market value of the warrants was de minimis. At December 31, 2015, the fair
market value of the warrants was $0.6 million. The Company recognized a gain related to the change in fair value
of the warrants of $0.6 million and $0.9 million for the years ended December 31, 2016 and 2015, respectively.
Note 14. Lease Pass-Through Financing Obligations
The Company has five ongoing transactions referred to as “lease pass-through arrangements.” Under lease
pass-through arrangements, the Company leases solar energy systems to Fund investors under a master lease
agreement, and these investors in turn are assigned the leases with customers. The Company receives all of the
value attributable to the accelerated tax depreciation and some or all of the value attributable to the other
incentives. The Company assigns to the Fund investors the value attributable to the investment tax credits (“ITC”),
and, for the duration of the master lease term, the long-term recurring customer payments. Given the assignment
of the operating cash flows, these arrangements are accounted for as financing obligations. In addition, in one of
the lease pass-through structures, the Company sold, as well as leased, solar energy systems to a Fund investor
under a master purchase agreement. As the substantial risks and rewards in the underlying solar energy systems
were retained by the Company, this arrangement was also accounted for as a financing obligation.
Under these lease pass-through arrangements, wholly owned subsidiaries of the Company finance the cost
of solar energy systems with investors for an initial term of 20 – 25 years. The solar energy systems are subject to
Customer Agreements with an initial term not exceeding 20 years. These solar energy systems are reported
under the line item solar energy systems, net in the consolidated balance sheets. As of December 31, 2016 and
2015, the cost of the solar energy systems placed in service under the lease pass-through arrangements was
$494.9 million and $447.4 million, respectively. The accumulated depreciation related to these assets as of
December 31, 2016 and 2015 was $50.8 million and $33.5 million, respectively.
The investors make a series of large up-front payments and in certain cases subsequent smaller quarterly
payments (lease payments) to the subsidiaries of the Company. The Company accounts for the payments
received from the investors under the arrangements as borrowings by recording the proceeds received as lease
pass-through financing obligations. These financing obligations are reduced over a period of approximately
20 years by customer payments under the Customer Agreements, U.S. Treasury grants (where applicable),
incentive rebates (where applicable), the fair value of the ITCs monetized (where applicable) and proceeds from
99
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
the contracted resale of SRECs as they are received by the investor. Under this approach, the Company
continues to account for the arrangement with the customers in its consolidated financial statements as if it is the
lessor in the arrangement with the customer and accounts for the customer lease and any related U.S. Treasury
grants or incentive rebates as well the resale of SRECs consistent with the Company’s revenue recognition
accounting policies and the monetization of investment tax credits as described in Note 2, Summary of Significant
Accounting Policies.
Interest is calculated on the lease pass-through financing obligations using the effective interest rate
method. The effective interest rate, which is adjusted on a prospective basis, is the interest rate that equates the
present value of the estimated cash amounts, including ITCs, to be received by the investor over the lease term
with the present value of the cash amounts paid by the investor to the Company, adjusted for amounts received
by the investor. The lease pass-through financing obligations are nonrecourse once the associated assets have
been placed in service and all the contractual arrangements have been assigned to the investor.
Under four of the lease pass-through arrangements, the investor has a right to extend its right to receive
cash flows from the customers beyond the initial term in certain circumstances. The Company has the option to
settle the outstanding financing obligation on the ninth anniversary for two of the lease pass-through obligations
and on the eleventh anniversary for two of the lease pass-through financing obligations at a price equal to the
higher of (a) the fair value of future remaining cash flows or (b) the amount that would result in the investor
earning their targeted return. In three of these lease pass-through arrangements, the investor has an option to
require repayment of the entire outstanding balance of the financing obligation on the tenth anniversary at a price
equal to the fair value of the future remaining cash flows. In the fourth lease pass through arrangement, the
investor has an option to require repayment of the entire outstanding balance of the financing obligation three
business days prior to the 7th anniversary in certain circumstances and on the 10th anniversary at a price equal
to the fair value of the future remaining cash flows.
In the fifth lease pass-through arrangement, the investor has a right, on June 30, 2019, to purchase all of the
systems leased at a price equal to the higher of (a) the sum of the present value of the expected remaining lease
payments due by the investor, discounted at 5%, and the fair market value of the Company’s residual interest in
the systems as determined through independent valuation or (b) a set value per kilowatt applied to the aggregate
size of all leased systems.
Under all lease pass-through arrangements, the Company is responsible for services such as warranty
support, accounting, lease servicing and performance reporting to the host customers. As part of the warranty and
performance guarantee with the host customers, the Company guarantees certain specified minimum annual
solar energy production output for the solar energy systems leased to the customers, which the Company
accounts for as disclosed in Note 2, Summary of Significant Accounting Policies.
As discussed in Note 12, Indebtedness, in connection with the pooling of assets related to the securitization
transaction entered into in July 2015, an aggregate amount of $88.9 million of the lease pass-through financing
obligation was repaid.
In September 2015, the Company entered into a lease pass-through arrangement and in connection with
this arrangement, the Company agreed to defer a portion (up to 25%) of the amounts required to be paid upfront
under the arrangement through a loan between an indirectly wholly owned subsidiary of the Company and a
subsidiary of the Fund investor. The term loan agreement is for an aggregate amount up to $25.0 million. The
loan is collateralized by the related cash flows assigned to the Fund investor. There is a legal right to offset the
loan if an event of default has occurred. Therefore, the lease pass-through financing obligation related to this
arrangement is recorded net of the loan. As of December 31, 2016, the loan amount was $23.2 million.
100
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
At December 31, 2016, future minimum lease payments expected to be made by the investor under the
lease pass-through fund arrangement for each of the next five years and thereafter are as follows (in thousands):
2017......................................................................................................................................... $
2018.........................................................................................................................................
2019.........................................................................................................................................
2020.........................................................................................................................................
2021.........................................................................................................................................
Thereafter ................................................................................................................................
Total.................................................................................................................................... $
523
523
523
523
523
2,989
5,604
Note 15. VIE Arrangements
The Company consolidated various VIEs at December 31, 2016 and 2015. The carrying amounts and
classification of the VIEs’ assets and liabilities included in the consolidated balance sheets are as follows (in
thousands):
Assets .............................................................................................................
Current assets................................................................................................
Cash ........................................................................................................... $
Restricted cash ...........................................................................................
Accounts receivable, net.............................................................................
Prepaid expenses and other current assets ...............................................
Total current assets.............................................................................
Solar energy systems, net ..........................................................................
Other assets ...............................................................................................
Total assets .......................................................................................... $
Liabilities ........................................................................................................
Current liabilities ...........................................................................................
Accounts payable ....................................................................................... $
Distributions payable to noncontrolling interests
and redeemable noncontrolling interests.................................................
Accrued expenses and other liabilities .......................................................
Deferred revenue, current portion...............................................................
Deferred grants, current portion..................................................................
Long-term non-recourse debt, current portion ............................................
Total current liabilities.........................................................................
Deferred revenue, net of current portion.....................................................
Deferred grants, net of current portion........................................................
Long-term non-recourse debt, net of current portion ..................................
Total liabilities ...................................................................................... $
December 31,
2016
2015
120,728 $
1,680
20,771
242
143,421
1,920,330
1,481
2,065,232 $
44,407
757
12,965
66
58,195
1,305,420
—
1,363,615
14,873 $
11,025
10,654
782
25,827
3,644
8,616
64,396
396,858
105,390
50,367
617,011 $
8,063
175
21,344
7,198
1,159
48,964
353,392
108,528
29,580
540,464
terminate the leasehold interests in all of the leased projects on the tenth anniversary of the effective date of the
master lease. In this circumstance, the Company would be required to pay the noncontrolling interest an amount
equal to the fair market value, as defined in the governing agreement of all leased projects as of that date.
The Company holds certain variable interests in nonconsolidated VIEs established as a result of five lease
pass-through Fund arrangements as further explained in Note 14, Lease Pass-Through Financing Obligations.
101
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
The Company does not have material exposure to losses as a result of its involvement with the VIEs in excess of
the amount of the financing liability recorded in the Company’s consolidated financial statements. The Company
is not considered the primary beneficiary of the VIEs.
Note 16. Redeemable Noncontrolling Interests
During certain specified periods of time (the “Early Exit Periods”), noncontrolling interests in certain funding
arrangements have the right to put all of their membership interests to the Company (the “Put Provisions”). During
a specific period of time (the “Call Periods”), the Company has the right to call all membership units of the related
redeemable noncontrolling interests.
The carrying value of redeemable noncontrolling interests was greater than the redemption value except for
four and two Funds at December 31, 2016 and 2015, respectively, where the carrying value has been adjusted to
the redemption value.
Note 17. Stockholders’ Equity
On August 10, 2015, the Company closed its initial public offering in which 17,900,000 shares of common
stock were sold at a public offering price of $14.00 per share, resulting in net proceeds of approximately $220.9
million, after deducting underwriting discounts and commissions and $7.9 million in offering expenses paid by the
Company, and excluding the proceeds received by the selling stockholders who sold an aggregate of 417,732
shares of the total 17,900,000 shares sold in the initial public offering.
Convertible Preferred Stock
Immediately prior to closing of the Company’s initial public offering, all 54,840,767 shares of the Company’s
outstanding preferred stock were automatically converted into shares of the Company’s common stock. In
addition, the Company issued 1,667,683 shares of common stock and executed a letter of intent to issue
1,250,764 warrants subject to contingencies being met to purchase the Company’s common stock to the former
Series D and E preferred stockholders as an inducement to convert their shares of convertible preferred stock into
shares of common stock immediately prior to the closing of the Company’s initial public offering and to waive any
potential anti-dilution adjustments resulting from the issuance of shares in the Company’s common stock in the
Company’s initial public offering. The additional shares and warrants resulted in a beneficial conversion feature as
a result of the inducement for Series D and E preferred stock and the Company recognized a $24.9 million
deemed dividend to Series D and E preferred stockholders at the conversion date. This non-cash charge impacts
net loss attributable to our common stockholders and basic and diluted net loss per share applicable to common
stockholders. The warrants were issued on September 30, 2015 and are considered freestanding derivatives as
disclosed in Note 13, Derivatives.
The Company did not have any convertible preferred stock issued and outstanding as of December 31,
2016 and 2015.
The Company has not declared or paid any dividends in 2016, 2015 or 2014 other than the $24.9 million
deemed dividend to Series D and E preferred stockholders in August 2015.
Common Stock
The Company has reserved sufficient shares of common stock for issuance upon the exercise of stock
options and the exercise of warrants. Common stockholders are entitled to dividends if and when declared by the
board of directors, subject to the prior rights of the preferred stockholders. As of December 31, 2016, no common
stock dividends had been declared by the board of directors.
102
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
The Company has reserved shares of common stock for issuance as follows (in thousands)
Stock plans ......................................................................................................
Shares available for grant .............................................................................
2015 Equity Incentive Plan .........................................................................
2015 Employee Stock Purchase Plan ........................................................
Options outstanding ......................................................................................
Restricted stock units outstanding.................................................................
Total ............................................................................................................
December 31,
2016
2015
11,081
2,511
12,897
4,106
30,595
12,006
1,000
12,795
1,506
27,307
Note 18. Stock-Based Compensation
MEC 2009 Stock Plan
In connection with the MEC acquisition in February 2014, the Company assumed nonstatutory stock options
granted under the Mainstream Energy Corporation 2009 Stock Plan (the “MEC Plan”) held by MEC employees
who continued employment with the Company after the closing and converted them into options to purchase
shares of the Company’s common stock. The MEC Plan was terminated on the closing of the acquisition but the
outstanding awards under the MEC Plan that the Company assumed in the acquisition will continue to be
governed by their existing terms. As of December 31, 2016, options to purchase 524,355 shares of the
Company’s common stock remained outstanding under the MEC Plan.
2013 Equity Incentive Plan
In July 2013, the Board of Directors approved the 2013 Plan. In March 2015, the Board of Directors
authorized an additional 3,000,000 shares reserved for issuance under the 2013 Plan. An aggregate of 4,500,000
shares of common stock are reserved for issuance under the 2013 Plan plus (i) any shares that were reserved but
not issued under the plan that was previously in place, and (ii) any shares subject to stock options or similar
awards granted under the plan that was previously in place that expire or otherwise terminate without having been
exercised in full and shares issued that are forfeited to or repurchased by the Company, with the maximum
number of shares to be added to the 2013 Plan pursuant to clauses (i) and (ii) equal to 8,044,829 shares. Stock
options granted to employees generally have a maximum term of ten-years and vest over a four-year period from
the date of grant; 25% vest at the end of one year, and 75% vest monthly over the remaining three years. The
options may include provisions permitting exercise of the option prior to full vesting. Any unvested shares shall be
subject to repurchase by the Company at the original exercise price of the option in the event of a termination of
an optionee’s employment prior to vesting. All the remaining shares that were available for future grants under the
2013 Plan were transferred to the 2015 Equity Incentive Plan (“2015 Plan”) at the inception of the 2015 Plan. As
of December 31, 2016, the Company had not granted restricted stock or other equity awards (other than options)
under the 2013 Plan.
2014 Equity Incentive Plan
In August 2014, the Board approved the 2014 Equity Incentive Plan (“2014 Plan”). An aggregate of 947,342
shares of common stock are reserved for issuance under the 2014 Plan. The 2014 Plan was adopted to
accommodate a broader transaction with a sales entity and to allow for similar transactions in the future. In July
2015, the Board approved an increase in the number of shares of common stock reserved to 1,197,342. As of
July 2015, the Company granted all 1,197,342 restricted stock units (“RSUs”) available under the 2014 Plan.
2015 Equity Incentive Plan
In July 2015, the Board approved the 2015 Plan. An aggregate of 11,400,000 shares of common stock are
reserved for issuance under the 2015 Plan plus (i) any shares that were reserved but not issued under the 2013
Plan at the inception of the 2015 Plan, and (ii) any shares subject to stock options or similar awards granted
103
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
under the 2008 Plan, 2013 Plan and 2014 Plan that expire or otherwise terminate without having been exercised
in full and shares issued that are forfeited to or repurchased by the Company, with the maximum number of
shares to be added to the 2015 Plan pursuant to clauses (i) and (ii) equal to 15,439,334 shares. The 2015 Plan
provides for annual automatic increases on January 1 to the shares reserved for issuance. The automatic
increase of the number of shares available for issuance under the 2015 Plan is equal to the least of 10 million
shares, 4% of the outstanding shares of common stock as of the last day of our immediately preceding fiscal year
or such other amount as the Board of Directors may determine. In May 2016, the Board of Directors authorized an
additional 4,051,282 shares reserved for issuance under the 2015 Plan. Stock options granted to employees
generally have a maximum term of ten-years and vest over a four-year period from the date of grant; 25% vest at
the end of one year, and 75% vest monthly over the remaining three years. The options may include provisions
permitting exercise of the option prior to full vesting. Any unvested shares shall be subject to repurchase by the
Company at the original exercise price of the option in the event of a termination of an optionee’s employment
prior to vesting. RSUs granted to employees generally vest over a four-year period from the date of grant; 25%
vest at the end of one year, and 75% vest quarterly over the remaining three years.
Stock Options
The following table summarizes the activity for all stock options under the Company’s equity incentive plans
for the years ended December 31, 2016 and 2015 (shares in thousands):
Outstanding at December 31, 2014.....
Granted...........................................
Exercised ........................................
Cancelled / forfeited........................
Outstanding at December 31, 2015.....
Granted...........................................
Exercised ........................................
Cancelled / forfeited........................
Outstanding at December 31, 2016.....
Options
Outstanding
11,408
3,806
(1,210)
(1,209)
12,795
3,674
(1,852)
(1,720)
$
12,897
$
Weighted
Average
Exercise Price
Outstanding
4.42
9.50
2.96
6.27
5.89
5.73
2.94
8.37
5.94
Weighted
Average
Remaining
Contractual Life
8.20
Aggregate
Intrinsic
Value
7.82
$
75,797
7.49
$
9,625
Options vested and exercisable at
December 31, 2016 ..........................
Options vested and expected to
vest at December 31, 2016 ..............
6,763
$
5.19
6.40
$
8,943
10,886
$
5.80
7.25
$
9,435
As of December 31, 2016, 154,000 outstanding stock options had a performance feature that is required to
be satisfied before the option is vested and exercisable. There were 276,660 and 517,285 unvested exercisable
shares as of December 31, 2016 and 2015, respectively, which are subject to a repurchase option held by the
Company at the original exercise price. These exercisable but unvested shares have a weighted average
remaining vesting period of 2.2 years. There was no exercise of unvested options in the year ended
December 31, 2016 and 2015. There were no unvested options subject to repurchase as of December 31, 2016
and 2015.
The weighted-average grant-date fair value of stock options granted during the year ended December 31,
2016, 2015 and 2014 were $2.26, $4.56 and $3.72 per share, respectively. The total intrinsic value of the options
exercised during the year ended December 31, 2016, 2015 and 2014 was $6.3 million, $8.1 million and $4.8
million, respectively. The aggregate intrinsic value is the difference of the current fair value of the stock and the
exercise price for in-the-money stock options. The total fair value of options vested during the year ended
December 31, 2016, 2015 and 2014 was $9.8 million, $9.1 million and $3.9 million, respectively.
104
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
The Company estimates the fair value of stock-based awards on their grant date using the Black-Scholes
option-pricing model. The Company estimates the fair value using a single-option approach and amortizes the fair
value on a straight-line basis for options expected to vest. All options are amortized over the requisite service
periods of the awards, which are generally the vesting periods.
The Company estimated the fair value of stock options with the following assumptions:
2016
Year Ended December 31,
2015
2014
Risk-free interest rate.....................................
1.18% - 2.23%
Volatility.......................................................... 36.00% - 49.64%
Expected term (in years) ................................
5.00 - 6.26
Expected dividend yield .................................
0.00%
1.55% - 1.95%
36.30% - 39.63%
5.50 - 6.23
1.68% - 2.01%
37.41% - 46.68%
5.34 - 6.08
0.00%
0.00%
The expected term assumptions were determined based on the average vesting terms and contractual lives
of the options. The risk-free interest rate is based on the rate for a U.S. Treasury zero-coupon issue with a term
that approximates the expected life of the option grant. For stock options granted in the year ended December 31,
2016, 2015 and 2014, the Company considered the volatility data of a group of publicly traded peer companies in
its industry. Forfeiture rates are estimated using the Company’s expectations of forfeiture rates for the Company’s
employees and are adjusted when estimates change. The estimation of stock awards that will ultimately vest
requires judgment, and to the extent actual results or updated estimates differ from the Company’s current
estimates, such amounts will be recorded as a cumulative adjustment in the period the estimates are revised. The
Company considers many factors when estimating expected forfeitures, including historical forfeiture pattern, the
types of awards and employee class. Actual results, and future changes in estimates, may differ substantially
from management’s current estimates.
Restricted Stock Units
In 2014, the Company granted a total of 947,342 RSUs that are subject to certain performance targets to a
third party partner. The RSUs will vest upon the third party originating certain thresholds of expected megawatts
in new systems for the period starting August 2014. In addition, these RSUs are subject to a clawback provision
that requires the holder of the RSUs to either forfeit all the RSUs or pay the Company the grant date fair value for
all RSUs that are not forfeited if the third party breaches the exclusivity provision of the parties’ commercial
agreement. Additionally, 372,342 of these RSUs are subject to an additional performance-based clawback
provision that is based on the third party originating certain additional thresholds of expected megawatts in new
systems from April 2016 through September 2017. The exclusivity and performance based clawbacks expire in
August 2017 and September 2017, respectively. The remaining 575,000 RSUs have an exclusivity provision
which expires in September 2019.
The performance-based provision is considered substantive. As a result, the Company will start recognizing
expense as the performance targets are met. The first performance target was met in 2015. The Company
recognized $1.2 million and $0.8 million compensation expense in the years ended December 31, 2016 and 2015
as certain performance targets were met.
105
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
In 2015, the Company granted 250,000 RSUs to a third party partner, in addition to RSUs granted to
employees as part of the 2015 Equity Incentive Plan. As of December 31, 2016, 470,000 outstanding RSUs had a
performance feature that is required to be satisfied before the option is vested and exercisable. The following
table summarizes the activity for all RSUs under all of the Company’s equity incentive plans for the years ended
December 31, 2016 and 2015 (shares in thousands):
Unvested balance at December 31, 2014 .......................................................
Granted .......................................................................................................
Issued .........................................................................................................
Cancelled / forfeited ....................................................................................
Unvested balance at December 31, 2015 .......................................................
Granted .......................................................................................................
Issued .........................................................................................................
Cancelled / forfeited ....................................................................................
Unvested balance at December 31, 2016 .......................................................
Weighted
Average Grant
Date Fair
Value
Shares
947
808
(182)
(67)
1,506
3,363
(422)
(341)
4,106
$
$
9.40
11.13
9.58
11.37
10.44
5.82
9.55
6.80
6.87
Employee Stock Purchase Plan
In July 2015, the board of directors approved the 2015 Employee Stock Purchase Plan (“ESPP”) and
adopted the ESPP in August 2015, under which 1,000,000 shares of the Company’s common stock have been
reserved for issuance to eligible employees. The ESPP provides for an automatic increase of the number of
shares available for issuance under the ESPP on the first day of each fiscal year beginning on January 1, 2016,
equal to the least of 5 million shares, 2% of the outstanding shares of our common stock on the last day of the
immediately preceding fiscal year, or such other amount as may be determined by the Board of Directors. In May
2016, the Board of Directors authorized an additional 2,025,641 shares reserved for issuance under the ESPP.
Eligible employees are offered shares bi-annually through two six month offering periods, which begin on the first
trading day on or after May 15 and November 15 of each year. Employees may purchase a limited number of
shares of the Company’s common stock via regular payroll deductions at a discount of 15% of the lower of the fair
market value of the Company’s common stock on the first trading date of each offering period or on the exercise
date. Employees may deduct up to 15% of payroll, with a cap of $25,000 of fair market value of shares in any
calendar year and 2,000 shares per employee per offering period.
Stock-Based Compensation Expense
The Company recognized stock-based compensation expense, including the compensation expense
resulting from the sales of common stock by employees and former employees in 2015 and 2014 to existing
investors and ESPP expenses, in the consolidated statements of operations as follows (in thousands):
Year Ended December 31,
2015
2014
2016
Cost of operating leases and incentives......................................... $
Cost of solar energy systems and product sales............................
Sales and marketing.......................................................................
Research and development............................................................
General and administration ............................................................
Total........................................................................................... $
2,039 $
409
7,831
515
7,929
18,723 $
1,649 $
236
5,242
205
8,491
15,823 $
155
682
897
270
7,214
9,218
The Company capitalized $0.1 million, $0.2 million and $0.1 million of stock based compensation for internal
use software development projects during the years ended December 31, 2016, 2015 and 2014, respectively.
106
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
As of December 31, 2016 and 2015, total unrecognized compensation cost related to outstanding stock
options and RSUs was $29.4 million and $20.9 million, respectively, which is expected to be recognized over a
weighted-average period of 2.6 years and 2.8 years, respectively.
Note 19. Retirement Plan
The Company offers a retirement plan qualified under Section 401(k) of the Code to its employees (the
“401(k) plan”). The available investments are selected by the Company and allow participants to defer pre-tax
amounts to the plan as allowed by the Code.
Upon acquisition of MEC, the Company incurred post-acquisition contributions of $0.5 million to the MEC
401(k) plan for the year ended December 31, 2014. The MEC 401(k) plan was terminated effective December 31,
2014.
Note 20. Operating Revenues under Customer Agreements
Customer Agreements representing PPAs require customers to make payments to Sunrun based on the
electricity production of the related Project, whereas Customer Agreements representing leases require fixed
monthly payments from customers.
Total revenue from customers’ contingent payments under PPAs recognized in the years ended
December 31, 2016, 2015 and 2014 was $86.2 million, $59.8 million and $42.8 million, respectively.
Future minimum lease payments to be received from customers whose Customer Agreements represent
non-cancelable leases are as follows (in thousands):
2017 ......................................................................................................................................... $
2018 .........................................................................................................................................
2019 .........................................................................................................................................
2020 .........................................................................................................................................
2021 .........................................................................................................................................
Thereafter ................................................................................................................................
Total .................................................................................................................................... $
27,727
28,141
28,525
28,921
29,327
443,840
586,481
Note 21. Income Taxes
The following table presents the loss before income taxes for the periods presented (in thousands):
For the Year Ended December 31,
2016
2014
2015
(127,680)
33,545
$
$
80,895
394,988
267,308 $
220,660
254,205 $
86,638
167,533
(Income) loss attributable to common stockholders ....................... $
Loss attributable to noncontrolling interest and
redeemable noncontrolling interests............................................
Loss before income taxes ............................................................ $
107
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
The income tax provision (benefit) consists of the following (in thousands):
Current............................................................................................
Federal ......................................................................................
State ..........................................................................................
Total current expense ...........................................................
Deferred..........................................................................................
Federal ......................................................................................
State ..........................................................................................
Total deferred provision ........................................................
Total.................................................................................
$
$
For the Year Ended December 31,
2014
2015
2016
— $
—
—
$
—
—
—
—
—
—
30,197
5,796
35,993
35,993 $
(7,516)
2,217
(5,299)
(5,299) $
(8,196)
(1,847)
(10,043)
(10,043)
rate for the periods presented:
For the Year Ended December 31,
2014
2016
2015
Tax provision (benefit) at federal statutory rate ...................................
State income taxes, net of federal benefit ...........................................
Effect of noncontrolling and redeemable noncontrolling interests .......
Stock-based compensation..................................................................
Effect of prepaid tax asset ...................................................................
Tax credits ...........................................................................................
Other ....................................................................................................
Total ................................................................................................
(34.00)%
(34.00)%
1.92
50.23
0.68
(5.57)
(1.61)
1.81
13.46%
0.87
29.53
1.06
0.04
(0.43)
0.85
(2.08)%
(34.00)%
(1.10)
17.59
1.37
9.39
(0.22)
0.98
(5.99)%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The
following table represents significant components of the Company’s deferred tax assets and liabilities for the
periods presented (in thousands):
Deferred tax assets .........................................................................................
Accruals and prepaids................................................................................ $
Deferred revenue .......................................................................................
Net operating loss carryforwards ...............................................................
Stock-based compensation........................................................................
Investment tax and other credits ................................................................
Total deferred tax assets.......................................................................
Less: Valuation allowance..........................................................................
Gross deferred tax assets .....................................................................
Deferred tax liabilities......................................................................................
Capitalized initial direct costs .....................................................................
Fixed asset depreciation ............................................................................
Deferred tax on investment in partnerships ...............................................
Gross deferred tax liabilities..................................................................
Net deferred tax liabilities ................................................................. $
December 31,
2016
2015
18,010 $
23,559
218,719
6,908
18,454
285,650
(663)
284,987
45,030
206,754
448,600
700,384
(415,397) $
12,904
34,710
229,464
3,748
11,261
292,087
—
292,087
27,539
178,511
276,183
482,233
(190,146)
108
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
As of December 31, 2016, the Company had net operating loss carryforwards for federal, California and
other state income tax purposes of approximately $571.3 million, $348.2 million and $176.7 million, respectively,
which will begin to expire in the year 2028, 2028 and 2024, respectively, if not utilized. Of the federal, California,
and other state NOL carryover, $8.6 million, $4.5 million and $2.4 million relates to windfall stock option
deductions which, when realized, will be an increase to additional paid in capital. As of December 31, 2015, the
Company had net operating loss carryforwards for federal, California and other state income tax purposes of
approximately $595.0 million, $368.0 million and $178.6 million, respectively. Of the federal, California, and other
state NOL carryover, $5.3 million, $1.3 million and $2.5 million relates to windfall stock option deductions which,
when realized, will be an increase to additional paid in capital.
As of December 31, 2016, the Company has an investment tax credit carryforward of approximately $9.3
million which begins to expire in the year 2028, if not utilized and California enterprise zone credits of
approximately $1.0 million, which are subject to valuation allowance. As of December 31, 2015, the Company has
an investment tax credit carryforward of approximately $4.2 million and California enterprise zone credits of
approximately $1.0 million.
Generally, utilization of the net operating loss carryforwards and credits may be subject to a substantial
annual limitation due to the ownership change limitations provided by the Internal Revenue Code (IRC) of 1986,
as amended and similar state provisions. The Company performed an analysis to determine whether an
ownership change under Section 382 of the Code had occurred and determined that no ownership changes were
identified as of December 31, 2016.
Valuation allowances are provided against deferred tax assets to the extent that it is more likely than not that
the deferred tax asset will not be realized. The Company’s management considers all available positive and
negative evidence including its history of operating income or losses, future reversals of existing taxable
temporary difference, taxable income in carryback years and tax-planning strategies. The Company has
concluded there was sufficient positive evidence based on the reversal pattern of the deferred tax liability and
available tax planning strategies being relied upon at the end of December 31, 2016 and 2015 to support the
position that the Company does not need to maintain a valuation allowance on deferred tax assets, except certain
state tax credits which are not expected to be utilized based on the above criteria.
Uncertain Tax Positions
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the
normal course of business, the Company is subject to examination by federal, state and local jurisdictions, where
applicable. The statute of limitations for the tax returns varies by jurisdictions.
We determine whether a tax position is more likely than not to be sustained upon examination, including
resolution of any related appeals or litigation processes, based on the technical merits of the position. We use a
two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates that it is more likely than not that the
position will be sustained upon tax authority examination, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50%
likely of being realized upon ultimate settlement. We have analyzed the Company’s inventory of tax positions with
respect to all applicable income tax issues for all open tax years (in each respective jurisdiction).
Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the
provision for taxes in the consolidated statements of operations. The Company does not have any tax positions
for which it is reasonably possible that the total amount of gross unrecognized tax benefits will significantly
change within 12 months of December 31, 2016.
109
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in
thousands):
Balance at December 31, 2014 ............................................................................................... $
Acquired from CEE ..................................................................................................................
Balance at December 31, 2015 and 2016 ............................................................................... $
—
1,525
1,525
As of December 31, 2016 and 2015, the Company had $1.5 million, of unrecognized tax benefits related to
the acquisition of CEE. In addition, there was $0.3 million and $0.3 million, respectively, of interest and penalties
for uncertain tax positions as of December 31, 2016 and 2015. The Company does not have any tax positions for
which it is reasonably possible that the total amount of gross unrecognized tax benefits will increase or decrease
within the next 12 months.
Five of our investment funds are currently being audited by the Internal Revenue Service (the “IRS”), three
of which involve a review of our fair market value determinations of our solar energy systems. In addition, two of
our investors are currently being audited by the IRS, which audits involve a review of the fair market value
determination of our solar energy systems. If these audits result in an adverse finding, we would be subject to an
indemnity obligation to these investors. The Company is subject to taxation and files income tax returns in the
U.S., and various state and local jurisdictions. Due to the Company’s net losses, substantially all of its federal,
state and local income tax returns since inception are still subject to audit.
The following table summarizes the tax years that remain open and subject to examination by the tax
authorities in the most significant jurisdictions in which the Company operates:
U.S. Federal .................................................................................................................
State .............................................................................................................................
Tax Years
2013 - 2016
2012 - 2016
Net Operating Loss Carryforwards
As a result of the Company’s net operating loss carryforwards as of December 31, 2016, the Company does
not expect to pay income tax, including in connection with its income tax provision for the year ended
December 31, 2016, until the Company’s net operating losses are fully utilized. As of December 31, 2016, the
Company’s federal and state net operating loss carryforwards were $571.3 million and $524.9 million,
respectively. If not utilized, the federal net operating loss will begin to expire in the year 2028 and the state net
operating losses will begin to expire in the year 2024.
Note 22. Commitments and Contingencies
Letters of Credit
As of December 31, 2016 and 2015, the Company had $6.2 million and $3.5 million, respectively, of unused
letters of credit outstanding, which carry fees of 2.75%, per annum.
Non-cancellable Operating Leases
The Company leases facilities and equipment under non-cancellable operating leases. Total operating lease
expenses were $12.4 million, $7.0 million and $4.0 million for the years ended December 31, 2016, 2015 and
2014, respectively.
Certain operating leases contain rent escalation clauses, which are recorded on a straight-line basis over
the initial term of the lease with the difference between the rent paid and the straight-line rent recorded as a
deferred rent liability. Lease incentives received from landlords are recorded as deferred rent liabilities and are
amortized on a straight-line basis over the lease term as a reduction to rent expense. Deferred rent liabilities were
$2.9 million and $1.9 million as of December 31, 2016 and 2015, respectively.
110
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Future minimum lease payments expected to be made under non-cancelable operating lease agreements
as of December 31, 2016 for each of the years ending December 31, are as follows (in thousands):
2017 ......................................................................................................................................... $
2018 .........................................................................................................................................
2019 .........................................................................................................................................
2020 .........................................................................................................................................
2021 .........................................................................................................................................
Thereafter ................................................................................................................................
Total .................................................................................................................................... $
Capital Lease Obligations
As of December 31, 2016 and 2015, capital lease obligations were $23.0 million and $24.0 million,
respectively. The capital lease obligations bear interest at rates up to 10% per annum.
The following is a schedule of future lease payments as of December 31, 2016 (in thousands):
2017 ........................................................................................................................................... $
2018 ...........................................................................................................................................
2019 ...........................................................................................................................................
2020 ...........................................................................................................................................
2021 ...........................................................................................................................................
Thereafter ..................................................................................................................................
Total future lease payments..................................................................................................
Less: Amount representing estimated executory costs included in future lease payments.......
Net minimum future lease payments.....................................................................................
Less: Amount representing interest ...........................................................................................
Present value of future payments .........................................................................................
Less: Current portion .................................................................................................................
Long term portion .................................................................................................................. $
9,651
8,751
5,524
3,622
2,227
2,543
32,318
10,814
7,920
4,751
854
177
40
24,556
512
24,044
1,064
22,980
10,015
12,965
Purchase Commitments
In January 2015, the Company entered into a purchase commitment with one of its suppliers to purchase
$70.0 million of photovoltaic modules over the next 12 months with the first modules delivered in January 2015. In
October 2015, the Company amended its commitment to purchase additional photovoltaic modules to be
delivered until December 2016, with an option to extend certain commitments until March 31, 2017, for a total
commitment of $146.0 million. In 2016, the Company signed multiple amendments to reduce the price for
products purchased after a specified date. In November 2016, the Company amended the structure of the
agreement, among other things, for which purchase commitments are no longer required.
Guarantees
The Company guarantees one of its investors in one of its Funds an internal rate of return, calculated on an
after-tax basis, in the event that it purchases the investor’s interest or the investor sells its interest to the
Company. The Company does not expect the internal rate of return to fall below the guaranteed amount;
however, due to uncertainties associated with estimating the timing and amount of distributions to the investor
and the possibility for and timing of the liquidation of the Fund, the Company is unable to determine the potential
maximum future payments that it would have to make under this guarantee.
111
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
ITC and Cash Grant Indemnification
The Company is contractually committed to compensate certain investors for any losses that they may
suffer in certain limited circumstances resulting from reductions in ITCs or U.S. Treasury grants. Generally, such
obligations would arise as a result of reductions to the value of the underlying solar energy systems as assessed
by the IRS or U.S. Treasury Department. At each balance sheet date, the Company assesses and recognizes,
when applicable, the potential exposure from this obligation based on all the information available at that time,
including any audits undertaken by the IRS. The Company believes that any payments to the investors in excess
of the amount already recognized by the Company for this obligation are not probable based on the facts known
as of the filing date of this Annual Report on Form 10-K. The maximum potential future payments that the
Company could have to make under this obligation would depend on the difference between the fair values of the
solar energy systems sold or transferred to the Funds as determined by the Company and the values the IRS
would determine as the fair value for the systems for purposes of claiming ITCs. ITCs are claimed based on the
statutory regulations from the IRS. The Company uses fair values determined with the assistance of an
independent third-party appraisal as the basis for determining the ITCs that are passed-through to and claimed by
the Fund investors. Since the Company cannot determine how the IRS will evaluate system values used in
claiming ITCs, the Company is unable to reliably estimate the maximum potential future payments that it could
have to make under this obligation as of each balance sheet date.
Litigation
The Company is subject to certain legal proceedings, claims, investigations and administrative proceedings
in the ordinary course of its business. The Company records a provision for a liability when it is both probable that
the liability has been incurred and the amount of the liability can be reasonably estimated. These provisions, if
any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings,
advice of legal counsel and other information and events pertaining to a particular case. Depending on the nature
and timing of any such proceedings that may arise, an unfavorable resolution of a matter could materially affect
the Company’s future consolidated results of operations, cash flows or financial position in a particular period.
In July 2012, the U.S. Treasury Department and the Department of Justice (together, the “Government”)
opened a civil investigation into the participation by residential solar developers in the Section 1603 grant
program. The Government served subpoenas on several developers, including Sunrun, along with their investors
and valuation firms. The focus of the investigation is the claimed fair market value of the solar systems the
developers submitted to the Government in their grant applications. The Company has cooperated fully with the
Government and plans to continue to do so. No claims have been brought against the Company. The Company is
not able to estimate the ultimate outcome or a range of possible loss at this point in time.
On April 13, 2016, a purported shareholder class action captioned Pytel v. Sunrun Inc., et al., Case No. CIV
538215, was filed in the Superior Court of California, County of San Mateo, against the Company, certain of the
Company’s directors and officers, the underwriters of the Company’s initial public offering and certain other
defendants. The complaint generally alleges that the defendants violated Sections 11, 12 and 15 of the Securities
Act of 1933 by making false or misleading statements in connection with the Company’s August 5, 2015 initial
public offering regarding the continuation of net metering programs. The plaintiffs seek to represent a class of
persons who acquired the Company’s common stock pursuant or traceable to the initial public offering. Plaintiffs
seek compensatory damages, including interest, rescission or rescissory damages, an award of reasonable costs
and attorneys’ fees, and any equitable or injunctive relief deemed appropriate by the court. On April 21, 2016, a
purported shareholder class action captioned Mancy v. Sunrun Inc., et al., Case No. CIV 538303, was filed in the
Superior Court of California, County of San Mateo. On April 22, 2016, a purported shareholder class action
captioned Brown et al. v. Sunrun Inc., et al., Case No. CIV 538311, was filed in the Superior Court of California,
County of San Mateo. On April 29, 2016, a purported shareholder class action captioned Baker et al. v. Sunrun
Inc., et al., Case No. CIV 538419, was filed in the Superior Court of California, County of San Mateo. On May 6,
2016, a purported shareholder class action captioned Greenberg v. Sunrun Inc., et al., Case 3:16-cv-02480, was
filed in the United States District Court for the Northern District of California. On May 10, 2016, a purported
shareholder class action captioned Nunez v. Sunrun Inc., et al., Case No. CIV 538593, was filed in the Superior
Court of California, County of San Mateo. On June 10, 2016, a purported shareholder class action captioned
Steinberg v. Sunrun Inc., et al., Case No. 539064, was filed in the Superior Court of California, County of San
112
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
Mateo. The Mancy, Brown, Baker, Greenberg, Nunez and Steinberg complaints are substantially similar to the
Pytel complaint, and seek similar relief against similar defendants on behalf of the same purported class.
l
On April 21, 2016, a purported shareholder class action captioned Cohen, et al. v. Sunrun Inc., et al., Case
No. CIV 538304, was filed in the Superior Court of California, County of San Mateo, against the Company, certain
of the Company’s directors and officers, and the underwriters of the Company’s initial public offering. The
complaint generally alleges that the defendants violated Sections 11, 12 and 15 of the Securities Act of 1933 by
making false or misleading statements in connection with an August 5, 2015 initial public offering regarding the
Company’s business practices and its dependence on complex financial instruments. The Cohen plaintiffs seek to
represent the same class and seek similar relief as the plaintiffs in the Pytel, Mancy, Brown, Greenberg, Nunez,
Steinberg and
Baker actions.
g
r
On September 26, 2016, the Baker, Brown, Cohen, Mancy, Nunez, Pytel and Steinberg actions were
consolidated. On February 9, 2017, the United States District Court for the Northern District of California granted
the Company’s motion to dismiss, with prejudice, with respect to these actions.
g
Note 23. Net Income (Loss) Per Share
Prior to the initial public offering, the Company calculated net income (loss) per share (EPS) available to
common stockholders using the two-class method, which allocates net income that otherwise would have been
available to common shareholders to holders of participating securities. In connection with the Company’s initial
public offering, the Company recognized a deemed dividend of $24.9 million to Series D and E convertible
preferred shareholders, as further discussed in Note 17, Shareholders’ Equity.
Basic net income (loss) per share is computed by dividing net income (loss) available to common
stockholders by the weighted-average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed by dividing net income (loss) available to common stockholders by the
weighted-average number of common shares outstanding during the period adjusted to include the effect of
potentially dilutive securities. Potentially dilutive securities are excluded from the computation of dilutive EPS in
periods in which the effect would be antidilutive.
The computation of the Company’s basic and diluted net income (loss) per share are as follows (in
thousands, except per share amounts):
Years Ended December 31,
2015
2014
2016
Numerator:
Net income (loss) attributable to common stockholders ...................... $
Less: Deemed dividend to convertible preferred stockholders ............
Net Income (loss) available to common stockholders .................... $
Denominator:
Weighted average shares used to compute net income (loss)
per share attributable to common stockholders, basic......................
Weighted average effect of potentially dilutive shares
to purchase common stock ...............................................................
Weighted average shares used to compute net income
(loss) per share attributable to common stockholders, diluted ....
Net income (loss) per share attributable to common
stockholders......................................................................................
Basic ............................................................................................... $
Diluted............................................................................................. $
91,687 $
—
91,687 $
(28,246) $
(24,890)
(53,136) $
(70,852)
—
(70,852)
102,367
55,091
22,795
2,597
—
—
104,964
55,091
22,795
0.90 $
0.87 $
(0.96) $
(0.96) $
(3.11)
(3.11)
113
Sunrun Inc.
Notes to Consolidated Financial Statements — Continued
The following shares were excluded from the computation of diluted net income (loss) per share as the
impact of including those shares would be anti-dilutive (in thousands):
Year Ended December 31,
2015
2014
2016
Preferred stock ...............................................................................
Warrants .........................................................................................
Outstanding stock options ..............................................................
Unvested restricted stock units.......................................................
ESPP ..............................................................................................
Total...........................................................................................
—
1,251
8,981
1,564
—
11,796
—
1,251
12,631
599
79
14,560
54,841
—
11,328
—
—
66,169
Note 24. Related Party Transactions
An individual who serves as one of the Company’s directors has direct and indirect ownership interests in
Enphase Energy, Inc. (“Enphase”). For the years ended December 31, 2016, 2015 and 2014, the Company
recorded $19.9 million, $11.9 million and $8.9 million, respectively, in purchases from Enphase and had
outstanding payables to Enphase of $0.4 million and $0.7 million as of December 31, 2016 and 2015,
respectively.
An individual who serves as one of the Company’s directors is also a director of Aquion, Inc. For the year
ended December 31, 2016, the Company recorded $0.4 million, in purchases from Aquion, Inc. and had a de
minimis amount of outstanding payables as of December 31, 2016. Prior to January 1, 2016, the Company did not
make purchases from Aquion, Inc.
114
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our “disclosure controls and
procedures” as of the end of the period covered by this Annual Report on Form 10-K, pursuant to Rules 13a-15(e)
and 15d-15(e) under the Exchange Act.
In connection with that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that
our disclosure controls and procedures were effective and designed to provide reasonable assurance that the
information required to be disclosed is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and forms as of December 31, 2016. The term
“disclosure controls and procedures,” as defined in Rules 13a-15I and 15d-15I under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management, including its principal executive
and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the
evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered
by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management used the Committee
of Sponsoring Organizations of the Treadway Commission Internal Control - Integrated Framework (2013), or the
COSO framework, to evaluate the effectiveness of internal control over financial reporting. Management believes
that the COSO framework is a suitable framework for its evaluation of financial reporting because it is free from
bias, permits reasonably consistent qualitative and quantitative measurements of our internal control over
financial reporting, is sufficiently complete so that those relevant factors that would alter a conclusion about the
effectiveness of our internal control over financial reporting are not omitted and is relevant to an evaluation of
internal control over financial reporting.
Management has assessed the effectiveness of our internal control over financial reporting as of
December 31, 2016 and has concluded that such internal control over financial reporting is effective.
Attestation Report of the Registered Public Accounting Firm on Internal Control over Financial Reporting
This Annual Report does not include an attestation report of our independent registered public accounting
firm on our internal control over financial reporting due to a transition period established by the rules of the SEC
115
for newly public companies and due to exemptions available to us as an “emerging growth company,” as defined
by the JOBS Act.
Item 9B. Other Information.
None.
116
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 of Form 10-K will be set forth in our proxy statement to be filed with
the SEC in connection with the solicitation of proxies for our 2017 Annual Meeting of Stockholders (“Proxy
Statement”) and is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120
days after the year-end of the fiscal year which this report relates.
Item 11. Executive Compensation.
The information required by this Item 11 will be set forth in the Proxy Statement and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The information required by this Item 12 will be set forth in the Proxy Statement and is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 will be set forth in the Proxy Statement and is incorporated herein
by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 will be set forth in the Proxy Statement and is incorporated herein
by reference.
117
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Documents filed as part of this report are as follows:
(1) Consolidated Financial Statements
Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial
Statements” under Item 8 of Part II of this Annual Report.
(2)
Financial Statement Schedules
The required information is included elsewhere in this Annual Report, not applicable, or not
material.
(3) Exhibits
The exhibits listed in the accompanying “Exhibit Index” are filed or incorporated by reference as
part of this Annual Report.
118
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
Date: March 8, 2017
Sunrun Inc.
By:
/s/ Lynn Jurich
Lynn Jurich
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been
signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ Lynn Jurich
Lynn Jurich
/s/ Robert Komin
Robert Komin
/s/ Edward Fenster
Edward Fenster
/s/ Steve Vassallo
Steve Vassallo
/s/ Richard Wong
Richard Wong
/s/ Gerald Risk
Gerald Risk
/s/ Jameson McJunkin
Jameson McJunkin
/s/ Katherine August-deWilde
Katherine August-deWilde
/s/ Leslie Dach
Leslie Dach
Chief Executive Officer and Director
(Principal Executive Officer)
March 8, 2017
Chief Financial Officer (Principal
Accounting and Financial Officer)
March 8, 2017
Chairman and Director
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
Director
Director
Director
Director
Director
Director
119
3.1
3.2
4.1
4.2
4.3
4.4
Exhibit
Number
Exhibit Description
EXHIBIT INDEX
Amended and Restated Certificate of Incorporation of the
Registrant
Incorporated by Reference
Form
File No.
Exhibit
Filing Date
10-Q 001-37511
3.1
9/15/15
Amended and Restated Bylaws of the Registrant
10-Q 001-37511
3.2
9/15/15
Form of common stock certificate of the Registrant
S-1
333-205217
4.1
6/25/15
Form of Warrant
8-K
001-37511
4.1
10/2/15
Tenth Amended and Restated Investors’ Rights Agreement
among the Registrant and certain holders of its capital
stock, dated as of March 31, 2015
S-1
333-205217
4.2
6/25/15
Shareholders Agreement among the Registrant and certain
holders of its capital stock, dated as of April 1, 2015
S-1
333-205217
4.4
6/25/15
4.5
Form of Stock Issuance Agreement
S-1/A 333-205217
4.4
7/22/15
10.1+
10.2+
10.3+
Form of Indemnification Agreement between the Registrant
and each of its directors and executive officers
S-1
333-205217
10.1
6/25/15
Sunrun Inc. 2015 Equity Incentive Plan and related form
agreements
S-1/A 333-205217
10.2
7/22/15
Sunrun Inc. 2015 Employee Stock Purchase Plan and
related form agreements
S-1/A 333-205217
10.3
7/22/15
10.4+
Sunrun Inc. 2014 Equity Incentive Plan
S-1
333-205217
10.4
6/25/15
10.5+
10.6+
Sunrun Inc. 2013 Equity Incentive Plan and related form
agreements
S-1
333-205217
10.5
6/25/15
Sunrun Inc. 2008 Equity Incentive Plan and related form
agreements
S-1
333-205217
10.6
6/25/15
10.7+ Mainstream Energy Corporation 2009 Stock Plan
S-1
333-205217
10.7
6/25/15
10.8+
Sunrun Inc. Executive Incentive Compensation Plan
S-1
333-205217
10.8
6/25/15
10.9+
Key Employee Change in Control and Severance Plan and
Summary Plan Description
S-1
333-205217
10.9
6/25/15
10.10+ Employment Letter between the Registrant and Lynn
S-1
333-205217 10.10
6/25/15
Jurich, dated as of May 8, 2015
10.11+ Employment Letter between the Registrant and Edward
S-1
333-205217 10.11
6/25/15
Fenster, dated as of May 8, 2015
10.12+ Employment Letter between the Registrant and Bob Komin,
S-1
333-205217 10.12
6/25/15
dated as of May 8, 2015
120
Exhibit
Number
Exhibit Description
Incorporated by Reference
Form
File No.
Exhibit
Filing Date
10.13+ Employment Letter between the Registrant and Thomas
S-1
333-205217 10.13
6/25/15
Holland, dated as of May 8, 2015
10.14+ Employment Letter between the Registrant and Paul
S-1
333-205217 10.14
6/25/15
Winnowski, dated as of May 8, 2015
10.15+ Board Services Agreement between the Registrant and
S-1
333-205217 10.15
6/25/15
Gerald Risk, dated as of February 1, 2014
10.16
Agreement of Sublease between the Registrant and Visa
U.S.A. Inc., dated as of April 1, 2013, as amended on
April 29, 2013
S-1
333-205217 10.16
6/25/15
10.17¥ Credit Agreement among the Registrant, Credit Suisse
S-1
333-205217 10.17
6/25/15
Securities (USA) LLC and the other parties thereto, dated as
of April 1, 2015
10.18¥ Credit Agreement among Sunrun Aurora Portfolio 2014-A,
S-1
333-205217 10.18
6/25/15
LLC, Investec Bank PLC, Keybank National Association
and the Lenders from time to time as party thereto, dated
December 31, 2014
10.19
Transition, Separation and General Release Agreement,
dated December 7, 2015 between Tom Holland and
Sunrun Inc
8-K
001-37511
10.1
12/8/15
10.20¥ Credit Agreement among Sunrun Hera Portfolio 2015-A,
10-Q 001-37511
10.1
5/13/16
LLC, Investec Bank PLC (as Administrative Agent),
Investec Bank PLC (as Issuing Bank) and the Lenders from
time to time as party thereto, dated January 15, 2016
10.21¥ Amendment No. 2 to Credit Agreement among the
10-Q 001-37511
10.1
8/11/16
10.22¥
10.23¥
Company, AEE Solar, Inc., Sunrun South LLC, Sunrun
Installation Services Inc., Clean Energy Experts, LLC, each
of the lenders identified on the signature pages thereto,
Credit Suisse AG and Silicon Valley Bank, dated as of June
15, 2016
Incremental Facility Agreement among the Company, AEE
Solar, Inc., Sunrun South LLC, Sunrun Installation Services
Inc., Clean Energy Experts, LLC, Credit Suisse AG and
Comerica Bank, dated as of July 21, 2016
First Amendment to Credit Agreement and Collateral
Agency Agreement among Sunrun Hera Portfolio 2015-A,
LLC, Investec Bank PLC (as administrative agent, issuing
bank and as lender), each of the additional lenders
identified on the signature pages thereto and Deutsche
Bank Trust Company Americas, dated as of May 12, 2016
10-Q 001-37511
10.2
8/11/16
10-Q 001-37511
10.3
8/11/16
121
Exhibit
Number
Exhibit Description
Incorporated by Reference
Form
File No.
Exhibit
Filing Date
10.24¥ Consent and Second Amendment to Credit Agreement
10-Q 001-37511
10.4
8/11/16
among Sunrun Hera Portfolio 2015-A, LLC, Investec Bank
PLC (as administrative agent, issuing bank and as lender)
and each of the additional lenders identified on the
signature pages thereto, dated of as June 29, 2016
10.25¥ Amendment No. 3 to Credit Agreement among the
Company, AEE Solar, Inc., Sunrun South LLC, Sunrun
Installation Services Inc., Clean Energy Experts, LLC, each
of the lenders identified on the signature pages thereto,
Credit Suisse AG and Silicon Valley Bank, dated as of
December 2, 2016
10.26¥ Consent and Third Amendment to Credit Agreement and
First Amendment to Cash Diversion and Commitment Fee
Guaranty among the Company, Sunrun Hera Portfolio
2015-A, LLC, Investec Bank Plc (as administrative agent,
issuing bank and as lender) and each of the additional
lenders identified on the signature pages thereto, dated as
of November 30, 2016
10.27¥ Consent and Fourth Amendment to Credit Agreement and
First Amendment to Guaranty and Security Agreement
among Sunrun Hera Portfolio 2015-A, LLC, Sunrun [*]
Manager [*], LLC, Sunrun [*] Manager [*], LLC, Sunrun [*]
Manager [*], LLC, Sunrun [*] Manager [*], LLC, Sunrun [*]
Manager [*], LLC, Sunrun [*] Manager [*], LLC, Sunrun [*]
Manager [*], LLC, Investec Bank Plc (as administrative
agent, issuing bank and as lender), Deutsche Bank Trust
Company Americas, and each of the additional lenders
identified on the signature pages thereto, dated as of
January 31, 2017
21.1
List of subsidiaries of the Registrant
S-1
333-205217
21.1
6/25/15
23.1
Consent of Independent Registered Public Accounting Firm
31.1
31.2
Certification of Chief Executive Officer pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1†
Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Schema Linkbase Document
101.CAL XBRL Taxonomy Definition Linkbase Document
122
Exhibit
Number
Exhibit Description
Incorporated by Reference
Form
File No.
Exhibit
Filing Date
101.DEF XBRL Taxonomy Calculation Linkbase Document
101.LAB XBRL Taxonomy Labels Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
†
+
¥
The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K, are deemed
furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by
reference into any filing of Sunrun Inc. under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form
10-K, irrespective of any general incorporation language contained in such filing.
Indicates management contract or compensatory plan.
Confidential treatment has been requested as to certain portions of this exhibit, which portions have been
omitted and submitted separately to the Securities and Exchange Commission.
123
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sunrun.com
595 Market Street
San Francisco, CA 94105