scty-10q_20160630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

x

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

For the quarterly period ended June 30, 2016

or

¨

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

For the transition period from              to             

Commission File Number: 001-35758

 

SolarCity Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

02-0781046

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3055 Clearview Way

San Mateo, California

 

94402

(Address of principal executive offices)

 

(Zip Code)

(650) 638-1028

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

 

x

 

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨

 

Smaller reporting company

 

¨

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

The number of shares outstanding of the registrant’s common stock as of June 30, 2016 was 100,267,138.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

 

 

Item 1.

 

Financial Statements

  

2

 

 

Consolidated Balance Sheets

  

2

 

 

Consolidated Statements of Operations

  

4

 

 

Consolidated Statements of Cash Flows

  

5

 

 

Notes to Condensed Consolidated Financial Statements

  

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

35

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

50

Item 4.

 

Controls and Procedures

  

51

 

PART II — OTHER INFORMATION

 

 

 

Item 1.

 

Legal Proceedings

  

52

Item 1A.

 

Risk Factors

  

53

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

81

Item 6.

 

Exhibits

  

81

 

 

 

i


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

 

 

 

1


 

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SolarCity Corporation

Consolidated Balance Sheets

(In Thousands, Except Share Par Values)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

145,714

 

 

$

382,544

 

Short-term investments

 

 

 

 

 

11,311

 

Restricted cash

 

 

99,477

 

 

 

39,864

 

Accounts receivable (net of allowances for doubtful accounts of $8,041 and $4,292 as

   of June 30, 2016 and December 31, 2015, respectively)

 

 

63,682

 

 

 

33,998

 

Rebates receivable (net of reserves of $3,385 and $2,207 as of June 30, 2016 and

   December 31, 2015, respectively)

 

 

15,786

 

 

 

11,545

 

Inventories

 

 

229,699

 

 

 

342,951

 

Prepaid expenses and other current assets

 

 

56,954

 

 

 

79,925

 

Total current assets

 

 

611,312

 

 

 

902,138

 

Solar energy systems, leased and to be leased – net

 

 

5,173,624

 

 

 

4,375,553

 

Property, plant and equipment – net

 

 

254,226

 

 

 

262,387

 

Build-to-suit lease asset under construction

 

 

655,064

 

 

 

284,500

 

Goodwill and intangible assets – net

 

 

485,271

 

 

 

517,109

 

MyPower customer notes receivable, net of current portion

 

 

529,852

 

 

 

488,461

 

MyPower deferred costs

 

 

237,460

 

 

 

215,708

 

Other assets

 

 

277,271

 

 

 

241,262

 

Total assets(1)

 

$

8,224,080

 

 

$

7,287,118

 

 

 

 

2


 

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

214,145

 

 

$

364,973

 

Distributions payable to noncontrolling interests and redeemable noncontrolling interests

 

 

9,396

 

 

 

26,769

 

Current portion of deferred U.S. Treasury grant income

 

 

14,913

 

 

 

15,336

 

Accrued and other current liabilities

 

 

231,866

 

 

 

276,506

 

Current portion of deferred revenue

 

 

120,506

 

 

 

103,078

 

Current portion of long-term debt

 

 

264,688

 

 

 

180,048

 

Current portion of solar bonds

 

 

19,186

 

 

 

13,189

 

Current portion of solar bonds issued to related parties

 

 

165,110

 

 

 

165,120

 

Current portion of solar asset-backed notes

 

 

18,275

 

 

 

13,864

 

Current portion of financing obligation

 

 

42,862

 

 

 

34,479

 

Total current liabilities

 

 

1,100,947

 

 

 

1,193,362

 

Deferred revenue, net of current portion

 

 

1,082,241

 

 

 

1,010,491

 

Long-term debt, net of current portion

 

 

1,173,464

 

 

 

1,006,595

 

Solar bonds, net of current portion

 

 

33,430

 

 

 

35,678

 

Solar bonds issued to related parties, net of current portion

 

 

100

 

 

 

100

 

Convertible senior notes

 

 

883,644

 

 

 

881,585

 

Convertible senior notes issued to related parties

 

 

12,977

 

 

 

12,975

 

Solar asset-backed notes, net of current portion

 

 

604,783

 

 

 

395,667

 

Long-term deferred tax liability

 

 

67

 

 

 

1,373

 

Financing obligation, net of current portion

 

 

77,268

 

 

 

68,940

 

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

 

 

364,247

 

 

 

382,283

 

Build-to-suit lease liability

 

 

655,064

 

 

 

284,500

 

Other liabilities and deferred credits

 

 

364,473

 

 

 

279,006

 

Total liabilities(1)

 

 

6,352,705

 

 

 

5,552,555

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests in subsidiaries

 

 

344,932

 

 

 

320,935

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value - authorized, 1,000,000 shares as of June 30, 2016 and

   December 31, 2015; issued and outstanding, 100,267 and 97,864 shares as of June 30, 2016

   and December 31, 2015, respectively

 

 

10

 

 

 

10

 

Additional paid-in capital

 

 

1,287,960

 

 

 

1,195,246

 

Accumulated deficit

 

 

(397,167

)

 

 

(316,690

)

Total stockholders' equity

 

 

890,803

 

 

 

878,566

 

Noncontrolling interests in subsidiaries

 

 

635,640

 

 

 

535,062

 

Total equity

 

 

1,526,443

 

 

 

1,413,628

 

Total liabilities and equity

 

$

8,224,080

 

 

$

7,287,118

 

 

(1)

SolarCity Corporation’s, or the Company’s, consolidated assets as of June 30, 2016 and December 31, 2015 include $3,590,091 and $2,866,882, respectively, of assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets include solar energy systems, leased and to be leased - net of $3,480,047 and $2,779,363 as of June 30, 2016 and December 31, 2015, respectively; property, plant and equipment - net of $0 and $21,960 as of June 30, 2016 and December 31, 2015, respectively; cash and cash equivalents of $33,360 and $33,537 as of June 30, 2016 and December 31, 2015, respectively; inventory of $0 and $1,000 as of June 30, 2016 and December 31, 2015, respectively; restricted cash, current, of $4,379 and $522 as of June 30, 2016 and December 31, 2015, respectively; accounts receivable - net of $32,823 and $10,267 as of June 30, 2016 and December 31, 2015, respectively; prepaid expenses and other current assets of $2,064 and $2,713 as of June 30, 2016 and December 31, 2015, respectively; rebates receivable of $11,343 and $6,220 as of June 30, 2016 and December 31, 2015, respectively; and other assets of $26,075 and $11,300 as of June 30, 2016 and December 31, 2015, respectively. The Company’s consolidated liabilities as of June 30, 2016 and December 31, 2015 included $175,694 and $33,475, respectively, of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to noncontrolling interests in subsidiaries and redeemable noncontrolling interests in subsidiaries of $9,396 and $26,769 as of June 30, 2016 and December 31, 2015, respectively; accounts payable of $382 and $1,954 as of June 30, 2016 and December 31, 2015, respectively; customer deposits of $1,586 and $2,928 as of June 30, 2016 and December 31, 2015, respectively; accrued liabilities and other payables of $2,311 and $1,824 as of June 30, 2016 and December 31, 2015, respectively; current portion of long-term debt of $3,482 and $0 as of June 30, 2016 and December 31, 2015, respectively; long-term debt, net of current portion of $158,537 and $0 as of June 30, 2016 and December 31, 2015, respectively.

 

See the further description in Note 7, VIE Arrangements.

See accompanying notes.

 

 

 

3


 

SolarCity Corporation

Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from periodic billings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Periodic operating lease billings and incentives

 

$

88,925

 

 

 

57,649

 

 

$

149,094

 

 

$

95,753

 

Sale of solar renewable energy credits

 

 

5,852

 

 

 

3,274

 

 

 

10,795

 

 

 

5,556

 

Revenue from solar energy systems under long-term loan

   arrangements

 

 

46,345

 

 

 

8,245

 

 

 

65,455

 

 

 

9,314

 

Total revenue from periodic billings

 

 

141,122

 

 

 

69,168

 

 

 

225,344

 

 

 

110,623

 

Solar energy systems and components sales revenue

 

 

25,674

 

 

 

16,275

 

 

 

47,697

 

 

 

27,914

 

Revenue from operating lease prepayments and upfront incentives

 

 

18,988

 

 

 

17,360

 

 

 

35,315

 

 

 

31,745

 

Total revenue

 

 

185,784

 

 

 

102,803

 

 

 

308,356

 

 

 

170,282

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of periodic billings revenue

   (exclusive of depreciation and amortization)

 

 

18,912

 

 

 

11,586

 

 

 

35,807

 

 

 

20,490

 

Cost of solar energy systems and components sales revenue

   (exclusive of amortization and warranty)

 

 

32,192

 

 

 

16,778

 

 

 

59,826

 

 

 

28,331

 

Depreciation, amortization and warranty

 

 

63,400

 

 

 

31,115

 

 

 

111,435

 

 

 

56,378

 

Total cost of revenue

 

 

114,504

 

 

 

59,479

 

 

 

207,068

 

 

 

105,199

 

Gross profit

 

 

71,280

 

 

 

43,324

 

 

 

101,288

 

 

 

65,083

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

116,647

 

 

 

113,160

 

 

 

242,730

 

 

 

199,831

 

General and administrative

 

 

86,097

 

 

 

50,211

 

 

 

173,023

 

 

 

98,865

 

Pre-production expense

 

 

19,189

 

 

 

 

 

 

35,772

 

 

 

 

Restructuring and other

 

 

29,083

 

 

 

 

 

 

29,083

 

 

 

 

Research and development

 

 

14,374

 

 

 

12,401

 

 

 

28,294

 

 

 

24,521

 

Total operating expenses

 

 

265,390

 

 

 

175,772

 

 

 

508,902

 

 

 

323,217

 

Loss from operations

 

 

(194,110

)

 

 

(132,448

)

 

 

(407,614

)

 

 

(258,134

)

Interest and other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (excluding amortization of debt discounts

   and fees) - recourse debt

 

 

9,842

 

 

 

6,324

 

 

 

18,916

 

 

 

11,717

 

Interest expense (excluding amortization of debt discounts

   and fees) - non-recourse debt

 

 

17,811

 

 

 

6,413

 

 

 

32,102

 

 

 

11,586

 

Other interest expense and amortization of debt discounts

   and fees, net

 

 

9,406

 

 

 

7,760

 

 

 

18,588

 

 

 

15,715

 

Other expense, net

 

 

19,079

 

 

 

2,768

 

 

 

56,201

 

 

 

4,872

 

Total interest and other expenses

 

 

56,138

 

 

 

23,265

 

 

 

125,807

 

 

 

43,890

 

Loss before income taxes

 

 

(250,248

)

 

 

(155,713

)

 

 

(533,421

)

 

 

(302,024

)

Income tax (provision) benefit

 

 

(9

)

 

 

(20

)

 

 

59

 

 

 

(646

)

Net loss

 

 

(250,257

)

 

 

(155,733

)

 

 

(533,362

)

 

 

(302,670

)

Net loss attributable to noncontrolling interests and redeemable

   noncontrolling interests

 

 

(194,768

)

 

 

(133,373

)

 

 

(452,885

)

 

 

(258,785

)

Net loss attributable to stockholders

 

$

(55,489

)

 

$

(22,360

)

 

$

(80,477

)

 

$

(43,885

)

Net loss attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(55,489

)

 

$

(22,360

)

 

$

(80,477

)

 

$

(43,885

)

Diluted

 

$

(55,489

)

 

$

(22,360

)

 

$

(80,477

)

 

$

(43,885

)

Net loss per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.56

)

 

$

(0.23

)

 

$

(0.81

)

 

$

(0.45

)

Diluted

 

$

(0.56

)

 

$

(0.23

)

 

$

(0.81

)

 

$

(0.45

)

Weighted-average shares used to compute net loss per share

   attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

99,483,067

 

 

 

97,013,499

 

 

 

98,778,592

 

 

 

96,845,827

 

Diluted

 

 

99,483,067

 

 

 

97,013,499

 

 

 

98,778,592

 

 

 

96,845,827

 

 

See accompanying notes.

 

 

 

4


 

SolarCity Corporation

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(533,362

)

 

$

(302,670

)

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

 

 

 

 

 

 

 

 

Depreciation, amortization and write-offs

 

 

144,414

 

 

 

74,420

 

Change in fair value of interest rate swaps

 

 

51,454

 

 

 

 

Non-cash interest and other expense

 

 

(1,592

)

 

 

7,533

 

Stock-based compensation, net of amounts capitalized

 

 

44,045

 

 

 

36,132

 

Tax impact of stock option exercises

 

 

5,833

 

 

 

 

Loss on extinguishment of long-term debt

 

 

610

 

 

 

 

Deferred income taxes

 

 

(1,306

)

 

 

6

 

Non-cash reduction in financing obligation

 

 

(21,065

)

 

 

(23,449

)

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

 

 

510

 

 

 

129

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

(87,420

)

 

 

5,499

 

Accounts receivable

 

 

(29,684

)

 

 

(11,525

)

Rebates receivable

 

 

(4,241

)

 

 

9,638

 

Inventories

 

 

114,048

 

 

 

(62,329

)

Prepaid expenses and other current assets

 

 

25,358

 

 

 

(15,766

)

MyPower deferred costs

 

 

(22,196

)

 

 

(94,203

)

Other assets

 

 

4,440

 

 

 

(18,887

)

Accounts payable

 

 

(149,762

)

 

 

39,787

 

Accrued and other liabilities

 

 

24,855

 

 

 

35,738

 

Deferred revenue

 

 

46,050

 

 

 

8,031

 

Net cash used in operating activities

 

 

(389,011

)

 

 

(311,916

)

Investing activities:

 

 

 

 

 

 

 

 

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

 

 

(857,164

)

 

 

(665,079

)

Purchase of property, plant and equipment

 

 

(44,404

)

 

 

(102,065

)

Purchases of short-term investments

 

 

 

 

 

(44,592

)

Proceeds from sales and maturities of short-term investments

 

 

11,243

 

 

 

114,642

 

Payments for the acquisition of noncontrolling interests

 

 

(13,664

)

 

 

 

Payments for termination of interest rate swaps

 

 

(9,284

)

 

 

 

Net cash used in investing activities

 

 

(913,273

)

 

 

(697,094

)

 

 

 

5


 

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Financing activities:

 

 

 

 

 

 

 

 

Investment fund financings, bank and other borrowings:

 

 

 

 

 

 

 

 

Borrowings under long-term debt

 

 

657,373

 

 

 

456,108

 

Repayments of long-term debt

 

 

(412,685

)

 

 

(134,613

)

Proceeds from issuance of solar bonds

 

 

11,665

 

 

 

32,494

 

Proceeds from issuance of solar bonds issued to related parties

 

 

165,010

 

 

 

165,010

 

Repayments of borrowings under solar bonds

 

 

(8,041

)

 

 

 

Repayments of borrowings under solar bonds issued to related parties

 

 

(165,010

)

 

 

 

Proceeds from issuance of solar asset-backed notes

 

 

221,472

 

 

 

 

Repayments of borrowings under solar asset-backed notes

 

 

(8,569

)

 

 

(7,355

)

Payment of deferred purchase consideration

 

 

 

 

 

(2,498

)

Proceeds from financing obligation

 

 

33,418

 

 

 

20,481

 

Repayments of financing obligation

 

 

(237

)

 

 

(5,023

)

Repayment of capital lease obligations

 

 

(5,247

)

 

 

(1,357

)

Proceeds from investment by noncontrolling interests and redeemable noncontrolling

   interests in subsidiaries

 

 

643,635

 

 

 

428,934

 

Distributions paid to noncontrolling interests and redeemable noncontrolling

   interests in subsidiaries

 

 

(63,798

)

 

 

(33,575

)

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

 

 

1,068,986

 

 

 

918,606

 

Equity and convertible notes issuances:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

2,301

 

 

 

7,441

 

Tax impact of stock option exercises

 

 

(5,833

)

 

 

 

Net cash provided by equity issuances

 

 

(3,532

)

 

 

7,441

 

Net cash provided by financing activities

 

 

1,065,454

 

 

 

926,047

 

Net decrease in cash and cash equivalents

 

 

(236,830

)

 

 

(82,963

)

Cash and cash equivalents, beginning of period

 

 

382,544

 

 

 

504,383

 

Cash and cash equivalents, end of period

 

$

145,714

 

 

$

421,420

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

43,470

 

 

$

22,193

 

Cash paid during the period for taxes, net of refunds

 

$

9,746

 

 

$

137

 

 

See accompanying notes.

 

 

 

6


 

SolarCity Corporation

Notes to Condensed Consolidated Financial Statements

 

1. Organization

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

 

 

2. Summary of Significant Accounting Policies and Procedures

Basis of Presentation and Principles of Consolidation

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

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation. In particular, the consolidated statements of operations have been expanded to present revenue generated from periodic billings under long-term contracts, including customer operating leases and MyPower contracts, as well as sales of solar renewable energy credits. Accordingly, the previously presented operating leases and solar energy systems incentives revenue has been separated into (i) revenue generated from periodic billings under operating leases as well as periodic incentives generated by the operating leases; (ii) revenue generated from sales of solar renewable energy credits and (iii) revenue from operating lease prepayments and upfront incentives that is recognized over the term of the operating lease. Additionally, revenue from sales under MyPower contracts, which was previously presented within revenue from solar energy systems and components sales, has been separately presented as revenue from solar energy systems under long-term loan arrangements; this together with periodic operating lease billings and incentives revenue and sales of solar renewable energy credits revenue comprise the total revenue from periodic billings. Furthermore, the cost of revenue line items have been expanded to conform to the current period revenue presentation and to separately present non-cash expenses, including depreciation, amortization and warranty expenses. Also, the previously presented net interest expense has been separated into (i) interest expense on recourse debt excluding the amortization of any debt discounts or fees; (ii) interest expense on non-recourse debt excluding the amortization of any debt discounts or fees and (iii) all other net interest expense including the amortization of all debt discounts and fees.

 

7


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (continued)

 

Use of Estimates

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Management regularly makes significant estimates and assumptions regarding the selling price of undelivered elements for revenue recognition purposes, the collectability of accounts and rebates receivable, the valuation of inventories, the labor costs for long-term contracts used as a basis for determining the percentage of completion for such contracts, the fair values and residual values of solar energy systems subject to leases, the accounting for business combinations, the fair values and useful lives of acquired tangible and intangible assets, the fair value of contingent consideration payable under business combinations, the useful lives of solar energy systems, property, plant and equipment, the determination of accrued warranty, the determination of accrued liability for solar energy system performance guarantees, the determination of lease pass-through financing obligations, the discount rates used to determine the fair values of investment tax credits, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, asset impairment, the valuation of build-to-suit lease assets, the fair value of interest rate swaps and other items. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates.

Interest Rate Swaps

In the second quarter of 2015, the Company began entering into fixed-for-floating interest rate swap agreements to swap variable interest payments on certain debt for fixed interest payments, as required by its lenders. The Company has not designated any interest rate swaps as hedging instruments. Accordingly, all interest rate swaps are recognized at fair value on the consolidated balance sheets within other assets or other liabilities and deferred credits, with any changes in fair value recognized as other income or expense in the consolidated statements of operations and with any cash flows recognized as investing activities in the consolidated statements of cash flows. As of and for the periods ended June 30, 2016, the Company had interest rate swaps outstanding as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Gross Gains

 

 

Gross Losses

 

 

 

Aggregate

 

 

Gross

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

Notional

 

 

Liability at

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

Amount

 

 

Fair Value

 

 

2016

 

 

2016

 

 

2016

 

 

2016

 

Interest rate swaps

 

$

802,154

 

 

$

53,709

 

 

$

378

 

 

$

378

 

 

$

19,785

 

 

$

51,828

 

 

Fair Value of Financial Instruments

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

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

 

·

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

 

·

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·

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

8


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (continued)

 

As of June 30, 2016, the assets and liabilities carried at fair value on a recurring basis included cash equivalents, interest rate swaps and contingent consideration, and their fair values were as follows (in thousands):

 

  

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

3,436

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

 

$

53,709

 

 

$

 

Contingent consideration

 

$

 

 

$

 

 

$

82,651

 

 

The Company classified its money market funds within Level 1 because their fair values are based on their quoted market prices. The Company classified its interest rate swaps within Level 2 because their fair values are determined using models that utilized market observable inputs, including current and forward interest rates. The Company classified its contingent consideration within Level 3 because its fair value is determined using unobservable probability estimates and unobservable estimated discount rates applicable to the acquisition. During the six months ended June 30, 2016, there were no transfers between the levels of the fair value hierarchy.

The contingent consideration is dependent on the achievement of the specified production milestones for the acquired business. The Company determined the fair value of the contingent consideration using a probability-weighted expected return methodology that considers the timing and probabilities of achieving these milestones and uses discount rates that reflect the appropriate cost of capital. The Company reassesses the valuation assumptions each reporting period, with any changes in the fair value accounted for in the consolidated statements of operations. The fair value of the contingent consideration is directly proportional to the estimated probabilities of achieving these milestones. On March 31, 2016, the Company determined that the first milestone was achieved and adjusted the accrued contingent consideration balance associated with the first milestone to the full amount payable of $48.3 million. On May 5, 2016, the Company issued 1.6 million shares of its common stock, valued at $34.2 million based on its stock price on the issuance date, to settle the liability. Accordingly, the Company recognized a gain of $14.1 million upon the settlement of the liability associated with the first milestone, which is included as an offset to general and administrative expense. The fair value of the contingent consideration balance related to the remaining milestones was determined using an estimated probability of achievement of 95% and discount rates ranging between 6% and 7%, which is included under other liabilities and deferred credits in the consolidated balance sheets. The following table summarizes the activity of the Level 3 contingent consideration balance in the six months ended June 30, 2016 (in thousands):

 

Balance - beginning of the period

 

$

123,008

 

Change in fair value

 

 

(40,357

)

Balance - end of the period

 

$

82,651

 

 

The Company’s financial instruments that are not carried at fair value include accounts receivable, customer notes receivable, rebates receivable, accounts payable, customer deposits, distributions payable to noncontrolling interests and redeemable noncontrolling interests, the participation interest, solar asset-backed notes, solar loan-backed notes, convertible senior notes, Solar Bonds and long-term debt. The carrying values of these financial instruments other than customer notes receivable, the participation interest, solar asset-backed notes, solar loan-backed notes, convertible senior notes, Solar Bonds and long-term debt approximated their fair values due to the fact that they were short-term in nature at June 30, 2016.

9


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (continued)

 

The Company estimates the fair value of convertible senior notes based on their last actively traded prices (Level 1) or market observable inputs (Level 2). The Company estimates the fair value of customer notes receivable, the participation interest, solar asset-backed notes, solar loan-backed notes, Solar Bonds and long-term debt based on rates currently offered for instruments with similar maturities and terms (Level 3). The following table presents their estimated fair values and their carrying values (in thousands):

 

 

 

June 30, 2016

 

 

 

Carrying Value

 

 

Fair Value

 

Participation interest

 

$

16,440

 

 

$

14,877

 

Solar asset-backed notes

 

$

448,752

 

 

$

454,693

 

Solar loan-backed notes

 

$

174,306

 

 

$

179,244

 

Convertible senior notes

 

$

896,621

 

 

$

669,994

 

MyPower customer notes receivable

 

$

536,638

 

 

$

536,638

 

Long-term debt

 

$

1,438,152

 

 

$

1,438,152

 

Solar bonds

 

$

217,826

 

 

$

217,826

 

 

Warranties

The Company provides a warranty on the installation and components of the solar energy systems it sells for periods typically between 10 to 30 years. The manufacturer’s warranty on the solar energy systems’ components, which is typically passed-through to customers, ranges from one to 25 years. For the solar energy systems under lease contracts or power purchase agreements, the Company does not accrue a warranty liability because those systems are owned by consolidated subsidiaries of the Company. Instead, any repair costs on those solar energy systems are expensed when they are incurred as a component of operating leases and solar energy systems incentives cost of revenue. The changes in the accrued warranty balance, recorded as a component of accrued and other current liabilities on the consolidated balance sheets, consisted of the following (in thousands):

 

  

 

As of and for the

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

Balance - beginning of the period

 

$

22,993

 

Increase in liability (including $3,424 related to

   MyPower contracts)

 

 

4,186

 

Change in estimate

 

 

630

 

Less warranty claims

 

 

(188

)

Balance - end of the period

 

$

27,621

 

 

Solar Energy Systems Performance Guarantees

The Company guarantees certain specified minimum solar energy production output for certain systems leased or sold to customers generally for a term of up to 30 years. The Company monitors the solar energy systems to ensure that these outputs are being achieved. The Company evaluates if any amounts are due to its customers and makes any payments periodically as specified in the customer contracts. As of June 30, 2016 and December 31, 2015, the Company recorded liabilities of $3.9 million and $3.1 million, respectively, under accrued and other current liabilities in the consolidated balance sheets, relating to these guarantees based on the Company’s assessment of its current exposure.

Solar Renewable Energy Credits

The Company accounts for solar renewable energy credits, or SRECs, when they are purchased by the Company or sold to third parties. For SRECs generated by solar energy systems owned by the Company and minted by government agencies, the Company does not recognize any specifically identifiable costs for those SRECs as there are no specific incremental costs incurred to generate the SRECs. For SRECs purchased by the Company, the Company carries these SRECs at their cost, subject to testing for impairment. The Company recognizes revenue from the sale of an SREC when the SREC is transferred to the buyer, and the cost of the SREC, if any, is then recorded within cost of periodic billings revenue.

10


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (continued)

 

Comprehensive Income (Loss)

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

Segment Information

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

Basic and Diluted Net Loss Per Share

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

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

Recently Issued Accounting Standards

In February 2015, the FASB issued Accounting Standards Update, or ASU, No. 2015-02, Amendments to the Consolidation Analysis, to amend the criteria for consolidation of certain legal entities. The Company adopted the ASU retrospectively on January 1, 2016. Adoption of the ASU did not have a material impact on the Company’s condensed consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, to change the accounting for subsequent adjustments to the provisional balances recognized in a business combination from retrospective to prospective. However, the ASU requires separate presentation or disclosure of the impact on prior periods had the adjustments been recognized as of the acquisition date. The Company adopted the ASU prospectively on January 1, 2016. Adoption of the ASU did not have a material impact on the Company’s condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, to replace the existing revenue recognition criteria for contracts with customers and to establish the disclosure requirements for revenue from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Deferral of the Effective Date, to defer the effective date of ASU No. 2014-09 to interim and annual periods beginning after December 15, 2017, with early adoption permitted. In March, April and May 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations, ASU No. 2016-10, Identifying Performance Obligations and Licensing, ASU No. 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, and ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, to clarify and amend the guidance in ASU No. 2014-09. Adoption of the ASUs is either retrospective to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company is currently assessing the impact of the ASUs on its condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Going Concern, to provide guidance within GAAP requiring management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and requiring related disclosures. The ASU is effective for annual periods ending after December 15, 2016. The Company anticipates that the adoption of the ASU will not have a material impact on its condensed consolidated financial statements.

11


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (continued)

 

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

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to mainly change the accounting for investments in equity securities and financial liabilities carried at fair value as well as to modify the presentation and disclosure requirements for financial instruments. The ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company is currently assessing the impact of the ASU on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, to require lessees to recognize most leases on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. The ASU also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. The ASU is effective for interim and annual periods beginning after December 15, 2018. Adoption of the ASU is modified retrospective. The Company is currently assessing the impact of the ASU on its condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments, to clarify when a contingent put or call option to accelerate the repayment of debt is an embedded derivative. The ASU is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. Adoption of the ASU is modified retrospective. The Company is currently assessing the impact of the ASU on its condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, to simplify the accounting for the income tax effects from share-based compensation, the accounting for forfeitures and the accounting for statutory income tax withholding, among others. The ASU is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. Adoption of the ASU is modified retrospective, retrospective and prospective, depending on the specific provision being adopted. The Company is currently assessing the impact of the ASU on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, to require, among others, financial assets carried at amortized cost to be presented at the net amount expected to be collected based on historical experience, current conditions and forecasts. The ASU is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASU is modified retrospective. The Company is currently assessing the impact of the ASU on its condensed consolidated financial statements.

 

 

3. Goodwill and Intangible Assets

Goodwill

As of June 30, 2016, the carrying value of goodwill was $321.9 million. There were no changes to the carrying value of goodwill during the six months ended June 30, 2016.

12


SolarCity Corporation

Notes to Condensed Consolidated Financial Statements (continued)

 

Intangible Assets

The following is a summary of intangible assets as of June 30, 2016 (in thousands):

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

useful life

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

 

Gross

 

 

amortization

 

 

Write-offs

 

 

Net

 

Developed technology - Silevo

 

 

10

 

 

$

115,000

 

 

$

(20,346

)

 

$

 

 

$

94,654

 

Developed technology - Zep Solar

 

 

7

 

 

 

60,100

 

 

 

(21,979

)

 

 

 

 

 

38,121

 

Trademarks and trade names

 

 

7

 

 

 

24,700

 

 

 

(9,021

)

 

 

 

 

 

15,679

 

Marketing database

 

 

5

 

 

 

17,427

 

 

 

(11,347

)

 

 

 

 

 

6,080

 

PowerSaver agreement

 

 

10

 

 

 

17,077

 

 

 

(4,815

)

 

 

(12,262

)

 

 

 

Non-compete agreements

 

 

5

 

 

 

7,189

 

 

 

(4,023

)

 

 

(3,035

)

 

 

131

 

Customer relationships

 

 

6

 

 

 

6,190

 

 

 

(1,093

)

 

 

 

 

 

5,097

 

Other

 

 

6