SUNRUN INC. You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q.
Overview
Sunrun's mission is to provide our customers with clean, affordable solar energy and storage, and a best-in-class customer experience. In 2007, we pioneered the residential solar service model, creating a low-cost solution for customers seeking to lower their energy bills. By removing the high initial cost and complexity of cash system sales 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. OnOctober 8, 2020 , we completed the acquisition of Vivint Solar, Inc. ("Vivint Solar") a leading full-service residential solar provider inthe United States , at an estimated purchase price of$5.0 billion , pursuant to an Agreement and Plan of Merger, dated as ofJuly 6, 2020 , by and amongSunrun , Vivint Solar andViking Merger Sub, Inc. , aDelaware corporation and direct wholly owned subsidiary of the Company ("Merger Sub"). Further information about the acquisition of Vivint Solar can be found in Note 18, Acquisitions to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We are engaged in the design, development, installation, sale, ownership and maintenance of residential solar energy systems ("Projects") inthe United States . We provide clean, solar energy typically at savings compared to traditional utility energy. Our primary customers are residential homeowners. We also offer battery storage along with solar energy systems to our customers in select markets and sell our services to certain commercial developers through our multi-family and new homes offerings. 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. 39 -------------------------------------------------------------------------------- Our core solar service offerings are provided through our lease and power purchase agreements, which we refer to as our "Customer Agreements" and which provide customers with simple, predictable pricing for solar energy that is insulated from rising retail electricity prices. While customers 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 Customer Agreements 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 typically a 20- or 25-year initial term. In addition, we monitor, maintain and insure the system during the term of the contract. In exchange, we receive 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, non-recourse debt and project equity 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. 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, and these partners include solar integrators, sales partners, installation partners and other strategic partners. The platform includes processes and software, as well as fulfillment and acquisition of marketing leads. 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. 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 well as through our acquisition of Vivint Solar in 2020. As ofJune 30, 2021 , we operated the largest fleet of residential solar energy systems inthe United States . We have a Networked Solar Energy Capacity of 4,238 Megawatts as ofJune 30, 2021 , which represents the aggregate megawatt production capacity of our solar energy systems that have been recognized as deployments, from our inception through the measurement date. Gross Earning Assets as ofJune 30, 2021 were approximately$8.6 billion . Please see the section entitled "Key Operating Metrics" for more details on how we calculate Networked Solar Energy Capacity and Gross Earning Assets. We also have a long track record of attracting low-cost capital from diverse sources, including tax equity and debt investors. Since inception we have raised tax equity investment funds to finance the installation of solar energy systems. Impacts of COVID-19 on Our Business The COVID-19 pandemic and the resulting impact on theU.S. economy have accelerated many of our operational initiatives to deliver best-in-class customer value and to reduce costs. We have invested in technology to streamline our installation processes, including online permitting and interconnection in many locations, enabled our entire salesforce to complete sales consultations in a virtual setting, and employed extensive use of drone technology to complete rooftop surveys. We believe this transition towards a digital model for many sales channels will position us well to realize sustaining reductions in customer acquisition costs. The COVID-19 pandemic has had an unprecedented impact on theU.S. economy, resulting in governments and organizations implementing public health measures in an effort to contain the virus, including physical distancing, work from home, supply chain logistical changes and closure of non-essential businesses. With vaccine administration rising, governments and organizations have responded by adjusting such restrictions and guidelines accordingly. We are monitoring this fluid situation and will continue to follow official regulations to protect our employees and customers. 40 -------------------------------------------------------------------------------- The ultimate impact of the COVID-19 pandemic (and virus variants) is still highly uncertain and subject to change, and we do not yet know the full extent of potential delays or impacts on our business, operations or the global economy as a whole. We will continue to monitor developments affecting our workforce, our customers, and our business operations generally and will take actions that we determine are necessary in order to mitigate these impacts. Investment Funds Our Customer Agreements provide for recurring customer payments, typically over 20 or 25 years, and the related solar energy systems are generally eligible for Commercial 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 Commercial ITCs, accelerated depreciation and certain government or utility incentives associated with the funds' ownership of solar energy systems. As ofJune 30, 2021 , we had 64 active investment funds, which 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 aSunrun 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 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) pass-through financing obligations, (ii) partnership flips and (iii) joint venture ("JV") inverted leases. We reflect pass-through financing obligations on our consolidated balance sheet as a 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 a redeemable noncontrolling interest at the greater of the HLBV and the redemption value. 41 --------------------------------------------------------------------------------
The table below provides an overview of our current investment funds (dollars in millions):
Consolidated Joint Ventures
Pass-Through
Financing
Obligations Partnership Flip JV Inverted Lease
Consolidation Owner entity Single entity, Owner and tenant
consolidated, consolidated entities
tenant entity not consolidated
consolidated
Balance sheet classification Pass-through Redeemable Redeemable
financing noncontrolling noncontrolling
obligation interests and interests and
noncontrolling noncontrolling
interests interests
Revenue from Commercial ITCs Recognized on the None None
permission to
operate ("PTO")
date
Method of calculating investor interest Effective Greater of HLBV or Greater of HLBV or
interest rate redemption value; or redemption value;
method pro rata or pro rata
Liability balance as of June 30, 2021 $ 337.1 N/A N/A
Noncontrolling interest balance (redeemable N/A $ 1,297.4 $ 38.3
or otherwise) as of
For further information regarding our investment funds, including the associated risks, see Part II, Item 1A. Risk Factors- "Our ability to provide our solar service offerings to customers 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", as well as Note 10, Pass-through Financing Obligations, Note 11, VIE Arrangements and Note 12, Redeemable Noncontrolling Interests and Equity to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q 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. •Networked Solar Energy Capacity represents the aggregate megawatt production capacity of our solar energy systems, whether sold directly to customers or subject to executed Customer Agreements (i) for which we have confirmation that the systems are installed on the roof, subject to final inspection; (ii) in the case of certain system installations by our partners, for which we have accrued at least 80% of the expected project cost, or (iii) for multi-family and any other systems that have reached NTP, measured on the percentage of the project that has been completed based on expected project cost. Systems that have met this criteria are considered to be deployed.
•Gross Earning Assets is calculated as Gross Earning Assets Contracted Period plus Gross Earning Assets Renewal Period.
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•Gross Earning Assets Contracted Period represents the present value of the
remaining net cash flows (discounted at 5%) during the initial term of our
Customer Agreements as of the measurement date. It is calculated as the present
value of cash flows (discounted at 5%) we expect to receive from Subscribers in
future periods, after deducting expected operating and maintenance costs,
equipment replacements costs, distributions to tax equity partners in
consolidated joint venture partnership flip structures, and distributions to
project equity investors. We include cash flows we expect to receive in future
periods from state incentive and rebate programs, contracted sales of solar
renewable energy credits, and awarded net cash flows from grid service programs
with utility or grid operators.
•Gross Earning Assets Renewal Period is the forecasted net present value we
would receive upon or following the expiration of the initial Customer Agreement
term but before the 30th anniversary of the system's activation (either in the
form of cash payments during any applicable renewal period or a system purchase
at the end of the initial term), for Subscribers as of the measurement date. We
calculate the Gross Earning Assets Renewal Period amount at the expiration of
the initial contract term assuming either a system purchase or a renewal,
forecasting only a 30-year customer relationship (although the customer may
renew for additional years, or purchase the system), 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 contract term, our Customer Agreements
typically automatically renew on an annual basis and the rate is initially set
at up to a 10% discount to then-prevailing utility power prices.
•Subscribers represent the cumulative number of Customer Agreements for systems that have been recognized as deployments through the measurement date.
•Customers represent the cumulative number of deployments, from our inception through the measurement date.
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.
The definitions of Gross Earning Assets, Gross Earning Assets Contracted Period,
and Gross Earning Assets Renewal Period use a discount rate of 5%; whereas the
definitions used in our periodic reports [prior to [date]] used a discount rate
of 6%.
As of June 30,
2021 2020
Networked Solar Energy Capacity (megawatts) 4,238 2,163
Customers 599,743 301,310
As of June 30,
2021 2020
(in thousands)
Gross Earning Assets Contracted Period
2,815,292 1,494,950
Gross Earning Assets $ 8,612,668 $ 4,386,849
43-------------------------------------------------------------------------------- As a result of the acquisition of Vivint Solar inOctober 2020 , we added$2.9 billion of Gross Earning Assets, of which$2.0 billion related to Gross Earning Assets Contracted Period and$0.9 billion related to Gross Earning Assets Renewal Period. The tables below provide a range of Gross Earning Asset amounts if different default, discount and purchase and renewal assumptions were used. Gross Earning Assets Contracted Period: As of June 30, 2021 Discount rate Default rate 3% 4% 5% 6% 7% (in thousands) 5%$ 6,695,649 $ 6,130,008 $ 5,635,070 $ 5,200,280 $ 4,816,858 0%$ 6,898,192 $ 6,310,775 $ 5,797,376 $ 5,345,961 $ 4,948,372
Gross Earning Assets Renewal Period:
As of June 30, 2021
Discount rate
Purchase or Renewal rate 3% 4% 5% 6% 7%
(in thousands)
80% $ 3,661,648 $ 2,983,738 $ 2,439,958 $ 2,002,213 $ 1,648,593
90% $ 4,223,224 $ 3,442,020 $ 2,815,292 $ 2,310,695 $ 1,903,005
100% $ 4,784,800 $ 3,900,301 $ 3,190,624 $ 2,619,176 $ 2,157,417 Total Gross Earning Assets:
As of June 30, 2021
Discount rate
Purchase or Renewal rate 3% 4% 5% 6% 7%
(in thousands)
80% $ 10,559,840 $ 9,294,514 $ 8,237,335 $ 7,348,174 $ 6,596,964
90% $ 11,121,417 $ 9,752,796 $ 8,612,668 $ 7,656,656 $ 6,851,377
100% $ 11,682,992 $ 10,211,077 $ 8,988,001 $ 7,965,137 $ 7,105,789 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 generally accepted accounting principles inthe United States ("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 of our annual report on Form 10-K for the year endedDecember 31, 2020 . We believe that policies associated with our principles of consolidation, revenue recognition, goodwill, impairment of long-lived assets, provision for income taxes, business combinations and calculation 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. 44 -------------------------------------------------------------------------------- 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 Quarterly Report on Form 10-Q. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands, except per share data) Revenue: Customer agreements and incentives$ 219,474 $ 106,095 $ 394,070 $ 205,219 Solar energy systems and product sales 181,692 75,199 341,890 186,806 Total revenue 401,166 181,294 735,960 392,025 Operating expenses: Cost of customer agreements and incentives 177,339 83,422 337,616 161,699 Cost of solar energy systems and product sales 151,588 63,746 285,670 155,344 Sales and marketing 144,599 69,701 270,712 139,971 Research and development 5,150 4,971 11,022 9,017 General and administrative 62,916 41,756 148,546 69,830 Amortization of intangible assets 1,343 1,167 2,688 2,650 Total operating expenses 542,935 264,763 1,056,254 538,511 Loss from operations (141,769) (83,469) (320,294) (146,486) Interest expense, net (74,999) (50,721) (149,269) (100,645) Other (expenses) income, net (11,553) (148) 22,794 (98) Loss before income taxes (228,321) (134,338) (446,769) (247,229) Income tax (benefit) expense (14,912) 211 (29,038) (3,131) Net loss (213,409) (134,549) (417,731) (244,098) Net loss attributable to noncontrolling interests and redeemable noncontrolling interests (172,165) (120,987) (352,698) (202,577) Net loss attributable to common stockholders$ (41,244) $ (13,562) $ (65,033) $ (41,521) Net loss per share attributable to common stockholders Basic$ (0.20) $ (0.11) $ (0.32) $ (0.35) Diluted$ (0.20) $ (0.11) $ (0.32) $ (0.35) Weighted average shares used to compute loss per share attributable to common stockholders Basic 204,378 120,279 203,475 120,201 Diluted 204,378 120,279 203,475 120,201 45
-------------------------------------------------------------------------------- Comparison of the Three Months EndedJune 30, 2021 and 2020 Revenue Three Months Ended June 30, Change 2021 2020 $ % (in thousands) Customer agreements$ 196,935 $ 98,525 $ 98,410 100 % Incentives 22,539 7,570 14,969 198 % Customer agreements and incentives 219,474 106,095 113,379 107 % Solar energy systems 90,422 44,579 45,843 103 % Products 91,270 30,620 60,650 198 % Solar energy systems and product sales 181,692 75,199 106,493 142 % Total revenue$ 401,166 $ 181,294 $ 219,872 121 % Customer Agreements and Incentives. The$98.4 million increase in revenue from Customer Agreements was primarily due to both an increase in solar energy systems under Customer Agreements being added to our fleet upon the acquisition of Vivint Solar inOctober 2020 , as well as new systems placed in service in the period fromJuly 1, 2020 throughJune 30, 2021 , plus a full quarter of revenue recognized in the second quarter of 2021 for systems placed in service in the second quarter of 2020 versus only a partial quarter of such revenue related to the period in which the assets were in service in 2020. Revenue from incentives primarily consists of sales of SRECs, which increased by$15.0 million during the three months endedJune 30, 2021 , compared to the prior year. Solar Energy Systems and Product Sales. Revenue from solar energy systems sales increased by$45.8 million compared to the prior year primarily due to solar energy systems sales from Vivint Solar, as well as increased demand through retail partners. Product sales increased by$60.7 million , primarily due to lower volume of wholesale products sold in 2020, which was impacted by COVID-19. Operating Expenses Three Months Ended June 30, Change 2021 2020 $ % (in thousands)
Cost of customer agreements and incentives
83,422 $ 93,917 113 %
Cost of solar energy systems and product
sales 151,588 63,746 87,842 138 %
Sales and marketing 144,599 69,701 74,898 107 %
Research and development 5,150 4,971 179 4 %
General and administrative 62,916 41,756 21,160 51 %
Amortization of intangible assets 1,343 1,167 176 15 %
Total operating expenses $ 542,935 $ 264,763 $ 278,172 105 %
Cost of Customer Agreements and Incentives. The $93.9 million increase in Cost
of customer agreements and incentives was primarily due to the increase in solar
energy systems added to our fleet upon the acquisition of Vivint Solar in
October 2020 , as well as new systems placed in service in the period from
July 1, 2020 through June 30, 2021 , plus a full quarter of costs recognized in
2021 for systems placed in service in the second quarter of 2020 versus only a
partial quarter of such expenses related to the period in which the assets were
in service in 2020. Additionally, there was an increase of $32.0 million related
to depreciation expense on solar fixed assets recorded in the initial purchase
accounting for the acquisition.
The cost of Customer Agreements and incentives remained relatively consistent at
81% of revenue from customer agreements and incentives during the three months
ended June 30, 2021 , compared with 79% during the three months ended June 30,
2020 .
46
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Cost of Solar Energy Systems and Product Sales. The $87.8 million increase in
Cost of solar energy systems and product sales was due to the corresponding net
increase in the solar energy systems and product sales discussed above.
Sales and Marketing Expense. The $74.9 million increase in Sales and marketing
expense was attributable to increases in headcount, which were primarily driven
by the acquisition of Vivint Solar in October 2020 , resulting in higher employee
compensation in the three months ended June 30, 2021 compared to the same period
in the prior year. Additionally, we spent more in costs to acquire customers
through our sales lead generating partners. Partially offsetting these increases
in Sales and marketing expense is a decrease in costs related to retail lead
generating partners, as well as a decrease of $6.9 million in non-recurring
costs incurred during the three months ended June 30, 2021 . Included in sales
and marketing expense is $5.4 million and $3.5 million of amortization of costs
to obtain Customer Agreements for the three months ended June 30, 2021 and 2020,
respectively.
Research and Development Expense. Research and development expense increased
$0.2 million during the three months ended June 30, 2021 , which was relatively
consistent with the same period in the prior year.
General and Administrative Expense. The $21.2 million increase in General and
administrative expenses was primarily attributable to the acquisition of Vivint
Solar, resulting in an increase in headcount driving higher employee
compensation, consulting costs, partially offset by a decrease of $7.3 million
in nonrecurring (primarily acquisition-related) costs during the three months
ended June 30, 2021 .
Non-Operating Expenses
Three Months Ended June 30, Change
2021 2020 $ %
(in thousands)
Interest expense, net $ (74,999) $ (50,721) $ (24,278) 48 %
Other expenses, net $ (11,553) $ (148) $ (11,405) 7,706 %
Interest Expense, net. The increase in Interest expense, net of $24.3 million is
primarily related to the $24.7 million of interest expense associated with the
debt acquired with Vivint Solar. Included in net interest expense is $6.5
million and $6.2 million of non-cash interest recognized under Customer
Agreements that have a significant financing component for the three months
ended June 30, 2021 and 2020, respectively.
Other Expenses, net. The increase in other expenses of $11.4 million relates
primarily to losses on derivatives recognized in the three months ended June 30,
2021 , with no such comparable activity in the three months ended June 30, 2020 .
Income Tax Expense (Benefit)
Three Months Ended June 30, Change
2021 2020 $ %
(in thousands)
Income tax benefit $ (14,912) $ 211 $(15,123) (7,167) %
The increase in income tax benefit of
47
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Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling
Interests
Three Months Ended June 30, Change
2021 2020 $ %
(in thousands)
Net loss attributable to noncontrolling
interests and redeemable noncontrolling
interests $ (172,165) $ (120,987) $ (51,178) 42 %
Net loss attributable to noncontrolling interests and redeemable noncontrolling
interests was primarily the result of an additional $22.7 million net loss
related Vivint Solar's noncontrolling interests and redeemable noncontrolling
interests, as well as an addition of five other new investment funds since
June 30, 2020 , for which the HLBV method used in determining the amount of net
loss attributable to noncontrolling interests. Redeemable noncontrolling
interests generally allocates more loss to the noncontrolling interest in the
first several years after fund formation.
Comparison of the Six Months Ended June 30, 2021 and 2020
Revenue
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands)
Customer agreements $ 354,765 $ 192,778 $ 161,987 84 %
Incentives 39,305 12,441 26,864 216 %
Customer agreements and incentives 394,070 205,219 188,851 92 %
Solar energy systems 179,472 115,856 63,616 55 %
Products 162,418 70,950 91,468 129 %
Solar energy systems and product
sales 341,890 186,806 155,084 83 %
Total revenue $ 735,960 $ 392,025 $ 343,935 88 %
Customer Agreements and Incentives. The $162.0 million increase in revenue from
Customer Agreements was primarily due to both an increase in solar energy
systems under Customer Agreements being added to our fleet upon the acquisition
of Vivint Solar in October 2020 , as well as new systems placed in service in the
period from July 1, 2020 through June 30, 2021 , plus a full six months of
revenue recognized in 2021 for systems placed in service in the first six months
of 2020 versus only a partial amount of such revenue related to the period in
which the assets were in service in 2020. Revenue from incentives primarily
consists of sales of SRECs, which increased by $26.9 million during the six
months ended June 30, 2021 , compared to the prior year.
Solar Energy Systems and Product Sales. Revenue from solar energy systems sales
increased by $63.6 million compared to the prior year primarily due to solar
energy systems sales from Vivint Solar, as well as increased demand through
retail partners. Product sales increased by $91.5 million , primarily due to
lower volume of wholesale products sold in 2020, which was impacted by COVID-19
and customers' reduced purchases in 2020 after purchasing safe harbor materials
in 2019 for use in 2020.
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Operating Expenses
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands)
Cost of customer agreements and incentives $ 337,616 $ 161,699 $ 175,917 109 %
Cost of solar energy systems and product
sales 285,670 155,344 130,326 84 %
Sales and marketing 270,712 139,971 130,741 93 %
Research and development 11,022 9,017 2,005 22 %
General and administrative 148,546 69,830 78,716 113 %
Amortization of intangible assets 2,688 2,650 38 1 %
Total operating expenses $ 1,056,254 $ 538,511 $ 517,743 96 %
Cost of Customer Agreements and Incentives. The $175.9 million increase in Cost
of customer agreements and incentives was primarily due to the increase in solar
energy systems added to our fleet upon the acquisition of Vivint Solar in
October 2020 , as well as new systems placed in service in the period from
July 1, 2020 through June 30, 2021 , plus a full six months of costs recognized
in 2021 for systems placed in service in the six months of 2020 versus only a
partial amount of such expenses related to the period in which the assets were
in service in 2020. Additionally, there was an increase of $64.0 million related
to depreciation expense on solar fixed assets recorded in the initial purchase
accounting for the acquisition.
The cost of Customer Agreements and incentives increased to 86% of revenue from
customer agreements and incentives during the six months ended June 30, 2021 ,
from 79% during the six months ended June 30, 2020 . The increase was impacted by
the acquisition of Vivint Solar, which had negative gross margins due to
seasonality during the winter months at the beginning of the year when solar
production is lower, as well as the increase in depreciation expense related to
the step up in solar systems fair value upon the acquisition of Vivint Solar
discussed above.
Cost of Solar Energy Systems and Product Sales. The $130.3 million increase in
Cost of solar energy systems and product sales was due to the corresponding net
increase in the solar energy systems and product sales discussed above.
Sales and Marketing Expense. The $130.7 million increase in Sales and marketing
expense was attributable to increases in headcount, which were primarily driven
by the acquisition of Vivint Solar in October 2020 , resulting in higher employee
compensation. Additionally, we spent more in costs to acquire customers through
our sales lead generating partners in the first six months of 2021 compared to
the prior year period. Partially offsetting these increases in Sales and
marketing expense is a decrease in costs related to retail lead generating
partners, as well as a decrease of $7.7 million in non-recurring and
restructuring costs incurred during the six months ended June 30, 2021 . Included
in sales and marketing expense is $9.6 million and $6.9 million of amortization
of costs to obtain Customer Agreements for the six months ended June 30, 2021
and 2020, respectively.
Research and Development Expense. The $2.0 million increase in Research and
development expense was primarily attributable to the acquisition of Vivint
Solar, resulting in an increase in headcount driving higher employee
compensation costs, consulting costs and $0.2 million of nonrecurring
acquisition related costs.
General and Administrative Expense. The $78.7 million increase in General and
administrative expenses was primarily attributable to the acquisition of Vivint
Solar, resulting in an increase in headcount driving higher employee
compensation and consulting costs, partially offset by a decrease of $5.6
million in nonrecurring (primarily acquisition-related) costs during the six
months ended June 30, 2021 .
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Non-Operating Expenses
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands)
Interest expense, net $ (149,269) $ (100,645) $ (48,624) 48 %
Other income (expenses), net $ 22,794 $ (98) $ 22,892 (23,359) %
Interest Expense, net. The increase in Interest expense, net of $48.6 million
included $45.5 million of interest expense associated with the debt acquired
with Vivint Solar. The remaining increase is primarily related to additional
non-recourse debt entered into subsequent to June 30, 2020 . Included in net
interest expense is $12.9 million and $12.3 million of non-cash interest
recognized under Customer Agreements that have a significant financing component
for the six months ended June 30, 2021 and 2020, respectively.
Other Income (expenses), net. The increase in other income of $22.9 million
relates primarily to gains on derivatives recognized in the six months ended
June 30, 2021 , with no such comparable activity in the six months ended June 30,
2020 .
Income Tax Expense (Benefit)
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands)
Income tax benefit $ (29,038) $ (3,131) $ (25,907) 827 %
The increase in income tax benefit of $25.9 million primarily relates to an
increase in tax benefit related to a higher pre-tax loss and an increase in
stock compensation deductions that was offset by an increase in noncontrolling
interest and redeemable noncontrolling interests.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling
Interests
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands)
Net loss attributable to noncontrolling
interests and redeemable noncontrolling
interests $ (352,698) $ (202,577) $ (150,121) 74 %
Net loss attributable to noncontrolling interests and redeemable noncontrolling
interests was primarily the result of an additional $71.4 million net loss
related Vivint Solar's noncontrolling interests and redeemable noncontrolling
interests, as well as an addition of five other new investment funds since
June 30, 2020 , for which the HLBV method used in determining the amount of net
loss attributable to noncontrolling interests. Redeemable noncontrolling
interests generally allocates more loss to the noncontrolling interest in the
first several years after fund formation.
Liquidity and Capital Resources
As ofJune 30, 2021 , we had cash of$679.6 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, cash generated from our sources of revenue and borrowings from secured credit facilities arrangements with syndicates of banks and from secured, long-term non-recourse loan arrangements. In 2020, we received$595.0 million of new commitments on secured credit facilities arrangements with syndicates of banks and$1.3 billion of commitments from secured, long-term non-recourse loan arrangements. Our principal uses of cash are funding our business, including the costs of acquisition and 50 -------------------------------------------------------------------------------- installation of solar energy systems, satisfaction of our obligations under our debt instruments and other working capital requirements. As ofJune 30, 2021 , we had outstanding borrowings of$217.3 million on our$250.0 million corporate bank line of credit maturing inApril 2022 . Additionally, we have purchase commitments, which have the ability to be canceled without significant penalties, with multiple suppliers to purchase$57.8 million of photovoltaic modules, inverters and batteries by the end of 2022. InJanuary 2021 , we issued$400.0 million of convertible senior notes with a maturity date ofFebruary 1, 2026 , for net proceeds of approximately$389.0 million . Our business model requires substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar energy systems. The solar energy systems that are operational are expected to generate a positive return rate over the term of the Customer Agreement, typically 20 or 25 years. However, in order to grow, we will continue to be dependent on financing from outside parties. If financing is not available to us on acceptable terms if and when needed, we may be required to reduce planned spending, which could have a material adverse effect on our operations. While there can be no assurances, we anticipate raising additional required capital from new and existing investors. We believe our cash, investment fund commitments and available borrowings as further described below will be sufficient to meet our anticipated cash needs for at least the next 12 months. The following table summarizes our cash flows for the periods indicated: Six Months Ended June 30, 2021 2020 (in thousands) Consolidated cash flow data: Net cash used in operating activities$ (355,764) $ (152,253) Net cash used in investing activities (757,051)
(364,417)
Net cash provided by financing activities 1,262,210
507,673
Net change in cash and restricted cash$ 149,395 $
(8,997)
Operating Activities During the six months endedJune 30, 2021 , we used$355.8 million in net cash from operating activities. The driver of our operating cash outflow consists of the cost of our revenue, as well as sales, marketing and general and administrative costs. During the six months endedJune 30, 2021 , our operating cash outflows were$147.6 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash outflow of$208.2 million . During the six months endedJune 30, 2020 , we used$152.3 million in net cash from operating activities. The driver of our operating cash inflow consists of the costs of our revenue, as well as sales, marketing and general and administrative costs. During the six months endedJune 30, 2020 , our operating cash outflows were$102.1 million from our net loss excluding non-cash and non-operating items. Changes in working capital resulted in a net cash inflow of$50.2 million . Investing Activities During the six months endedJune 30, 2021 , we used$757.1 million in cash in investing activities. The majority was used to design, acquire and install solar energy systems and components under our long-term Customer Agreements. During the six months endedJune 30, 2020 , we used$364.4 million in cash in investing activities. The majority was used to design, acquire and install solar energy systems and components under our long-term Customer Agreements. Financing Activities During the six months endedJune 30, 2021 , we generated$1,262.2 million from financing activities. This was primarily driven by$487.4 million in net proceeds from fund investors and$762.0 million in net proceeds from debt, offset by$6.1 million in repayments under finance lease obligations. 51 --------------------------------------------------------------------------------
During the six months ended
Debt and Investing Fund Commitments As ofJune 30, 2021 , we had committed and available capital of approximately$650.6 million that 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. For a discussion of the terms and conditions of debt instruments and changes thereof in the period, refer to Note 8, Indebtedness, to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Convertible Senior Notes Offering OnJanuary 25, 2021 , we entered into a purchase agreement (the "Purchase Agreement") withCredit Suisse Securities (USA) LLC andMorgan Stanley & Co. LLC , as representatives of the several initial purchasers (the "Purchasers"), to issue and sell$350.0 million aggregate principal amount of 0% Convertible Senior Notes due 2026 (the "Notes") in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Notes were sold to the Purchasers pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act. In addition, we granted the Purchasers an option to purchase, during a 13-day period beginning on, and including, the date on which the Notes were first issued, up to an additional$50.0 million aggregate principal amount of Notes on the same terms and conditions. The Purchasers exercised their option in full onJanuary 26, 2021 . The net proceeds from the sale of the Notes issued onJanuary 28, 2021 (after deducting the Purchasers' discount and estimated offering expenses) was approximately$389.0 million . OnJanuary 28, 2021 , we entered into an Indenture (the "Indenture") withWells Fargo Bank, National Association , as trustee (the "Trustee"), pursuant to which we issued$400.0 million aggregate principal amount of Notes. The Notes will not bear regular interest, and the principal amount of the notes will not accrete. The Notes may bear special interest under specified circumstances relating to our failure to comply with our reporting obligations under the Indenture or if the Notes are not freely tradable as required by the Indenture. The Notes will mature onFebruary 1, 2026 , unless earlier repurchased by us, redeemed by us or converted pursuant to their terms. In connection with the offering of the Notes, onJanuary 25, 2021 andJanuary 26, 2021 , we entered into privately negotiated capped call transactions withCredit Suisse Capital LLC , represented byCredit Suisse Securities (USA) LLC ,Morgan Stanley & Co. LLC , Barclays Bank PLC, through its agentBarclays Capital Inc. , and Royal Bank of Canada, represented byRBC Capital Markets, LLC (the "Capped Calls"). The Capped Calls each have an initial strike price of approximately$117.91 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of$157.22 per share. The Capped Calls cover, subject to anti-dilution adjustments, approximately 3.4 million shares of common stock. The Capped Calls are expected generally to reduce the potential dilution to the common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Notes, as the case may be, in the event the market price per share of common stock, as measured under the Capped Calls, is greater than the strike price of the Capped Call, with such offset subject to a cap. If, however, the market price per share of the common stock, as measured under the Capped Calls, exceeds the cap price of the Capped Calls, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of the common stock exceeds the cap price. We used approximately$28.0 million from the net proceeds from the issuance and sale of the Notes to purchase the Capped Calls. The final components of the Capped Calls are scheduled to expire onJanuary 29, 2026 .
Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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