Sunrun Inc. — Q2 2015 Form 10-Q Summary
Reporting period: Unaudited quarter and six months ended June 30, 2015; comparisons are to the corresponding 2014 periods. Amounts are in U.S. dollars. Sunrun designs, installs, owns and maintains residential solar systems, generally under 20-year customer leases or power-purchase agreements, and also sells systems and solar products. It completed its IPO in August 2015, after the reporting period.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $72.7 million | $51.9 million | $122.4 million | $82.3 million |
| Gross profit and margin* | $11.0 million; 15.1% | $9.2 million; 17.8% | $14.0 million; 11.4% | $14.3 million; 17.3% |
| Operating loss | $(46.2) million | $(30.6) million | $(91.3) million | $(53.2) million |
| Consolidated net loss | $(49.9) million | $(32.7) million | $(102.4) million | $(57.3) million |
| Net income (loss) available to common stockholders | $0.0 million | $(17.2) million | $(10.5) million | $(29.0) million |
*Gross profit and margin are calculated as revenue less the two reported cost-of-revenue lines; they are not separately presented subtotals in the filing. Q2 2015 common-stockholder income before participating-security allocation was $7.5 million, but it was fully allocated to preferred-stock participating securities; reported EPS available to common stockholders was zero. Six-month 2015 loss per share was $0.41.
- Q2 revenue rose 40% year over year; six-month revenue rose 49%. Growth reflected more systems in service, higher incentive revenue, product and system sales growth, and the April 2015 Clean Energy Experts (CEE) acquisition.
- Operating expenses increased 44% in Q2 and 58% for the six-month period. Sales and marketing rose 98% in both comparisons, reflecting expansion of direct sales, hiring, market entry and advertising.
- Cash and cash equivalents were $116.6 million at June 30, down from $152.2 million at year-end 2014. Current assets were $229.1 million and current liabilities $193.9 million. Restricted cash was an additional $13.2 million.
- For the six months, operating cash flow was $(44.6) million, versus $10.1 million provided in 2014; investing cash outflow was $277.1 million versus $218.8 million; financing cash inflow was $286.1 million versus $313.0 million. Cash decreased $35.5 million.
- Total debt was $337.7 million: $140.0 million under a recourse bank line and $197.7 million of non-recourse debt. The line had $44.6 million of unused borrowing capacity; total unused capacity shown for debt facilities was $62.6 million. The company reported compliance with debt covenants at quarter-end.
- Total assets were $2.24 billion, including $1.70 billion of net solar systems. Accumulated deficit was $69.5 million. Certain consolidated VIE assets can only settle VIE obligations; VIE creditors generally have no recourse to Sunrun.
Material changes and developments
- CEE was acquired in April for stated consideration of $25.0 million in cash and 1.9 million common shares, with deferred installments and potential additional consideration tied to sales targets and continued employment. The filing recorded $35.8 million of goodwill from the acquisition; the purchase-price allocation was preliminary.
- The company entered a new syndicated working-capital facility in April, with commitments up to $205 million, replacing a prior facility. It drew $80 million at closing; the June 30 balance was $140.0 million. The facility includes minimum unencumbered liquidity and interest-coverage covenants.
- Sunrun deployed 42.4 MW in Q2 versus 35.4 MW in Q2 2014; cumulative deployed capacity reached 472.5 MW versus 322.7 MW a year earlier. Estimated retained value was $1.223 billion, up from $787.0 million; estimated retained value per watt was $2.39 versus $2.40.
- After quarter-end, Sunrun issued $111 million of asset-backed notes at a 4.50% weighted-average rate, primarily to repay lease pass-through financing. Its August IPO sold 17.9 million shares at $14 per share. The filing reports approximately $220.1 million net proceeds after underwriting discounts, commissions and offering expenses; elsewhere it reports $228.8 million after underwriting discounts but before offering expenses.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said cash, investment-fund commitments and available borrowings were expected to meet anticipated cash needs for at least 12 months, while noting that continued growth depends substantially on third-party financing and that unavailable or unfavorable financing could require spending reductions.
- Key business exposures include dependence on tax-equity investors and government incentives, including the then-scheduled reduction of the federal commercial investment tax credit after December 31, 2016; changes to net metering, utility rates and regulation; competition; interest rates; customer credit; and installation, supplier and weather risks.
- The company reported a material weakness in internal control over financial reporting relating principally to deferred taxes, prepaid tax assets and amortization associated with intercompany transactions. Prior financial statements had been restated; management concluded disclosure controls were ineffective as of June 30, 2015.
- Contingencies include a government investigation of the Section 1603 grant program and related system valuations, consumer and wage-and-hour class actions, and investor indemnification obligations related to investment tax credits. The filing said potential losses for the investigation and certain litigation were not estimable; management did not consider a loss probable for the investigation or consumer action.
- Other notable exposures include a fund-investor minimum-return guarantee whose maximum potential payment could not be estimated, and purchase commitments for solar modules and inverters. A $0.4 million loss on early extinguishment of debt was recorded in 2015.
Important facts for investors to verify
- Whether operating cash burn, investment spending and sales-and-marketing costs can be supported by recurring financing and cash generation.
- The availability, cost and terms of future investment funds, debt and securitizations, including how much committed fund capital remains drawable and subject to conditions.
- Progress remediating the material weakness, and whether tax accounting and fund-allocation controls are reliable in future filings.
- Potential outcomes of the Treasury/Justice investigation, tax-credit valuation disputes, and pending consumer and employee litigation, including any resulting indemnity payments.
- The effect of incentive, net-metering and utility-rate changes on customer savings and system economics, as well as the effect of the scheduled tax-credit step-down under law at the time of filing.
- Reconcile the IPO proceeds figures and assess dilution from the preferred-stock conversion, additional shares and proposed warrants disclosed after quarter-end.