Acquisitions

12 Months Ended

Dec. 31, 2022

Business Combination and Asset Acquisition [Abstract]

Acquisitions

In February 2021, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with certain of our subsidiaries, SunStreet and LEN X, LLC, a Florida limited liability company, the sole member of SunStreet and a wholly-owned subsidiary of Lennar Corporation ("Lenx"). Pursuant to the Merger Agreement, in April 2021, we acquired SunStreet, Lennar Corporation's ("Lennar") residential solar platform, in exchange for up to 7,011,751 shares of our common stock (the "Acquisition"), comprised of 3,095,329 shares in initial consideration issued at closing, 27,526 shares related to the purchase price adjustments in the third quarter of 2021 and up to 3,888,896 shares issuable as earnout consideration after closing of the Acquisition as described below. We believe the Acquisition provides a new strategic path to further scale our solar business, reduces customer acquisition costs, provides a multi-year supply of sites through the development of new solar communities and allows us to pursue the development of clean and resilient microgrids across the U.S.

The purchase consideration was approximately $218.6 million, consisting of $128.2 million in the issuance of common stock shares and $90.4 million representing the fair value of contingent consideration based upon estimated new solar energy system installations through 2025 and the execution of certain binding agreements before the fifth anniversary of the closing of the Acquisition. Pursuant to the Earnout Agreement entered into between us and Lenx, Lenx will have the ability to earn up to an additional 3,888,896 shares of common stock over a five-year period in connection with the Acquisition. The earnout payments are conditioned on SunStreet meeting certain commercial milestones and achieving specified in-service levels. There are two elements to the earnout arrangement. First, we will issue up to 2,777,784 shares to the extent we and our subsidiaries (including SunStreet) place target amounts of solar energy systems into service and enter into qualifying customer agreements related to such solar energy systems. The 2,777,784 shares of common stock issuable under this portion of the earnout can be earned in four installments on a yearly basis (if the in-service target for each such year is achieved) or at the end of the four-year period (if the cumulative in-service target is achieved by the fourth and final year), with the annual periods commencing on the closing date of the Acquisition. See Note 14, Stockholders' Equity. This earnout is recorded as contingent consideration. The second element of the earnout is related to the development of microgrid communities. Pursuant to this portion of the earnout, we will issue up to 1,111,112 shares in two separate tranches, each of which has different criteria, if, prior to the fifth anniversary of the closing date of the Acquisition, we enter into binding agreements for the development of microgrid communities. One of these tranches is recorded as contingent consideration. As of December 31, 2022, the amount of contingent consideration that could be paid to Lennar has an estimated maximum value of $50.8 million and a minimum value of $9.8 million. These values were determined based on the projected average share price over the five year earnout period

multiplied by the number of shares to be transferred to Lennar if the targets for purchased solar energy systems placed in service are achieved. In connection with the Acquisition, Lennar has committed to contribute an aggregate $200.0 million (the "Funding Commitment") to four Sunnova tax equity funds, each formed annually during a period of four consecutive years (each such year, a "Contribution Year") commencing in 2021. See Note 13, Redeemable Noncontrolling Interests and Noncontrolling Interests. The solar service agreements and related solar energy systems acquired by each of these four tax equity funds will generally be originated by SunStreet, though a certain number of solar service agreements may be originated by our dealers, subject to certain criteria and expected in-service levels for the year. The favorable terms of the Funding Commitment result in an intangible asset. During the years ended December 31, 2022 and 2021, we incurred transaction costs of $7.8 million and $6.7 million related to acquisitions.

The fair values of the assets acquired and liabilities assumed are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. We estimated the fair value of the assets acquired at the acquisition date using a multi-period excess earnings methodology for customer relationships related to system sales and servicing, a cost savings methodology for customer relationships related to new customers, a relief from royalty methodology for the trade name and a discounted cash flow methodology for the tax equity commitment, all using Level 3 inputs.

During the third quarter of 2021, we made changes to our purchase price allocation for facts and circumstances that existed at the acquisition date related to (a) the issuance of additional shares of common stock, (b) changes to the aggregate principal amount of the debt acquired, (c) modifications to the forecasted cash flows for the intangible assets, (d) modifications to the estimated earnout consideration and (e) resulting changes to goodwill. During the third quarter of 2021, we recorded an increase to goodwill of $9.1 million as a result of purchase price adjustments. The following table presents the fair value of the assets acquired and liabilities assumed, inclusive of the purchase price adjustments, with the excess recorded as goodwill:


	As Adjusted
	(in thousands)
Cash	$	503
Other current assets (includes inventory of $26,835)	33,562
Property and equipment	217
Intangible assets	211,836
Other assets	1,060
Total assets acquired	247,178
Accounts payable	3,762
Accrued expenses	4,580
Current portion of long-term debt	32,301
Other current liabilities	364
Other long-term liabilities	697
Total liabilities assumed	41,704
Net assets acquired, excluding goodwill	205,474
Purchase consideration	218,624
Goodwill	$	13,150

Goodwill represents the excess of the purchase consideration over the aggregate fair value of the assets acquired and liabilities assumed. Goodwill is primarily attributable to the acquired assembled workforce. We do not expect to take any tax deductions for the goodwill associated with the Acquisition unless we decide to make an asset election in the future that would make a portion of the goodwill deductible for tax purposes. The portion of revenue and earnings associated with the acquired business was not separately identifiable due to the integration with our operations.