SolarCity to review 2012 and 2013 fiscal earnings following an auditing error

(Image courtesy of SolarCity)
(Image courtesy of SolarCity)

SolarCity (NASDAQ:SCTY), a San Mateo-based solar installation company, on Monday announced its plans to review its fiscal earnings, beginning with the first quarter of 2012, after an auditing error was discovered this past week.

Although the company’s fourth fiscal quarter earnings were originally scheduled for release on Feb. 24, the company delayed the earnings release date by a week, saying that it had not yet completed accounting for its recent acquisitions of Zep Solar, Inc. and Common Assets, Inc.

While the company has completed its review of accounting for the two acquisitions, Lyndon Rive, SolarCity’s chief executive officer, said on March 3 that updated financials will now not be released until March 18.

“This week as we looked at completing the 2013 year-end financials our internal controls discovered an overhead allocation error,” he said on a March 3 conference call with analysts. “Once we identified this overhead allocation error, we discussed with our auditors and they agreed that a correction was needed.”

The company’s auditors are Ernst & Young. On the call, Rive apologized for the delay.

The company said the error originated from a mistake in an allocation formula, due to a large volume increase in solar lease systems, during the fourth quarter. On the call, Rive emphasized that total overhead, or ongoing business expenses, had not changed, but simply needed to be moved from the balance sheet to the income statement. The company said it defines overhead as non-direct expenses associated with solar installations, such as warehouse rent, safety services and fleet expenses.

According to Bob Kelly, the company’s Chief Financial Officer, SolarCity became aware of the overhead allocation issue, after gross margins appeared inconsistent. The company attributed the error to jobs that spanned multiple quarters, resulting in an over allocation of operating lease assets, or rooftop installations. The company said the error will reduce the costs associated with leases. The costs will be transferred to system sales.

Kelly said on the call that the miscalculations will not impact operating metrics. In addition, the company expects positive net cash flow for the fourth quarter of 2013. He emphasized net balance will remain at $577 million.

“The primary impact is that the operating lease asset will decrease as the allocated amount is now lower,” Kelly said on the call. “Currently, we expect decreases of $16 million to $20 million in 2013 and $20 million to $23 million in 2012.”

Following the call, four law firms, Levi & Korsinsky, LLP, Pomerantz Law Firm, Harwood Feffer LLP and Bronstein, Gewirtz & Grossman, LLC said in public statements they would be investigating potential claims on the part of investors against SolarCity for possible violations of federal securities laws.

In an official statement, Pomerantz Law Firm said “the investigation concerns whether SolarCity and certain of its officers/directors have violated Section 10(b) and 20(a) of the Securities Exchange Act,” which prohibits any stop-loss orders on the purchase or sale of non-government securities and insider trading.

For the third quarter of 2013, SolarCity reported a net profit of $3.4 million or 4 cents per share. Revenues rose to $48.6 million, a 52 percent increase year-over-year.

In addition to Zep Solar and Common Assets, SolarCity also acquired Paramount Energy Solutions, Inc., a solar sales and marketing firm, in fiscal 2013.

Since its initial public offering in December 2012, SolarCity’s shares have increased in value by more than 400 percent. While SolarCity has been growing, some analysts remain disappointed with the company’s gross margins. The 52-week range for the stock has bounced between $15.88 per share and $88.35 per share.

Following Monday’s announcement, shares of SolarCity dropped 2 percent to $83.25. The day after the delay was announced, earnings per share rose by 2.8 percent. At the 4 p.m. close of trading Friday on the NASDAQ stock market, shares of Solar City dropped by 2.84 percent to $77.80. In after-hours trading, shares fell to $77.41, a 0.5 percent decrease.

Homepage photo courtesy of SolarCity.

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