VIVINT SOLAR, INC., 10-K filed on 3/15/2016
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Mar. 2, 2016
Jun. 30, 2015
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2015 
 
 
Document Fiscal Year Focus
2015 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
VSLR 
 
 
Entity Registrant Name
Vivint Solar, Inc. 
 
 
Entity Central Index Key
0001607716 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
106,595,407 
 
Entity Public Float
 
 
$ 264.1 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 92,213 
$ 261,649 
Accounts receivable, net
3,636 
1,837 
Inventories
631 
774 
Prepaid expenses and other current assets
17,078 
16,806 
Total current assets
113,558 
281,066 
Restricted cash and cash equivalents
15,035 
6,516 
Solar energy systems, net
1,102,157 
588,167 
Property and equipment, net
48,168 
13,024 
Intangible assets, net
2,031 
18,487 
Goodwill
36,601 
36,601 
Prepaid tax asset, net
277,496 
111,910 
Other non-current assets, net
14,024 
8,553 
TOTAL ASSETS
1,609,070 1
1,064,324 1
Current liabilities:
 
 
Accounts payable
49,986 
51,354 
Accounts payable—related party
1,905 
2,132 
Distributions payable to non-controlling interests and redeemable non-controlling interests
11,347 
6,780 
Accrued compensation
13,758 
16,794 
Current portion of deferred revenue
4,968 
314 
Current portion of capital lease obligation
5,489 
3,502 
Accrued and other current liabilities
29,017 
14,016 
Total current liabilities
116,470 
94,892 
Capital lease obligation, net of current portion
10,055 
6,176 
Long-term debt
415,850 
105,000 
Deferred tax liability, net
216,033 
112,227 
Deferred revenue, net of current portion
43,304 
4,466 
Other non-current liabilities
28,565 
 
Total liabilities
830,277 1
322,761 1
Commitments and contingencies (Note 16)
   
   
Redeemable non-controlling interests
169,541 
128,427 
Stockholders' equity:
 
 
Common stock, $0.01 par value—1,000,000 authorized, 106,576 shares issued and outstanding as of December 31, 2015; 1,000,000 authorized, 105,303 shares issued and outstanding as of December 31, 2014
1,066 
1,053 
Additional paid-in capital
530,646 
502,785 
Accumulated deficit
(12,769)
(25,849)
Total stockholders' equity
518,943 
477,989 
Non-controlling interests
90,309 
135,147 
Total equity
609,252 
613,136 
TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
$ 1,609,070 
$ 1,064,324 
[1] The Company’s consolidated assets as of December 31, 2015 and 2014 include $1,005.8 million and $540.1 million consisting 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, net, of $990.6 million and $525.9 million as of December 31, 2015 and 2014; cash and cash equivalents of $12.0 million and $12.6 million as of December 31, 2015 and 2014; accounts receivable, net, of $3.1 million and $1.5 million as of December 31, 2015 and 2014; and prepaid expenses and other current assets of $0.1 million and zero as of December 31, 2015 and 2014. The Company’s consolidated liabilities as of December 31, 2015 and 2014 included $66.4 million and $11.4 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to non-controlling interests and redeemable non-controlling interests of $11.3 million and $6.8 million as of December 31, 2015 and 2014; deferred revenue of $47.9 million and $4.6 million as of December 31, 2015 and 2014; accrued and other current liabilities of $3.9 million and zero as of December 31, 2015 and 2014; and other non-current liabilities of $3.3 million and zero as of December 31, 2015 and 2014. For further information see Note 11—Investment Funds.
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2015
Dec. 31, 2014
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
106,576,000 
105,303,000 
Common stock, shares outstanding
106,576,000 
105,303,000 
Total assets
$ 1,609,070,000 1
$ 1,064,324,000 1
Solar energy systems, net
1,102,157,000 
588,167,000 
Cash and cash equivalents
92,213,000 
261,649,000 
Accounts receivable, net
3,636,000 
1,837,000 
Prepaid expenses and other current assets
17,078,000 
16,806,000 
Total liabilities
830,277,000 1
322,761,000 1
Distributions payable to non-controlling interests and redeemable non-controlling interests
11,347,000 
6,780,000 
Accrued and other current liabilities
29,017,000 
14,016,000 
Other non-current liabilities
28,565,000 
 
Variable Interest Entities
 
 
Total assets
1,005,825,000 
540,086,000 
Solar energy systems, net
990,609,000 
525,903,000 
Cash and cash equivalents
12,014,000 
12,641,000 
Accounts receivable, net
3,063,000 
1,542,000 
Prepaid expenses and other current assets
121,000 
Total liabilities
66,417,000 
11,352,000 
Distributions payable to non-controlling interests and redeemable non-controlling interests
11,347,000 
6,780,000 
Deferred revenue
47,900,000 
4,600,000 
Accrued and other current liabilities
3,869,000 
Other non-current liabilities
$ 3,283,000 
$ 0 
[1] The Company’s consolidated assets as of December 31, 2015 and 2014 include $1,005.8 million and $540.1 million consisting 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, net, of $990.6 million and $525.9 million as of December 31, 2015 and 2014; cash and cash equivalents of $12.0 million and $12.6 million as of December 31, 2015 and 2014; accounts receivable, net, of $3.1 million and $1.5 million as of December 31, 2015 and 2014; and prepaid expenses and other current assets of $0.1 million and zero as of December 31, 2015 and 2014. The Company’s consolidated liabilities as of December 31, 2015 and 2014 included $66.4 million and $11.4 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to non-controlling interests and redeemable non-controlling interests of $11.3 million and $6.8 million as of December 31, 2015 and 2014; deferred revenue of $47.9 million and $4.6 million as of December 31, 2015 and 2014; accrued and other current liabilities of $3.9 million and zero as of December 31, 2015 and 2014; and other non-current liabilities of $3.3 million and zero as of December 31, 2015 and 2014. For further information see Note 11—Investment Funds.
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Revenue:
 
 
 
Operating leases and incentives
$ 61,150 
$ 21,688 
$ 5,864 
Solar energy system and product sales
3,032 
3,570 
306 
Total revenue
64,182 
25,258 
6,170 
Operating expenses:
 
 
 
Cost of revenue—operating leases and incentives
131,213 
67,984 
19,004 
Cost of revenue—solar energy system and product sales
1,762 
1,997 
123 
Sales and marketing
48,078 
21,869 
7,348 
Research and development
3,901 
1,892 
 
General and administrative
92,664 
78,899 
16,438 
Amortization of intangible assets
13,172 
14,911 
14,595 
Impairment of intangible assets
4,506 
 
 
Total operating expenses
295,296 
187,552 
57,508 
Loss from operations
(231,114)
(162,294)
(51,338)
Interest expense
12,568 
9,323 
3,144 
Other (income) expense
(154)
1,372 
1,865 
Loss before income taxes
(243,528)
(172,989)
(56,347)
Income tax expense (benefit)
9,737 
(7,070)
123 
Net loss
(253,265)
(165,919)
(56,470)
Net loss attributable to non-controlling interests and redeemable non-controlling interests
(266,345)
(137,036)
(62,108)
Net income available (loss attributable) to common stockholders
$ 13,080 
$ (28,883)
$ 5,638 
Net income available (loss attributable) per share to common stockholders:
 
 
 
Basic
$ 0.12 
$ (0.35)
$ 0.08 
Diluted
$ 0.12 
$ (0.35)
$ 0.07 
Weighted-average shares used in computing net income available (loss attributable) per share to common stockholders:
 
 
 
Basic
106,088 
83,446 
75,000 
Diluted
109,858 
83,446 
75,223 
Consolidated Statements of Redeemable Non-Controlling Interests and Equity (USD $)
In Thousands
Total
Redeemable Non-Controlling Interests
Common Stock
Additional Paid-in Capital
(Accumulated Deficit) Retained Earnings
Total Stockholders Equity
Non-Controlling Interests
Balance at Dec. 31, 2012
$ 71,323 
$ 17,741 
$ 750 
$ 73,177 
$ (2,604)
$ 71,323 
 
Balance (in Shares) at Dec. 31, 2012
 
 
75,000 
 
 
 
 
Stock-based compensation expense
294 
 
 
294 
 
294 
 
Non-cash contributions for services
160 
 
 
160 
 
160 
 
Capital contribution from Parent
1,418 
 
 
1,418 
 
1,418 
 
Contributions from non-controlling interests and redeemable non-controlling interests
60,000 
63,154 
 
 
 
 
60,000 
Distributions to non-controlling interests and redeemable non-controlling interests
(670)
(3,064)
 
 
 
 
(670)
Net (loss) income attributable available to stockholders
(51,904)
 
 
 
5,638 
5,638 
(57,542)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests
 
(4,566)
 
 
 
 
 
Balance at Dec. 31, 2013
80,621 
73,265 
750 
75,049 
3,034 
78,833 
1,788 
Balance (in Shares) at Dec. 31, 2013
 
 
75,000 
 
 
 
 
Stock-based compensation expense
23,687 
 
 
23,687 
 
23,687 
 
Non-cash contributions for services
200 
 
 
200 
 
200 
 
Issuance of common stock, net of costs
412,912 
 
303 
412,609 
 
412,912 
 
Issuance of common stock (in shares)
 
 
30,303 
 
 
 
 
Costs related to issuance of common stock
(8,760)
 
 
(8,760)
 
(8,760)
 
Contributions from non-controlling interests and redeemable non-controlling interests
275,777 
63,735 
 
 
 
 
275,777 
Deemed dividend
43,430 
 
 
43,430 
 
43,430 
 
Return of capital adjustment
(43,430)
 
 
(43,430)
 
(43,430)
 
Distributions to non-controlling interests and redeemable non-controlling interests
(8,801)
(5,154)
 
 
 
 
(8,801)
Net (loss) income attributable available to stockholders
(162,500)
 
 
 
(28,883)
(28,883)
(133,617)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests
 
(3,419)
 
 
 
 
 
Balance at Dec. 31, 2014
613,136 
128,427 
1,053 
502,785 
(25,849)
477,989 
135,147 
Balance (in Shares) at Dec. 31, 2014
105,303 
 
105,303 
 
 
 
 
Stock-based compensation expense
25,604 
 
 
25,604 
 
25,604 
 
Excess tax effects from stock-based compensation
1,713 
 
 
1,713 
 
1,713 
 
Issuance of common stock, net of costs
557 
 
13 
544 
 
557 
 
Issuance of common stock (in shares)
 
 
1,273 
 
 
 
 
Contributions from non-controlling interests and redeemable non-controlling interests
178,833 
113,896 
 
 
 
 
178,833 
Distributions to non-controlling interests and redeemable non-controlling interests
(23,542)
(6,566)
 
 
 
 
(23,542)
Net (loss) income attributable available to stockholders
(187,049)
 
 
 
13,080 
13,080 
(200,129)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests
 
(68,772)
 
 
 
 
 
Balance at Dec. 31, 2015
$ 609,252 
$ 169,541 
$ 1,066 
$ 530,646 
$ (12,769)
$ 518,943 
$ 90,309 
Balance (in Shares) at Dec. 31, 2015
106,576 
 
106,576 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$ (253,265)
$ (165,919)
$ (56,470)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
24,924 
8,523 
1,984 
Amortization of intangible assets
13,172 
15,042 
14,595 
Impairment of intangible assets
4,506 
 
 
Deferred income taxes
107,466 
74,848 
30,927 
Stock-based compensation
25,604 
23,687 
294 
Loss on removal of solar energy systems and property and equipment
1,024 
 
 
Non-cash interest and other expense
3,724 
6,512 
2,930 
Reduction in lease pass-through financing obligation
(231)
 
 
Non-cash contributions for services
 
200 
160 
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable, net
(1,799)
(1,018)
(512)
Inventories
143 
(195)
 
Prepaid expenses and other current assets
(576)
(10,486)
(3,605)
Prepaid tax asset, net
(165,586)
(81,172)
(30,738)
Other non-current assets, net
(5,268)
(8,451)
(741)
Accounts payable
1,636 
1,905 
1,425 
Accounts payable—related party
(227)
(935)
2,592 
Accrued compensation
(892)
(1,073)
10,367 
Deferred revenue
43,492 
3,387 
1,340 
Accrued and other current liabilities
12,909 
(773)
4,579 
Net cash used in operating activities
(189,244)
(135,918)
(20,873)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Payments for the cost of solar energy systems
(540,399)
(383,522)
(134,138)
Payments for property and equipment
(6,307)
(3,505)
 
Change in restricted cash and cash equivalents
(8,519)
(1,516)
(3,500)
Purchase of intangible assets
(1,221)
(370)
 
Payment in connection with business acquisition, net of cash acquired
 
(12,040)
 
Proceeds from U.S. Treasury grants
 
190 
10,116 
Net cash used in investing activities
(556,446)
(400,763)
(127,522)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from investment by non-controlling interests and redeemable non-controlling interests
292,729 
339,512 
123,154 
Distributions paid to non-controlling interests and redeemable non-controlling interests
(25,541)
(8,751)
(2,284)
Proceeds from long-term debt
310,850 
105,000 
 
Proceeds from short-term debt
 
75,500 
 
Payments on short-term debt
 
(75,500)
 
Payments for debt issuance costs
(5,422)
 
 
Proceeds from lease pass-through financing obligation
7,228 
 
 
Proceeds from revolving lines of credit—related party
 
154,500 
83,482 
Payments on revolving lines of credit—related party
 
(200,192)
(60,000)
Payments on revolving lines of credit
 
 
(2,000)
Principal payments on capital lease obligations
(5,363)
(2,623)
(987)
Proceeds from issuance of common stock
649 
412,912 
 
Payments for deferred offering costs
(589)
(8,066)
 
Excess tax effects from stock-based compensation
1,713 
 
 
Capital contribution from Parent
 
 
1,418 
Net cash provided by financing activities
576,254 
792,292 
142,783 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(169,436)
255,611 
(5,612)
CASH AND CASH EQUIVALENTS—Beginning of period
261,649 
6,038 
11,650 
CASH AND CASH EQUIVALENTS—End of period
92,213 
261,649 
6,038 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
8,469 
4,473 
206 
Cash paid for income taxes
67,135 
4,350 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Property acquired under build-to-suit agreements
25,560 
 
 
Vehicles acquired under capital leases
11,363 
8,541 
4,749 
Accrued distributions to non-controlling interests and redeemable non-controlling interests
4,567 
5,204 
1,450 
Costs of solar energy systems included in changes in accounts payable, accrued compensation and other accrued liabilities
(6,589)
25,990 
19,946 
Solar energy system sales
 
 
 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Receivable for tax credit recorded as a reduction to solar energy system costs
$ 1,678 
$ 4,132 
$ 2,122 
Organization
Organization

1.Organization

Vivint Solar, Inc. (the “Company” and formerly known as V Solar Holdings, Inc.) was incorporated as a Delaware corporation on August 12, 2011. Vivint Solar, Inc. and its subsidiaries are collectively referred to as the “Company.” The Company commenced operations in May 2011. In November 2012 (the “Acquisition Date”), investment funds affiliated with The Blackstone Group L.P. (the “Sponsor”) and certain co-investors (collectively, the “Investors”), through 313 Acquisition LLC (“313” or “Parent”), acquired 100% of the equity interests of APX Group, Inc. (“Vivint”) and the Company (the “Acquisition”). The Acquisition was accomplished through certain mergers and related reorganization transactions pursuant to which the Company became a direct wholly owned subsidiary of 313, an entity owned by the Investors. In October 2014, the Company closed its initial public offering with 313 remaining the majority shareholder.

Merger Agreement with SunEdison

On July 20, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SunEdison, Inc., a Delaware corporation (“SunEdison”) and SEV Merger Sub, Inc., a wholly-owned subsidiary of SunEdison. The Merger Agreement was subsequently amended on December 9, 2015 to update the terms of the merger. The Company terminated the Merger Agreement on March 7, 2016. 

On March 8, 2016, the Company filed suit in the Court of Chancery State of Delaware against SunEdison alleging that SunEdison willfully breached its obligations under the Merger Agreement and breached its implied covenant of good faith and fair dealing. The Company is seeking declaratory judgment, award damages, costs and reasonable attorney’s fees and such further relief that the court finds equitable, appropriate and just.

Business

The Company primarily offers solar energy to residential customers through long-term customer contracts, such as power purchase agreements and solar energy system leases. The Company enters into these long-term customer contracts primarily through a sales organization that uses a direct-to-home sales model. The long-term customer contracts are typically for 20 years and require the customer to make monthly payments to the Company. In 2015, the Company also began offering customers the option to purchase solar energy systems. In May 2015, the Company began offering solar energy systems to commercial and industrial (“C&I”) customers through long-term customer contracts.

The Company has formed various investment funds and entered into long-term debt facilities to monetize the recurring customer payments under its long-term customer contracts and the investment tax credits, accelerated tax depreciation and other incentives associated with residential solar energy systems. The Company uses the cash received from the investment funds, long-term debt facilities and revenue generated from operations to finance a portion of the Company’s variable and fixed costs associated with installing the residential solar energy systems. The obligations of the Company are in no event obligations of the investment funds.


Since inception, the Company has relied on Vivint and certain of its affiliates for some of its administrative, managerial, account management and operational services. The Company’s use of Vivint services has steadily decreased since 2013 and now consists primarily of IT support. The Company was consolidated by Vivint as a variable interest entity prior to the Acquisition, and continues to be an affiliated entity and related party subsequent to the Acquisition. The Company has entered into various agreements and transactions with Vivint and its affiliates related to these services. See Note 15—Related Party Transactions.          

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2.Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflect the accounts and operations of the Company, its subsidiaries in which the Company has a controlling financial interest and the investment funds formed to fund the purchase of solar energy systems, which are consolidated as variable interest entities (“VIEs”). The Company uses a qualitative approach in assessing the consolidation requirement for VIEs. This approach focuses on determining whether the Company has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and whether the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. For all periods presented, the Company has determined that it is the primary beneficiary in the operational VIEs in which it has an equity interest. The Company evaluates its relationships with 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. For additional information regarding these VIEs, see Note 11—Investment Funds.

The consolidated financial statements reflect all of the costs of doing business, including the allocation of expenses incurred by Vivint on behalf of the Company. For additional information, see Note 15—Related Party Transactions. These expenses were allocated to the Company on a basis that was considered to reasonably reflect the utilization of the services provided to, or the benefit obtained by, the Company. The allocations may not, however, reflect the expense the Company would have incurred as an independent company for the periods presented, and may not be indicative of the Company’s future results of operations and financial position.

With respect to liquidity, the Company believes its cash and cash equivalents, including investment fund commitments, projected investment fund contributions and its current debt facilities, in addition to financing that may be obtained from other sources, including the Company’s financial sponsors, will be sufficient to meet its anticipated cash needs for at least the next 12 months. While the Company believes additional financing is available and will continue to be available to support the current level of operations, the Company believes it has the ability and intent to reduce operations to the level of available financial resources at least through the year ended December 31, 2016.

Certain prior period amounts have been reclassified to conform to current year presentation. These reclassifications did not have a significant impact on the consolidated financial statements.

Segment Information

The Company’s chief operating decision maker is its Chief Executive Officer. The Chief Executive Officer reviews financial information for purposes of allocating resources and evaluating financial performance. Prior to the second quarter of 2015, the Company had one business activity that was focused primarily on providing service to customers in the residential market. During the second quarter of 2015, the Company closed its first C&I investment fund with plans to service customers in the C&I market. As of December 31, 2015, the C&I fund was not operational, i.e., no projects had been initiated within the fund. During the year ended December 31, 2015, the Company has aligned its operations as two reporting segments: (1) Residential and (2) C&I. For additional segment information, see Note 18—Segment Information.

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect the Company’s principles of consolidation, investment tax credits, revenue recognition, solar energy systems, net, impairment of long-lived assets, goodwill impairment analysis, the recognition and measurement of loss contingencies, stock-based compensation, provision for income taxes, and non-controlling interests and redeemable non-controlling interests. The Company 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.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Cash equivalents consist principally of time deposits and money market accounts with high quality financial institutions.

Restricted Cash

The Company’s guaranty agreements with certain of its fund investors require the maintenance of minimum cash balances of $10.0 million. For additional information, see Note 11—Investment Funds. The Company was also required to deposit $5.0 million into a separate interest reserve account in accordance with the terms of its loan credit facility with Bank of America, N.A. For additional information, see Note 10—Debt Obligations. These minimum cash balances are classified as restricted cash.

Accounts Receivable, Net

Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. Accounts receivable also include unbilled accounts receivable, which is comprised of the monthly power generation under power purchase agreements not yet invoiced and the monthly bill rate of legal-form leases as of the end of the reporting period. The Company estimates its allowance for doubtful accounts based upon the collectability of the receivables in light of historical trends and adverse situations that may affect customers’ ability to pay. Revisions to the allowance are recorded as an adjustment to bad debt expense. After appropriate collection efforts are exhausted, specific accounts receivable deemed to be uncollectible are charged against the allowance in the period they are deemed uncollectible. Recoveries of accounts receivable previously written-off are recorded as credits to bad debt expense. The Company had an allowance for doubtful accounts of $0.9 million and $0.6 million as of December 31, 2015 and 2014.

Inventories

Inventories include components related to photovoltaic installation devices and software products and are stated at the lower of cost, on an average cost basis, or market. Inventories also include solar energy systems held for sale, which are solar energy systems under construction that have yet to be interconnected to the power grid and that will be sold to customers. Solar energy systems held for sale are stated at the lower of cost, on a first-in-first-out basis, or market. Solar energy systems held for sale was $0.1 million as of December 31, 2015. No solar energy systems were held for sale as of December 31, 2014.

The Company evaluates its inventory reserves on a quarterly basis and writes down the value of inventories for estimated excess and obsolete inventories based on assumptions about future demand and market conditions.

Concentrations of Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The associated concentration risk for cash and cash equivalents is mitigated by banking with creditworthy institutions. At certain times, amounts on deposit exceed Federal Deposit Insurance Corporation insurance limits. The Company does not require collateral or other security to support accounts receivable. The Company is not dependent on any single customer. The loss of a customer would not adversely impact the Company’s operating results or financial position.

The Company purchases solar panels, inverters and other system components from a limited number of suppliers. Three suppliers accounted for approximately 50%, 30% and 20% of the solar photovoltaic module purchases for the year ended December 31, 2015. Two of those suppliers accounted for approximately 50% and 40% of these purchases for the year ended December 31, 2014. The same two suppliers each individually accounted for over 48% of these purchases for the year ended December 31, 2013. Two suppliers accounted for approximately 55% and 40% of the Company’s inverter purchases for the year ended December 31, 2015. One of those suppliers accounted for a substantial majority of the Company’s inverter purchases for the years ended December 31, 2014 and 2013. If these suppliers fail to satisfy the Company’s requirements on a timely basis or if the Company fails to develop, maintain and expand its relationship with these suppliers, the Company could suffer delays in being able to deliver or install its solar energy systems, experience a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.

As of December 31, 2015, the Company’s customers under long-term customer contracts are primarily located in Arizona, California, Connecticut, Hawaii, Maryland, Massachusetts, New Jersey, New Mexico, New York, Pennsylvania, South Carolina and Utah. Future operations could be affected by changes in the economic conditions in these and other geographic areas, by changes in the demand for renewable energy generated by solar panel systems or by changes or eliminations of solar energy related government incentives.

Fair Value of Financial Instruments

Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

 

·

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

·

Level II—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities 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 related assets or liabilities; and

 

·

Level III—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company’s financial instruments consist of Level I and Level II assets and liabilities. See Note 3—Fair Value Measurements

Investment Tax Credits

The Company applies for and receives investment tax credits under Section 48(a) of the Internal Revenue Code. The amount for the investment tax credit is equal to 30% of the value of eligible solar property. The Company receives minimal allocations of investment tax credits as the majority of such credits are allocated to the fund investor. Some of the Company’s investment funds obligate it to make certain fund investors whole for losses that the investors may suffer in certain limited circumstances resulting from the disallowance or recapture of investment tax credits as a result of the Internal Revenue Service’s (the “IRS”) assessment of the fair value of such systems. The Company has concluded that the likelihood of a recapture event is remote and consequently has not recorded any liability in the consolidated financial statements for any potential recapture exposure.

U.S. Treasury Grants

In the first quarter of 2014 and prior, certain solar energy systems were eligible to receive U.S. Treasury grants under Section 1603 of the American Recovery and Reinvestment Act of 2009, as amended by the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of December 2010. The Company recorded a reduction in the basis of the solar energy system in the amount of cash to be received, at the grant approval date. This accounting treatment results in decreased depreciation of such solar energy systems over their useful lives. If it becomes probable that a U.S. Treasury grant is required to be repaid, the Company would assess whether it is necessary to derecognize any grant (or portion thereof) in accordance with Accounting Standards Codification section 450.

Solar Energy Systems, Net

The Company sells energy to customers through power purchase agreements or leases solar energy systems to customers under legal-form lease agreements. The Company has determined that these contracts should be accounted for as operating leases and, accordingly, the related solar energy systems are stated at cost, less accumulated depreciation and amortization. In 2014, the Company began offering leases to customers.

Solar energy systems, net is comprised of system equipment costs and initial direct costs related to solar energy systems. System equipment costs include components such as solar panels, inverters, racking systems and other electrical equipment, as well as costs for design and installation activities once a long-term customer contract has been executed. Initial direct costs related to solar energy systems consist of sales commissions and other direct customer acquisition expenses. System equipment costs and initial direct costs are capitalized and recorded within solar energy systems, net.

Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the respective assets as follows: 

 

  

Useful Lives

System equipment costs

  

30 years

Initial direct costs related to solar energy systems

  

Lease term (20 years)


System equipment costs are depreciated and initial direct costs are amortized once the respective systems have been installed and interconnected to the power grid. As of December 31, 2015 and 2014, the Company had recorded costs of $1,134.7 million and $598.4 million in solar energy systems, of which $882.7 million and $407.7 million related to systems that had been interconnected to the power grid, with accumulated depreciation and amortization of $32.5 million and $10.2 million.

Property and Equipment, Net

The Company’s property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Vehicles leased under capital leases are depreciated over the life of the lease term, which is typically three years. The estimated useful lives of computer equipment, furniture, fixtures and purchased software are three years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. The estimated useful lives of leasehold improvements currently range from one to three years. Repairs and maintenance costs are expensed as incurred. Major renewals and improvements that extend the useful lives of existing assets are capitalized and depreciated over their estimated useful lives.

Intangible Assets

Finite-lived intangible assets, which consist of customer contracts, customer relationships, trademarks/trade names and developed technology acquired in business combinations are initially recorded at fair value and presented net of accumulated amortization. These intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company amortizes customer contracts over three years, customer relationships over five years, trademarks/trade names over 10 years and developed technology over five to eight years. See Note 7—Intangible Assets and Goodwill.

In-process research and development reflects research and development projects that have not yet been completed and are capitalized as indefinite-lived intangibles subject to amortization upon completion or impairment if the assets are subsequently impaired or abandoned. In-process research and development projects were acquired in January 2014 as part of the Solmetric acquisition. See Note 4—Solmetric Acquisition.

The Company also capitalizes costs incurred in the development of internal-use software during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life. The Company tests these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. During the year ended December 31, 2015, the development for certain internal-use software applications was completed and the Company began to amortize the internal-use software applications over the expected useful lives of three years. For the year ended December 31, 2015, $0.2 million of amortization was recorded for internal-use software. No amortization was recorded for internal-use software prior to the year ended December 31, 2015 as the internal-use software applications were still under development.

Impairment of Long-Lived Assets

The carrying amounts of the Company’s long-lived assets, including solar energy systems, property and equipment and finite-lived intangible assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated. Factors that the Company considers in deciding when to perform an impairment review include significant negative industry or economic trends, and significant changes or planned changes in the Company’s use of the assets. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the new shorter useful life.

In February 2015, the Company decided to discontinue the external sales of the SunEye and PV Designer products, the rights to which the Company acquired when it acquired Solmetric Corporation, or Solmetric, in January 2014. This discontinuance was considered an indicator of impairment, and a review regarding the recoverability of the carrying value of the related intangible assets was performed. As a result of this review, the Company recorded a total impairment charge of $4.5 million for the year ended December 31, 2015. See Note 7—Intangible Assets and Goodwill.


Goodwill and Impairment Analysis

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. As of December 31, 2015, the Company consisted of two operating segments: (1) Residential and (2) C&I. As C&I was created internally in 2015 and the Company’s goodwill was recorded prior to 2015, all goodwill remains with the Residential operating segment. As such, the Company’s impairment test is based on a single operating segment and reporting unit structure.

The Company performs its annual impairment test of goodwill as of October 1st of each fiscal year or whenever events or circumstances change that would indicate that goodwill might be impaired. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, loss of key personnel, significant changes in the manner the Company uses the acquired assets or the strategy for the overall business, significant negative industry or economic trends or significant underperformance relative to historical operations or projected future results of operations.

In conducting the impairment test, the Company first assesses qualitative factors, including those stated previously, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If the qualitative step is not passed, the Company performs a two-step impairment test whereby in the first step, the Company must compare the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying value of the goodwill. Any excess of the goodwill carrying value over the implied fair value is recognized as an impairment loss.

The Company determined the two-step test was not necessary based on the results of its qualitative assessments and concluded that it was more likely than not that the fair value of its reporting unit was greater than its respective carrying value as of October 1, 2015 and October 1, 2014.

Prepaid Tax Asset, Net

The Company recognizes sales of solar energy systems to the investment funds for income tax purposes. As the investment funds are consolidated by the Company, the gain on the sale of the solar energy systems has been eliminated in the consolidated financial statements. However, this gain is recognized for tax reporting purposes. Since these transactions are intercompany sales for GAAP purposes, any tax expense incurred related to these intercompany sales is deferred and amortized over the estimated useful life of the underlying solar energy systems, which has been estimated to be 30 years.

Other Non-Current Assets

Other non-current assets primarily consist of deferred financing costs, advances receivable due from sales representatives and long-term refundable rent deposits. Costs incurred in connection with obtaining debt financing are deferred and amortized utilizing the straight-line method, which approximates the effective-interest method, over the term of the related financing. The Company provides advance payments of compensation to direct-sales personnel under certain circumstances. The advance is repaid as a reduction of the direct-sales personnel’s future compensation. The Company has established an allowance related to advances to direct-sales personnel who have terminated their employment agreement with the Company. These are non-interest bearing advances.

Distributions Payable to Non-Controlling Interests and Redeemable Non-Controlling Interests

As discussed in Note 11—Investment Funds, the Company and fund investors have formed various investment funds that the Company consolidates as the Company has determined that it is the primary beneficiary of these VIEs. These VIEs are required to pay cumulative cash distributions to their respective fund investors. The Company accrues amounts payable to fund investors in distributions payable to non-controlling interests and redeemable non-controlling interests in its consolidated balance sheets.

Deferred Revenue

Deferred revenue primarily includes deferred investment tax credit (“ITC”) revenue and rebates and incentives. Deferred ITC revenue is related to a lease pass-through arrangement in which a portion of the rent prepayment is allocated to ITC revenue. Rebates and incentives are received from utility companies and various government agencies and are recognized as revenue over the related lease term of 20 years. See Revenue Recognition below.

Home Installation Reserve and Warranties

The Company typically warrants solar energy systems sold to customers for periods of one through twenty years against defects in design and workmanship, and for periods of one to ten years that installation will remain watertight. The manufacturers’ warranties on the solar energy system components, which is typically passed through to the customers, has a typical product warranty period of 10 years and a limited performance warranty period of 25 years. The Company warrants its photovoltaic installation devices and software products for one to two years against defects in materials or installation workmanship.

The Company generally assesses a reserve for damages related to home installations and provides for the estimated cost of warranties at the time the related revenue is recognized. The Company assesses the accrued home installation reserve and warranty regularly and adjusts the amounts as necessary based on actual experience and changes in future estimates. Accrued warranty and home installation reserve is recorded as a component of accrued and other current liabilities on the consolidated balance sheets and was $0.3 million as of December 31, 2015. These accruals were not significant as of December 31, 2014.

Comprehensive Income (Loss)

As the Company had no other comprehensive income or loss, comprehensive income (loss) is the same as net income available (loss attributable) to common stockholders for all periods presented.

Revenue Recognition

The Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery or performance has occurred, (3) the sales price is fixed or determinable and (4) collectability is reasonably assured. The Company generates revenue through power purchase agreements and solar energy system leases, solar renewable energy certificates (“SRECs”) sales, rebate incentives and solar energy system sales. Revenue associated with power purchase agreements and solar energy system leases, SRECs and rebate incentives are included within operating leases and incentives revenue. The Company also recognizes revenue related to the sale of photovoltaic installation devices and software products and solar energy system sales within solar energy system and product sales. In the first quarter of 2015, the Company decided to discontinue the external sales of its photovoltaic installation software products.

Operating Leases and Incentives Revenue

The Company’s primary revenue-generating activity consists of entering into long-term power purchase agreements with residential customers, under which the customer agrees to purchase all of the power generated by the solar energy system for the term of the contract, which is 20 years. The agreement includes a fixed price per kilowatt hour with a fixed annual price escalation percentage. Customers have not historically been charged for installation or activation of the solar energy system. For all power purchase agreements, the Company assesses the probability of collectability on a customer-by-customer basis through a credit review process that evaluates their financial condition and ability to pay.

The Company has determined that power purchase agreements should be accounted for as operating leases after evaluating and concluding that none of the following capitalized lease classification criteria are met: no transfer of ownership or bargain purchase option exists at the end of the lease, the lease term is not greater than 75% of the useful life or the present value of minimum lease payments does not exceed 90% of the fair value at lease inception. As customer payments under a power purchase agreement are dependent on power generation, they are considered contingent rentals and are excluded from future minimum annual lease payments. Revenue from power purchase agreements is recognized based on the actual amount of power generated at rates specified under the contracts, assuming the other revenue recognition criteria discussed above are met.

In 2014, the Company began offering solar energy systems to customers pursuant to legal-form leases. The customer agreements are structured as legal-form leases due to local regulations that can be read to prohibit the sale of electricity pursuant to the Company’s standard power purchase agreement. Pursuant to the lease agreements, the customers’ monthly payments are a pre-determined amount calculated based on the expected solar energy generation by the system and includes an annual fixed percentage price escalation over the period of the contracts, which is 20 years. The Company provides its legal-form lease customers a performance guarantee, under which the Company agrees to make a payment at the end of each year to the customer if the solar energy systems do not meet a guaranteed production level in the prior 12-month period.

The guaranteed production levels have varying terms. Dependent on the level of the production guarantee, the Company either (1) recognizes the monthly lease payments as revenue and records a solar energy performance guarantee liability due to the contingent nature of the lease payments, or (2) straight-lines the contracted payments over the initial term of the lease. Solar energy performance guarantee liabilities were de minimis as of December 31, 2015 and 2014.

Future minimum annual lease receipts from customers under these legal-form lease agreements are as follows (in thousands):

Years Ending December 31,

 

 

 

2016

$

1,668

 

2017

 

1,716

 

2018

 

1,766

 

2019

 

1,817

 

2020

 

1,870

 

The Company applies for and receives SRECs in certain jurisdictions for power generated by its solar energy systems. When SRECs are granted, the Company typically sells them to other companies directly, or to brokers, to assist them in meeting their own mandatory emission reduction or conservation requirements. The Company recognizes revenue related to the sale of these certificates upon delivery, assuming the other revenue recognition criteria discussed above are met. The portion of SRECs included in operating leases and incentives was $13.9 million, $2.6 million and $0.3 million for the years ended December 31, 2015, 2014 and 2013.

The Company considers upfront rebate incentives earned from its solar energy systems to be minimum lease payments and are recognized on a straight-line basis over the life of the long-term customer contracts, assuming the other revenue recognition criteria discussed above are met. The portion of rebates recognized within operating leases and incentives was $0.4 million, $0.2 million and de minimis for the years ended December 31, 2015, 2014 and 2013.

Operating leases and incentives revenue is recorded net of sales tax collected.

Lease Pass-Through Arrangement

In 2015, a lease pass-through fund arrangement became operational under which the Company contributes solar energy systems and the investor contributes cash. Contemporaneously, a subsidiary of the Company entered into a master lease arrangement to lease the solar energy systems and the associated customer lease or power purchase agreements to the fund investor. The Company’s subsidiary makes a tax election to pass-through the investment tax credits (“ITCs”) that accrue to the solar energy systems to the fund investor, who as the legal lessee of the property is allowed to claim the ITCs under Section 50(d)(5) of the Internal Revenue Code and the related regulations.

Under this arrangement, the fund investor makes a large upfront lease payment to the Company’s subsidiary and subsequently makes periodic lease payments. The Company allocates a portion of the aggregate payments received from the fund investor to the estimated fair value of the assigned ITCs. The Company’s subsidiary has an obligation to ensure the solar energy system is in service and operational for a term of five years to avoid any recapture of the ITCs. Accordingly, the Company recognizes ITC revenue as the recapture provisions lapse assuming all other revenue recognition criteria have been met. The amounts allocated to ITCs are initially recorded as deferred revenue in the consolidated balance sheet, and subsequently, one-fifth of the amounts allocated to ITCs is recognized as revenue from operating leases and solar energy systems incentives in the consolidated statements of operations based on the anniversary of each solar energy system’s placed in service date over the next five years. As of December 31, 2015, no ITC revenue has been recognized.

Solar Energy System and Product Sales

Revenue from solar energy system sales is recognized upon the solar energy system passing an inspection by the responsible city department after completion of system installation and interconnection to the power grid per the completed contract method, assuming the remaining revenue recognition criteria discussed above have been met.

Revenue from the sale of photovoltaic installation devices and software products is recognized upon delivery of the product to the customer assuming the remaining revenue recognition criteria discussed above have been met.

Multiple-Element Arrangements

Subsequent to the acquisition of Solmetric in January 2014 and prior to the discontinuance of external sales of the SunEye and PV Designer products, the Company entered into multiple-element arrangements typically involving sales of (1) photovoltaic installation hardware devices containing software essential to the hardware product’s functionality and (2) stand-alone software. The Company allocated revenue based on the Company’s best estimate of selling price, which was determined by considering multiple factors including, but not limited to, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The consideration allocated to the delivered photovoltaic device is recognized at the time of shipment provided that the four general revenue recognition criteria discussed above have been met.

Cost of Revenue

Cost of Revenue—Operating Leases and Incentives

Cost of revenue—operating leases and incentives includes the depreciation of the cost of the solar energy systems and the amortization of capitalized initial direct costs. It also includes other costs related to the processing, account creation, design, installation, interconnection and servicing of solar energy systems that are not capitalized, such as personnel costs not directly associated to a solar energy system installation, warehouse rent and utilities, and fleet vehicle executory costs. The cost of revenue for the sales of SRECs is limited to broker fees which are paid in connection with certain SREC transactions.

Cost of Revenue—Solar Energy System and Product Sales

Cost of revenue—solar energy system and product sales consists of direct and indirect material and labor costs for solar energy systems. It also consists of materials, personnel costs, depreciation, facilities costs, other overhead costs and infrastructure expenses associated with the manufacturing of the photovoltaic installation devices and software products.

Research and Development

Research and development expense is primarily comprised of salaries and benefits associated with research and development personnel and other costs related to photovoltaic installation devices and software products and the development of other solar technologies. Research and development costs are charged to expense when incurred. The Company’s research and development expense was $3.9 million and $1.9 million for the years ended December 31, 2015 and 2014. Prior to the acquisition of Solmetric in January 2014, the Company did not incur any research and development expenses.

Advertising Costs

Advertising costs are expensed when incurred and are included in sales and marketing expenses in the consolidated statements of operations. The Company’s advertising expense was $4.5 million, $3.5 million and $1.3 million for the years ended December 31, 2015, 2014 and 2013.

Other Income (Expense)

The Company incurred interest and penalties primarily associated with employee payroll withholding tax payments that were not paid in a timely manner of $1.4 million and $1.9 million for the years ended December 31, 2014 and 2013. For the year ended December 31, 2015, the Company received an abatement of a portion of such penalties and interest.

Income Taxes

The Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards, and other tax credits measured by applying currently enacted tax laws. A valuation allowance is provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.


In the fourth quarter of 2015, the Company prospectively adopted Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This update requires that deferred tax assets and liabilities, including any related valuation allowance, be classified as non-current in a classified statement of financial position and eliminates the requirement that an entity separate deferred tax liabilities and assets into current and non-current amounts. The adoption of this update resulted in a reclassification of the Company’s $7.3 million net current deferred tax asset to the net non-current deferred tax liability in the Company’s consolidated balance sheet as of December 31, 2015. No prior periods were retrospectively adjusted.

The Company determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company uses a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within income tax expense (benefit) in the consolidated statements of operations.

Stock-Based Compensation Expense

Stock-based compensation expense for equity instruments issued to employees is measured based on the grant-date fair value of the awards. The fair value of each time-based employee stock option is estimated on the date of grant using the Black-Scholes-Merton stock option pricing valuation model. The fair value of each performance-based employee stock option is estimated on the date of grant using the Monte Carlo simulation model. The fair value of each restricted stock award and performance share unit award is determined as the closing price of the Company’s stock on the date of grant. The Company recognizes compensation costs using the accelerated attribution method for all employee stock-based compensation awards that are expected to vest over the requisite service period of the awards, which is generally the awards’ vesting period. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Stock-based compensation expense for equity instruments issued to non-employees is recognized based on the estimated fair value of the equity instrument. The fair value of the non-employee awards is subject to remeasurement at each reporting period until services required under the arrangement are completed, which is the vesting date.

Post-Employment Benefits

In the periods presented, the Company participated in a 401(k) Plan sponsored by Vivint that covered all of the Company’s eligible employees. The Company did not provide a discretionary company match to employee contributions during any of the periods presented.

Non-Controlling Interests and Redeemable Non-Controlling Interests

Non-controlling interests and redeemable non-controlling interests represent fund investors’ interest in the net assets of certain consolidated investment funds, which have been entered into by the Company in order to finance the costs of solar energy systems under long-term customer contracts. The Company has determined that the provisions in the contractual arrangements represent substantive profit-sharing arrangements. The Company has further determined that the appropriate methodology for attributing income and loss to the non-controlling interests and redeemable non-controlling interests each period is a balance sheet approach referred to as the hypothetical liquidation at book value (“HLBV”) method. Under the HLBV method, the amounts of income and loss attributed to the non-controlling interests and redeemable non-controlling interests in the consolidated statements of operations reflect changes in the amounts the fund investors would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements of these structures, assuming the net assets of these funding structures were liquidated at recorded amounts. The fund investors’ non-controlling interest in the results of operations of these funding structures is determined as the difference in the non-controlling interests’ claim under the HLBV method at the start and end of each reporting period, after taking into account any capital transactions, such as contributions or distributions, between the fund and the fund investors. The use of the HLBV methodology to allocate income to the non-controlling and redeemable non-controlling interest holders may create volatility in the Company’s consolidated statements of operations as the application of HLBV can drive changes in net income available and loss attributable to non-controlling interests and redeemable non-controlling interests from quarter to quarter.


The Company classifies certain non-controlling interests with redemption features that are not solely within the control of the Company outside of permanent equity on its consolidated balance sheets. Redeemable non-controlling interests are reported using the greater of their carrying value at each reporting date as determined by the HLBV method or their estimated redemption value in each reporting period.

Loss Contingencies

The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. The Company considers the likelihood of loss or impairment of an asset, or the incurrence of a liability, as well as the Company’s ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. If the Company determines that a loss is possible and the range of the loss can be reasonably determined, then the Company discloses the range of the possible loss. The Company regularly evaluates current information available to determine whether an accrual is required, an accrual should be adjusted or a range of possible loss should be disclosed.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (Topic 842). The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update primarily changes the recognition by lessees of lease assets and liabilities for leases currently classified as operating leases. Lessor accounting remains largely unchanged. This update is effective in fiscal years beginning after December 15, 2018 for public business entities and early adoption is permitted. The amendments should be applied using a modified retrospective approach. The Company has operating leases that will be affected by this update and is evaluating the impact on its consolidated financial statements and disclosures. The Company expects to apply the update upon its effectiveness in the first quarter of 2019.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This update is effective in fiscal years beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact this update will have on its consolidated financial statements and related disclosures.

In September 2015, the FASB issued ASU 2015-16, Business Combinations – Simplifying the Accounting for Measurement-Period Adjustments. Under current GAAP, an acquirer is required to retrospectively adjust any provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. To simplify the accounting for adjustments to provisional amounts, the update eliminates the requirement to retrospectively account for those adjustments. This update is effective in fiscal years beginning after December 15, 2015 and early adoption is permitted. The Company does not currently have acquisitions which would be affected by this update.

In August 2015, the FASB issued ASU 2015-15, Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which addresses an omission in ASU 2015-03. In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented as a direct reduction from the carrying amount of that debt liability similar to debt discounts. Existing recognition and measurement guidance is not impacted. However, ASU 2015-15 acknowledges that ASU 2015-03 does not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Per ASU 2015-15, an entity may defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. ASU 2015-15 is effective immediately. ASU 2015-03 is effective in fiscal years beginning after December 15, 2015 and early adoption is permitted. The Company has debt issuance costs related to line-of-credit arrangements and has adopted ASU 2015-15, which resulted in no change of presentation. If the Company enters into other debt arrangements that fall under ASU 2015-03, the Company will account for any related debt issuance costs per the update upon its effectiveness in the first quarter of 2016.


In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which defers the effective date of ASU 2014-09. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2015-14 defers the effective date of ASU 2014-09 for one year, and the standard is now effective for the Company on January 1, 2018. The deferral allows for early adoption of the standard, which for the Company would be on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating which transition method to use for adopting ASU 2014-09 when required and does not expect the update to have a significant impact on its consolidated financial statements and related disclosures based on its current business model.

In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customers Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance regarding the accounting for fees paid by a customer in cloud computing arrangements. If a cloud computing arrangement includes a software license, the payment of fees should be accounted for in the same manner as the acquisition of other software licenses. If there is no software license, the fees should be accounted for as a service contract. The update is effective in fiscal years beginning after December 15, 2015 and early adoption is permitted. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The Company does not expect that this update will have a significant impact on its consolidated financial statements and disclosures.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This update makes some targeted changes to current consolidation guidance. These changes impact both the voting and the variable interest consolidation models. In particular, the update will change how companies determine whether limited partnerships or similar entities are VIEs. The update is effective in fiscal years, including interim periods, beginning after December 15, 2015, and early adoption is permitted. The Company currently consolidates all VIEs in which it has an equity interest and does not expect that ASU 2015-02 will have a significant impact on its consolidated financial statements and related disclosures.

Fair Value Measurements
Fair Value Measurements

3.Fair Value Measurements

The Company measures and reports its cash equivalents at fair value. The following tables set forth the fair value of the Company’s financial assets measured on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

December 31, 2015

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

$

 

 

$

1,900

 

 

$

 

 

$

1,900

 

Total financial assets

 

$

 

 

$

1,900

 

 

$

 

 

$

1,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

 

$

 

 

$

1,900

 

 

$

 

 

$

1,900

 

Money market funds

 

 

607

 

 

 

 

 

 

 

 

 

607

 

Total financial assets

 

$

607

 

 

$

1,900

 

 

$

 

 

$

2,507

 

 

The carrying amounts of certain financial instruments of the Company, consisting of cash and cash equivalents excluding time deposits; accounts receivable; accounts payable; accounts payable—related party and distributions payable to redeemable non-controlling interests (all Level I) approximate fair value due to their relatively short maturities. Time deposits (Level II) approximate fair value due to their short-term nature (30 days) and, upon renewal, the interest rate is adjusted based on current market rates. The Company’s long-term debt is carried at cost and was $415.9 million and $105.0 million as of December 31, 2015 and 2014. The Company estimated the fair value of long-term debt to approximate its carrying value as interest accrues at a floating rate based on market rates. The Company did not have realized gains or losses related to financial assets for any of the periods presented.

Solmetric Acquisition
Solmetric Acquisition


4.Solmetric Acquisition

In January 2014, the Company completed the acquisition of Solmetric (the “Solmetric Acquisition”), a developer and manufacturer of photovoltaic installation devices and software products. The purchase price agreed to in the purchase agreement with Solmetric was $12.0 million plus a net working capital adjustment resulting in total cash purchase consideration of $12.2 million. The total consideration of $12.2 million was used for the purchase of all outstanding stock and options of Solmetric, settlement of Solmetric’s short-term promissory note and settlement of other liabilities including employee-related liabilities of Solmetric incurred in connection with the acquisition. The Company incurred $0.3 million of costs related to retention bonuses to key Solmetric employees and $0.1 million of transaction fees, all of which were included in the consolidated statements of operations for the year ended December 31, 2014.

Pursuant to the terms of the purchase agreement, $1.0 million of the purchase consideration was placed in escrow and was held for general representations and warranties, rather than specific contingencies or specific assets or liabilities of the Company. The Company had no right to these funds, nor did it have a direct obligation associated with them. Accordingly, the Company did not include the escrow funds in its consolidated balance sheets. Notwithstanding any prior claims to the escrow fund due to a breach of representations and warranties, the escrow was released on the one year anniversary of the Solmetric Acquisition.

The estimated fair values of the assets acquired and liabilities assumed were based on information obtained from various sources including third party valuations, management’s internal valuation and historical experience. The fair values of the intangible assets related to customer relationships, trade names and trademarks, developed technology and in-process research and development were determined using the income approach and significant estimates relate to assumptions as to the future economic benefits to be received, cash flow projections and discount rates.

The purchase price was allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition. The purchase price allocation was finalized as of December 31, 2014.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands):

Cash acquired

 

$

139

 

Inventories

 

 

580

 

Other current assets acquired

 

 

221

 

Property

 

 

77

 

Customer relationships

 

 

738

 

Trademarks/trade names

 

 

1,664

 

Developed technology

 

 

1,295

 

In-process research and development

 

 

2,097

 

Goodwill

 

 

7,056

 

Deferred tax liability, net

 

 

(1,478

)

Current liabilities assumed

 

 

(210

)

Total

 

$

12,179

 

Goodwill, which represents the purchase price in excess of the fair value of net assets acquired, is not deductible for income tax purposes. This goodwill is reflective of the value derived from the Company utilizing Solmetric’s advanced technology to improve the installation and efficacy of its solar panels as well as the expected growth in the Solmetric business, based on its historical performance and the expectation of continued growth as the solar industry expands.

For tax purposes, the acquired intangible assets are not amortized. Accordingly, a deferred tax liability of $2.5 million was recorded for the difference between the book and tax basis related to the intangible assets. Additionally, a deferred tax asset of $1.0 million was recorded mainly as a result of Solmetric’s net operating losses.

Financial results for Solmetric since the acquisition date are included in the results of operations for the year ended December 31, 2014. Solmetric contributed $3.2 million of revenues and $0.4 million of net income for the year ended December 31, 2014. During 2015, the Company discontinued the external sale of two Solmetric products. This discontinuance was considered an indicator of impairment, and the Company performed a review regarding the recoverability of the carrying value of the related intangible assets. As a result of this review, the Company recorded an impairment charge of $4.5 million in the first quarter of 2015.

Unaudited Solmetric Pro Forma Information

The following pro forma financial information is based on the historical financial statements of the Company and presents the Company’s results as if the Solmetric Acquisition had occurred as of January 1, 2013 (in thousands):

 

 

Years Ended

 

 

 

December 31,

 

 

 

2014

 

 

2013

 

Pro forma revenue

 

$

25,380

 

 

$

9,122

 

Pro forma net loss

 

 

(165,734

)

 

 

(57,046

)

Pro forma net (loss attributable) income available to common stockholders

 

 

(28,698

)

 

 

5,062

 

The unaudited pro forma results include the accounting effects resulting from the Solmetric Acquisition, such as the amortization charges from acquired intangible assets, reversal of costs related to special retention bonuses and other payments to employees and transaction costs directly related to the Solmetric Acquisition, elimination of intercompany sales and reversal of the related tax effects. The pro forma information presented does not purport to present what the actual results would have been had the Solmetric Acquisition actually occurred on January 1, 2013, nor is the information intended to project results for any future period.

Solar Energy Systems
Solar Energy Systems

5.Solar Energy Systems

Solar energy systems, net consisted of the following (in thousands):

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

System equipment costs

 

$

893,088

 

 

$

478,502

 

Initial direct costs related to solar energy systems

 

 

171,081

 

 

 

75,349

 

 

 

 

1,064,169

 

 

 

553,851

 

Less: Accumulated depreciation and amortization

 

 

(32,505

)

 

 

(10,186

)

 

 

 

1,031,664

 

 

 

543,665

 

Solar energy system inventory

 

 

70,493

 

 

 

44,502

 

Solar energy systems, net

 

$

1,102,157

 

 

$

588,167

 

Solar energy system inventory represents the solar components and materials used in the installation of solar energy systems prior to being installed on customers’ roofs. As such, no depreciation is recorded related to this line item. The Company recorded depreciation and amortization expense related to solar energy systems of $22.3 million, $8.1 million and $2.0 million for the years ended December 31, 2015, 2014 and 2013.

Property and Equipment
Property and Equipment

6.Property and Equipment

Property and equipment, net consisted of the following (in thousands):

 

 

Estimated

 

December 31,

 

 

December 31,

 

 

 

Useful Lives

 

2015

 

 

2014

 

Vehicles acquired under capital leases

 

3 years

 

$

24,149

 

 

$

13,351

 

Furniture and computer and other equipment

 

3 years

 

 

6,524

 

 

 

2,183

 

Leasehold improvements

 

1-3 years

 

 

4,116

 

 

 

2,088

 

 

 

 

 

 

34,789

 

 

 

17,622

 

Less: Accumulated depreciation and amortization

 

 

 

 

(12,181

)

 

 

(4,598

)

 

 

 

 

 

22,608

 

 

 

13,024

 

Build-to-suit lease asset under construction

 

 

 

 

25,560

 

 

 

 

Property and equipment, net

 

 

 

$

48,168

 

 

$

13,024

 

The Company recorded depreciation and amortization related to property and equipment of $8.2 million, $3.4 million and $1.2 million for the years ended December 31, 2015, 2014 and 2013.


The Company leases fleet vehicles that are accounted for as capital leases and are included in property and equipment, net. Depreciation on vehicles under capital leases totaling $5.5 million, $3.0 million and $1.2 million was capitalized in solar energy systems, net for the years ended December 31, 2015, 2014 and 2013. For the years ended December 31, 2015 and 2014, a de minimis amount of depreciation was also expensed. For the year ended December 31, 2013, no depreciation was expensed.

Because of its involvement in certain aspects of the construction of a new headquarters building in Lehi, UT, the Company is deemed the owner of the building for accounting purposes during the construction period. Accordingly, the Company recorded a build-to-suit lease asset of $25.6 million as of December 31, 2015. See Note 16—Commitments and Contingencies.

Future minimum lease payments for vehicles under capital leases as of December 31, 2015 were as follows (in thousands):

Years Ending December 31,

 

 

 

 

2016

 

$

6,405

 

2017

 

 

5,679

 

2018

 

 

4,136

 

2019

 

 

1,008

 

2020

 

 

36

 

Thereafter

 

 

 

Total minimum lease payments

 

 

17,264

 

Less: interest

 

 

1,720

 

Present value of capital lease obligations

 

 

15,544

 

Less: current portion

 

 

5,489

 

Long-term portion

 

$

10,055

 

 

Intangible Assets and Goodwill
Intangible Assets and Goodwill

7.Intangible Assets and Goodwill

Intangible assets consisted of the following (in thousands):

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Cost:

 

 

 

 

 

 

 

 

Internal-use software

 

$

1,591

 

 

$

370

 

Developed technology

 

 

522

 

 

 

1,295

 

Trademarks/trade names

 

 

201

 

 

 

1,664

 

Customer relationships

 

 

164

 

 

 

738

 

Customer contracts

 

 

 

 

 

43,783

 

In-process research and development

 

 

 

 

 

2,097

 

Total carrying value

 

 

2,478

 

 

 

49,947

 

Accumulated amortization:

 

 

 

 

 

 

 

 

Internal-use software

 

 

(219

)

 

 

 

Developed technology

 

 

(126

)

 

 

(160

)

Trademarks/trade names

 

 

(39

)

 

 

(152

)

Customer relationships

 

 

(63

)

 

 

(135

)

Customer contracts

 

 

 

 

 

(31,013

)

Total accumulated amortization

 

 

(447

)

 

 

(31,460

)

Total intangible assets, net

 

$

2,031

 

 

$

18,487

 

The Company recorded amortization expense of $13.2 million for the year ended December 31, 2015, $14.9 million for the year ended December 31, 2014, of which $0.1 million was recorded in cost of revenue-solar energy system and product sales, and $14.6 million for the year ended December 31, 2013. Customer contracts acquired in the Acquisition were fully amortized in 2015.


In February 2015, the Company decided to discontinue the external sales of the SunEye and PV Designer products, the rights to which the Company acquired when it acquired Solmetric Corporation, or Solmetric, in January 2014. This discontinuance was considered an indicator of impairment, and a review regarding the recoverability of the carrying value of the related intangible assets was performed. In-process research and development, which was intended to generate Solmetric product sales in the residential market, was discontinued and deemed fully impaired resulting in a charge of $2.1 million. The Solmetric, SunEye and PV Designer trade names will no longer be utilized and were deemed fully impaired resulting in a charge of $1.3 million. The SunEye and PV Designer developed technology assets were deemed fully impaired resulting in a charge of $0.7 million. Customer relationships were deemed partially impaired by $0.4 million due to the loss of external customers who purchased the discontinued products. As a result of this review, the Company recorded a total impairment charge of $4.5 million for the year ended December 31, 2015. No impairment was recorded in the years ended December 31, 2014 and 2013.

As of December 31, 2015, expected amortization expense for the unamortized intangible assets is as follows (in thousands):

Years Ending December 31,

 

 

 

 

2016

 

$

656

 

2017

 

 

558

 

2018

 

 

475

 

2019

 

 

129

 

2020

 

 

86

 

Thereafter

 

 

127

 

Total

 

$

2,031

 

No changes to goodwill were recorded for the year ended December 31, 2015. The carrying amount of goodwill for the years ended December 31, 2015 and 2014 was $36.6 million.

Accrued Compensation
Accrued Compensation

8.Accrued Compensation

Accrued compensation consisted of the following (in thousands):

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Accrued payroll

 

$

6,918

 

 

$

10,219

 

Accrued commissions

 

 

6,840

 

 

 

6,575

 

Total accrued compensation

 

$

13,758

 

 

$

16,794

 

 

Accrued and Other Current Liabilities
Accrued and Other Current Liabilities

9.Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following (in thousands):

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Accrued professional fees

 

$

7,918

 

 

$

1,289

 

Income tax payable

 

 

6,169

 

 

 

4,097

 

Current portion of lease pass-through financing obligation

 

 

3,835

 

 

 

 

Sales and use tax payable

 

 

3,524

 

 

 

5,052

 

Accrued litigation settlements

 

 

1,790

 

 

 

450

 

Deferred rent

 

 

1,064

 

 

 

1,090

 

Accrued unused commitment fees and interest

 

 

1,014

 

 

 

478

 

Other accrued expenses

 

 

3,703

 

 

 

1,560

 

Total accrued and other current liabilities

 

$

29,017

 

 

$

14,016

 

 

Debt Obligations
Debt Obligations

10.Debt Obligations

Debt obligations consisted of the following (in thousands):

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Aggregation credit facility

 

$

269,100

 

 

$

105,000

 

Working capital credit facility

 

 

146,750

 

 

 

 

Total debt

 

$

415,850

 

 

$

105,000

 

Bank of America, N.A. Aggregation Credit Facility

In September 2014, the Company entered into an aggregation credit facility (the “Aggregation Facility”), which was subsequently amended in February 2015 and November 2015, pursuant to which the Company may borrow up to an aggregate of $375.0 million and, upon the satisfaction of certain conditions and the approval of the lenders, up to an additional aggregate of $175.0 million in borrowings with certain financial institutions for which Bank of America, N.A. is acting as administrative agent.

The February 2015 amendment to the Aggregation Facility increased the funding commitment by $25.0 million pursuant to which the Company may borrow up to an aggregate of $375.0 million. In addition, the right to which the Company may request additional borrowing capacity, upon the satisfaction of certain conditions and the approval of the lenders, was reduced to $175.0 million, such that the total potential capacity under the facility remains at $550.0 million. The other terms of the Aggregation Facility remained unchanged.

The November 2015 amendments primarily included (1) changing the formula for determining the amount that the Company may borrow subject to the satisfaction of certain conditions, without changing the $375.0 million loan commitment, enabling the Company to draw additional loan proceeds from the existing conditions satisfied, (2) converting the facility from a term facility into a revolving facility and (3) requiring the Company to enter into an interest rate hedging agreement before September 13, 2016. For accounting purposes, the Aggregation Facility is considered a modification of the term loan credit facility entered into in May 2014 described below.

Prepayments are permitted under the Aggregation Facility, and the principal and accrued interest on any outstanding loans mature in March 2018. Under the Aggregation Facility, interest on borrowings accrues at a floating rate equal to either (1)(a) the London Interbank Offer Rate (“LIBOR”) or (b) the greatest of (i) the Federal Funds Rate plus 0.5%, (ii) the administrative agent’s prime rate and (iii) LIBOR plus 1% and (2) a margin that varies between 3.25% during the period during which the Company may incur borrowings and 3.50% after such period. Interest is payable at the end of each interest period that the Company may elect as a term of either one, two or three months.

The borrower under the Aggregation Facility is Vivint Solar Financing I, LLC, one of the Company’s indirect wholly owned subsidiaries, which in turn holds the Company’s interests in the managing members in the Company’s existing investment funds. These managing members guarantee the borrower’s obligations under the Aggregation Facility. In addition, Vivint Solar Holdings, Inc. has pledged its interests in the borrower, and the borrower has pledged its interests in the guarantors as security for the borrower’s obligations under the Aggregation Facility. The related solar energy systems are not subject to any security interest of the lenders, and there is no recourse to the Company in the case of a default.

The Aggregation Facility includes customary covenants, including covenants that restrict, subject to certain exceptions, the borrower’s, and the guarantors’ ability to incur indebtedness, incur liens, make investments, make fundamental changes to their business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. Among other restrictions, the Aggregation Facility provides that the borrower may not incur any indebtedness other than that related to the Aggregation Facility or in respect of permitted swap agreements, and that the guarantors may not incur any indebtedness other than that related to the Aggregation Facility or as permitted under existing investment fund transaction documents. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. As of December 31, 2015, the Company was in compliance with such covenants. As of December 31, 2015, the Company has not entered into any interest rate hedges as required by the latest debt modification.

As of December 31, 2015, the Company had incurred an aggregate of $269.1 million in borrowings under the Aggregation Facility. The remaining borrowing capacity was $105.9 million as of December 31, 2015. However, the Company does not have immediate access to the remaining $105.9 million balance as future borrowings are dependent on when it has solar energy system revenue to collateralize the borrowings.

The Aggregation Facility also contains certain customary events of default. If an event of default occurs, lenders under the Aggregation Facility will be entitled to take various actions, including the acceleration of amounts due under the Aggregation Facility and foreclosure on the interests of the borrower and the guarantors that have been pledged to the lenders.

Interest expense was approximately $9.9 million and $1.4 million in the years ended December 31, 2015 and 2014. As of December 31, 2015, the current portion of deferred financing costs of $4.0 million was recorded in prepaid expenses and other current assets, and the long-term portion of deferred financing costs of $4.9 million was recorded in other non-current assets, net in the consolidated balance sheet. In addition, a $5.0 million interest reserve amount was deposited in an interest reserve account with the administrative agent and is included in restricted cash and cash equivalents. The interest reserve increases as borrowings increase under the Aggregation Facility.

Working Capital Credit Facility

In March 2015, the Company entered into a revolving credit agreement (the “Working Capital Facility”) pursuant to which the Company may borrow up to an aggregate principal amount of $131.0 million from certain financial institutions for which Goldman Sachs Lending Partners LLC is acting as administrative agent and collateral agent. In May 2015, certain conditions were satisfied and the aggregate amount of available revolver borrowings was increased to $150.0 million. Loans under the Working Capital Facility will be used to pay for the costs incurred in connection with the design and construction of solar energy systems, and letters of credit may be issued for working capital and general corporate purposes. As of December 31, 2015, the Company had incurred an aggregate of $146.8 million in borrowings under the Working Capital Facility. Further, the Company established a letter of credit under the Working Capital Facility for $3.2 million related to an insurance contract. As such, there was no remaining borrowing capacity available as of December 31, 2015.

The Company has pledged the interests in the assets of the Company and its subsidiaries, excluding Vivint Solar Financing I, LLC, as security for its obligations under the Working Capital Facility. Prepayments are permitted under the Working Capital Facility, and the principal and accrued interest on any outstanding loans mature in March 2020. Interest accrues on borrowings at a floating rate equal to, dependent on the type of borrowing, (1) a rate equal to the Eurodollar Rate for the interest period divided by one minus the Eurodollar Reserve Percentage, plus a margin of 3.25%; or (2) the highest of (a) the Federal Funds Rate plus 0.50%, (b) the Citibank prime rate and (c) the one-month interest period Eurodollar rate plus 1.00%, plus a margin of 2.25%. Interest is payable dependent on the type of borrowing at the end of (1) the interest period that the Company may elect as a term and not to exceed three months, (2) quarterly or (3) at maturity of the Working Capital Facility.

The Working Capital Facility includes customary covenants, including covenants that restrict, subject to certain exceptions, the Company’s ability to incur indebtedness, incur liens, make investments, make fundamental changes to its business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. Among other restrictions, the Working Capital Facility provides that the Company may not incur any indebtedness other than that related to the Working Capital Facility or permitted swap agreements. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. The Company is also required to maintain $25.0 million in cash and cash equivalents and certain investments as of the last day of each quarter. As of December 31, 2015, the Company was in compliance with such covenants.

The Working Capital Facility also contains certain customary events of default. If an event of default occurs, lenders under the Working Capital Facility will be entitled to take various actions, including the acceleration of amounts then outstanding.

Interest expense for this facility was approximately $2.3 million for the year ended December 31, 2015. As of December 31, 2015, the current portion of deferred debt issuance costs of $0.5 million was recorded in prepaid expenses and other current assets, and the long-term portion of deferred debt issuance costs of $1.8 million was recorded in other non-current assets, net in the consolidated balance sheet.

Bank of America, N.A. Term Loan Credit Facility

In May 2014, the Company entered into a term loan credit facility for an aggregate principal amount of $75.5 million with certain financial institutions for which Bank of America, N.A. acted as administrative agent. In September 2014 in connection with the entry into the Aggregation Facility, the Company repaid the then outstanding $75.5 million in aggregate borrowings and terminated the agreement. Under this credit facility, the Company incurred interest on the term borrowings that accrued at a floating rate based on (1) LIBOR plus a margin equal to 4%, or (2) a rate equal to 3% plus the greatest of (a) the Federal Funds Rate plus 0.5%, (b) the administrative agent’s prime rate and (c) LIBOR plus 1%. Interest expense from inception of this credit facility in May 2014 through payoff in September 2014 was approximately $1.3 million.


The credit facility included customary covenants, including covenants that restricted, subject to certain exceptions, the Company’s ability to incur indebtedness, incur liens, make investments, make fundamental changes to the Company’s business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. As of the day on which borrowings under the credit facility were repaid, the Company was in compliance with all such covenants. In addition, the $1.6 million interest reserve amount that was deposited in an interest reserve account with the administrative agent was released upon termination of the credit facility.

Revolving Lines of CreditRelated Party

On October 9, 2014, the Company repaid $58.8 million in aggregate borrowings and interest owed to Vivint under the 2013 Loan Agreement and the 2012 Loan Agreement defined below. These loan agreements were terminated upon repayment.

In May 2013, the Company entered into a Subordinated Note and Loan Agreement with APX Parent Holdco, Inc., pursuant to which the Company was able to incur up to $20.0 million in revolver borrowings (“2013 Loan Agreement”). From May 2013 through December 2013, the Company incurred $18.5 million in principal borrowings under the agreement. Interest accrued on these borrowings at 12% per year through November 2013 and 20% per year thereafter, and accrued interest was paid-in-kind through additions to the principal amount on a semi-annual basis. In January 2014, the Company amended and restated the 2013 Loan Agreement, pursuant to which the Company was able to incur an additional $30.0 million in revolver borrowings, resulting in a total borrowing capacity of $50.0 million, with interest on the borrowings accruing at a rate of 12% per year. From January 2014 through September 2014, the Company incurred an aggregate of $154.5 million in revolver borrowings under the 2013 Loan Agreement of which $141.5 million was repaid within one to eight days from the respective borrowing date. None of these borrowings individually exceeded the borrowing capacity of $50.0 million. Interest expense was $3.1 million and $1.5 million for the years ended December 31, 2014 and 2013.

In December 2012 and amended in July 2013, the Company entered into a Subordinated Note and Loan Agreement with Vivint pursuant to which the Company could incur revolver borrowings of up to $20.0 million (“2012 Loan Agreement”). In December 2012, the Company incurred $15.0 million in revolver borrowings. From January 2013 through May 2013, the Company incurred an additional $5.0 million in revolver borrowings. Interest accrued on these borrowings at 7.5% per year, and accrued interest was paid-in-kind through additions to the principal amount on a semi-annual basis. Interest expense was $1.3 million and $1.5 million for the years ended December 31, 2014 and 2013.

In November 2013, the Company entered into a Subordinated Note and Loan Agreement with APX Parent Holdco, Inc. for a one day loan of $20.0 million to obtain funding for an investment fund and repaid the full amount the next day. The imputed interest on the principal amount was not significant.

In July 2013, the Company entered into a Subordinated Note and Loan Agreement with APX Parent Holdco, Inc. for a one day loan of $40.0 million to obtain funding for an investment fund and repaid the full amount the next day. The imputed interest on the principal amount was not significant.

Interest Expense and Amortization of Deferred Financing Costs

For the years ended December 31, 2015 and 2014, total interest expense incurred under debt obligations was $12.2 million and $9.3 million, of which $3.5 million and $2.2 million was amortization of deferred financing costs. For the year ended December 31, 2013, total interest expense incurred under debt obligations was $3.1 million and did not include amortization of deferred financing costs as no deferred financing costs had been incurred.

Investment Funds
Investment Funds

11.Investment Funds

As of December 31, 2015, the Company had formed 17 investment funds for the purpose of funding the purchase of solar energy systems. The Company has aggregated the financial information of the investment funds in the table below. The aggregate carrying value of these funds’ assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s consolidated balance sheets were as follows (in thousands):

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,014

 

 

$

12,641

 

Accounts receivable, net

 

 

3,063

 

 

 

1,542

 

Prepaid expenses and other current assets

 

 

121

 

 

 

 

Total current assets

 

 

15,198

 

 

 

14,183

 

Solar energy systems, net

 

 

990,609

 

 

 

525,903

 

Other non-current assets, net

 

 

18

 

 

 

 

Total assets

 

$

1,005,825

 

 

$

540,086

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Distributions payable to non-controlling interests and redeemable

   non-controlling interests

 

$

11,347

 

 

$

6,780

 

Current portion of deferred revenue

 

 

4,824

 

 

 

237

 

Accrued and other current liabilities

 

 

3,869

 

 

 

 

Total current liabilities

 

 

20,040

 

 

 

7,017

 

Deferred revenue, net of current portion

 

 

43,094

 

 

 

4,335

 

Other non-current liabilities

 

 

3,283

 

 

 

 

Total liabilities

 

$

66,417

 

 

$

11,352

 

 

The Company consolidates the investment funds in which it has an equity interest, and all intercompany balances and transactions between the Company and the investment funds are eliminated in the consolidated financial statements. The Company determined that each of these investment funds meets the definition of a VIE. The Company uses a qualitative approach in assessing the consolidation requirement for VIEs that focuses on determining whether the Company has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and whether the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

The Company has considered the provisions within the contractual arrangements that grant it power to manage and make decisions that affect the operation of these VIEs, including determining the solar energy systems and associated long term customer contracts to be sold or contributed to the VIE, and installation, operation and maintenance of the solar energy systems. The Company considers that the rights granted to the other investors under the contractual arrangements are more protective in nature rather than participating rights. As such, the Company has determined it is the primary beneficiary of the VIEs for all periods presented. The Company evaluates its relationships with the VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary.

Under the related agreements, cash distributions of income and other receipts by the fund, net of agreed-upon expenses and estimated expenses, tax benefits and detriments of income and loss, and tax benefits of tax credits, are assigned to the fund investor and Company’s subsidiary as specified in contractual arrangements. Certain of these arrangements have call and put options to acquire the investor’s equity interest as specified in the contractual agreements.

Residential Investment Funds

As of December 31, 2015, the Company had formed 16 residential investment funds. Fund investors for three of the funds are managed indirectly by the Sponsor and are considered related parties. As of December 31, 2015 and 2014, the cumulative total of contributions into the VIEs by all investors was $773.0 million and $480.2 million. Of these contributions, a cumulative total of $110.0 million was contributed by related parties in prior periods.


C&I Investment Fund

In May 2015, a wholly owned subsidiary of the Company entered into a C&I solar investment fund arrangement with a fund investor. The fund was not operational, i.e., no projects had been initiated within the fund as of December 31, 2015, and as such, the Company did not have any assets or liabilities associated with the fund. The total available committed capital under the fund is $150.0 million, which is expected to be contributed in 2016.

Lease Pass-Through Financing Obligation

In the year ended December 31, 2015, a new lease pass-through fund arrangement became operational under which the Company contributes solar energy systems and the investor contributes cash. Contemporaneously, a subsidiary of the Company entered into a master lease arrangement to lease the solar energy systems and the associated customer lease or power purchase agreements to the fund investor. The Company’s subsidiary makes a tax election to pass-through the ITCs that accrue to the solar energy systems to the fund investor, who as the legal lessee of the property is allowed to claim the ITCs under Section 50(d)(5) of the Internal Revenue Code and the related regulations. The solar energy systems are included under solar energy systems, net in the consolidated balance sheets, and as of December 31, 2015, the net carrying value of the solar energy systems was $64.7 million.

Under the arrangement, the fund investor makes a large upfront payment to the Company’s subsidiary and subsequent periodic payments. The Company allocates a portion of the aggregate payments received from the fund investor to the estimated fair value of the assigned ITCs, and the balance to the future customer lease payments that are also assigned to the investor. The Company’s subsidiary has an obligation to ensure the solar energy system is in service and operational for a term of five years to avoid any recapture of the ITCs. Accordingly, the Company recognizes revenue as the recapture provisions lapse assuming all other revenue recognition criteria have been met. The amounts allocated to ITCs are initially recorded as deferred revenue in the consolidated balance sheet, and subsequently, one-fifth of the amounts allocated to ITCs is recognized as revenue from operating leases and solar energy systems incentives in the consolidated statements of operations based on the anniversary of each solar energy system’s placed in service date over the next five years.

The Company accounts for the residual of the payments received from the fund investor, net of amounts allocated to ITCs, as a borrowing by recording the proceeds received as a lease pass-through financing obligation, which will be repaid through customer payments that will be received by the investor. Under this approach, the Company continues to account for the arrangement with the customers in its consolidated financial statements, whether the cash generated from the customer arrangements is received by the lessor or paid directly to the fund investor. A portion of the amounts received by the fund investor from customer payments is applied to reduce the lease pass-through financing obligation, and the balance is allocated to interest expense. The customer payments are recognized into revenue based on cash receipts during the period as required by GAAP. Interest is calculated on the lease pass-through financing obligation using the effective interest rate method. The effective interest rate is the interest rate that equates the present value of the cash amounts to be received by a fund investor over the master lease term with the present value of the cash amounts paid by the investor to the Company, adjusted for any payments made by the Company.

The lease pass-through financing obligation is nonrecourse once the associated assets have been placed in service and all the customer arrangements have been assigned to the fund investor. However, there is a one-time future lease payment reset mechanism that is set to occur after all of the solar energy systems are delivered and placed in service. This reset date occurs when the installed capacity of the solar energy systems and their in-service dates are known or on an agreed upon date. As part of this reset process, the lease prepayment is updated to reflect certain specified conditions as they exist at such date, including the final installed capacity, cost and in-service dates of the solar energy systems. As a result of this reset process, the Company may be obligated to refund a portion of an investor’s master lease prepayments or may be entitled to receive an additional master lease prepayment. Any additional master lease prepayments by an investor would be recorded as an additional lease pass-through financing obligation, while any refunds of master lease prepayments would reduce the lease pass-through financing obligation. As of December 31, 2015, the Company had recorded financing liabilities of $47.3 million related to this fund arrangement as deferred revenue in its consolidated balance sheet.


As of December 31, 2015, the future minimum lease payments to be received from the fund investor based on the solar energy systems then under the lease pass-through fund arrangement, for each of the next five years and thereafter, were as follows (in thousands):

Years Ending December 31,

 

 

 

 

2016

 

$

1,701

 

2017

 

 

3,009

 

2018

 

 

3,064

 

2019

 

 

3,111

 

2020

 

 

3,159

 

Thereafter

 

 

10,549

 

Total minimum lease payments to be received

 

$

24,593

 

The fund investor is responsible for services such as warranty support, accounting, lease servicing and performance reporting, which have been outsourced to the Company under administrative and maintenance service agreements.

Guarantees

With respect to the investment funds, the Company and the fund investors have entered into guaranty agreements under which the Company guarantees the performance of certain financial obligations of its subsidiaries to the investment funds. These guarantees do not result in the Company being required to make payments to the fund investors unless such payments are mandated by the investment fund governing documents and the investment fund fails to make such payment.

The Company is contractually obligated to make certain VIE investors whole for losses that the investors may suffer in certain limited circumstances resulting from the disallowance or recapture of investment tax credits. The Company has concluded that the likelihood of a significant recapture event is remote and consequently has not recorded any liability in the consolidated financial statements for any potential recapture exposure. The maximum potential future payments that the Company could have to make under this obligation would depend on the IRS successfully asserting upon audit that the fair market values of the solar energy systems sold or transferred to the funds as determined by the Company exceeded the allowable basis for the systems for purposes of claiming ITCs. The fair market values of the solar energy systems and related ITCs are determined and the ITCs are allocated to the fund investors in accordance with the funds governing agreements. Due to uncertainties associated with estimating the timing and amounts of distributions, the likelihood of an event that may trigger repayment, forfeiture or recapture of ITCs to such investors, and the fact that the Company cannot determine how the IRS will evaluate system values used in claiming ITCs, the Company cannot determine the potential maximum future payments that are required under these guarantees.

For a certain fund, if it does not have sufficient cash flows to make a stated cash distribution to the fund investor each annual period, the Company’s subsidiary (which is the managing member of the fund) is obligated to contribute additional cash sufficient to allow the investment fund to make such distribution to the fund investor. The Company has not made payments under its guarantee of performance of the obligations of the subsidiary in prior periods because the fund has generated sufficient cash flow to make the stated cash distributions to the fund investor. The Company has determined that the maximum potential exposure under the guarantee to the fund is not significant.

From time to time, the Company incurs penalties for non-performance, which non-performance may include delays in the installation process and interconnection to the power grid of solar energy systems and other factors. Based on the terms of the investment fund agreements, the Company will either reimburse a portion of the fund investor’s capital or pay the fund investor a penalty fee. As of December 31, 2015 and 2014, the Company accrued an estimated $5.2 million and $4.0 million in distributions to reimburse fund investors a portion of their capital contributions in order to true-up the investors’ expected rate of return primarily due to a delay in solar energy systems being interconnected to the power grid.

As a result of the guaranty arrangements in certain funds, the Company is required to hold minimum cash balances of $10.0 million and $5.0 million as of December 31, 2015 and 2014, which are classified as restricted cash and cash equivalents on the consolidated balance sheets.

Redeemable Non-Controlling Interests, Equity and Preferred Stock
Redeemable Non-Controlling Interests, Equity and Preferred Stock

12.Redeemable Non-Controlling Interests, Equity and Preferred Stock

Common Stock

The Company has 1.0 billion authorized shares of common stock. As of December 31, 2015 and 2014, the Company had 106.6 million and 105.3 million shares of common stock issued and outstanding.

The Company had shares of common stock reserved for issuance as follows (in thousands):

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Shares available for grant under equity incentive plans

 

 

12,267

 

 

 

8,783

 

Stock options issued and outstanding

 

 

9,277

 

 

 

10,053

 

Long-term incentive plan

 

 

3,382

 

 

 

4,059

 

Restricted stock units issued and outstanding

 

 

930

 

 

 

22

 

Total

 

 

25,856

 

 

 

22,917

 

On October 6, 2014, the Company closed its initial public offering in which 20.6 million shares of its common stock were sold at a public offering price of $16.00 per share, which generated net proceeds, after deducting underwriting discounts and commissions and $8.8 million in offering expenses, of $300.6 million.

In August 2014, the Company issued and sold an aggregate of 2.7 million shares of common stock to 313 for $10.667 per share for aggregate proceeds of $28.5 million. In September 2014, the Company issued and sold an aggregate of 7.0 million additional shares to 313 and two of its directors for $10.667 per share for aggregate gross proceeds of $75.0 million. The Company intended for the proceeds from such sales to fund its growing operations and to bolster its financial condition in advance of its initial public offering. Subsequent to such transactions, the Company set the preliminary price range for its initial public offering, the mid-point of which was $17.00 per share. The Company determined that, for financial reporting purposes, it was appropriate to record the aggregate difference between the per share purchase price and mid-point of the preliminary price range for its initial public offering with respect to the shares sold to the two directors, or $14.8 million, as stock-based compensation expense, which was recorded in general and administrative expense. Regarding the shares of common stock sold to 313, the Company also determined that, for financial reporting purposes, it was appropriate to record the aggregate difference of $43.4 million as a deemed distribution within additional paid-in capital.

Non-Controlling Interests and Redeemable Non-Controlling Interests

Seven of the investment funds include a right for the non-controlling interest holder to elect to require the Company’s wholly owned subsidiary to purchase all of its membership interests in the fund after a stated period of time (each, a “Put Option”). In one of the investment funds, the Company’s wholly owned subsidiary has the right to elect to require the non-controlling interest holder to sell all of its membership units to the Company’s wholly owned subsidiary (a “Call Option”) after the expiration of the non-controlling interest holder’s Put Option. In the six other investment funds that have Put Options, the Company’s wholly owned subsidiary has a Call Option for a stated period prior to the effectiveness of the Put Option. In nine other investment funds there is a Call Option which is exercisable after a stated period of time. One investment fund has neither a Put Option nor a Call Option. 

The purchase price for the fund investor’s interest in the seven investment funds under the Put Options is the greater of fair market value at the time the option is exercised and a specified amount, ranging from $0.7 million to $4.1 million. The Put Options for these seven investment funds are exercisable beginning on the date that specified conditions are met for each respective fund. None of the Put Options are expected to become exercisable prior to 2019.

Because the Put Options represent redemption features that are not solely within the control of the Company, the non-controlling interests in these investment funds are presented outside of permanent equity. Redeemable non-controlling interests are reported using the greater of their carrying value at each reporting date (which is impacted by attribution under the hypothetical liquidation at book value method) or their estimated redemption value in each reporting period. The carrying values of redeemable non-controlling interests at December 31, 2015 and December 31, 2014 were greater than the redemption values.

The purchase price for the fund investors’ interests under the Call Options varies by fund, but is generally the greater of a specified amount, which ranges from approximately $0.7 million to $7.0 million, the fair market value of such interest at the time the option is exercised, or an amount that causes the fund investor to achieve a specified return on investment. The Call Options are exercisable beginning on the date that specified conditions are met for each respective fund. None of the Call Options are expected to become exercisable prior to 2019.

Preferred Stock

In October 2014, the Company authorized 10.0 million shares of preferred stock that is issuable in series. As of December 31, 2015 and 2014, there were no series of preferred stock issued or designated.

Equity Compensation Plans
Equity Compensation Plans

13.Equity Compensation Plans

Equity Incentive Plans

2014 Equity Incentive Plan

In September 2014, the Company adopted the 2014 Equity Incentive Plan (the “2014 Plan”). Under the 2014 Plan, the Company may grant stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, performance shares and performance awards to its employees, directors and consultants, and its parent and subsidiary corporations’ employees and consultants.

As of December 31, 2015, a total of 13.3 million shares of common stock are reserved for issuance under the 2014 plan, subject to adjustment in the case of certain events. In addition, any shares that otherwise would be returned to the Omnibus Plan (as defined below) as the result of the expiration or termination of stock options may be added to the 2014 Plan. The number of shares available for issuance under the 2014 Plan is subject to an annual increase on the first day of each year, equal to the least of 8.8 million shares, 4% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year and an amount of shares as determined by the Company. In accordance with the annual increase, an additional 4.2 million shares were reserved for issuance at the beginning of 2015 under the 2014 Plan.

As of December 31, 2015, there were 0.1 million time-based stock options, 0.8 million restricted stock units (“RSUs”), and 0.1 million performance share units (“PSUs”) outstanding under the 2014 Plan. The time-based options are subject to ratable time-based vesting over four years. The RSUs are subject to ratable time-based vesting over one to four years. The PSUs vest quarterly over one to four years subject to individual participants’ achievement of quarterly performance goals.

2013 Omnibus Incentive Plan; Non-plan Option Grant

In July 2013, the Company adopted the 2013 Omnibus Incentive Plan (the “Omnibus Plan”), which was terminated in connection with the adoption of the 2014 Plan in September 2014, and accordingly no additional shares are available for issuance under the Omnibus Plan. The Omnibus Plan continues to govern outstanding awards granted under the plan. In August 2013, the Company granted an option to purchase 0.6 million shares of common stock outside of the Omnibus Plan; however, the provisions of this option were substantially similar to those of the options granted pursuant to the Omnibus Plan.

During 2014 and 2013, the Company granted options of which one-third are subject to ratable time-based vesting over a five year period and two-thirds are subject to vesting upon certain performance conditions and the achievement of certain investment return thresholds by 313. The options have a ten-year contractual period.

In April 2014, the Company amended the vesting schedules of certain options outstanding under the Omnibus Plan and the option granted outside of the Omnibus Plan described above to provide that a portion of each of these options vests upon the Company’s aggregate market capitalization (using the 30-day, volume-weighted average closing bid price listed on the New York Stock Exchange) being equal to or exceeding $1.0 billion at the end of any trading day at least 240 days following the completion of the Company’s public offering.

During the year ended December 31, 2015, the first performance condition was met and 3.3 million performance-based options immediately vested and became exercisable during the second quarter of 2015. The Company accelerated all remaining expense related to the vested options for the first performance condition, resulting in additional stock-based compensation expense of approximately $7.4 million in the second quarter of 2015. For the year ended December 31, 2015, the Company recognized total expense of $10.8 million related to performance-based options. As of December 31, 2015, there were 3.2 million shares subject to outstanding options that are subject to performance and market conditions that have not yet been met. During the year ended December 31, 2014, the Company recorded $5.8 million in stock-based compensation related to the performance conditions as it became probable the performance conditions would be met.

Long-term Incentive Plan

In July 2013, the Company’s board of directors approved 4.1 million shares of common stock for six Long-term Incentive Plan Pools (“LTIP Pools”) that comprise the 2013 Long-term Incentive Plan (the “LTIP”). The purpose of the LTIP is to attract and retain key service providers and strengthen their commitment to the Company by providing incentive compensation measured by reference to the value of the shares of the Company’s common stock. Eligible participants include nonemployee direct sales personnel, who sell the solar energy system contracts, employees that install and maintain the solar energy systems and employees that recruit new employees to the Company.

Based on the terms of the agreement, participants are allocated a portion of the LTIP Pools relative to the performance of other participants. LTIP awards to employees are considered to be granted when the allocation of the LTIP Pools to each participant is fixed, which occurs once performance and service conditions are met. The Company amended five of six of the LTIP Pools in April 2014 and the final pool in August 2014. The amendment modified the date on which each participant’s award is fixed from the date of a public offering to a subsequent date based on fulfilling certain service or other performance conditions based on stockholder returns, which will be the same date on which the award vests.

Nonemployee awards are granted and will be measured on the date on which the performance is complete, which is the date the service or other performance conditions are achieved. The Company recognizes stock-based compensation expense based on the lowest aggregate fair value of the non-employee awards at the reporting date.

During the year ended December 31, 2015, 0.6 million shares of common stock were awarded to participants under the LTIP. As of December 31, 2015, 3.4 million shares remained outstanding, as 0.1 million shares represented the exercise price that were returned to the 2014 Plan. The Company recognized $8.3 million of expense related to these shares in the year ended December 31, 2015. No shares were awarded and no expense was recognized under the LTIP prior to the year ended December 31, 2015.

Stock Options

Stock Option Activity

Stock options are granted under the 2014 Plan and Omnibus Plan as described above. Stock option activity for the year ended December 31, 2015 was as follows (in thousands, except term and per share amounts):

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

Average

 

 

 

 

 

 

 

Shares

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

Underlying

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

 

Options

 

 

Price

 

 

Term

 

 

Value

 

Outstanding—December 31, 2014

 

 

10,053

 

 

$

1.21

 

 

 

 

 

 

$

80,790

 

Granted

 

 

114

 

 

 

12.56

 

 

 

 

 

 

 

 

 

Exercised

 

 

(595

)

 

 

1.09

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(295

)

 

 

1.23

 

 

 

 

 

 

 

 

 

Outstanding—December 31, 2015

 

 

9,277

 

 

$

1.36

 

 

 

7.8

 

 

$

76,488

 

Options vested and exercisable—December 31, 2015

 

 

4,166

 

 

$

1.20

 

 

 

7.8

 

 

$

34,842

 

Options vested and expected to vest—December 31, 2015

 

 

8,964

 

 

$

1.35

 

 

 

7.8

 

 

$

73,568

 

The following table summarizes stock option activity by range of exercise price as of December 31, 2015 (number of awards in thousands): 

 

 

Awards Outstanding

 

 

Awards Exercisable

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Awards

 

 

Remaining

 

Weighted-Average

 

 

Number of Awards

 

 

Weighted-Average