VIVINT SOLAR, INC., 10-Q filed on 5/10/2016
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2016
May 2, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q1 
 
Trading Symbol
VSLR 
 
Entity Registrant Name
Vivint Solar, Inc. 
 
Entity Central Index Key
0001607716 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
107,180,606 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 87,164 
$ 92,213 
Accounts receivable, net
7,025 
3,636 
Inventories
1,530 
631 
Prepaid expenses and other current assets
20,043 
17,078 
Total current assets
115,762 
113,558 
Restricted cash and cash equivalents
17,648 
15,035 
Solar energy systems, net
1,200,322 
1,102,157 
Property and equipment, net
51,202 
48,168 
Intangible assets, net
2,056 
2,031 
Goodwill
 
36,601 
Prepaid tax asset, net
319,493 
277,496 
Other non-current assets, net
14,591 
14,024 
TOTAL ASSETS
1,721,074 1
1,609,070 1
Current liabilities:
 
 
Accounts payable
47,719 
49,986 
Accounts payable—related party
886 
1,905 
Distributions payable to non-controlling interests and redeemable non-controlling interests
4,823 
11,347 
Accrued compensation
19,459 
13,758 
Current portion of deferred revenue
8,260 
4,968 
Current portion of capital lease obligation
5,742 
5,489 
Accrued and other current liabilities
28,255 
29,017 
Total current liabilities
115,144 
116,470 
Capital lease obligation, net of current portion
9,467 
10,055 
Long-term debt
500,032 
415,850 
Deferred tax liability, net
260,404 
216,033 
Deferred revenue, net of current portion
41,070 
43,304 
Other non-current liabilities
30,378 
28,565 
Total liabilities
956,495 1
830,277 1
Commitments and contingencies (Note 15)
   
   
Redeemable non-controlling interests
156,198 
169,541 
Stockholders' equity:
 
 
Common stock, $0.01 par value—1,000,000 authorized, 106,734 shares issued and outstanding as of March 31, 2016; 1,000,000 authorized, 106,576 shares issued and outstanding as of December 31, 2015
1,067 
1,066 
Additional paid-in capital
531,877 
530,646 
Accumulated deficit
(43,988)
(12,769)
Total stockholders' equity
488,956 
518,943 
Non-controlling interests
119,425 
90,309 
Total equity
608,381 
609,252 
TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
$ 1,721,074 
$ 1,609,070 
[1] The Company’s assets as of March 31, 2016 and December 31, 2015 include $1,121.2 million and $1,005.8 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 $1,104.5 million and $990.6 million as of March 31, 2016 and December 31, 2015; cash and cash equivalents of $9.4 million and $12.0 million as of March 31, 2016 and December 31, 2015; accounts receivable, net, of $6.0 million and $3.1 million as of March 31, 2016 and December 31, 2015; other non-current assets, net of $1.0 million and a de minimis amount as of March 31, 2016 and December 31, 2015; and prepaid expenses and other current assets of $0.3 million and $0.1 million as of March 31, 2016 and December 31, 2015. The Company’s liabilities as of March 31, 2016 and December 31, 2015 included $59.8 million and $66.4 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 $4.8 million and $11.3 million as of March 31, 2016 and December 31, 2015; deferred revenue of $47.8 million and $47.9 million as of March 31, 2016 and December 31, 2015; accrued and other current liabilities of $4.7 million and $3.9 million as of March 31, 2016 and December 31, 2015; and other non-current liabilities of $2.4 million and $3.3 million as of March 31, 2016 and December 31, 2015. For further information see Note 10—Investment Funds.
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2016
Dec. 31, 2015
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
106,734,000 
106,576,000 
Common stock, shares outstanding
106,734,000 
106,576,000 
Total assets
$ 1,721,074,000 1
$ 1,609,070,000 1
Solar energy systems, net
1,200,322,000 
1,102,157,000 
Cash and cash equivalents
87,164,000 
92,213,000 
Accounts receivable, net
7,025,000 
3,636,000 
Other non-current assets, net
14,591,000 
14,024,000 
Prepaid expenses and other current assets
20,043,000 
17,078,000 
Total liabilities
956,495,000 1
830,277,000 1
Distributions payable to non-controlling interests and redeemable non-controlling interests
4,823,000 
11,347,000 
Accrued and other current liabilities
28,255,000 
29,017,000 
Other non-current liabilities
30,378,000 
28,565,000 
Variable Interest Entities
 
 
Total assets
1,121,160,000 
1,005,825,000 
Solar energy systems, net
1,104,451,000 
990,609,000 
Cash and cash equivalents
9,374,000 
12,014,000 
Accounts receivable, net
5,988,000 
3,063,000 
Other non-current assets, net
1,029,000 
18,000 
Prepaid expenses and other current assets
318,000 
121,000 
Total liabilities
59,782,000 
66,417,000 
Distributions payable to non-controlling interests and redeemable non-controlling interests
4,823,000 
11,347,000 
Deferred revenue
47,800,000 
47,900,000 
Accrued and other current liabilities
4,694,000 
3,869,000 
Other non-current liabilities
$ 2,437,000 
$ 3,283,000 
[1] The Company’s assets as of March 31, 2016 and December 31, 2015 include $1,121.2 million and $1,005.8 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 $1,104.5 million and $990.6 million as of March 31, 2016 and December 31, 2015; cash and cash equivalents of $9.4 million and $12.0 million as of March 31, 2016 and December 31, 2015; accounts receivable, net, of $6.0 million and $3.1 million as of March 31, 2016 and December 31, 2015; other non-current assets, net of $1.0 million and a de minimis amount as of March 31, 2016 and December 31, 2015; and prepaid expenses and other current assets of $0.3 million and $0.1 million as of March 31, 2016 and December 31, 2015. The Company’s liabilities as of March 31, 2016 and December 31, 2015 included $59.8 million and $66.4 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 $4.8 million and $11.3 million as of March 31, 2016 and December 31, 2015; deferred revenue of $47.8 million and $47.9 million as of March 31, 2016 and December 31, 2015; accrued and other current liabilities of $4.7 million and $3.9 million as of March 31, 2016 and December 31, 2015; and other non-current liabilities of $2.4 million and $3.3 million as of March 31, 2016 and December 31, 2015. For further information see Note 10—Investment Funds.
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Revenue:
 
 
Operating leases and incentives
$ 16,578 
$ 8,580 
Solar energy system and product sales
652 
965 
Total revenue
17,230 
9,545 
Operating expenses:
 
 
Cost of revenue—operating leases and incentives
37,760 
23,880 
Cost of revenue—solar energy system and product sales
422 
438 
Sales and marketing
12,648 
6,433 
Research and development
1,232 
582 
General and administrative
22,920 
18,630 
Amortization of intangible assets
265 
3,763 
Impairment of goodwill and intangible assets
36,601 
4,506 
Total operating expenses
111,848 
58,232 
Loss from operations
(94,618)
(48,687)
Interest expense
5,765 
2,127 
Other expense
30 
313 
Loss before income taxes
(100,413)
(51,127)
Income tax expense
5,149 
8,848 
Net loss
(105,562)
(59,975)
Net loss attributable to non-controlling interests and redeemable non-controlling interests
(74,343)
(72,124)
Net (loss attributable) income available to common stockholders
$ (31,219)
$ 12,149 
Net (loss attributable) income available per share to common stockholders:
 
 
Basic
$ (0.29)
$ 0.12 
Diluted
$ (0.29)
$ 0.11 
Weighted-average shares used in computing net (loss attributable) income available per share to common stockholders:
 
 
Basic
106,619 
105,303 
Diluted
106,619 
109,051 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net loss
$ (105,562)
$ (59,975)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
9,103 
4,208 
Amortization of intangible assets
265 
3,763 
Impairment of goodwill and intangible assets
36,601 
4,506 
Deferred income taxes
44,371 
17,024 
Stock-based compensation
1,625 
2,707 
Loss on removal of solar energy systems and property and equipment
444 
 
Non-cash interest and other expense
1,430 
795 
Reduction in lease pass-through financing obligation
(438)
 
Excess tax effects from stock-based compensation
(393)
 
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(3,389)
(1,537)
Inventories
(899)
Prepaid expenses and other current assets
(2,142)
(224)
Prepaid tax asset, net
(41,997)
(36,437)
Other non-current assets, net
(1,707)
96 
Accounts payable
(455)
29 
Accounts payable—related party
(1,019)
(308)
Accrued compensation
4,330 
(469)
Deferred revenue
1,058 
1,489 
Accrued and other current liabilities
(1,715)
20,271 
Net cash used in operating activities
(60,489)
(44,060)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Payments for the cost of solar energy systems
(106,697)
(108,185)
Payments for property and equipment
(1,392)
(1,176)
Change in restricted cash and cash equivalents
(2,613)
(5,644)
Purchase of intangible assets
(291)
(22)
Net cash used in investing activities
(110,993)
(115,027)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Proceeds from investment by non-controlling interests and redeemable non-controlling interests
89,986 
81,218 
Distributions paid to non-controlling interests and redeemable non-controlling interests
(6,394)
(2,365)
Proceeds from long-term debt
94,502 
17,500 
Payments on long-term debt
(4,150)
 
Payments for debt issuance costs
(6,230)
(3,078)
Proceeds from lease pass-through financing obligation
281 
 
Principal payments on capital lease obligations
(1,562)
(1,013)
Payments for deferred offering costs
 
(589)
Net cash provided by financing activities
166,433 
91,673 
NET DECREASE IN CASH AND CASH EQUIVALENTS
(5,049)
(67,414)
CASH AND CASH EQUIVALENTS—Beginning of period
92,213 
261,649 
CASH AND CASH EQUIVALENTS—End of period
87,164 
194,235 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Property acquired under build-to-suit agreements
2,896 
2,909 
Vehicles acquired under capital leases
1,346 
1,280 
Costs of solar energy systems included in changes in accounts payable, accrued compensation and other accrued liabilities
(598)
15,277 
Accrued distributions to non-controlling interests and redeemable non-controlling interests
(6,524)
382 
Solar energy system sales
 
 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Receivable for tax credit recorded as a reduction to solar energy system costs
$ 820 
$ 635 
Organization
Organization

1.

Organization

Vivint Solar, 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.

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. The Company also offers customers the option to purchase solar energy systems. Additionally, the Company offers 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 cash generated from operations to finance a portion of the Company’s variable and fixed costs associated with installing the residential solar energy systems under long-term customer contracts. The obligations of the Company are in no event obligations of the investment funds.

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.

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 unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K dated as of March 14, 2016. The unaudited condensed consolidated financial statements are prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2016 or for any other interim period or other future year.

The condensed consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities (“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. 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, see Note 10—Investment Funds.

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.

Comprehensive (Loss) Income

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

Debt Issuance Costs

During the three months ended March 31, 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-03, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt obligation. ASU 2015-15 further clarified that this treatment is not required to be applied to revolving line-of-credit arrangements. The Company applied ASU 2015-03 on a retrospective basis; however, the Company’s long-term debt in all prior periods presented was comprised of revolving line-of-credit arrangements. As such, there is no change to the Company’s prior period condensed consolidated balance sheet. In 2016, the Company entered into term loan facilities that are presented net of debt issuance costs.

Intangible Assets – Internal-Use Software

During the three months ended March 31, 2016, the Company adopted ASU 2015-05, which requires that 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 Company adopted this update prospectively, which did not have a significant impact on the Company’s condensed consolidated financial statements in the current period.

Other Changes

During the three months ended March 31, 2016, there have been no other changes to the Company’s significant accounting policies as described in the Company’s annual report on Form 10-K for the year ended December 31, 2015.

Recent Accounting Pronouncements

In April 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and in March 2016 issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). Both of these updates clarify aspects of the guidance in ASU 2014-09, Revenue from Contracts with Customers. The Company is evaluating the impact that these updates will have on its consolidated financial statements. Additionally, ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, defers the effective date of ASU 2014-09 for one year, and the standard is now effective for the Company on January 1, 2018, with early adoption available 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 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 March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture rates and classification on the statement of cash flows. This update is effective for annual periods beginning after December 15, 2016 for public business entities and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact this update will have on its share-based payment accounting and consolidated financial statements.


In February 2016, 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.

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):

 

 

March 31, 2016

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$

 

 

$

1,900

 

 

$

 

 

$

1,900

 

Total financial assets

$

 

 

$

1,900

 

 

$

 

 

$

1,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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 outstanding principal balance of long-term debt is carried at cost and was $506.2 million and $415.9 million as of March 31, 2016 and December 31, 2015. The Company estimated the fair values of long-term debt to approximate its carrying values as interest accrues at floating rates based on market rates. The Company did not realize gains or losses related to financial assets for any of the periods presented.

Solar Energy Systems
Solar Energy Systems


4.

Solar Energy Systems

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

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

System equipment costs

$

994,179

 

 

$

893,088

 

Initial direct costs related to solar energy systems

 

194,741

 

 

 

171,081

 

 

 

1,188,920

 

 

 

1,064,169

 

Less: Accumulated depreciation and amortization

 

(40,821

)

 

 

(32,505

)

 

 

1,148,099

 

 

 

1,031,664

 

Solar energy system inventory

 

52,223

 

 

 

70,493

 

Solar energy systems, net

$

1,200,322

 

 

$

1,102,157

 

 

 

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 $8.3 million and $3.8 million for the three months ended March 31, 2016 and 2015.  

Property and Equipment
Property and Equipment

5.

Property and Equipment

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

 

 

 

Estimated

 

March 31,

 

 

December 31,

 

 

 

Useful Lives

 

2016

 

 

2015

 

Vehicles acquired under capital leases

 

3 years

 

$

23,601

 

 

$

24,149

 

Furniture and computer and other equipment

 

3 years

 

 

7,122

 

 

 

6,524

 

Leasehold improvements

 

1-3 years

 

 

4,863

 

 

 

4,116

 

 

 

 

 

 

35,586

 

 

 

34,789

 

Less: Accumulated depreciation and amortization

 

 

 

 

(12,840

)

 

 

(12,181

)

 

 

 

 

 

22,746

 

 

 

22,608

 

Build-to-suit lease asset under construction

 

 

 

 

28,456

 

 

 

25,560

 

Property and equipment, net

 

 

 

$

51,202

 

 

$

48,168

 

 

The Company recorded depreciation and amortization related to property and equipment of $2.4 million and $1.6 million for the three months ended March 31, 2016 and 2015.

The Company leases fleet vehicles that are accounted for as capital leases and are included in property and equipment, net. Of total property and equipment depreciation and amortization, depreciation on vehicles under capital leases of $1.7 million and $1.1 million was capitalized in solar energy systems, net for the three months ended March 31, 2016 and 2015.

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 asset of $28.5 million and $25.6 million as of March 31, 2016 and December 31, 2015. See Note 15—Commitments and Contingencies.

Intangible Assets and Goodwill
Intangible Assets and Goodwill

6.

Intangible Assets and Goodwill

Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Cost:

 

 

 

 

 

 

 

Internal-use software

$

1,605

 

 

$

1,591

 

Developed technology

 

522

 

 

 

522

 

Trademarks/trade names

 

201

 

 

 

201

 

Customer relationships

 

164

 

 

 

164

 

Total carrying value

 

2,492

 

 

 

2,478

 

Accumulated amortization:

 

 

 

 

 

 

 

Internal-use software

 

(178

)

 

 

(219

)

Developed technology

 

(142

)

 

 

(126

)

Trademarks/trade names

 

(44

)

 

 

(39

)

Customer relationships

 

(72

)

 

 

(63

)

Total accumulated amortization

 

(436

)

 

 

(447

)

Total intangible assets, net

$

2,056

 

 

$

2,031

 

 

The Company recorded amortization expense of $0.3 million and $3.8 million for the three months ended March 31, 2016 and 2015, which was included in amortization of intangible assets in the condensed consolidated statements of operations. An internal-use software asset of $0.3 million reached the end of its useful life during the three months ended March 31, 2016 and was removed from cost and accumulated amortization.

In February 2015, the Company decided to discontinue the external sales of two Vivint Solar Labs products: the SunEye and PV Designer. 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 Vivint Solar Labs product sales in the residential market, was discontinued and deemed fully impaired resulting in a charge of $2.1 million. Certain trade names that will no longer be utilized 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 three months ended March 31, 2015.

Goodwill Impairment

Annual Goodwill Impairment Test

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 the C&I business was created in 2015 by the Company, and not acquired, 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 goodwill impairment test annually or whenever events or circumstances change that would indicate that goodwill might be impaired. The Company first assesses qualitative factors 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.

Based on the results of the annual goodwill impairment analysis in the fourth quarter of 2015, the Company determined the two-step test was not necessary based on its qualitative assessments and concluded that it was more likely than not that the fair value of its Residential reporting unit was greater than its respective carrying value as of October 1, 2015 and 2014.


Goodwill Impairment Test as of March 31, 2016

In conjunction with the acquisition by SunEdison failing to occur, the Company’s market capitalization decreased significantly during the first quarter of 2016 from $1.0 billion as of December 31, 2015 to $283 million as of March 31, 2016. The Company considered this significant decrease in market capitalization to be an indicator of impairment and the Company performed a step one test for potential impairment as of March 31, 2016.

The step one analysis resulted in the Company concluding that the carrying book value of its Residential reporting unit was higher than the business unit’s fair value. Because the Residential reporting unit failed the step one test, the Company was required to perform the step two test, which utilizes a notional purchase price allocation using the estimated fair value from step one as the purchase price to determine the implied value of the reporting unit’s goodwill. The completion of the step two test resulted in the determination that the $36.6 million of the Residential reporting unit’s goodwill was fully impaired. The $36.6 million impairment charge is shown in the line item impairment of goodwill and intangible assets in the Company’s consolidated statements of operations.

In performing step one of the goodwill impairment test, it was necessary to determine the fair value of the Residential reporting segment. The fair value of the reporting unit was estimated using a discounted cash flow methodology (“DCF”). The market analysis included looking at the valuations of comparable public companies, as well as recent acquisitions of comparable companies.

Two key inputs to the DCF analysis were the future cash flow projection and the discount rate. The Company used a 30-year future cash flow projection, based on the Company’s long-range forecast of current customer contracts and an estimate of customer renewals of 90% subsequent to the 20-year customer contract period, discounted to present value.

The discount rate was determined by estimating the reporting unit’s weighted average cost of capital, reflecting the nature of the reporting unit and the perceived risk of the underlying cash flows. In its DCF methodology, the Company used a 7.25% discount rate for the cash flows related to current customer contracts and a 9.25% discount rate for the estimated cash flows from customer renewals subsequent to the 20-year customer contract period. A higher discount rate was used for the estimated customer renewals due to the increased subjectivity of this cash flow stream. If the Company had varied the discount rates by 1.0%, it would not have impacted the ultimate results of the step one test. The excess of the carrying value over the fair value of the Residential reporting unit was approximately 15%.

Because the Residential reporting unit failed the step one test, the Company was required to perform the step two test, which utilizes a purchase price allocation using the estimated fair value from step one as the purchase price to determine the implied value of the reporting unit’s goodwill. The step two test involves allocating the fair value of the Residential reporting unit to all of its assets and liabilities on a fair value basis, with the excess amount representing the implied value of goodwill. As part of this process the fair value of the reporting unit’s identifiable assets was determined. The fair values of these assets were determined primarily through the use of the DCF method if the fair value was estimated to differ materially from book value. After determining the fair value of the reporting unit’s assets and liabilities and allocating the fair value of the Residential reporting unit to those assets and liabilities, it was determined that there was no implied value of goodwill. The carrying value of the reporting unit’s goodwill was $36.6 million, which resulted in the impairment charge of $36.6 million, which was recorded in impairment of goodwill and intangible assets in the condensed consolidated statements of operations.

Accrued Compensation
Accrued Compensation

7.

Accrued Compensation

Accrued compensation consisted of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Accrued payroll

$

11,828

 

 

$

6,918

 

Accrued commissions

 

7,631

 

 

 

6,840

 

Total accrued compensation

$

19,459

 

 

$

13,758

 

 

Accrued and Other Current Liabilities
Accrued and Other Current Liabilities

8.

Accrued and Other Current Liabilities

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

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Accrued professional fees

$

5,820

 

 

$

7,918

 

Current portion of lease pass-through financing obligation

 

4,662

 

 

 

3,835

 

Accrued unused commitment fees and interest

 

3,690

 

 

 

1,014

 

Sales and use tax payable

 

3,319

 

 

 

3,524

 

Accrued litigation settlements

 

1,855

 

 

 

1,790

 

Income tax payable

 

1,308

 

 

 

6,169

 

Deferred rent

 

1,039

 

 

 

1,064

 

Other accrued expenses

 

6,562

 

 

 

3,703

 

Total accrued and other current liabilities

$

28,255

 

 

$

29,017

 

 

Debt Obligations
Debt Obligations

9.

Debt Obligations

Debt obligations consisted of the following (in thousands):

 

March 31, 2016

 

 

 

 

 

 

Unamortized

 

 

 

 

 

 

Principal

 

 

Debt Issuance

 

 

 

 

 

 

Borrowings

 

 

Costs

 

 

Net Balance

 

Revolving lines of credit

 

 

 

 

 

 

 

 

 

 

 

Aggregation credit facility

$

338,500

 

 

$

 

(1)

$

338,500

 

Working capital credit facility

 

142,600

 

 

 

 

(1)

 

142,600

 

Term loan facility

 

25,000

 

 

 

5,992

 

 

 

19,008

 

Credit agreement

 

102

 

 

 

178

 

 

 

(76

)

Total debt

$

506,202

 

 

$

6,170

 

 

$

500,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

Unamortized

 

 

 

 

 

 

Principal

 

 

Debt Issuance

 

 

 

 

 

 

Borrowings

 

 

Costs

 

 

Net Balance

 

Aggregation credit facility

$

269,100

 

 

$

 

(1)

$

269,100

 

Working capital credit facility

 

146,750

 

 

 

 

(1)

 

146,750

 

Total debt

$

415,850

 

 

$

 

 

$

415,850

 

(1) Revolving lines of credit are not presented net of unamortized debt issuance costs. See Note 2—Summary of Significant Accounting Policies. 

Term Loan Facility

In March 2016, Vivint Solar Financing Holdings, LLC, one of the Company’s subsidiaries, entered into a financing agreement pursuant to which it may borrow up to an aggregate principal amount of $200.0 million of term loan borrowings from investment funds and accounts advised by Highbridge Principal Strategies, LLC. The Company refers to such financing agreement as the “term loan facility.” The initial $75.0 million in borrowings are referred to as “Tranche A” borrowings. As of March 31, 2016, the Company had incurred an aggregate of $25.0 million of the Tranche A borrowings and incurred the remaining Tranche A borrowings in the second quarter of 2016.  The remaining $125.0 million aggregate principal amount in borrowings may be incurred in three installments of at least $25.0 million aggregate principal amount prior to the first anniversary of the closing date. Such subsequent borrowings, if any, are referred to as “Tranche B” borrowings. If no Tranche B borrowings are incurred, the Company must repay outstanding Tranche A borrowings in December 2016. If any Tranche B borrowings are incurred, the maturity date for all borrowings will be extended to the fourth anniversary of the closing date. If any Tranche B borrowings are incurred, the Company may not prepay any borrowings until the second anniversary of the closing date and any subsequent prepayments of principal are subject to a fee equal to 3.0%. Borrowings under the term loan facility will be used for the construction and acquisition of solar energy systems.  The remaining borrowing capacity was $175.0 million as of March 31, 2016.


Interest on the Tranche A borrowings accrues at a floating rate of LIBOR plus 5.5%, provided that if any Tranche B borrowings are incurred, the interest rate increases to a floating rate of LIBOR plus 8.0% for the entire principal amount outstanding. The term loan facility includes customary events of default, conditions to borrowing and 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. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. Additionally, the parties to the term loan facility must maintain certain consolidated and project subsidiary loan-to-value ratios and a consolidated debt service coverage ratio, with such covenants to be tested as of the last day of each fiscal quarter and upon each incurrence of borrowings. Each of the parties to the term loan facility has pledged assets not otherwise pledged under another existing debt facility as collateral to secure their obligations under the term loan facility. Vivint Solar Financing Holdings Parent, LLC, another of the Company’s subsidiaries and the parent company of the borrower and certain other of the Company’s subsidiaries guarantee the borrower’s obligations under the financing agreement.

Interest expense for the term loan facility was approximately $0.2 million for the three months ended March 31, 2016. No interest expense was recorded for the three months ended March 31, 2015. A $1.3 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 term loan facility.

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.

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 March 31, 2016, the Company was in compliance with such covenants. As of March 31, 2016, the Company has not entered into any interest rate hedges, which the Company is required to obtain by September 13, 2016.

As of March 31, 2016, the Company had incurred an aggregate of $338.5 million in borrowings under the Aggregation Facility. The remaining borrowing capacity was $36.5 million as of March 31, 2016. However, the Company does not have immediate access to the full remaining $36.5 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 $4.0 million and $2.1 million for the three months ended March 31, 2016 and 2015. As of March 31, 2016, the current portion of debt issuance costs of $4.0 million was recorded in prepaid expenses and other current assets, and the long-term portion of debt issuance costs of $3.9 million was recorded in other non-current assets, net in the consolidated balance sheet. In addition, a $6.3 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 $150.0 million from certain financial institutions for which Goldman Sachs Lending Partners LLC is acting as administrative agent and collateral agent. 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 March 31, 2016, the Company had incurred an aggregate of $142.6 million in borrowings under the Working Capital Facility. Further, the Company established letters of credit under the Working Capital Facility for up to $7.4 million related to insurance contracts. As such, there was no remaining borrowing capacity available as of March 31, 2016.

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 March 31, 2016, 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 $1.5 million and de minimis for the three months ended March 31, 2016 and 2015. As of March 31, 2016, the current portion of debt issuance costs of $0.5 million was recorded in prepaid expenses and other current assets, and the long-term portion of debt issuance costs of $1.6 million was recorded in other non-current assets, net in the consolidated balance sheet.

Credit Agreement

In February 2016, a subsidiary of the Company entered into a credit agreement (the “Credit Agreement”) pursuant to which Goldman Sachs, through GSUIG Real Estate Member LLC, committed to lend an aggregate principal amount of $3.0 million. Proceeds from the Credit Agreement are to be used for the deployment of certain solar energy systems. Quarterly payments of principal and interest are due over a seven year term. The seven year term begins after the final completion date of the underlying solar energy systems. Interest accrues on borrowings at a rate of 6.50%. As of March 31, 2016, the Company had received $0.1 million in loan proceeds from the Credit Agreement. Because these borrowings were incurred, the Company netted the $0.2 million in debt issuance costs incurred against the principal balance in long-term debt in the condensed consolidated balance sheet as of March 31, 2016. The repayment term had not yet begun as of March 31, 2016. Interest expense under the Credit Agreement was de minimis for the three months ended March 31, 2016. No interest expense was recorded for the three months ended March 31, 2015.

Interest Expense and Amortization of Debt Issuance Costs

For the three months ended March 31, 2016 and 2015, total interest expense incurred under all debt obligations was $5.7 million and $2.1 million, of which $1.2 million and $0.8 million was amortization of debt issuance costs.

Investment Funds
Investment Funds

10.

Investment Funds

As of March 31, 2016, the Company had formed 17 investment funds for the purpose of funding the purchase of solar energy systems. The aggregate carrying value of these funds’ assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed consolidated balance sheets were as follows (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

9,374

 

 

$

12,014

 

Accounts receivable, net

 

5,988

 

 

 

3,063

 

Prepaid expenses and other current assets

 

318

 

 

 

121

 

Total current assets

 

15,680

 

 

 

15,198

 

Solar energy systems, net

 

1,104,451

 

 

 

990,609

 

Other non-current assets, net

 

1,029

 

 

 

18

 

Total assets

$

1,121,160

 

 

$

1,005,825

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Distributions payable to non-controlling interests and redeemable non-controlling

   interests

$

4,823

 

 

$

11,347

 

Current portion of deferred revenue

 

7,038

 

 

 

4,824

 

Accrued and other current liabilities

 

4,694

 

 

 

3,869

 

Total current liabilities

 

16,555

 

 

 

20,040

 

Deferred revenue, net of current portion

 

40,790

 

 

 

43,094

 

Other non-current liabilities

 

2,437

 

 

 

3,283

 

Total liabilities

$

59,782

 

 

$

66,417

 

 

Residential Investment Funds

As of March 31, 2016, the Company had formed 16 residential investment funds. Fund investors for three of the funds are managed indirectly by The Blackstone Group L.P. (the “Sponsor”) and are considered related parties. As of March 31, 2016 and December 31, 2015, the cumulative total of contributions into the VIEs by all investors was $862.9 million and $773.0 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 investment fund arrangement with a fund investor. The fund was not operational, i.e., no projects had been initiated within the fund as of March 31, 2016, 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 must be utilized by the Company in 2016 based on the current fund agreement. If the investor’s commitment is not utilized, the Company may incur financial penalties for non-performance up to $3.0 million primarily due to delays in project approval and solar energy systems being interconnected to the power grid. As of March 31, 2016, the Company had accrued a non-performance fee of $2.1 million payable to the C&I fund investor.

Lease Pass-Through Financing Obligation

In July 2015, a wholly owned subsidiary of the Company entered into a lease pass-through fund arrangement under which the Company contributes solar energy systems and the investor contributes cash. The net carrying value of the related solar energy systems was $64.4 million and $64.7 million as of March 31, 2016 and December 31, 2015.

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 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 unrecognized revenue allocated to ITCs is recorded as deferred revenue in the condensed consolidated balance sheets.

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 condensed 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.

As of March 31, 2016 and December 31, 2015, the Company had recorded financing liabilities of $47.2 million and $47.3 million related to this fund arrangement as deferred revenue in its condensed consolidated balance sheets.

 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.

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 non-performance fee. As discussed in “C&I Investment Fund” above, the Company accrued an estimated $2.1 million non-performance fee as of March 31, 2016. As of December 31, 2015, the Company had accrued $5.2 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 delays in solar energy systems being interconnected to the power grid. During the three months ended March 31, 2016, the Company amended one of the investment funds agreements to extend the solar energy system interconnection period and, as such, released the accrued distribution. A de minimis amount was reimbursed to fund investors during the period.

As a result of the guaranty arrangements in certain funds, the Company was required to hold a minimum cash balance of $10.0 million as of March 31, 2016 and December 31, 2015, which is classified as restricted cash and cash equivalents on the condensed consolidated balance sheets.

Redeemable Non-Controlling Interests and Equity
Redeemable Non-Controlling Interests and Equity

11.Redeemable Non-Controlling Interests and Equity

Common Stock

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

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Shares available for grant under equity incentive plans

 

16,378

 

 

 

12,267

 

Stock options issued and outstanding

 

9,277

 

 

 

9,277

 

Long-term incentive plan

 

3,382

 

 

 

3,382

 

Restricted stock units issued and outstanding

 

924

 

 

 

930

 

Total

 

29,961

 

 

 

25,856

 

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

The changes in redeemable non-controlling interests were as follows (in thousands):

 

Balance as of December 31, 2015

$

169,541

 

Contributions from redeemable non-controlling interests

 

27,324

 

Distributions to redeemable non-controlling interests

 

(1,949

)

Net loss

 

(38,718

)

Balance as of March 31, 2016

$

156,198

 

 

The changes in stockholders’ equity and non-controlling interests were as follows (in thousands):

 

 

Total

 

 

 

 

 

 

 

 

 

 

Stockholders'

 

 

Non-Controlling

 

 

 

 

 

 

Equity

 

 

Interests

 

 

Total Equity

 

Balance as of December 31, 2015

$

518,943

 

 

$

90,309

 

 

$

609,252

 

Stock-based compensation expense

 

1,625

 

 

 

 

 

 

1,625

 

Excess tax effects from stock-based compensation

 

(393

)

 

 

 

 

 

(393

)

Contributions from non-controlling interests

 

 

 

 

62,662

 

 

 

62,662

 

Distributions to non-controlling interests

 

 

 

 

2,079

 

 

 

2,079

 

Net loss

 

(31,219

)

 

 

(35,625

)

 

 

(66,844

)

Balance as of March 31, 2016

$

488,956

 

 

$

119,425

 

 

$

608,381

 

 

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 March 31, 2016 and December 31, 2015 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.

Equity Compensation Plans
Equity Compensation Plans

12.

Equity Compensation Plans

Equity Incentive Plans

2014 Equity Incentive Plan

The Company adopted the 2014 Equity Incentive Plan (the “2014 Plan”) in September 2014. 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 March 31, 2016, a total of 17.4 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 4.3 million shares were reserved for issuance at the beginning of 2016 under the 2014 Plan.


As of March 31, 2016, there were 0.1 million time-based stock options, 0.7 million restricted stock units (“RSUs”), and 0.2 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 grant under the Omnibus Plan. The Omnibus Plan will continue 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 stock 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 Acquisition LLC, a subsidiary of the Company’s Sponsor. The stock options have a ten-year contractual period.

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.

In April 2015, 0.6 million shares of common stock were awarded to participants under the LTIP. As of March 31, 2016, 3.4 million shares remained outstanding, as 0.1 million shares represented the exercise price that were returned to the 2014 Plan.

Stock Options

Stock Option Activity

Stock options are granted under the 2014 Plan and Omnibus Plan as described above. Stock option activity for the three months ended March 31, 2016 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, 2015

 

9,277

 

 

$

1.36

 

 

 

 

 

 

$

76,488

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding—March 31, 2016

 

9,277

 

 

$

1.36

 

 

 

7.6

 

 

$

13,688

 

Options vested and exercisable—March 31, 2016

 

4,256

 

 

$

1.29

 

 

 

7.6

 

 

$

6,339

 

Options vested and expected to vest—March 31, 2016

 

9,023

 

 

$

1.36

 

 

 

7.6

 

 

$

13,311

 

 

No time-based stock options were granted during the three months ended March 31, 2016. The weighted-average grant date fair value of time-based stock options granted during the three months ended March 31, 2015 was $8.01 per share. No performance-based stock options were granted during the three months ended March 31, 2016 and 2015. There were no stock options exercised during the three months ended March 31, 2016 and 2015. Intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the common stock for the options that had exercise prices that were lower than the fair value per share of the common stock.

The total fair value of stock options vested for the three months ended March 31, 2016 and 2015 was $0.6 million and $0.5 million.

Determination of Fair Value of Stock Options

The Company estimates the fair value of the time-based stock options granted on each grant date using the Black-Scholes-Merton option pricing model and applies the accelerated attribution method for expense recognition. The fair values using the Black-Scholes-Merton method were estimated on each grant date using the following weighted-average assumptions:

 

 

Three Months Ended

 

 

March 31, 2015

 

Expected term (in years)

 

6.3

 

Volatility

 

88.5

%

Risk-free interest rate

 

1.9

%

Dividend yield

 

0.0

%

 

No options were granted in the three months ended March 31, 2016. As such, no Black-Scholes-Merton assumptions were required for the three months ended March 31, 2016.

Restricted Stock Units

RSUs are granted under the 2014 Plan and the LTIP as described above. RSU activity for the three months ended March 31, 2016 was as follows (awards in thousands):

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Average

 

 

Number of

 

 

Grant Date

 

 

Awards

 

 

Fair Value

 

Outstanding at December 31, 2015

 

930

 

 

$

12.84

 

Granted

 

177

 

 

 

2.65

 

Vested

 

(158

)

 

 

12.93

 

Forfeited

 

(25

)

 

 

12.53

 

Outstanding at March 31, 2016

 

924

 

 

$

10.88

 

 

The total fair value of RSUs vested was $0.8 million for the three months ended March 31, 2016. No RSUs vested in the three months ended March 31, 2015. The Company determines the fair value of RSUs granted on each grant date based on the fair value of the Company’s common stock on the grant date.

Stock-Based Compensation Expense

Stock-based compensation was included in operating expenses as follows (in thousands):

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Cost of revenue

$

303

 

 

$

278

 

Sales and marketing

 

 

 

 

233

 

General and administrative

 

1,106

 

 

 

2,178

 

Research and development

 

216

 

 

 

18

 

Total stock-based compensation

$

1,625

 

 

$

2,707

 

 

Unrecognized stock-based compensation expense, net of estimated forfeitures, for time-based stock options, performance-based stock options, RSUs and PSUs as of March 31, 2016 was as follows (in thousands, except years):

 

Unrecognized

 

 

 

 

Stock-Based

 

 

Weighted-

 

Compensation

 

 

Average Period

 

Expense

 

 

of Recognition

Time-based stock options

$

2,290

 

 

2.7 years

Performance-based stock options

 

1,495

 

 

1.0 years

RSUs and PSUs

 

4,718

 

 

2.7 years

Total unrecognized stock-based compensation expense as of March 31, 2016

$

8,503

 

 

 

 

Income Taxes
Income Taxes

13.

Income Taxes

The income tax expense for the three months ended March 31, 2016 and 2015 was calculated on a discrete basis resulting in a consolidated quarterly effective income tax rate of (5.1)% and (17.3)%. The variations between the consolidated effective income tax rate and the U.S. federal statutory rate for the three months ended March 31, 2016 were primarily attributable to the effect of non-controlling interests and redeemable non-controlling interests and the goodwill impairment charge. The variations between the consolidated effective income tax rate and the U.S. federal statutory rate for the three months ended March 31, 2015 were primarily attributable to the effect of non-controlling interests and redeemable non-controlling interests.

The Company sells 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 is not recognized in the condensed 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. Accordingly, the Company has recorded a prepaid tax asset, net of $319.5 million and $277.5 million as of March 31, 2016 and December 31, 2015.

Uncertain Tax Positions

As of March 31, 2016 and December 31, 2015, the Company had no unrecognized tax benefits. There was no interest and penalties accrued for any uncertain tax positions as of March 31, 2016 and December 31, 2015. The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized benefits will increase or decrease within the next 12 months. The Company is subject to taxation and files income tax returns in the United States, and various state and local jurisdictions. Due to the Company’s net losses, substantially all of its federal, state and local income tax returns since inception are still subject to audit.

Related Party Transactions
Related Party Transactions

14.

Related Party Transactions

The Company’s operations included the following related party transactions (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Cost of revenue—operating leases and incentives

$

1,147

 

 

$

1,490

 

Sales and marketing

 

524

 

 

 

378

 

General and administrative

 

153

 

 

 

213

 

 

Vivint Services

The Company has negotiated and entered into a number of agreements with its sister company, APX Group, Inc. (“Vivint”), related to services and other support that Vivint provides to the Company. Under the terms of these agreements, Vivint primarily provides the Company with information technology and infrastructure and certain other services. The Company incurred fees under these agreements of $1.4 million and $1.8 million for the three months ended March 31, 2016 and 2015, which reflect the amount of services provided by Vivint on behalf of the Company.

Payables to Vivint recorded in accounts payable—related party were $0.9 million and $1.9 million as of March 31, 2016 and December 31, 2015. These payables include amounts due to Vivint related to the services agreements and other miscellaneous intercompany payables including healthcare cost reimbursements and ancillary purchases.

Advances ReceivableRelated Party

Net amounts due from direct-sales personnel were $2.8 million and $2.9 million as of March 31, 2016 and December 31, 2015. The Company provided a reserve of $1.1 million and $0.7 million as of March 31, 2016 and December 31, 2015 related to advances to direct-sales personnel who have terminated their employment agreement with the Company.

Investment Funds

Fund investors for three of the funds are indirectly managed by the Sponsor and accordingly are considered related parties. The Company accrued equity distributions to these entities of $1.0 million and $1.7 million as of March 31, 2016 and December 31, 2015, included in distributions payable to non-controlling and redeemable non-controlling interests. See Note 10—Investment Funds. The Company has also entered into a Backup Maintenance Servicing Agreement with Vivint in which Vivint will provide maintenance servicing of the fund assets in the event that the Company is removed as the service provider for the funds. No services have been performed by Vivint under this agreement.

Commitments and Contingencies
Commitments and Contingencies

15.

Commitments and Contingencies

Non-Cancellable Leases

The Company has entered into operating lease agreements for corporate and operating facilities, warehouses and related equipment in states in which the Company conducts operations. The aggregate expense incurred under these operating leases was $4.1 million and $2.3 million for the three months ended March 31, 2016 and 2015.

Build-to-Suit Lease Arrangements

In September 2014, the Company entered into a non-cancellable lease whereby the Company will terminate the current lease for its corporate headquarters in Lehi, UT and move into another building being constructed in the same general location. Because of its involvement in certain aspects of the construction per the terms of the lease, the Company is deemed the owner of the building for accounting purposes during the construction period. Accordingly, as of March 31, 2016, the Company recorded a build-to-suit lease asset of $28.5 million included in property and equipment, net, and a corresponding $27.8 million build-to-suit lease liability included in other non-current liabilities, capitalized interest of $0.6 million and building costs paid by the Company of $0.1 million. Construction on the new building is expected to be completed during the second quarter of 2016.

Letters of Credit

During the three months ended March 31, 2016, the Company fulfilled its obligations under a forward contract to sell SRECs entered into in November 2013. As a result, the related $1.8 million stand-by letter of credit that was outstanding at December 31, 2015 was cancelled during the three months ended March 31, 2016. The corresponding time deposit will be released during the second quarter of 2016.

As of March 31, 2016, the Company had established letters of credit under the Working Capital Facility for up to $7.4 million related to insurance contracts.

Indemnification Obligations

From time to time, the Company enters into contracts that contingently require it to indemnify parties against claims. These contracts primarily relate to provisions in the Company’s services agreements with related parties that may require the Company to indemnify the related parties against services rendered; and certain agreements with the Company’s officers and directors under which the Company may be required to indemnify such persons for liabilities. In addition, under the terms of the agreements related to the Company’s investment funds and other material contracts, the Company may also be required to indemnify fund investors and other third parties for liabilities. For further information see Note 10—Investment Funds.

Legal Proceedings

In September 2014, two former installation technicians of the Company, on behalf of themselves and a purported class, filed a complaint for damages, injunctive relief and restitution in the Superior Court of the State of California in and for the County of San Diego against the Company and unnamed John Doe defendants. The complaint alleges certain violations of the California Labor Code and the California Business and Professions Code based on, among other things, alleged improper classification of installer technicians, installer helpers, electrician technicians and electrician helpers, failure to pay minimum and overtime wages, failure to provide accurate itemized wage statements, and failure to provide wages on termination. In December 2014, the original plaintiffs and three additional plaintiffs filed an amended complaint with essentially the same allegations. On November 5, 2015, the parties agreed to preliminary terms of a settlement of all claims related to allegations in the complaint in return for the Company’s payment of $1.7 million to be paid out to the purported class members. The settlement agreement must be approved by the Court, after notice to the purported class. As of March 31, 2016, a $1.7 million reserve was recorded related to this proceeding in the Company’s consolidated financial statements.

In November and December 2014, two putative class action lawsuits were filed in the U.S. District Court for the Southern District of New York against the Company, its directors, certain of its officers and the underwriters of the Company’s initial public offering of common stock alleging violation of securities laws and seeking unspecified damages. In January 2015, the Court ordered these cases to be consolidated into the earlier filed case, Hyatt v. Vivint Solar, Inc. et al., 14-cv-9283 (KBF). The plaintiffs filed a consolidated amended complaint in February 2015. On May 6, 2015, the Company filed a motion to dismiss the complaint and on December 10, 2015, the Court issued an Opinion and Order dismissing the complaint with prejudice. On January 5, 2016, the plaintiffs filed a Notice of Appeal to the Second Circuit Court of Appeals. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision. If an unfavorable outcome were to occur in this case, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable.

On July 31, 2015, a putative class action lawsuit was filed in the Court of Chancery State of Delaware against the Company’s directors, SunEdison Inc. (“SunEdison”), and TerraForm Power (“TerraForm”), alleging that the proposed acquisition by SunEdison is unfair to the Company’s stockholders. On August 7, 2015, a second putative class action lawsuit was filed in the same court alleging similar claims, and including 313, Acquisition, LLC as a named defendant. Both complaints seek injunctive relief and unspecified damages. On or about September 10, 2015, two purported class action lawsuits were also filed in Utah's Fourth District State Court (the "Utah Actions"), alleging similar claims to the complaints previously filed in the Delaware Chancery Court. On September 22, 2015, the Company, through counsel notified plaintiff's counsel in the Utah Actions that pursuant to the Company's Articles of Incorporation, any such derivative action was subject to exclusive jurisdiction in the Delaware Chancery Court, and accordingly, the Utah Actions should be dismissed. After a December 2015 amendment to the proposed acquisition, a new complaint was filed in the Delaware Chancery Court on January 11, 2016. As a result of the termination of the SunEdison acquisition, plaintiffs filed a motion for voluntary dismissal of the complaint in this action. On April 20, 2016, the Delaware court entered the dismissal of this case.

On September 9, 2015, two of the Company’s customers, on behalf of themselves and a purported class, named the Company in a putative class action, Case No. BCV-15-100925(Cal. Super. Ct., Kern County), alleging violation of California Business and Professional Code Section 17200 and requesting relief pursuant to Section 1689 of the California Civil Code. The complaint seeks: (1) rescission of their power purchase agreements along with restitution to the plaintiffs individually and (2) declaratory and injunctive relief. On October 16, 2015, the Company moved to compel arbitration of the plaintiffs’ claims pursuant to the provisions set forth in the power purchase agreements, which the Court granted and dismissed the class claims without prejudice. Plaintiffs have appealed the Court’s order. It is not possible to estimate the amount or range of potential loss, if any, at this time.

On March 8, 2016, the Company filed suit in the Court of Chancery State of Delaware against SunEdison and SEV Merger Sub Inc. alleging that SunEdison willfully breached its obligations under the Merger Agreement pursuant to which the Company was to be acquired 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. On April 21, 2016, SunEdison filed for Chapter 11 bankruptcy, thereby creating a temporary stay on the prosecution of the Company’s litigation in the Delaware court. The Company will participate in the bankruptcy case so as to maximize the recovery from the claims against SunEdison.

In addition to the matters discussed above, in the normal course of business, the Company has from time to time been named as a party to various legal claims, actions and complaints. While the outcome of these matters cannot be predicted with certainty, the Company does not currently believe that the outcome of any of these claims will have a material adverse effect, individually or in the aggregate, on its consolidated financial position, results of operations or cash flows.

The Company accrues for losses that are probable and can be reasonably estimated. The Company evaluates the adequacy of its legal reserves based on its assessment of many factors, including interpretations of the law and assumptions about the future outcome of each case based on available information.

Basic and Diluted Net (Loss) Income Per Share
Basic and Diluted Net (Loss) Income Per Share

16.

Basic and Diluted Net (Loss) Income Per Share

The Company computes basic net (loss) income per share by dividing net (loss attributable) income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution of securities that could be exercised or converted into common shares, and is computed by dividing net (loss attributable) income available to common stockholders by the weighted-average number of common shares outstanding plus the effect of potentially dilutive shares to purchase common stock.

The following table sets forth the computation of the Company’s basic and diluted net (loss attributable) income available per share to common stockholders for the three months ended March 31, 2016 and 2015 (in thousands, except per share amounts):  

 

 

Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

Net (loss attributable) income available  to common

   stockholders

$

(31,219

)

 

$

12,149

 

Denominator:

 

 

 

 

 

 

 

Shares used in computing net (loss attributable)

   income available per share to common stockholders, basic

 

106,619

 

 

 

105,303

 

Weighted-average effect of potentially dilutive shares to

   purchase common stock

 

 

 

 

3,748

 

Shares used in computing net (loss attributable)

   income available per share to common stockholders, diluted

 

106,619

 

 

 

109,051

 

Net (loss attributable) income available per share to common

   stockholders:

 

 

 

 

 

 

 

Basic

$

(0.29

)

 

$

0.12

 

Diluted

$

(0.29

)

 

$

0.11

 

 

For the three months ended March 31, 2016, the Company incurred a net loss attributable to common stockholders. As such, the potentially dilutive shares were anti-dilutive and were not considered in the weighted-average number of common shares outstanding for the period. As of March 31, 2015, stock-based awards for 3.4 million underlying shares of common stock were subject to performance conditions which had not yet been met. Accordingly, these performance-based stock awards were not included in the computation of diluted net income per share for the three months ended March 31, 2015. In addition, awards remaining to be granted under the LTIP Pools were not included in the computation of diluted net income per share as these shares had not been granted as of March 31, 2015. For the three months ended March 31, 2015, a de minimis number of shares were excluded from the dilutive share calculations as the effect on net income per share would have been anti-dilutive.

Segment Information
Segment Information

17.

Segment Information

The Company has aligned its operations as two reporting segments: (1) Residential and (2) C&I.  As of March 31, 2016, the C&I fund was not operational, i.e., no projects had been initiated within the fund. As of March 31, 2016, the Company recorded no assets related to the C&I segment. Segment loss from operations is comprised of operating unit revenue less operating expenses attributable to each operating segment. For the three months ended March 31, 2016, no revenue was recognized in the C&I segment as the C&I investment fund was not operational. Operating expenses in the C&I segment are comprised primarily of a $2.1 million accrued non-performance fee and personnel costs of employees directly involved in the development of C&I. For additional information regarding the accrued non-performance fee, see Note 10—Investment Funds. Operating results by reporting segment in 2016 were as follows:

 

 

Three Months Ended

 

 

March 31, 2016

 

 

Residential

 

 

C&I

 

 

Total

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Operating leases and incentives

$

16,578

 

 

$

 

 

$

16,578

 

Solar energy system and product sales

 

652

 

 

 

 

 

 

652

 

Total revenue

 

17,230

 

 

 

 

 

 

17,230

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue—operating leases and incentives

 

37,760

 

 

 

 

 

 

37,760

 

Cost of revenue—solar energy system and product sales

 

422

 

 

 

 

 

 

422

 

Sales and marketing

 

12,382

 

 

 

266

 

 

 

12,648

 

Research and development

 

1,232

 

 

 

 

 

 

1,232

 

General and administrative

 

20,532

 

 

 

2,388

 

 

 

22,920

 

Amortization of intangible assets

 

265

 

 

 

 

 

 

265

 

Impairment of goodwill and intangible assets

 

36,601

 

 

 

 

 

 

36,601

 

Total operating expenses

 

109,194

 

 

 

2,654

 

 

 

111,848

 

Loss from operations

$

(91,964

)

 

$

(2,654

)

 

$

(94,618

)

 

Subsequent Events
Subsequent Events

18.Subsequent Events

On May 2, 2016, the board of directors of the Company accepted Greg Butterfield’s resignation from the board and from his position as president and chief executive officer of the Company. There were no known disagreements between Mr. Butterfield and the Company or any officer or director of the Company that led to Mr. Butterfield’s resignation. Pursuant to a separation agreement and release of claims entered into with the Company, Mr. Butterfield will receive payments and benefits, including a severance payment of $1.0 million, payable over an 18-month period, and the acceleration of 0.2 million options to purchase shares of the Company’s common stock, which is not expected to have a significant impact on stock-based compensation expense.

The Company also announced the appointment of David Bywater as the Company’s interim chief executive officer. Mr. Bywater will serve as the Company’s primary executive officer while the Company conducts a search for a new chief executive officer. Mr. Bywater will take a leave of absence from his current employer, Vivint, while he serves as the interim chief executive officer of the Company.

Summary of Significant Accounting Policies (Policies)

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K dated as of March 14, 2016. The unaudited condensed consolidated financial statements are prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2016 or for any other interim period or other future year.

The condensed consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities (“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. 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, see Note 10—Investment Funds.

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.

Comprehensive (Loss) Income

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

Debt Issuance Costs

During the three months ended March 31, 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-03, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt obligation. ASU 2015-15 further clarified that this treatment is not required to be applied to revolving line-of-credit arrangements. The Company applied ASU 2015-03 on a retrospective basis; however, the Company’s long-term debt in all prior periods presented was comprised of revolving line-of-credit arrangements. As such, there is no change to the Company’s prior period condensed consolidated balance sheet. In 2016, the Company entered into term loan facilities that are presented net of debt issuance costs.

Intangible Assets – Internal-Use Software

During the three months ended March 31, 2016, the Company adopted ASU 2015-05, which requires that 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 Company adopted this update prospectively, which did not have a significant impact on the Company’s condensed consolidated financial statements in the current period.

Recent Accounting Pronouncements

In April 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and in March 2016 issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). Both of these updates clarify aspects of the guidance in ASU 2014-09, Revenue from Contracts with Customers. The Company is evaluating the impact that these updates will have on its consolidated financial statements. Additionally, ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, defers the effective date of ASU 2014-09 for one year, and the standard is now effective for the Company on January 1, 2018, with early adoption available 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 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 March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture rates and classification on the statement of cash flows. This update is effective for annual periods beginning after December 15, 2016 for public business entities and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact this update will have on its share-based payment accounting and consolidated financial statements.


In February 2016, 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.

Fair Value Measurements (Tables)
Schedule of Fair Value of Financial Assets Measured on Recurring Basis

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):

 

 

March 31, 2016

 

 

Level I