Vivint Solar, Inc. (formerly known as V Solar Holdings, Inc.) was incorporated as a Delaware corporation on August 12, 2011, and changed its name to Vivint Solar, Inc. from V Solar Holdings, Inc., on April 29, 2014. Vivint Solar, Inc. and its subsidiaries are collectively referred to as the “Company.” The Company commenced operations in May 2011. The Company 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 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. Through the acquisition of Solmetric Corporation (“Solmetric”) in the first quarter of 2014, the Company also offers photovoltaic installation software products and devices.

The Company has formed various investment funds 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 to finance a portion of the Company’s variable and fixed costs associated with installing the residential solar energy systems.

On November 16, 2012 (the “Acquisition Date”), investment funds affiliated with The Blackstone Group L.P. (the “Sponsor”) and certain co-investors (collectively, the “Investors”), through 313 Acquisition LLC (“313”), acquired 100% of the equity interests of APX Group, Inc. (“Vivint”) and the Company (the “Acquisition”). The Acquisition was accomplished through certain mergers and related reorganization transactions pursuant to which the Company became a direct wholly owned subsidiary of 313, an entity owned by the Investors.

Since inception and continuing after the Acquisition, the Company has relied upon Vivint and certain of its affiliates for many of its administrative, managerial, account management and operational services. The Company was consolidated by Vivint as a variable interest entity prior to the Acquisition, and continues to be an affiliated entity and related party subsequent to the Acquisition. The Company has entered into various agreements and transactions with Vivint and its affiliates related to these services. See Note 14—Related Party Transactions.

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 (the “SEC”) 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 prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on October 1, 2014 (the “Prospectus”). The results of the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2014 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. For all periods presented, the Company has determined that it is the primary beneficiary in all of its operational VIEs. 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.

The condensed consolidated financial statements reflect all of the costs of doing business, including the allocation of expenses incurred by Vivint on behalf of the Company. For additional information, see Note 14—Related Party Transactions. These expenses were allocated to the Company on a basis that was considered to reasonably reflect the utilization of the services provided to, or the benefit obtained by, the Company. The allocations may not, however, reflect the expense the Company would have incurred as an independent company for the periods presented, and may not be indicative of the Company’s future results of operations and financial position.

Use of Estimates

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the 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, revenue recognition, the useful lives of solar energy systems, the valuation and recoverability of intangible assets and goodwill acquired, useful lives of intangible assets, recoverability of long-lived assets, the recognition and measurement of loss contingencies, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, and the valuation of 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

As the Company has no other comprehensive income or loss, comprehensive loss is the same as net loss for all periods presented.

During the three months ended September 30, 2014, there have been no changes to the Company’s significant accounting policies as described in the Prospectus.

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):

The carrying amounts of certain financial instruments of the Company, consisting of cash and cash equivalents excluding time deposits; accounts receivable; accounts payable; accounts payable—related party and distributions payable to redeemable non-controlling interests (all Level I) approximate fair value due to their relatively short maturities. Time deposits (Level II) approximate fair value due to their short-term nature (30 days) and, upon renewal, the interest rate is adjusted based on current market rates. The Company’s long-term debt, consisting of an aggregation credit facility (as described in Note 9), is carried at cost and was $87.0 million as of September 30, 2014. As the Company’s aggregation credit facility was entered into on September 12, 2014 and interest is based on market rates, the carrying value approximates fair value. The Company’s revolving lines of credit—related party are comprised of two lines of credit and are carried at cost of $58.7 million and $41.4 million as of September 30, 2014 and December 31, 2013. The Company has estimated the fair value of its related party revolving lines of credit to be $55.8 million and $39.0 million as of September 30, 2014 and December 31, 2013 based on rates for companies with similar credit ratings and issuances at approximately the same time period and in the same market environment. The Company did not have realized gains or losses related to financial assets for any of the periods presented.

In January 2014, the Company completed the acquisition of Solmetric (the “Solmetric Acquisition”), a developer and manufacturer of photovoltaic installation software products and devices. The purchase price agreed to in the purchase agreement with Solmetric was $12.0 million plus a net working capital adjustment resulting in total cash purchase consideration of $12.2 million. In connection with the Solmetric Acquisition, the total consideration of $12.2 million was used for the purchase of all outstanding stock and options of Solmetric, settlement of Solmetric’s short-term promissory note, and settlement of other liabilities including employee-related liabilities of Solmetric incurred in connection with the acquisition. The Company incurred $0.3 million of costs related to retention bonuses to key Solmetric employees and $59,000 of transaction fees, all of which have been included in the various line items of the condensed consolidated statements of operations for the nine months ended September 30, 2014.

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

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

The purchase price has been preliminarily allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to working capital adjustments and income tax-related items. The purchase price allocation is expected to be completed within 12 months of the acquisition date.

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

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

For tax purposes, the acquired intangible assets are not amortized. Accordingly, a deferred tax liability of $2.5 million was recorded for the difference between the book and tax basis related to the intangible assets. Additionally, a deferred tax asset of $1.2 million was recorded mainly as a result of Solmetric’s net operating losses.

Financial results for Solmetric since the acquisition date are included in the results of operations for the nine months ended September 30, 2014. Solmetric contributed $1.1 million of revenues and $0.4 million of net income for the three months ended September 30, 2014. Solmetric contributed $2.4 million of revenues and $0.2 million of net income from the date of the acquisition through September 30, 2014.

Pro Forma Information

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

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

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

The Company recorded depreciation and amortization expense related to solar energy systems of $2.0 million and $0.5 million for the three months ended September 30, 2014 and 2013. Depreciation and amortization expense related to solar energy systems of $5.1 million and $1.0 million was recorded for the nine months ended September 30, 2014 and 2013.

Intangible assets consisted of the following (in thousands):

During the three months ended September 30, 2014, the Company incurred third-party costs related to the development of an internal-use software application to improve the sales process. The costs have been capitalized and are subject to amortization over the expected useful life of three years. The Company recorded amortization expense of $3.7 million and $3.6 million for the three months ended September 30, 2014 and 2013, which was included in amortization of intangible assets in the condensed consolidated statements of operations. The Company recorded amortization expense of $11.3 million for the nine months ended September 30, 2014, of which $0.1 million was recorded in cost of revenue-solar energy system and product sales. Amortization expense was $10.9 million for the nine months ended September 30, 2013.

Accrued compensation consisted of the following (in thousands):

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

Debt consisted of the following (in thousands):

Bank of America, N.A. Aggregation Credit Facility

In September 2014, the Company entered into an aggregation credit facility (the “Aggregation Facility”) pursuant to which the Company may borrow up to an aggregate of $350.0 million and, subject to certain conditions, up to an additional aggregate of $200.0 million in borrowings with certain financial institutions for which Bank of America, N.A. is acting as administrative agent. For accounting purposes, the Aggregation Facility is considered a modification of a term loan credit facility entered into in May 2014.

Prepayments are permitted under the Aggregation Facility, and the principal and accrued interest on any outstanding loans mature on March 12, 2018. Under the Aggregation Facility, interest on borrowings accrues at a floating rate equal to (1) a margin that varies between 3.25% during the period during which the Company may incur borrowings and 3.50% after such period and either (2)(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%. 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, that 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 September 30, 2014, the Company had incurred an aggregate of $87.0 million in term loan borrowings under this agreement, of which approximately $75.7 million was used to repay the outstanding principal and accrued and unpaid interest under the May 2014 credit facility discussed below. The remaining borrowing capacity was $263.0 million as of September 30, 2014. However, the Company does not have immediate access to the remaining $263.0 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 $0.3 million in the three and nine months ended September 30, 2014. No interest expense was recorded for the three and nine months ended September 30, 2013. As of September 30, 2014, the current portion of deferred financing costs of $2.5 million was recorded in prepaid expenses and other current assets, and the long-term portion of deferred financing costs of $6.1 million was recorded in other non-current assets, net in the condensed consolidated balance sheet. In addition, a $1.5 million interest reserve amount was deposited in an interest reserve account with the administrative agent and is included in restricted cash.

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

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

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

Revolving Lines of Credit—Related Party

In May 2013, the Company entered into a Subordinated Note and Loan Agreement with APX Parent Holdco, Inc., pursuant to which the Company may incur up to $20.0 million in revolver borrowings (“2013 Loan Agreement”). From May 2013 through December 2013, the Company incurred $18.5 million in principal borrowings under the agreement. Interest accrued on these borrowings at 12% per year through November 2013 and 20% per year thereafter, and accrued interest is paid-in-kind through additions to the principal amount on a semi-annual basis. In January 2014, the Company amended and restated the 2013 Loan Agreement, pursuant to which the Company may incur an additional $30.0 million in revolver borrowings, resulting in a total borrowing capacity of $50.0 million, with interest on the borrowings accruing at a rate of 12% per year for the remaining term of the agreement. From January 2014 through September 2014, the Company incurred an aggregate of $154.5 million in revolver borrowings under the 2013 Loan Agreement of which $141.5 million was repaid within one to eight days from the respective borrowing date. None of these borrowings individually exceeded the borrowing capacity of $50.0 million. As of September 30, 2014, the Company had $31.5 million of principal borrowings outstanding and $18.5 million in borrowing capacity available under the agreement. Interest expense for the three months ended September 30, 2014 and 2013 was $1.0 million and $0.6 million. Interest expense for the nine months ended September 30, 2014 and 2013 was $3.0 million and $0.7 million. While prepayments are permitted, the principal amount and accrued interest is payable by the Company upon the earliest to occur of (1) a change of control, (2) an event of default, and (3) January 1, 2017. The Company’s obligation under the 2013 Loan Agreement is subordinate to the Company’s guaranty obligations to its investment funds and all other indebtedness of the Company.

In December 2012 and amended in July 2013, the Company entered into a Subordinated Note and Loan Agreement with Vivint pursuant to which the Company may incur revolver borrowings of up to $20.0 million (“2012 Loan Agreement”). In December 2012, the Company incurred $15.0 million in revolver borrowings. From January 2013 through May 2013, the Company incurred an additional $5.0 million in revolver borrowings. Interest accrues on these borrowings at 7.5% per year, and accrued interest is paid-in-kind through additions to the principal amount on a semi-annual basis. Interest expense for the three months ended September 30, 2014 and 2013 was $0.4 million in both periods. Interest expense for the nine months ended September 30, 2014 and 2013 was $1.2 million and $1.0 million. While prepayments are permitted, the principal amount and accrued interest is payable by the Company upon the earliest to occur of (1) a change of control, (2) an event of default and (3) January 1, 2016. As of September 30, 2014, the Company had an aggregate of $0 in borrowing capacity available under the $20.0 million agreement. The Company’s obligations under the 2012 Loan Agreement are subordinate to the Company’s guaranty obligations to its investment funds and all other indebtedness of the Company.

As of September 30, 2014 and December 31, 2013, the total borrowings under both the 2012 Loan Agreement and the 2013 Loan Agreement were $58.7 million and $41.4 million. These amounts include $51.5 million and $38.5 million of principal borrowings and $7.2 million and $2.9 million of paid-in-kind and accrued interest.

The Company has formed investment funds and raised capital to fund the purchase of solar energy systems that will be contributed to or purchased by the investment fund. For discussion purposes, these 11 investment funds, including one arrangement with a large financial institution, are referred to as Fund A through Fund K.

The Company has aggregated the financial information of the investment funds in the table below. The aggregate carrying value of these funds’ assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s condensed consolidated balance sheets were as follows (in thousands):

Fund investors for Funds D, E and H are managed indirectly by the Sponsor and accordingly are considered related parties. As of September 30, 2014 and December 31, 2013, the cumulative total of contributions into the VIEs by all investors was $381.6 million and $140.7 million, of which $110.0 million and $60.0 million were contributed by related parties.

All funds, except for Funds F and K, were operational as of September 30, 2014. The Company did not have any assets, liabilities or activity associated with Funds F and K. Total available committed capital under Funds F and K was $150.0 million as of September 30, 2014.

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 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 also 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.

As a result of the guaranty arrangements in certain funds, as of September 30, 2014 and December 31, 2013, the Company is required to hold minimum cash balances of $5.0 million in the aggregate for both periods, which are classified as restricted cash on the condensed consolidated balance sheets.

Common Stock

The Company had shares of common stock reserved for issuance as follows:

In August 2014, the Company issued and sold an aggregate of 2,671,875 shares of common stock to 313 for $10.667 per share for aggregate proceeds of $28.5 million. In September 2014, the Company issued and sold an aggregate of 7,031,247 additional shares to 313 and two of its directors for $10.667 per share for aggregate gross proceeds of $75.0 million. The Company intended for the proceeds from such sales to fund its growing operations without altering its plans and to bolster its financial condition in advance of its initial public offering. The transactions were negotiated on an arms’ length basis and represented what the Company believed to be the most agreeable alternative at the time.  Subsequent to such transactions, the Company set the preliminary price range for its initial public offering, the 43 of which was $17.00 per share. The Company has determined that, for financial reporting purposes, it is appropriate to record the aggregate difference between the per share purchase price and mid-point of the preliminary price range for its initial public offering with respect to the shares sold to the two directors, or $14.8 million, as stock-based compensation expense, which was recorded in general and administrative expense. Regarding the shares of common stock sold to 313, the Company has also determined that for financial reporting purposes, it is appropriate to record the aggregate difference of $43.4 million as an aggregate return of capital within additional paid-in capital.

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

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

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

Funds A, B, C and I each 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 Fund A, 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 (the “Call Option”) after the expiration of the non-controlling interest holder’s Put Option. In Funds B, C and I, the Company’s wholly owned subsidiary has a Call Option for a stated period prior to the effectiveness of the Put Option. In Funds D, E, G, H, J and K there is a Call Option which is exercisable after a stated period of time.

The purchase price for the fund investor’s interest in Funds A, B, C and I under the Put Options is the greater of fair market value at the time the option is exercised and $0.7 million, $2.1 million, $3.3 million and $4.1 million. The Put Options for Funds A, B, C and I 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 2017.

Because the Put Options represent redemption features that are not solely within the control of the Company, the non-controlling interests in these funds is 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 value of redeemable non-controlling interests at September 30, 2014 and December 31, 2013 was greater than the redemption value.

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 for Funds A, B, C, D, E, H, J and K 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 2018.

2014 Equity Incentive Plan

The Company adopted the 2014 Equity Incentive Plan (the “2014 Plan”), which became effective upon the effectiveness of the Company’s registration statement on Form S-1, on September 30, 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.

Under the 2014 Plan, a total of 8,800,000 shares of common stock initially are reserved for issuance, subject to adjustment in the case of certain events, of which no awards were issued and outstanding as of September 30, 2014. 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 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 beginning in 2015, equal to the least of 8,800,000 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.

2013 Omnibus Incentive Plan; Non-plan Option Grant

In July 2013, the Company adopted the 2013 Omnibus Incentive Plan (the “Omnibus Plan”), which was terminated in connection with the adoption of the 2014 Plan in September 2014, and accordingly no additional shares are available for issuance under the Omnibus Plan. The Omnibus Plan will continue to govern outstanding awards granted under the plan. In August 2013, the Company granted an option to purchase 617,647 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 the third quarter of 2013 and the first nine months of 2014, the Company granted options of which one-third are subject to ratable time-based vesting over a five year period and two-thirds are subject to vesting upon certain performance conditions and the achievement of certain investment return thresholds by 313.

In April 2014, the Company amended the vesting schedules of certain options outstanding under the Omnibus Plan and an option granted outside of the Omnibus Plan described above to provide that a portion of each of these options vests upon the Company’s aggregate market capitalization being equal to or exceeding $1.0 billion at the end of any trading day at least 240 days following the completion of the Company’s public offering.

During the three and nine months ended September 30, 2014, the Company recorded $3.8 million in stock-based compensation related to the performance conditions as it is now probable that the performance condition will be met. In prior periods, all recognized stock compensation expense was related to the time-based vesting conditions. As of September 30, 2014, there are 6.7 million shares subject to outstanding options that are subject to performance and market conditions.

A summary of stock option activity is as follows (in thousands, except share and per share amounts):

The weighted-average grant-date fair value of time-based options granted during the nine months ended September 30, 2014 and 2013 was $4.69 and $0.91 per share. The weighted-average grant-date fair value of performance-based options granted during the nine months ended September 30, 2014 and 2013 was $2.80 and $2.23 per share. There were no options exercised during the periods presented. Intrinsic value is calculated as the difference between the exercise price of the underlying 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.

As of September 30, 2014 and December 31, 2013, there were approximately $15.1 million and $4.9 million of total unrecognized stock-based compensation expense, net of estimated forfeitures related to nonvested time-based and performance condition stock options. As of September 30, 2014 and December 31, 2013, the time-based awards are expected to be recognized over the weighted average period of 2.6 years and 2.7 years. As of September 30, 2014, the performance-based awards are expected to be recognized over a weighted period of 2.2 years.

The total fair value of options vested for the nine months ended September 30, 2014 and 2013 was $0.3 million and zero.

Long-term Incentive Plan

In July 2013, the Company’s board of directors approved 4,058,823 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 nonemployees, which is comprised of direct sales personnel, who sell the solar energy system contracts, employees that install and maintain the solar energy systems and employees that recruit new employees to the Company.

Based on the terms of the agreement, participants are allocated a portion of the LTIP Pools relative to the performance of other participants. LTIP awards to employees are considered to be granted when the allocation of the LTIP Pools to each participant is fixed which occurs once performance and service conditions are met. The performance conditions include the execution of a public offering or change of control or a declaration of a payment by the compensation committee. In addition, after the performance condition is achieved, participants must fulfill service or other conditions based on shareholder return to vest in the award. Expense associated with the units will be recognized once the units have been granted to individual participants.

The Company amended five of six of the LTIP Pools in April 2014 and the final pool in August 2014. The amendment modified the date on which each participant’s award is fixed from the date of a public offering to a subsequent date based on fulfilling certain service or other performance conditions based on stockholder returns, which will be the same date on which the award vests. No LTIP awards have been granted to employees as of September 30, 2014.

Nonemployee awards are granted and will be measured on the date on which the performance is complete which is the date the service or other performance conditions are achieved. The Company recognizes stock-based compensation expense based on the lowest aggregate fair value of the non-employee awards at the reporting date. The Company has not recognized any expense related to the LTIP in any of the periods presented.

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 Company estimates the fair value and the vesting period of the performance-based options granted on each grant date using the Monte Carlo simulation method. The fair values using the Black-Scholes-Merton method were estimated on each grant date using the following weighted-average assumptions:

The fair values using the Monte Carlo Simulation method were estimated on each grant date using the following weighted-average assumptions:

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

In September 2014, the Company recorded $14.8 million of stock-based compensation expense in general and administrative expense related to the sale of shares of common stock to two of its directors as discussed in Note 11—Redeemable Non-controlling Interests and Equity.

The income tax (benefit) expense for the three months ended September 30, 2014 and 2013 was determined based on the Company’s consolidated quarterly effective income tax rate of 16.5% and -0.2%. For the nine months ended September 30, 2014 and 2013, the Company’s consolidated quarterly effective income tax rate was 2.5% and -0.2%. The variations between the consolidated quarterly effective income tax rates and the U.S. federal statutory rate were primarily attributable to the effect of non-controlling interests and redeemable non-controlling interests, changes in a valuation allowance, the current amortization of the prepaid income taxes due to intercompany sales held within the consolidated group, tax credits, state income taxes and nondeductible expenses.

The Company sells solar energy systems to the investment funds. As the investment funds are consolidated by the Company, the gain on the sale of the assets has been eliminated in the condensed consolidated financial statements. These transactions are treated as intercompany sales and any tax expense incurred related to these sales is being deferred and amortized over the estimated useful life of the underlying systems which has been estimated to be 30 years. The deferral of the tax expense results in recording of a prepaid tax asset. As of September 30, 2014 and December 31, 2013, the Company recorded a long-term prepaid tax asset of $76.6 million and $30.7 million, net of amortization.

Uncertain Tax Positions

As of September 30, 2014 and December 31, 2013, the Company had no unrecognized tax benefits. There was no interest and penalties accrued for any uncertain tax positions as of September 30, 2014 and December 31, 2013. 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.

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

Vivint Services

In conjunction with the Company’s registration statement on Form S-1, which became effective on September 30, 2014, the Company negotiated and entered into a number of agreements with Vivint related to services and other support that Vivint provided and will provide to the Company following its initial public offering. These agreements included the following: Master Intercompany Framework Agreement, Non-competition Agreement, Transition Services Agreement, Product Development and Supply Agreement, Marketing and Customer Relations Agreement, Bill of Sale and Trademark License Agreement. As more fully described in the Prospectus, under certain of these agreements, the Company may be obligated to pay fees to, or may be entitled to receive fees from, Vivint. The Company did not enter into any transactions under these agreements during the three or nine months ended September 30, 2014.

In June 2013, the Company entered into a full service sublease agreement (the “Sublease Agreement”) with Vivint, which was applied retroactively to be in effect as of January 1, 2013. Under the Sublease Agreement, Vivint provided various administrative services, such as management, human resources, information technology, facilities and use of corporate office space to the Company. The Company pays Vivint a monthly services fee and rent based on headcount and square footage used. In 2011, and amended June 2013, the Company entered into a trademark / service mark license agreement (“Trademark Agreement”) with Vivint, pursuant to which the Company paid Vivint a monthly fee in exchange for rights to use certain trademarks, based on kilowatt hours produced by the solar energy systems each month. In June 2013, the Trademark Agreement was amended and restated to grant the Company a royalty-free, non-exclusive license to use certain Vivint marks, subject to certain quality control requirements and was applied retroactively to be in effect as of January 1, 2013.

The Company incurred fees under these agreements of $2.4 million and $0.8 million for the three months ended September 30, 2014 and 2013 reflecting the amount of services provided by Vivint on behalf of the Company. The Company incurred fees under these agreements of $6.6 million and $1.9 million for the nine months ended September 30, 2014 and 2013.

Payables to Vivint recorded in accounts payable—related party were de minimis and $3.1 million as of September 30, 2014 and December 31, 2013. These payables include amounts due to Vivint related to the services agreements and additional costs allocated, as well as other miscellaneous intercompany payables including freight, healthcare cost reimbursements and ancillary purchases.

313 Incentive Units Plan

Incentive units from 313 have been granted to certain board members of the Company. Such board members are also employees of Vivint. As a result, the related compensation expense has been allocated between the two companies based on the net equity of the respective companies at the Acquisition. The Company recorded expense of $0.1 million and $0.2 million and a corresponding noncash capital contribution from 313 during the three and nine months ended September 30, 2014. Expenses incurred relating to these 313 grants were de minimis and $0.1 million during the three and nine months ended September 30, 2013. The incentive units are subject to time-based and performance-based vesting conditions, with one-third subject to ratable time-based vesting over a five year period and two-thirds subject to the achievement of certain investment return thresholds by the sponsor and its affiliates. 313 has determined that it is not probable that the performance conditions will be achieved, and as such, all allocated stock compensation expense is related to the time-based vesting conditions during the three and nine months ended September 30, 2014 and 2013. The fair value of stock-based awards is measured at the grant date and is recognized as expense over the board members’ requisite service period.

Advisory Agreements

In May 2014, the Company entered into an advisory agreement with Blackstone Advisory Partners L.P., an affiliate of the Sponsor (“BAP”), under which BAP will provide financial advisory and placement services related to the Company’s financing of residential solar energy systems. Under the agreement, the Company is required under certain circumstances to pay a placement fee to BAP ranging from 0.75% to 1.5% of the transaction capital, depending on the identity of the investor and whether the financing relates to residential or commercial projects. This agreement replaced the 2013 advisory agreement described below.

Effective May 2013, the Company entered into an advisory agreement with BAP that provided financial advisory and placement services related to the Company’s financing of residential solar energy systems. Under the agreement, BAP was paid a placement fee ranging from 0% to 2% of the transaction capital, depending on the identity of the investor and how contact with the investor is established. The Company incurred fees under these agreements of zero and $0.8 million for the three months ended September 30, 2014 and 2013. The Company incurred fees under these agreements of $2.2 million and $0.8 million for the nine months ended September 30, 2014 and 2013. The amounts were recorded in general and administrative expense in the Company’s condensed consolidated statements of operations.

Advances Receivable—Related Party

Amounts due from direct-sales personnel were $2.0 million and $0.7 million as of September 30, 2014 and December 31, 2013. The Company provided a reserve of $1.2 million and $0.4 million as of September 30, 2014 and December 31, 2013 related to advances to direct-sales personnel who have terminated their employment agreement with the Company.

Transactions with 313 and Directors

In August and September 2014, the Company issued and sold shares of common stock to 313 and two of its directors as discussed in Note 11—Redeemable Non-controlling Interests and Equity. In April 2013, the Company received a $1.4 million capital contribution from 313. No other cash contributions were received during the nine months ended September 30, 2014 and 2013.

Investment Funds

Fund investors for Funds D, E and H are indirectly managed by the Sponsor and accordingly are considered related parties. See Note 10—Investment Funds. In July 2014, the Company 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 Funds J and K. No services have been performed by Vivint under this agreement.

Capital Leases

The Company leases fleet vehicles which are accounted for as capital leases and are included in property, net.

Non-Cancellable Operating Leases

In May 2014, the Company entered into non-cancellable leases in anticipation of relocating its corporate office space to Lehi, Utah (the “Prior Leases”). As noted below under “Build-to-Suit Lease Arrangements,” the Prior Leases were determined to achieve sale-leaseback accounting upon construction completion in September 2014 and are now classified as operating leases.  Pursuant to a termination agreement and new leases (the “New Leases”), the Company will terminate the Prior Leases upon construction completion of office space in an adjacent building in Lehi, Utah. Under the Prior Leases, the Company will make lease payments of approximately $0.2 million in 2014, and $1.1 million in 2015 – the end of the non-cancellable lease term for the Prior Leases as a result of the termination agreement.

In July 2014, the Company entered into non-cancellable operating leases in anticipation of moving certain of its operations to Orem, Utah. Under these agreements, the Company will make lease payments of approximately $0.4 million for the remainder of 2014 and $1.0 million to $1.5 million per year from 2015 to 2017.

The Company entered into lease agreements for warehouses and related equipment from 2011 through 2013, located in states in which the Company conducts operations. As part of the acquisition of Solmetric in January 2014, the Company added an additional lease agreement for Solmetric office space. The equipment lease agreements, the longest of which is 12-months, include basic renewal options for an additional set period, continued renting by the month, or return of the unit.

For all non-cancellable lease arrangements, there are no bargain renewal options, penalties for failure to renew, or any guarantee by the Company of the lessor’s debt or a loan from the Company to the lessor related to the leased property. These leases have been classified and accounted for as non-cancellable operating leases. Aggregate operating lease expense was $1.2 million and $0.3 million for the three months ended September 30, 2014 and 2013. Aggregate operating lease expense was $2.6 million and $0.8 million for the nine months ended September 30, 2014 and 2013.

Build-to-Suit Lease Arrangements

In September 2014, the Company entered into a non-cancellable lease with an affiliate of its landlord of the Prior Leases whereby the Company will move into another building being constructed by the affiliate in the same general location. It is anticipated that this new building will be completed during the first quarter of 2016. At the time the new building is completed, the Prior Leases will be cancelled. The terms of the New Leases are similar to those of the Prior Leases, with the exception that the Company will be leasing additional space. Under the New Leases, the Company will make lease payments of approximately $3.1 million to $3.6 million per year from 2016 to 2020. The Company will be deemed the owner of the building for accounting purposes during the construction period due to the terms of the New Leases.

Because of its involvement in certain aspects of the construction related to the Prior Leases, the Company was previously deemed the owner of the building for accounting purposes during the construction period. Accordingly, the Company had recorded assets of $18.6 million, included in property, net, and a corresponding build-to-suit lease liability as of June 30, 2014 related to the Prior Leases. Upon completion of construction in September 2014, the Company determined the transaction qualified for sale-leaseback accounting and therefore the $18.6 million in assets and liabilities related to the Prior Leases were de-recognized in September 2014, with no gain or loss recognized.

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. The Company has not recorded a liability related to these indemnification provisions and the indemnification arrangements have not had any significant impact to the Company’s condensed consolidated financial statements to date.

Legal Proceedings

In December 2013, one of the Company’s former sales representatives, on behalf of himself and a purported class, filed a complaint for unspecified damages, injunctive relief and restitution in the Superior Court of the State of California in and for the County of San Diego against Vivint Solar Developer, LLC, one of the Company’s subsidiaries, and unnamed John Doe defendants. This action alleges certain violations of the California Labor Code and the California Business and Professions Code based on, among other things, alleged improper classification of sales representatives and sales managers, failure to pay overtime compensation, failure to provide meal periods, failure to provide accurate itemized wage statements, failure to pay wages on termination and failure to reimburse expenses. The complaint also seeks penalties of an unspecified amount associated with the alleged violations, interest on all economic damages and reasonable attorney’s fees and costs. In addition, the complaint requests an injunction, which would enjoin the Company from similar violations of California’s Labor Code and Business and Professions Code, and restitution of costs to the plaintiff and purported class members under California’s unfair competition law. In January 2014, the Company filed an answer denying the allegations in the complaint and asserting various affirmative defenses. The parties are currently engaged in limited discovery and have agreed to participate in mediation. The Company has recorded a $0.4 million reserve related to this proceeding in its condensed consolidated financial statements.

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. The Company believes that it has strong defenses to the claims asserted in this matter. Although we cannot predict with certainty the ultimate resolution of this suit, we do not believe it will have a material adverse effect on our business, results of operations, cash flows or financial condition.

In May 2014, Vivint made the Company aware that the U.S. Attorney’s office for the State of Utah is engaged in an investigation that Vivint believes relates to certain political contributions made by some of Vivint’s executive officers that are directors of the Company and some of Vivint’s employees. The Company has no reason to believe that it, the executive officers or employees are targets of such investigation.

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 condensed 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.

The Company computes basic earnings (loss) per share by dividing net earnings or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could be exercised or converted into common shares, and is computed by dividing net earnings or loss 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 and nine months ended September 30, 2014 and 2013 (in thousands, except share and per share amounts):  

For the three and nine months ended September 30, 2014, the Company incurred net losses attributable to common stockholders. As such, the potentially dilutive shares were anti-dilutive and were not considered in weighted average number of common shares outstanding for those periods.

Initial Public Offering

On October 6, 2014, the Company closed its initial public offering in which 20,600,000 shares of its common stock were sold at a public offering price of $16.00 per share, resulting in net proceeds of $300.8 million, after deducting underwriting discounts and commissions and $8.6 million in offering expenses payable by the Company. The offering costs were recorded in other non-current assets, net in the Company’s consolidated balance sheet as of September 30, 2014.

Repayment of Revolving Lines of Credit—Related Party

On October 9, 2014, the Company repaid $58.8 million in aggregate borrowings owed to Vivint under the 2013 Loan Agreement and the 2012 Loan Agreement, which was comprised of the September 30, 2014 balance of $58.7 million plus accrued interest for the first nine days of October. The loan agreements were terminated upon repayment.

Investment Fund

In October 2014, a wholly owned subsidiary of the Company entered into a solar investment fund arrangement with a fund investor. The total commitment under the solar investment fund arrangement is $5.0 million. The Company has not yet completed its assessment of whether the fund arrangement is a VIE.

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 (the “SEC”) 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 prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on October 1, 2014 (the “Prospectus”). The results of the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2014 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. For all periods presented, the Company has determined that it is the primary beneficiary in all of its operational VIEs. 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.

The condensed consolidated financial statements reflect all of the costs of doing business, including the allocation of expenses incurred by Vivint on behalf of the Company. For additional information, see Note 14—Related Party Transactions. These expenses were allocated to the Company on a basis that was considered to reasonably reflect the utilization of the services provided to, or the benefit obtained by, the Company. The allocations may not, however, reflect the expense the Company would have incurred as an independent company for the periods presented, and may not be indicative of the Company’s future results of operations and financial position.

Use of Estimates

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the 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, revenue recognition, the useful lives of solar energy systems, the valuation and recoverability of intangible assets and goodwill acquired, useful lives of intangible assets, recoverability of long-lived assets, the recognition and measurement of loss contingencies, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, and the valuation of 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

As the Company has no other comprehensive income or loss, comprehensive loss is the same as net loss for all periods presented.

During the three months ended September 30, 2014, there have been no changes to the Company’s significant accounting policies as described in the Prospectus.

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):

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

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

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

Intangible assets consisted of the following (in thousands):

Accrued compensation consisted of the following (in thousands):

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

Debt consisted of the following (in thousands):

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):

The Company had shares of common stock reserved for issuance as follows: