VIVINT SOLAR, INC., 10-Q filed on 11/8/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2016
Nov. 1, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q3 
 
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
 
110,121,252 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 113,037 
$ 92,213 
Accounts receivable, net
12,080 
3,636 
Inventories
6,522 
631 
Prepaid expenses and other current assets
19,422 
17,078 
Total current assets
151,061 
113,558 
Restricted cash and cash equivalents
23,469 
15,035 
Solar energy systems, net
1,389,946 
1,102,157 
Property and equipment, net
26,176 
48,168 
Intangible assets, net
1,559 
2,031 
Goodwill
 
36,601 
Prepaid tax asset, net
399,809 
277,496 
Other non-current assets, net
15,823 
14,024 
TOTAL ASSETS
2,007,843 1
1,609,070 1
Current liabilities:
 
 
Accounts payable
48,775 
49,986 
Accounts payable—related party
425 
1,905 
Distributions payable to non-controlling interests and redeemable non-controlling interests
16,439 
11,347 
Accrued compensation
24,490 
13,758 
Current portion of deferred revenue
14,754 
4,968 
Current portion of capital lease obligation
5,451 
5,489 
Accrued and other current liabilities
27,378 
29,017 
Total current liabilities
137,712 
116,470 
Capital lease obligation, net of current portion
6,756 
10,055 
Long-term debt
675,978 
415,850 
Deferred tax liability, net
341,231 
216,033 
Deferred revenue, net of current portion
36,914 
43,304 
Other non-current liabilities
9,824 
28,565 
Total liabilities
1,208,415 1
830,277 1
Commitments and contingencies (Note 17)
   
   
Redeemable non-controlling interests
137,931 
169,541 
Stockholders' equity:
 
 
Common stock, $0.01 par value—1,000,000 authorized, 109,868 shares issued and outstanding as of September 30, 2016; 1,000,000 authorized, 106,576 shares issued and outstanding as of December 31, 2015
1,099 
1,066 
Additional paid-in capital
538,123 
530,646 
Accumulated other comprehensive income
429 
 
Accumulated deficit
(14,921)
(12,769)
Total stockholders' equity
524,730 
518,943 
Non-controlling interests
136,767 
90,309 
Total equity
661,497 
609,252 
TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
$ 2,007,843 
$ 1,609,070 
[1] The Company’s assets as of September 30, 2016 and December 31, 2015 include $1,277.4 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 $1,244.9 million and $990.6 million as of September 30, 2016 and December 31, 2015; cash and cash equivalents of $22.1 million and $12.0 million as of September 30, 2016 and December 31, 2015; accounts receivable, net, of $7.8 million and $3.1 million as of September 30, 2016 and December 31, 2015; other non-current assets, net of $1.5 million and a de minimis amount as of September 30, 2016 and December 31, 2015; and prepaid expenses and other current assets of $1.1 million and $0.1 million as of September 30, 2016 and December 31, 2015. The Company’s liabilities as of September 30, 2016 and December 31, 2015 included $69.5 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 $16.4 million and $11.3 million as of September 30, 2016 and December 31, 2015; deferred revenue of $44.7 million and $47.9 million as of September 30, 2016 and December 31, 2015; accrued and other current liabilities of $6.7 million and $3.9 million as of September 30, 2016 and December 31, 2015; and other non-current liabilities of $1.7 million and $3.3 million as of September 30, 2016 and December 31, 2015. For further information see Note 12—Investment Funds.
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 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
109,868,000 
106,576,000 
Common stock, shares outstanding
109,868,000 
106,576,000 
Total assets
$ 2,007,843,000 1
$ 1,609,070,000 1
Solar energy systems, net
1,389,946,000 
1,102,157,000 
Cash and cash equivalents
113,037,000 
92,213,000 
Accounts receivable, net
12,080,000 
3,636,000 
Other non-current assets, net
15,823,000 
14,024,000 
Prepaid expenses and other current assets
19,422,000 
17,078,000 
Total liabilities
1,208,415,000 1
830,277,000 1
Distributions payable to non-controlling interests and redeemable non-controlling interests
16,439,000 
11,347,000 
Accrued and other current liabilities
27,378,000 
29,017,000 
Other non-current liabilities
9,824,000 
28,565,000 
Variable Interest Entities
 
 
Total assets
1,277,383,000 
1,005,825,000 
Solar energy systems, net
1,244,876,000 
990,609,000 
Cash and cash equivalents
22,149,000 
12,014,000 
Accounts receivable, net
7,781,000 
3,063,000 
Other non-current assets, net
1,459,000 
18,000 
Prepaid expenses and other current assets
1,118,000 
121,000 
Total liabilities
69,489,000 
66,417,000 
Distributions payable to non-controlling interests and redeemable non-controlling interests
16,439,000 
11,347,000 
Deferred revenue
44,700,000 
47,900,000 
Accrued and other current liabilities
6,690,000 
3,869,000 
Other non-current liabilities
$ 1,710,000 
$ 3,283,000 
[1] The Company’s assets as of September 30, 2016 and December 31, 2015 include $1,277.4 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 $1,244.9 million and $990.6 million as of September 30, 2016 and December 31, 2015; cash and cash equivalents of $22.1 million and $12.0 million as of September 30, 2016 and December 31, 2015; accounts receivable, net, of $7.8 million and $3.1 million as of September 30, 2016 and December 31, 2015; other non-current assets, net of $1.5 million and a de minimis amount as of September 30, 2016 and December 31, 2015; and prepaid expenses and other current assets of $1.1 million and $0.1 million as of September 30, 2016 and December 31, 2015. The Company’s liabilities as of September 30, 2016 and December 31, 2015 included $69.5 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 $16.4 million and $11.3 million as of September 30, 2016 and December 31, 2015; deferred revenue of $44.7 million and $47.9 million as of September 30, 2016 and December 31, 2015; accrued and other current liabilities of $6.7 million and $3.9 million as of September 30, 2016 and December 31, 2015; and other non-current liabilities of $1.7 million and $3.3 million as of September 30, 2016 and December 31, 2015. For further information see Note 12—Investment Funds.
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Revenue:
 
 
 
 
Operating leases and incentives
$ 33,394 
$ 21,781 
$ 80,033 
$ 45,662 
Solar energy system and product sales
7,868 
693 
13,363 
2,492 
Total revenue
41,262 
22,474 
93,396 
48,154 
Operating expenses:
 
 
 
 
Cost of revenue—operating leases and incentives
39,268 
37,624 
115,566 
94,799 
Cost of revenue—solar energy system and product sales
6,468 
470 
10,606 
1,384 
Sales and marketing
8,617 
12,051 
32,078 
37,181 
Research and development
842 
1,047 
2,218 
2,549 
General and administrative
19,022 
21,954 
60,006 
71,948 
Amortization of intangible assets
342 
3,711 
762 
11,195 
Impairment of goodwill and intangible assets
 
 
36,601 
4,506 
Total operating expenses
74,559 
76,857 
257,837 
223,562 
Loss from operations
(33,297)
(54,383)
(164,441)
(175,408)
Interest expense
9,361 
3,351 
22,539 
8,208 
Other (income) expense
(434)
26 
(95)
399 
Loss before income taxes
(42,224)
(57,760)
(186,885)
(184,015)
Income tax (benefit) expense
(2,959)
(7,448)
10,245 
15,977 
Net loss
(39,265)
(50,312)
(197,130)
(199,992)
Net loss attributable to non-controlling interests and redeemable non-controlling interests
(55,961)
(50,780)
(194,978)
(226,262)
Net income available (loss attributable) to common stockholders
$ 16,696 
$ 468 
$ (2,152)
$ 26,270 
Net income available (loss attributable) per share to common stockholders:
 
 
 
 
Basic
$ 0.15 
$ 0.00 
$ (0.02)
$ 0.25 
Diluted
$ 0.15 
$ 0.00 
$ (0.02)
$ 0.24 
Weighted-average shares used in computing net income available (loss attributable) per share to common stockholders:
 
 
 
 
Basic
108,692 
106,492 
107,516 
105,932 
Diluted
113,344 
110,223 
107,516 
109,694 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net income available (loss attributable) to common stockholders
$ 16,696 
$ 468 
$ (2,152)
$ 26,270 
Other comprehensive income:
 
 
 
 
Unrealized gain on cash flow hedging instruments (net of tax effect of $286, $0, $286, $0)
429 
 
429 
 
Comprehensive income (loss)
$ 17,125 
$ 468 
$ (1,723)
$ 26,270 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Unrealized gain on cash flow hedging instruments, tax
$ 286 
$ 0 
$ 286 
$ 0 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net loss
$ (197,130)
$ (199,992)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
32,376 
16,771 
Amortization of intangible assets
762 
11,195 
Impairment of goodwill and intangible assets
36,601 
4,506 
Deferred income taxes
124,912 
77,480 
Stock-based compensation
6,145 
23,206 
Loss on solar energy systems and property and equipment
4,576 
1,169 
Non-cash interest and other expense
4,963 
2,557 
Gain on ineffective portion of cash flow hedge
(258)
 
Reduction in lease pass-through financing obligation
(3,279)
 
Excess tax effects from stock-based compensation
(1,280)
 
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(8,444)
(3,627)
Inventories
(5,891)
302 
Prepaid expenses and other current assets
98 
1,498 
Prepaid tax asset, net
(122,313)
(135,951)
Other non-current assets, net
(4,255)
(990)
Accounts payable
664 
6,570 
Accounts payable—related party
(1,480)
(588)
Accrued compensation
8,334 
3,713 
Deferred revenue
3,396 
25,761 
Accrued and other liabilities
(2,377)
21,785 
Net cash used in operating activities
(123,880)
(144,635)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Payments for the cost of solar energy systems
(318,273)
(383,674)
Payments for property and equipment, net
(2,004)
(5,282)
Change in restricted cash and cash equivalents
(8,434)
(6,656)
Purchase of intangible assets
(291)
(1,675)
Net cash used in investing activities
(329,002)
(397,287)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Proceeds from investment by non-controlling interests and redeemable non-controlling interests
237,148 
232,071 
Distributions paid to non-controlling interests and redeemable non-controlling interests
(22,230)
(17,146)
Proceeds from long-term debt
500,257 
148,000 
Payments on long-term debt
(224,400)
 
Payments for debt issuance costs
(16,774)
(3,078)
Proceeds from lease pass-through financing obligation
1,417 
4,005 
Principal payments on capital lease obligations
(4,357)
(3,600)
Proceeds from issuance of common stock
2,645 
648 
Excess tax effects from stock-based compensation
 
1,717 
Payments for deferred offering costs
 
(589)
Net cash provided by financing activities
473,706 
362,028 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
20,824 
(179,894)
CASH AND CASH EQUIVALENTS—Beginning of period
92,213 
261,649 
CASH AND CASH EQUIVALENTS—End of period
113,037 
81,755 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Costs of lessor-financed tenant improvements
7,850 
 
Accrued distributions to non-controlling interests and redeemable non-controlling interests
5,092 
1,536 
Property acquired under build-to-suit agreements
2,896 
12,250 
Sale-leaseback of property under build-to-suit agreements
(28,456)
 
Vehicles acquired under capital leases
1,868 
8,882 
Change in fair value of interest rate swap
973 
 
Costs of solar energy systems included in changes in accounts payable, accrued compensation and other accrued liabilities
503 
28,619 
Solar energy system sales
 
 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Receivable for tax credit recorded as a reduction to solar energy system costs
$ 1,364 
$ 914 
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 also offers customers the option to purchase solar energy systems. The Company enters into 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 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 against SunEdison alleging that SunEdison willfully breached its obligations under the Merger Agreement and breached its implied covenant of good faith and fair dealing. SunEdison filed for Chapter 11 bankruptcy in April 2016. On September 13, 2016, the bankruptcy court denied the Company’s motion for relief from the automatic stay, requiring that the Company’s claim for breach of the Merger Agreement be brought in the bankruptcy proceeding. See Note 17—Commitments and Contingencies.

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 nine months ended September 30, 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 12—Investment Funds.

 


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 condensed 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 analysis 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 Income (Loss)

Prior to the three months ended September 30, 2016, the Company had no comprehensive income or loss. For the three months ended September 30, 2016, other comprehensive income (loss) includes an unrealized gain on a derivative financial instrument designated as a cash flow hedge. See “—Derivative Financial Instruments” for accounting policies related to the Company’s derivative financial instruments.

Derivative Financial Instruments

The Company entered into an interest rate swap in August 2016 in order to reduce interest rate risk as required by the terms of one of the Company’s debt agreements. See Note 10—Debt Obligations. The interest rate swap is designated as a cash flow hedge. Changes in fair value for the effective portion of this cash flow hedge are recorded in other comprehensive income and will subsequently be reclassified to interest expense over the life of the related debt facilities as interest payments are made. Changes in fair value for the ineffective portion of the cash flow hedge are recognized in other (income) expense. See Note 11—Derivative Financial Instruments.

Debt Issuance Costs

During the nine months ended September 30, 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 sheets. In 2016, the Company entered into term loan facilities that are presented net of debt issuance costs.

Intangible Assets – Internal-Use Software

During the nine months ended September 30, 2016, the Company adopted ASU 2015-05, which requires that if a cloud computing arrangement includes a software license, the payment of fees are accounted for in the same manner as the acquisition of other software licenses. If there is no software license, the fees are 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.

Revenue Recognition for Solar Energy System Sales

The revenue from solar energy system sales is recognized upon the solar energy system passing an inspection by the responsible governmental department after completion of system installation and interconnection to the power grid, assuming all other revenue recognition criteria are met.

In connection with a sale, the Company is obligated to assist with processing and submitting customer claims on the manufacturer warranties, provide routine system monitoring services on sold systems and notify the customer of any problems. While the value and nature of these services is not significant, the Company considers these services to have standalone value to the customer. Therefore, the Company allocates a portion of the contract consideration to these administrative and maintenance services based on the relative selling price method and the Company recognizes the deferred revenue over the contractual service term. As of September 30, 2016, the Company’s obligations to customers subsequent to the sale of solar energy systems were approximately $0.2 million. No obligations were recorded as of December 31, 2015 as sales of solar energy systems were de minimis.

Other Changes

During the nine months ended September 30, 2016, the Company consolidated its reporting segments as discussed in Note 19—Segment Information.  

Recent Accounting Pronouncements

In October 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-17, Consolidation (Topic 810): Interests held through related parties that are under common control. This update does not change the characteristics of a primary beneficiary in current account guidance, but requires an entity to consider additional factors when determining if it is the primary beneficiary of a VIE that is under common control with related parties. This update is effective for annual periods beginning after December 15, 2016 for public business entities. The amendments in this updates should be applied using a modified retrospective approach. The Company is evaluating this update but currently expects it will not have a material impact on its condensed consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Current accounting guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This update will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective for annual periods beginning after December 15, 2017 for public business entities and early adoption is permitted. The amendments in this update should be applied using a modified retrospective approach. The Company is evaluating this update but currently expects it will have a material impact on its condensed consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update clarifies how certain cash flows should be classified with the objective of reducing the existing diversity in practice. This update is effective for annual periods beginning after December 15, 2017 for public business entities and early adoption is permitted. The amendments in this update should be applied using a retrospective transition method and must all be applied in the same period. The Company is evaluating the impact of this update on its condensed consolidated financial statements and related disclosures.

From March 2016 through May 2016, the FASB issued ASU 2016-12, ASU 2016-11, ASU 2016-10 and ASU 2016-08. These updates all clarify aspects of the guidance in ASU 2014-09, Revenue from Contracts with Customers, which represents comprehensive reform to revenue recognition principles related to customer contracts. Additionally, per ASU 2015-14, the effective date of these updates for the Company was deferred to January 1, 2018, with early adoption available on January 1, 2017. The Company currently plans to adopt the new standard in 2018 using the retrospective transition method. The Company is still evaluating the impact this guidance will have on the Company’s condensed consolidated financial statements and related disclosures.

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. The Company expects to apply the update upon its effectiveness in the first quarter of 2017 and expects the update to have an impact to its equity balance in the condensed consolidated balance sheet and all expense line items where stock compensation is recorded on the condensed consolidated statement of operations in the first quarter of 2017.

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 condensed consolidated financial statements and related disclosures.


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 does not expect the update to have a significant impact on its condensed consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. This ASU changes the measurement principle for inventories valued under the first-in, first-out ("FIFO") or weighted-average methods from the lower of cost or market to the lower of cost or net realizable value. Net realizable value is defined by the FASB as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU does not change the measurement principles for inventories valued under the last-in, first-out method. The update is effective in fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company does not expect this update to have a significant impact on its condensed 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):

 

 

September 30, 2016

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

$

 

 

$

973

 

 

$

 

 

$

973

 

Time deposits

 

 

 

 

100

 

 

 

 

 

 

100

 

Total financial assets

$

 

 

$

1,073

 

 

$

 

 

$

1,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 interest rate swap (Level II) is valued using a discounted cash flow model which incorporates an assessment of the risk of non-performance by the interest rate swap counterparty and the Company. The valuation model uses various observable inputs including contractual terms, interest rate curves, credit spreads and measures of volatility.

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 $691.7 million and $415.9 million as of September 30, 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.

Inventories
Inventories

4.Inventories

Inventories consisted of the following (in thousands):

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Solar energy systems held for sale

$

5,780

 

 

$

121

 

Photovoltaic installation devices and software products

 

742

 

 

 

510

 

Total inventories

$

6,522

 

 

$

631

 

Solar energy systems held for sale are solar energy systems under construction that have yet to be interconnected to the power grid and that will be sold to customers. Solar energy systems held for sale are stated at the lower of cost, on a FIFO basis, or market. Photovoltaic installation devices and software products are stated at the lower of cost, on an average cost basis, or market.

Solar Energy Systems
Solar Energy Systems

5.

Solar Energy Systems

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

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

System equipment costs

$

1,178,684

 

 

$

893,088

 

Initial direct costs related to solar energy systems

 

242,220

 

 

 

171,081

 

 

 

1,420,904

 

 

 

1,064,169

 

Less: Accumulated depreciation and amortization

 

(61,542

)

 

 

(32,505

)

 

 

1,359,362

 

 

 

1,031,664

 

Solar energy system inventory

 

30,584

 

 

 

70,493

 

Solar energy systems, net

$

1,389,946

 

 

$

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 $11.1 million and $6.3 million for the three months ended September 30, 2016 and 2015. Depreciation and amortization expense related to solar energy systems of $29.1 million and $15.0 million was recorded for the nine months ended September 30, 2016 and 2015. 

Property and Equipment
Property and Equipment

6.

Property and Equipment

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

 

 

 

Estimated

 

September 30,

 

 

December 31,

 

 

 

Useful Lives

 

2016

 

 

2015

 

Vehicles acquired under capital leases

 

3 years

 

$

21,558

 

 

$

24,149

 

Leasehold improvements

 

1-12 years

 

 

15,060

 

 

 

4,116

 

Furniture and computer and other equipment

 

3 years

 

 

6,130

 

 

 

6,524

 

 

 

 

 

 

42,748

 

 

 

34,789

 

Less: Accumulated depreciation and amortization

 

 

 

 

(16,572

)

 

 

(12,181

)

 

 

 

 

 

26,176

 

 

 

22,608

 

Build-to-suit lease asset under construction

 

 

 

 

 

 

 

25,560

 

Property and equipment, net

 

 

 

$

26,176

 

 

$

48,168

 

 

The Company recorded depreciation and amortization related to property and equipment of $3.0 million and $2.2 million for the three months ended September 30, 2016 and 2015. Depreciation and amortization expense related to property and equipment of $8.2 million and $5.6 million was recorded for the nine months ended September 30, 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 $1.5 million and $1.4 million was capitalized in solar energy systems, net for the three months ended September 30, 2016 and 2015. Depreciation on vehicles under capital leases of $4.8 million and $3.8 million was capitalized in solar energy systems, net for the nine months ended September 30, 2016 and 2015.

Because of its involvement in certain aspects of the construction of a new headquarters building in Lehi, UT, the Company was deemed the owner of the building for accounting purposes during the construction period. Accordingly, the Company recorded a build-to-suit lease asset and corresponding liabilities during the construction period. In May 2016, construction on the headquarters building was completed. The building qualified for sale-leaseback treatment as the Company determined the lease to be a normal leaseback, payment terms indicated the landlord has continuing investment in the property and the payment terms transferred the risks and rewards of ownership to the landlord. As such, the Company has removed the build-to-suit lease asset and liabilities from its condensed consolidated balance sheet as of September 30, 2016. For additional information regarding the related build-to-suit liabilities and the resulting ongoing lease, see Note 17—Commitments and Contingencies.

Intangible Assets and Goodwill
Intangible Assets and Goodwill

7.

Intangible Assets and Goodwill

Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Cost:

 

 

 

 

 

 

 

Internal-use software

$

1,314

 

 

$

1,591

 

Developed technology

 

522

 

 

 

522

 

Trademarks/trade names

 

201

 

 

 

201

 

Customer relationships

 

164

 

 

 

164

 

Total carrying value

 

2,201

 

 

 

2,478

 

Accumulated amortization:

 

 

 

 

 

 

 

Internal-use software

 

(325

)

 

 

(219

)

Developed technology

 

(175

)

 

 

(126

)

Trademarks/trade names

 

(54

)

 

 

(39

)

Customer relationships

 

(88

)

 

 

(63

)

Total accumulated amortization

 

(642

)

 

 

(447

)

Total intangible assets, net

$

1,559

 

 

$

2,031

 

 

The Company recorded amortization expense of $0.3 million and $3.7 million for the three months ended September 30, 2016 and 2015, which was included in amortization of intangible assets in the condensed consolidated statements of operations. The Company recorded amortization expense of $0.8 million and $11.2 million for the nine months ended September 30, 2016 and 2015. Internal-use software assets of $0.6 million reached the end of their useful lives during the nine months ended September 30, 2016 and were 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 nine months ended September 30, 2015. In the second quarter of 2016, the Company resumed external sales of the SunEye product.

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) Commercial and Industrial (“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 condensed 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. The Residential reporting unit is comprised of many differing consolidated entities and components that have been aggregated for operational and financial reporting purposes. The discount rate is applicable to the Residential reporting unit as a whole and is not intended for use for any individual asset, entity or component of the Company.

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 as a whole 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

8.

Accrued Compensation

Accrued compensation consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Accrued payroll

$

14,763

 

 

$

6,918

 

Accrued commissions

 

8,777

 

 

 

6,840

 

Accrued severance

 

950

 

 

 

 

Total accrued compensation

$

24,490

 

 

$

13,758

 

 

Accrued and Other Current Liabilities
Accrued and Other Current Liabilities

9.

Accrued and Other Current Liabilities

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

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Current portion of lease pass-through financing obligation

$

4,813

 

 

$

3,835

 

Accrued unused commitment fees and interest

 

3,212

 

 

 

1,014

 

Income tax payable

 

3,194

 

 

 

6,169

 

Accrued professional fees

 

3,149

 

 

 

7,918

 

Accrued litigation settlements

 

2,772

 

 

 

1,790

 

Accrued return of lease pass-through upfront lease payment

 

1,808

 

 

 

 

Sales and use tax payable

 

1,751

 

 

 

3,524

 

Deferred rent

 

1,414

 

 

 

1,064

 

Other accrued expenses

 

5,265

 

 

 

3,703

 

Total accrued and other current liabilities

$

27,378

 

 

$

29,017

 

 

Debt Obligations
Debt Obligations

10.Debt Obligations

Debt obligations consisted of the following as of September 30, 2016 (in thousands, except interest rates):

 

 

 

 

 

Unamortized

 

 

 

 

 

 

Unused

 

 

 

 

 

 

 

 

Principal

 

 

Debt Issuance

 

 

Net Carrying

 

 

Borrowing

 

 

 

 

 

 

 

 

Borrowings

 

 

Costs

 

 

Value

 

 

Capacity

 

 

Interest Rate

 

 

Maturity Date

Revolving lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregation credit facility

$

148,500

 

 

$

 

(1)

$

148,500

 

 

$

226,500

 

 

 

3.8

%

 

March 2018

Working capital credit facility(2)

 

142,600

 

 

 

 

(1)

 

142,600

 

 

 

 

 

 

3.8

 

 

March 2020

Term loan facility

 

300,000

 

 

 

(10,322

)

 

 

289,678

 

 

 

 

 

 

3.5

 

(3)

August 2021

Subordinated HoldCo credit facility

 

99,750

 

 

 

(5,239

)

 

 

94,511

 

 

 

100,000

 

 

 

8.6

 

 

March 2020

Credit agreement

 

857

 

 

 

(168

)

 

 

689

 

 

 

2,143

 

 

 

6.5

 

 

(4)

Total debt

$

691,707

 

 

$

(15,729

)

 

$

675,978

 

 

$

328,643

 

 

 

 

 

 

 

Debt obligations consisted of the following as of December 31, 2015 (in thousands, except interest rates):

 

 

 

 

 

Unamortized

 

 

 

 

 

 

Unused

 

 

 

 

 

 

 

 

Principal

 

 

Debt Issuance

 

 

Net Carrying

 

 

Borrowing

 

 

 

 

 

 

 

 

Borrowings

 

 

Costs

 

 

Value

 

 

Capacity

 

 

Interest Rate

 

 

Maturity Date

Aggregation credit facility

$

269,100

 

 

$

 

(1)

$

269,100

 

 

$

105,900

 

 

 

3.8

%

 

March 2018

Working capital credit facility

 

146,750

 

 

 

 

(1)

 

146,750

 

 

 

 

 

 

3.5

 

 

March 2020

Total debt

$

415,850

 

 

$

 

 

$

415,850

 

 

$

105,900

 

 

 

 

 

 

 

 

(1)

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

(2)

Facility is recourse debt, which refers to debt that is collateralized by the Company’s general assets. All of the Company’s other debt obligations are non-recourse, which refers to debt that is only collateralized by specified assets or subsidiaries of the Company.

(3)

The interest rate of this facility is partially hedged to an effective interest rate of 4.0% for $270.0 million of the principal borrowings. See Note 11—Derivative Financial Instruments.

(4)

Quarterly payments of principal and interest are payable over a seven year term. The seven year term begins after the final completion date of the underlying solar energy systems.

 


Term Loan Facility

In August 2016, the Company entered into a credit agreement (the “Term Loan Facility”) pursuant to which it may borrow up to $313.0 million aggregate principal amount of term borrowings and letters of credit from certain financial institutions for which Investec Bank PLC is acting as administrative agent. The borrower under the Term Loan Facility is Vivint Solar Financing II, LLC, a wholly owned indirect subsidiary of the Company. Proceeds of $300.0 million in term loan borrowings under the Term Loan Facility were used to: (1) repay $220.5 million of existing indebtedness under the Aggregation Facility to remove the portfolio of projects being used as collateral for the Term Loan Facility (the “Portfolio”); (2) distribute $63.6 million to the Company; (3) pay $10.6 million in transaction costs and fees in connection with the Term Loan Facility; and (4) fund $5.3 million in agreed reserve accounts. Additionally, letters of credit for up to $13.0 million were issued for a debt service reserve.

For the initial four years of the term of the Term Loan Facility, interest on borrowings accrues at an annual rate equal to the London Interbank Offered Rate (“LIBOR”) plus 3.00%. Thereafter interest accrues at an annual rate equal to LIBOR plus 3.25%. In the third quarter of 2016, the Company entered into an interest rate swap hedging arrangement such that 90% of the aggregate principal amount of the outstanding term loan is subject to a fixed interest rate. See Note 11—Derivative Financial Instruments. Certain principal payments are due on a quarterly basis, at the end of January, April, July and October of each year, subject to the occurrence of certain events, including failure to meet certain distribution conditions, proceeds received by the borrower or subsidiary guarantors in respect of casualties, and proceeds received for purchased systems. Principal and interest payable under the Term Loan Facility mature in August 2021 and optional prepayments, in whole or in part, are permitted under the Term Loan Facility, without premium or penalty apart from any customary LIBOR breakage provisions.

The Term Loan Facility includes customary events of default, conditions to borrowing and covenants, including negative covenants that restrict, subject to certain exceptions, the borrower’s and guarantors’ ability to incur indebtedness, incur liens, make fundamental changes to their respective businesses, make certain types of restricted payments and investments or enter into certain transactions with affiliates. A debt service reserve account was funded with the outstanding letters of credit under the Term Loan Facility. As such, the debt service reserve is not classified as restricted cash and cash equivalents on the condensed consolidated balance sheets. The borrower is required to maintain an average debt service coverage ratio of 1.55 to 1. As of September 30, 2016, the Company was in compliance with such covenants.

Prior to the maturity of the Term Loan Facility, a fund investor could exercise a put option in two of the Company’s investment funds and require the Company to purchase the fund investor’s interest in those investment funds. As such, the Company was required to establish a $2.9 million reserve at the inception of the Term Loan Facility in order to pay the fund investor if either of the put options is exercised prior to the maturity of the Term Loan Facility. In addition, a $2.4 million escrow account was established with respect to those systems in the Portfolio that had not been placed in service as of the closing date, with a single disbursement of this amount to occur once such systems have been placed in service, subject to compliance with the Portfolio concentration restrictions and limitations related to the Portfolio. These reserves are classified as restricted cash and cash equivalents on the condensed consolidated balance sheets.

The obligations of the borrower are secured by a pledge of the membership interests in the borrower, all of the borrower’s assets, and the assets of the borrower’s directly owned subsidiaries acting as managing members of the underlying investment funds. In addition, the Company guarantees certain obligations of the borrower under the Term Loan Facility.

Interest expense for the Term Loan Facility was approximately $2.2 million for the three and nine months ended September 30, 2016. No interest expense was incurred for the three and nine months ended September 30, 2015.

Subordinated HoldCo Facility

In March 2016, the Company entered into a financing agreement (the “Subordinated HoldCo Facility,” formerly known as the “Term Loan Facility”) 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 HPS Investment Partners, formerly known as Highbridge Principal Strategies, LLC. The borrower under the Subordinated HoldCo Facility is Vivint Solar Financing Holdings, LLC, one of the Company’s subsidiaries. The initial $75.0 million in borrowings are referred to as “Tranche A” borrowings. 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 March 2017. Such subsequent borrowings are referred to as “Tranche B” borrowings. The Company incurred $25.0 million in Tranche B borrowings in July 2016. As a result, the maturity date for all borrowings was extended to March 2020. The Company may not prepay any borrowings until March 2018 and any subsequent prepayments of principal are subject to a 3.0% fee. Borrowings under the Subordinated HoldCo Facility will be used for the construction and acquisition of solar energy systems.


Prior to the Tranche B borrowings being incurred, interest on principal borrowings under the Subordinated HoldCo Facility accrued at a floating rate of LIBOR plus 5.5%. Subsequent to the Tranche B borrowings being incurred, interest accrues at a floating rate of LIBOR plus 8.0%. The Subordinated HoldCo 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 Subordinated HoldCo 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. As of September 30, 2016, the Company was in compliance with such covenants. Each of the parties to the Subordinated HoldCo Facility has pledged assets not otherwise pledged under another existing debt facility as collateral to secure their obligations under the Subordinated HoldCo 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 Subordinated HoldCo Facility was approximately $2.6 million and $4.4 million for the three and nine months ended September 30, 2016. No interest expense was recorded for the three and nine months ended September 30, 2015. A $5.1 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 Subordinated HoldCo Facility.

Bank of America, N.A. Aggregation Credit Facility

In September 2014, the Company entered into an aggregation credit facility (as amended, the “Aggregation Facility”), 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) 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 Financing I Parent, LLC, 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, 2016, the Company was in compliance with such covenants. Previously, the Company was required to obtain an interest rate hedge by September 13, 2016. As of September 30, 2016, the Company is now required to obtain the interest rate hedge by January 16, 2017, and no interest rate hedge has been entered into for this facility.

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 $3.0 million and $2.6 million for the three months ended September 30, 2016 and 2015. Interest expense was approximately $11.2 million and $7.0 million for the nine months ended September 30, 2016 and 2015. As of September 30, 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 $1.9 million was recorded in other non-current assets, net in the condensed consolidated balance sheet. In addition, a $3.0 million interest reserve amount was deposited in an interest reserve account with the administrative agent and is included in restricted cash and cash equivalents. The interest reserve increases as borrowings increase under the Aggregation Facility.

Working Capital Credit Facility

In March 2015, the Company entered into a revolving credit agreement (the “Working Capital Facility”) pursuant to which the Company may borrow up to an aggregate principal amount of $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. In addition to the outstanding borrowings as of September 30, 2016, the Company had established letters of credit under the Working Capital Facility for up to $7.4 million related to insurance contracts.

The Company has pledged the interests in the assets of the Company and its subsidiaries, excluding the Company’s existing investment funds, their managing members, the Term Loan Facility, the Subordinated HoldCo Facility, the Aggregation Facility and Solmetric Corporation, 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 September 30, 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 $1.4 million and $0.7 million for the three months ended September 30, 2016 and 2015. Interest expense was approximately $4.4 million and $1.1 million for the nine months ended September 30, 2016 and 2015. As of September 30, 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 $1.4 million was recorded in other non-current assets, net in the condensed 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%.  The repayment term had not yet begun as of September 30, 2016. Interest expense under the Credit Agreement was de minimis for the three and nine months ended September 30, 2016. No interest expense was recorded for the three and nine months ended September 30, 2015.

Interest Expense and Amortization of Debt Issuance Costs

For the three months ended September 30, 2016 and 2015, total interest expense incurred under all debt obligations was approximately $9.2 million and $3.3 million, of which $1.8 million and $0.9 million was amortization of debt issuance costs. For the nine months ended September 30, 2016 and 2015, total interest expense incurred under all debt obligations was approximately $22.2 million and $8.1 million, of which $4.5 million and $2.6 million was amortization of debt issuance costs.

Derivative Financial Instruments
Derivative Financial Instruments

11.

Derivative Financial Instruments

Derivative financial instruments consisted of the following at fair value (in thousands):

 

 

September 30, 2016

 

 

 

 

 

 

Balance Sheet

 

 

Fair Value

 

 

Location

Asset derivatives designated as hedging instruments:

 

 

 

 

 

 

Interest rate swap

 

$

973

 

 

Other non-current assets

Total derivatives

 

$

973

 

 

 

The Company is exposed to interest rate risk relating to its outstanding debt facilities which have variable interest rates. In connection with closing the Term Loan Facility in August 2016, the Company entered into an interest rate swap with a notional amount of $270.0 million to offset changes in the variable interest rate for a portion of the Company’s LIBOR-indexed floating-rate loans. The notional amount of the interest rate swap decreases through July 31, 2028 to match the Company’s estimated quarterly principal payments on its loans through that date. The Company had no other derivative financial instruments prior to entering into this interest rate swap. The Company records derivatives in the condensed consolidated balance sheets at fair value.

The interest rate swap is designated as a cash flow hedge. The amount of accumulated other comprehensive income expected to be reclassified to interest expense within the next 12 months is approximately $0.9 million. The Company will discontinue the hedge accounting designation of this derivative if the payment schedule of the Term Loan Facility is accelerated and the derivative becomes less than highly effective.

The effect of derivative financial instruments on the condensed consolidated statements of comprehensive income and the condensed consolidated statements of operations, before tax effect, consisted of the following (in thousands):

 

 

Three and Nine Months Ended September 30,

 

 

 

 

 

2016

 

 

2015

 

 

Location of Gain

Gain recognized in OCI - effective portion:

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

715

 

 

$

 

 

 

Total

 

$

715

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain recognized in income - ineffective portion:

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

258

 

 

$

 

 

Other income

Total

 

$

258

 

 

$

 

 

 

 

Investment Funds
Investment Funds

12.Investment Funds

As of September 30, 2016, the Company had 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):

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

22,149

 

 

$

12,014

 

Accounts receivable, net

 

7,781

 

 

 

3,063

 

Prepaid expenses and other current assets

 

1,118

 

 

 

121

 

Total current assets

 

31,048

 

 

 

15,198

 

Solar energy systems, net

 

1,244,876

 

 

 

990,609

 

Other non-current assets, net

 

1,459

 

 

 

18

 

Total assets

$

1,277,383

 

 

$

1,005,825

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Distributions payable to non-controlling interests and redeemable

   non-controlling interests

$

16,439

 

 

$

11,347

 

Current portion of deferred revenue

 

8,145

 

 

 

4,824

 

Accrued and other current liabilities

 

6,690

 

 

 

3,869

 

Total current liabilities

 

31,274

 

 

 

20,040

 

Deferred revenue, net of current portion

 

36,505

 

 

 

43,094

 

Other non-current liabilities

 

1,710

 

 

 

3,283

 

Total liabilities

$

69,489

 

 

$

66,417

 

 

Residential Investment Funds

As of September 30, 2016, the Company had 17 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 September 30, 2016 and December 31, 2015, the cumulative total of contributions into the VIEs by all investors was $1,009.6 million and $773.0 million. Of these contributions, a cumulative total of $110.0 million was contributed by related parties in prior periods.

Lease Pass-Through Financing Obligation

In June 2015, a wholly owned subsidiary of the Company entered into a lease pass-through fund arrangement that became operational in July 2015. Under the agreement, the Company contributes solar energy systems and the investor contributes cash. The net carrying value of the related solar energy systems was $63.3 million and $64.7 million as of September 30, 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 fair value of the ITCs is estimated by multiplying the ITC rate of 30% by the fair value of the systems that are sold to the lease pass-through fund. 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 September 30, 2016 and December 31, 2015, the Company had recorded financing liabilities of $43.6 million and $47.3 million related to this fund arrangement, of which $37.1 million and $40.1 million was deferred revenue and $6.5 million and $7.2 million was the lease pass-through financing obligation recorded in other liabilities.

 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. The Company paid a fee of $1.0 million to terminate and release any and all claims related to its C&I investment fund during the nine months ended September 30, 2016. As of September 30, 2016 and December 31, 2015, the Company had accrued $8.9 million and $5.2 million in potential distributions to reimburse fund investors a portion of their upfront lease payments and 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.

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 September 30, 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

13.

Redeemable Non-Controlling Interests and Equity

Common Stock

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

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Shares available for grant under equity incentive plans

 

10,131

 

 

 

12,267

 

Restricted stock units issued and outstanding

 

7,791

 

 

 

930

 

Stock options issued and outstanding

 

6,198

 

 

 

9,277

 

Long-term incentive plan

 

2,706

 

 

 

3,382

 

Total

 

26,826

 

 

 

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

 

42,803

 

Distributions to redeemable non-controlling interests

 

(6,612

)

Net loss

 

(67,801

)

Balance as of September 30, 2016

$

137,931

 

 

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

 

6,145

 

 

 

 

 

 

6,145

 

Excess tax effects from stock-based compensation

 

(1,280

)

 

 

 

 

 

(1,280

)

Issuance of common stock

 

2,645

 

 

 

 

 

 

2,645

 

Contributions from non-controlling interests

 

 

 

 

194,345

 

 

 

194,345

 

Distributions to non-controlling interests

 

 

 

 

(20,710

)

 

 

(20,710

)

Change in comprehensive income

 

429

 

 

 

 

 

 

429

 

Net loss

 

(2,152

)

 

 

(127,177

)

 

 

(129,329

)

Balance as of September 30, 2016

$

524,730

 

 

$

136,767

 

 

$

661,497

 

 

Non-Controlling Interests and Redeemable Non-Controlling Interests

Six 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 five 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 ten 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 six 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 six 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 September 30, 2016 and December 31, 2015 were greater than or equal to 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

14.

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 September 30, 2016, a total of 10.1 million shares of common stock are available to grant 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 to grant under the 2014 Plan is subject to an annual increase on the first day of each year. In accordance with the annual increase, an additional 4.3 million shares became available to grant at the beginning of 2016 under the 2014 Plan.

As of September 30, 2016, there were 0.2 million time-based stock options, 6.0 million restricted stock units (“RSUs”), and 1.8 million performance share units (“PSUs”) outstanding under the 2014 Plan. The time-based options are subject to ratable time-based vesting over three to four years. The RSUs are subject to ratable time-based vesting over one to four years. The PSUs vest quarterly or annually over one to four years subject to individual participants’ achievement of respective quarterly or annual performance goals.

2013 Omnibus Incentive Plan; Non-plan Option Grant

The Company’s 2013 Omnibus Incentive Plan (the “Omnibus Plan”) 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.

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. Certain of the performance options were modified as described in the section captioned “Equity Award Modifications”. 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.

As of September 30, 2016, 1.1 million shares of common stock had been awarded to participants under the LTIP. As of September 30, 2016, 2.7 million shares remained outstanding, as 0.3 million shares represented the exercise price that were returned to the 2014 Plan.

Equity Award Modifications

Former CEO Resignation

On May 2, 2016, the Company accepted the resignation of its former CEO. Pursuant to a separation agreement, the Company accelerated the vesting of 0.2 million of the former CEO’s stock options. Further, all of the CEO’s vested stock options were modified such that they will remain exercisable until the third anniversary of his termination date. As a result of these modifications, the Company recorded incremental stock-based compensation expense of $0.7 million during the nine months ended September 30, 2016.

Interim CEO Equity Awards

On May 2, 2016, the Company appointed an interim CEO. In connection with his appointment, the interim CEO was awarded 1.0 million stock options pursuant to the 2014 Plan. The stock options vest on the first anniversary of his start date, or, if earlier, on the date on which a successor CEO is appointed. On May 11, 2016, the Company cancelled such stock options and granted the interim CEO 0.5 million RSUs which vest on the first anniversary of his start date, or, if earlier, on the date on which a successor CEO is appointed. This was accounted for as a modification; however, there was no incremental value arising from the modification.

Omnibus Plan Performance Options

In May 2016, the Company modified the unvested Omnibus Plan performance options (the “Tier II Options”). The modified Tier II Options vest annually over three years with the first vesting date occurring in May 2017. The original performance condition for the Tier II Options remains in effect and will trigger immediate vesting of the Tier II Options if it is met prior to the three year time-based vesting period. Due to the modification, the Company now considers the Tier II Options to be time-based options. Additionally, the Company will record incremental stock-based compensation expense of approximately $1.5 million over the three year time-based vesting period, subject to immediate acceleration if the performance condition is met prior to the three year time-based vesting period.

Stock Options

Stock Option Activity

Stock options are granted under the 2014 Plan and Omnibus Plan as described above. Stock option activity for the nine months ended September 30, 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

 

1,078

 

 

 

3.21

 

 

 

 

 

 

 

 

 

Exercised

 

(2,415

)

 

 

1.08

 

 

 

 

 

 

 

 

 

Cancelled

 

(1,742

)

 

 

2.69

 

 

 

 

 

 

 

 

 

Outstanding—September 30, 2016

 

6,198

 

 

$

1.41

 

 

 

6.5

 

 

$

11,922

 

Options vested and exercisable—September 30, 2016

 

1,996

 

 

$

1.51

 

 

 

6.5

 

 

$

3,766

 

Options vested and expected to vest—September 30, 2016

 

3,751

 

 

$

1.52

 

 

 

6.8

 

 

$

7,078

 

 

The weighted-average grant date fair value of time-based stock options granted during the nine months ended September 30, 2016 and 2015 was $2.23 and $9.39 per share. No performance-based stock options were granted during the nine months ended September 30, 2016 and 2015. The total intrinsic value of options exercised for the nine months ended September 30, 2016 and 2015 was $5.0 million and $7.4 million. 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 nine months ended September 30, 2016 and 2015 was $1.0 million and $14.1 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:

 

 

Nine Months Ended

 

 

September 30,

 

 

2016

 

 

2015

 

Expected term (in years)

 

5.5

 

 

 

6.2

 

Volatility

 

84.9

%

 

 

89.0

%

Risk-free interest rate

 

1.4

%

 

 

1.8

%

Dividend yield

 

0.0

%

 

 

0.0

%

 

Restricted Stock Units

RSUs are granted under the 2014 Plan and the LTIP as described above. RSU activity for the nine months ended September 30, 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

 

8,588

 

 

 

2.66

 

Vested

 

(877

)

 

 

6.83

 

Forfeited

 

(850

)

 

 

4.16

 

Outstanding at September 30, 2016

 

7,791

 

 

$

3.25

 

 

The total fair value of RSUs vested was $3.1 million and $8.7 million for the nine months ended September 30, 2016 and 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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,