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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.
|
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 six months ended June 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 11—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 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)
As the Company has no other comprehensive income or loss, comprehensive income (loss) is the same as net income available (loss attributable) to common stockholders for all periods presented.
Debt Issuance Costs
During the six months ended June 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 sheet. In 2016, the Company entered into term loan facilities that are presented net of debt issuance costs.
Intangible Assets – Internal-Use Software
During the six months ended June 30, 2016, the Company adopted ASU 2015-05, which requires that if a cloud computing arrangement includes a software license, the payment of fees should be accounted for in the same manner as the acquisition of other software licenses. If there is no software license, the fees should be accounted for as a service contract. The Company adopted this update prospectively, which did not have a significant impact on the Company’s condensed consolidated financial statements in the current period.
Other Changes
During the six months ended June 30, 2016, the Company consolidated its reporting segments as discussed in Note 18—Segment Information. There have been no other changes to the Company’s significant accounting policies as described in the Company’s annual report on Form 10-K for the year ended December 31, 2015.
Recent Accounting Pronouncements
In March 2016 through May 2016, the Financial Accounting Standards Board (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. The Company is evaluating the impact that these updates will have on its condensed consolidated financial statements. Additionally, ASU 2015-14 defers the effective date of ASU 2014-09 for the Company to January 1, 2018, with early adoption available on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating which transition method to use and does not expect the update to have a significant impact on its condensed consolidated financial statements and related disclosures based on its current business model.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture rates and classification on the statement of cash flows. This update is effective for annual periods beginning after December 15, 2016 for public business entities and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company 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 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 disclosures. The Company expects to apply the update upon its effectiveness in the first quarter of 2019.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This update is effective in fiscal years beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company 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. This update is not expected to have a significant impact on the condensed consolidated financial statements of the Company.
|
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):
|
June 30, 2016 |
|
|||||||||||||
|
Level I |
|
|
Level II |
|
|
Level III |
|
|
Total |
|
||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
$ |
— |
|
|
$ |
100 |
|
|
$ |
— |
|
|
$ |
100 |
|
Total financial assets |
$ |
— |
|
|
$ |
100 |
|
|
$ |
— |
|
|
$ |
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015 |
|
|||||||||||||
|
Level I |
|
|
Level II |
|
|
Level III |
|
|
Total |
|
||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
$ |
— |
|
|
$ |
1,900 |
|
|
$ |
— |
|
|
$ |
1,900 |
|
Total financial assets |
$ |
— |
|
|
$ |
1,900 |
|
|
$ |
— |
|
|
$ |
1,900 |
|
The carrying amounts of certain financial instruments of the Company, consisting of cash and cash equivalents excluding time deposits, accounts receivable, accounts payable, accounts payable—related party and distributions payable to redeemable non-controlling interests (all Level I) approximate fair value due to their relatively short maturities. Time deposits (Level II) approximate fair value due to their short-term nature (30 days) and, upon renewal, the interest rate is adjusted based on current market rates. The Company’s outstanding principal balance of long-term debt is carried at cost and was $556.4 million and $415.9 million as of June 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.
|
4. |
Inventories |
Inventories consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Solar energy systems held for sale |
$ |
3,399 |
|
|
$ |
121 |
|
Photovoltaic installation devices and software products |
|
468 |
|
|
|
510 |
|
Total inventories |
$ |
3,867 |
|
|
$ |
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.
|
5. |
Solar Energy Systems |
Solar energy systems, net consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
System equipment costs |
$ |
1,092,752 |
|
|
$ |
893,088 |
|
Initial direct costs related to solar energy systems |
|
219,650 |
|
|
|
171,081 |
|
|
|
1,312,402 |
|
|
|
1,064,169 |
|
Less: Accumulated depreciation and amortization |
|
(50,471 |
) |
|
|
(32,505 |
) |
|
|
1,261,931 |
|
|
|
1,031,664 |
|
Solar energy system inventory |
|
41,973 |
|
|
|
70,493 |
|
Solar energy systems, net |
$ |
1,303,904 |
|
|
$ |
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 $9.7 million and $4.9 million for the three months ended June 30, 2016 and 2015. Depreciation and amortization expense related to solar energy systems of $18.0 million and $8.7 million was recorded for the six months ended June 30, 2016 and 2015.
|
6. |
Property and Equipment |
Property and equipment, net consisted of the following (in thousands):
|
|
Estimated |
|
June 30, |
|
|
December 31, |
|
||
|
|
Useful Lives |
|
2016 |
|
|
2015 |
|
||
Vehicles acquired under capital leases |
|
3 years |
|
$ |
22,361 |
|
|
$ |
24,149 |
|
Leasehold improvements |
|
1-12 years |
|
|
13,952 |
|
|
|
4,116 |
|
Furniture and computer and other equipment |
|
3 years |
|
|
6,755 |
|
|
|
6,524 |
|
|
|
|
|
|
43,068 |
|
|
|
34,789 |
|
Less: Accumulated depreciation and amortization |
|
|
|
|
(14,325 |
) |
|
|
(12,181 |
) |
|
|
|
|
|
28,743 |
|
|
|
22,608 |
|
Build-to-suit lease asset under construction |
|
|
|
|
— |
|
|
|
25,560 |
|
Property and equipment, net |
|
|
|
$ |
28,743 |
|
|
$ |
48,168 |
|
The Company recorded depreciation and amortization related to property and equipment of $2.8 million and $1.9 million for the three months ended June 30, 2016 and 2015. Depreciation and amortization expense related to property and equipment of $5.2 million and $3.4 million was recorded for the six months ended June 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 $1.6 million and $1.2 million was capitalized in solar energy systems, net for the three months ended June 30, 2016 and 2015. Depreciation on vehicles under capital leases of $3.3 million and $2.4 million was capitalized in solar energy systems, net for the six months ended June 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 such, the Company has removed the build-to-suit lease asset and liabilities from its condensed consolidated balance sheet as of June 30, 2016. For additional information regarding the related build-to-suit liabilities and the resulting ongoing lease, see Note 16—Commitments and Contingencies.
|
7. |
Intangible Assets and Goodwill |
Intangible Assets
Intangible assets consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Cost: |
|
|
|
|
|
|
|
Internal-use software |
$ |
1,605 |
|
|
$ |
1,591 |
|
Developed technology |
|
522 |
|
|
|
522 |
|
Trademarks/trade names |
|
201 |
|
|
|
201 |
|
Customer relationships |
|
164 |
|
|
|
164 |
|
Total carrying value |
|
2,492 |
|
|
|
2,478 |
|
Accumulated amortization: |
|
|
|
|
|
|
|
Internal-use software |
|
(304 |
) |
|
|
(219 |
) |
Developed technology |
|
(158 |
) |
|
|
(126 |
) |
Trademarks/trade names |
|
(49 |
) |
|
|
(39 |
) |
Customer relationships |
|
(80 |
) |
|
|
(63 |
) |
Total accumulated amortization |
|
(591 |
) |
|
|
(447 |
) |
Total intangible assets, net |
$ |
1,901 |
|
|
$ |
2,031 |
|
The Company recorded amortization expense of $0.2 million and $3.7 million for the three months ended June 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 $0.4 million and $7.5 million for the six months ended June 30, 2016 and 2015. An internal-use software asset of $0.3 million reached the end of its useful life during the six months ended June 30, 2016 and was removed from cost and accumulated amortization.
In February 2015, the Company decided to discontinue the external sales of two Vivint Solar Labs products: the SunEye and PV Designer. This discontinuance was considered an indicator of impairment, and a review regarding the recoverability of the carrying value of the related intangible assets was performed. In-process research and development, which was intended to generate Vivint Solar Labs product sales in the residential market, was discontinued and deemed fully impaired resulting in a charge of $2.1 million. Certain trade names that will no longer be utilized were deemed fully impaired resulting in a charge of $1.3 million. The SunEye and PV Designer developed technology assets were deemed fully impaired resulting in a charge of $0.7 million. Customer relationships were deemed partially impaired by $0.4 million due to the loss of external customers who purchased the discontinued products. As a result of this review, the Company recorded a total impairment charge of $4.5 million for the six months ended June 30, 2015. In the second quarter of 2016, the Company resumed external sales of the SunEye product. These resumed sales were not significant for the three or six months ended June 30, 2016.
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.
|
8. |
Accrued Compensation |
Accrued compensation consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Accrued payroll |
$ |
10,150 |
|
|
$ |
6,918 |
|
Accrued commissions |
|
7,555 |
|
|
|
6,840 |
|
Accrued severance |
|
1,406 |
|
|
$ |
— |
|
Total accrued compensation |
$ |
19,111 |
|
|
$ |
13,758 |
|
|
9. |
Accrued and Other Current Liabilities |
Accrued and other current liabilities consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Income tax payable |
$ |
9,283 |
|
|
$ |
6,169 |
|
Current portion of lease pass-through financing obligation |
|
4,671 |
|
|
|
3,835 |
|
Accrued professional fees |
|
3,706 |
|
|
|
7,918 |
|
Accrued litigation settlements |
|
2,690 |
|
|
|
1,790 |
|
Accrued return of lease pass-through upfront lease payment |
|
2,500 |
|
|
|
— |
|
Accrued unused commitment fees and interest |
|
1,829 |
|
|
|
1,014 |
|
Sales and use tax payable |
|
1,736 |
|
|
|
3,524 |
|
Deferred rent |
|
1,732 |
|
|
|
1,064 |
|
Other accrued expenses |
|
4,645 |
|
|
|
3,703 |
|
Total accrued and other current liabilities |
$ |
32,792 |
|
|
$ |
29,017 |
|
|
10. |
Debt Obligations |
Debt obligations consisted of the following as of June 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 |
$ |
338,500 |
|
|
$ |
— |
|
(1) |
$ |
338,500 |
|
|
$ |
36,500 |
|
|
|
3.7 |
% |
|
March 2018 |
Working capital credit facility |
|
142,600 |
|
|
|
— |
|
(1) |
|
142,600 |
|
|
|
— |
|
|
|
3.7 |
|
|
March 2020 |
Subordinated HoldCo credit facility |
|
75,000 |
|
|
|
(5,662 |
) |
|
|
69,338 |
|
|
|
125,000 |
|
|
|
6.1 |
|
|
March 2020 |
Credit agreement |
|
306 |
|
|
|
(172 |
) |
|
|
134 |
|
|
|
2,694 |
|
|
|
6.5 |
|
|
(2) |
Total debt |
$ |
556,406 |
|
|
$ |
(5,834 |
) |
|
$ |
550,572 |
|
|
$ |
164,194 |
|
|
|
|
|
|
|
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) 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.
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 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 the first anniversary of the closing date. Such subsequent borrowings, if any, are referred to as “Tranche B” borrowings. If no Tranche B borrowings are incurred, the Company must repay outstanding Tranche A borrowings in December 2016. If any Tranche B borrowings are incurred, the maturity date for all borrowings will be extended to the fourth anniversary of the closing date. If any Tranche B borrowings are incurred, the Company may not prepay any borrowings until the second anniversary of the closing date and any subsequent prepayments of principal are subject to a fee equal to 3.0%. No Tranche B borrowings had been incurred as of June 30, 2016. Borrowings under the Subordinated HoldCo Facility will be used for the construction and acquisition of solar energy systems.
Interest on the Tranche A borrowings accrues at a floating rate of the London Interbank Offer Rate (“LIBOR”) plus 5.5%, provided that if any Tranche B borrowings are incurred, the interest rate increases to a floating rate of LIBOR plus 8.0% for the entire principal amount outstanding. The 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. 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 $1.6 million and $1.8 million for the three and six months ended June 30, 2016. No interest expense was recorded for the three and six months ended June 30, 2015. 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 Subordinated HoldCo Facility.
Bank of America, N.A. Aggregation Credit Facility
In September 2014, the Company entered into an aggregation credit facility (the “Aggregation Facility”), which was subsequently amended in February 2015 and November 2015, pursuant to which the Company may borrow up to an aggregate of $375.0 million and, upon the satisfaction of certain conditions and the approval of the lenders, up to an additional aggregate of $175.0 million in borrowings with certain financial institutions for which Bank of America, N.A. is acting as administrative agent.
Prepayments are permitted under the Aggregation Facility, and the principal and accrued interest on any outstanding loans mature in March 2018. Under the Aggregation Facility, interest on borrowings accrues at a floating rate equal to either (1)(a) LIBOR or (b) the greatest of (i) the Federal Funds Rate plus 0.5%, (ii) the administrative agent’s prime rate and (iii) LIBOR plus 1% and (2) a margin that varies between 3.25% during the period during which the Company may incur borrowings and 3.50% after such period. Interest is payable at the end of each interest period that the Company may elect as a term of either one, two or three months.
The borrower under the Aggregation Facility is Vivint Solar Financing I, LLC, one of the Company’s indirect wholly owned subsidiaries, which in turn holds the Company’s interests in the managing members in the Company’s existing investment funds. These managing members guarantee the borrower’s obligations under the Aggregation Facility. In addition, Vivint Solar Holdings, Inc. has pledged its interests in the borrower, and the borrower has pledged its interests in the guarantors as security for the borrower’s obligations under the Aggregation Facility. The related solar energy systems are not subject to any security interest of the lenders, and there is no recourse to the Company in the case of a default.
The Aggregation Facility includes customary covenants, including covenants that restrict, subject to certain exceptions, the borrower’s, and the guarantors’ ability to incur indebtedness, incur liens, make investments, make fundamental changes to their business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. Among other restrictions, the Aggregation Facility provides that the borrower may not incur any indebtedness other than that related to the Aggregation Facility or in respect of permitted swap agreements, and that the guarantors may not incur any indebtedness other than that related to the Aggregation Facility or as permitted under existing investment fund transaction documents. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. As of June 30, 2016, the Company was in compliance with such covenants. As of June 30, 2016, the Company has not entered into any interest rate hedges, which the Company is required to obtain by September 13, 2016.
As of June 30, 2016, the remaining borrowing capacity was $36.5 million, which was available but undrawn.
The Aggregation Facility also contains certain customary events of default. If an event of default occurs, lenders under the Aggregation Facility will be entitled to take various actions, including the acceleration of amounts due under the Aggregation Facility and foreclosure on the interests of the borrower and the guarantors that have been pledged to the lenders.
Interest expense was approximately $4.2 million and $2.3 million for the three months ended June 30, 2016 and 2015. Interest expense was approximately $8.2 million and $4.4 million for the six months ended June 30, 2016 and 2015. As of June 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 $2.9 million was recorded in other non-current assets, net in the condensed consolidated balance sheet. In addition, a $6.6 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 June 30, 2016, the Company had established letters of credit under the Working Capital Facility for up to $7.4 million related to insurance contracts. As such, there was no remaining borrowing capacity available as of June 30, 2016.
The Company has pledged the interests in the assets of the Company and its subsidiaries, excluding Vivint Solar Financing I, LLC, as security for its obligations under the Working Capital Facility. Prepayments are permitted under the Working Capital Facility, and the principal and accrued interest on any outstanding loans mature in March 2020. Interest accrues on borrowings at a floating rate equal to, dependent on the type of borrowing, (1) a rate equal to the Eurodollar Rate for the interest period divided by one minus the Eurodollar Reserve Percentage, plus a margin of 3.25%; or (2) the highest of (a) the Federal Funds Rate plus 0.50%, (b) the Citibank prime rate and (c) the one-month interest period Eurodollar rate plus 1.00%, plus a margin of 2.25%. Interest is payable dependent on the type of borrowing at the end of (1) the interest period that the Company may elect as a term and not to exceed three months, (2) quarterly or (3) at maturity of the Working Capital Facility.
The Working Capital Facility includes customary covenants, including covenants that restrict, subject to certain exceptions, the Company’s ability to incur indebtedness, incur liens, make investments, make fundamental changes to its business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. Among other restrictions, the Working Capital Facility provides that the Company may not incur any indebtedness other than that related to the Working Capital Facility or permitted swap agreements. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. The Company is also required to maintain $25.0 million in cash and cash equivalents and certain investments as of the last day of each quarter. As of June 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 $1.5 million and $0.4 million for the three months ended June 30, 2016 and 2015. Interest expense was approximately $3.0 million and $0.4 million for the six months ended June 30, 2016 and 2015. As of June 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 $1.5 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 June 30, 2016. Interest expense under the Credit Agreement was de minimis for the three and six months ended June 30, 2016. No interest expense was recorded for the three and six months ended June 30, 2015.
Interest Expense and Amortization of Debt Issuance Costs
For the three months ended June 30, 2016 and 2015, total interest expense incurred under all debt obligations was approximately $7.3 million and $2.7 million, of which $1.5 million and $0.9 million was amortization of debt issuance costs. For the six months ended June 30, 2016 and 2015, total interest expense incurred under all debt obligations was approximately $13.0 million and $4.8 million, of which $2.7 million and $1.7 million was amortization of debt issuance costs.
|
11. |
Investment Funds |
As of June 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):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
17,832 |
|
|
$ |
12,014 |
|
Accounts receivable, net |
|
9,288 |
|
|
|
3,063 |
|
Prepaid expenses and other current assets |
|
802 |
|
|
|
121 |
|
Total current assets |
|
27,922 |
|
|
|
15,198 |
|
Solar energy systems, net |
|
1,208,794 |
|
|
|
990,609 |
|
Other non-current assets, net |
|
1,190 |
|
|
|
18 |
|
Total assets |
$ |
1,237,906 |
|
|
$ |
1,005,825 |
|
Liabilities |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Distributions payable to non-controlling interests and redeemable non-controlling interests |
$ |
9,820 |
|
|
$ |
11,347 |
|
Current portion of deferred revenue |
|
8,169 |
|
|
|
4,824 |
|
Accrued and other current liabilities |
|
7,208 |
|
|
|
3,869 |
|
Total current liabilities |
|
25,197 |
|
|
|
20,040 |
|
Deferred revenue, net of current portion |
|
37,505 |
|
|
|
43,094 |
|
Other non-current liabilities |
|
1,779 |
|
|
|
3,283 |
|
Total liabilities |
$ |
64,481 |
|
|
$ |
66,417 |
|
Residential Investment Funds
As of June 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 June 30, 2016 and December 31, 2015, the cumulative total of contributions into the VIEs by all investors was $956.2 million and $773.0 million. Of these contributions, a cumulative total of $110.0 million was contributed by related parties in prior periods.
C&I Investment Fund
In June 2016, the Company terminated its C&I investment fund. No projects were purchased by the fund. As such, the Company did not have any assets or liabilities associated with the fund. In June 2016, the Company paid a fee of $1.0 million to the C&I fund investor to terminate the fund and release any and all claims.
Lease Pass-Through Financing Obligation
In July 2015, a wholly owned subsidiary of the Company entered into a lease pass-through fund arrangement under which the Company contributes solar energy systems and the investor contributes cash. The net carrying value of the related solar energy systems was $63.9 million and $64.7 million as of June 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 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 June 30, 2016 and December 31, 2015, the Company had recorded financing liabilities of $44.5 million and $47.3 million related to this fund arrangement as deferred revenue in its condensed consolidated balance sheets.
Guarantees
With respect to the investment funds, the Company and the fund investors have entered into guaranty agreements under which the Company guarantees the performance of certain financial obligations of its subsidiaries to the investment funds. These guarantees do not result in the Company being required to make payments to the fund investors unless such payments are mandated by the investment fund governing documents and the investment fund fails to make such payment. The Company is contractually obligated to make certain VIE investors whole for losses that the investors may suffer in certain limited circumstances resulting from the disallowance or recapture of investment tax credits.
From time to time, the Company incurs penalties for non-performance, which non-performance may include delays in the installation process and interconnection to the power grid of solar energy systems and other factors. Based on the terms of the investment fund agreements, the Company will either reimburse a portion of the fund investor’s capital or pay the fund investor a non-performance fee. As discussed in “C&I Investment Fund” above, the Company paid a $1.0 million termination fee as of June 30, 2016. As of June 30, 2016 and December 31, 2015, the Company had accrued $3.5 million and $5.2 million in 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 June 30, 2016 and December 31, 2015, which is classified as restricted cash and cash equivalents on the condensed consolidated balance sheets.
|
12. |
Redeemable Non-Controlling Interests and Equity |
Common Stock
The Company had reserved shares of common stock for issuance as follows (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Shares available for grant under equity incentive plans |
|
10,287 |
|
|
|
12,267 |
|
Stock options issued and outstanding |
|
8,441 |
|
|
|
9,277 |
|
Restricted stock units issued and outstanding |
|
7,566 |
|
|
|
930 |
|
Long-term incentive plan |
|
2,705 |
|
|
|
3,382 |
|
Total |
|
28,999 |
|
|
|
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 |
|
41,053 |
|
Distributions to redeemable non-controlling interests |
|
(4,402 |
) |
Net loss |
|
(55,506 |
) |
Balance as of June 30, 2016 |
$ |
150,686 |
|
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 |
|
2,467 |
|
|
|
— |
|
|
|
2,467 |
|
Excess tax effects from stock-based compensation |
|
(981 |
) |
|
|
— |
|
|
|
(981 |
) |
Issuance of common stock |
|
490 |
|
|
|
— |
|
|
|
490 |
|
Contributions from non-controlling interests |
|
— |
|
|
|
142,210 |
|
|
|
142,210 |
|
Distributions to non-controlling interests |
|
— |
|
|
|
(5,885 |
) |
|
|
(5,885 |
) |
Net loss |
|
(18,848 |
) |
|
|
(83,511 |
) |
|
|
(102,359 |
) |
Balance as of June 30, 2016 |
$ |
502,071 |
|
|
$ |
143,123 |
|
|
$ |
645,194 |
|
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 June 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.
|
13. |
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 June 30, 2016, a total of 10.3 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 June 30, 2016, there were 0.1 million time-based stock options, 6.0 million restricted stock units (“RSUs”), and 1.6 million performance share units (“PSUs”) outstanding under the 2014 Plan. The time-based options are subject to ratable time-based vesting over four years. The RSUs are subject to ratable time-based vesting over one to four years. The PSUs vest quarterly 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 June 30, 2016, 1.1 million shares of common stock had been awarded to participants under the LTIP. As of June 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.
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 six months ended June 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 |
|
1,000 |
|
|
|
3.21 |
|
|
|
|
|
|
|
|
|
Exercised |
|
(379 |
) |
|
|
1.29 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
(1,457 |
) |
|
|
2.79 |
|
|
|
|
|
|
|
|
|
Outstanding—June 30, 2016 |
|
8,441 |
|
|
$ |
1.34 |
|
|
|
6.7 |
|
|
$ |
15,972 |
|
Options vested and exercisable—June 30, 2016 |
|
4,042 |
|
|
$ |
1.28 |
|
|
|
6.5 |
|
|
$ |
7,722 |
|
Options vested and expected to vest—June 30, 2016 |
|
5,872 |
|
|
$ |
1.39 |
|
|
|
6.8 |
|
|
$ |
11,023 |
|
The weighted-average grant date fair value of time-based stock options granted during the six months ended June 30, 2016 and 2015 was $2.23 and $9.39 per share. No performance-based stock options were granted during the six months ended June 30, 2016 and 2015. The total intrinsic value of options exercised for the six months ended June 30, 2016 and 2015 was $0.7 million and $6.7 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 six months ended June 30, 2016 and 2015 was $1.0 million and $13.8 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:
|
Six Months Ended |
|
|||||
|
June 30, |
|
|||||
|
2016 |
|
|
2015 |
|
||
Expected term (in years) |
|
5.5 |
|
|
|
6.2 |
|
Volatility |
|
85.0 |
% |
|
|
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 six months ended June 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 |
|
7,725 |
|
|
|
2.64 |
|
Vested |
|
(740 |
) |
|
|
6.53 |
|
Forfeited |
|
(349 |
) |
|
|
4.96 |
|
Outstanding at June 30, 2016 |
|
7,566 |
|
|
$ |
3.40 |
|
The total fair value of RSUs vested was $2.6 million and $8.7 million for the six months ended June 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 |
|
|
Six Months Ended |
|
||||||||||
|
June 30, |
|
|
June 30, |
|
||||||||||
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Cost of revenue |
$ |
637 |
|
|
$ |
2,295 |
|
|
$ |
940 |
|
|
$ |
2,573 |
|
Sales and marketing |
|
1,613 |
|
|
|
9,070 |
|
|
|
1,613 |
|
|
|
9,303 |
|
General and administrative |
|
(553 |
) |
|
|
6,432 |
|
|
|
553 |
|
|
|
8,610 |
|
Research and development |
|
(855 |
) |
|
|
106 |
|
|
|
(639 |
) |
|
|
124 |
|
Total stock-based compensation |
$ |
842 |
|
|
$ |
17,903 |
|
|
$ |
2,467 |
|
|
$ |
20,610 |
|
During the six months ended June 30, 2016, several of the Company’s senior management, including the Company’s former CEO, left the Company. The Company reversed all stock-based compensation expense for awards that were forfeited by the terminated employees, which reduced stock-based compensation expense for the three and six months ended June 30, 2016 below historical levels. As a result of these and other terminations, the Company increased its forfeiture rate during the six months ended June 30, 2016, which is reflected in stock-based compensation expense for the three and six months ended June 30, 2016.
Unrecognized stock-based compensation expense, net of estimated forfeitures, for time-based stock options, RSUs and PSUs as of June 30, 2016 was as follows (in thousands, except years):
|
Unrecognized |
|
|
|
|
|
|
|
Stock-Based |
|
|
Weighted- |
|
||
|
Compensation |
|
|
Average Period |
|
||
|
Expense |
|
|
of Recognition |
|
||
Time-based stock options |
$ |
2,474 |
|
|
|
2.7 |
|
RSUs and PSUs |
|
18,085 |
|
|
|
1.8 |
|
Total unrecognized stock-based compensation expense as of June 30, 2016 |
$ |
20,559 |
|
|
|
|
|
|
14. |
Income Taxes |
The income tax expense for the three months ended June 30, 2016 and 2015 was calculated on a discrete basis resulting in a consolidated quarterly effective income tax rate of (18.2)% and (19.4)%. For the six months ended June 30, 2016 and 2015, the Company’s consolidated effective income rate was (9.1)% and (18.6)%. The variations between the consolidated effective income tax rate and the U.S. federal statutory rate for the three and six months ended June 30, 2016 were primarily attributable to the effect of non-controlling interests and redeemable non-controlling interests, and for the six months ended June 30, 2016, the goodwill impairment charge. The variations between the consolidated effective income tax rate and the U.S. federal statutory rate for the three and six months ended June 30, 2015 were primarily attributable to the effect of non-controlling interests and redeemable non-controlling interests.
The Company sells solar energy systems to the investment funds for income tax purposes. As the investment funds are consolidated by the Company, the gain on the sale of the solar energy systems is not recognized in the condensed consolidated financial statements. However, this gain is recognized for tax reporting purposes. Since these transactions are intercompany sales for GAAP purposes, any tax expense incurred related to these intercompany sales is deferred and amortized over the estimated useful life of the underlying solar energy systems, which has been estimated to be 30 years. Accordingly, the Company has recorded a prepaid tax asset, net, of $364.5 million and $277.5 million as of June 30, 2016 and December 31, 2015.
Uncertain Tax Positions
As of June 30, 2016 and December 31, 2015, the Company had no unrecognized tax benefits. There was no interest and penalties accrued for any uncertain tax positions as of June 30, 2016 and December 31, 2015. The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized benefits will increase or decrease within the next 12 months. The Company is subject to taxation and files income tax returns in the United States, and various state and local jurisdictions. Due to the Company’s net losses, substantially all of its federal, state and local income tax returns since inception are still subject to audit.
|
15. |
Related Party Transactions |
The Company’s operations included the following related party transactions (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, |
|
|
June 30, |
|
||||||||||
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Cost of revenue—operating leases and incentives |
$ |
869 |
|
|
$ |
1,439 |
|
|
$ |
2,016 |
|
|
$ |
2,929 |
|
Sales and marketing |
|
572 |
|
|
|
883 |
|
|
|
1,096 |
|
|
|
1,261 |
|
General and administrative |
|
128 |
|
|
|
4,589 |
|
|
|
281 |
|
|
|
4,802 |
|
Vivint Services
The Company has negotiated and entered into a number of agreements with its sister company, APX Group, Inc. (“Vivint”), related to services and other support that Vivint provides to the Company. Under the terms of these agreements, Vivint primarily provides the Company with information technology and infrastructure and certain other services. The Company incurred fees under these agreements of $1.0 million and $2.3 million for the three months ended June 30, 2016 and 2015, which reflect the amount of services provided by Vivint on behalf of the Company. The Company incurred fees under these agreements of $2.4 million and $4.1 million for the six months ended June 30, 2016 and 2015.
Payables to Vivint recorded in accounts payable—related party were $0.5 million and $1.9 million as of June 30, 2016 and December 31, 2015. These payables include amounts due to Vivint related to the services agreements and other miscellaneous intercompany payables.
Advances Receivable—Related Party
Net amounts due from direct-sales personnel were $3.3 million and $2.9 million as of June 30, 2016 and December 31, 2015. The Company provided a reserve of $1.2 million and $0.7 million as of June 30, 2016 and December 31, 2015 related to advances to direct-sales personnel who have terminated their employment agreement with the Company.
Investment Funds
Fund investors for three of the funds are indirectly managed by the Sponsor and accordingly are considered related parties. The Company accrued equity distributions to these entities of $1.9 million and $1.7 million as of June 30, 2016 and December 31, 2015, included in distributions payable to non-controlling and redeemable non-controlling interests. See Note 11—Investment Funds. The Company has also entered into a Backup Maintenance Servicing Agreement with Vivint in which Vivint will provide maintenance servicing of the fund assets in the event that the Company is removed as the service provider for the funds. No services have been performed by Vivint under this agreement.
|
16. |
Commitments and Contingencies |
Non-Cancellable Operating Leases
The Company has entered into operating lease agreements for corporate and operating facilities, warehouses and related equipment in states in which the Company conducts operations. The aggregate expense incurred under these operating leases was $4.5 million and $2.4 million for the three months ended June 30, 2016 and 2015. The aggregate expense incurred under these operating leases was $8.6 million and $4.7 million for the six months ended June 30, 2016 and 2015.
Build-to-Suit Lease Arrangements
In September 2014, the Company entered into a non-cancellable lease whereby the Company would terminate the current lease for its corporate headquarters in Lehi, UT and move into another building (the “New Headquarters”) that was being constructed in the same general location. Because of its involvement in certain aspects of the construction of the New Headquarters per the terms of the lease, 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 build-to-suit lease liabilities during the construction period.
In May 2016, construction on the New Headquarters was completed and the Company commenced occupancy. The building qualified for sale-leaseback treatment. As such, the Company removed the build-to-suit lease asset and liabilities from its condensed consolidated balance sheet as of June 30, 2016. The New Headquarters lease is classified and accounted for as a non-cancellable operating lease.
Letters of Credit
During the six months ended June 30, 2016, the Company fulfilled its obligations under a forward contract to sell SRECs entered into in November 2013. As a result, the related $1.8 million stand-by letter of credit that was outstanding at December 31, 2015 was cancelled during the six months ended June 30, 2016. The corresponding time deposit was released during the six months ended June 30, 2016.
As of June 30, 2016, the Company had established letters of credit under the Working Capital Facility for up to $7.4 million related to insurance contracts.
Indemnification Obligations
From time to time, the Company enters into contracts that contingently require it to indemnify parties against claims. These contracts primarily relate to provisions in the Company’s services agreements with related parties that may require the Company to indemnify the related parties against services rendered; and certain agreements with the Company’s officers and directors under which the Company may be required to indemnify such persons for liabilities. In addition, under the terms of the agreements related to the Company’s investment funds and other material contracts, the Company may also be required to indemnify fund investors and other third parties for liabilities. For further information see Note 11—Investment Funds.
Legal Proceedings
In September 2014, two former installation technicians of the Company, on behalf of themselves and a purported class, filed a complaint for damages, injunctive relief and restitution in the Superior Court of the State of California in and for the County of San Diego against the Company and unnamed John Doe defendants. The complaint alleges certain violations of the California Labor Code and the California Business and Professions Code based on, among other things, alleged improper classification of installer technicians, installer helpers, electrician technicians and electrician helpers, failure to pay minimum and overtime wages, failure to provide accurate itemized wage statements, and failure to provide wages on termination. In December 2014, the original plaintiffs and three additional plaintiffs filed an amended complaint with essentially the same allegations. On November 5, 2015, the parties agreed to preliminary terms of a settlement of all claims related to allegations in the complaint in return for the Company’s payment of $1.7 million to be paid out to the purported class members. The settlement agreement has received preliminary approval from the Court, with final approval hearing set for September 30, 2016. As of June 30, 2016, a $1.7 million reserve was recorded related to this proceeding in the Company’s condensed consolidated financial statements.
In November and December 2014, two putative class action lawsuits were filed in the U.S. District Court for the Southern District of New York against the Company, its directors, certain of its officers and the underwriters of the Company’s initial public offering of common stock alleging violation of securities laws and seeking unspecified damages. In January 2015, the Court ordered these cases to be consolidated into the earlier filed case, Hyatt v. Vivint Solar, Inc. et al., 14-cv-9283 (KBF). The plaintiffs filed a consolidated amended complaint in February 2015. On May 6, 2015, the Company filed a motion to dismiss the complaint and on December 10, 2015, the Court issued an Opinion and Order dismissing the complaint with prejudice. On January 5, 2016, the plaintiffs filed a Notice of Appeal to the Second Circuit Court of Appeals. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision. If an unfavorable outcome were to occur in this case, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable.
On July 31, 2015, a putative class action lawsuit was filed in the Court of Chancery State of Delaware against the Company’s directors, SunEdison, and TerraForm Power (“TerraForm”), alleging that the proposed acquisition by SunEdison is unfair to the Company’s stockholders. On August 7, 2015, a second putative class action lawsuit was filed in the same court alleging similar claims, and including 313, Acquisition, LLC as a named defendant. Both complaints seek injunctive relief and unspecified damages. On or about September 10, 2015, two purported class action lawsuits were also filed in Utah's Fourth District State Court (the "Utah Actions"), alleging similar claims to the complaints previously filed in the Delaware Chancery Court. On September 22, 2015, the Company, through counsel notified plaintiff's counsel in the Utah Actions that pursuant to the Company's Articles of Incorporation, any such derivative action was subject to exclusive jurisdiction in the Delaware Chancery Court, and accordingly, the Utah Actions should be dismissed. After a December 2015 amendment to the proposed acquisition, a new complaint was filed in the Delaware Chancery Court on January 11, 2016. As a result of the termination of the SunEdison acquisition, plaintiffs filed a motion for voluntary dismissal of the complaint in this action. On April 20, 2016, the Delaware court entered the dismissal of this case.
On September 9, 2015, two of the Company’s customers, on behalf of themselves and a purported class, named the Company in a putative class action, Case No. BCV-15-100925(Cal. Super. Ct., Kern County), alleging violation of California Business and Professional Code Section 17200 and requesting relief pursuant to Section 1689 of the California Civil Code. The complaint seeks: (1) rescission of their power purchase agreements along with restitution to the plaintiffs individually and (2) declaratory and injunctive relief. On October 16, 2015, the Company moved to compel arbitration of the plaintiffs’ claims pursuant to the provisions set forth in the power purchase agreements, which the Court granted and dismissed the class claims without prejudice. Plaintiffs have appealed the Court’s order. It is not possible to estimate the amount or range of potential loss, if any, at this time.
On March 8, 2016, the Company filed suit in the Court of Chancery State of Delaware against SunEdison and SEV Merger Sub Inc. alleging that SunEdison willfully breached its obligations under the Merger Agreement pursuant to which the Company was to be acquired and breached its implied covenant of good faith and fair dealing. The Company is seeking declaratory judgment, award damages, costs and reasonable attorney’s fees and such further relief that the court finds equitable, appropriate and just. On April 21, 2016, SunEdison filed for Chapter 11 bankruptcy, thereby creating a temporary stay on the prosecution of the Company’s litigation in the Delaware court. The Company is participating in the bankruptcy case so as to maximize the recovery from the claims against SunEdison. On July 7, 2016, the Company filed a motion with the bankruptcy court seeking to lift the stay and allow the Company to litigate its claim against SunEdison.
In March 2016, a civil complaint was filed against the Company alleging negligence and related claims arising from damage to a customer’s residence. In June 2016, the Company reached agreement between the Company, the plaintiffs and the Company’s liability insurance provider to participate in an arbitration proceeding that will determine the extent of the damages – with a minimum amount set at $1.0 million and a maximum amount set at $3.0 million. Based on the above agreement, a $1.0 million reserve was recorded related to this matter in the Company’s condensed consolidated financial statements. The Company anticipates that the entirety of any damage award will be satisfied by its liability insurance provider and a related $1.0 million receivable was recorded in its condensed consolidated financial statements.
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.
|
18. |
Segment Information |
Since the second quarter of 2015, the Company had aligned its operations as two reporting segments, (1) Residential and (2) C&I, as the result of entering into a C&I investment fund with plans to service customers in the C&I market. During that time, no projects were initiated within the fund and no revenue was recorded in the C&I segment. In June 2016, the Company ended its C&I investment fund and settled with a $1.0 million termination fee. As a result of this termination, the Company realigned and consolidated its reporting segments as the Residential segment, which is now the Company’s only reporting segment. No restatement of prior periods is necessary, as the restated prior periods are the previously disclosed condensed consolidated statements of operations for quarterly reporting.
Operating expenses in the C&I segment included sales and marketing and general and administrative. For the three and six months ended June 30, 2016, sales and marketing expenses were a de minimis amount and $0.3 million. For the three and six months ended June 30, 2016, general and administrative expenses were $(0.9) million and $1.5 million. In the first quarter of 2016, the Company had accrued a $2.1 million non-utilization fee which was subsequently settled with a $1.0 million termination fee in the second quarter of 2016. The reduction in the accrual was recognized in C&I general and administrative expenses during the three months ended June 30, 2016. The Company did not have any assets or liabilities associated with the C&I fund. For additional information regarding the termination of the C&I investment fund, see Note 11—Investment Funds.
|
19. |
Subsequent Events |
On August 4, 2016, the Company entered into a credit agreement (the “Term Loan Facility”) pursuant to which it may borrow up to an aggregate principal amount of $313.0 million with certain financial institutions for which Investec Bank PLC is acting as administrative agent, issuing bank, joint bookrunner and joint lead arranger. The borrower under the Term Loan Facility is Vivint Solar Financing II, LLC, a wholly owned indirect subsidiary of the Company. Upon closing, the Company’s subsidiary incurred $300.0 million aggregate principal amount of term borrowings and may draw up to $13.0 million of letters of credit. Proceeds of the Term Loan Facility will be used to (1) repay existing indebtedness under the Aggregation Facility with respect to the portfolio of projects being used as collateral for the Term Loan Facility (the “Portfolio”), (2) fund the debt service reserve account if not funded through the letter of credit facility and other agreed reserves, (3) pay transaction costs and fees in connection with the Term Loan Facility and (4) distribute to the Company as reimbursement for capital costs associated with deployment of the Portfolio. An escrow account will be established with respect to a portion of the term borrowings with respect to those systems in the Portfolio that have not been placed in service as of the closing date, with a single disbursement of such remaining amounts to occur once such systems have been placed in service, subject to compliance with the Portfolio concentration restrictions and limitations related to the Portfolio.
For the initial four years of the term of the Term Loan Facility, interest on borrowings accrue at an annual rate equal to LIBOR plus 3.00%. Thereafter interest accrues at an annual rate equal to LIBOR plus 3.25%. In addition, the Company is required to enter into interest rate hedging arrangements with the joint lead arrangers or their affiliates such that at least 75% of the aggregate principal amount of the outstanding term loans are subject to a fixed interest rate or other interest rate protection by no later than 30 business days following the closing date of the Term Loan Facility. 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 five years 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 shall be funded at closing in an amount at least equal to the next six months of scheduled principal and interest associated with the term borrowings, and the borrower is required to maintain an average debt service coverage ratio of 1.55 to 1.
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 shall guarantee certain obligations of the borrower under the Term Loan Facility.
|
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 six months ended June 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 11—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 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)
As the Company has no other comprehensive income or loss, comprehensive income (loss) is the same as net income available (loss attributable) to common stockholders for all periods presented.
Debt Issuance Costs
During the six months ended June 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 sheet. In 2016, the Company entered into term loan facilities that are presented net of debt issuance costs.
Intangible Assets – Internal-Use Software
During the six months ended June 30, 2016, the Company adopted ASU 2015-05, which requires that if a cloud computing arrangement includes a software license, the payment of fees should be accounted for in the same manner as the acquisition of other software licenses. If there is no software license, the fees should be accounted for as a service contract. The Company adopted this update prospectively, which did not have a significant impact on the Company’s condensed consolidated financial statements in the current period.
Other Changes
During the six months ended June 30, 2016, the Company consolidated its reporting segments as discussed in Note 18—Segment Information. There have been no other changes to the Company’s significant accounting policies as described in the Company’s annual report on Form 10-K for the year ended December 31, 2015.
Recent Accounting Pronouncements
In March 2016 through May 2016, the Financial Accounting Standards Board (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. The Company is evaluating the impact that these updates will have on its condensed consolidated financial statements. Additionally, ASU 2015-14 defers the effective date of ASU 2014-09 for the Company to January 1, 2018, with early adoption available on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating which transition method to use and does not expect the update to have a significant impact on its condensed consolidated financial statements and related disclosures based on its current business model.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture rates and classification on the statement of cash flows. This update is effective for annual periods beginning after December 15, 2016 for public business entities and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company 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 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 disclosures. The Company expects to apply the update upon its effectiveness in the first quarter of 2019.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This update is effective in fiscal years beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company 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. This update is not expected to have a significant impact on the condensed consolidated financial statements of the Company.
|
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):
|
June 30, 2016 |
|
|||||||||||||
|
Level I |
|
|
Level II |
|
|
Level III |
|
|
Total |
|
||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
$ |
— |
|
|
$ |
100 |
|
|
$ |
— |
|
|
$ |
100 |
|
Total financial assets |
$ |
— |
|
|
$ |
100 |
|
|
$ |
— |
|
|
$ |
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Inventories consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Solar energy systems held for sale |
$ |
3,399 |
|
|
$ |
121 |
|
Photovoltaic installation devices and software products |
|
468 |
|
|
|
510 |
|
Total inventories |
$ |
3,867 |
|
|
$ |
631 |
|
|
Solar energy systems, net consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
System equipment costs |
$ |
1,092,752 |
|
|
$ |
893,088 |
|
Initial direct costs related to solar energy systems |
|
219,650 |
|
|
|
171,081 |
|
|
|
1,312,402 |
|
|
|
1,064,169 |
|
Less: Accumulated depreciation and amortization |
|
(50,471 |
) |
|
|
(32,505 |
) |
|
|
1,261,931 |
|
|
|
1,031,664 |
|
Solar energy system inventory |
|
41,973 |
|
|
|
70,493 |
|
Solar energy systems, net |
$ |
1,303,904 |
|
|
$ |
1,102,157 |
|
|
Property and equipment, net consisted of the following (in thousands):
|
|
Estimated |
|
June 30, |
|
|
December 31, |
|
||
|
|
Useful Lives |
|
2016 |
|
|
2015 |
|
||
Vehicles acquired under capital leases |
|
3 years |
|
$ |
22,361 |
|
|
$ |
24,149 |
|
Leasehold improvements |
|
1-12 years |
|
|
13,952 |
|
|
|
4,116 |
|
Furniture and computer and other equipment |
|
3 years |
|
|
6,755 |
|
|
|
6,524 |
|
|
|
|
|
|
43,068 |
|
|
|
34,789 |
|
Less: Accumulated depreciation and amortization |
|
|
|
|
(14,325 |
) |
|
|
(12,181 |
) |
|
|
|
|
|
28,743 |
|
|
|
22,608 |
|
Build-to-suit lease asset under construction |
|
|
|
|
— |
|
|
|
25,560 |
|
Property and equipment, net |
|
|
|
$ |
28,743 |
|
|
$ |
48,168 |
|
|
Intangible assets consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Cost: |
|
|
|
|
|
|
|
Internal-use software |
$ |
1,605 |
|
|
$ |
1,591 |
|
Developed technology |
|
522 |
|
|
|
522 |
|
Trademarks/trade names |
|
201 |
|
|
|
201 |
|
Customer relationships |
|
164 |
|
|
|
164 |
|
Total carrying value |
|
2,492 |
|
|
|
2,478 |
|
Accumulated amortization: |
|
|
|
|
|
|
|
Internal-use software |
|
(304 |
) |
|
|
(219 |
) |
Developed technology |
|
(158 |
) |
|
|
(126 |
) |
Trademarks/trade names |
|
(49 |
) |
|
|
(39 |
) |
Customer relationships |
|
(80 |
) |
|
|
(63 |
) |
Total accumulated amortization |
|
(591 |
) |
|
|
(447 |
) |
Total intangible assets, net |
$ |
1,901 |
|
|
$ |
2,031 |
|
|
Accrued compensation consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Accrued payroll |
$ |
10,150 |
|
|
$ |
6,918 |
|
Accrued commissions |
|
7,555 |
|
|
|
6,840 |
|
Accrued severance |
|
1,406 |
|
|
$ |
— |
|
Total accrued compensation |
$ |
19,111 |
|
|
$ |
13,758 |
|
|
Accrued and other current liabilities consisted of the following (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Income tax payable |
$ |
9,283 |
|
|
$ |
6,169 |
|
Current portion of lease pass-through financing obligation |
|
4,671 |
|
|
|
3,835 |
|
Accrued professional fees |
|
3,706 |
|
|
|
7,918 |
|
Accrued litigation settlements |
|
2,690 |
|
|
|
1,790 |
|
Accrued return of lease pass-through upfront lease payment |
|
2,500 |
|
|
|
— |
|
Accrued unused commitment fees and interest |
|
1,829 |
|
|
|
1,014 |
|
Sales and use tax payable |
|
1,736 |
|
|
|
3,524 |
|
Deferred rent |
|
1,732 |
|
|
|
1,064 |
|
Other accrued expenses |
|
4,645 |
|
|
|
3,703 |
|
Total accrued and other current liabilities |
$ |
32,792 |
|
|
$ |
29,017 |
|
|
Debt obligations consisted of the following as of June 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 |
$ |
338,500 |
|
|
$ |
— |
|
(1) |
$ |
338,500 |
|
|
$ |
36,500 |
|
|
|
3.7 |
% |
|
March 2018 |
Working capital credit facility |
|
142,600 |
|
|
|
— |
|
(1) |
|
142,600 |
|
|
|
— |
|
|
|
3.7 |
|
|
March 2020 |
Subordinated HoldCo credit facility |
|
75,000 |
|
|
|
(5,662 |
) |
|
|
69,338 |
|
|
|
125,000 |
|
|
|
6.1 |
|
|
March 2020 |
Credit agreement |
|
306 |
|
|
|
(172 |
) |
|
|
134 |
|
|
|
2,694 |
|
|
|
6.5 |
|
|
(2) |
Total debt |
$ |
556,406 |
|
|
$ |
(5,834 |
) |
|
$ |
550,572 |
|
|
$ |
164,194 |
|
|
|
|
|
|
|
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) 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.
|
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):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
17,832 |
|
|
$ |
12,014 |
|
Accounts receivable, net |
|
9,288 |
|
|
|
3,063 |
|
Prepaid expenses and other current assets |
|
802 |
|
|
|
121 |
|
Total current assets |
|
27,922 |
|
|
|
15,198 |
|
Solar energy systems, net |
|
1,208,794 |
|
|
|
990,609 |
|
Other non-current assets, net |
|
1,190 |
|
|
|
18 |
|
Total assets |
$ |
1,237,906 |
|
|
$ |
1,005,825 |
|
Liabilities |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Distributions payable to non-controlling interests and redeemable non-controlling interests |
$ |
9,820 |
|
|
$ |
11,347 |
|
Current portion of deferred revenue |
|
8,169 |
|
|
|
4,824 |
|
Accrued and other current liabilities |
|
7,208 |
|
|
|
3,869 |
|
Total current liabilities |
|
25,197 |
|
|
|
20,040 |
|
Deferred revenue, net of current portion |
|
37,505 |
|
|
|
43,094 |
|
Other non-current liabilities |
|
1,779 |
|
|
|
3,283 |
|
Total liabilities |
$ |
64,481 |
|
|
$ |
66,417 |
|
|
The Company had reserved shares of common stock for issuance as follows (in thousands):
|
June 30, |
|
|
December 31, |
|
||
|
2016 |
|
|
2015 |
|
||
Shares available for grant under equity incentive plans |
|
10,287 |
|
|
|
12,267 |
|
Stock options issued and outstanding |
|
8,441 |
|
|
|
9,277 |
|
Restricted stock units issued and outstanding |
|
7,566 |
|
|
|
930 |
|
Long-term incentive plan |
|
2,705 |
|
|
|
3,382 |
|
Total |
|
28,999 |
|
|
|
25,856 |
|
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 |
|
41,053 |
|
Distributions to redeemable non-controlling interests |
|
(4,402 |
) |
Net loss |
|
(55,506 |
) |
Balance as of June 30, 2016 |
$ |
150,686 |
|
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 |
|
2,467 |
|
|
|
— |
|
|
|
2,467 |
|
Excess tax effects from stock-based compensation |
|
(981 |
) |
|
|
— |
|
|
|
(981 |
) |
Issuance of common stock |
|
490 |
|
|
|
— |
|
|
|
490 |
|
Contributions from non-controlling interests |
|
— |
|
|
|
142,210 |
|
|
|
142,210 |
|
Distributions to non-controlling interests |
|
— |
|
|
|
(5,885 |
) |
|
|
(5,885 |
) |
Net loss |
|
(18,848 |
) |
|
|
(83,511 |
) |
|
|
(102,359 |
) |
Balance as of June 30, 2016 |
$ |
502,071 |
|
|
$ |
143,123 |
|
|
$ |
645,194 |
|
|
Stock options are granted under the 2014 Plan and Omnibus Plan as described above. Stock option activity for the six months ended June 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 |
|
1,000 |
|
|
|
3.21 |
|
|
|
|
|
|
|
|
|
Exercised |
|
(379 |
) |
|
|
1.29 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
(1,457 |
) |
|
|
2.79 |
|
|
|
|
|
|
|
|
|
Outstanding—June 30, 2016 |
|
8,441 |
|
|
$ |
1.34 |
|
|
|
6.7 |
|
|
$ |
15,972 |
|
Options vested and exercisable—June 30, 2016 |
|
4,042 |
|
|
$ |
1.28 |
|
|
|
6.5 |
|
|
$ |
7,722 |
|
Options vested and expected to vest—June 30, 2016 |
|
5,872 |
|
|
$ |
1.39 |
|
|
|
6.8 |
|
|
$ |
11,023 |
|
The fair values using the Black-Scholes-Merton method were estimated on each grant date using the following weighted-average assumptions:
|
Six Months Ended |
|
|||||
|
June 30, |
|
|||||
|
2016 |
|
|
2015 |
|
||
Expected term (in years) |
|
5.5 |
|
|
|
6.2 |
|
Volatility |
|
85.0 |
% |
|
|
89.0 |
% |
Risk-free interest rate |
|
1.4 |
% |
|
|
1.8 |
% |
Dividend yield |
|
0.0 |
% |
|
|
0.0 |
% |
RSUs are granted under the 2014 Plan and the LTIP as described above. RSU activity for the six months ended June 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 |
|
7,725 |
|
|
|
2.64 |
|
Vested |
|
(740 |
) |
|
|
6.53 |
|
Forfeited |
|
(349 |
) |
|
|
4.96 |
|
Outstanding at June 30, 2016 |
|
7,566 |
|
|
$ |
3.40 |
|
Stock-based compensation was included in operating expenses as follows (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, |
|
|
June 30, |
|
||||||||||
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Cost of revenue |
$ |
637 |
|
|
$ |
2,295 |
|
|
$ |
940 |
|
|
$ |
2,573 |
|
Sales and marketing |
|
1,613 |
|
|
|
9,070 |
|
|
|
1,613 |
|
|
|
9,303 |
|
General and administrative |
|
(553 |
) |
|
|
6,432 |
|
|
|
553 |
|
|
|
8,610 |
|
Research and development |
|
(855 |
) |
|
|
106 |
|
|
|
(639 |
) |
|
|
124 |
|
Total stock-based compensation |
$ |
842 |
|
|
$ |
17,903 |
|
|
$ |
2,467 |
|
|
$ |
20,610 |
|
Unrecognized stock-based compensation expense, net of estimated forfeitures, for time-based stock options, RSUs and PSUs as of June 30, 2016 was as follows (in thousands, except years):
|
Unrecognized |
|
|
|
|
|
|
|
Stock-Based |
|
|
Weighted- |
|
||
|
Compensation |
|
|
Average Period |
|
||
|
Expense |
|
|
of Recognition |
|
||
Time-based stock options |
$ |
2,474 |
|
|
|
2.7 |
|
RSUs and PSUs |
|
18,085 |
|
|
|
1.8 |
|
Total unrecognized stock-based compensation expense as of June 30, 2016 |
$ |
20,559 |
|
|
|
|
|
|
The Company’s operations included the following related party transactions (in thousands):
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, |
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June 30, |
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|
2016 |
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|
2015 |
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|
2016 |
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|
2015 |
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||||
Cost of revenue—operating leases and incentives |
$ |
869 |
|
|
$ |
1,439 |
|
|
$ |
2,016 |
|
|
$ |
2,929 |
|
Sales and marketing |
|
572 |
|
|
|
883 |
|
|
|
1,096 |
|
|
|
1,261 |
|
General and administrative |
|
128 |
|
|
|
4,589 |
|
|
|
281 |
|
|
|
4,802 |
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