VIVINT SOLAR, INC., 10-K filed on 3/16/2017
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Mar. 1, 2017
Jun. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
VSLR 
 
 
Entity Registrant Name
Vivint Solar, Inc. 
 
 
Entity Central Index Key
0001607716 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
110,262,711 
 
Entity Public Float
 
 
$ 78.4 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 96,586 
$ 92,213 
Accounts receivable, net
12,658 
3,636 
Inventories
11,285 
631 
Prepaid expenses and other current assets
46,683 
17,078 
Total current assets
167,212 
113,558 
Restricted cash and cash equivalents
26,853 
15,035 
Solar energy systems, net
1,458,355 
1,102,157 
Property and equipment, net
23,199 
48,168 
Intangible assets, net
1,420 
2,031 
Goodwill
 
36,601 
Prepaid tax asset, net
419,474 
277,496 
Other non-current assets, net
29,843 
14,024 
TOTAL ASSETS
2,126,356 1
1,609,070 1
Current liabilities:
 
 
Accounts payable
46,630 
49,986 
Accounts payable—related party
191 
1,905 
Distributions payable to non-controlling interests and redeemable non-controlling interests
16,176 
11,347 
Accrued compensation
20,003 
13,758 
Current portion of long-term debt
6,252 
 
Current portion of deferred revenue
19,911 
4,968 
Current portion of capital lease obligation
5,163 
5,489 
Accrued and other current liabilities
19,364 
29,017 
Total current liabilities
133,690 
116,470 
Long-term debt, net of current portion
750,728 
415,850 
Deferred revenue, net of current portion
34,379 
43,304 
Capital lease obligation, net of current portion
5,476 
10,055 
Deferred tax liability, net
395,218 
216,033 
Other non-current liabilities
10,355 
28,565 
Total liabilities
1,329,846 1
830,277 1
Commitments and contingencies (Note 18)
   
   
Redeemable non-controlling interests
129,676 
169,541 
Stockholders' equity:
 
 
Common stock, $0.01 par value—1,000,000 authorized, 110,245 shares issued and outstanding as of December 31, 2016; 1,000,000 authorized, 106,576 shares issued and outstanding as of December 31, 2015
1,102 
1,066 
Additional paid-in capital
542,348 
530,646 
Accumulated other comprehensive income
7,631 
 
Retained earnings (accumulated deficit)
5,217 
(12,769)
Total stockholders' equity
556,298 
518,943 
Non-controlling interests
110,536 
90,309 
Total equity
666,834 
609,252 
TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
$ 2,126,356 
$ 1,609,070 
[1] The Company’s consolidated assets as of December 31, 2016 and 2015 include $1,303.5 million and $1,005.8 million consisting of assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, of $1,273.8 million and $990.6 million as of December 31, 2016 and 2015; cash and cash equivalents of $23.2 million and $12.0 million as of December 31, 2016 and 2015; accounts receivable, net, of $4.0 million and $3.1 million as of December 31, 2016 and 2015; and prepaid expenses and other current assets of $0.8 million and $0.1 million as of December 31, 2016 and 2015. The Company’s consolidated liabilities as of December 31, 2016 and 2015 included $64.2 million and $66.4 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to non-controlling interests and redeemable non-controlling interests of $16.2 million and $11.3 million as of December 31, 2016 and 2015; deferred revenue of $41.7 million and $47.9 million as of December 31, 2016 and 2015; accrued and other current liabilities of $4.5 million and $3.9 million as of December 31, 2016 and 2015; and other non-current liabilities of $1.9 million and $3.3 million as of December 31, 2016 and 2015. For further information see Note 13—Investment Funds.
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2016
Dec. 31, 2015
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
110,245,000 
106,576,000 
Common stock, shares outstanding
110,245,000 
106,576,000 
Total assets
$ 2,126,356,000 1
$ 1,609,070,000 1
Solar energy systems, net
1,458,355,000 
1,102,157,000 
Cash and cash equivalents
96,586,000 
92,213,000 
Accounts receivable, net
12,658,000 
3,636,000 
Prepaid expenses and other current assets
46,683,000 
17,078,000 
Total liabilities
1,329,846,000 1
830,277,000 1
Distributions payable to non-controlling interests and redeemable non-controlling interests
16,176,000 
11,347,000 
Accrued and other current liabilities
19,364,000 
29,017,000 
Other non-current liabilities
10,355,000 
28,565,000 
Variable Interest Entities
 
 
Total assets
1,303,503,000 
1,005,825,000 
Solar energy systems, net
1,273,813,000 
990,609,000 
Cash and cash equivalents
23,190,000 
12,014,000 
Accounts receivable, net
3,958,000 
3,063,000 
Prepaid expenses and other current assets
761,000 
121,000 
Total liabilities
64,193,000 
66,417,000 
Distributions payable to non-controlling interests and redeemable non-controlling interests
16,176,000 
11,347,000 
Deferred revenue
41,700,000 
47,900,000 
Accrued and other current liabilities
4,458,000 
3,869,000 
Other non-current liabilities
$ 1,875,000 
$ 3,283,000 
[1] The Company’s consolidated assets as of December 31, 2016 and 2015 include $1,303.5 million and $1,005.8 million consisting of assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, of $1,273.8 million and $990.6 million as of December 31, 2016 and 2015; cash and cash equivalents of $23.2 million and $12.0 million as of December 31, 2016 and 2015; accounts receivable, net, of $4.0 million and $3.1 million as of December 31, 2016 and 2015; and prepaid expenses and other current assets of $0.8 million and $0.1 million as of December 31, 2016 and 2015. The Company’s consolidated liabilities as of December 31, 2016 and 2015 included $64.2 million and $66.4 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to non-controlling interests and redeemable non-controlling interests of $16.2 million and $11.3 million as of December 31, 2016 and 2015; deferred revenue of $41.7 million and $47.9 million as of December 31, 2016 and 2015; accrued and other current liabilities of $4.5 million and $3.9 million as of December 31, 2016 and 2015; and other non-current liabilities of $1.9 million and $3.3 million as of December 31, 2016 and 2015. For further information see Note 13—Investment Funds.
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenue:
 
 
 
Operating leases and incentives
$ 105,353 
$ 61,150 
$ 21,688 
Solar energy system and product sales
29,814 
3,032 
3,570 
Total revenue
135,167 
64,182 
25,258 
Operating expenses:
 
 
 
Cost of revenue—operating leases and incentives
150,796 
131,213 
67,984 
Cost of revenue—solar energy system and product sales
23,185 
1,762 
1,997 
Sales and marketing
41,436 
48,078 
21,869 
Research and development
2,979 
3,901 
1,892 
General and administrative
81,802 
92,664 
78,899 
Amortization of intangible assets
901 
13,172 
14,911 
Impairment of goodwill and intangible assets
36,601 
4,506 
 
Total operating expenses
337,700 
295,296 
187,552 
Loss from operations
(202,533)
(231,114)
(162,294)
Interest expense
34,008 
12,568 
9,323 
Other (income) expense
(1,437)
(154)
1,372 
Loss before income taxes
(235,104)
(243,528)
(172,989)
Income tax expense (benefit)
7,433 
9,737 
(7,070)
Net loss
(242,537)
(253,265)
(165,919)
Net loss attributable to non-controlling interests and redeemable non-controlling interests
(260,523)
(266,345)
(137,036)
Net income available (loss attributable) to common stockholders
$ 17,986 
$ 13,080 
$ (28,883)
Net income available (loss attributable) per share to common stockholders:
 
 
 
Basic
$ 0.17 
$ 0.12 
$ (0.35)
Diluted
$ 0.16 
$ 0.12 
$ (0.35)
Weighted-average shares used in computing net income available (loss attributable) per share to common stockholders:
 
 
 
Basic
108,190 
106,088 
83,446 
Diluted
112,538 
109,858 
83,446 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net income available (loss attributable) to common stockholders
$ 17,986,000 
$ 13,080,000 
$ (28,883,000)
Other comprehensive income:
 
 
 
Unrealized gains on cash flow hedging instruments (net of tax effect of $5,258 in 2016)
7,875,000 
 
 
Less: Interest expense on derivatives recognized into earnings (net of tax effect of $(163) in 2016)
(244,000)
 
 
Total other comprehensive income
7,631,000 
 
Comprehensive income (loss)
$ 25,617,000 
$ 13,080,000 
$ (28,883,000)
Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Statement Of Income And Comprehensive Income [Abstract]
 
Unrealized gains on cash flow hedging instruments, tax
$ 5,258 
Interest expense on derivatives recognized into earnings, tax
$ (163)
Consolidated Statements of Redeemable Non-Controlling Interests and Equity (USD $)
Share data in Thousands
Total
Redeemable Non-Controlling Interests
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income
Retained Earnings (Accumulated Deficit)
Total Stockholders Equity
Non-Controlling Interests
Balance at Dec. 31, 2013
$ 80,621,000 
$ 73,265,000 
$ 750,000 
$ 75,049,000 
 
$ 3,034,000 
$ 78,833,000 
$ 1,788,000 
Balance (in Shares) at Dec. 31, 2013
 
 
75,000 
 
 
 
 
 
Stock-based compensation expense
23,687,000 
 
 
23,687,000 
 
 
23,687,000 
 
Non-cash contributions for services
200,000 
 
 
200,000 
 
 
200,000 
 
Issuance of common stock
412,912,000 
 
303,000 
412,609,000 
 
 
412,912,000 
 
Issuance of common stock (in shares)
 
 
30,303 
 
 
 
 
 
Costs related to issuance of common stock
(8,760,000)
 
 
(8,760,000)
 
 
(8,760,000)
 
Contributions from non-controlling interests and redeemable non-controlling interests
275,777,000 
63,735,000 
 
 
 
 
 
275,777,000 
Deemed dividend
43,430,000 
 
 
43,430,000 
 
 
43,430,000 
 
Return of capital adjustment
(43,430,000)
 
 
(43,430,000)
 
 
(43,430,000)
 
Distributions to non-controlling interests and redeemable non-controlling interests
(8,801,000)
(5,154,000)
 
 
 
 
 
(8,801,000)
Net (loss) income attributable available to stockholders
(162,500,000)
 
 
 
 
(28,883,000)
(28,883,000)
(133,617,000)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests
 
(3,419,000)
 
 
 
 
 
 
Balance at Dec. 31, 2014
613,136,000 
128,427,000 
1,053,000 
502,785,000 
 
(25,849,000)
477,989,000 
135,147,000 
Balance (in Shares) at Dec. 31, 2014
 
 
105,303 
 
 
 
 
 
Stock-based compensation expense
25,604,000 
 
 
25,604,000 
 
 
25,604,000 
 
Excess tax benefit from stock-based compensation
1,713,000 
 
 
1,713,000 
 
 
1,713,000 
 
Issuance of common stock
557,000 
 
13,000 
544,000 
 
 
557,000 
 
Issuance of common stock (in shares)
 
 
1,273 
 
 
 
 
 
Contributions from non-controlling interests and redeemable non-controlling interests
178,833,000 
113,896,000 
 
 
 
 
 
178,833,000 
Distributions to non-controlling interests and redeemable non-controlling interests
(23,542,000)
(6,566,000)
 
 
 
 
 
(23,542,000)
Total other comprehensive income
 
 
 
 
 
 
 
Net (loss) income attributable available to stockholders
(187,049,000)
 
 
 
 
13,080,000 
13,080,000 
(200,129,000)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests
 
(66,216,000)
 
 
 
 
 
 
Balance at Dec. 31, 2015
609,252,000 
169,541,000 
1,066,000 
530,646,000 
 
(12,769,000)
518,943,000 
90,309,000 
Balance (in Shares) at Dec. 31, 2015
106,576 
 
106,576 
 
 
 
 
 
Stock-based compensation expense
10,614,000 
 
 
10,614,000 
 
 
10,614,000 
 
Excess tax detriment from stock-based compensation
(1,713,000)
 
 
(1,713,000)
 
 
(1,713,000)
 
Issuance of common stock
2,837,000 
 
36,000 
2,801,000 
 
 
2,837,000 
 
Issuance of common stock (in shares)
 
 
3,669 
 
 
 
 
 
Contributions from non-controlling interests and redeemable non-controlling interests
235,045,000 
42,803,000 
 
 
 
 
 
235,045,000 
Distributions to non-controlling interests and redeemable non-controlling interests
(29,313,000)
(7,650,000)
 
 
 
 
 
(29,313,000)
Total other comprehensive income
7,631,000 
 
 
 
7,631,000 
 
7,631,000 
 
Net (loss) income attributable available to stockholders
(167,519,000)
 
 
 
 
17,986,000 
17,986,000 
(185,505,000)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests
 
(75,018,000)
 
 
 
 
 
 
Balance at Dec. 31, 2016
$ 666,834,000 
$ 129,676,000 
$ 1,102,000 
$ 542,348,000 
$ 7,631,000 
$ 5,217,000 
$ 556,298,000 
$ 110,536,000 
Balance (in Shares) at Dec. 31, 2016
110,245 
 
110,245 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$ (242,537)
$ (253,265)
$ (165,919)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
46,821 
24,924 
8,523 
Amortization of intangible assets
901 
13,172 
15,042 
Impairment of goodwill and intangible assets
36,601 
4,506 
 
Deferred income taxes
174,090 
107,466 
74,848 
Stock-based compensation
10,614 
25,604 
23,687 
Loss on solar energy systems and property and equipment
6,432 
1,024 
 
Non-cash interest and other expense
7,161 
3,724 
6,712 
Reduction in lease pass-through financing obligation
(4,239)
(231)
 
Gains on ineffective portions of cash flow hedges
(1,591)
 
 
Excess tax detriment from stock-based compensation
(1,713)
 
 
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable, net
(9,022)
(1,799)
(1,018)
Inventories
(10,654)
143 
(195)
Prepaid expenses and other current assets
(32,526)
(576)
(10,486)
Prepaid tax asset, net
(141,978)
(165,586)
(81,172)
Other non-current assets, net
(6,078)
(5,268)
(8,451)
Accounts payable
2,698 
1,636 
1,905 
Accounts payable—related party
(1,714)
(227)
(935)
Accrued compensation
5,567 
(892)
(1,073)
Deferred revenue
6,018 
43,492 
3,387 
Accrued and other liabilities
(10,541)
12,909 
(773)
Net cash used in operating activities
(165,690)
(189,244)
(135,918)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Payments for the cost of solar energy systems
(405,635)
(540,399)
(383,522)
Payments for property and equipment
(2,785)
(6,307)
(3,505)
Proceeds from disposals of property and equipment
913 
 
 
Change in restricted cash and cash equivalents
(11,818)
(8,519)
(1,516)
Proceeds from tax credits and U.S. Treasury grants
5,169 
 
190 
Purchase of intangible assets
(291)
(1,221)
(370)
Payment in connection with business acquisition, net of cash acquired
 
 
(12,040)
Net cash used in investing activities
(414,447)
(556,446)
(400,763)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from investment by non-controlling interests and redeemable non-controlling interests
277,848 
292,729 
339,512 
Distributions paid to non-controlling interests and redeemable non-controlling interests
(32,134)
(25,541)
(8,751)
Proceeds from long-term debt
589,246 
310,850 
105,000 
Payments on long-term debt
(233,244)
 
 
Payments for debt issuance costs
(16,774)
(5,422)
 
Proceeds from lease pass-through financing obligation
2,388 
7,228 
 
Principal payments on capital lease obligations
(5,657)
(5,363)
(2,623)
Proceeds from issuance of common stock
2,837 
649 
412,912 
Proceeds from revolving lines of credit—related party
 
 
154,500 
Payments on revolving lines of credit—related party
 
 
(200,192)
Proceeds from short-term debt
 
 
75,500 
Payments on short-term debt
 
 
(75,500)
Excess tax benefits from stock-based compensation
 
1,713 
 
Payments for deferred offering costs
 
(589)
(8,066)
Net cash provided by financing activities
584,510 
576,254 
792,292 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
4,373 
(169,436)
255,611 
CASH AND CASH EQUIVALENTS—Beginning of period
92,213 
261,649 
6,038 
CASH AND CASH EQUIVALENTS—End of period
96,586 
92,213 
261,649 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
23,733 
8,469 
4,473 
Cash paid for income taxes
15,905 
67,135 
4,350 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Changes in fair value of interest rate swaps
14,317 
 
 
Costs of lessor-financed tenant improvements
7,850 
 
 
Accrued distributions to non-controlling interests and redeemable non-controlling interests
4,829 
4,567 
5,204 
Property acquired under build-to-suit agreements
2,896 
25,560 
 
Sale-leaseback of property under build-to-suit agreements
(28,456)
 
 
Vehicles acquired under capital leases
1,947 
11,363 
8,541 
Costs of solar energy systems included in changes in accounts payable, accrued compensation and other accrued liabilities
(4,508)
(6,589)
25,990 
Solar energy system sales
 
 
 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Receivable for tax credit recorded as a reduction to solar energy system costs
$ 1,552 
$ 1,678 
$ 4,132 
Organization
Organization

1.Organization

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

Business

The Company primarily offers solar energy to residential customers through long-term customer contracts, such as power purchase agreements (“PPAs”) and legal-form leases (“Solar Leases”). The Company also offers its customers the option to purchase solar energy systems (“System Sales”) through a third-party loan offering or cash purchase. The Company enters into these customer agreements 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 revenue generated from operations to finance a portion of the Company’s variable and fixed costs associated with installing solar energy systems. The obligations of the Company are in no event obligations of the investment funds.

Since inception, the Company has relied on Vivint and certain of its affiliates for some of its administrative, managerial, account management and operational services. The Company’s use of Vivint services has steadily decreased since 2013 and in 2016 the remaining services consisted primarily of certain IT support. The Company was consolidated by Vivint as a variable interest entity prior to the Acquisition, and continues to be an affiliated entity and related party subsequent to the Acquisition. The Company has entered into various agreements and transactions with Vivint and its affiliates related to these services. See Note 17—Related Party Transactions.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2.Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflect the accounts and operations of the Company, its subsidiaries in which the Company has a controlling financial interest and the investment funds formed to fund the purchase of solar energy systems under long-term customer contracts, which are consolidated as variable interest entities (“VIEs”). The Company uses a qualitative approach in assessing the consolidation requirement for VIEs. This approach focuses on determining whether the Company has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and whether the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. All of these determinations involve significant management judgments and estimates. The Company has determined that it is the primary beneficiary in the operational VIEs in which it has an equity interest. The Company evaluates its relationships with the VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. For additional information regarding these VIEs, see Note 13—Investment Funds.

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


Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect the Company’s principles of consolidation; investment tax credits (“ITCs”); revenue recognition; solar energy systems, net; the impairment analysis of long-lived assets; the goodwill impairment analysis; stock-based compensation; the provision for income taxes; the valuation of derivative financial instruments; the recognition and measurement of loss contingencies; and non-controlling interests and redeemable non-controlling interests. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

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

Restricted Cash

The Company’s guaranty agreements with certain of its fund investors require the maintenance of minimum cash balances of $10.0 million. For additional information, see Note 13—Investment Funds. The Company was also required to deposit a total of $16.9 million into separate interest reserve accounts in accordance with the terms of its various debt obligations. For additional information, see Note 11—Debt Obligations. These minimum cash balances are classified as restricted cash.

Liquidity

In order to grow, the Company requires cash to finance the deployment of solar energy systems. As of the date of this filing, the Company will require additional sources of cash beyond current cash balances, and currently available financing facilities to fund long-term planned growth. If the Company is unable to secure additional financing when needed, or upon desirable terms, the Company may be unable to finance installation of customers’ systems in a manner consistent with past performance, cost of capital could increase, or the Company may be required to significantly reduce the scope of operations, any of which would have a material adverse effect on the business, financial condition, results of operations and prospects. While the Company believes additional financing is available and will continue to be available to support current levels of operations, the Company believes it has the ability and intent to reduce operations to the level of available financial resources for at least the next 12 months from the date of this report.

Accounts Receivable, Net

Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. Accounts receivable also include unbilled accounts receivable, which is comprised of the monthly PPA power generation not yet invoiced and the monthly bill rate of Solar Leases as of the end of the reporting period. The Company estimates its allowance for doubtful accounts based upon the collectability of the receivables in light of historical trends and adverse situations that may affect customers’ ability to pay. Revisions to the allowance are recorded as an adjustment to bad debt expense or as a reduction to revenue when collectability is not reasonably assured. After appropriate collection efforts are exhausted, specific accounts receivable deemed to be uncollectible would be charged against the allowance in the period they are deemed uncollectible. Recoveries of accounts receivable previously written-off are recorded as credits to bad debt expense. The Company had an allowance for doubtful accounts of $1.8 million and $0.9 million as of December 31, 2016 and 2015.

Inventories

Inventories include solar energy systems under construction that have yet to be interconnected to the power grid and that will be sold to customers. Inventory is stated at the lower of cost, on a first-in-first-out basis (“FIFO”), or market. Upon interconnection to the power grid, solar energy system inventory is removed using the specific identification method. Inventories also include components related to photovoltaic installation devices and software products and are stated at the lower of cost, on an average cost basis, or market. The Company evaluates its inventory reserves on a quarterly basis and writes down the value of inventories for estimated excess and obsolete inventories based on assumptions about future demand and market conditions. See Note 5—Inventories.

Concentrations of Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The associated concentration risk for cash and cash equivalents is mitigated by banking with creditworthy institutions. At certain times, amounts on deposit exceed Federal Deposit Insurance Corporation insurance limits. Approximately 64% of accounts receivable as of December 31, 2016 was due from a third-party loan provider that offers financing to System Sales customers. The Company does not require collateral or other security to support accounts receivable. The Company is not dependent on any single customer outside of the third-party loan provider.

The Company purchases solar panels, inverters and other system components from a limited number of suppliers. Three suppliers accounted for nearly 84% of the solar photovoltaic module purchases for the year ended December 31, 2016. Two suppliers accounted for approximately 95% of the Company’s inverter purchases for the year ended December 31, 2016. If these suppliers fail to satisfy the Company’s requirements on a timely basis or if the Company fails to develop, maintain and expand its relationship with these suppliers, the Company could suffer delays in being able to deliver or install its solar energy systems, experience a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.

As of December 31, 2016, the Company’s customers are located in 14 states. Solar energy system installations in California accounted for approximately 31%, 36% and 48% of total installations for the years ended December 31, 2016, 2015 and 2014. Solar energy system installations in the Northeastern United States accounted for approximately 35%, 40% and 38% of total installations for the years ended December 31, 2016, 2015 and 2014. Future operations could be affected by changes in the economic conditions in these and other geographic areas, by changes in the demand for renewable energy generated by solar panel systems or by changes or eliminations of solar energy related government incentives.

Fair Value of Financial Instruments

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

 

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

 

Level II—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

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

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

Investment Tax Credits (ITCs)

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


Solar Energy Systems, Net

The Company sells energy to customers through PPAs or leases solar energy systems to customers through Solar Leases. The Company has determined that these contracts should be accounted for as operating leases and, accordingly, the related solar energy systems are stated at cost, less accumulated depreciation and amortization. The Company also sells solar energy systems to customers through System Sales. Systems that are sold to customers are not part of solar energy systems, net.

Solar energy systems, net is comprised of system equipment costs and initial direct costs related to solar energy systems subject to PPAs or Solar Leases. System equipment costs include components such as solar panels, inverters, racking systems and other electrical equipment, as well as costs for design and installation activities once a long-term customer contract has been executed. Initial direct costs related to solar energy systems consist of sales commissions and other direct customer acquisition expenses. System equipment costs and initial direct costs are capitalized and recorded within solar energy systems, net. Cash received under U.S. Treasury grants are recorded as a reduction in the basis of the related solar energy systems. This accounting treatment results in decreased depreciation of such solar energy systems over their useful lives.

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

 

  

Useful Lives

System equipment costs

  

30 years

Initial direct costs related to solar energy systems

  

Lease term (20 years)

System equipment costs are depreciated and initial direct costs are amortized once the respective systems have been installed and interconnected to the power grid. The determination of the useful lives of assets included within solar energy systems involves significant management judgment. As of December 31, 2016 and 2015, the Company had recorded costs of $1,532.1 million and $1,134.7 million in solar energy systems, of which $1,417.4 million and $882.7 million related to systems that had been interconnected to the power grid, with accumulated depreciation and amortization of $73.8 million and $32.5 million.

Property and Equipment, Net

The Company’s property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Vehicles leased under capital leases are depreciated over the life of the lease term, which is typically three to four years. The estimated useful lives of computer equipment, furniture, fixtures and purchased software are three years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. The estimated useful lives of leasehold improvements currently range from one to 12 years. Repairs and maintenance costs are expensed as incurred. Major renewals and improvements that extend the useful lives of existing assets would be capitalized and depreciated over their estimated useful lives.

Intangible Assets

The Company capitalizes costs incurred in the development of internal-use software during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life. The Company tests these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The Company recorded amortization for internal-use software of $0.8 million and $0.2 million for the years ended December 31, 2016 and 2015. No amortization for internal-use software was recorded for the year ended December 31, 2014 as the internal-use software applications were still under development. During the year ended December 31, 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-05, which requires that if a cloud computing arrangement includes a software license, the payment of fees is accounted for in the same manner as the acquisition of other software licenses. If there is no software license, the fees are accounted for as a service contract. The Company adopted this update prospectively, which did not have a significant impact on the Company’s consolidated financial statements in the current period.

Other finite-lived intangible assets, which consist of developed technology acquired in business combinations, trademarks/trade names and customer relationships are initially recorded at fair value and presented net of accumulated amortization. These intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company amortizes customer relationships over five years, trademarks/trade names over 10 years and developed technology over five to eight years. See Note 8—Intangible Assets and Goodwill.

Impairment of Long-Lived Assets

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

In February 2015, the Company ceased the external sales of two Solmetric Corporation (“Solmetric”) products: the SunEye and PV Designer. This change was considered an indicator of impairment, and a review regarding the recoverability of the carrying value of the related intangible assets was performed. As a result of this review, the Company recorded a total impairment charge of $4.5 million for the year ended December 31, 2015. See Note 8—Intangible Assets and Goodwill.

Goodwill Impairment Analysis

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. During the first quarter of 2016, the Company’s market capitalization decreased significantly 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 goodwill impairment test as of March 31, 2016. The impairment test determined that there was no implied value of goodwill, which resulted in an impairment charge of $36.6 million, which was recorded in impairment of goodwill and intangible assets.

Prior to goodwill being impaired in 2016, the Company performed its annual impairment test of goodwill as of October 1st of each fiscal year or whenever events or circumstances changed that would indicate that goodwill might be impaired. In conducting the impairment test, the Company first assessed qualitative factors to determine whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount as a basis for determining whether it was necessary to perform the two-step goodwill impairment test. If the qualitative step was not passed, the Company performed a two-step impairment test whereby in the first step, the Company would compare the fair value of the reporting unit with its carrying amount. If the carrying amount exceeded its fair value, the Company performed the second step of the goodwill impairment test to determine the amount of impairment. The second step, measuring the impairment loss, compared 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 would be recognized as an impairment loss.

Prepaid Tax Asset, Net

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

Other Non-Current Assets

Other non-current assets primarily consist of interest rate swaps, the long-term portion of lease incentive assets, tax credits receivable, advances receivable due from sales representatives, debt issuance costs and long-term refundable rent deposits. For additional information regarding the interest rate swaps, see “—Derivative Financial Instruments” and Note 12—Derivative Financial Instruments. Lease incentives represent cash payments made by the Company to customers in order to finalize long-term customer contracts. Tax credits receivable represent refundable tax credits for which the Company has elected to receive in cash in lieu of offsetting future tax liabilities. The Company provides advance payments of compensation to direct-sales personnel under certain circumstances. The advance is repaid as a reduction of the direct-sales personnel’s future compensation. The Company has established an allowance related to advances to direct-sales personnel who have terminated their employment agreement with the Company. These are non-interest bearing advances. Debt issuance costs represent costs incurred in connection with obtaining revolving debt financings and are deferred and amortized utilizing the straight-line method, which approximates the effective-interest method, over the term of the related financing.

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

As discussed in Note 13—Investment Funds, the Company and fund investors have formed various investment funds that the Company consolidates as the Company has determined that it is the primary beneficiary in the operational VIEs in which it has an equity interest. These VIEs are required to pay cumulative cash distributions to their respective fund investors. The Company accrues amounts payable to fund investors in distributions payable to non-controlling interests and redeemable non-controlling interests.

Deferred Revenue

Deferred revenue primarily includes deferred ITC revenue, rebate incentives and cash received related to System Sales. Deferred ITC revenue is related to a lease pass-through arrangement in which a portion of the rent prepayment is allocated to ITC revenue. Rebate incentives are received from utility companies and various government agencies and are recognized as revenue over the related lease term of 20 years. A portion of the cash received for System Sales is attributable to administrative services and is deferred over the period that the administrative services are provided. The majority of the cash received for System Sales is deferred until the solar energy systems are interconnected to the local power grids and receive permission to operate. See “Revenue Recognition” for additional information regarding revenue.

Home Installation Accruals and Warranties

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

The Company generally assesses a loss contingency accrual for damages related to home installations and roof penetrations, and provides for the estimated cost of warranties at the time the related revenue is recognized. The Company assesses the accrued home installation reserve and warranty regularly and adjusts the amounts as necessary based on actual experience and changes in future estimates. The current portion of this accrual is recorded as a component of accrued and other current liabilities and was $0.8 million and $0.3 million as of December 31, 2016 and 2015. The non-current portion of this accrual is recorded as a component of other non-current liabilities and was $0.8 million as of December 31, 2016.

Derivative Financial Instruments

The Company entered into interest rate swaps in August 2016 in order to reduce interest rate risk as required by the terms of one of the Company’s debt agreements. See Note 11—Debt Obligations. The interest rate swaps are designated as cash flow hedges. Changes in fair value for the effective portions of these cash flow hedges are recorded in other comprehensive income and will subsequently be reclassified to interest expense over the life of the related debt facilities as interest payments are made. Changes in fair value for the ineffective portions of the cash flow hedges are recognized in other (income) expense. As interest payments for the associated debt agreements and derivatives are recognized, the Company includes the effect of these payments in cash flows from operating activities within the consolidated statements of cash flows. Derivative instruments may be offset under their master netting arrangements. See Note 12—Derivative Financial Instruments.

Comprehensive Income (Loss)

Due to the Company entering into interest rate swaps, other comprehensive income (loss) (“OCI”) includes unrealized gains on the cash flow hedges for the year ended December 31, 2016. Prior to 2016, the Company had no comprehensive income or loss.

Debt Issuance Costs

During the year ended December 31, 2016, the Company adopted 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 the updates 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 consolidated balance sheets. In 2016, the Company entered into term loan facilities that are presented net of debt issuance costs. Debt issuance costs are presented consistent with the balance sheet classification of the related debt arrangements.

Revenue Recognition

The Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery or performance has occurred, (3) the sales price is fixed or determinable and (4) collectability is reasonably assured. The Company’s revenue is comprised of operating leases and incentives, and solar energy system and product sales as captioned in the consolidated statements of operations. Operating leases and incentives revenue includes PPA and Solar Lease revenue, solar renewable energy certificates (“SRECs”) sales and rebate incentives. Solar energy system and product sales revenue includes System Sales, which may include structural upgrades in sales contracts and SREC sales related to sold systems, and the sale of photovoltaic installation devices and software products. Revenue is recorded net of any sales tax collected.

Operating Leases and Incentives Revenue

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

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

The Company also offers solar energy systems to customers pursuant to Solar Leases in certain markets. The customer agreements are structured as Solar Leases due to local regulations that can be read to prohibit the sale of electricity pursuant to the Company’s standard PPA. Pursuant to Solar Leases, the customers’ monthly payments are a pre-determined amount calculated based on the expected solar energy generation by the system and includes an annual fixed percentage price escalation over the period of the contracts, which is 20 years. The Company provides its Solar Lease customers a performance guarantee, under which the Company agrees to make a payment at the end of each year to the customer if the solar energy system does not meet a guaranteed production level in the prior 12-month period.

At times the Company makes nominal cash payments to customers in order to facilitate the finalization of long-term customer contracts and the installation of related solar energy systems. These cash payments are considered lease incentives that are deferred and recognized over the term of the contract as a reduction of revenue.

The guaranteed production levels have varying terms. Dependent on the level of the production guarantee, the Company either (1) recognizes the monthly lease payments as revenue and records a solar energy performance guarantee liability due to the contingent nature of the lease payments, or (2) straight-lines the contracted payments over the initial term of the lease. Solar energy performance guarantee liabilities were de minimis as of December 31, 2016 and 2015.

Future minimum annual lease receipts from customers under Solar Leases are as follows (in thousands):

Years Ending December 31,

 

 

 

2017

$

4,962

 

2018

 

5,106

 

2019

 

5,254

 

2020

 

5,406

 

2021

 

5,565

 


The Company applies for and receives SRECs in certain jurisdictions for power generated by its solar energy systems under long-term customer contracts. When SRECs are granted, the Company typically sells them to other companies directly, or to brokers, to assist them in meeting their own mandatory emission reduction or conservation requirements. The Company recognizes revenue related to the sale of these certificates upon delivery, assuming the other revenue recognition criteria discussed above are met. The portion of SRECs included in operating leases and incentives was $19.3 million, $13.9 million and $2.6 million for the years ended December 31, 2016, 2015 and 2014.

The Company considers upfront rebate incentives earned from its solar energy systems under long-term customer contracts to be minimum lease payments and are recognized on a straight-line basis over the life of the long-term customer contracts, assuming the other revenue recognition criteria discussed above are met. The portion of rebates recognized within operating leases and incentives was $0.5 million, $0.4 million and $0.2 million for the years ended December 31, 2016, 2015 and 2014.

Lease Pass-Through Arrangement

In 2015, a lease pass-through fund arrangement became operational under which the Company contributed solar energy systems and the investor contributed cash. Contemporaneously, a wholly owned subsidiary of the Company entered into a master lease arrangement to lease the solar energy systems and the associated PPAs or Solar Leases to the fund investor. The Company’s subsidiary made a tax election to pass the ITCs related to the solar energy systems through to the fund investor, who as the legal lessee of the property is allowed to claim the ITCs under Section 50(d)(5) of the Internal Revenue Code and the related regulations.

Under this arrangement, the fund investor made a large upfront lease payment to one of the Company’s wholly owned subsidiaries and is obligated to make subsequent periodic payments. The Company allocated a portion of the aggregate payments received from the fund investor to the estimated fair value of the assigned ITCs. The fair value of the ITCs was estimated by multiplying the ITC rate of 30% by the fair value of the systems that were sold to the lease pass-through fund. The fair value of the systems was determined by independent appraisals. The Company’s subsidiary has an obligation to ensure the solar energy system is in service and operational for a term of five years to avoid any recapture of the ITCs. Accordingly, the Company recognizes ITC revenue as the recapture provisions lapse assuming all other revenue recognition criteria have been met. The amounts allocated to the ITCs were initially recorded as deferred revenue in the consolidated balance sheet, and subsequently, one-fifth of the amounts allocated to the ITCs is recognized as operating leases and incentives revenue in the consolidated statements of operations based on the anniversary of each solar energy system’s placed in service date.

Solar Energy System Sales

System Sale revenue is recognized when the solar energy system is interconnected to the local power grid and granted permission to operate, assuming all other revenue recognition criteria are met. With respect to System Sales where customers obtain third-party financing, the Company incurs a lender fee, which is recognized as a direct reduction of the recognized revenue related to the sale. Additionally, customers who finance System Sales may require structural upgrades to facilitate the installation of the system, which the Company provides for an additional fee. This revenue is recognized at the point the structural upgrade work is completed, assuming all other revenue recognition criteria are met.

In connection with a System Sale, the Company is obligated to assist with processing and submitting customer claims on the manufacturer warranties, provide routine system monitoring services on sold systems and notify the customer of any problems. While the value and nature of these services is not significant, the Company considers these services to have standalone value to the customer. Therefore, the Company allocates a portion of the contract consideration to these administrative and maintenance services based on the relative selling price method and the Company recognizes the deferred revenue over the contractual service term. As of December 31, 2016, the Company’s obligations to customers subsequent to the sale of solar energy systems were approximately $0.4 million. No obligations were recorded as of December 31, 2015 as sales of solar energy systems were de minimis.

Photovoltaic Installation and Software Products

The Company also recognizes revenue from the sale of photovoltaic installation devices and software products. These sales are either: (1) standalone and are recognized at the time of product shipment to the customer, assuming the remaining revenue recognition criteria have been met; or (2) multiple-element arrangements typically involving sales of photovoltaic installation hardware devices containing software essential to the hardware product’s functionality and standalone software. The Company recognizes revenue related to these transactions according to GAAP.

Cost of Revenue

Cost of Revenue—Operating Leases and Incentives

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

Cost of Revenue—Solar Energy System and Product Sales

Cost of revenue—solar energy system and product sales consists of direct and allocated indirect material and labor costs for System Sales, photovoltaic installation devices and software products and structural upgrades. Indirect material and labor costs include costs related to the processing, account creation, design, installation, interconnection and servicing of solar energy systems that are not capitalized, such as personnel costs not directly associated to a solar energy system installation, warehouse rent and utilities, and fleet vehicle executory costs. Costs of solar energy system sales are recognized in conjunction with the related revenue when the solar energy system is interconnected to the local power grid and granted permission to operate, assuming all other revenue recognition criteria are met.

Research and Development

Research and development expense is primarily comprised of salaries and benefits associated with research and development personnel and other costs related to photovoltaic installation devices and software products and the development of other solar technologies. Research and development costs are charged to expense when incurred. The Company’s research and development expense was $3.0 million, $3.9 million and $1.9 million for the years ended December 31, 2016, 2015 and 2014.

Advertising Costs

Advertising costs are expensed when incurred and are included in sales and marketing expenses in the consolidated statements of operations. The Company’s advertising expense was $2.3 million, $4.5 million and $3.5 million for the years ended December 31, 2016, 2015 and 2014.

Vivint Related Party Expenses

The consolidated financial statements reflect all costs of doing business, including the allocation of expenses incurred by Vivint on behalf of the Company. For additional information, see Note 17—Related Party Transactions. These expenses were allocated to the Company on a basis that was considered to reasonably reflect the utilization of the services provided to, or the benefit obtained by, the Company. The allocations may not, however, reflect the expense the Company would have incurred as an independent company for the periods presented, and as the Company continues to absorb these services, the allocations may not be indicative of the Company’s ongoing results of operations and financial position.

Other (Income) Expense

For the year ended December 31, 2016, other (income) expense primarily includes changes in fair value for the ineffective portions of the cash flow hedges. Other (income) expense also includes interest and penalties and related abatements associated with tax payments that were not paid in a timely manner.

Provision for Income Taxes

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


The Company recognizes sales of solar energy systems to substantially all of the investment funds for income tax purposes. As the investment funds are consolidated by us, the gain on the sale of the solar energy systems is not recognized in the consolidated financial statements. However, this gain is recognized for tax reporting purposes. Since these transactions are intercompany sales for GAAP purposes, any tax expense incurred related to these intercompany sales is deferred and recorded as a prepaid tax asset and amortized over the estimated useful life of the underlying solar energy systems, which has been estimated to be 30 years.

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

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

Stock-Based Compensation Expense

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

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

Post-Employment Benefits

In 2016, the Company began to sponsor its own 401(k) Plan that covered all of the Company’s eligible employees. In 2015 and 2014, the Company participated in a 401(k) Plan sponsored by Vivint that covered all of the Company’s eligible employees. The Company did not provide a discretionary company match to employee contributions during any of the periods presented.

Non-Controlling Interests and Redeemable Non-Controlling Interests

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


The Company classifies certain non-controlling interests with redemption features that are not solely within the control of the Company outside of permanent equity on its consolidated balance sheets. Estimated redemption value is calculated as the discounted cash flows subsequent to the expected flip date of the respective investment funds. Redeemable non-controlling interests are reported using the greater of their carrying value at each reporting date as determined by the HLBV method or their estimated redemption value in each reporting period.

Loss Contingencies

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

Segment Information

The Company’s chief operating decision maker is its chief executive officer. The chief executive officer reviews financial information for purposes of allocating resources and evaluating financial performance. From the second quarter of 2015 through the second quarter of 2016, the Company had aligned its operations as two reporting segments, (1) Residential and (2) Commercial and Industrial (“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 again the Company’s only reporting segment. No restatement of prior periods is necessary, as the restated prior periods are the previously disclosed consolidated statements of operations.

Operating expenses in the C&I segment included sales and marketing and general and administrative. For the year ended December 31, 2016 and 2015, sales and marketing expense was $0.3 million and $0.7 million. For the year ended December 31, 2016 and 2015, general and administrative expense was $1.5 million and $2.2 million. 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 13—Investment Funds.

Recent Accounting Pronouncements

New Revenue Guidance

From March 2016 through December 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-20, 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 (Topic 606), which represents comprehensive reform to revenue recognition principles related to customer contractsAdditionally, per ASU 2015-14, the effective date of these updates for the Company was deferred to January 1, 2018, with early adoption available on January 1, 2017. The Company currently plans to adopt the new standard in 2018. Adoption of this ASU is either full retrospective to each prior period presented or retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company is currently considering adopting the standard using the full retrospective method and is still evaluating the impact of the new standard on its accounting policies, processes and system requirements.

Under the current accounting guidance, the Company accounts for PPAs and Solar Leases as operating leases. The Company is evaluating whether these agreements will continue to meet the definition of a lease under ASC 842, Leases, or whether these agreements will be accounted for in accordance with Topic 606. The Company is still evaluating the impact of this new standard on the consolidated financial statements. The Company currently accounts for certain Solar Leases, rebates and incentives as minimum lease payments under ASC 840, Leases, and the Company is currently evaluating the accounting for these revenues under Topic 606. The Company is also evaluating the accounting for incremental costs of obtaining a contract, which under current accounting policies are capitalized as initial direct costs and amortized over the lease term.

The Company is in the final stages of analyzing the impact of Topic 606 on System Sales and has preliminarily concluded that it will not have a material impact on the consolidated financial statements.

The Company is assessing the impact of Topic 606 as it relates to other revenue streams such as sales of ITCs through its lease pass-through fund arrangement and sales of photovoltaic installation and software products.

While the Company continues to assess all potential impacts under the new standard, including the areas described above, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the consolidated financial statements at this time.

New Lease Guidance

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 currently accounts for PPAs and Solar Leases pursuant to ASC 840, Leases. The Company is evaluating whether these agreements will meet the definition of a lease pursuant to ASC 842, Leases, or whether these agreements will be accounted for in accordance with ASC 606, Revenue from Contracts with Customers. The Company is currently considering early adopting ASC 842 to coincide with the adoption of ASC 606, however a decision to early adopt is not final. The Company has operating leases that will be affected by this update and is still evaluating the impact on its consolidated financial statements and related disclosures.

Other Recent Accounting Pronouncements

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issued Task Force). This updated clarifies that transfers between cash and restricted cash are not part of the entity’s operating, investing and financing activities, and details of those transfers are not reported as cash flow activities in the statement of cash flows. This update is effective for annual periods beginning after December 15, 2017 for public business entities. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company is evaluating this update but currently anticipates it will have a material impact on its consolidated financial statements and related disclosures as changes in restricted cash will no longer be presented as cash flows from investing activities.

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

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Current accounting guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This update will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective for annual periods beginning after December 15, 2017 for public business entities and early adoption is permitted. The amendments in this update should be applied using a modified retrospective approach. The Company is evaluating this update but currently anticipates it will have a material impact on its consolidated financial statements and related disclosures as the Company will no longer record prepaid tax assets on the consolidated balance sheets and will record the income tax consequences of intra-entity transfers through income tax expense (benefit) on the consolidated statements of operations.

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

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture rates and classification on the statement of cash flows. This update is effective for annual periods beginning after December 15, 2016 for public business entities and early adoption is permitted. The Company expects to apply the update upon its effectiveness in the first quarter of 2017, which will impact its equity balance in the consolidated balance sheet and all expense line items where stock compensation is recorded on the consolidated statement of operations.

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 and early adoption is permitted. The Company does not anticipate this update to have a significant impact on its consolidated financial statements and related disclosures.

Fair Value Measurements
Fair Value Measurements

3.Fair Value Measurements

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

 

December 31, 2016

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

14,317

 

 

$

 

 

$

14,317

 

Time deposits

 

 

 

 

100

 

 

 

 

 

 

100

 

Total financial assets

$

 

 

$

14,417

 

 

$

 

 

$

14,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$

 

 

$

1,900

 

 

$

 

 

$

1,900

 

Total financial assets

$

 

 

$

1,900

 

 

$

 

 

$

1,900

 

 

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

Time deposits (Level II) approximate fair value due to their short-term nature (30 days) and, upon renewal, the interest rate is adjusted based on current market rates. The Company’s total debt obligations are carried at cost and were $771.9 million and $415.9 million as of December 31, 2016 and 2015. The Company estimated the fair value of its total debt obligations to approximate carrying value as interest accrues at a floating rate based on market rates. The Company did not have realized gains or losses related to financial assets for any of the periods presented.

Solmetric Acquisition
Solmetric Acquisition

4.Solmetric Acquisition

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

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


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

The purchase price was allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition. The purchase price allocation was finalized as of December 31, 2014. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands):

Cash acquired

$

139

 

Inventories

 

580

 

Other current assets acquired

 

221

 

Property

 

77

 

Customer relationships

 

738

 

Trademarks/trade names

 

1,664

 

Developed technology

 

1,295

 

In-process research and development

 

2,097

 

Goodwill

 

7,056

 

Deferred tax liability, net

 

(1,478

)

Current liabilities assumed

 

(210

)

Total

$

12,179

 

Goodwill represents the purchase price in excess of the fair value of net assets acquired. In the first quarter of 2016, the Company determined that its total goodwill balance was impaired, resulting in a total impairment charge of $36.6 million, including $7.1 million attributable to the Solmetric acquisition. See Note 8—Intangible Assets and Goodwill.

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

Financial results for Solmetric since the acquisition date are included in the results of operations for the year ended December 31, 2014. Solmetric contributed $3.2 million of revenues and $0.4 million of net income for the year ended December 31, 2014. During 2015, the Company ceased the external sale of two Solmetric products. This change was considered an indicator of impairment, and the Company performed a review regarding the recoverability of the carrying value of the related intangible assets. As a result of this review, the Company recorded an impairment charge of $4.5 million in the first quarter of 2015. In the second quarter of 2016, the Company resumed external sales of the SunEye product.

Unaudited Solmetric Pro Forma Information

The following pro forma financial information is based on the historical financial statements of the Company and presents the Company’s results as if the Solmetric Acquisition had occurred as of January 1, 2014 (in thousands):

 

Year Ended

 

 

December 31,

 

 

2014

 

Pro forma revenue

$

25,380

 

Pro forma net loss

 

(165,734

)

Pro forma net loss attributable to common stockholders

 

(28,698

)

The unaudited pro forma results include the accounting effects resulting from the Solmetric Acquisition, such as the amortization charges from acquired intangible assets, reversal of costs related to special retention bonuses and other payments to employees and transaction costs directly related to the Solmetric Acquisition, elimination of intercompany sales and reversal of the related tax effects. The pro forma information presented does not purport to present what the actual results would have been had the Solmetric Acquisition actually occurred on January 1, 2014, nor is the information intended to project results for any future period.

Inventories
Inventories

5.Inventories

Inventories consisted of the following (in thousands):

 

December 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Solar energy systems held for sale

$

10,540

 

 

$

121

 

Photovoltaic installation devices and software products

 

745

 

 

 

510

 

Total inventories

$

11,285

 

 

$

631

 

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

Solar Energy Systems
Solar Energy Systems

6.Solar Energy Systems

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

 

December 31,

 

 

December 31,

 

 

2016

 

 

2015

 

System equipment costs

$

1,238,968

 

 

$

893,088

 

Initial direct costs related to solar energy systems

 

261,318

 

 

 

171,081

 

 

 

1,500,286

 

 

 

1,064,169

 

Less: Accumulated depreciation and amortization

 

(73,793

)

 

 

(32,505

)

 

 

1,426,493

 

 

 

1,031,664

 

Solar energy system inventory

 

31,862

 

 

 

70,493

 

Solar energy systems, net

$

1,458,355

 

 

$

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 $41.3 million, $22.3 million and $8.1 million for the years ended December 31, 2016, 2015 and 2014.

Property and Equipment
Property and Equipment

7.Property and Equipment

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

 

 

Estimated

 

December 31,

 

 

December 31,

 

 

 

Useful Lives

 

2016

 

 

2015

 

Vehicles acquired under capital leases

 

3-4 years

 

$

20,384

 

 

$

24,149

 

Leasehold improvements

 

1-12 years

 

 

14,694

 

 

 

4,116

 

Furniture and computer and other equipment

 

3 years

 

 

6,270

 

 

 

6,524

 

 

 

 

 

 

41,348

 

 

 

34,789

 

Less: Accumulated depreciation and amortization

 

 

 

 

(18,149

)

 

 

(12,181

)

 

 

 

 

 

23,199

 

 

 

22,608

 

Build-to-suit lease asset under construction

 

 

 

 

 

 

 

25,560

 

Property and equipment, net

 

 

 

$

23,199

 

 

$

48,168

 

The Company recorded depreciation and amortization related to property and equipment of $11.1 million, $8.2 million and $3.4 million for the years ended December 31, 2016, 2015 and 2014.

The Company leases fleet vehicles that are accounted for as capital leases and are included in property and equipment, net. Depreciation on vehicles under capital leases totaling $5.5 million, $5.5 million and $3.0 million was capitalized in solar energy systems, net for the years ended December 31, 2016, 2015 and 2014.


Because of its involvement in certain aspects of the construction of its headquarters building in Lehi, UT, the Company was deemed the owner of the building for accounting purposes during the construction period. Accordingly, the Company recorded a build-to-suit lease asset and corresponding liabilities during the construction period. In May 2016, construction on the headquarters building was completed. The building qualified for sale-leaseback treatment as the Company determined the lease to be a normal leaseback, payment terms indicated the landlord has continuing investment in the property and the payment terms transferred the risks and rewards of ownership to the landlord. As such, the Company removed the build-to-suit lease asset and liabilities from its consolidated balance sheet as of December 31, 2016. For additional information regarding the related build-to-suit liabilities and the resulting ongoing lease, see Note 18—Commitments and Contingencies.

Future minimum lease payments for vehicles under capital leases as of December 31, 2016 were as follows (in thousands):

Years Ending December 31,

 

 

 

 

2017

 

$

5,751

 

2018

 

 

4,119

 

2019

 

 

1,239

 

2020

 

 

477

 

2021

 

 

 

Thereafter

 

 

 

Total minimum lease payments

 

 

11,586

 

Less: interest

 

 

947

 

Present value of capital lease obligations

 

 

10,639

 

Less: current portion

 

 

5,163

 

Long-term portion

 

$

5,476

 

 

Intangible Assets and Goodwill
Intangible Assets and Goodwill

8.Intangible Assets and Goodwill

Intangible assets consisted of the following (in thousands):

 

December 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Cost:

 

 

 

 

 

 

 

Internal-use software

$

1,314

 

 

$

1,591

 

Developed technology

 

522

 

 

 

522

 

Trademarks/trade names

 

201

 

 

 

201

 

Customer relationships

 

164

 

 

 

164

 

Total carrying value

 

2,201

 

 

 

2,478

 

Accumulated amortization:

 

 

 

 

 

 

 

Internal-use software

 

(434

)

 

 

(219

)

Developed technology

 

(191

)

 

 

(126

)

Trademarks/trade names

 

(59

)

 

 

(39

)

Customer relationships

 

(97

)

 

 

(63

)

Total accumulated amortization

 

(781

)

 

 

(447

)

Total intangible assets, net

$

1,420

 

 

$

2,031

 

The Company recorded amortization expense of $0.9 million and $13.2 million for the years ended December 31, 2016 and 2015, and $14.9 million for the year ended December 31, 2014, of which $0.1 million was recorded in cost of revenue solar energy system and product sales.


In February 2015, the Company ceased the external sales of the SunEye and PV Designer products, the rights to which the Company acquired when it acquired Solmetric. This change was considered an indicator of impairment, and a review regarding the recoverability of the carrying value of the related intangible assets was performed. In-process research and development, which was intended to generate Solmetric product sales in the residential market, was terminated and deemed fully impaired resulting in a charge of $2.1 million. The Solmetric, SunEye and PV Designer trade names were determined to no longer be utilized and were deemed fully impaired resulting in a charge of $1.3 million. The SunEye and PV Designer developed technology assets were deemed fully impaired resulting in a charge of $0.7 million. Customer relationships were deemed partially impaired by $0.4 million due to the loss of external customers who purchased the SunEye and PV Designer. As a result of this review, the Company recorded a total impairment charge of $4.5 million for the year ended December 31, 2015. No impairment was recorded in the years ended December 31, 2016 and 2014. In the second quarter of 2016, the Company resumed external sales of the SunEye product.

As of December 31, 2016, expected amortization expense for the unamortized intangible assets was as follows (in thousands):

Years Ending December 31,

 

 

 

2017

$

558

 

2018

 

515

 

2019

 

134

 

2020

 

86

 

2021

 

86

 

Thereafter

 

41

 

Total

$

1,420

 

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.

At the time this impairment test was performed, the Company consisted of two reporting segments, and all goodwill remained with the Residential reporting unit. 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 was recorded in impairment of goodwill and intangible assets.

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.

Accrued Compensation
Accrued Compensation

9.Accrued Compensation

Accrued compensation consisted of the following (in thousands):

 

December 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Accrued payroll

$

12,558

 

 

$

6,918

 

Accrued commissions

 

7,445

 

 

 

6,840

 

Total accrued compensation

$

20,003

 

 

$

13,758

 

 

Accrued and Other Current Liabilities
Accrued and Other Current Liabilities

10.Accrued and Other Current Liabilities

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

December 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Current portion of lease pass-through financing obligation

$

4,833

 

 

$

3,835

 

Accrued unused commitment fees and interest

 

3,827

 

 

 

1,014

 

Accrued professional fees

 

3,222

 

 

 

7,918

 

Sales, use and property taxes payable

 

1,785

 

 

 

3,683

 

Current portion of deferred rent

 

1,155

 

 

 

1,064

 

Income tax payable

 

 

 

 

6,169

 

Accrued litigation settlements

 

 

 

 

1,790

 

Other accrued expenses

 

4,542

 

 

 

3,544

 

Total accrued and other current liabilities

$

19,364

 

 

$

29,017

 

 

Debt Obligations
Debt Obligations


11.Debt Obligations

Debt obligations consisted of the following as of December 31, 2016 (in thousands, except interest rates):

 

Principal

 

 

Unamortized Debt

 

 

 

 

 

 

 

 

 

 

Unused

 

 

 

 

 

 

 

 

Borrowings

 

 

Issuance Costs

 

 

Net Carrying Value

 

 

Borrowing

 

 

Interest

 

 

Maturity

 

Outstanding

 

 

Current

 

 

Long-term

 

 

Current

 

 

Long-term

 

 

Capacity

 

 

Rate

 

 

Date

Revolving lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregation credit facility

$

187,000

 

 

$

 

(1)

$

 

(1)

$

 

 

$

187,000

 

 

$

188,000

 

 

 

4.2

%

 

March 2018

Working capital credit facility(2)

 

136,500

 

 

 

 

(1)

 

 

(1)

 

 

 

 

136,500

 

 

 

 

 

 

3.9

 

 

March 2020

2016 Term loan facility

 

297,506

 

 

 

(169

)

 

 

(9,643

)

 

 

4,788

 

 

 

282,906

 

 

 

 

 

 

3.6

(3)

 

August 2021

Subordinated HoldCo credit facility

 

149,500

 

 

 

(47

)

 

 

(4,851

)

 

 

1,453

 

 

 

143,149

 

 

 

50,000

 

 

 

8.6

 

 

March 2020

Credit agreement

 

1,346

 

 

 

(1

)

 

 

(161

)

 

 

11

 

 

 

1,173

 

 

 

 

 

 

6.5

 

 

(4)

Total debt

$

771,852

 

 

$

(217

)

 

$

(14,655

)

 

$

6,252

 

 

$

750,728

 

 

$

238,000

 

 

 

 

 

 

 

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

 

Principal

 

 

Unamortized Debt

 

 

 

 

 

 

 

 

 

 

Unused

 

 

 

 

 

 

 

 

Borrowings

 

 

Issuance Costs

 

 

Net Carrying Value

 

 

Borrowing

 

 

Interest

 

 

Maturity

 

Outstanding

 

 

Current

 

 

Long-term

 

 

Current

 

 

Long-term

 

 

Capacity

 

 

Rate

 

 

Date

Aggregation credit facility

$

269,100

 

 

$

 

(1)

$

 

(1)

$

 

 

$

269,100

 

 

$

105,900

 

 

 

3.8

%

 

March 2018

Working capital credit facility

 

146,750

 

 

 

 

(1)

 

 

(1)

 

 

 

 

146,750

 

 

 

 

 

 

3.5

 

 

March 2020

Total debt

$

415,850

 

 

$

 

 

$

 

 

$

 

 

$

415,850

 

 

$

105,900

 

 

 

 

 

 

 

 

(1)

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

(2)

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

(3)

The interest rate of this facility is partially hedged to an effective interest rate of 4.0% for $270.0 million of the principal borrowings outstanding. See Note 12—Derivative Financial Instruments.

(4)

Quarterly payments of principal and interest are payable over a seven-year term. The seven-year term begins after the final completion date of the underlying solar energy systems, which is anticipated to begin in the first quarter of 2017.

2016 Term Loan Facility

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

For the initial four years of the term of the 2016 Term Loan Facility, interest on borrowings accrues at an annual rate equal to the London Interbank Offered Rate (“LIBOR”) plus 3.00%. Thereafter interest accrues at an annual rate equal to LIBOR plus 3.25%. In the third quarter of 2016, the Company entered into interest rate swap hedging arrangements such that 90% of the aggregate principal amount of the outstanding term loan is subject to a fixed interest rate. See Note 12—Derivative Financial Instruments. Certain principal payments are due on a quarterly basis subject to the occurrence of certain events, including proceeds received by the borrower or subsidiary guarantors in respect of casualties, proceeds received for purchased systems and failure to meet certain distribution conditions. Estimated principal payments due in the next 12 months are classified as the current portion of long-term debt, net of the related unamortized debt issuance costs. Optional prepayments, in whole or in part, are permitted under the 2016 Term Loan Facility, without premium or penalty apart from any customary LIBOR breakage provisions.

The 2016 Term Loan Facility includes customary events of default, conditions to borrowing and covenants, including negative covenants that restrict, subject to certain exceptions, the borrower’s and guarantors’ ability to incur indebtedness, incur liens, make fundamental changes to their respective businesses, make certain types of restricted payments and investments or enter into certain transactions with affiliates. A debt service reserve account was funded with the outstanding letters of credit under the 2016 Term Loan Facility, and as a result, it is not classified as restricted cash and cash equivalents. The borrower is required to maintain an average debt service coverage ratio of 1.55 to 1. As of December 31, 2016, the Company was in compliance with such covenants.

Prior to the maturity of the 2016 Term Loan Facility, a fund investor could exercise a put option in two of the Company’s investment funds and require the Company to purchase the fund investor’s interest in those investment funds. As such, the Company was required to establish a $2.9 million reserve at the inception of the 2016 Term Loan Facility in order to pay the fund investor if either of the put options is exercised prior to the maturity of the 2016 Term Loan Facility. In addition, a $2.4 million escrow account was established with respect to those systems in the 2016 Term Loan Portfolio that had not been placed in service as of the closing date, with a single disbursement of this amount to occur once such systems have been placed in service, subject to compliance with the 2016 Term Loan Portfolio concentration restrictions and limitations related to the 2016 Term Loan Portfolio. These reserves are classified as restricted cash and cash equivalents.

The obligations of the borrower are secured by a pledge of the membership interests in the borrower, all of the borrower’s assets, and the assets of the borrower’s directly owned subsidiaries acting as managing members of the underlying investment funds. In addition, the Company guarantees certain obligations of the borrower under the 2016 Term Loan Facility.

Interest expense for the 2016 Term Loan Facility was approximately $5.8 million for the year ended December 31, 2016. No interest expense was incurred for the years ended December 31, 2015 and 2014.

Subordinated HoldCo Facility

In March 2016, the Company entered into a financing agreement (the “Subordinated HoldCo Facility,” formerly known as the “Term Loan Facility”) pursuant to which it may borrow up to an aggregate principal amount of $200.0 million of term loan borrowings from investment funds and accounts advised by HPS Investment Partners, formerly known as Highbridge Principal Strategies, LLC. The borrower under the Subordinated HoldCo Facility is Vivint Solar Financing Holdings, LLC, one of the Company’s wholly owned subsidiaries. The initial $75.0 million in borrowings are referred to as “Tranche A” borrowings. The remaining $125.0 million aggregate principal amount in borrowings may be incurred in three installments of at least $25.0 million aggregate principal amount prior to March 2017. Such subsequent borrowings are referred to as “Tranche B” borrowings. The Company incurred Tranche B borrowings in July 2016. As a result, the maturity date for all borrowings was extended to March 2020. The Company may not prepay any borrowings outside of required prepayments until March 2018, and any subsequent prepayments of principal are subject to a 3.0% fee. Subsequent to the date of the financial statements, the Company incurred the remaining borrowing capacity available under this arrangement. Borrowings under the Subordinated HoldCo Facility will be used for the construction and acquisition of solar energy systems.

Prior to the Tranche B borrowings being incurred, interest on principal borrowings under the Subordinated HoldCo Facility accrued at a floating rate of LIBOR plus 5.5%. Subsequent to the Tranche B borrowings being incurred, interest accrues at a floating rate of LIBOR plus 8.0%. Certain principal payments are due on a quarterly basis. Estimated principal payments due in the next 12 months are classified as the current portion of long-term debt, net of the related unamortized debt issuance costs.

The Subordinated HoldCo Facility includes customary events of default, conditions to borrowing and covenants, including covenants that restrict, subject to certain exceptions, the borrower’s, and the guarantors’ ability to incur indebtedness, incur liens, make investments, make fundamental changes to their business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. Additionally, the parties to the Subordinated HoldCo Facility must maintain certain consolidated and project subsidiary loan-to-value ratios and a consolidated debt service coverage ratio, with such covenants to be tested as of the last day of each fiscal quarter and upon each incurrence of borrowings. As of December 31, 2016, the Company was in compliance with such covenants. Each of the parties to the Subordinated HoldCo Facility has pledged assets not otherwise pledged under another existing debt facility as collateral to secure their obligations under the Subordinated HoldCo Facility. Vivint Solar Financing Holdings Parent, LLC, another of the Company’s wholly owned 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 $7.3 million for the year ended December 31, 2016. No interest expense was recorded for the years ended December 31, 2015 and 2014. A $7.6 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 Subordinated HoldCo Facility.


Bank of America, N.A. Aggregation Credit Facility

In September 2014, the Company entered into an aggregation credit facility (as amended, the “Aggregation Facility”), pursuant to which the Company may borrow up to an aggregate of $375.0 million and, upon the satisfaction of certain conditions and the approval of the lenders, up to an additional aggregate of $175.0 million in borrowings with certain financial institutions for which Bank of America, N.A. is acting as administrative agent. The Company’s ability to draw on any available borrowing capacity under the Aggregation Facility is dependent on when it has solar energy system revenue to collateralize the borrowings.

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

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

The Aggregation Facility includes customary covenants, including covenants that restrict, subject to certain exceptions, the borrower’s, and the guarantors’ ability to incur indebtedness, incur liens, make investments, make fundamental changes to their business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. Among other restrictions, the Aggregation Facility provides that the borrower may not incur any indebtedness other than that related to the Aggregation Facility or in respect of permitted swap agreements, and that the guarantors may not incur any indebtedness other than that related to the Aggregation Facility or as permitted under existing investment fund transaction documents. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. As of December 31, 2016, the Company was in compliance with such covenants.

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 $14.1 million, $9.9 million and $1.4 million for the years ended December 31, 2016, 2015 and 2014. As of December 31, 2016, the current portion of unamortized debt issuance costs of $4.0 million was recorded in prepaid expenses and other current assets, and the long-term portion of unamortized debt issuance costs of $0.9 million was recorded in other non-current assets, net. In addition, a $3.9 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 December 31, 2016, the Company had established letters of credit under the Working Capital Facility for up to $13.5 million related to insurance contracts.

The Company has pledged the interests in the assets of the Company and its subsidiaries, excluding the Company’s existing investment funds, their managing members, the 2016 Term Loan Facility, the Subordinated HoldCo Facility, the Aggregation Facility and Solmetric, as security for its obligations under the Working Capital Facility. Prepayments are permitted under the Working Capital Facility, and the principal and accrued interest on any outstanding loans mature in March 2020. Interest accrues on borrowings at a floating rate equal to, dependent on the type of borrowing, (1) a rate equal to the Eurodollar Rate for the interest period divided by one minus the Eurodollar Reserve Percentage, plus a margin of 3.25%; or (2) the highest of (a) the Federal Funds Rate plus 0.50%, (b) the Citibank prime rate and (c) the one-month interest period Eurodollar rate plus 1.00%, plus a margin of 2.25%. Interest is payable dependent on the type of borrowing at the end of (1) the interest period that the Company may elect as a term and not to exceed three months, (2) quarterly or (3) at maturity of the Working Capital Facility.

The Working Capital Facility includes customary covenants, including covenants that restrict, subject to certain exceptions, the Company’s ability to incur indebtedness, incur liens, make investments, make fundamental changes to its business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. Among other restrictions, the Working Capital Facility provides that the Company may not incur any indebtedness other than that related to the Working Capital Facility or permitted swap agreements. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. The Company is also required to maintain $25.0 million in cash and cash equivalents and certain investments as of the last day of each quarter. As of December 31, 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 $6.1 million and $2.3 million for the years ended December 31, 2016 and 2015. No interest expense was recorded for the year ended December 31, 2014. As of December 31, 2016, the current portion of unamortized debt issuance costs of $0.5 million was recorded in prepaid expenses and other current assets, and the long-term portion of unamortized debt issuance costs of $1.2 million was recorded in other non-current assets, net.

Credit Agreement

In February 2016, a wholly owned 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 up to $3.0 million upon the satisfaction of certain conditions and the approval of the lenders. Proceeds from the Credit Agreement were 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. The Company did not draw upon the full borrowing capacity of the Credit Agreement, and no borrowing capacity remained as of December 31, 2016. As of December 31, 2016, the repayment term had not yet begun. Interest accrues on borrowings at a rate of 6.50%. Interest expense under the Credit Agreement was $0.1 million for the year ended December 31, 2016. No interest expense was recorded for the years ended December 31, 2015 and 2014.

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

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

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

Revolving Lines of CreditRelated Party

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

In May 2013, the Company entered into a Subordinated Note and Loan Agreement with APX Parent Holdco, Inc., pursuant to which the Company was able to incur up to $20.0 million in revolver borrowings (“2013 Loan Agreement”). In January 2014, the Company amended and restated the 2013 Loan Agreement, pursuant to which the Company was able to incur an additional $30.0 million in revolver borrowings, resulting in a total borrowing capacity of $50.0 million, with interest on the borrowings accruing at a rate of 12% per year. Accrued interest was paid-in-kind through additions to the principal amount on a semi-annual basis. The Company incurred and repaid revolver borrowings in 2014. Interest expense was $3.1 million for the year ended December 31, 2014.


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

Interest Expense and Amortization of Debt Issuance Costs

For the years ended December 31, 2016, 2015 and 2014, total interest expense incurred under debt obligations was $33.4 million, $12.2 million and $9.3 million, of which $6.5 million, $3.5 million and $2.2 million was amortization of debt issuance costs.

Scheduled Maturities of Debt

The scheduled maturities of debt as of December 31, 2016 are as follows (in thousands):

2017

$

6,469

 

2018

 

193,652

 

2019

 

6,611

 

2020

 

286,795

 

2021

 

277,061

 

Thereafter

 

1,264

 

Total

$

771,852

 

 

Derivative Financial Instruments
Derivative Financial Instruments

12.Derivative Financial Instruments

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

 

December 31, 2016

 

 

Balance Sheet Location

Asset derivatives designated as hedging instruments:

 

 

 

 

 

 

Interest rate swaps

 

$

14,317

 

 

Other non-current assets

Total derivatives

 

$

14,317

 

 

 

The Company is exposed to interest rate risk relating to its outstanding debt facilities that have variable interest rates. In connection with closing the Term Loan Facility in August 2016, the Company entered into interest rate swaps with an aggregate notional amount of $270.0 million to offset changes in the variable interest rate for a portion of the Company’s LIBOR-indexed floating-rate loans. The notional amount of the interest rate swaps decreases through June 30, 2028 to match the Company’s estimated monthly and quarterly principal payments on its loans through that date. The Company had no other derivative financial instruments prior to entering into these interest rate swaps. The Company records derivatives at fair value.

The interest rate swaps are designated as cash flow hedges. The amount of accumulated other comprehensive income (“AOCI”) expected to be reclassified to interest expense within the next 12 months is approximately $0.1 million. The Company will discontinue the hedge accounting designation of these derivatives if interest payments on LIBOR-indexed floating rate loans compared to the payments under the derivatives are no longer highly effective.


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

 

 

Year Ended December 31,

 

 

 

 

 

2016

 

 

2015

 

 

Location of Gain (Loss)

Gains recognized in OCI - effective portion:

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

13,133

 

 

$

 

 

 

Total

 

$

13,133

 

 

$