VIVINT SOLAR, INC., 10-K filed on 3/7/2018
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Mar. 1, 2018
Jun. 30, 2017
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
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
 
115,141,419 
 
Entity Public Float
 
 
$ 172.5 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 108,452 
$ 96,586 
Accounts receivable, net
19,665 
12,658 
Inventories
22,597 
11,285 
Prepaid expenses and other current assets
34,049 
46,683 
Total current assets
184,763 
167,212 
Restricted cash and cash equivalents
46,486 
26,853 
Solar energy systems, net
1,673,532 
1,458,355 
Property and equipment, net
15,078 
23,199 
Intangible assets, net
862 
1,420 
Prepaid tax asset, net
505,883 
419,474 
Other non-current assets, net
37,325 
29,843 
TOTAL ASSETS
2,463,929 1
2,126,356 1
Current liabilities:
 
 
Accounts payable
40,736 
46,630 
Accounts payable—related party
163 
191 
Distributions payable to non-controlling interests and redeemable non-controlling interests
16,437 
16,176 
Accrued compensation
20,992 
20,003 
Current portion of long-term debt
13,585 
6,252 
Current portion of deferred revenue
41,846 
19,911 
Current portion of capital lease obligation
4,166 
5,163 
Accrued and other current liabilities
29,675 
19,364 
Total current liabilities
167,600 
133,690 
Long-term debt, net of current portion
925,964 
750,728 
Deferred revenue, net of current portion
29,200 
34,379 
Capital lease obligation, net of current portion
1,599 
5,476 
Deferred tax liability, net
342,382 
395,218 
Other non-current liabilities
13,674 
10,355 
Total liabilities
1,480,419 1
1,329,846 1
Commitments and contingencies (Note 17)
   
   
Redeemable non-controlling interests
122,444 
129,676 
Stockholders' equity:
 
 
Common stock, $0.01 par value—1,000,000 authorized, 115,099 shares issued and outstanding as of December 31, 2017; 1,000,000 authorized, 110,245 shares issued and outstanding as of December 31, 2016
1,151 
1,102 
Additional paid-in capital
559,788 
542,348 
Accumulated other comprehensive income
6,905 
7,631 
Retained earnings
213,107 
5,217 
Total stockholders' equity
780,951 
556,298 
Non-controlling interests
80,115 
110,536 
Total equity
861,066 
666,834 
TOTAL LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
$ 2,463,929 
$ 2,126,356 
[1] The Company’s consolidated assets as of December 31, 2017 and 2016 include $1,516.2 million and $1,303.5 million consisting of assets of variable interest entities (“VIEs”) that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, of $1,486.0 million and $1,273.8 million as of December 31, 2017 and 2016; cash and cash equivalents of $17.3 million and $23.2 million as of December 31, 2017 and 2016; accounts receivable, net, of $5.1 million and $4.0 million as of December 31, 2017 and 2016; other non-current assets, net of $6.8 million and $1.8 million as of December 31, 2017 and 2016; and prepaid expenses and other current assets of $1.0 million and $0.8 million as of December 31, 2017 and 2016. The Company’s consolidated liabilities as of December 31, 2017 and 2016 included $58.4 million and $64.2 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to non-controlling interests and redeemable non-controlling interests of $16.4 million and $16.2 million as of December 31, 2017 and 2016; deferred revenue of $36.0 million and $41.7 million as of December 31, 2017 and 2016; accrued and other current liabilities of $4.5 million as of December 31, 2017 and 2016; and other non-current liabilities of $1.4 million and $1.9 million as of December 31, 2017 and 2016. For further information see Note 12—Investment Funds.
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000 
1,000,000,000 
Common stock, shares issued
115,099,000 
110,245,000 
Common stock, shares outstanding
115,099,000 
110,245,000 
Total assets
$ 2,463,929,000 1
$ 2,126,356,000 1
Solar energy systems, net
1,673,532,000 
1,458,355,000 
Cash and cash equivalents
108,452,000 
96,586,000 
Accounts receivable, net
19,665,000 
12,658,000 
Other non-current assets, net
37,325,000 
29,843,000 
Prepaid expenses and other current assets
34,049,000 
46,683,000 
Total liabilities
1,480,419,000 1
1,329,846,000 1
Distributions payable to non-controlling interests and redeemable non-controlling interests
16,437,000 
16,176,000 
Accrued and other current liabilities
29,675,000 
19,364,000 
Other non-current liabilities
13,674,000 
10,355,000 
Variable Interest Entities
 
 
Total assets
1,516,190,000 
1,303,503,000 
Solar energy systems, net
1,486,023,000 
1,273,813,000 
Cash and cash equivalents
17,280,000 
23,190,000 
Accounts receivable, net
5,143,000 
3,958,000 
Other non-current assets, net
6,792,000 
1,781,000 
Prepaid expenses and other current assets
952,000 
761,000 
Total liabilities
58,382,000 
64,193,000 
Distributions payable to non-controlling interests and redeemable non-controlling interests
16,437,000 
16,176,000 
Deferred revenue
36,000,000 
41,700,000 
Accrued and other current liabilities
4,478,000 
4,458,000 
Other non-current liabilities
$ 1,444,000 
$ 1,875,000 
[1] The Company’s consolidated assets as of December 31, 2017 and 2016 include $1,516.2 million and $1,303.5 million consisting of assets of variable interest entities (“VIEs”) that can only be used to settle obligations of the VIEs. These assets include solar energy systems, net, of $1,486.0 million and $1,273.8 million as of December 31, 2017 and 2016; cash and cash equivalents of $17.3 million and $23.2 million as of December 31, 2017 and 2016; accounts receivable, net, of $5.1 million and $4.0 million as of December 31, 2017 and 2016; other non-current assets, net of $6.8 million and $1.8 million as of December 31, 2017 and 2016; and prepaid expenses and other current assets of $1.0 million and $0.8 million as of December 31, 2017 and 2016. The Company’s consolidated liabilities as of December 31, 2017 and 2016 included $58.4 million and $64.2 million of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to non-controlling interests and redeemable non-controlling interests of $16.4 million and $16.2 million as of December 31, 2017 and 2016; deferred revenue of $36.0 million and $41.7 million as of December 31, 2017 and 2016; accrued and other current liabilities of $4.5 million as of December 31, 2017 and 2016; and other non-current liabilities of $1.4 million and $1.9 million as of December 31, 2017 and 2016. For further information see Note 12—Investment Funds.
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenue:
 
 
 
Operating leases and incentives
$ 150,862 
$ 105,353 
$ 61,150 
Solar energy system and product sales
117,166 
29,814 
3,032 
Total revenue
268,028 
135,167 
64,182 
Cost of revenue:
 
 
 
Cost of revenue—operating leases and incentives
141,305 
150,796 
131,213 
Cost of revenue—solar energy system and product sales
88,977 
23,185 
1,762 
Total cost of revenue
230,282 
173,981 
132,975 
Gross profit (loss)
37,746 
(38,814)
(68,793)
Operating expenses:
 
 
 
Sales and marketing
38,696 
41,436 
48,078 
Research and development
3,340 
2,979 
3,901 
General and administrative
79,399 
81,802 
92,664 
Amortization of intangible assets
558 
901 
13,172 
Impairment of goodwill and intangible assets
 
36,601 
4,506 
Total operating expenses
121,993 
163,719 
162,321 
Loss from operations
(84,247)
(202,533)
(231,114)
Interest expense
64,264 
34,008 
12,568 
Other expense (income), net
352 
(1,437)
(154)
Loss before income taxes
(148,863)
(235,104)
(243,528)
Income tax (benefit) expense
(157,333)
7,433 
9,737 
Net income (loss)
8,470 
(242,537)
(253,265)
Net loss attributable to non-controlling interests and redeemable non-controlling interests
(200,628)
(260,523)
(266,345)
Net income available to common stockholders
$ 209,098 
$ 17,986 
$ 13,080 
Net income available per share to common stockholders:
 
 
 
Basic
$ 1.85 
$ 0.17 
$ 0.12 
Diluted
$ 1.77 
$ 0.16 
$ 0.12 
Weighted-average shares used in computing net income available per share to common stockholders:
 
 
 
Basic
113,132 
108,190 
106,088 
Diluted
118,268 
112,538 
109,858 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net income available to common stockholders
$ 209,098 
$ 17,986 
$ 13,080 
Unrealized (losses) gains on cash flow hedging instruments (net of tax effect of $(562) and $5,258 in 2017 and 2016)
(843)
7,875 
 
Less: Interest income (expense) on derivatives recognized into earnings (net of tax effect of $78 and $(163) in 2017 and 2016)
117 
(244)
 
Total other comprehensive (loss) income
(726)
7,631 
 
Comprehensive income
$ 208,372 
$ 25,617 
$ 13,080 
Consolidated Statements of Comprehensive Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Statement Of Income And Comprehensive Income [Abstract]
 
 
Unrealized losses on cash flow hedging instruments, tax
$ (562)
$ 5,258 
Interest expense on derivatives recognized into earnings, tax
$ 78 
$ (163)
Consolidated Statements of Redeemable Non-Controlling Interests and Equity (USD $)
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, 2014
$ 613,136 
$ 128,427 
$ 1,053 
$ 502,785 
 
$ (25,849)
$ 477,989 
$ 135,147 
Balance (in Shares) at Dec. 31, 2014
 
 
105,303 
 
 
 
 
 
Stock-based compensation expense
25,604 
 
 
25,604 
 
 
25,604 
 
Excess tax benefit from stock-based compensation
1,713 
 
 
1,713 
 
 
1,713 
 
Issuance of common stock, net
557 
 
13 
544 
 
 
557 
 
Issuance of common stock, net (in shares)
 
 
1,273 
 
 
 
 
 
Contributions from non-controlling interests and redeemable non-controlling interests
178,833 
113,896 
 
 
 
 
 
178,833 
Distributions to non-controlling interests and redeemable non-controlling interests
(23,542)
(6,566)
 
 
 
 
 
(23,542)
Net (loss) income attributable available to stockholders
(187,049)
 
 
 
 
13,080 
13,080 
(200,129)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests
 
(66,216)
 
 
 
 
 
 
Balance at Dec. 31, 2015
609,252 
169,541 
1,066 
530,646 
 
(12,769)
518,943 
90,309 
Balance (in Shares) at Dec. 31, 2015
 
 
106,576 
 
 
 
 
 
Stock-based compensation expense
10,614 
 
 
10,614 
 
 
10,614 
 
Excess tax detriment from stock-based compensation
(1,713)
 
 
(1,713)
 
 
(1,713)
 
Issuance of common stock, net
2,837 
 
36 
2,801 
 
 
2,837 
 
Issuance of common stock, net (in shares)
 
 
3,669 
 
 
 
 
 
Contributions from non-controlling interests and redeemable non-controlling interests
235,045 
42,803 
 
 
 
 
 
235,045 
Distributions to non-controlling interests and redeemable non-controlling interests
(29,313)
(7,650)
 
 
 
 
 
(29,313)
Total other comprehensive income (loss)
7,631 
 
 
 
7,631 
 
7,631 
 
Net (loss) income attributable available to stockholders
(167,519)
 
 
 
 
17,986 
17,986 
(185,505)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests
 
(75,018)
 
 
 
 
 
 
Balance at Dec. 31, 2016
666,834 
129,676 
1,102 
542,348 
7,631 
5,217 
556,298 
110,536 
Balance (in Shares) at Dec. 31, 2016
110,245 
 
110,245 
 
 
 
 
 
Cumulative-effect adjustment from adoption of ASU 2016-09
806 
 
 
2,014 
 
(1,208)
806 
 
Stock-based compensation expense
12,917 
 
 
12,917 
 
 
12,917 
 
Issuance of common stock, net
637 
 
49 
588 
 
 
637 
 
Issuance of common stock, net (in shares)
 
 
4,854 
 
 
 
 
 
Contributions from non-controlling interests and redeemable non-controlling interests
148,666 
65,062 
 
 
 
 
 
148,666 
Distributions to non-controlling interests and redeemable non-controlling interests
(39,984)
(7,566)
 
 
 
 
 
(39,984)
Acquisition of redeemable non-controlling interests
1,921 
(3,203)
 
1,921 
 
 
1,921 
 
Total other comprehensive income (loss)
(726)
 
 
 
(726)
 
(726)
 
Net (loss) income attributable available to stockholders
69,995 
 
 
 
 
209,098 
209,098 
(139,103)
Net (loss) Income attributable to non-controlling interests and redeemable non-controlling interests
 
(61,525)
 
 
 
 
 
 
Balance at Dec. 31, 2017
$ 861,066 
$ 122,444 
$ 1,151 
$ 559,788 
$ 6,905 
$ 213,107 
$ 780,951 
$ 80,115 
Balance (in Shares) at Dec. 31, 2017
115,099 
 
115,099 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$ 8,470 
$ (242,537)
$ (253,265)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization
60,606 
46,821 
24,924 
Amortization of intangible assets
558 
901 
13,172 
Impairment of goodwill and intangible assets
 
36,601 
4,506 
Deferred income taxes
(52,828)
174,090 
107,466 
Stock-based compensation
12,917 
10,614 
25,604 
Loss on solar energy systems and property and equipment
6,858 
6,432 
1,024 
Noncash interest and other expense
9,422 
7,161 
3,724 
Reduction in lease pass-through financing obligation
(4,515)
(4,239)
(231)
Losses (gains) on interest rate swaps
359 
(1,591)
 
Excess tax detriment from stock-based compensation
 
(1,713)
 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(7,007)
(9,022)
(1,799)
Inventories
(11,312)
(10,654)
143 
Prepaid expenses and other current assets
10,864 
(32,526)
(576)
Prepaid tax asset, net
(86,409)
(141,978)
(165,586)
Other non-current assets, net
(5,502)
(6,078)
(5,268)
Accounts payable
(93)
2,698 
1,636 
Accounts payable—related party
(192)
(1,714)
(227)
Accrued compensation
495 
5,567 
(892)
Deferred revenue
16,756 
6,018 
43,492 
Accrued and other liabilities
6,699 
(10,541)
12,909 
Net cash used in operating activities
(33,854)
(165,690)
(189,244)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Payments for the cost of solar energy systems
(276,651)
(405,635)
(540,399)
Payments for property and equipment
(672)
(2,785)
(6,307)
Proceeds from disposals of solar energy systems and property and equipment
2,428 
913 
 
Change in restricted cash and cash equivalents
(19,633)
(11,818)
(8,519)
Proceeds from state tax credits
3,720 
5,169 
 
Purchase of intangible assets
 
(291)
(1,221)
Net cash used in investing activities
(290,808)
(414,447)
(556,446)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from investment by non-controlling interests and redeemable non-controlling interests
213,728 
277,848 
292,729 
Distributions paid to non-controlling interests and redeemable non-controlling interests
(47,289)
(32,134)
(25,541)
Proceeds from long-term debt
356,750 
589,246 
310,850 
Payments on long-term debt
(172,495)
(233,244)
 
Payments for debt issuance and deferred offering costs
(13,917)
(16,774)
(6,011)
Proceeds from lease pass-through financing obligation
3,581 
2,388 
7,228 
Principal payments on capital lease obligations
(4,467)
(5,657)
(5,363)
Proceeds from issuance of common stock
637 
2,837 
649 
Excess tax benefits from stock-based compensation
 
 
1,713 
Net cash provided by financing activities
336,528 
584,510 
576,254 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
11,866 
4,373 
(169,436)
CASH AND CASH EQUIVALENTS—Beginning of period
96,586 
92,213 
261,649 
CASH AND CASH EQUIVALENTS—End of period
108,452 
96,586 
92,213 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
51,127 
23,733 
8,469 
Cash (recovered from) paid for income taxes
(33,245)
15,905 
67,135 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Changes in fair value of interest rate swaps
(1,569)
14,317 
 
Vehicles acquired under capital leases
874 
1,947 
11,363 
Costs of solar energy systems included in changes in accounts payable, accounts payable—related party, accrued compensation and accrued and other liabilities
610 
(4,508)
(6,589)
Accrued distributions to non-controlling interests and redeemable non-controlling interests
261 
4,829 
4,567 
Costs of lessor-financed tenant improvements
 
7,850 
 
Property acquired under build-to-suit agreements
 
2,896 
25,560 
Sale-leaseback of property under build-to-suit agreements
 
(28,456)
 
Solar energy system sales
 
 
 
NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Receivable for tax credit recorded as a reduction to solar energy system costs
$ 102 
$ 1,552 
$ 1,678 
Organization
Organization

1.Organization

Vivint Solar, Inc. and its subsidiaries are collectively referred to as the “Company.” The Company most commonly 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 third-party loan offerings or a cash purchase. The Company enters into customer contracts through a sales organization that primarily uses a direct-to-home sales model. The long-term customer contracts under PPAs and Solar Leases 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 investment tax credits (“ITCs”), accelerated tax depreciation and other incentives associated with residential solar energy systems. The Company uses the cash received from the investment funds, long-term debt facilities and cash generated from operations, including System Sales, to finance a portion of the Company’s variable and fixed costs associated with installing solar energy systems.

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. 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 12—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, ITCs; revenue recognition; solar energy systems, net; the impairment analysis of long-lived assets; 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 12—Investment Funds. As of December 31, 2017, the Company also had $36.5 million in required reserves outstanding in separate collateral accounts in accordance with the terms of its various debt obligations. For additional information, see Note 10—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, if necessary.

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 $3.6 million and $1.8 million as of December 31, 2017 and 2016.

Inventories

Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2015-11, which simplifies the measurement of inventory by changing 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 as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this ASU prospectively and no prior periods were adjusted. The adoption of this ASU had no material effect on the consolidated financial statements.

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 FIFO basis, or net realizable value. 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 products and are stated at the lower of cost, on an average cost basis, or net realizable value. 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 4—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, net as of December 31, 2017 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 providers.


The Company purchases solar panels, inverters and other system components from a limited number of suppliers. Three suppliers accounted for approximately 99% of the solar photovoltaic module purchases for the year ended December 31, 2017. Two suppliers accounted for approximately 98 % of the Company’s inverter purchases for the year ended December 31, 2017. 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, 2017, the Company’s customers are located in 21 states. Solar energy system installations in California accounted for approximately 39 %, 31 % and 36 % of total installations for the years ended December 31, 2017, 2016 and 2015. Solar energy system installations in the Northeastern United States accounted for approximately 33 %, 38 % and 40 % of total installations for the years ended December 31, 2017, 2016 and 2015. Future operations could be affected by changes in the economic conditions in these and other geographic areas, by changes in materials costs, 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 measured on a recurring basis 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 ITC 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 accounts for its ITCs as a reduction of income tax expense in the year in which the credits arise. 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. 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, interconnected to the power grid and received permission to operate. The determination of the useful lives of assets included within solar energy systems involves significant management judgment. As of December 31, 2017 and 2016, the Company had recorded costs of $1,803.2 million and $1,532.1 million in solar energy systems, of which $1,717.3 million and $1,417.4 million related to systems that had been interconnected to the power grid, with accumulated depreciation and amortization of $129.6 million and $73.8 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 five 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 $0.4 million, $0.8 million, and $0.2 million for the years ended December 31, 2017, 2016, and 2015.

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  eight years. See Note 7—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 7—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 for the year ended December 31, 2016.

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 as deferred tax expense 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, advances receivable due from sales representatives, debt issuance costs, prepaid insurance, a straight-line lease asset and long-term refundable rent deposits. For additional information regarding the interest rate swaps, see “—Derivative Financial Instruments” and Note 11—Derivative Financial Instruments. Lease incentives represent cash payments made by the Company to customers in order to finalize long-term customer contracts. 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. During the year ended December 31, 2017, the Company acquired two insurance policies to mitigate the risk of ITC recapture. The insurance premiums are being amortized on a straight-line basis over the policy period. For Solar Lease agreements, the Company recognizes revenue on a straight-line basis over the lease term and records an asset that represents future customer payments.

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

As discussed in Note 12—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 to ten years against defects in design and workmanship, and for periods of one to ten years that installations will remain watertight. The manufacturers’ warranties on the solar energy system components, which are typically passed through to the customers, have typical product warranty periods of 10 to 20 years and a limited performance warranty period of 25 years. The Company warrants its photovoltaic installation devices 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 their estimated cost at the time the related revenue is recognized. The Company assesses the accrued home installation and roof penetration reserves 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 $1.4 million and $0.8 million as of December 31, 2017 and 2016. The non-current portion of this accrual is recorded as a component of other non-current liabilities and was $2.1 million and $0.8 million as of December 31, 2017 and 2016.

Derivative Financial Instruments

The Company maintains interest rate swaps as required by the terms of its debt agreements. See Note 10—Debt Obligations. The interest rate swaps related to the 2016 Term Loan Facility are designated as cash flow hedges. Changes in fair value for the effective portions of these cash flow hedges are recorded in other comprehensive (loss) income (“OCI”) and will subsequently be reclassified to interest expense over the life of the related debt facility as interest payments are made. Changes in fair value for the ineffective portions of the cash flow hedges are recognized in other expense (income), net. As interest payments for the associated debt agreement 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. The interest rate swaps related to the Aggregation Facility are not designated as hedge instruments and any changes in fair value are accounted for in other expense (income), net. Derivative instruments may be offset under their master netting arrangements. See Note 11—Derivative Financial Instruments.

Comprehensive Income

Due to the Company entering into interest rate swaps, OCI includes unrealized gains on the cash flow hedges for the years ended December 31, 2017 and 2016. Prior to 2016, the Company had no comprehensive income or loss.

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, ITC revenue 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 products. Revenue is recorded net of any sales tax collected.


Operating Leases and Incentives Revenue

The Company’s most common 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 $0.1 million and de minimis as of December 31, 2017 and 2016.

Future minimum annual lease receipts due from customers under Solar Leases as of December 31, 2017 are as follows (in thousands):

Years Ending December 31,

 

 

 

2018

$

6,266

 

2019

 

6,448

 

2020

 

6,635

 

2021

 

6,827

 

2022

 

7,025

 

The Company applies for and receives SRECs in certain jurisdictions for power generated by solar energy systems it has installed. 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. Total SREC revenue was $33.8 million, $19.3 million and $13.9 million for the years ended December 31, 2017, 2016 and 2015.

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 wholly owned 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 wholly owned 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, 2017 and 2016, the Company’s obligations to customers subsequent to the sale of solar energy systems were approximately $2.1  million and $0.4 million.

Photovoltaic Installation Products

The Company also recognizes revenue from the sale of photovoltaic installation products. These sales are standalone and are recognized at the time of product shipment to the customer, assuming the remaining revenue recognition criteria have been met.

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 operating leases and incentives also includes allocated facilities and information technology 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 products and structural upgrades. Indirect material and labor costs are ratably allocated to System Sales and include costs related to the processing; account creation; design; installation; interconnection and servicing of solar energy systems, 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 solar energy system and product sales also includes allocated facilities and information technology costs. Costs of solar energy system sales are recognized in conjunction with the related revenue upon the solar energy system passing an inspection by the responsible governmental department after completion of system installation and interconnection to the local power grid, 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 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 $3.3 million, $3.0 million and $3.9 million for the years ended December 31, 2017, 2016 and 2015.

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, $2.3 million and $4.5 million for the years ended December 31, 2017, 2016 and 2015.

Vivint Related Party Expenses

The consolidated financial statements reflect all costs of doing business, including the allocation of expenses incurred by Vivint, Inc. (“Vivint”) on behalf of the Company. The Company has historically relied on the technical support of Vivint to run its business. The Company used certain of Vivint’s information technology and infrastructure until transitioning off in July 2017. 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. For additional information, see Note 16—Related Party Transactions.

Other Expense (Income), Net

For the year ended December 31, 2017, other expense (income), net primarily includes changes in fair value for the ineffective portions of the cash flow hedges and the interest rate swaps not designated as hedges.

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. As required by ASC 740, the Company recognizes the effect of tax rate and law changes on deferred taxes in the reporting period in which the legislation is enacted.

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 the Company, 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 (benefit) expense.


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 Company recognizes compensation costs using the accelerated attribution method for all employee stock-based compensation awards over the requisite service period of the awards, which is generally the awards’ vesting period.

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.

Effective January 1, 2017, the Company adopted ASU 2016-09, which simplifies several aspects of the accounting for share-based payment transactions. The resulting changes were as follows:

 

all excess tax benefits and tax deficiencies resulting from stock-based compensation are now recognized as income tax expense or benefit in the consolidated income statements, and excess tax benefits are now recognized regardless of whether the benefit reduces taxes payable in the current period;

 

excess tax benefits are now classified along with other tax cash flows as an operating activity on the consolidated statements of cash flows;

 

the Company elected to recognize forfeitures as they occur beginning on January 1, 2017;

 

the Company may withhold up to the maximum statutory tax rate for each employee without triggering liability accounting; and

 

cash paid by the Company when directly withholding shares for tax withholding purposes is classified as a financing activity on the consolidated statements of cash flows.

Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures were adopted using a modified retrospective transition method by means of a cumulative-effect adjustment, resulting in a net $1.2 million reduction to retained earnings as of January 1, 2017.

Amendments related to the presentation of employee taxes paid on the statements of cash flows when an employer withholds shares for tax withholding purposes was adopted using the retrospective method, but had no impact on prior periods.

Amendments related to the recognition of excess tax benefits and tax deficiencies in the consolidated income statements and the presentation of excess tax benefits on the consolidated statements of cash flows were adopted prospectively. No prior periods were adjusted.

In the second quarter of 2017, the Company adopted ASU 2017-09, which clarifies when changes to equity awards require the use of modification accounting guidance. This update clarifies that if the fair value, vesting conditions and classification of an award remain the same after modification, then modification accounting is not required. This guidance was adopted prospectively and no prior periods were adjusted. The adoption of this ASU had no material effect on the consolidated financial statements.

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, 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.

Attributing income and loss to the non-controlling interests and redeemable non-controlling interests under the HLBV method requires the use of significant assumptions and estimates to calculate the amounts that fund investors would receive upon a hypothetical liquidation. Changes in these assumptions and estimates can have a significant impact on the amount that fund investors would receive upon a hypothetical liquidation. 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. Estimating the redemption value of the redeemable non-controlling interests requires the use of significant assumptions and estimates. Changes in these assumptions and estimates can have a significant impact on the calculation of the redemption value.

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 12—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 contracts. The effective date of these updates for the Company is January 1, 2018. Adoption of this ASU is either full retrospective to each prior period presented or modified retrospective with a cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. The Company will adopt the standard using the modified retrospective method.

Under the current accounting guidance, the Company accounts for PPAs and Solar Leases as operating leases. The Company has determined that these agreements do not meet the definition of a lease under ASC 842, Leases, and will be accounted for in accordance with Topic 606 once the Company adopts ASC 842. The Company has determined that under Topic 606 there will be no change from current revenue recognition practices for its PPA revenue stream. The Company currently accounts for certain Solar Leases, rebates and incentives as minimum lease payments under ASC 840, Leases. For the Company’s Solar Leases, the Company has concluded that the impact of adopting Topic 606 will be immaterial. Revenue from all of the Company’s Solar Leases will now be recognized on a straight-line basis over the contractual term; currently a significant majority of Solar Leases are recognized on a straight-line basis. The Company has also concluded that there will be no material change related to the timing of revenue recognition for rebates and incentives.

The Company has evaluated 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 has concluded that it will continue to capitalize the costs of obtaining a PPA, Solar Lease or System Sale contract, which are primarily comprised of sales commissions. For PPA and Solar Lease contracts, the amortization period will remain the life of the related contract, which is 20 years. For System Sales, the capitalized costs of obtaining a contract will continue to be recognized when the related solar energy system is interconnected to the local power grid and granted permission to operate. This will result in minimal changes to the Company’s method of revenue recognition in the consolidated financial statements.

The Company has analyzed the impact of Topic 606 on System Sales and photovoltaic installation products, and has concluded that it will not have a material impact on the method of revenue recognition in the consolidated financial statements.

The Company has assessed the impact of Topic 606 as it relates to the sales of ITCs through its lease pass-through fund arrangement. The Company has concluded that revenue related to the sale of ITCs through its lease pass-through arrangement will be recognized when the related solar energy systems are placed in service. Currently, the Company recognizes this revenue evenly over the five-year ITC recapture period. This earlier recognition of the ITC lease pass-through revenue is anticipated to be material. For example, if Topic 606 was applied retrospectively, the revenue recognized in fiscal 2016 would increase by approximately $12 million and the revenue recognized in fiscal 2017 would be reduced by approximately $8 million.

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 are required to be applied using a modified retrospective approach. The Company has determined to adopt this ASU effective January 1, 2019. The Company has operating leases that will be affected by this update and the Company is still evaluating the full impact on its consolidated financial statements and related disclosures. The impact is not expected to be significant to the Company’s consolidated financial statements.


Other Recent Accounting Pronouncements

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The Tax Cuts and Jobs Act (the “TCJA”) was enacted in December 2017. The TCJA reduced the U.S. federal corporate income tax rate and made other changes to U.S. federal tax law. ASU 2018-02 allows an entity to elect to reclassify the income tax effects of the TCJA on items within accumulated other comprehensive income (“AOCI”) to retained earnings, and requires certain additional disclosures. This update is effective for all entities for fiscal years beginning after December 15, 2018 and early adoption is permitted. The amendments in this update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company expects to early adopt this ASU, effective January 1, 2018, and expects to reclassify the income tax effects of the TCJA on items within AOCI to retained earnings in the period of adoption. The total amount the Company expects to reclassify to retained earnings is approximately $1.5 million.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update makes targeted improvements to accounting for hedge activities by easing certain documentation and assessment requirements and eliminating the requirement to separately measure and report hedge ineffectiveness. This update is effective for annual periods beginning after December 15, 2018 for public business entities and early adoption is permitted. The amendments in this update should be applied using a modified retrospective transition method by recording a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to AOCI with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. This ASU will not have a material impact on the Company’s consolidated financial statements and related disclosures. The Company will early adopt the new standard effective January 1, 2018.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This update 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 statements 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 the retrospective transition method. This update will have a material impact on the Company’s consolidated statements of cash flows 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 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP 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. The amendments in this update should be applied using a modified retrospective approach. This update will have a material impact on the Company’s 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 on the consolidated statements of operations. As of December 31, 2017, the prepaid tax asset, net is $505.9 million and it is anticipated that the vast majority of this amount will be written off to retained earnings upon adoption. Once adopted, the ongoing income tax impacts of these intra-entity transfers will be reported as income tax expense.

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. The amendments in this update should be applied using a retrospective transition method and must all be applied in the same period. This update will not have a material impact on the Company’s consolidated statements of cash flows.

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 and liabilities measured on a recurring basis by level within the fair value hierarchy (in thousands):

 

December 31, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

14,028

 

 

$

 

 

$

14,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

1,280

 

 

$

 

 

$

1,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

 

 

$

14,317

 

 

$

 

 

$

14,317

 

Time deposits

 

 

 

 

100

 

 

 

 

 

 

100

 

Total financial assets

$

 

 

$

14,417

 

 

$

 

 

$

14,417

 

The interest rate swaps (Level 2) were 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 2) 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 did not realize gains or losses related to financial assets for any of the periods presented.

The carrying values and fair values of the Company’s long-term debt were as follows (in thousands):

 

December 31, 2017

 

 

December 31, 2016

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Floating-rate long-term debt

$

757,044

 

 

$

757,044

 

 

$

771,852

 

 

$

771,852

 

Fixed-rate long-term debt

 

199,063

 

 

 

238,618

 

 

 

 

 

 

 

Total

$

956,107

 

 

$

995,662

 

 

$

771,852

 

 

$

771,852

 

The Company’s outstanding principal balance of long-term debt is carried at cost. The Company estimated the fair values of its floating-rate debt facilities to approximate their carrying values as interest accrues at floating rates based on market rates. The Company’s fixed-rate debt facilities (Level 2) were valued using quoted prices for corporate debt with similar terms.

Inventories
Inventories

4.Inventories

Inventories consisted of the following (in thousands):

 

December 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Solar energy systems held for sale

$

21,971

 

 

$

10,540

 

Photovoltaic installation products

 

626

 

 

 

745

 

Total inventories

$

22,597

 

 

$

11,285

 

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 net realizable value. Photovoltaic installation products are stated at the lower of cost, on an average cost basis, or net realizable value.

Solar Energy Systems
Solar Energy Systems

5.Solar Energy Systems

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

 

December 31,

 

 

December 31,

 

 

2017

 

 

2016

 

System equipment costs

$

1,437,419

 

 

$

1,238,968

 

Initial direct costs related to solar energy systems

 

336,136

 

 

 

261,318

 

 

 

1,773,555

 

 

 

1,500,286

 

Less: Accumulated depreciation and amortization

 

(129,640

)

 

 

(73,793

)

 

 

1,643,915

 

 

 

1,426,493

 

Solar energy system inventory

 

29,617

 

 

 

31,862

 

Solar energy systems, net

$

1,673,532

 

 

$

1,458,355

 

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 $55.8 million, $41.3 million and $22.3 million for the years ended December 31, 2017, 2016 and 2015.

Property and Equipment
Property and Equipment

6.Property and Equipment

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

 

 

Estimated

 

December 31,

 

 

December 31,

 

 

 

Useful Lives

 

2017

 

 

2016

 

Vehicles acquired under capital leases

 

3-5 years

 

$

15,113

 

 

$

20,384

 

Leasehold improvements

 

1-12 years

 

 

15,071

 

 

 

14,694

 

Furniture and computer and other equipment

 

3 years

 

 

6,492

 

 

 

6,270

 

 

 

 

 

 

36,676

 

 

 

41,348

 

Less: Accumulated depreciation and amortization

 

 

 

 

(21,598

)

 

 

(18,149

)

Property and equipment, net

 

 

 

$

15,078

 

 

$

23,199

 

The Company recorded depreciation and amortization related to property and equipment of $8.4 million, $11.1 million and $8.2 million for the years ended December 31, 2017, 2016 and 2015.

The Company leases fleet vehicles that are accounted for as capital leases and are included in property and equipment, net. Of total property and equipment depreciation and amortization, depreciation on vehicles under capital leases of $3.6 million, $5.5 million and $5.5 million was capitalized in solar energy systems, net for the years ended December 31, 2017, 2016 and 2015.

Future minimum lease payments for vehicles under capital leases as of December 31, 2017 were as follows (in thousands):

Years Ending December 31,

 

 

 

 

2018

 

$

4,457

 

2019

 

 

1,232

 

2020

 

 

455

 

2021

 

 

 

2022

 

 

 

Thereafter

 

 

 

Total minimum lease payments

 

 

6,144

 

Less: interest

 

 

379

 

Present value of capital lease obligations

 

 

5,765

 

Less: current portion

 

 

4,166

 

Long-term portion

 

$

1,599

 

 

Intangible Assets and Goodwill
Intangible Assets and Goodwill

7.Intangible Assets and Goodwill

Intangible Assets

Intangible assets consisted of the following (in thousands):

 

December 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Cost:

 

 

 

 

 

 

 

Internal-use software

$

1,314

 

 

$

1,314

 

Developed technology

 

522

 

 

 

522

 

Trademarks/trade names

 

201

 

 

 

201

 

Customer relationships

 

164

 

 

 

164

 

Total carrying value

 

2,201

 

 

 

2,201

 

Accumulated amortization:

 

 

 

 

 

 

 

Internal-use software

 

(872

)

 

 

(434

)

Developed technology

 

(258

)

 

 

(191

)

Trademarks/trade names

 

(79

)

 

 

(59

)

Customer relationships

 

(130

)

 

 

(97

)

Total accumulated amortization

 

(1,339

)

 

 

(781

)

Total intangible assets, net

$

862

 

 

$

1,420

 

The Company recorded amortization expense of $0.6 million, $0.9 million and $13.2 million for the years ended December 31, 2017, 2016 and 2015.

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, 2017 and 2016. In the second quarter of 2016, the Company resumed external sales of the SunEye product.

As of December 31, 2017, expected amortization expense for the unamortized intangible assets was as follows (in thousands):

Years Ending December 31,

 

 

 

2018

$

515

 

2019

 

134

 

2020

 

86

 

2021

 

86

 

2022

 

20

 

Thereafter

 

21

 

Total

$

862

 


Goodwill Impairment

The Company’s market capitalization decreased significantly during the first quarter of 2016 from $1.0 billion as of December 31, 2015 to $283.0 million as of March 31, 2016 in conjunction with the Company’s determination to terminate an agreement and plan of merger with SunEdison, Inc. (“SunEdison”) and SEV Merger Sub Inc. 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 Company performed a step-one test for impairment using the discounted cash flow methodology to estimate the fair value of the reporting unit and determined that the carrying book value of the reporting unit was higher than the business unit’s fair value. The Company then performed a step-two test which utilizes purchase price allocation using the estimated fair value from step-one as the purchase price to determine the implied fair value of the reporting unit’s goodwill. The step-two impairment test determined that there was no implied value of goodwill, which resulted in an impairment charge of $36.6 million. This charge was recorded in impairment of goodwill for the year ended December 31, 2016.

Accrued Compensation
Accrued Compensation

8.Accrued Compensation

Accrued compensation consisted of the following (in thousands):

 

December 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Accrued payroll

$

13,064

 

 

$

12,558

 

Accrued commissions

 

7,928

 

 

 

7,445

 

Total accrued compensation

$

20,992

 

 

$

20,003

 

 

Accrued and Other Current Liabilities
Accrued and Other Current Liabilities

9.Accrued and Other Current Liabilities

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

 

December 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Accrued unused commitment fees and interest

$

7,445

 

 

$

3,827

 

Current portion of lease pass-through financing obligation

 

4,931

 

 

 

4,833

 

Accrued inventory

 

4,122

 

 

 

2,117

 

Accrued professional fees

 

3,977

 

 

 

3,222

 

Sales, use and property taxes payable

 

3,046

 

 

 

1,785

 

Current portion of deferred rent

 

937

 

 

 

1,155

 

Other accrued expenses

 

5,217

 

 

 

2,425

 

Total accrued and other current liabilities

$

29,675

 

 

$

19,364

 

 

Debt Obligations
Debt Obligations

10.Debt Obligations

Debt obligations consisted of the following as of December 31, 2017 (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

2017 Term loan facility

$

197,764

 

 

$

(176

)

 

$

(4,990

)

 

$

6,644

 

 

$

185,954

 

 

$

 

 

 

6.0

%

 

January 2035

2016 Term loan facility(1)

 

287,919

 

 

 

(141

)

 

 

(7,623

)

 

 

4,962

 

 

 

275,193

 

 

 

 

 

 

4.3

 

 

August 2021

Subordinated HoldCo facility

 

197,625

 

 

 

(35

)

 

 

(3,451

)

 

 

1,965

 

 

 

192,174

 

 

 

 

 

 

9.3

 

 

March 2020

Credit agreement

 

1,299

 

 

 

(2

)

 

 

(140

)

 

 

14

 

 

 

1,143

 

 

 

 

 

 

6.5

 

 

February 2023

Revolving lines of credit(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregation facility(3)

 

135,000

 

 

 

 

 

 

 

 

 

 

 

 

135,000

 

 

 

240,000

 

 

 

4.7

 

 

September 2020

Working capital facility(4)

 

136,500

 

 

 

 

 

 

 

 

 

 

 

 

136,500

 

 

 

 

 

 

4.8

 

 

March 2020

Total debt

$

956,107

 

 

$

(354

)

 

$

(16,204

)

 

$

13,585

 

 

$

925,964

 

 

$

240,000

 

 

 

 

 

 

 

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

2016 Term loan facility(1)

$

297,506

 

 

$

(169

)

 

$

(9,643

)

 

$

4,788

 

 

$

282,906

 

 

$

 

 

 

3.6

%

 

August 2021

Subordinated HoldCo 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

 

 

February 2023

Revolving lines of credit(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregation facility

 

187,000

 

 

 

 

 

 

 

 

 

 

 

 

187,000

 

 

 

188,000

 

 

 

4.2

 

 

March 2018

Working capital facility(4)

 

136,500

 

 

 

 

 

 

 

 

 

 

 

 

136,500

 

 

 

 

 

 

3.9

 

 

March 2020

Total debt

$

771,852

 

 

$

(217

)

 

$

(14,655

)

 

$

6,252

 

 

$

750,728

 

 

$

238,000

 

 

 

 

 

 

 

 

(1)

The interest rate of this facility is partially hedged to an effective interest rate of 4.0% for $260.9 million of the principal borrowings. See Note 11—Derivative Financial Instruments.

(2)

Revolving lines of credit are not presented net of unamortized debt issuance costs.

(3)

The Aggregation facility was amended in March 2017. See the section captioned “—Aggregation Facility.”

(4)

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.

2017 Term Loan Facility

In January 2017, the Company entered into a long-term fixed rate credit agreement (the “2017 Term Loan Facility”) pursuant to which the Company borrowed $203.8 million with certain financial institutions for which Wells Fargo Bank, National Association is acting as administrative agent. The borrower under the 2017 Term Loan Facility is Vivint Solar Financing III, LLC, a wholly owned subsidiary of the Company. Proceeds of the 2017 Term Loan Facility were used to (1) repay existing indebtedness of $140.3 million under the Aggregation Facility with respect to the portfolio of projects being used as collateral for the 2017 Term Loan Facility (the “2017 Term Loan Portfolio”), (2) fund a debt service reserve account and other agreed reserves of $20.1 million, (3) pay transaction costs and fees in connection with the 2017 Term Loan Facility of $5.5 million, (4) pay the ITC insurance premium of $2.0 million on behalf of one of the Company’s investment funds, and (5) distribute $35.9 million to the Company as reimbursement for capital costs associated with deployment of the 2017 Term Loan Portfolio.

Interest on borrowings accrues at an annual fixed rate equal to 6.0% and is payable in arrears. Certain principal payments are due on a quarterly basis, subject to the occurrence of certain events. The Company’s first principal and interest payment was made in April 2017. Principal and interest payable under the 2017 Term Loan Facility will be paid over the term of the loan until the final maturity date of January 5, 2035. Optional prepayments are permitted under the 2017 Term Loan Facility without premium or penalty.

The 2017 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 the 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. The borrower is required to maintain an average debt service coverage ratio of 1.20 to 1. As of December 31, 2017, the Company was in compliance with such covenants.

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 2017 Term Loan Portfolio. In addition, the Company guarantees certain obligations of the borrower under the 2017 Term Loan Facility.

Interest expense for the 2017 Term Loan Facility was $12.6 million for the year ended December 31, 2017. No interest expense was incurred for the years ended December 31, 2016 and 2015. As of December 31, 2017, the Company had $19.2 million in required reserves outstanding in collateral accounts with the administrative agent, which were included in restricted cash and cash equivalents.

2016 Term Loan Facility

In August 2016, the Company entered into a credit agreement (the “2016 Term Loan Facility”) pursuant to which it borrowed $300.0 million aggregate principal amount of term borrowings and $12.1 million for 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 subsidiary of the Company.

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%. The Company has entered into an interest rate swap hedging arrangement such that approximately 90% of the aggregate principal amount of the outstanding term loan is subject to a fixed interest rate. See Note 11—Derivative Financial Instruments. Certain principal payments are due on a quarterly basis 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 the 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. As such, the debt service reserve is not classified as restricted cash and cash equivalents on the consolidated balance sheets. The borrower is required to maintain an average debt service coverage ratio of 1.55 to 1. As of December 31, 2017, 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 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. As of December 31, 2017, the Company had $2.6 million in required reserves outstanding in collateral accounts with the administrative agent, which were included in restricted cash and cash equivalents. Previously, the Company was required to establish a $2.4 million escrow account with respect to those systems in the 2016 Term Loan Portfolio that had not been placed in service as of the closing date. During 2017, these conditions were met and the escrow was released.

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 $14.4 million and $5.8 million for the years ended December 31, 2017 and 2016. No interest expense was incurred for the year ended December 31, 2015.

Subordinated HoldCo Facility

In March 2016, the Company entered into a financing agreement (the “Subordinated HoldCo Facility”) pursuant to which it borrowed an aggregate principal amount of $200.0 million of term loans from investment funds and accounts advised by HPS Investment Partners. The borrower under the Subordinated HoldCo Facility is Vivint Solar Financing Holdings, LLC, one of the Company’s wholly owned subsidiaries. Borrowings under the Subordinated Holdco Facility mature in 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. Borrowings under the Subordinated HoldCo Facility were used for the construction and acquisition of solar energy systems.

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 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, 2017, 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 $19.5 million and $7.3 million for the years ended December 31, 2017 and 2016. No interest expense was recorded for the year ended December 31, 2015. A $10.4 million interest reserve amount was deposited in an interest reserve account with the administrative agent and is included in restricted cash and cash equivalents.

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. Principal and interest payments under the Credit Agreement will be paid quarterly over the term of the loan until the final maturity date of February 2023. The Company did not draw upon the full borrowing capacity of the Credit Agreement, and no borrowing capacity remained as of December 31, 2017. Interest accrues on borrowings at a rate of 6.50%. Interest expense under the Credit Agreement was $0.1 million for the years ended December 31, 2017 and 2016. No interest expense was recorded for the year ended December 31, 2015.

Aggregation 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.

In March 2017, the Company amended the Aggregation Facility, and the parties agreed to (1) extend the date through which the Company may incur borrowings under the Aggregation Facility to March 31, 2020 (“Availability Period”), with an option to extend such period by an additional 12 months to the extent the lenders agree to such extension; (2) extend the maturity date for the initial loans under the Aggregation Facility from March 2018 to September 2020; and (3) increase the “Applicable Margin” used to determine the applicable interest rate on outstanding borrowings after the Availability Period from 3.50% to 3.75%. The “Applicable Margin” used to determine the applicable interest rate on outstanding borrowings during the Availability Period remains unchanged at 3.25%.

In addition, the amendments to the Aggregation Facility (1) allow the Company to satisfy concentration covenants by maintaining insurance policies with respect to certain tax equity funds for the benefit of the lenders to cover any indemnification payments the Company may be required to make to certain of its tax equity investors in connection with the loss of ITCs, and (2) modify the customer FICO score requirement thresholds to enable the Company to borrow more against certain solar energy systems. The amendments to the Aggregation Facility also provide the ability for the Company to enter into forward-starting interest rate hedges and require no less than 75% of outstanding loan balances to be hedged. The Company is required to meet this threshold within 15 business days after the end of each quarterly period. See Note 11—Derivative Financial Instruments.


Prepayments are permitted under the Aggregation Facility, and the principal and accrued interest on any outstanding loans mature in September 2020. 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 3.75% 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 wholly owned subsidiaries, which in turn holds the Company’s interests in the managing members in certain of the Company’s 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, 2017, 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 $10.3 million, $14.1 million and $9.9 million for the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017, the current portion of debt issuance costs of $3.1 million was recorded in prepaid expenses and other current assets, and the long-term portion of debt issuance costs of $5.4 million was recorded in other non-current assets, net. As of December 31, 2017, the Company had $4.1 million in required reserves outstanding in collateral accounts with the administrative agent, which were included in restricted cash and cash equivalents.

Working Capital 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. Available borrowings under the Working Capital Facility are subject to a borrowing base tied to the (1) level of PPA and Solar Lease systems under development and (2) combined future available tax equity fund commitments and available borrowing capacity under the Company’s back-leverage facilities. To the extent that outstanding borrowings exceed the borrowing base, the Company would be required to repay borrowings under the Working Capital Facility. 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, 2017, 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 2017 Term Loan Facility, the 2016 Term Loan Facility, the Subordinated HoldCo Facility, the Aggregation Facility and Solmetric Corporation, as security for its obligations under the Working Capital Facility. Prepayments are permitted under the Working Capital Facility, and the principal and accrued interest on any outstanding loans mature in March 2020. Interest accrues on borrowings at a floating rate equal to, dependent on the type of borrowing, (1) a rate equal to the Eurodollar Rate for the interest period divided by one minus the Eurodollar Reserve Percentage, plus a margin of 3.25%; or (2) the highest of (a) the Federal Funds Rate plus 0.50%, (b) the Citibank prime rate and (c) the one-month interest period Eurodollar rate plus 1.00%, plus a margin of 2.25%. Interest is payable dependent on the type of borrowing at the end of (1) the interest period that the Company may elect as a term and not to exceed three months, (2) quarterly or (3) at maturity of the Working Capital Facility.


The Working Capital Facility includes customary covenants, including covenants that restrict, subject to certain exceptions, the Company’s ability to incur indebtedness, incur liens, make investments, make fundamental changes to its business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. Among other restrictions, the Working Capital Facility provides that the Company may not incur any indebtedness other than that related to the Working Capital Facility or permitted swap agreements. These restrictions do not impact the Company’s ability to enter into investment funds, including those that are similar to those entered into previously. The Company is also required to maintain $25.0 million in cash and cash equivalents and certain investments as of the last day of each quarter. As of December 31, 2017, 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 $6.7 million, $6.1 million and $2.3 million for the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017, the current portion of debt issuance costs of $0.6 million was recorded in prepaid expenses and other current assets, and the long-term portion of debt issuance costs of $0.7 million was recorded in other non-current assets, net.

Interest Expense and Amortization of Debt Issuance Costs

For the years ended December 31, 2017, 2016 and 2015, total interest expense incurred under debt obligations was $63.6 million, $33.4 million and $12.2 million, of which $8.8 million, $6.5 million and $3.5 million was amortization of debt issuance costs.

Scheduled Maturities of Debt

The scheduled maturities of debt as of December 31, 2017 are as follows (in thousands):

2018

$

13,939

 

2019

 

13,939

 

2020

 

477,113

 

2021

 

278,085

 

2022

 

5,791

 

Thereafter

 

167,240