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As filed with the Securities and Exchange Commission on September 18, 2014.

Registration No. 333-198372

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

VIVINT SOLAR, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   4931   45-5605880

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

3301 N. Thanksgiving Way, Suite 500

Lehi, Utah 84043

(877) 404-4129

(Address, including zip code and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Gregory S. Butterfield

Chief Executive Officer and President

Vivint Solar, Inc.

3301 N. Thanksgiving Way, Suite 500

Lehi, Utah 84043

(877) 404-4129

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

Larry W. Sonsini

Jeffrey D. Saper

Michael Nordtvedt

Wilson Sonsini Goodrich & Rosati,

Professional Corporation

650 Page Mill Road

Palo Alto, California 94304-1050

(650) 493-9300

    

Shawn J. Lindquist

Chief Legal Officer, Executive Vice President and Secretary

Vivint Solar, Inc.

3301 N. Thanksgiving Way, Suite 500

Lehi, Utah 84043

(877) 404-4129

    

Kevin P. Kennedy

Igor Fert

Simpson Thacher & Bartlett LLP

2475 Hanover Street

Palo Alto, California 94304

(650) 251-5000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  ¨

 

Large accelerated filer           ¨    Accelerated filer   ¨
Non-accelerated filer           x        (Do not check  if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

         
Title of each class of Securities to be
Registered
 

Shares to be

Registred(1)

 

Proposed Maximum
Offering Price Per
Share

 

Proposed Maximum
Aggregate Offering
Price(2)

  Amount of
Registration Fee(3)

Common Stock $0.01 par value per share

  23,690,000   $18.00   $426,420,000   $54,922.90

 

 

  (1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes the additional shares that the underwriters have the option to purchase.
  (2) Estimated solely for the purpose of calculating the registration fee.
  (3) The Registrant previously paid $25,700 of the registration fee with the prior filings of this Registration Statement.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We and the selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we and the selling stockholder are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated September 18, 2014

20,600,000 Shares

 

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Vivint Solar, Inc.

Common Stock

 

                                     

This is an initial public offering of shares of common stock of Vivint Solar.

Vivint Solar is offering 20,600,000 shares to be sold in the offering.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $16.00 and $18.00. We have been approved to list our common stock on the New York Stock Exchange under the symbol “VSLR.”

We are an “emerging growth company” as defined under the federal securities laws, and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings.

After the completion of this offering, 313 Acquisition LLC, a stockholder and an affiliate of The Blackstone Group L.P., will continue to own a majority of the voting power of all outstanding shares of the common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange. See “Principal and Selling Stockholders.”

See “Risk Factors” on page 19 to read about factors you should consider before buying shares of our common stock.

 

                                     

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

                                     

 

 

     Per Share      Total  

Initial public offering price

   $                                $                            

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to us

   $         $     

                                     

(1) In addition, we have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting (Conflicts of Interest).”

To the extent that the underwriters sell more than 20,600,000 shares of common stock, the underwriters have the option to purchase up to an additional 3,090,000 shares from the selling stockholder at the initial public offering price less the underwriting discount. Vivint Solar will not receive any of the proceeds from the sale of the shares being sold by the selling stockholder.

                                     

 

The underwriters expect to deliver the shares against payment in New York, New York on     , 2014.

 

Goldman, Sachs & Co.  

BofA Merrill Lynch

 

Credit Suisse

 

Citigroup        
 

Deutsche Bank Securities

     
    Morgan Stanley    
      Barclays  
        Blackstone Capital Markets

                                     

Prospectus dated     , 2014.

 


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VIVINT SOLAR PAY LESS FOR POWER TM

THE PROCESS

Hello

SALE/REFERRAL CONSULTATION DESIGN & ENGINEERING FINANCING MAINTENANCE MONITORING

THE BENEFITS OF SOLAR MARKET POTENTIAL

SOLAR MAKES SENSE. WHETHER IT’S COST SAVINGS, ENVIRONMENTAL IMPACT, OR JUST INTRODUCING CHOICE INTO AN INDUSTRY, THE ADVANTAGES ADD UP.

SAVE ENVIRONMENT CHOICE

VIVINT SOLAR INSTALLATIONS

TOTAL SOLAR PRODUCED IN 2013

TOTAL ENERGY PRODUCED IN 2013

LESS THAN 1% PENETRATION

*PVPS Report Snapshot of Global PV 1992-2013 Preliminary Trends Information from the IEA PVPS Programme

VIVINT SOLAR MEGAWATTS INSTALLED

2,669

532

AS OF JUNE 2012

2012

10,521

4,679

AS OF JUNE 2013

2013

8,625

AS OF JUNE 2014

2014

14.4

2.8

AS OF JUNE 2012

2012

58.0

24.4

AS OF JUNE 2013

2013

56.8

AS OF JUNE 2014

2014

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TABLE OF CONTENTS

Prospectus

 

Prospectus Summary

    1   

Summary Consolidated Financial and Other Data

    15   

Risk Factors

    19   

Special Note Regarding Forward-Looking Statements and Industry Data

    59   

Use of Proceeds

    61   

Dividend Policy

    62   

Capitalization

    63   

Dilution

    65   

Selected Consolidated Financial and Other Data

    67   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    71   

Business

    124   

Management

    141   

Executive Compensation

    153   

Certain Relationships and Related Party Transactions

    172   

Principal and Selling Stockholders

    184   

Description of Capital Stock

    186   

Shares Eligible for Future Sale

    196   

Material U.S. Federal Income Tax Consequences for Non-U.S. Holders of Common Stock

    200   

Underwriting (Conflicts of Interest)

    205   

Legal Matters

    213   

Experts

    213   

Where You Can Find Additional Information

    213   

Index to Consolidated Financial Statements

    F-1   

Through and including     , 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We, the selling stockholder and the underwriters have not authorized anyone to provide you with information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. We take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give you.

For investors outside the United States: neither we, the selling stockholder nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

 

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We have rights to the trademark “Vivint Solar,” and “Solmetric” and “SunEye” are our trademarks in the United States and in certain other jurisdictions. This prospectus contains additional trade names, trademarks and service marks of other companies. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including the matters set forth under the sections of this prospectus captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes.

Unless the context otherwise requires, the terms “Vivint Solar,” “the company,” “we,” “us” and “our” in this prospectus refer to Vivint Solar, Inc. and its subsidiaries, including Vivint Solar Holdings, Inc. References to “Vivint” refer to APX Parent Holdco, Inc. and its subsidiaries, including our sister company Vivint, Inc. Investment funds associated with or designated by The Blackstone Group L.P., which controls our principal stockholder, are referred to herein as “Blackstone” or “our sponsor.”

Vivint Solar

Our Mission

We are committed to providing a lower-cost, environmentally conscious alternative to traditional utility generated energy. We enable our customers to access the advantages of solar energy with little to no upfront costs to them through long-term contracts that generate recurring, predictable customer payments to us. We aim to provide best-in-class customer service and deploy technology that empowers our customers to take charge of their energy future.

Overview

We offer distributed solar energy — electricity generated by a solar energy system installed at customers’ locations — to residential customers based on 20-year contracts at prices below their current utility rates. Our customers pay little to no money upfront, typically realize savings of 15% to 30% relative to utility generated electricity immediately following system interconnection to the power grid and continue to benefit from guaranteed energy prices over the term of their contracts, insulating them against unpredictable increases in utility rates.

Our 20-year customer contracts generate predictable, recurring cash flows and establish a long-term relationship with homeowners. Through our investment funds, we own an interest in the solar energy systems we install and ownership of the solar energy systems allows us and the other fund investors to benefit from various local, state and federal incentives. Together, these cash flows and incentives facilitate our ability to obtain financing and to optimize our financial returns. Our sources of financing are designed to offset our direct installation costs and most, if not all, of our allocated overhead expenses. Our direct relationship with homeowners also facilitates our ability to control quality and provide high levels of customer service and provides us with an opportunity in the future to offer additional value-added products and services to our customers.

From our inception in May 2011 through June 30, 2014, we have experienced rapid growth, installing solar energy systems with an aggregate of 129.7 megawatts of capacity at more than 21,900 homes in seven states for an average solar energy system capacity of approximately 5.9 kilowatts. According to GTM Research, an industry research firm, we were the second largest

 

 

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installer of solar energy systems to the U.S. residential market with approximately 8% market share in 2013 and 9% in the first quarter of 2014, up from 1% in 2012, according to its ‘Q2 2014 PV Leaderboard’ report. We believe the key ingredients to our success include the following:

 

    High growth industry with a significant addressable market.    The market for residential distributed solar energy is growing rapidly and disrupting the traditional electricity market. According to GTM Research, an industry research firm, the U.S. residential solar energy market is expected to grow at a compound annual growth rate, or CAGR, of approximately 37% from 2012 through 2018. Residential distributed solar has currently penetrated less than 1% of its total addressable market in the United States.

 

    Differentiated and highly scalable platform.    We have developed an integrated approach to providing distributed solar energy where we fully control the lifecycle of our customers’ experience including the initial professional consultation, design and engineering process, installation and ongoing monitoring and service. We deploy our sales force on a neighborhood-by-neighborhood basis, which allows us to cultivate a geographically concentrated customer base that reduces our costs and increases our operating efficiency. We couple this model with repeatable and highly scalable processes to establish warehouse facilities, assemble and train sales and installation teams and open new offices. We believe that our processes enable us to expand rapidly within existing markets and into new markets. We also believe that our direct sales model and integrated approach represent a differentiated platform unique in the industry that accelerates our growth by maximizing sales effectiveness, delivering high levels of customer satisfaction and driving cost efficiency.

 

    Long-term, highly visible, recurring cash flow.    Our customers typically sign 20-year contracts for solar electricity generated by the system owned by us and pay us directly over the term of their contracts. These customer contracts generate recurring monthly customer payments. As of June 30, 2014, the average estimated nominal contracted payments for our customer contracts exceeded $30,000, and there is the potential for additional payments if customers choose to renew their contracts at the end of the term. The solar energy systems we install are eligible for investment tax credits, or ITCs, accelerated tax depreciation and other governmental incentives. We have historically financed the assets created by substantially all of these contracts through investment funds, which reduces our cost of capital to finance our operations.

We currently operate in Arizona, California, Hawaii, Maryland, Massachusetts, New Jersey and New York. We have chosen to initially introduce our solar energy systems in these states because the utility prices, sun exposure, climate conditions and regulatory policies in these states provide for the most compelling markets for distributed solar energy. We intend to continue our rapid growth by further increasing our presence in these existing markets and expanding our presence in other markets where distributed solar energy generation is an economically attractive alternative to purchasing power from utilities. Our standardized and efficient process for opening new offices enables us to begin operations quickly, and has in the past allowed us to obtain executed contracts within a day of opening a new office. During the 12 months ended June 30, 2014, we established 21 new sales offices in addition to the 16 sales offices in place as of June 30, 2013. The number of our active direct sellers grew from 153 to 489 over the same period.

 

 

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As of the date of this prospectus, we have raised 10 investment funds to which investors such as banks and other large financial investors have committed to invest approximately $543 million which will enable us to install solar energy systems of total fair market value approximating $1.3 billion. As of the date of this prospectus, we had tax equity commitments to fund approximately 81 MWs of future deployments. We are currently in negotiations with financial investors to create additional investment funds in 2014. We also expect to create additional investment funds with financial investors and potentially with corporate investors, and may also use debt, equity or other financing strategies to fund our operations. To that end, in September 2014, we entered into an aggregation credit facility pursuant to which we may borrow up to an aggregate of $350 million and, subject to certain conditions, up to an aggregate of $200 million in additional borrowings. In addition in August and September 2014, we received non-binding letters of intent from four financial institutions on a several basis in amounts equaling up to $300 million in the aggregate. We estimate such investments would be sufficient to fund approximately 133 MWs of future deployments. It is contemplated that each of the potential investment funds would adopt the partnership structure and be on terms similar to those of our existing investment funds that have adopted such structure, which terms may include conditions on our ability to draw on the financing commitments made by these funds. Such letters of intent are non-binding and do not constitute a commitment to invest. Although we cannot be certain when, if ever, such investment documentation will be executed, our current expectation is that forward investment documentation will be executed within the last quarter of 2014 or the first quarter of 2015 to fund investments at various times throughout 2015 and 2016. If we are unable to consummate these investments or establish the other investment funds that we intend to pursue during this period, we will be required to obtain additional financing in order to continue to grow our business or finance the deployment of solar energy systems using cash on hand until such additional financing has been secured.

We were founded in 2011 when Vivint, Inc., our sister company, a residential security solutions and home automation services provider, recognized an opportunity to replicate its strong direct-to-home sales model in the solar energy market. Vivint, Inc. had approximately 850,000 subscribers as of June 30, 2014, and we believe that there will be a continued opportunity to leverage our relationship with Vivint to offer our solar energy systems to its customers in markets that we serve.

Market Opportunity

The market for residential distributed solar energy is growing rapidly. According to research compiled by GTM Research, 494 megawatts of capacity was installed within the U.S. residential solar energy market in 2012 and 3,258 megawatts of capacity is expected to be installed in 2018, representing a CAGR of approximately 37%. This market possesses significant growth opportunities as compared to the total U.S. electricity market, as distributed solar energy has penetrated less than 1% of its total addressable market in the residential sector. We believe that there is a significant opportunity for distributed solar energy to continue to displace electricity generated from fossil fuels in the residential market.

The following recent trends have made solar energy a cost effective power source for homeowners in an increasing number of markets:

 

   

Declining solar energy system costs.    According to the Lawrence Berkeley National Laboratory, residential solar energy system costs decreased by 40% on a per watt

 

 

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basis from 2005 through 2012, or 7% annually, for solar installations with capacities of 10 kilowatts or less.

 

    Rising retail electricity prices.    Average U.S. retail electricity prices from the power grid increased at a 3.3% CAGR from 2005 to 2012, according to the Energy Information Administration. In many of the markets we currently serve, the utility rates have increased faster than the national average.

 

    Lower cost of financing.    Financing for distributed solar energy has become increasingly available, reducing the cost of capital for distributed solar energy system providers. According to Bloomberg New Energy Finance, renewable energy tax equity investment commitments in 2013 totaled $7.1 billion. Securitization represents an emerging financing strategy that also has the potential to contribute to the declining cost of capital trend.

The availability of various incentives has also contributed to the growth of U.S. residential solar installations:

 

    Net Metering.    Net metering allows a homeowner to pay his or her local traditional utility only for their power usage net of production from the solar energy system installed on his or her house, transforming the conventional relationship between customers and traditional utilities. In addition to benefitting the homeowner economically, net metering is consistent with policy objectives of reducing peak electricity load and offsetting other potential sources of generation.

 

    Federal Investment Tax Credit.    Solar energy system owners are currently allowed to claim a tax credit that is equal to 30% of the system’s eligible tax basis, which is generally the fair market value of the system. By statute, this tax credit is scheduled to decrease to 10% on January 1, 2017. Although this scheduled reduction in the ITC will likely adversely impact growth in the distributed solar energy market, decreasing system costs, combined with increasing retail utility rates, are expected to partially mitigate the impact of such reduction.

 

    State and Local Incentives.    A variety of state and local incentives have been available to incentivize distributed solar energy adoption. In some states, including Arizona, California, Massachusetts and New York, rebates are available for the installation of residential solar energy systems. As of March 2014, twenty-nine states and the District of Columbia had enacted policies that require minimum amounts of renewable energy generation and 16 states, including Arizona, Massachusetts and New York, had enacted policies specifically requiring a minimum amount of solar or distributed renewable energy generation. In some states there is a market for solar renewable energy certificates, or SRECs, which can be used by utilities to meet these requirements.

Increasing utility rates, decreasing solar energy system costs, the availability of incentives and the lower cost of financing now available to distributed solar energy installations have all contributed to reduce overall costs of distributed solar energy systems. As a result, a number of U.S. states are now achieving “grid parity,” the point at which the overall cost of retail distributed solar generated electricity matches the cost of retail utility generated electricity.

 

 

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Our Approach

We secure financing that enables our customers to access solar energy for little to no upfront cost to them. The key elements of our integrated approach to providing distributed solar energy include:

 

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    Professional consultation.    We deploy our direct-to-home sales force to provide in-person professional consultations to prospective customers to evaluate the feasibility of installing a solar energy system at their residence. Our sales closing and referral rates are enhanced by homeowners’ responsiveness to our direct-to-home, neighborhood-by-neighborhood outreach strategy.

 

    Design and engineering.    We have developed a streamlined process incorporating our proprietary software, which enables us to efficiently design and install a custom solar energy system that delivers significant customer savings. We continue to pursue technology innovation to integrate accurate system design into the initial in-person sales consultation as a competitive tool to enhance the customer experience and increase sales close rates.

 

    Installation.    We are a licensed contractor in every market we serve, and we are responsible for every customer installation. We manage the entire process from permitting through inspection to interconnection to the power grid, thereby making the system installation process simple and seamless for our customers. Controlling every aspect of the installation process allows us to minimize costs, ensure quality and deliver high levels of customer satisfaction.

 

   

Monitoring and service.    We monitor the performance of all of our solar energy systems, leveraging a combination of internally developed solutions as well as capabilities provided by our suppliers. Currently, most of our existing solar energy systems use Enphase Energy, Inc.’s communications gateway device paired with its

 

 

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monitoring service. We leverage the Enphase communications gateway and monitoring service to collect performance data and use this data to ensure we deliver quality operations and maintenance services for our solar energy systems.

 

    Referrals.    We believe that we generate a significant amount of sales through customer referrals. These referrals increase our neighborhood penetration rates, lower our customer acquisition costs and accelerate our growth. Our financial returns also benefit from the cost savings derived from increasing the density of installations in a neighborhood.

Our Strengths

We believe the following strengths position us well to capitalize on the expected growth in the distributed solar energy market:

 

    Differentiated sales model.    We deploy our sales force on a neighborhood-by-neighborhood basis, which allows us to cultivate a geographically concentrated customer base. We believe that this direct-to-home sales model improves sales effectiveness and reduces customer acquisition costs. We also believe this model reduces system installation costs given the efficiencies associated with working in a concentrated area.

 

    Integration and operational efficiency.    Our integrated approach to residential solar deployment coupled with our direct-to-home sales model enables us to ensure installation quality, reduce overall costs per system, enhance our competitiveness in existing and potential new markets and allows us to earn attractive financial returns on investment. We believe our cost structure, with its emphasis on variable compensation for our sales personnel and installers, allows us to offer homeowners competitive solar pricing and will continue to support rapid solar energy system installation growth.

 

    Funding available to accelerate growth.    As of the date of this prospectus, we have raised 10 investment funds to which investors such as banks and other large financial investors have committed to invest approximately $543 million which will enable us to install solar energy systems of total fair market value approximating $1.3 billion. As of the date of this prospectus, we had tax equity commitments to fund approximately 81 MWs of future deployments. We have developed strong, long-term relationships with leading tax equity and debt financing providers, several of whom have provided capital to us on multiple occasions, and we believe that these relationships position us well to raise additional financing.

 

    Relationship with Vivint.    Vivint, Inc., our sister company, had approximately 850,000 subscribers as of June 30, 2014, and we believe the opportunity to cross-sell to Vivint customers provides us with a competitive advantage by reducing customer acquisition costs and helping to accelerate our growth when we enter into new markets. Our relationship also allows continued utilization of best-practices for in-person sales techniques, process efficiencies between sales and equipment installation, and the latest technology innovations around customer care, data aggregation and deployment of adjacent, complementary technologies. We also expect to enter into an agreement with Vivint pursuant to which we will purchase internet gateway devices and energy management products from Vivint, which we believe will further enhance our value proposition.

 

 

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    Experienced management team.    Our executive management team members have track records of leading successful growth businesses and public companies, and have extensive experience across a broad range of disciplines. We believe the strength of our management team is a key ingredient to our continued success and ability to execute our strategy.

Our Strategy

Our goal is to become the premier provider of distributed solar energy. Key elements of our strategy include:

 

    Further penetrating our existing markets.     We believe the markets in which we currently operate continue to be significantly underpenetrated, and we intend to increase our presence in these markets by introducing our solar energy systems into new neighborhoods and communities in states in which we already have operations. We intend to leverage our brand and existing customer base to grow in these markets at lower customer acquisition and installation costs relative to our competitors.

 

    Expanding into new locations and commercial markets.    To enlarge our addressable market, we plan to expand our presence to new states and are considering the option of expanding into markets outside of the residential market, such as the small business market. We have a track record of entering new markets quickly and efficiently. During the 12 months ended June 30, 2014, we established 21 new sales offices in addition to the 16 sales offices that were in place as of June 30, 2013.

 

    Capitalizing on opportunities to increase sales and lower costs.    We intend to capitalize on our opportunities to increase sales and lower costs through internal development initiatives, acquisitions and alternative financing structures. We anticipate making additional investments in new technologies related to our system design and installation and ongoing customer service practices. Such investments will enable us to continue to improve our operating efficiency, cost structure and customer satisfaction. In addition, our management team has significant experience in successfully integrating acquisitions into their businesses, and we believe there are opportunities to acquire related businesses, talent and technology to drive sales and lower costs. Additionally, we intend to lower our cost of capital through alternative financing sources such as securitization by pooling and transferring certain of our solar energy systems and associated customer contracts into special purpose entities, or SPEs, and subsequently issuing and selling interests in these SPEs as securities.

 

    Building and leveraging strategic relationships.    We plan to build and leverage strategic relationships with new and existing partners to, among other things, grow our business and drive cost reductions. For example, in addition to our direct sales channel, we are currently exploring opportunities to sell solar energy systems to customers through a number of distribution channels including relationships with homebuilders, home improvement stores, large construction, electrical and roofing companies and other third parties that have access to large numbers of potential customers.

 

 

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Risks Associated with Our Business and the Offering

Our business and our ability to execute our strategy are subject to many risks. Before making a decision to invest in our common stock, you should carefully consider all of the risks and uncertainties described in the section of this prospectus captioned “Risk Factors” immediately following this prospectus summary and all of the other information in this prospectus. These risks include, but are not limited to the following:

 

    we need to enter into substantial additional financing arrangements to facilitate our customers’ access to our solar energy systems, and if financing is not available to us on acceptable terms when needed, our ability to continue to grow our business would be materially adversely impacted;

 

    a material reduction in the retail price of traditional utility generated electricity or electricity from other sources would harm our business, financial condition, results of operations and prospects;

 

    electric utility industry policies and regulations may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for electricity from our solar energy systems;

 

    our business currently depends on the availability of rebates, tax credits and other financial incentives and the expiration, elimination or reduction of these rebates, credits or incentives, particularly the scheduled reduction in the ITC in 2017, could adversely impact our business;

 

    we rely on net metering and related policies to offer competitive pricing to our customers in all of our current markets, and changes to net metering policies may significantly reduce demand for electricity from our solar energy systems;

 

    our ability to remediate the material weakness in our internal control over financial reporting;

 

    if we fail to manage our recent and future growth effectively, including attracting, training and retaining sales personnel and solar energy system installers, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges; and

 

    our sponsor and its affiliates control us and their interests may conflict with ours or yours in the future.

Corporate Information and History

We were incorporated in Delaware in 2011 when Vivint, Inc., a residential security solutions and home automation services provider, with approximately 850,000 subscribers as of June 30, 2014, recognized an opportunity to replicate its strong and scalable direct-to-home selling model in the solar energy market. Vivint offers a fully integrated and remotely accessible residential services platform that offers subscribers a suite of products and services including interactive security, life-safety, energy management and home automation.

 

 

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On November 16, 2012, investment funds affiliated with The Blackstone Group L.P. and certain co-investors, through 313 Acquisition LLC, acquired 100% of the equity interests of Vivint Solar, Inc. (then known as V Solar Holdings, Inc.) and Vivint. The acquisition was accomplished through certain mergers and related reorganization transactions pursuant to which each of Vivint and us became wholly owned subsidiaries of 313 Acquisition LLC, an entity wholly owned by Blackstone and its co-investors. Vivint Solar Holdings, Inc., our wholly owned subsidiary, wholly owns or partially owns a number of subsidiaries and other entities related to various solar energy system financing vehicles. Prior to this offering, we changed the name of this subsidiary to Vivint Solar Holdings, Inc. from Vivint Solar, Inc., our current name. 313 Acquisition LLC was formed to facilitate the acquisitions of Vivint and us. 313 Acquisition LLC is the selling stockholder in this offering. See the section of this prospectus captioned “Principal and Selling Stockholders.”

Our principal executive office is located at 3301 N. Thanksgiving Way, Suite 500, Lehi, Utah 84043. Our telephone number is (877) 404-4129. Our website address is www.vivintsolar.com. Information contained in, or that can be accessed through, our website is not a part of, and is not incorporated into, this prospectus and you should not rely on any such information in making the decision whether to purchase our common stock.

 

 

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Organizational Structure

The following chart summarizes our organizational structure and equity ownership immediately following the consummation of this offering. This chart is provided for illustrative purposes only and does not represent all legal entities affiliated with, or obligations of, our company.

 

LOGO

Our Sponsor

Blackstone is one of the world’s leading investment and advisory firms. Blackstone’s alternative asset management businesses include the management of corporate private equity funds, real estate funds, hedge fund solutions, credit-oriented funds and closed-end mutual funds. Blackstone also provides various financial advisory services, including financial and strategic advisory, restructuring and reorganization advisory and fund placement services. Through its different investment businesses, as of June 30, 2014, Blackstone had assets under management of approximately $279 billion.

 

 

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Immediately following this offering, 313 Acquisition LLC, which is controlled by our sponsor and its affiliates, will beneficially own approximately 78% of our common stock, or approximately 75% if the underwriters option to purchase additional shares is exercised in full. For a discussion of certain risks, potential conflicts and other matters associated with Blackstone’s control, see “Risk Factors—Risks Related to this Offering—We have elected to take advantage of the “controlled company” exemption to the corporate governance rules for NYSE-listed companies, which could make our common stock less attractive to some investors or otherwise harm our stock price” and “—Risks Related to this Offering—Our sponsor and its affiliates control us and their interests may conflict with ours or yours in the future.”

 

 

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The Offering

 

Common stock offered by us

20,600,000 shares

 

Common stock to be outstanding after this offering

105,303,122 shares

 

Option to purchase additional shares from the selling stockholder

3,090,000 by the selling stockholder

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $320.4 million, based on the assumed initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

  Approximately $58.8 million of the net proceeds received by us from this offering will be used to repay borrowings incurred under revolving lines of credit with Vivint. We plan to use the remaining net proceeds that we receive in this offering for working capital and general corporate purposes. We may also use a portion of the net proceeds to acquire, license and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction. See “Use of Proceeds.”

 

  We will not receive any proceeds from the sale of shares of common stock offered by the selling stockholder if the underwriters exercise their option to purchase additional shares from the selling stockholder in this offering.

 

Reserved Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to business associates, friends and family of our officers, directors and Vivint service providers. Purchasers will be subject to a 180-day lock-up restriction with respect to any shares purchased through the reserved share program. If these persons purchase reserved shares it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

 

NYSE symbol

“VSLR”

 

 

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Conflicts of Interest

Affiliates of Blackstone Advisory Partners L.P. control 313 Acquisition LLC, which owns in excess of 10% of our issued and outstanding common stock and, as the selling stockholder in this offering, may receive in excess of 5% of the net proceeds of this offering if the underwriters exercise their option to purchase additional shares in full. Because Blackstone Advisory Partners L.P. is an underwriter in this offering and its affiliates may receive more than 5% of the net proceeds of this offering and because affiliates of Blackstone Advisory Partners L.P. control in excess of 10% of our issued and outstanding common stock, Blackstone Advisory Partners L.P. is deemed to have a “conflict of interest” under Rule 5121 of the Financial Industry Regulatory Authority, Inc., or FINRA. Accordingly, this offering will be conducted in accordance with Rule 5121. Pursuant to FINRA Rule 5121, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any member that has a conflict of interest and meet the requirements of paragraph (c)(12)(E) of FINRA Rule 5121. See “Underwriting—Conflicts of Interest.”

The number of shares of our common stock to be outstanding immediately after this offering is based on 84,703,122 shares of our common stock outstanding as of June 30, 2014 after giving effect to the issuance and sale by us of 9,703,122 shares of common stock to 313 Acquisition LLC and two of our directors in August and September 2014 and excludes as of June 30, 2014:

 

    9,728,681 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2014, pursuant to our 2013 Omnibus Incentive Plan and an option granted outside of such plan with substantially the same terms as those granted pursuant to such plan with a weighted-average exercise price of $1.10 per share;

 

    320,000 shares of common stock issuable upon the exercise of options granted on July 7, 2014 at a weighted-average exercise price of $4.14 per share;

 

    4,068,966 shares of common stock reserved for issuance under our 2013 Omnibus Incentive Plan, 4,058,823 of which are reserved for the settlement of awards granted based on achieving certain performance conditions under our long-term incentive plan pools as described in the section of this prospectus captioned “Executive Compensation—Employee Benefit Plans—Long-Term Incentive Plan,” as of June 30, 2014; and

 

    8,800,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan on the date of this prospectus, and additional shares that become available under the plan pursuant to provisions thereof that provide for automatic annual increases in the number of shares reserved under the plan each year, as more fully described in the section of this prospectus captioned “Executive Compensation—Employee Benefit Plans—2014 Equity Incentive Plan.”

 

 

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Except as otherwise indicated, all information in this prospectus assumes:

 

    no exercise of outstanding options;

 

    the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering; and

 

    no exercise by the underwriters of their option to purchase up to an additional 3,090,000 shares of common stock from the selling stockholder.

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth summary historical consolidated financial and other data for the periods ended and at the dates indicated below. On November 16, 2012, we were acquired by our sponsor. We refer to the period from January 1, 2012 through November 16, 2012 as the Predecessor Period or Predecessor and the periods from November 17, 2012 through December 31, 2012, the year ended December 31, 2013, and the six months ended June 30, 2013 and 2014 as the Successor Periods or Successor. Our summary historical consolidated statement of operations data for the Predecessor Period, the period from November 17, 2012 to December 31, 2012 and the year ended December 31, 2013 presented in this table have been derived from our historical audited consolidated financial statements included elsewhere in this prospectus. The summary statements of operations data for each of the six-month periods ended June 30, 2013 and 2014 and the balance sheet data as of June 30, 2014 set forth below are derived from our unaudited quarterly consolidated financial statements included elsewhere in this prospectus and contain all adjustments, consisting of normal recurring adjustments, that management considers necessary for a fair presentation of our financial position and results of operations for the periods presented. See the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Basis of Presentation” for more information regarding the presentation of our consolidated financial statements. Operating results for the six-month periods are not necessarily indicative of results for a full financial year, or any other periods. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with the sections of this prospectus captioned “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Predecessor      Successor  
     Period from
January 1,
through
November 16,
2012
     Period from
November 17,
though
December 31,
2012
    Year Ended
December 31,
2013
    Six
Months
Ended
June 30,
2013
    Six
Months
Ended
June 30,
2014
 
                  (Restated)    

(Unaudited)

 
     (In thousands, except share and per share data)  

Statement of Operations Data:

             

Revenue:

             

Operating leases and incentives

   $ 183       $ 109      $ 5,864        1,793      $ 8,667   

Solar energy system and product
sales

     157                306        132        1,398   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     340         109        6,170        1,925        10,065   

Operating expenses:

             

Cost of revenue — operating leases and incentives

     3,302         1,018        19,004        8,013        27,646   

Cost of revenue — solar energy system and product sales

     95                123        76        883   

Sales and marketing

     1,471         533        7,348        2,890        11,009   

Research and development

                                  972   

General and administrative

     7,789         971        16,438        4,832        26,106   

Amortization of intangible assets

             1,824        14,595        7,297        7,428   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses(1)

     12,657         4,346        57,508        23,108        74,044   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (12,317      (4,237     (51,338     (21,183     (63,979

Interest expense

     881         96        3,144        991        4,074   

Other expense

     240         44        1,865        522        1,165   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (13,438      (4,377     (56,347     (22,696     (69,218

Income tax expense (benefit)

     7         (1,074     123        45        6,936   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (13,445      (3,303     (56,470     (22,741     (76,154

Net loss attributable to non-controlling interests and redeemable non-controlling interests

     (1,771      (699     (62,108     (2,307     (88,688
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     Predecessor      Successor  
     Period from
January 1,
through
November 16,
2012
     Period from
November 17,
though
December 31,
2012
    Year Ended
December 31,
2013
     Six
Months
Ended
June 30,
2013
    Six
Months
Ended
June 30,
2014
 
                  (Restated)      (Unaudited)  
     (In thousands, except share and per share data)  

Net income available (loss attributable) to stockholder

         (11,674      (2,604     5,638         (20,434     12,534   

Accretion to redemption value of Series B redeemable preferred stock

     (20,000                              
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income available (loss attributable) to common stockholder

   $ (31,674    $ (2,604   $ 5,638         $(20,434   $ 12,534   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income per share available (loss attributable) to common stockholder(2):

              

Basic

   $ (0.42    $ (0.03   $ 0.08       $ (0.27   $ 0.17   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ (0.42    $ (0.03   $ 0.07       $ (0.27   $ 0.16   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average shares used in computing net income per share available (loss attributable) to common stockholder(2):

              

Basic

     75,000,000         75,000,000        75,000,000         75,000,000        75,000,000   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

     75,000,000         75,000,000        75,223,183         75,000,000        76,194,463   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Pro forma net income per share available to common stockholders (unaudited) (3):

              

Basic

          $ 0.09         $ 0.16   
         

 

 

      

 

 

 

Diluted

          $ 0.09         $ 0.16   
         

 

 

      

 

 

 

Weighted-average shares used in computing pro forma net income per share available to common stockholders (unaudited)(3):

              

Basic

            86,445,874           87,814,512   
         

 

 

      

 

 

 

Diluted

            86,669,057           89,008,975   
         

 

 

      

 

 

 

 

(1) In connection with the finalization of this offering, we re-evaluated the estimate of the fair value of our common stock for financial reporting purposes with respect to the stock options granted to our employees during the period from January 1, 2014 through the date of this prospectus. As a result of this re-evaluation we currently expect to record approximately $0.4 million of stock-based compensation expense across multiple operating expense line items for options granted in 2014 through the date of this prospectus, which includes approximately $0.3 million of incremental stock-based compensation expense, associated with option grants made in the six months ended June 30, 2014. We also expect to record approximately $14.8 million in compensation expense in general and administrative expenses in our third quarter 2014 financial statements with respect to the September sale of common stock to Alex Dunn and an entity affiliated with Todd Pedersen, which represents the aggregate difference between the $10.667 per share purchase price and $17.00, the midpoint of the price range set forth on the cover page of this prospectus.
(2) See Note 18 to our audited consolidated financial statements for an explanation of the method used to calculate basic and diluted net income per share available (loss attributable) to common stockholder and the weighted-average number of shares used in the computation of the per share amounts.
(3) The pro forma basic and diluted net income per share available to common stockholders have been calculated assuming (1) the issuance and sale by us of an aggregate of 9,703,122 shares of our common stock to 313 Acquisition LLC and two of our directors in August and September 2014, (2) the repayment in full of outstanding borrowings under our revolving lines of credit, related party, using proceeds from our initial public offering of $58.8 million and (3) the assumed issuance of shares of common stock weighted for the period that the debt to be repaid was outstanding as if these transactions had occurred as of January 1, 2013. This assumes net proceeds of $320.4 million based on the initial public offering price of $17.00, the midpoint of the price range set forth on the cover of the prospectus, after deducting $21.0 million in underwriter discounts and commissions and estimated offering expenses of $8.8 million. The table in footnote 3 to the Selected Consolidated Financial and Other Data on page 69 sets forth the computation of the pro forma basic and diluted net income per share available to common stockholders.

 

 

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     As of June 30, 2014  
     Actual      Pro Forma
As Adjusted(1)
 
     (In thousands)  
     (Unaudited)  

Balance Sheet Data:

     

Cash and cash equivalents

   $      25,230       $     393,131   

Solar energy systems, net

     364,965         364,965   

Total assets

     566,250         935,651   

Short-term debt

    
75,500
  
       

Long-term debt, net

             78,300   

Revolving lines of credit, related party

     57,290           

Redeemable non-controlling interests

     104,342         104,342   

Total equity

     127,474         551,365   

 

(1) Gives effect to (a) the issuance and sale by us of an aggregate of 9,703,122 shares of our common stock to 313 Acquisition LLC and two of our directors in August and September 2014, (b) the incurrence of an aggregate of $87.0 million of term loan borrowings under our aggregation credit facility, net of discount of $8.7 million and the repayment of an aggregate of $75.5 million of term borrowings under our credit facility in September 2014, (c) the sale and issuance by us of 20,600,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $17.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting $21.0 million in underwriting discounts and commissions and estimated offering expenses of $8.8 million and (d) the repayment of $57.3 million of borrowings outstanding as of June 30, 2014. Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, would increase (decrease) each of cash and cash equivalents, total assets and total equity by approximately $19.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares offered by us would increase (decrease) each of cash and cash equivalents, total assets and total equity by approximately $16.0 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

Key Operating Metrics:

We regularly review a number of metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

 

     Year Ended December 31,      Six Months Ended June 30,  
     2012      2013      2013      2014  

Solar energy system installations(1)

     2,669         10,521         4,679         8,625   

Megawatts installed(2)

     14.4         58.0         24.4         56.8   
     As of December 31,      As of June 30,  
     2012      2013      2013      2014  

Cumulative solar energy system installations(1)

         2,775             13,296             7,454         21,921   

Cumulative megawatts installed(2)

     14.8         72.8         39.2         129.7   

Estimated nominal contracted payments remaining (in millions)(3)

   $ 89.2       $ 394.1       $ 223.3       $ 647.5   

Estimated retained value under energy contracts (in millions)(4)

     33.1         151.2         81.1         246.2   

Estimated retained value of renewal (in millions)(4)

     8.5         39.2         21.5         63.7   

Estimated retained value (in millions)(4)

     41.6         190.4         102.7         309.9   

Estimated retained value per watt(5)

     2.83         2.62         2.63         2.39   

 

(1) Includes the number of solar energy systems installed on customers’ premises. We track the number of solar energy system installations as of the end of a given period as an indicator of our historical growth and as an indicator of our rate of growth from period to period. For additional information about this metric, see the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating Metrics — Solar Energy System Installations.”

 

 

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(2) Megawatts installed represents the aggregate megawatt nameplate capacity of solar energy systems that have been installed during the applicable period. Cumulative megawatts installed represents the aggregate megawatt nameplate capacity of solar energy systems that have been installed. For additional information about this metric, see the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating Metrics — Megawatts Installed and Cumulative Megawatts Installed.”
(3) Estimated nominal contracted payments remaining equals the sum of the remaining cash payments that our customers are expected to pay over the term of their agreements with us for systems installed as of the measurement date. For a power purchase agreement, we multiply the contract price per kilowatt-hour by the estimated annual energy output of the associated solar energy system to determine the estimated nominal contracted payments. For a customer lease, we include the monthly fees and upfront fee, if any, as set forth in the lease. For additional information about this metric, see the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating Metrics — Estimated Nominal Contract Payments Remaining.”
(4) Estimated retained value represents the net cash flows, discounted at 6%, that we expect to receive from customers pursuant to long-term customer contracts net of estimated cash distributions to fund investors and estimated operating expenses for systems installed as of the measurement date. For purposes of the calculation, we aggregate the estimated retained value from the solar energy systems during the typical 20-year term of our contracts, which we refer to as estimated retained value under energy contracts, and the estimated retained value associated with an assumed 10-year renewal term following the expiration of the initial contract term, which we refer to as estimated retained value of renewal. To calculate estimated retained value of renewal, we assume all contracts are renewed at 90% of the contractual price in effect at the expiration of the initial term. For additional information about this metric, see the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating Metrics — Estimated Retained Value.”
(5) Estimated retained value per watt is calculated by dividing the estimated retained value as of the measurement date by the aggregate nameplate capacity of solar energy systems under long-term customer contracts that have been installed as of such date, and is subject to the same assumptions and uncertainties as estimated retained value. For additional information about this metric, see the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating Metrics — Estimated Retained Value.”

 

 

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RISK FACTORS

Investing in our common stock involves a substantial risk of loss. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks occurred, it could materially adversely affect our business, financial condition or operating results. In that case, the trading price of our common stock could decline, and you may lose part or all of your investment. See the section of this prospectus captioned “Special Note Regarding Forward-Looking Statements and Industry Data.”

Risks Related to our Business

We need to enter into substantial additional financing arrangements to facilitate our customers’ access to our solar energy systems, and if financing is not available to us on acceptable terms when needed, our ability to continue to grow our business would be materially adversely impacted.

Our future success depends on our ability to raise capital from third-party investors on competitive terms to help finance the deployment of our solar energy systems. We seek to minimize our cost of capital in order to maintain the price competitiveness of the electricity produced by, or the lease payments for, our solar energy systems. If we are unable to establish new investment funds when needed, or upon desirable terms, to enable our customers’ access to our solar energy systems with little to no upfront cost to them, we may be unable to finance installation of our customers’ systems or our cost of capital could increase, either of which would have a material adverse effect on our business, financial condition, results of operations and prospects. As of the date of this prospectus, we have raised 10 investment funds to which investors such as banks and other large financial investors have committed to invest approximately $543 million which will enable us to install solar energy systems of total fair market value approximating $1.3 billion. As of the date of this prospectus, we had tax equity commitments to fund approximately 81 MWs of future deployments, which we estimate to be sufficient to fund solar energy systems with a total fair market value of approximately $405 million. The contract terms in certain of our investment fund documents impose conditions on our ability to draw on financing commitments from the fund investors, including if an event occurs that could reasonably be expected to have a material adverse effect on the fund or on us. If we do not satisfy such conditions due to events related to our business or a specific investment fund or developments in our industry or otherwise, and as a result we are unable to draw on existing commitments, our inability to draw on such commitments could have a material adverse effect on our business, liquidity, financial condition and prospects.

To meet the capital needs of our growing business, we will need to obtain additional financing from new investors and investors with whom we currently have arrangements. If any of the financial institutions that currently provide financing decide not to invest in the future due to general market conditions, concerns about our business or prospects or any other reason, or decide to invest at levels that are inadequate to support our anticipated needs or materially change the terms under which they are willing to provide future financing, we will need to identify new financial institutions and companies to provide financing and negotiate new financing terms.

In the past, we have at times been unable to establish investment funds in accordance with our plans, due in part to the relatively limited number of investors attracted to such types of funds,

 

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competition for such capital and the complexity associated with negotiating the agreements with respect to such funds. Delays in raising financing could cause us to delay entering into new markets and hiring additional personnel in support of our planned growth. Any future delays in capital raising could similarly cause us to delay deployment of a substantial number of solar energy systems for which we have signed power purchase agreements with customers. Our future ability to obtain additional financing depends on banks’ and other financing sources’ continued confidence in our business model and the renewable energy industry as a whole. It could also be impacted by the liquidity needs of such financing sources themselves. We face intense competition from a variety of other companies, technologies and financing structures for such limited investment capital. If we are unable to continue to offer a competitive investment profile, we may lose access to these funds or they may only be available to us on terms that are less favorable than those received by our competitors. For example, if we experience higher customer default rates than we currently experience in our existing investment funds, this could make it more difficult or costly to attract future financing. In our experience, there are a relatively small number of investors that generate sufficient profits and possess the requisite financial sophistication that can benefit from and have significant demand for the tax benefits that our investment funds can provide. Historically, in the distributed solar energy industry, investors have typically been large financial institutions and a few large, profitable corporations. Our ability to raise investment funds is limited by the relatively small number of such investors. Any inability to secure financing could lead us to cancel planned installations, could impair our ability to accept new customers and could increase our borrowing costs, any of which would have a material adverse effect on our business, financial condition, results of operations and prospects.

A material reduction in the retail price of traditional utility generated electricity or electricity from other sources would harm our business, financial condition, results of operations and prospects.

We believe that a significant number of our customers decide to buy solar energy because they want to pay less for electricity than what is offered by the traditional utilities. However, distributed residential solar energy has yet to achieve broad market adoption as evidenced by the fact that distributed solar has penetrated less than 1% of its total addressable market in the U.S. residential sector.

The customer’s decision to choose solar energy may also be affected by the cost of other renewable energy sources. Decreases in the retail prices of electricity from the traditional utilities or from other renewable energy sources would harm our ability to offer competitive pricing and could harm our business. The price of electricity from traditional utilities could decrease as a result of:

 

    construction of a significant number of new power generation plants, including plants utilizing natural gas, nuclear, coal, renewable energy or other generation technologies;

 

    relief of transmission constraints that enable local centers to generate energy less expensively;

 

    reductions in the price of natural gas;

 

    utility rate adjustment and customer class cost reallocation;

 

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    energy conservation technologies and public initiatives to reduce electricity consumption;

 

    development of new or lower-cost energy storage technologies that have the ability to reduce a customer’s average cost of electricity by shifting load to off-peak times; and

 

    development of new energy generation technologies that provide less expensive energy.

A reduction in utility electricity prices would make the purchase of electricity under our power purchase agreements or the lease of our solar energy systems less economically attractive. If the retail price of energy available from traditional utilities were to decrease due to any of these reasons, or other reasons, we would be at a competitive disadvantage, we may be unable to attract new customers and our growth would be limited.

Electric utility industry policies and regulations may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for electricity from our solar energy systems.

Federal, state and local government regulations and policies concerning the electric utility industry, utility rate structures, interconnection procedures, and internal policies of electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies often relate to electricity pricing and the interconnection of distributed electricity generation systems to the power grid. Policies and regulations that promote renewable energy have been challenged by traditional utilities and questioned by those in government and others arguing for less governmental spending and involvement in the energy market. To the extent that such views are reflected in government policy, the changes in such policies and regulations could adversely affect our results of operations, cost of capital and growth prospects.

In the United States, governments and the state public service commissions that determine utility rates continuously modify these regulations and policies. These regulations and policies could result in a significant reduction in the potential demand for electricity from our solar energy systems and could deter customers from entering into contracts with us. In addition, depending on the region, electricity generated by solar energy systems competes most effectively with the most expensive retail rates for electricity from the power grid, rather than the less expensive average price of electricity. Modifications to the utilities’ peak hour pricing policies or rate design, such as to a flat rate, would make our current products less competitive with the price of electricity from the power grid. For example, a shift in the timing of peak rates for utility-generated electricity to a time of day when solar energy generation is less efficient could make our solar energy system offerings less competitive and reduce demand for our offerings.

In addition, any changes to government or internal utility regulations and policies that favor electric utilities could reduce our competitiveness and cause a significant reduction in demand for our offerings or increase our costs or the prices we charge our customers. Certain jurisdictions have proposed allowing traditional utilities to assess fees on customers purchasing energy from solar energy systems or imposing a new charge that would disproportionately impact solar energy system customers who utilize net metering, either of which would increase the cost of energy to those customers and could reduce demand for our solar energy systems. For example, California has adopted and implemented Assembly Bill 327, which has directly revised the caps on net

 

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metering applicable to each utility in the state, and further mandates that the California Public Utilities Commission, or CPUC, study net metering and craft an updated program that may result in future charges being imposed on our customers in California. It is possible these charges could be imposed on not just future customers but our existing customers, causing a potentially significant consumer relations problem and harming our reputation and business. Due to the concentration of our business in California and Hawaii, which account for approximately 53% and 15% of our total installations as of June 30, 2014, respectively, any such changes in these markets would be particularly harmful to our business, results of operations and future growth.

Our business currently depends on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives could adversely impact our business.

Federal, state and local government bodies provide incentives to owners, end users, distributors, system integrators and manufacturers of solar energy systems to promote solar electricity in the form of rebates, tax credits and other financial incentives such as system performance payments, payments for renewable energy credits associated with renewable energy generation and exclusion of solar energy systems from property tax assessments. We rely on these governmental rebates, tax credits and other financial incentives to finance solar energy system installations. These incentives enable us to lower the price we charge customers for energy from, and to lease, our solar energy systems, helping to catalyze customer acceptance of solar energy with those customers as an alternative to utility provided power. However, these incentives may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption rates increase. These reductions or terminations often occur without warning. In addition, the financial value of certain incentives decrease over time. For example, the value of solar renewable energy credits, or SRECs, in a market tends to decrease over time as the supply of SREC producing solar energy systems installed in that market increases. If we overestimate the future value of these incentives, it could adversely impact our financial results.

The federal government currently offers a 30% investment tax credit, or the ITC, under Section 48(a) of the Internal Revenue Code for the installation of certain solar power facilities until December 31, 2016. By statute, the ITC is scheduled to decrease to 10% of the fair market value of a solar energy system on January 1, 2017, and the amounts that fund investors are willing to invest could decrease or we may be required to provide a larger allocation of customer payments to the fund investors as a result of this scheduled decrease. To the extent we have a reduced ability to raise investment funds as a result of this reduction, the rate of growth of installations of our residential solar energy systems would be negatively impacted. The ITC has been a significant driver of the financing supporting the adoption of residential solar energy systems in the United States and its scheduled reduction beginning in 2017, unless modified by an intervening change in law, will significantly impact the attractiveness of solar to these investors and potentially our business.

Applicable authorities may adjust or decrease incentives from time to time or include provisions for minimum domestic content requirements or other requirements to qualify for these incentives. Reductions in, eliminations or expirations of or additional application requirements for, governmental incentives could adversely impact our results of operations and ability to compete in our industry by increasing our cost of capital, causing us to increase the prices of our energy and solar energy systems and reducing the size of our addressable market. In addition, this would adversely impact our ability to attract investment partners and to form new investment funds and our ability to offer attractive financing to prospective customers.

 

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We rely on net metering and related policies to offer competitive pricing to our customers in all of our current markets, and changes to net metering policies may significantly reduce demand for electricity from our solar energy systems.

Our business benefits significantly from favorable net metering policies in states in which we operate. Net metering allows a homeowner to pay his or her local electric utility only for their power usage net of production from the solar energy system, transforming the conventional relationship between customers and traditional utilities. Homeowners receive credit for the energy that the solar installation generates to offset energy usage at times when the solar installation is not generating energy. In states that provide for net metering, the customer typically pays for the net energy used or receives a credit against future bills at the retail rate if more energy is produced than consumed. In some states and utility territories, customers are also reimbursed by the electric utility for net excess generation on a periodic basis.

Forty-three states, Puerto Rico and the District of Columbia have adopted some form of net metering. Each of the states where we currently serve customers has adopted some form of a net metering policy. In 2013, however, net metering programs were subject to regulatory scrutiny in some states, such as Arizona, California, Colorado, Idaho and Louisiana. Generally, the programs were upheld in their current form, though some were subject to minor modification and others, including California, have been designated for additional regulatory review in the next few years. In California, for example, the current net metering rules, as applied to the state’s three large investor-owned utilities (San Diego Gas and Electric Company, Southern California Edison Company and Pacific Gas and Electric Company), would generally be grandfathered for a period of 20 years, but only for systems installed prior to the earlier of July 1, 2017 or the date the applicable utility reaches its statutory net metering cap. This net metering cap is measured based on the nameplate capacity of net metered systems within the applicable utility’s service territory. Currently, the net metering cap for the three large investor-owned utilities are: 607 megawatts for San Diego Gas and Electric Company; 2,240 megawatts for Southern California Edison Company; and 2,409 megawatts for Pacific Gas and Electric Company. Once the net metering cap is reached for one of the three investor-owned utilities, customers of that utility seeking to net meter will be required to take service under the new net metering tariff. As of June 30, 2014, none of these investor-owned utilities had reached 50% of its net metering cap. The statute providing the current caps also provides that, once the new net metering rules are effective, there will be no net metering caps applied to these utilities.

Once the current net metering tariff is no longer available in California, it is unclear whether net metering customers will enjoy the same rate of credit for exporting electricity to the grid and monthly fees that apply only to net metering customers could be imposed.

If net metering caps in certain jurisdictions are reached while they are still in effect, or if the value of the credit that customers receive for net metering is significantly reduced, future customers may be unable to recognize the same level of cost savings associated with net metering that current customers enjoy. The absence of favorable net metering policies or of net metering entirely, or the imposition of new charges that only or disproportionately impact customers that use net metering would significantly limit customer demand for our solar energy systems and the electricity they generate and could adversely impact our business, results of operations and future growth.

 

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Technical and regulatory limitations may significantly reduce our ability to sell electricity from our solar energy systems in certain markets.

Technical and regulatory limits may curb our growth in certain key markets. For example, the Federal Energy Regulatory Commission, in promulgating the first form small generator interconnection procedures, recommended limiting customer-sited intermittent generation resources, such as our solar energy systems, to a certain percentage of peak load on a given electrical feeder circuit. Similar limits have been adopted by many states as a de facto standard and could constrain our ability to market to customers in certain geographic areas where the concentration of solar installations exceeds this limit. For example, Hawaiian electric utilities have adopted certain policies that limit distributed electricity generation in certain geographic areas. While these limits have constrained our growth in Hawaii, legislative and regulatory developments in Hawaii have generally allowed distributed electricity generation penetration beyond the electric utility imposed limitations. Future revisions, however, could result in limitations on deployment of solar energy systems in Hawaii, which accounted for approximately 15% of our total installations as of June 30, 2014 and would negatively impact our business. Furthermore, in certain areas, we benefit from policies that allow for expedited or simplified procedures related to connecting solar energy systems to the power grid. If such procedures are changed or cease to be available, our ability to sell the electricity generated by solar energy systems we install may be adversely impacted. As adoption of solar distributed generation rises along with the commercial operation of utility scale solar generation in key markets such as California, the amount of solar energy being fed into the power grid will surpass the amount planned for relative to the amount of aggregate demand. Some traditional utilities claim that in less than five years, solar generation resources may reach a level capable of producing an over-generation situation, which may require some solar generation resources to be curtailed to maintain operation of the grid. While the prospect of such curtailment is somewhat speculative, the adverse effects of such curtailment without compensation could adversely impact our business, results of operations and future growth.

We are not currently regulated as an electric utility under applicable law, but we may be subject to regulation as an electric utility in the future.

We are not regulated as an electric utility in any of the markets in which we currently operate. As a result, we are not subject to the various federal, state and local standards, restrictions and regulatory requirements applicable to traditional utilities. Any federal, state, or local regulations that cause us to be treated as an electric utility, or to otherwise be subject to a similar regulatory regime of commission-approved operating tariffs, rate limitations, and related mandatory provisions, could place significant restrictions on our ability to operate our business and execute our business plan by prohibiting, restricting or otherwise regulating our sale of electricity. If we were subject to the same state or federal regulatory authorities as public electric utilities in the United States or if new regulatory bodies were established to oversee our business in the United States, then our operating costs would materially increase.

Our business depends in part on the regulatory treatment of third-party owned solar energy systems.

Retail sales of electricity by non-utilities such as us face regulatory hurdles in some states and jurisdictions, including states and jurisdictions that we intend to enter where the laws and regulatory policies have not historically embraced competition to the service provided by the incumbent, vertically integrated electric utility. Some of the principal challenges pertain to whether

 

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non-customer owned systems qualify for the same levels of rebates or other non-tax incentives available for customer-owned solar energy systems, whether third-party owned systems are eligible at all for these incentives and whether third-party owned systems are eligible for net metering and the associated significant cost savings. Furthermore, in some states and utility territories third parties are limited in the way that they may deliver solar to their customers. In jurisdictions such as Arizona, Florida, Georgia, Iowa, Kentucky, North Carolina and Oklahoma and in Los Angeles, California, laws have been interpreted to prohibit the sale of electricity pursuant to our standard power purchase agreement, leading us and other residential solar energy system providers to use leases in lieu of power purchase agreements. Changes in law, reductions in, eliminations of or additional application requirements for, these benefits could reduce demand for our systems, adversely impact our access to capital and could cause us to increase the price we charge our customers for energy.

If the Internal Revenue Service makes a determination that the fair market value of our solar energy systems is materially lower than what we have reported in our fund tax returns, we may have to pay significant amounts to our investment funds, to our fund investors and/or the U.S. government. Such determinations could have a material adverse effect on our business, financial condition and prospects.

We report in our fund tax returns and we and our fund investors claim the ITC based on the fair market value of our solar energy systems. While the Internal Revenue Service has not audited the appraisals or fair market value determinations of any of our ITC investment funds to date, scrutiny with respect to fair market value determinations has increased industry-wide in recent years. If the Internal Revenue Service were to review the fair market value that we used to establish our basis for claiming ITCs on audit and determine that the ITCs previously claimed should be reduced, we would owe certain of our investment funds or our fund investors an amount equal to 30% of the investor’s share of the difference between the fair market value used to establish our basis for claiming ITCs and the adjusted fair market value determined by the Internal Revenue Service upon audit, plus any costs and expenses associated with a challenge to that fair market value, plus a gross up to pay for additional taxes. We could also be subject to tax liabilities, including interest and penalties based on our share of claimed ITCs. To date, we have not been required to make such payments under any of our investment funds.

Separate from the Internal Revenue Service fair market value determination for purposes of ITCs, the U.S. Treasury Department has issued subpoenas related to its cash grant program and reviewed the fair market value determinations of a number of other significant participants in residential solar investment funds. Although we were not a target of this investigation, after discussions with the U.S. Treasury Department in early 2013, we accepted approximately $2.5 million less in cash grant payments than we had originally anticipated, a reduction of approximately 12%, which reduction affected a single investment fund. Although we were not obligated to make any payments to the investor in such fund, this resulted in a reduction of the fund investor’s overall investment by approximately $1.0 million. We have no other existing cash grant investment funds as of the date of this prospectus, but if we were to enter into such funds in the future we may be required to engage in further discussions with, or otherwise be subject to investigation by, the U.S. Treasury Department in relation to applications for cash grants made by such funds.

 

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Our ability to provide solar energy systems to customers on an economically viable basis depends on our ability to finance these systems with fund investors who require particular tax and other benefits.

Solar energy systems that began construction or satisfied a safe harbor by incurring eligible project costs prior to the end of 2011 were eligible to receive a 30% federal cash grant paid by the U.S. Treasury Department under Section 1603 of the “American Recovery and Reinvestment Act of 2009,” or the U.S. Treasury grant. Substantially all of our solar energy systems installed to date have been eligible for ITCs or U.S. Treasury grants, as well as accelerated depreciation benefits. We have relied on, and will continue to rely on, financing structures that monetize a substantial portion of those benefits and provide financing for our solar energy systems. If, for any reason, we were unable to continue to monetize those benefits through these arrangements, we may be unable to provide solar energy systems for new customers and maintain solar energy systems for new and existing customers on an economically viable basis.

The availability of this tax-advantaged financing depends upon many factors, including:

 

    our ability to compete with other renewable energy companies for the limited number of potential investment fund investors, each of which has limited funds and limited appetite for the tax benefits associated with these financings;

 

    the state of financial and credit markets;

 

    changes in the legal or tax risks associated with these financings; and

 

    non-renewal of these incentives or decreases in the associated benefits.

Solar energy system owners are currently allowed to claim a tax credit that is equal to 30% of the system’s eligible tax basis, which is generally the fair market value of the system. By statute, this tax credit is scheduled to decrease to 10% on January 1, 2017. Moreover, potential fund investors must remain satisfied that the structures we offer qualify for the tax benefits associated with solar energy systems available to these investors, which depends both on the investors’ assessment of tax law and the absence of any unfavorable interpretations of that law. Changes in existing law and interpretations by the Internal Revenue Service and the courts could reduce the willingness of fund investors to invest in funds associated with these solar energy system investments. We cannot assure you that this type of financing will be available to us. Alternatively, new investment fund structures or other financing mechanisms may become available, and if we are unable to take advantage of these fund structures and financing mechanisms it may place us at a competitive disadvantage. If, for any reason, we are unable to finance solar energy systems through tax-advantaged structures or if we are unable to realize or monetize depreciation benefits, or if we are otherwise unable to structure investment funds in ways that are both attractive to investors and allow us to provide desirable pricing to customers, we may no longer be able to provide solar energy systems to new customers on an economically viable basis. This would have a material adverse effect on our business, financial condition, results of operations and prospects.

Rising interest rates could adversely impact our business.

Changes in interest rates could have an adverse impact on our business by increasing our cost of capital. For example, rising interest rates would increase our cost of capital and may negatively impact our ability to secure financing on favorable terms needed to build our solar energy systems.

 

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The majority of our cash flows to date have been from customer contracts that have been partially monetized under various investment fund structures. One of the components of this monetization is the present value of the payment streams from the customers who enter into these contracts. If the rate of return required by the fund investor rises as a result of a rise in interest rates, the present value of the customer payment stream and the total value that we are able to derive from monetizing the payment stream will each be reduced. Interest rates are at historically low levels, partially as a result of intervention by the U.S. Federal Reserve. The Federal Reserve has taken actions to begin the tapering off of this intervention and should these actions continue, it is likely that interest rates will rise, our costs of capital will increase and our ability to secure financing could be impeded. Rising interest rates could harm our business and financial condition.

Our investment funds contain arrangements which provide for priority distributions to fund investors until they receive their targeted rates of return. In addition, under the terms of certain of our investment funds, we may be required to make payments to the investors if certain tax benefits that are allocated to such investors are not realized as expected. Our financial condition may be adversely impacted if a fund is required to make these priority distributions for a longer period than anticipated to achieve the investors’ targeted rates of return or if we are required to make any tax related payments.

Our fund investors expect returns partially in the form of cash and, to enable such returns, our investment funds contain terms that contractually require the funds to make priority distributions to the fund investor, to the extent cash is available, until it achieves its targeted rate of return. The amounts of potential future distributions under these arrangements depends on the amounts and timing of receipt of cash flows into the investment fund, almost all of which is generated from customer payments related to solar energy systems that have been previously purchased (or leased, as applicable) by such fund. If such cash flows are lower than expected, the priority distributions to the investor may continue for longer than initially anticipated. Additionally, certain of our investment funds require that, under certain circumstances, we forego distributions from the fund that we are otherwise contractually entitled to so that such distributions can be redirected to the fund investor until it achieves the targeted return.

Our fund investors also expect returns partially in the form of tax benefits and, to enable such returns, our investment funds contain terms that contractually require us to make payments to the funds that are then used to make payments to the fund investor in certain circumstances so that the fund investor receives value equivalent to the tax benefits it expected to receive when entering into the transaction. The amounts of potential tax payments under these arrangements depend on the tax benefits that accrue to such investors from the funds’ activities.

Due to uncertainties associated with estimating the timing and amounts of these cash distributions and allocations of tax benefits to such investors, we cannot determine the potential maximum future impact on our cash flows or payments that we could have to make under these arrangements. We may agree to similar terms in the future if market conditions require it. Any significant payments that we may be required to make or distributions to us that are relinquished as a result of these arrangements could adversely affect our financial condition.

 

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We may incur substantially more debt or take other actions that could restrict our ability to pursue our business strategies.

In September 2014, we entered into an aggregation credit facility pursuant to which we may borrow up to an aggregate of $350 million and, subject to certain conditions, up to an aggregate of $200 million in additional borrowings. We are also party to revolving lines of credit with Vivint that allow us to incur from time to time up to $70.0 million in revolver borrowings and as of June 30, 2014, approximately $18.5 million of borrowing capacity was remaining under the revolving lines of credit. The credit facility restricts our ability to dispose of assets, incur indebtedness, incur liens, pay dividends or make other distributions to holders of our capital stock, repurchase our capital stock, make specified investments or engage in transactions with our affiliates. We and our subsidiaries may incur substantial additional debt in the future and any debt instrument we enter into in the future may contain similar restrictions. In addition, certain of our affiliates, including Vivint, are and may in the future be restricted in engaging in transactions with us pursuant to the terms of the instruments governing indebtedness incurred by them. These restrictions could inhibit our ability to pursue our business strategies. Furthermore, if we default on one of our debt instruments, and such event of default is not cured or waived, the lenders could terminate commitments to lend and cause all amounts outstanding with respect to the debt to be due and payable immediately, which in turn could result in cross acceleration under other debt instruments. Our assets and cash flow may not be sufficient to fully repay borrowings under all of our outstanding debt instruments if some or all of these instruments are accelerated upon a default.

Furthermore, there is no assurance that we will be able to enter into new debt instruments on acceptable terms. If we are unable to satisfy financial covenants and other terms under existing or new instruments or obtain waivers or forbearance from our lenders or if we are unable to obtain refinancing or new financings for our working capital, equipment and other needs on acceptable terms if and when needed, our business would be adversely affected.

Our business is concentrated in certain markets, putting us at risk of region specific disruptions.

As of June 30, 2014, approximately 53% and 15% of our total installations were in California and Hawaii, respectively, and 21 of our 37 offices were located in these states. In addition, we expect much of our near-term future growth to occur in California, further concentrating our customer base and operational infrastructure. Accordingly, our business and results of operations are particularly susceptible to adverse economic, regulatory, political, weather and other conditions in such markets and in other markets that may become similarly concentrated.

It is difficult to evaluate our business and prospects due to our limited operating history.

Since our formation in 2011, we have focused our efforts exclusively on the sales, financing, engineering, installation, maintenance and monitoring of solar energy systems for residential customers. We may be unsuccessful in significantly broadening our customer base through installation of solar energy systems within our current markets or in new markets we may enter. Our limited operating history, combined with the rapidly evolving and competitive nature of our industry, may not provide an adequate basis for you to evaluate our operating and financial results and business prospects. In addition, we have limited insight into emerging trends that may adversely impact our business, prospects and operating results.

 

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Additionally, due to our limited operating history, we do not have empirical evidence of the effect of our systems on the resale value of our customers’ houses. Due to the length of our customer contracts, the system deployed on a customer’s roof may be outdated prior to the expiration of the term of the customer contract reducing the likelihood of renewal of our contracts at the end of the 20-year term, and possibly increasing the occurrence of defaults. This could have an adverse effect on our business, financial condition, results of operations and cash flow. As a result, our limited operating history may impair our ability to accurately forecast our future performance and to invest accordingly.

A material weakness in our internal control over financial reporting relating to inadequate financial statement preparation and review procedures was identified in connection with the preparation of our consolidated financial statements and resulted in the restatement of certain of our financial statements.

In connection with the preparation, audits and interim reviews of our consolidated financial statements, we and our independent registered public accounting firm identified a material weakness in internal control over financial reporting. This material weakness was further evidenced by errors discovered during the preparation and review of our consolidated financial statements as of and for the six months ended June 30, 2014 which resulted in the restatement of our consolidated financial statements as of and for the year ended December 31, 2013 and as of and for the three months ended March 31, 2014. These errors included, but were not limited to: (1) incorrectly accounting for income taxes, (2) incorrect inputs in the HLBV method of attributing net income or loss to non-controlling interests and redeemable non-controlling interests and (3) the incorrect classification of paid-in-kind interest in our statement of cash flows.

Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. This material weakness resulted from several control deficiencies.

Specifically and in addition to the errors that resulted in the restatement discussed above, we and our independent registered public accounting firm identified a number of material errors and other audit adjustments and determined that we did not design and implement sufficient controls and processes and did not have a sufficient number of qualified accounting and finance personnel. Additionally, the nature of our investment funds increases the complexity of our accounting for the allocation of net income (loss) between our stockholders and non-controlling interests under the HLBV method and the calculation of our tax provision. As we enter into additional investment funds, which may have contractual provisions different from those of our existing funds, the calculation under the HLBV method and the calculation of our tax provision could become increasingly complicated. This additional complexity could increase the chance that we experience additional errors in the future, particularly because we have a material weakness in internal controls. In addition, our need to devote our resources to addressing this complexity could delay or prolong our remediation efforts and thereby prolong the existence of the material weakness. As a result, we and our independent registered public accounting firm determined that we did not have adequate procedures and controls and adequate personnel to ensure that accurate financial statements could be prepared on a timely basis.

 

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To remediate this material weakness, we believe that we must continue to add qualified accounting, finance and tax personnel, formalize and implement written policies and procedures for the review of account analyses, tax provisions, reconciliations and journal entries, and implement and improve systems to automate certain financial reporting processes and to improve efficiency and accuracy.

We have begun taking numerous steps and plan to take additional steps to remediate the underlying causes of the material weakness. The actions that we are taking are subject to ongoing senior management review as well as audit committee oversight. We cannot estimate how long it will take to remediate the material weakness, although we expect it will take at least a year and may take more than a year, and our initiatives may not prove to be successful in remediating this material weakness.

If in future periods we determine that this material weakness has not been remediated or we identify other material weaknesses in internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective, which could result in the loss of investor confidence. In addition, to date, the audit of our consolidated financial statements by our independent registered public accounting firm has included a consideration of internal control over financial reporting as a basis of designing their audit procedures, but not for the purpose of expressing an opinion on the effectiveness of our internal controls over financial reporting. When we cease to be an emerging growth company we will be required to have our independent registered accounting firm perform such an evaluation, and additional material weaknesses or other control deficiencies may be identified.

If we are unable to successfully remediate our current material weakness or avoid or remediate any future material weakness, our stock price may be adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements.

We have incurred operating losses and may be unable to achieve or sustain profitability in the future.

We have incurred operating losses since our inception. We incurred net losses of $56.5 million and $76.2 million for the year ended December 31, 2013 and the six months ended June 30, 2014, respectively. We expect to continue to incur net losses from operations as we increase our spending to finance the expansion of our operations, expand our installation, engineering, administrative, sales and marketing staffs, and implement internal systems and infrastructure to support our growth. In addition, as a public company, we will incur significant additional legal, accounting and other expenses that we did not incur as a private company. We do not know whether our revenue will grow rapidly enough to absorb these costs, and our limited operating history makes it difficult to assess the extent of these expenses or their impact on our operating results. Our ability to achieve profitability depends on a number of factors, including:

 

    growing our customer base;

 

    finding investors willing to invest in our investment funds;

 

    maintaining and further lowering our cost of capital;

 

    reducing the cost of components for our solar energy systems; and

 

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    reducing our operating costs by optimizing our sales, design and installation processes and supply chain logistics.

Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

Substantially all of our business is conducted primarily using one channel, direct-selling.

While we are in the process of evaluating different distribution channels, currently substantially all of our business is conducted using direct-selling. We compete against companies that sell solar energy systems to customers through a number of distribution channels, including homebuilders, home improvement stores, large construction, electrical and roofing companies and other third parties and companies that access customers through relationships with third parties in addition to other direct-selling companies. This single distribution channel may place us at a disadvantage with consumers who prefer to purchase products through these other distribution channels. Additionally, we are vulnerable to changes in laws related to direct marketing as regulations have limited unsolicited residential sales calls and may impose additional restrictions. If additional laws affecting direct marketing are passed in the markets in which we operate, it would take time to train our sales force to comply with such laws, and we may be exposed to fines or other penalties for violations of such laws. If we fail to compete effectively through our direct-selling efforts or are not successful in executing our strategy to sell our solar energy systems through other channels, our financial condition, results of operations and growth prospects will be adversely affected.

We are highly dependent on our ability to attract, train and retain an effective sales force.

The success of our direct-selling channel efforts depends upon the recruitment, retention and motivation of a large number of sales personnel to compensate for a high turnover rate among sales personnel, which is a common characteristic of a direct-selling business. For example, approximately 43% of the sales force on January 1, 2013, were no longer providing services to us by the end of the year. In order to grow our business, we need to recruit, train and retain sales personnel on a continuing basis. Historically, we have recruited a large portion of our sales personnel from our sister company, Vivint. In the future, we expect that we will need to recruit greater numbers of our sales personnel from other sources and we may be unable to successfully do so.

Sales personnel are attracted to direct-selling by competitive earnings opportunities and so direct-sellers typically compete for sales personnel by providing a more competitive earnings opportunity than that offered by the competition. Competitors devote substantial effort to determining the effectiveness of such incentives so that they can invest in incentives that are the most cost effective or produce the best return on incentive. For example, we have historically compensated our sales personnel on a commission basis, based on the size of the solar energy systems they sell. Some sales personnel may prefer a compensation structure that also includes a salary and equity incentive component. We may need to adjust our compensation model to include such components, and these adjustments could adversely impact our operating results and financial performance.

 

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In addition to our sales compensation model, our ability to recruit, train and retain effective sales personnel could be harmed by additional factors, including:

 

    any adverse publicity regarding us, our solar energy systems, our distribution channel, or our industry;

 

    lack of interest in, or the technical failure of, our solar energy systems;

 

    lack of a compelling product or income opportunity that generates interest for potential new sales personnel, or perception that other product or income opportunities are more attractive;

 

    any negative public perception of our sales personnel and direct-selling businesses in general;

 

    any regulatory actions or charges against us or others in our industry;

 

    general economic and business conditions; and

 

    potential saturation or maturity levels in a given market which could negatively impact our ability to attract and retain sales personnel in such market.

We are subject to significant competition for the recruitment of sales personnel from other direct-selling companies and from other companies that sell solar energy systems in particular. It is therefore continually necessary to innovate and enhance our direct-selling and service model as well as to recruit and retain new sales personnel. If we are unable to do so, our business will be adversely affected.

A failure to hire and retain a sufficient number of employees in key functions would constrain our growth and our ability to timely complete our customers’ projects.

To support our growth, we need to hire, train, deploy, manage and retain a substantial number of skilled installers and electricians in the relevant markets. Competition for qualified personnel in our industry is increasing, particularly for skilled electricians and other personnel involved in the installation of solar energy systems. We also compete with the homebuilding and construction industries for skilled labor. As these industries seek to hire additional workers, our cost of labor may increase. In addition, we compensate our installers and electricians based on the number of solar energy systems they install. Companies with whom we compete to hire installers may offer an hourly rate or equity incentive component, which certain installers may prefer. Shortages of skilled labor could significantly delay a project or otherwise increase our costs. While we do not currently have any unionized employees, we have expanded, and may continue to expand, into areas such as the Northeast, where labor unions are more prevalent. The unionization of our labor force could also increase our labor costs.

Because we are a licensed electrical contractor in every jurisdiction in which we operate, we are required to employ licensed electricians. As we expand into new markets, we are required to hire and/or contract with seasoned licensed electricians in order for the company to qualify for the requisite state and local licenses. Because of the high demand for these seasoned licensed

 

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electricians, these individuals currently or in the future may demand greater compensation. In addition, our inability to attract and retain these qualifying electricians may adversely impact our ability to continue operations in current markets or expand into new areas.

If we cannot meet our hiring, retention and efficiency goals, we may be unable to complete our customers’ projects on time, in an acceptable manner or at all. Any significant failures in this regard would materially impair our growth, reputation, business and financial results. If we are required to pay higher compensation than we anticipate, these greater expenses may also adversely impact our financial results and the growth of our business.

Historically, we have only provided our offerings to residential customers, which could put us at a disadvantage relative to companies who also compete in other markets.

We have historically only provided our offerings to residential customers. We compete with companies who sell solar panels in the commercial and government markets, in addition to the residential market. While we are considering the option of expanding into markets outside of the residential market, such as the small business market, and while we believe that in the future we may have opportunities to expand our operations into other markets, there are no assurances that our design and installation systems will work for non-residential customers or that we will be able to compete successfully with companies with historical presences in such markets. Additionally, there is intense competition in the residential solar energy market in the markets in which we operate. As new entrants continue to enter into these markets, we may be unable to gain or maintain market share and we may be unable to compete with companies that earn revenue in both the residential market and non-residential markets.

We face competition from traditional regulated electric utilities, from less-regulated third party energy service providers and from new renewable energy companies.

The solar energy and renewable energy industries are both highly competitive and continually evolving as participants strive to distinguish themselves within their markets and compete with large traditional utilities. We believe that our primary competitors are the traditional utilities that supply electricity to our potential customers. Traditional utilities generally have substantially greater financial, technical, operational and other resources than we do. As a result, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and changes in market conditions than we can. Traditional utilities could also offer other value-added products or services that could help them to compete with us even if the cost of electricity they offer is higher than ours. In addition, a majority of utilities’ sources of electricity is non-solar, which may allow utilities to sell electricity more cheaply than electricity generated by our solar energy systems.

We also compete with companies that are not regulated like traditional utilities but that have access to the traditional utility electricity transmission and distribution infrastructure pursuant to state and local pro-competitive and consumer choice policies. These energy service companies are able to offer customers electricity supply-only solutions that are competitive with our solar energy system options on both price and usage of renewable energy technology while avoiding the long-term agreements and physical installations that our current fund-financed business model requires. This may limit our ability to attract new customers, particularly those who wish to avoid long-term contracts or have an aesthetic or other objection to putting solar panels on their roofs.

 

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We also compete with solar companies with business models that are similar to ours. In addition, we compete with solar companies in the downstream value chain of solar energy. For example, we face competition from purely finance driven organizations that acquire customers and then subcontract out the installation of solar energy systems, from installation businesses that seek financing from external parties, from large construction companies and utilities, and increasingly from sophisticated electrical and roofing companies. Some of these competitors specialize in the residential solar energy market, and some may provide energy at lower costs than we do. Further, some of our competitors are integrating vertically in order to ensure supply and to control costs. Many of our competitors also have significant brand name recognition and have extensive knowledge of our target markets. For us to remain competitive, we must distinguish ourselves from our competitors by offering an integrated approach that successfully competes with each level of products and services offered by our competitors at various points in the value chain. If our competitors develop an integrated approach similar to ours including sales, financing, engineering, manufacturing, installation, maintenance and monitoring services, this will reduce our marketplace differentiation.

As the solar industry grows and evolves, we will also face new competitors who are not currently in the market. Our industry is characterized by low technological barriers to entry and well-capitalized companies could choose to enter the market and compete with us. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors will limit our growth and will have a material adverse effect on our business and prospects.

Developments in alternative technologies or improvements in distributed solar energy generation may materially adversely affect demand for our offerings.

Significant developments in alternative technologies, such as advances in other forms of distributed solar power generation, storage solutions such as batteries, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other forms of centralized power production may materially and adversely affect our business and prospects in ways we do not currently anticipate. Any failure by us to adopt new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay deployment of our solar energy systems, which could result in product obsolescence, the loss of competitiveness of our systems, decreased revenue and a loss of market share to competitors.

We depend on a limited number of suppliers of solar energy system components and technologies to adequately meet anticipated demand for our solar energy systems. Due to the limited number of suppliers in our industry, the acquisition of any of these suppliers by a competitor or any shortage, delay, price change, imposition of tariffs or duties or other limitation in our ability to obtain components or technologies we use could result in sales and installation delays, cancellations and loss of market share.

We purchase solar panels, inverters and other system components from a limited number of suppliers, making us susceptible to quality issues, shortages and price changes. In 2013, Trina Solar Limited and Yingli Green Energy Americas, Inc. accounted for substantially all of our solar photovoltaic module purchases and Enphase Energy, Inc. accounted for all of our inverter purchases. If we fail to develop, maintain and expand our relationships with these or other suppliers, our ability to adequately meet anticipated demand for our solar energy systems may be adversely affected, or we may only be able to offer our systems at higher costs or after delays. If

 

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one or more of the suppliers that we rely upon to meet anticipated demand ceases or reduces production due to its financial condition, acquisition by a competitor or otherwise, is unable to increase production as industry demand increases or is otherwise unable to allocate sufficient production to us, it may be difficult to quickly identify alternate suppliers or to qualify alternative products on commercially reasonable terms, and our ability to satisfy this demand may be adversely affected. There are a limited number of suppliers of solar energy system components and technologies. While we believe there are other sources of supply for these products available, transitioning to a new supplier may result in additional costs and delays in acquiring our solar products and deploying our systems. These issues could harm our business or financial performance.

In addition, the acquisition of a component supplier or technology provider by one of our competitors could limit our access to such components or technologies and require significant redesigns of our solar energy systems or installation procedures and have a material adverse effect on our business. For example, the recent acquisition of Zep Solar, Inc., who sold us virtually all of the racking systems used in our hardware in 2013, by one of our competitors and the resulting limitation in our ability to acquire Zep Solar, Inc. products required us to redesign certain aspects of our systems to accommodate alternative racking hardware. While we are in the process of diversifying our racking providers, it is possible that sales and installation delays, cancellations and loss of market share may occur before we complete our transition to alternate suppliers. These risks are compounded by the fact that some of our investment funds require the use of designated equipment, and our inability to obtain any such required equipment could limit our ability to finance solar energy systems that we intend to place in those funds.

There have also been periods of industry-wide shortages of key components, including solar panels, in times of rapid industry growth. The manufacturing infrastructure for some of these components has a long lead-time, requires significant capital investment and relies on the continued availability of key commodity materials, potentially resulting in an inability to meet demand for these components. The solar industry is currently experiencing rapid growth and, as a result, shortages of key components, including solar panels, may be more likely to occur, which in turn may result in price increases for such components. Even if industry-wide shortages do not occur, suppliers may decide to allocate key components with high demand or insufficient production capacity to more profitable customers, customers with long-term supply agreements or customers other than us and our supply of such components may be reduced as a result.

Typically, we purchase the components for our solar energy systems on an as-needed basis and do not operate under long-term supply agreements. All of these purchases under these purchase orders are denominated in U.S. dollars. Since our revenue is also generated in U.S. dollars we are mostly insulated from currency fluctuations. However, since our suppliers often incur a significant amount of their costs by purchasing raw materials and generating operating expenses in foreign currencies, if the value of the U.S. dollar depreciates significantly or for a prolonged period of time against these other currencies this may cause our suppliers to raise the prices they charge us, which could harm our financial results. Since we purchase almost all of the solar photovoltaic modules we use from China, we are particularly exposed to exchange rate risk from increases in the value of the Chinese Renminbi. In addition, the U.S. government has recently imposed tariffs on solar cells manufactured in China and is investigating pricing practices concerning solar panels manufactured in China and Taiwan that contain solar cells produced in other countries, at the conclusion of which it could impose additional tariffs or duties. Any such tariffs or duties, or

 

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shortages, delays, price changes or other limitation in our ability to obtain components or technologies we use could limit our growth, cause cancellations or adversely affect our profitability, and result in loss of market share and damage to our brand.

Our operating results may fluctuate from quarter to quarter, which could make our future performance difficult to predict and could cause our operating results for a particular period to fall below expectations, resulting in a severe decline in the price of our common stock.

Our quarterly operating results are difficult to predict and may fluctuate significantly in the future. We have experienced seasonal and quarterly fluctuations in the past. However, given that we are an early-stage company operating in a rapidly growing industry, the true extent of these fluctuations may have been masked by our recent growth rates and thus may not be readily apparent from our historical operating results and may be difficult to predict. For example, the amount of revenue we recognize in a given period from our customer contracts is dependent in part on the amount of energy generated by solar energy systems under such contracts. As a result, revenue derived from power purchase agreements is impacted by seasonally shorter daylight hours in winter months. In addition, our ability to install solar energy systems is impacted by weather, as for example during the winter months in the Northeastern United States. Such delays can impact the timing of when we can install and begin to generate revenue from solar energy systems. As such, our past quarterly operating results may not be good indicators of future performance.

In addition to the other risks described in this “Risk Factors” section, the following factors could cause our operating results to fluctuate:

 

    the expiration or initiation of any rebates or incentives;

 

    significant fluctuations in customer demand for our offerings;

 

    our ability to complete installations in a timely manner;

 

    the availability and costs of suitable financing;

 

    the amount and timing of sales of SRECs;

 

    our ability to continue to expand our operations, and the amount and timing of expenditures related to this expansion;

 

    actual or anticipated changes in our growth rate relative to our competitors;

 

    announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;

 

    changes in our pricing policies or terms or those of our competitors, including traditional utilities; and

 

    actual or anticipated developments in our competitors’ businesses or the competitive landscape.

 

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For these or other reasons, the results of any prior quarterly or annual periods should not be relied upon as indications of our future performance. In addition, our actual revenue, key operating metrics and other operating results in future quarters may fall short of the expectations of investors and financial analysts, which could have an adverse effect on the trading price of our common stock.

Our business has benefited from the declining cost of solar panels, and our financial results may be harmed now that the cost of solar panels has stabilized and could increase in the future.

The declining cost of solar panels and the raw materials necessary to manufacture them has been a key driver in the price we charge for electricity and customer adoption of solar energy. According to industry experts, solar panel and raw material prices are not expected to continue to decline at the same rate as they have over the past several years. In addition, growth in the solar industry and the resulting increase in demand for solar panels and the raw materials necessary to manufacture them may also put upward pressure on prices. The resulting prices could slow our growth and cause our financial results to suffer. In addition, in the past we have purchased virtually all of the solar panels used in our solar energy systems from manufacturers based in China which have benefited from favorable governmental policies by the Chinese government. If this governmental support were to decrease or be eliminated, our ability to purchase these products on competitive terms or to access specialized technologies from China could be restricted. Even if this support were to continue, the U.S. government could impose additional tariffs on solar cells manufactured in China. In 2012, the U.S. government imposed anti-dumping tariffs on Chinese crystalline silicon photovoltaic cells on a manufacturer specific basis with rates ranging from approximately 18.3% to 250.0%, and applicable countervailing duty rates ranging from approximately 14.8% to 16.0%. In January 2014, the U.S. government broadened its investigation of Chinese pricing practices in this area to include solar panels and modules produced in China containing solar cells manufactured in other countries. On June 10, 2014, the U.S. government issued a preliminary determination of countervailing subsidies by China and has proposed duties ranging from 18.6% to 35.2% on Chinese solar companies importing certain solar products into the United States, including our solar panel suppliers. On July 25, 2014, the U.S. government issued a separate preliminary determination imposing antidumping duties on imports of certain solar products from China. Although the exact applicability remains unclear, these duties are at rates of 26.3% to 165% for affected Chinese products, including our solar panel supplier Trina Solar. The U.S. government issued a separate preliminary determination relating to imports of solar products from Taiwan, with duties at rates from 20.9% to 27.6% for affected Taiwanese products (although we do not currently purchase Taiwanese products). To the extent that the U.S. government makes a final determination that U.S. market participants experience harm from these Chinese pricing practices, such solar panels and modules could become subject to these or additional tariffs. These combined tariffs would make such solar cells less competitively priced in the United States, and the Chinese and Taiwanese manufacturers may choose to limit the amount of solar equipment they sell into the United States. As a result, it may be easier for solar cell manufacturers located outside of China or Taiwan to increase the prices of the solar cells they sell into the United States. If we are required to pay higher prices, accept less favorable terms or purchase solar panels or other system components from alternative, higher-priced sources, our financial results will be adversely affected.

 

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The residual value of our solar energy systems at the end of the associated term of the lease or power purchase agreement may be lower than projected today and adversely affect our financial performance and valuation.

We intend to amortize the costs of our solar energy systems over 30 years for accounting purposes, which exceeds the period of the component warranties and the corresponding payment streams from our contracts with our customers. If we incur repair and maintenance costs on these systems after the warranties have expired and if they then fail or malfunction we will be liable for the expense of repairing these systems without a chance of recovery from our suppliers. In addition, we typically bear the cost of removing the solar energy systems at the end of the term of the customer contract if the customer does not renew his or her contract at the end of its term. Furthermore, it is difficult to predict how future environmental regulations may affect the costs associated with the removal, disposal or recycling of our solar energy systems. If the residual value of the systems is less than we expect at the end of the customer contract, after giving effect to any associated removal and redeployment costs, we may be required to accelerate all or some of the remaining unamortized costs. This could materially impair our future operating results and estimated retained value.

We act as the licensed general contractor for our customers and are subject to risks associated with construction, cost overruns, delays, regulatory compliance and other contingencies, any of which could have a material adverse effect on our business and results of operations.

We are a licensed contractor in every market we service and we are responsible for every customer installation. We are the general contractor, electrician, construction manager and installer for all our solar energy systems. We may be liable to customers for any damage we cause to their home, belongings or property during the installation of our systems. For example, we penetrate our customers’ roofs during the installation process and may incur liability for the failure to adequately weatherproof such penetrations following the completion of installation of solar energy systems. In addition, because the solar energy systems we deploy are high-voltage energy systems, we may incur liability for the failure to comply with electrical standards and manufacturer recommendations. Because our profit on a particular installation is based in part on assumptions as to the cost of such project, cost overruns, delays or other execution issues may cause us to not achieve our expected results or cover our costs for that project.

In addition, the installation of solar energy systems is subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building, fire and electrical codes, safety, environmental protection, utility interconnection and metering, and related matters. We also rely on certain of our employees to maintain professional licenses in many of the jurisdictions in which we operate, and our failure to employ properly licensed personnel could adversely affect our licensing status in those jurisdictions. It is difficult and costly to track the requirements of every authority having jurisdiction over our operations and our solar energy systems. Any new government regulations or utility policies pertaining to our systems, or changes to existing government regulations or utility policies pertaining to our systems, may result in significant additional expenses to us and our customers and, as a result, could cause a significant reduction in demand for our systems.

 

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Compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties, operational delays and adverse publicity.

The installation of solar energy systems requires our employees to work at heights with complicated and potentially dangerous electrical systems. The evaluation and modification of buildings as part of the installation process requires our employees to work in locations that may contain potentially dangerous levels of asbestos, lead, mold or other materials known or believed to be hazardous to human health. We also maintain a fleet of more than 350 trucks and other vehicles to support our installers and operations. There is substantial risk of serious injury or death if proper safety procedures are not followed. Our operations are subject to regulation under the U.S. Occupational Safety and Health Act, or OSHA, the U.S. Department of Transportation, or DOT, and equivalent state laws. Changes to OSHA or DOT requirements, or stricter interpretation or enforcement of existing laws or regulations, could result in increased costs. If we fail to comply with applicable OSHA regulations, even if no work-related serious injury or death occurs, we may be subject to civil or criminal enforcement and be required to pay substantial penalties, incur significant capital expenditures or suspend or limit operations. Because our installation employees are compensated on a per project basis, they are incentivized to work more quickly than installers that are compensated on an hourly basis. While we have not experienced a high level of injuries to date, this incentive structure may result in higher injury rates than others in the industry and could accordingly expose us to increased liability. In the past, we have had workplace accidents and received citations from OSHA regulators for alleged safety violations, resulting in fines. Any such accidents, citations, violations, injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and adversely affect our business.

Problems with product quality or performance may cause us to incur expenses, may lower the residual value of our solar energy systems and may damage our market reputation and adversely affect our financial results.

We agree to maintain the solar energy systems installed on our customers’ homes during the length of the term of our customer contracts, which is typically 20 years. We are exposed to any liabilities arising from the systems’ failure to operate properly and are generally under an obligation to ensure that each system remains in good condition during the term of the agreement. As part of our operations and maintenance work, we provide a pass-through of the inverter and panel manufacturers’ warranty coverage to our customers, which generally range from 10 to 25 years. One of these third-party manufacturers could cease operations and no longer honor these warranties, leaving us to fulfill these potential obligations to our customers or to our fund investors without underlying warranty coverage. In most of our investment funds, the fund itself would bear this cost; however, in certain funds we would bear this cost with respect to such major equipment. Even if the investment fund bears the direct expense of such replacement equipment, we could suffer financial losses associated with a loss of production from the solar energy systems.

Beginning in 2014, we began structuring some customer contracts as solar energy system leases. To be competitive in the market our solar energy system leases contain a performance guarantee in favor of the lessee. Leases with performance guarantees require us to refund money to the lessee if the solar energy system fails to generate the minimum amount of electricity in a 12-month period. We may also suffer financial losses associated with such refunds if a performance guarantee payment is triggered.

 

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Although we have not had material claims in the past, we may incur material claims in the future. Our failure to accurately predict future claims could result in unexpected volatility in our financial condition. Because of the limited operating history of our solar energy systems, we have been required to make assumptions and apply judgments regarding a number of factors, including our anticipated rate of warranty claims, and the durability, performance and reliability of our solar energy systems. We have made these assumptions based on the historic performance of similar systems or on accelerated life cycle testing. Our assumptions could prove to be materially different from the actual performance of our systems, causing us to incur substantial expense to repair or replace defective solar energy systems in the future or to compensate customers for systems that do not meet their production guarantees. Equipment defects, serial defects or operational deficiencies also would reduce our revenue from power purchase agreements because the customer payments under such agreements are dependent on system production or require us to make refunds under the performance guarantees under our leases. Any widespread product failures or operating deficiencies may damage our market reputation and adversely impact our financial results.

We are responsible for providing maintenance, repair and billing on solar energy systems that are owned or leased by our investment funds on a fixed fee basis, and our financial performance could be adversely affected if our cost of providing such services is higher than we project.

We typically provide a five-year workmanship warranty to our investment funds for every system sold thereto. We are also generally obligated to cover the cost of maintenance, repair and billing on any solar energy systems that we sell or lease to our investment funds. We are subject to a maintenance services agreement under which we are required to operate and maintain the system, and perform customer billing services for a fixed fee that is calculated to cover our future expected maintenance and servicing costs of the solar energy systems in each investment fund over the term of the lease or power purchase agreement with the covered customers. If our solar energy systems require an above-average amount of repairs or if the cost of repairing systems were higher than our estimate, we would need to perform such repairs without additional compensation. If our solar energy systems, a majority of which are located in California and Hawaii, are damaged in the event of a natural disaster beyond our control, such as an earthquake, tsunami or hurricane, losses could be outside the scope of insurance policies or exceed insurance policy limits, and we could incur unforeseen costs that could harm our business and financial condition. We may also incur significant costs for taking other actions in preparation for, or in reaction to, such events. When required to do so under the terms of a particular investment fund, we purchase property and business interruption insurance with industry standard coverage and limits approved by the investor’s third-party insurance advisors to hedge against such risk, but such coverage may not cover our losses, and we have not acquired such coverage for all of our funds.

Product liability claims against us or accidents could result in adverse publicity and potentially significant monetary damages.

If one of our solar energy systems injured someone, then we could be exposed to product liability claims. In addition, it is possible that our products could injure our customer or third parties, or that our products could cause property damage as a result of product malfunctions, defects, improper installation, fire or other causes. We rely on our general liability insurance to cover product liability claims. Any product liability claim we face could be expensive to defend and divert

 

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management’s attention. The successful assertion of product liability claims against us could result in potentially significant monetary damages, penalties or fines, subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our systems and other products. In addition, product liability claims, injuries, defects or other problems experienced by other companies in the residential solar industry could lead to unfavorable market conditions to the industry as a whole, and may have an adverse effect on our ability to attract new customers, thus affecting our growth and financial performance.

Failure by our component suppliers to use ethical business practices and comply with applicable laws and regulations may adversely affect our business.

We do not control our suppliers or their business practices. Accordingly, we cannot guarantee that they follow ethical business practices such as fair wage practices and compliance with environmental, safety and other local laws. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations. Violation of labor or other laws by our suppliers or the divergence of a supplier’s labor or other practices from those generally accepted as ethical in the United States or other markets in which we do business could also attract negative publicity for us and harm our business.

Damage to our brand and reputation, or change or loss of use of our brand, would harm our business and results of operations.

We depend significantly on our reputation for high-quality products, best-in-class customer service and the brand name “Vivint Solar” to attract new customers and grow our business. If we fail to continue to deliver our solar energy systems within the planned timelines, if our offerings do not perform as anticipated or if we damage any of our customers’ properties or delay or cancel projects, our brand and reputation could be significantly impaired. Future technical improvements may allow us to offer lower prices or offer new technology to new customers; however, technical limitations in our current solar energy systems may prevent us from offering such lower prices or new technology to our existing customers. The inability of our current customers to benefit from technological improvements could cause our existing customers to lower the value they perceive our existing products offer and impair our brand and reputation.

We have focused particular attention on growing our direct sales force, leading us in some instances to take on candidates who we later determined did not fit our company culture. This has led to instances of customer complaints, some of which have affected our digital footprint on rating websites such as that for the Better Business Bureau. If we cannot manage our hiring and training processes to avoid these issues, our reputation may be harmed and our ability to attract new customers would suffer.

Given our past relationship with our sister company Vivint and the similarity in our names, customers may associate us with any problems experienced with Vivint, such as complaints with the Better Business Bureau. Because we have no control over Vivint, we may not be able to take remedial action to cure any issues Vivint has with its customers, and our brand and reputation may be harmed if we are mistaken for the same company.

In addition, if we were to no longer use, lose the right to continue to use, or if others use, the “Vivint Solar” brand, we could lose recognition in the marketplace among customers, suppliers

 

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and partners, which could affect our growth and financial performance, and would require financial and other investment, and management attention in new branding, which may not be as successful.

Marketplace confidence in our liquidity and long-term business prospects is important for building and maintaining our business.

Our financial condition, operating results and business prospects may suffer materially if we are unable to establish and maintain confidence about our liquidity and business prospects among consumers and within our industry. Our solar energy systems require ongoing maintenance and support. If we were to reduce operations, even years from now, buyers of our systems from years earlier might have difficulty in having us repair or service our systems, which remain our responsibility under the terms of our customer contracts. As a result, consumers may be less likely to purchase our solar energy systems now if they are uncertain that our business will succeed or that our operations will continue for many years. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with us if they are not convinced that our business will succeed. Accordingly, in order to build and maintain our business, we must maintain confidence among customers, suppliers and other parties in our liquidity and long-term business prospects. We may not succeed in our efforts to build this confidence.

If we fail to manage our recent and future growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges.

We have experienced significant growth in recent periods with the cumulative capacity of our solar energy systems growing from 14.8 megawatts as of December 31, 2012 to 129.7 megawatts as of June 30, 2014, and we intend to continue to expand our business significantly within existing markets and in a number of new locations in the future. This growth has placed, and any future growth may place, a significant strain on our management, operational and financial infrastructure. In particular, we will be required to expand, train and manage our growing employee base and scale and otherwise improve our IT infrastructure in tandem with that headcount growth. Our management will also be required to maintain and expand our relationships with customers, suppliers and other third parties and attract new customers and suppliers, as well as manage multiple geographic locations.

In addition, our current and planned operations, personnel, IT and other systems and procedures might be inadequate to support our future growth and may require us to make additional unanticipated investment in our infrastructure. Our success and ability to further scale our business will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner. If we cannot manage our growth, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures. This could also result in declines in quality or customer satisfaction, increased costs, difficulties in introducing new offerings or other operational difficulties. Any failure to effectively manage growth could adversely impact our business and reputation.

 

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We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.

We acquired Solmetric Corporation in January 2014 and in the future we may acquire additional companies, project pipelines, products or technologies or enter into joint ventures or other strategic initiatives. We may not realize the anticipated benefits of this acquisition or any other future acquisition, and any acquisition has numerous risks. These risks include the following:

 

    difficulty in assimilating the operations and personnel of the acquired company;

 

    difficulty in effectively integrating the acquired technologies or products with our current technologies;

 

    difficulty in maintaining controls, procedures and policies during the transition and integration;

 

    disruption of our ongoing business and distraction of our management and employees from other opportunities and challenges due to integration issues;

 

    difficulty integrating the acquired company’s accounting, management information and other administrative systems;

 

    inability to retain key technical and managerial personnel of the acquired business;

 

    inability to retain key customers, vendors and other business partners of the acquired business;

 

    inability to achieve the financial and strategic goals for the acquired and combined businesses;

 

    incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

 

    potential failure of the due diligence processes to identify significant issues with product quality, intellectual property infringement and other legal and financial liabilities, among other things;

 

    potential inability to assert that internal controls over financial reporting are effective; and

 

    potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions.

Mergers and acquisitions of companies are inherently risky and, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition or results of operations.

 

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The loss of one or more members of our senior management or key employees may adversely affect our ability to implement our strategy.

We depend on our experienced management team, and the loss of one or more key executives could have a negative impact on our business. In particular, we are dependent on the services of our chief executive officer, Greg Butterfield. We also depend on our ability to retain and motivate key employees and attract qualified new employees. None of our key executives are bound by employment agreements for any specific term and we do not maintain key person life insurance policies on any of our executive officers. In addition, two-thirds of the outstanding options to purchase shares of our common stock granted to our key executives and other employees under our 2013 Omnibus Incentive Plan will vest if Blackstone receives a return on its invested capital at pre-established thresholds, subject to the employee’s continued service through the receipt of such return. While this offering would not itself constitute an event that would trigger vesting, subsequent sales by Blackstone of our common stock after we are public could result in the vesting of such options. As a result, the retention incentives associated with these options could lapse for all employees holding these options under our 2013 Omnibus Incentive Plan at the same time or times. This decrease in retention incentive could cause significant turnover after these options vest. We may be unable to replace key members of our management team and key employees if we lose their services. Integrating new employees into our team could prove disruptive to our operations, require substantial resources and management attention and ultimately prove unsuccessful. An inability to attract and retain sufficient managerial personnel who have critical industry experience and relationships could limit or delay our strategic efforts, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

The execution of our business plan and development strategy may be seriously harmed if integration of our senior management team is not successful.

Since August 2013, we have experienced and we may continue to experience significant changes in our senior management team. Specifically, eight members of our senior management team, including our chief executive officer and chief financial officer, have joined us since August 2013 and only one member of our senior management team has prior experience in the distributed solar energy industry. This lack of long-term experience working together and limited experience in the distributed solar energy industry may adversely impact our senior management team’s ability to effectively manage our business and accurately forecast our results, including revenue from our distributed solar energy systems and sales.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and officers.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the listing requirements of the New York Stock Exchange, or NYSE, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and, if required, improve our disclosure controls and procedures and internal

 

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control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns which could harm our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future which will increase our costs and expenses. Moreover, our independent registered public accounting firm identified a material weakness in our internal control over financial reporting in connection with the preparation, audits and interim reviews of our consolidated financial statements, and if we fail to remediate this material weakness or, in the future, we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee and compensation committee.

We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

Third parties, including our competitors, may own patents or other intellectual property rights that cover aspects of our technology or business methods. Such parties may claim we have misappropriated, misused, violated or infringed third party intellectual property rights, and, if we gain greater recognition in the market, we face a higher risk of being the subject of claims that we have violated others’ intellectual property rights. Any claim that we violate a third party’s intellectual property rights, whether with or without merit, could be time-consuming, expensive to settle or litigate and could divert our management’s attention and other resources. If we do not successfully settle or defend an intellectual property claim, we could be liable for significant monetary damages and could be prohibited from continuing to use certain technology, business methods, content or brands. To avoid a prohibition, we could seek a license from third parties, which could require us to pay significant royalties, increasing our operating expenses. If a license is not available at all or not available on reasonable terms, we may be required to develop or license a non-violating alternative, either of which could require significant effort and expense. If we cannot license or develop a non-violating alternative, we would be forced to limit or stop sales of our offerings and may be unable to effectively compete. Any of these results would adversely affect our business, results of operations, financial condition and cash flows. To deter other companies from making intellectual property claims against us or to gain leverage in settlement negotiations, we may be forced to significantly increase the size of our intellectual property portfolio through internal efforts and acquisitions from third parties, both of which could require significant expenditures. However, a robust intellectual property portfolio may provide little or no deterrence, particularly for patent holding companies or other patent owners that have no relevant product revenues.

 

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We use “open source” software in our solutions, which may restrict how we distribute our offerings, require that we release the source code of certain software subject to open source licenses or subject us to possible litigation or other actions that could adversely affect our business.

We currently use in our solutions, and expect to continue to use in the future, software that is licensed under so-called “open source,” “free” or other similar licenses. Open source software is made available to the general public on an “as-is” basis under the terms of a non-negotiable license. We currently combine our proprietary software with open source software but not in a manner that we believe requires the release of the source code of our proprietary software to the public. We do not plan to integrate our proprietary software with open source software in ways that would require the release of the source code of our proprietary software to the public, however, our use and distribution of open source software may entail greater risks than use of third-party commercial software. Open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, if we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar offerings with lower development effort and time and ultimately could result in a loss of sales. We may also face claims alleging noncompliance with open source license terms or infringement or misappropriation of proprietary software. These claims could result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our software, any of which would have a negative effect on our business and operating results. In addition, if the license terms for open source software that we use change, we may be forced to re-engineer our solutions, incur additional costs or discontinue the sale of our offerings if re-engineering could not be accomplished on a timely basis. Although we monitor our use of open source software to avoid subjecting our offerings to unintended conditions, few courts have interpreted open source licenses, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our offerings. We cannot guarantee that we have incorporated open source software in our software in a manner that will not subject us to liability, or in a manner that is consistent with our current policies and procedures.

The installation and operation of solar energy systems depends heavily on suitable solar and meteorological conditions. If meteorological conditions are unexpectedly unfavorable, the electricity production from our solar energy systems may be substantially below our expectations and our ability to timely deploy new systems may be adversely impacted.

The energy produced and revenue and cash receipts generated by a solar energy system depend on suitable solar, atmospheric and weather conditions, all of which are beyond our control. Furthermore, components of our systems, such as panels and inverters, could be damaged by severe weather, such as hailstorms or lightning. Although we maintain insurance to cover for many such casualty events, our investment funds would be obligated to bear the expense of repairing the damaged solar energy systems, sometimes subject to limitations based on our ability to successfully make warranty claims. Our economic model and projected returns on our systems require us to achieve certain production results from our systems and, in some cases, we guarantee these results for both our consumers and our investors. If the systems underperform for any reason, our financial results could suffer. Sustained unfavorable weather also could delay our installation of solar energy systems, leading to increased expenses and decreased revenue and

 

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cash receipts in the relevant periods. Weather patterns could change, making it harder to predict the average annual amount of sunlight striking each location where we install a solar energy system. This could make our solar energy systems less economical overall or make individual systems less economical. Any of these events or conditions could harm our business, financial condition, results of operations and prospects.

Disruptions to our solar monitoring systems could negatively impact our revenues and increase our expenses.

Our ability to accurately charge our customers for the energy produced by our solar energy systems depends on customers maintaining a broadband internet connection so that we may receive data regarding solar energy systems production from their home networks. We could incur significant expenses or disruptions of our operations in connection with failures of our solar monitoring systems, including failures of our customers’ home networks that would prevent us from accurately monitoring solar energy production. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of our systems. The costs to us to eliminate or alleviate viruses and bugs, or any problems associated with failures of our customers’ home networks could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions. We have in the past experienced periods where some of our customers’ networks have been unavailable and, as a result, we have been forced to estimate the production of their solar energy systems. Such estimates may prove inaccurate and could cause us to underestimate the power being generated by our solar energy systems and undercharge our customers, thereby harming our results of operations.

We are exposed to the credit risk of our customers.

Our solar energy customers purchase energy or lease solar energy systems from us pursuant to one of two types of long-term contracts: a power purchase agreement or a lease. The power purchase agreement and lease terms are typically for 20 years, and require the customer to make monthly payments to us. Accordingly, we are subject to the credit risk of our customers. As of June 30, 2014, the average FICO score of our customers was approximately 750. As of June 30, 2014, customer defaults, in the aggregate, have been immaterial; however, we expect that the risk of customer defaults will increase as we grow our business. Due to the immaterial amount of customer defaults, our reserve for this exposure is minimal and our future exposure may exceed the amount of such reserves.

The Office of the Inspector General of the U.S. Department of Treasury has issued subpoenas to a number of significant participants in the rooftop solar energy installation industry and may take further action based on this ongoing investigation or for other reasons.

In July 2012, other companies that are significant participants in both the solar industry and the U.S. Treasury grant program received subpoenas from the U.S. Department of Treasury’s Office of the Inspector General to deliver certain documents in their possession related to their applications for U.S. Treasury grants and communications with certain other solar development companies or certain firms that appraise solar energy property for U.S. Treasury grant application purposes. The Inspector General is working with the Civil Division of the U.S. Department of

 

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Justice to investigate the administration and implementation of the U.S. Treasury grant program, including possible misrepresentations concerning the fair market value of the solar power systems submitted in grant applications by companies in the solar industry. While we have not been a direct target of this investigation to date, given our participation in the U.S. Treasury grant program, the Inspector General or the Department of Justice could broaden the investigation to include us. If it were broadened to include us, the period of time necessary to resolve the investigation would be uncertain, and the matter could require significant management and financial resources that could otherwise be devoted to the operation of our business. The Department of Justice could also decide to bring a civil action to recover amounts it believes were improperly paid to us. If it were successful in asserting this action, it could have a material adverse effect on our business, liquidity, financial condition and prospects.

A failure to comply with laws and regulations relating to our interactions with current or prospective residential customers could result in negative publicity, claims, investigations, and litigation, and adversely affect our financial performance.

Our business substantially focuses on contracts and transactions with residential customers. We must comply with numerous federal, state and local laws and regulations that govern matters relating to our interactions with residential consumers, including those pertaining to privacy and data security, consumer financial and credit transactions, home improvement contracts, warranties, and door-to-door solicitation. These laws and regulations are dynamic and subject to potentially differing interpretations, and various federal, state and local legislative and regulatory bodies may expand current laws or regulations, or enact new laws and regulations, regarding these matters. Changes in these laws or regulations or their interpretation could dramatically affect how we do business, acquire customers, and manage and use information we collect from and about current and prospective customers and the costs associated therewith. We strive to comply with all applicable laws and regulations relating to our interactions with residential customers. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Our non-compliance with any such law or regulations could also expose the company to claims, proceedings, litigation and investigations by private parties and regulatory authorities, as well as substantial fines and negative publicity, each of which may materially and adversely affect our business. We have incurred, and will continue to incur, significant expenses to comply with such laws and regulations, and increased regulation of matters relating to our interactions with residential consumers could require us to modify our operations and incur significant additional expenses, which could have an adverse effect on our business, financial condition and results of operations.

Any unauthorized access to, or disclosure or theft of personal information we gather, store or use could harm our reputation and subject us to claims or litigation.

We receive, store and use personal information of our customers, including names, addresses, e-mail addresses, credit information and other housing and energy use information. We also store and use personal information of our employees. In addition, we currently utilize certain shared information and technology systems with Vivint. We take certain steps in an effort to protect the security, integrity and confidentiality of the personal information we collect, store or transmit, but there is no guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. Because techniques used to obtain unauthorized access or sabotage systems change frequently

 

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and generally are not identified until they are launched against a target, we and our suppliers or vendors, including Vivint, may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures.

Unauthorized use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of our suppliers or vendors, including Vivint, by an unauthorized party, or through employee or contractor error, theft or misuse, or otherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal information were to occur, our operations could be seriously disrupted and we could be subject to demands, claims and litigation by private parties, and investigations, related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying affected persons and entities and otherwise complying with the multitude of federal, state and local laws and regulations relating to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to, or use or disclosure of, such information could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business, financial condition and results of operations.

We are involved, and may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could adversely affect our financial results.

We are, and may in the future become, party to litigation. For example, in December 2013 one of our former sales representatives filed a class-action lawsuit on behalf of himself and all similarly situated plaintiffs against us in the Superior Court of the State of California, County of San Diego. This action alleges certain violations of the California Labor Code and the California Business and Professions Code based on, among other things, alleged improper classification of sales representatives and sales managers, failure to pay overtime compensation, failure to provide meal periods, failure to provide accurate itemized wage statements, failure to pay wages on termination and failure to reimburse expenses. The complaint seeks unspecified damages including penalties and attorneys’ fees in addition to wages and overtime. On or about January 24, 2014, we filed an answer denying the allegations in the complaint and asserting various affirmative defenses. While we intend to defend against this action vigorously, the ultimate outcome of this case is presently not determinable as it is in a preliminary phase. We may become party to similar types of disputes in other jurisdictions. In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly affect financial results and the conduct of our business. It is not possible to predict the final resolution of the litigation to which we currently are or may in the future become party, and the impact of certain of these matters on our business, prospects, financial condition, liquidity, results of operations and cash flows.

 

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Risks Related to our Relationship with Vivint

Vivint provides us with certain key services for our business. If Vivint fails to perform its obligations to us or if we do not find appropriate replacement services, we may be unable to perform these services or implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.

We have historically relied on the technical, administrative and operational support of Vivint to run our business. In addition, Vivint has made available to us revolving lines of credit in the aggregate amount of up to $70.0 million. Some of the Vivint resources we are using include office space, information and technology resources and systems, purchasing services, operational and fleet services and marketing services. In addition, historically we have recruited a majority of our sales personnel from Vivint. In conjunction with this offering, we are in the process of separating our operations from those of Vivint and either creating our own financial, administrative, operational and other support systems or contracting with third parties to replace Vivint’s systems and services that will not be provided to us under the terms of the transition services agreement between us and Vivint described in the section of this prospectus captioned “Certain Relationships and Related Party Transactions—Agreements with Vivint—Expected Agreements with Vivint—Transition Services Agreement.” The implementation of new software support systems requires significant management time, support and cost, and there are inherent risks associated with implementing, developing, improving and expanding our core systems. We cannot be sure that these systems will be fully or effectively implemented on a timely basis, if at all. If we do not successfully implement these systems, our operations may be disrupted and our operating results could be harmed. In addition, the new systems may not operate as we expect them to, and we may be required to expend significant resources to correct problems or find alternative sources for performing these functions.

In order to successfully transition to our own systems, services and service providers and operate as a stand-alone business, we will enter into various agreements with Vivint in connection with the consummation of this offering. See the section of this prospectus captioned “Certain Relationships and Related Party Transactions—Agreements with Vivint—Expected Agreements with Vivint.” These include a master framework agreement providing the overall terms of the relationship and a transition services agreement detailing various information technology and back office support services that Vivint will provide. Vivint will provide each service until we agree that support from Vivint is no longer required for that service. The services provided under the transition services agreement may not be sufficient to meet our needs and we may not be able to replace these services at favorable costs and on favorable terms, if at all. Any failure or significant downtime in our own financial or administrative systems or in Vivint’s financial or administrative systems during the transition period and any difficulty in separating our operations from Vivint’s operations and integrating newly developed or acquired services into our business could result in unexpected costs, impact our results or prevent us from paying our suppliers and employees and performing other technical, administrative and operations services on a timely basis and could materially harm our business, financial condition, results of operations and cash flows.

Our historical financial information may not be representative of future results as a stand-alone public company.

The historical financial information we have included in this prospectus does not necessarily reflect what our financial position, results of operations or cash flows would have been

 

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had we operated separately from Vivint during the historical periods presented. The historical costs and expenses reflected in our consolidated financial statements include charges to certain corporate functions historically provided to us by Vivint. We and Vivint believe these charges are reasonable reflections of the historical utilization levels of these services in support of our business, however, these charges may not include all of the expenses that would have been incurred had we operated separately from Vivint during the historical periods presented. As a result, our historical financial information is not necessarily indicative of our future results of operations, financial position, cash flows or costs and expenses.

Our inability to resolve any disputes that arise between us and Vivint with respect to our past and ongoing relationships may adversely affect our financial results, and such disputes may also result in claims for indemnification.

Disputes may arise between Vivint and us in a number of areas relating to our past and ongoing relationships, including the following:

 

    intellectual property, labor, tax, employee benefits, indemnification and other matters arising from our separation from Vivint;

 

    employee retention and recruiting;

 

    our ability to use, modify and enhance the intellectual property that we have licensed from Vivint;

 

    business combinations involving us;

 

    pricing for shared and transitional services;

 

    exclusivity arrangements;

 

    the nature, quality and pricing of products and services Vivint agrees to provide to us; and

 

    business opportunities that may be attractive to both Vivint and us.

In conjunction with this offering, we are entering into certain agreements with Vivint as set forth in the section of this prospectus captioned “Certain Relationships and Related Party Transactions—Agreements with Vivint—Expected Agreements with Vivint.” Pursuant to the terms of the Non-Competition Agreement we are entering into with Vivint, we and Vivint each define our areas of business and our competitors, and agree not to directly or indirectly engage in the other’s business for three years. Such agreement may limit our ability to pursue attractive opportunities that we may have otherwise pursued.

Additionally, such agreement prohibits, for a period of five years, either Vivint or us from soliciting for employment any member of the other’s executive or senior management team, or any of the other’s employees who primarily manage sales, installation or services of the other’s products and services. The commitment not to solicit those employees lasts for 180 days after such employee finishes employment with us or Vivint. Historically we have recruited a majority of our sales personnel from Vivint. This agreement may require us to obtain personnel from other sources, and may limit our ability to continue scaling our business if we are unable to do so.

 

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Pursuant to the terms of the Marketing and Customer Relations Agreement we are entering into with Vivint, we and Vivint are required to compensate one another for sales leads that result in sales. Vivint may direct sales leads to other solar companies in markets in which we have not entered. However, once we enter a market, Vivint must exclusively direct to us all leads for customers and potential customers with an interest in solar. Vivint’s ability to sell leads to other solar providers in markets where we are not currently operating may adversely affect our ability to scale rapidly if we subsequently enter into such market as many of Vivint’s customers with solar inclinations may have already been referred to another solar company by the time we enter into such market.

We may not be able to resolve any potential conflicts relating to these agreements or otherwise, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party. In addition, we will have indemnification obligations under the intercompany services agreements we will enter into with Vivint, and disputes between us and Vivint may result in claims for indemnification. However, we do not currently expect that these indemnification obligations will materially affect our potential liability compared to what it would be if we did not enter into these agreements with Vivint.

Risks Related to this Offering

An active, liquid and orderly trading market for our common stock may not develop, our stock price may be volatile, and you may be unable to sell your shares at or above the offering price you paid.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for our common stock will be determined by negotiations between us, the selling stockholder and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market after the offering closes. The market price of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section and others beyond our control, including:

 

    changes in laws or regulations applicable to our industry or offerings;

 

    additions or departures of key personnel;

 

    the failure of securities analysts to cover our common stock after this offering;

 

    actual or anticipated changes in expectations regarding our performance by investors or securities analysts;

 

    price and volume fluctuations in the overall stock market;

 

    volatility in the market price and trading volume of companies in our industry or companies that investors consider comparable;

 

    share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

    our ability to protect our intellectual property and other proprietary rights;

 

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    sales of our common stock by us or our stockholders;

 

    the expiration of contractual lock-up agreements;

 

    litigation or disputes involving us, our industry or both;

 

    major catastrophic events; and

 

    general economic and market conditions.

Further, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices of many renewable energy companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of our common stock to decline. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment and may lose some or all of your investment.

In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

As an emerging growth company within the meaning of the Securities Act, we will utilize certain modified disclosure requirements, and we cannot be certain if these reduced requirements will make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have in this prospectus utilized, and we plan in future filings with the SEC to continue to utilize, the modified disclosure requirements available to emerging growth companies. As a result, our stockholders may not have access to certain information they may deem important.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

 

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We could remain an ‘‘emerging growth company’’ for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenue exceeds $1 billion, (2) the date that we become a ‘‘large accelerated filer’’ as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

Upon completion of this offering, we will have 105,303,122 outstanding shares of common stock based on the number of shares outstanding as of June 30, 2014 after giving effect to the issuance and sale by us of an aggregate of 9,703,122 shares of our common stock to 313 Acquisition LLC and two of our directors in August and September 2014 and assuming no exercise of outstanding options after June 30, 2014. The shares sold pursuant to this offering will be immediately tradable without restriction, excluding any shares sold under our reserved share program. We, the selling stockholder and all of our directors and officers, as well as the other holders of substantially all shares of our common stock outstanding immediately prior to the completion of this offering, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock until 180 days following the date of this prospectus, except with the prior written consent of the representatives of the underwriters. After the expiration of the 180 day restricted period, these shares may be sold in the public market in the United States, subject to prior registration in the United States, if required, or reliance upon an exemption from U.S. registration, including, in the case of shares held by affiliates or control persons, compliance with the volume restrictions of Rule 144. Participants in the reserved share program, which provides for the sale of up to 5% of the shares offered by this prospectus, have agreed to similar restrictions for 180 days following the date of this prospectus, which restrictions may be waived with the prior written consent of the representatives of the underwriters.

 

Number of Shares
and % of Total
Outstanding

  

Date Available for Sale into Public Markets

19,570,000

or 18.6%

   Immediately after this offering (comprised of the shares sold in this offering other than shares sold as part of the reserved share program).

85,733,122

or 81.4%

   From time to time after the date 180 days after the date of this prospectus due to contractual obligations and lock-up agreements, upon expiration of their respective holding periods under Rule 144. However, the underwriters can waive the provisions of these lock-up agreements and allow these stockholders to sell their shares at any time, provided their respective holding periods under Rule 144 have expired.

In addition, 676,467 shares reserved for future issuance under our Long-Term Incentive Plan will issue, vest and be immediately tradable without restriction on the date that is six months after the closing of this offering. An additional 2,705,889 shares reserved for future issuance under our Long-Term Incentive Plan will issue, vest and be immediately tradable without restriction at the

 

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later of (1) the date our sponsor and its affiliates achieve a specified return on their invested capital and (2) the date that is six months after the closing of this offering. On the date that is 18-months after the closing of this offering, 676,467 shares reserved for future issuance under our Long-Term Incentive Plan will issue, vest and be immediately tradable without restriction. For more information regarding the shares reserved under our Long Term Incentive Plan see the section of this prospectus under the caption “Shares Eligible for Future Sale.”

Further, options to purchase 9,728,681 shares remained outstanding as of June 30, 2014, one-third of which are subject to ratable time-based vesting over a five year period and will become immediately tradable once vested. The remaining two-thirds are subject to vesting upon certain performance conditions and the achievement of certain investment return thresholds by 313 Acquisition LLC and will vest and become immediately tradable as follows: (1) one-half of the shares vest (a) if 313 Acquisition LLC receives cash proceeds with respect to its holdings of our common stock in an amount that equals $250 million more than its cumulative investment in our common stock (which amount shall be equal to $75 million plus any amounts invested after November 16, 2012) or (b) if 240 days after the completion of this offering, our aggregate equity market capitalization exceeds $1 billion and (2) one-half of the shares vest when 313 Acquisition LLC receives cash proceeds with respect to its holdings of our common stock in an amount that equals $500 million more than its cumulative investment in our common stock (which amount shall be equal to $75 million plus any amounts invested after November 16, 2012).

Following the date that is 180 days after the completion of this offering, stockholders owning an aggregate of 84,703,122 shares will be entitled, under contracts providing for registration rights, to require us to register shares of our common stock owned by them for public sale in the United States, subject to the restrictions of Rule 144. In addition, we intend to file a registration statement to register the approximately 22,917,647 shares previously issued or reserved for future issuance under our equity compensation plans and agreements. Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and, in certain cases, lock-up agreements with the representatives of the underwriters referred to above, the shares of common stock issued upon exercise of outstanding options will be available for immediate resale in the United States in the open market. Sales of our common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause our stock price to fall and make it more difficult for you to sell shares of our common stock.

Our sponsor and its affiliates control us and their interests may conflict with ours or yours in the future.

Immediately following this offering, 313 Acquisition LLC, which is controlled by our sponsor and its affiliates, will beneficially own approximately 78% of our common stock, or 75% if the underwriters exercise their option to purchase additional shares in full. Moreover, under our organizational documents and the stockholders agreement with 313 Acquisition LLC that will be in effect by the completion of this offering, for so long as our existing owners and their affiliates retain significant ownership of us, we will agree to nominate to our board individuals designated by our sponsor, whom we refer to as the sponsor directors. In addition, for so long as 313 Acquisition LLC continues to own shares representing a majority of the total voting power, we will agree to nominate to our board individuals appointed by Summit Partners and Todd Pedersen. Even when our sponsor and its affiliates and certain of its co-investors cease to own shares of our stock representing a majority of the

 

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total voting power, for so long as our sponsor and its affiliates continue to own a significant percentage of our stock our sponsor will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval. In addition, under the stockholders agreement, affiliates of our sponsor will have consent rights with respect to certain actions involving our company, provided a certain aggregate ownership threshold is maintained collectively by our sponsor and its affiliates, together with Summit Partners, Todd Pedersen and Alex Dunn and their respective affiliates. Accordingly, for such period of time, our sponsor and certain of its co-investors will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as our sponsor and its affiliates continue to own a significant percentage of our stock, our sponsor will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our company and ultimately might affect the market price of our common stock.

Our sponsor and its affiliates engage in a broad spectrum of activities, including investments in the energy sector. In the ordinary course of their business activities, our sponsor and its affiliates may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. For example, affiliates of our sponsor regularly invest in utility companies that compete with solar energy and renewable energy companies such as ours. In addition, affiliates of our sponsor own interests in one of the largest solar power developers in India and may in the future make other investments in solar power, including in the United States. Our certificate of incorporation will provide that none of our sponsor, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our sponsor also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our sponsor may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.

We have elected to take advantage of the “controlled company” exemption to the corporate governance rules for NYSE-listed companies, which could make our common stock less attractive to some investors or otherwise harm our stock price.

Because we qualify as a “controlled company” under the corporate governance rules for NYSE-listed companies, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, in the future we could elect not to have a majority of our board of directors be independent or not to have a compensation committee or nominating and governance committee. Accordingly, should the interests of 313 Acquisition LLC or our sponsor differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for NYSE-listed companies. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

 

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Our management will have broad discretion over the use of the proceeds from this offering and may not apply the proceeds of this offering in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds we receive from this offering and you will be relying on its judgment regarding the application of these proceeds. We expect to use the net proceeds from this offering as described under the section of this prospectus captioned “Use of Proceeds.” However, management may not apply the net proceeds of this offering in ways that increase the value of your investment.

Provisions in our certificate of incorporation, bylaws, stockholders agreement and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our certificate of incorporation, bylaws and stockholders agreement contain provisions that could depress the trading price of our common stock by discouraging, delaying or preventing a change of control of our company or changes in our management that the stockholders of our company may believe advantageous. These provisions include:

 

    establishing a classified board of directors so that not all members of our board of directors are elected at one time;

 

    authorizing “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

 

    limiting the ability of stockholders to call a special stockholder meeting;

 

    limiting the ability of stockholders to act by written consent;

 

    providing that the board of directors is expressly authorized to make, alter or repeal our bylaws;

 

    establishing advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;

 

    requiring our sponsor to consent to certain actions, as described under the section of this prospectus captioned “Certain Relationships and Related Party Transactions—Agreements with Our Sponsor—Stockholders Agreement,” for so long as our sponsor, Summit Partners, Todd Pedersen and Alex Dunn or their respective affiliates collectively own, in the aggregate, at least 30% of our outstanding shares of common stock;

 

    the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class, if Blackstone and its affiliates beneficially own, in the aggregate, less than 30% in voting power of the stock of the Company entitled to vote generally in the election of directors; and

 

   

that certain provisions may be amended only by the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the

 

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Company entitled to vote thereon, voting together as a single class, if Blackstone and its affiliates beneficially own, in the aggregate, less than 30% in voting power of the stock of the Company entitled to vote generally in the election of directors.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to management. Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this prospectus contain forward-looking statements. Forward-looking statements include all statements that are not historical facts and can be identified by words such as: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” and similar expressions that convey uncertainty of future events or outcomes, although not all forward-looking statements contain these words.

These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

    federal, state and local regulations and policies governing the electric utility industry;

 

    the regulatory regime for our offerings and for third-party owned solar energy systems;

 

    technical limitations imposed by operators of the power grid;

 

    the continuation of tax rebates, credits and incentives, including changes to the rates of the ITC beginning in 2017;

 

    the calculation of estimated nominal contracted payments remaining, retained value, and certain other metrics based on forward-looking projections;

 

    the price of utility-generated electricity and electricity from other sources;

 

    our ability to finance the installation of solar energy systems;

 

    our ability to sustain and manage growth;

 

    our ability to further penetrate existing markets, expand into new markets and expand into markets for non-residential solar energy systems;

 

    our relationship with Vivint and our sponsor;

 

    our expected use of proceeds from this offering;

 

    our ability to manage our supply chain;

 

    the cost of solar panels and the residual value of solar panels after the expiration of our customer contracts;

 

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    our ability to maintain our brand and protect our intellectual property; and

 

    our expectations regarding remediation of the material weakness in our internal control over financial reporting.

In addition, you should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Further, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all, or as predictions of future events. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

This prospectus contains market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $320.4 million from our sale of the 20,600,000 shares of common stock offered by us in this offering, based upon an assumed initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting $21.0 million in estimated underwriting discounts and commissions and estimated offering expenses of $8.8 million to be paid by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $17.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, net proceeds to us from the offering by approximately $19.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting an incremental $1.2 million in underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $16.0 million, assuming the assumed initial public offering price remains the same, and after deducting an incremental $1.0 million in underwriting discounts and commissions.

We will not receive any of the proceeds from the sale of common stock by the selling stockholder pursuant to the underwriters’ option to purchase additional shares, although we will bear the costs, other than the underwriting discounts and commissions, associated with the sale of these shares.

Approximately $58.8 million of the net proceeds received by us from this offering will be used to repay revolver borrowings incurred under revolving lines of credit with Vivint. We plan to use the remaining net proceeds that we receive in this offering for working capital and general corporate purposes. We may also use a portion of the net proceeds to acquire, license and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction.

As of June 30, 2014, we had an aggregate of $57.3 million in debt outstanding under the revolving lines of credit referred to above, which we incurred for working capital purposes. Such borrowings currently accrue interest at a rate of 7.5% or 12% per year and mature on January 1, 2016 and January 1, 2017 respectively, unless, in each case, the maturity is accelerated as a result of a change of control or an event of default.

Our management will have broad discretion in the application of the net proceeds that we receive in this offering, and investors will be relying on the judgment of our management regarding the treatment of these proceeds. Pending the uses described above, we plan to invest the net proceeds that we receive in this offering in short-term and intermediate-term investment-grade interest-bearing securities, such as certificates of deposit, commercial paper, money market accounts or direct or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. In addition, the terms of our future debt instruments may prohibit us from paying cash dividends on our common stock. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and provisions of our debt instruments and organizational documents, after taking into account our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2014 on an actual basis, and a pro forma as adjusted basis to reflect (1) the issuance and sale by us of an aggregate of 9,703,122 shares of our common stock to 313 Acquisition LLC and two of our directors in August and September 2014, (2) the incurrence of an aggregate of $87.0 million of term loan borrowings under our aggregation credit facility, net of discount of $8.7 million, and the repayment of an aggregate of $75.5 million of term borrowings under our credit facility in September 2014, (3) the filing and effectiveness of our certificate of incorporation immediately prior to the closing of this offering, (4) our sale of 20,600,000 shares of common stock in this offering at an assumed initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting $21.0 million in underwriting discounts and commissions and estimated offering expenses of $8.8 million and (5) our receipt of the net proceeds from that sale after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of such proceeds, including the repayment of $57.3 million of borrowings outstanding as of June 30, 2014.

You should read this table together with the sections of this prospectus captioned “Selected Consolidated Financial and Other Data,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2014  
     Actual      Pro Forma
As Adjusted(1)
 
     (In thousands
except share and per share data)
 

Cash and cash equivalents

   $ 25,230       $  393,131   
  

 

 

    

 

 

 

Short-term debt

   $ 75,500       $   

Long-term debt, net

             78,300   

Capital lease obligations

     7,661         7,661   

Revolving lines of credit, related party

     57,290           

Redeemable non-controlling interests

     104,342         104,342   

Stockholders’ equity:

     

Preferred stock, $0.01 par value per share; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted

               

Common stock, $0.01 par value per share; 100,000,000 shares authorized, 75,000,000 shares issued and outstanding, actual; 1,000,000,000 shares authorized, 105,303,122 shares issued and outstanding, pro forma as adjusted

     750         1,053   

Additional paid-in capital

     75,984         514,416   

Retained earnings

     15,568         724,000   
  

 

 

    

 

 

 

Total stockholders’ equity

     92,302         516,193   

Non-controlling interests

     35,172         35,172   
  

 

 

    

 

 

 

Total equity

     127,474         551,365   
  

 

 

    

 

 

 

Total capitalization

   $ 372,267       $ 741,668   
  

 

 

    

 

 

 

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the mid point of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity, total equity and total capitalization by approximately $19.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting an incremental $1.2 million in underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares

 

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  in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity, total equity and total capitalization by approximately $16.0 million, assuming that the assumed initial price to public remains the same, and after deducting an incremental $1.0 million in underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

The actual number of shares of common stock to be outstanding following this offering is based on 84,703,122 shares of common stock outstanding as of June 30, 2014 after giving effect to the issuance and sale by us of 9,703,122 shares of common stock to 313 Acquisition LLC and two of our directors in August and September, 2014 and excludes as of June 30, 2014:

 

    9,728,681 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2014, pursuant to our 2013 Omnibus Incentive Plan and an option granted outside of such plan with substantially the same terms as those granted pursuant to such plan with a weighted-average exercise price of $1.10 per share;

 

    320,000 shares of common stock issuable upon the exercise of options granted on July 7, 2014 at a weighted-average exercise price of $4.14 per share;

 

    4,068,966 shares of common stock reserved for issuance under our 2013 Omnibus Incentive Plan, 4,058,823 of which are reserved for the settlement of awards granted based on achieving certain performance conditions under our long-term incentive plan pools as described in the section of this prospectus captioned “Executive Compensation—Employee Benefit Plans—Long-Term Incentive Plan,” as of June 30, 2014; and

 

    8,800,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan on the date of this prospectus, and additional shares that become available under the plan pursuant to provisions thereof that provide for automatic annual increases in the number of shares reserved under the plan, as more fully described in the section of this prospectus captioned “Executive Compensation—Employee Benefit Plans—2014 Equity Incentive Plan.”

 

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DILUTION

Investors purchasing our common stock in this offering will experience immediate and substantial dilution in the pro forma as adjusted net tangible book value of their shares of common stock. Dilution in pro forma as adjusted net tangible book value represents the difference between the initial public offering price of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the offering.

Historical net tangible book value per share represents our total tangible assets (total assets less intangible assets) less total liabilities and redeemable non-controlling interests divided by the number of shares of outstanding common stock. After giving effect to (1) the issuance and sale by us of 9,703,122 shares of our common stock in August and September 2014, (2) the filing and effectiveness of our certificate of incorporation immediately prior to the closing of this offering, (3) the issuance of 20,600,000 shares of common stock in this offering, (4) the receipt of the net proceeds from the sale of shares of common stock in this offering by us at an assumed initial public offering price of $17.00 per share (the midpoint of the price range set forth on the cover of this prospectus), after deducting $21.0 million in underwriting discounts and commissions and estimated offering expenses of $8.8 million and (5) the repayment of $58.8 million of borrowings as described in the section of this prospectus captioned “Use of Proceeds”, the pro forma as adjusted net tangible book value as of June 30, 2014 would have been approximately $489.4 million, or $4.65 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $2.66 per share to existing stockholders and an immediate dilution of $12.35 per share to new investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors.

 

Assumed initial public offering price per share

      $ 17.00   

Historical net tangible book value per share as of June 30, 2014 adjusted for the equity issuances in August and September 2014, the drawdown of $87.0 million in September 2014, less applicable fees and expenses, and the repayment of the short-term debt.

   $ 1.99      

Increase in net tangible book value per share attributable to investors participating in this offering

     2.66      
  

 

 

    

Pro forma as adjusted net tangible book value per share, as adjusted to give effect to this offering

        4.65   
     

 

 

 

Dilution per share to investors participating in this offering

      $ 12.35   
     

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share would increase (decrease) total consideration paid by new investors by approximately $19.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting an incremental $1.2 million in underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) total consideration paid by new investors by $16.0 million, assuming that the assumed initial public offering price remains the same, and after deducting an incremental $1.0 million in underwriting discounts and commissions.

 

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The following table summarizes, on a pro forma as adjusted basis as of June 30, 2014, the differences between the number of shares of common stock purchased from us, the total consideration and the weighted-average price per share paid by existing stockholders and by investors participating in this offering at an assumed initial public offering price of $17.00 per share, after deducting $21.0 million in underwriting discounts and commissions and estimated offering expenses of $8.8 million (in thousands, except share and per share amounts):

 

     Shares Purchased      Total Consideration      Weighted -
Average
Price Per

Share
 
     Number      Percent      Amount      Percent     

Existing stockholders

     84,703,122         80.4%       $ 195,081         37.8%       $ 2.30   

Investors participating in this offering

     20,600,000         19.6            320,388         62.2            15.55   
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

     105,303,122         100%       $ 515,469         100%         4.90   
  

 

 

    

 

 

    

 

 

    

 

 

    

If the underwriters’ option to purchase additional shares is exercised in full, sales by the selling stockholder in this offering will reduce the number of shares held by the existing stockholder to 81,613,122 shares, or approximately 77.5% of the total shares of our common stock outstanding after this offering and increase the number of shares purchased by new investors to 23,690,000 shares, or approximately 22.5% of the total shares of our common stock outstanding after this offering.

The actual number of shares of common stock to be outstanding following this offering is based on 84,703,122 shares of common stock outstanding as of June 30, 2014 after giving effect to the issuance and sale by us of an aggregate of 9,703,122 shares of common stock to 313 Acquisition LLC and two of our directors in August and September, 2014, and excludes:

 

    9,728,681 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2014, pursuant to our 2013 Omnibus Incentive Plan and an option granted outside of such plan with substantially the same terms as those granted pursuant to such plan with a weighted-average exercise price of $1.10 per share;

 

    320,000 shares of common stock issuable upon the exercise of options granted on July 7, 2014 at a weighted-average exercise price of $4.14 per share;

 

    4,068,966 shares of common stock reserved for issuance under our 2013 Omnibus Incentive Plan, 4,058,823 of which are reserved for the settlement of awards granted based on achieving certain performance conditions under our long-term incentive plan pools as described in the section of this prospectus captioned “Executive Compensation—Employee Benefit Plans—Long-Term Incentive Plan,” as of June 30, 2014; and

 

    8,800,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan on the date of this prospectus, and additional shares that become available under the plan pursuant to provisions thereof that provide for automatic annual increases in the number of shares reserved under the plan, as more fully described in the section of this prospectus captioned “Executive Compensation—Employee Benefit Plans—2014 Equity Incentive Plan.”

To the extent that new options are issued under the equity benefit plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth selected historical consolidated financial and other data for the periods ended and at the dates indicated below. On November 16, 2012, we were acquired by our sponsor. We refer to the period from January 1, 2012 through November 16, 2012 as the Predecessor Period or Predecessor and the periods from November 17, 2012 through December 31, 2012, the year ended December 31, 2013, and the six months ended June 30, 2013 and 2014 as the Successor Periods or Successor. Our selected historical consolidated statement of operations data for the Predecessor Period, the period from November 17, 2012 to December 31, 2012 and the year ended December 31, 2013 presented in this table and the balance sheet data as of December 31, 2012 and 2013 have been derived from our historical audited consolidated financial statements included elsewhere in this prospectus. The statements of operations data for each of the six-month periods ended June 30, 2013 and 2014 and the balance sheet data as of June 30, 2014 set forth below are derived from our unaudited quarterly consolidated financial statements included elsewhere in this prospectus and contain all adjustments, consisting of normal recurring adjustments, that management considers necessary for a fair presentation of our financial position and results of operations for the periods presented. See the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Basis of Presentation” for more information regarding the presentation of our consolidated financial statements. Operating results for the six-month periods are not necessarily indicative of results for a full financial year, or any other periods. Our historical results are not necessarily indicative of the results that may be expected in the future. The following selected financial data should be read in conjunction with the sections of this prospectus captioned “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Predecessor     Successor  
    Period from
January 1,
through
November 16,
2012
    Period from
November 17,
though
December 31,
2012
    Year Ended
December 31,
2013
    Six Months
Ended
June 30,
2013
    Six Months
Ended
June 30,
2014
 
                (Restated)    

(Unaudited)

 
    (In thousands, except share and per share data)  
                         

Statement of Operations Data:

           

Revenue:

           

Operating leases and incentives

  $ 183      $ 109      $ 5,864      $ 1,793      $ 8,667   

Solar energy system and product sales

    157               306        132        1,398   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    340        109        6,170        1,925        10,065   

Operating expenses:

           

Cost of revenue — operating leases and incentives

    3,302        1,018        19,004        8,013        27,646   

Cost of revenue — solar energy system and product sales

    95               123        76        883   

Sales and marketing

    1,471        533        7,348        2,890        11,009   

Research and development

                                972   

General and administrative

    7,789        971        16,438        4,832        26,106   

Amortization of intangible assets

           1,824        14,595        7,297        7,428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses(1)

    12,657        4,346        57,508        23,108        74,044   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (12,317     (4,237     (51,338     (21,183     (63,979

Interest expense

    881        96        3,144        991        4,074   

Other expense

    240        44        1,865        522        1,165   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (13,438     (4,377     (56,347     (22,696     (69,218

Income tax expense (benefit)

    7        (1,074     123        45        6,936   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (13,445     (3,303     (56,470     (22,741     (76,154

Net loss attributable to non-controlling interests and redeemable
non-controlling interests

    (1,771     (699     (62,108     (2,307     (88,688
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Predecessor     Successor  
    Period from
January 1,
through
November 16,
2012
    Period from
November 17,
though
December 31,
2012
    Year Ended
December 31,
2013
    Six Months
Ended
June 30,
2013
    Six Months
Ended
June 30,
2014
 
                (Restated)     (Unaudited)  
    (In thousands, except share and per share data)  

Net income available (loss attributable) to stockholder

    (11,674     (2,604     5,638       
(20,434

   
12,534
  

Accretion to redemption value of Series B redeemable preferred stock

    (20,000                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholder

  $ (31,674   $ (2,604   $ 5,638      $ (20,434   $ 12,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share available (loss attributable) to common stockholder(2):

           

Basic

  $ (0.42   $ (0.03   $ 0.08      $ (0.27   $ 0.17   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.42   $ (0.03   $ 0.07      $ (0.27   $ 0.16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net income per share available (loss attributable) to common stockholder(2):

           

Basic

    75,000,000        75,000,000        75,000,000        75,000,000        75,000,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    75,000,000        75,000,000        75,223,183        75,000,000        76,194,463   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share available to common stockholders (unaudited)(3):

         

Basic

      $ 0.09        $ 0.16   
     

 

 

     

 

 

 

Diluted

      $ 0.09        $ 0.16   
     

 

 

     

 

 

 

Weighted-average shares used in computing pro forma net income per share available to common stockholders (unaudited)(3):

         

Basic

        86,445,874          87,814,512   
     

 

 

     

 

 

 

Diluted

        86,669,057          89,008,975   
     

 

 

     

 

 

 

 

(1) In connection with the finalization of this offering, we re-evaluated the estimate of the fair value of our common stock for financial reporting purposes with respect to the stock options granted to our employees during the period from January 1, 2014 through the date of this prospectus. As a result of this re-evaluation we currently expect to record approximately $0.4 million of stock-based compensation expense across multiple operating expense line items for options granted in 2014 through the date of this prospectus, which includes approximately $0.3 million of incremental stock-based compensation expense, associated with option grants made in the six months ended June 30, 2014. We also expect to record approximately $14.8 million in compensation expense in general and administrative expenses in our third quarter 2014 financial statements with respect to the September sale of common stock to Alex Dunn and an entity affiliated with Todd Pedersen, which represents the aggregate difference between the $10.667 per share purchase price and $17.00, the midpoint of the price range set forth on the cover page of this prospectus.
(2)

See Note 18 to our audited consolidated financial statements for an explanation of the method used to calculate basic and diluted net income per share available (loss attributable) to common stockholder and the weighted-average number of shares used in the computation of the per share amounts.

 

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(3) The pro forma basic and diluted net income per share available to common stockholders have been calculated assuming (1) the issuance and sale by us of an aggregate of 9,703,122 shares of common stock to 313 Acquisition LLC and two of our directors in August and September, 2014, (2) the repayment in full of outstanding borrowings under our revolving lines of credit, related party, using proceeds from our initial public offering of $57.3 million and (3) the assumed issuance of shares of common stock weighted for the period that the debt to be repaid was outstanding as if these transactions had occurred as of January 1, 2013. This assumes net proceeds of $320.4 million based on the initial public offering price of $17.00, the midpoint of the price range set forth on the cover of the prospectus, after deducting $21.0 million in underwriter discounts and commissions and estimated offering expenses of $8.8 million. The pro forma adjustment to eliminate the interest expense is equal to the actual interest expense recorded in the respective periods related to all borrowings under our revolving lines of credit, related party. The following table sets forth the computation of the pro forma basic and diluted net income per share available to common stockholders:

 

    Year Ended
December 31, 2013
    Six Months Ended
June 30, 2014
 
    (In thousands, except share and per share
amounts)
 

Numerator:

   

Net income available to common stockholders

    5,638        12,534   

Pro forma adjustment to eliminate the interest expense on outstanding borrowings to be repaid with the proceeds from the initial public offering

    2,930        2,877   

Pro forma adjustment to reflect the tax effect at the statutory rate

    (1,026     (1,007
 

 

 

   

 

 

 

Net income available to common stockholders for pro forma earnings per share computation, basic and diluted

  $ 7,543      $ 14,404   
 

 

 

   

 

 

 

Denominator:

   

Weighted-average shares used in computing net income per share available to common stockholders, basic

    75,000,000        75,000,000   

Pro forma adjustment to reflect shares issued to 313 Acquisition LLC in August and September 2014

    9,703,122        9,703,122   

Pro forma adjustment to reflect shares issued in this offering used to repay outstanding borrowings

    1,742,752        3,111,390   
 

 

 

   

 

 

 

Weighted-average shares used in computing pro forma net income per share available to common stockholders, basic

    86,445,874        87,814,512   
 

 

 

   

 

 

 

Weighted-average shares used in computing net income per share available to common stockholders, diluted

    75,223,183        76,194,463   

Pro forma adjustment to reflect shares issued to 313 Acquisition LLC in August and September 2014

    9,703,122        9,703,122   

Pro forma adjustment to reflect shares issued in this offering used to repay outstanding borrowings

    1,742,752        3,111,390   
 

 

 

   

 

 

 

Weighted-average shares used in computing pro forma net income per share available to common stockholders, diluted

    86,669,057        89,008,975   
 

 

 

   

 

 

 

Pro forma net income per share available to common stockholders:

   

Basic

  $ 0.09      $ 0.16   
 

 

 

   

 

 

 

Diluted

  $ 0.09      $ 0.16   
 

 

 

   

 

 

 

 

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     As of December 31,      As of June 30,  
     2012      2013      2014  
            (Restated)      (Unaudited)  
    

(In thousands)

 

Balance Sheet Data:

        

Cash and cash equivalents

   $ 11,650       $ 6,038       $ 25,230   

Solar energy systems, net

     47,089         188,058         364,965   

Total assets

             132,087                 297,707                 566,250   

Revolving lines of credit, related party

     15,000         41,412         57,290   

Short-term debt

                     75,500   

Redeemable non-controlling interests

     17,741         73,265         104,342   

Total equity

     71,323         80,621         127,474   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this prospectus.

Overview

We offer distributed solar energy to residential customers based on long-term contracts at prices below their current utility rates. Our customer focus, neighborhood-driven direct-to-home sales model, brand and operational efficiency have driven our rapid growth in solar energy installations. We believe our continued growth is disrupting the traditional electricity market by satisfying customers’ demand for increased energy independence and less expensive, more socially responsible electricity generation.

The following is a chronology of some of our key corporate milestones:

 

    we were founded in May 2011 when Vivint, Inc., a residential security solutions and home automation services provider with approximately 850,000 subscribers as of June 30, 2014, recognized an opportunity to replicate its strong direct-to-home sales model in the solar energy market, and in July 2011 we installed our first solar energy system;

 

    in 2012, we installed an aggregate of 2,669 solar energy systems, which reflects an average of 51 solar energy system installations per week and as of December 31, 2012, we had installed solar energy systems with an aggregate of 14.8 megawatts of capacity to 2,775 homes in four states;

 

    in 2013, we installed an aggregate of 10,521 solar energy systems, which reflects an average of 202 solar energy system installations per week and as of December 31, 2013, we had installed solar energy systems with an aggregate of 72.8 megawatts of capacity to 13,296 homes in six states;

 

    for the six months ended June 30, 2014, we installed an aggregate of 8,625 solar energy systems, which reflects an average of 332 solar energy system installations per week and as of June 30, 2014, we had installed solar energy systems with an aggregate of 129.7 megawatts of capacity to more than 21,900 homes in seven states;

 

    in January 2014, we acquired Solmetric Corporation, a developer of photovoltaic installation software products, to enable us to install higher quality distributed solar energy systems in less time and at a lower cost;

 

    in September 2014, we entered in to an aggregation credit facility pursuant to which we may incur up to an aggregate of $350 million in term loan borrowing and, subject to certain conditions, up to an aggregate of $200 million in additional borrowings; and

 

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    as of the date of this prospectus, we have raised investment funds to which investors had committed an aggregate of approximately $543 million.

We sell the electricity that our solar energy systems produce through long-term power purchase agreements or we lease our solar energy systems through long-term leases. Prior to the first quarter of 2014, all of our long-term customer contracts were structured as power purchase agreements. In the first quarter of 2014, we began offering leases to residential customers in connection with our entry into the Arizona market. In some jurisdictions, such as Arizona, Florida, Georgia, Iowa, Kentucky, North Carolina, Oklahoma and in Los Angeles, California, laws have been interpreted to prohibit the sale of electricity pursuant to our standard power purchase agreement. In such jurisdictions, however, a customer may lease a solar system so we and other residential solar providers enter into leases in lieu of power purchase agreements. Under either contract type, we install our solar energy system at our customer’s home and bill the customer monthly. In the power purchase agreement structure, we charge customers a fee per kilowatt hour based on the amount of electricity the solar energy system actually produces. In the lease structure, the customer’s monthly payment is fixed based on a calculation that takes into account expected solar energy generation. We provide our lease customers a production guarantee, under which we agree to make a payment at the end of each year to the customer if the solar energy system does not meet the guaranteed production level in the prior 12-month period. The power purchase agreement and lease terms are typically for 20 years, and virtually all the prices that we charge to our customers are subject to pre-determined annual fixed percentage price escalations as specified in the customer contract. Most of our current customer contracts contain price escalators ranging from 2.9% to 3.9% annually. We do not believe that either form of long-term customer contract is materially more advantageous to us than the other.

Our ability to offer long-term customer contracts depends in part on our ability to finance the installation of the solar energy systems by monetizing the resulting customer receivables and investment tax credits, accelerated tax depreciation and other incentives related to the solar energy systems. A number of market participants in our industry monetize federal tax credits through a variety of structured investments, also known as “tax equity.” Tax equity investments are generally structured as non-recourse project financings. In the context of the distributed solar energy market, tax equity investors make an upfront advance payment to a sponsor through an investment fund in exchange for a share of the tax attributes and cash flows emanating from an underlying portfolio of solar energy systems. In these tax equity investments, the U.S. federal tax attributes offset taxes that otherwise would have been payable on the investors’ other operations. As of the date of this prospectus, we have raised 10 investment funds to which investors such as banks and other large financial investors have committed to invest approximately $543 million. These commitments will enable us to install solar energy systems of total fair market value (as determined at the time of such investment) of approximately $1.3 billion, of which approximately $913 million has been installed. As of the date of this prospectus, we had tax equity commitments to fund approximately 81 MWs of future deployments. We are currently in negotiations with financial investors to create additional investment funds in 2014. We also expect to create additional investment funds with financial investors and potentially with corporate investors, and may also use debt, equity or other financing strategies to fund our operations. To that end, in August 2014 and September 2014, we received non-binding letters of intent from four financial institutions on a several basis in amounts equaling up to $300 million in the aggregate. We estimate such investments would be sufficient to fund approximately 133 MWs of future deployments. It is contemplated that each of the potential investment funds would adopt the

 

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partnership structure described above and be on terms similar to those of our existing investment funds that have adopted such structure, which terms may include conditions on our ability to draw on the financing commitments made by these funds. Such letters of intent are non-binding and do not constitute a commitment to invest. Although we cannot be certain when, if ever, such investment documentation will be executed, our current expectation is that forward investment documentation will be executed within the last quarter of 2014 or the first quarter of 2015 to fund investments at various times throughout 2015 and 2016. If we are unable to consummate these investments or establish the other investment funds that we intend to pursue during this period, we will be required to obtain additional financing in order to continue to grow our business or finance the deployment of solar energy systems using cash on hand until such additional financing has been secured.

We compete mainly with traditional utilities. In the markets we serve, our strategy is to price the energy we sell below prevailing retail electricity rates. As a result, the price our customers pay to buy energy from us varies depending on the state where the customer is located and the local traditional utility. In markets that are also served by other distributed solar energy system providers, the price we charge also depends on customer price sensitivity, the need to offer a compelling financial benefit and the price other solar energy companies charge in the region.

Components and direct labor comprise the substantial majority of the costs of our solar energy systems. We have adopted a commission-based compensation model for our sales force and a piece-rate compensation model for our installation personnel to allow us to operate our business with relatively low fixed costs. Under U.S. generally accepted accounting principles, or GAAP, the cost of revenue from our long-term customer contracts is comprised of the depreciation of the cost of the solar energy systems, which are depreciated for accounting purposes over 30 years, and the amortization of initial direct costs, which are amortized over 20 years. Cost of revenue under long-term customer contracts is also comprised of warehouse rent, utilities, fleet vehicle executory costs and the indirect costs related to the design, installation and interconnection of solar energy systems, such as personnel costs not directly associated to a solar energy system installation, which are not capitalized. For tax purposes, we utilize an accelerated depreciation schedule for our systems of six years.

Investment Funds

Our long-term customer contracts provide for recurring customer payments and the related solar energy systems are eligible for investment tax credits, accelerated tax depreciation, bonus depreciation (to the extent available under prior applicable law) and other government incentives. Our financial strategy is to monetize these benefits at the lowest cost of capital available. We share the economic benefit of this lower cost of capital with our customers by lowering the price they pay for electricity generated by the solar energy systems. We have established different types of investment funds with fund investors to implement our asset monetization strategy, including partnerships and inverted lease structures. We call these arrangements our investment funds. Fund investors recognize these as high-quality assets with a relatively low loss rate because these recurring customer payments are paid by individuals with high credit scores and generate attractive returns for investors due to the availability of investment tax credits, accelerated depreciation and certain other government incentives. As of June 30, 2014, the average FICO score of our customers was approximately 750. We contribute or sell the solar energy systems, customer contracts, and associated rights to the investment funds and receive cash and an equity

 

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interest in the fund. Depending on the nature of the investment fund, cash may be contributed to the investment fund by the investor upfront or in stages based on milestones associated with the design, construction or interconnection status of the solar energy systems. The cash contributed by the fund investor is used by the investment fund to purchase the solar energy systems developed by us. The investment funds own the solar energy systems, customer contracts and associated rights, and the monthly payments from customers are made directly to the investment funds. While typically the investment funds do not have express limits on their terms, the economic modeling of the funds is generally tied to the 20-year terms of the underlying customer agreements. We expect to receive ongoing cash distributions from the investment funds out of a portion of these monthly customer payments during operation of the solar energy systems. We use the cash received from the investment funds to cover our variable and fixed costs associated with installing the related solar energy systems. In the future, in addition to or in lieu of monetizing the value through investment funds, we may use debt, equity or other financing strategies to fund our operations. The allocation of the economic benefits (including incentives) among us and the fund investors and related accounting varies depending on the structure. Fund investors and their related investment committees have different levels of experience with particular fund structures. We negotiate with the fund investors and may be willing to accommodate a fund structure which best matches their experience while also providing us with the most attractive cost of capital.

As of the date of this prospectus, six of our investment funds were partnership structures. Under partnership structures, we and our fund investors contribute cash into a partnership company. The partnership uses this cash to acquire solar energy systems developed by us and sells energy from such systems to customers or directly leases the solar energy systems to customers. Prior to the fund investor receiving its contractual targeted rate of return on its investment, the fund investor receives substantially all of the value attributable to the long-term recurring customer payments, investment tax credits, accelerated tax depreciation and, in some cases, other government incentives. The target rate of return varies by investment fund. Typically fund investors require an after tax rate of return ranging from 7% to 13%, however, in certain circumstances fund investors have historically required rates of return up to 20%. After the fund investor receives a contractual targeted rate of return on its investment, we receive substantially all of the value attributable to the long-term recurring customer payments and the other incentives.

As of the date of this prospectus, four of our investment funds were inverted lease structures. Under our existing inverted lease structure, we and the fund investor set up a multi-tiered investment vehicle that is comprised of two partnership entities which facilitate the pass through of the tax benefits to the fund investors. In this structure we contribute solar energy systems to an “owner” partnership entity in exchange for interests in the owner partnership and the fund investors contribute cash to a “tenant” partnership in exchange for interests in the tenant partnership which in turn makes an investment in the owner partnership entity in exchange for interests in the owner partnership. The owner partnership distributes the cash contributions received from the tenant partnership to our wholly owned subsidiary that contributed the projects to the owner partnership. The owner partnership leases the contributed solar energy systems to the tenant partnership under a master lease, and the tenant partnership pays the owner partnership rent for those systems. The tenant partnership sells energy from the solar energy systems to customers and collects payments from the customers, or leases solar energy systems to customers and collects payments from the customers. Customer payments made to the tenant partnership are used to pay expenses (including fees to us), make master lease rent payments and pay preferred return distributions to the fund investor. The owner partnership distributes cash

 

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to us and the tenant partnership. As the tenant partnership is an investor in the owner partnership, this allows the fund investors to receive the tax benefits associated with investment tax credits as well as benefits associated with accelerated tax depreciation and operating losses associated with the ownership of the assets. Under our existing inverted lease structure inverted lease structure, a substantial portion of the value generated by the solar energy systems is provided to the fund investor for a specified period of time, which is generally based upon the period of time corresponding to the expiry of the recapture period associated with the investment tax credits. After that point in time, we receive substantially all of the value attributable to the long-term recurring customer payments and the other incentives.

The diagram below is an illustrative depiction of the typical relationships between the entities involved in our current inverted lease structures. The entity labeled “Vivint Solar Provider, LLC” is a wholly-owned indirect subsidiary responsible for providing operations and maintenance service to our investment funds. The entity labeled “Vivint Solar Developer, LLC” is our wholly-owned indirect subsidiary responsible for customer acquisition and installation of the solar energy systems prior to the systems being transferred to an investment fund. The entity labeled “Vivint Solar Manager, LLC” is a wholly-owned indirect subsidiary formed for each of these inverted lease investment funds to serve as fund manager in the applicable fund’s tenant partnership and owner partnership.

 

LOGO

Compared to the partnership structure, our existing inverted lease structure in and of itself does not generally result in materially different overall economics to us or to the investor. However, given that the tenant partnership owns less than 100% interest in the assets, the fund investor in our existing inverted lease structures will be allocated less depreciation than in our existing partnership structure. The economics are negotiated on a fund-by-fund basis to meet the investor’s targeted return and other market terms. In the inverted lease structure, the aggregate amount of

 

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cash that we expect to receive (both distributions from the “owner” partnership and the fees paid to us) is, for an investment fund with similar overall economics, approximately the same as the aggregate amount of cash we would expect to receive from distributions in the partnership structure. The frequency of distributions, and the amount of each distribution, varies by fund and fund structure.

We have determined that we are the primary beneficiary in these partnership and inverted lease structures for accounting purposes. Accordingly, we consolidate the assets and liabilities and operating results of these partnerships in our consolidated financial statements. We recognize the fund investors’ share of the net assets of the investment funds as non-controlling interests and redeemable non-controlling interests in our consolidated balance sheets. Please see the section of this prospectus captioned “—Components of Results of Operations—Net Income Available (Loss Attributable) to Stockholders” for further discussion regarding how we attribute net income (loss) to the fund investors. We recognize the amounts that are contractually payable to these investors in each period as distributions to non-controlling interests and redeemable non-controlling interests in our consolidated statements of redeemable preferred stock, redeemable non-controlling interests and equity. Our statements of cash flows reflect cash received from these fund investors as proceeds from investment by non-controlling interests and redeemable non-controlling interests. Our statements of cash flows also reflect cash paid to these fund investors as distributions paid to non-controlling interests and redeemable non-controlling interests. We reflect any unpaid distributions to these fund investors as distributions payable to non-controlling interests and redeemable non-controlling interests in our consolidated balance sheets.

The terms and conditions of each investment fund vary significantly by investor and by fund. In our investment funds, the investor commitments range in size from approximately $9 million to $100 million, which allows us to finance portfolios of solar energy systems with a total fair market value (as determined at the time of such investment) ranging from approximately $40 million to approximately $235 million. The fund investor is only required to invest the committed capital if we achieve specified project development milestones within a specified time frame. Our investment funds also require that we meet certain capital deployment deadlines. If we fail to use all of a fund investor’s committed capital by any such deadline, we may be required to pay a fee for failure to utilize the committed capital. Through the date of this prospectus, we have not been required to pay any such fees. Our rights to receive cash distributions or other payments from the investment funds vary widely depending on a variety of factors, including the investment fund structure, the terms and conditions of the specific investment fund and the performance and composition of the investment fund portfolio of solar energy systems. We typically have an option to acquire all of the equity interests that our fund investors hold in the investment funds approximately six years after the last solar energy system in each investment fund is operational. In some of our earlier investment funds, the fund investor can require us to purchase its equity interest if we do not exercise our option to acquire the investor’s equity interest. If either of these options are exercised, then we are typically required to pay at least the fair market value of the fund investor’s equity interest. Following any such exercise we would receive 100% of the customer payments for the remainder of the term of the customer contracts. In the event these purchase options are not exercised, we are projected to receive greater than 75% of customer payments through the end of the term of the customer contract.

 

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Key Operating Metrics

We regularly review a number of metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Some of our key operating metrics are estimates. These estimates are based on our management’s beliefs and assumptions and on information currently available to management. Although we believe that we have a reasonable basis for each of these estimates, we caution you that these estimates are based on a combination of assumptions that may not prove to be accurate over time, particularly given that a number of them involve estimates of cash flows up to 30 years in the future. Underperformance of the solar energy systems, payment defaults by our customers, cancellation of signed contracts, competition from other distributed solar energy companies, development in the distributed solar energy market and the energy market more broadly, technical innovation or other factors described under the section of this prospectus captioned “Risk Factors” could cause our actual results to differ materially from our calculations. Furthermore, while we believe we have calculated these key metrics in a manner consistent with those used by others in our industry, other companies may in fact calculate these metrics differently than we do now or in the future, which would reduce their usefulness as a comparative measure.

Solar Energy System Installations

We track the number of solar energy systems installed on customers’ premises as of the end of a given period as an indicator of our historical growth and as an indicator of our rate of growth from period to period.

The following table sets forth the number of solar energy systems we have installed during the periods presented:

 

     Year Ended December 31,      Six Months Ended June 30,  
     2012      2013      2013      2014  

Installations

     2,669         10,521         4,679         8,625   

The following table sets forth the number of cumulative solar energy systems we have installed as of the dates presented:

 

     As of December 31,      As of June 30,  
     2012      2013      2013      2014  

Cumulative installations

     2,775         13,296         7,454         21,921   

Megawatts Installed and Cumulative Megawatts Installed

We track the electricity-generating nameplate capacity of our solar energy systems as measured in megawatts. Because the size of solar energy systems varies greatly, we believe that tracking the aggregate megawatt nameplate capacity of the systems is an indicator of our growth rate. We track megawatts installed in a given period as an indicator of asset growth in the period and cumulative megawatts installed as of the end of a given period as an indicator of our historical growth.

Megawatts installed represents the aggregate megawatt nameplate capacity of solar energy systems that have been installed during the applicable period. Cumulative megawatts

 

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installed represents the aggregate megawatt nameplate capacity of solar energy systems that have been installed.

The following sets forth the megawatt nameplate capacity of solar energy systems we have installed during the periods presented:

 

     Year Ended December 31,      Six Months Ended June 30,  
     2012      2013      2013      2014  

Megawatts installed

     14.4         58.0         24.4         56.8   

The following sets forth the cumulative megawatts we have installed as of the dates presented:

 

     As of December 31,      As of June 30,  
     2012      2013      2013      2014  

Cumulative megawatts installed

     14.8         72.8         39.2         129.7   

Estimated Nominal Contracted Payments Remaining

Our long-term customer contracts create recurring customer payments over the 20-year term of the customer contract. We use a portion of the value created by these contracts that we refer to as “nominal contracted payments,” together with the value attributable to investment tax credits, accelerated depreciation, solar renewable energy certificates, or SRECs, state tax benefits and rebates, to cover the fixed and variable costs associated with installing solar energy systems.

We track the estimated nominal contracted payments remaining of our long-term customer contracts for installed systems as of specified dates. Estimated nominal contracted payments remaining equals the sum of the remaining cash payments that our customers are expected to pay over the term of the agreements with us for systems installed as of the measurement date. Estimated nominal contracted payments remaining does not reflect potential customer defaults or cancellations as such amounts have been de minimis to date. For a power purchase agreement, we multiply the contract price per kilowatt-hour by the estimated annual energy output of the associated solar energy system to determine the estimated nominal contracted payments. For a customer lease, we include the monthly fees and upfront fee, if any, as set forth in the lease. The estimated nominal contracted payments remaining for a particular power purchase agreement or lease decline as the payments are made. Estimated nominal contracted payments include value attributable to long-term customer contracts that are owned by our investment funds. Currently, fund investors have contractual rights to a portion of these nominal contracted payments.

Estimated nominal contracted payments remaining is a reporting metric forecasted as of specified dates. It is a forward-looking number, and we use judgment in developing the assumptions used to calculate it. The primary assumption in the calculation is the annual energy output of the associated solar energy systems, which is estimated based on typical annual sun hours given the system’s location, nameplate production capacity of the system, and estimated declines in the solar equipment productivity over the life of the system. Those assumptions may not prove to be accurate over time.

 

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The following table sets forth, with respect to our long-term customer contracts, the estimated nominal contracted payments remaining as of the end of each period presented:

 

     As of December 31,      As of June 30,  
     2012      2013      2013      2014  
     (In millions)  

Estimated nominal contracted payments remaining

   $ 89.2       $ 394.1       $ 223.3       $ 647.5   

In addition to the nominal contracted payments, our long-term customer contracts provide us with a post-contract renewal opportunity. Because our solar energy systems have an estimated life of 30 years, they will continue to have a useful life after the 20-year term of the long-term customer contract. At the end of the original contract term, we intend to offer our customers renewal contracts at a then-determined price. The solar energy systems will already be installed on the customer’s home, which we believe will facilitate customer acceptance of our renewal offer and result in limited additional costs to us.

Estimated Retained Value

Estimated retained value and estimated retained value per watt are key operating metrics because these amounts reflect the net cash flows we expect to receive from customers pursuant to long-term customer contracts and represent valuable future revenue streams created by our operations, but which are not yet recognized on our financial statements. Management and public investors consider these metrics to be important because they represent value created by us that is not yet recognized in our financial statements.

Estimated retained value represents the cash flows, discounted at 6%, that we expect to receive from customers pursuant to long-term customer contracts net of estimated cash distributions to fund investors and estimated operating expenses for systems installed as of the measurement date. For purposes of the calculation, we aggregate the estimated retained value from the solar energy systems during the typical 20-year term of our contracts, which we refer to as estimated retained value under energy contracts, and the estimated retained value associated with an assumed 10-year renewal term following the expiration of the initial contract term, which we refer to as estimated retained value of renewal.

Estimated retained value under energy contract considers the net cash flows during the initial 20-year term of our long-term customer contracts, and is based on the solar energy systems under long-term customer contracts that have been installed as of the measurement date. Estimated retained value under energy contract is defined as the forecasted net present value, discounted at 6%, of estimated nominal contracted payments remaining, net of estimated cash payments we believe we will be obligated to distribute to tax equity investors, and estimated expenses. All such estimated expenses associated with the operations, maintenance, and administrative activities of the solar energy systems are subtracted for the purpose of calculating estimated retained value. The anticipated expenses include accounting, reporting, audit, insurance, maintenance and repairs. These costs vary by investment fund based on the requirements of the particular fund and are estimated as a cost per watt or as a specific dollar amount. In aggregate we estimate these expenses to range from $0.60 to $0.80 per watt over the contract period and assumed renewal period. We also include the replacement cost of inverters,

 

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which have a 10 to 20-year warranty, with an estimated 2% annual price decline from current pricing. Our other costs and exposure related to this equipment is mainly covered by the applicable product’s warranty, which generally meet or exceed the life of the contract. Aside from the inverter replacement costs, we expect to incur routine operating costs which are mainly administrative in nature and estimated on our experience in the normal course of business. Expected distributions to fund investors vary between the different funds and are based on individual fund contract provisions. These distributions are estimated based on contracted rates, expected sun hours, and the production capacity of the solar equipment installed.

Estimated retained value of renewal is the forecasted net present value, discounted at 6%, of payments we would receive during an assumed 10-year renewal term following the expiration of the initial contract term, net of the same amounts described in estimated retained value under energy contract. To calculate estimated retained value of renewal, we assume all contracts are renewed at 90% of the contractual price in effect at expiration of the initial term. Such calculation is based on the solar energy systems under long-term customer contracts that have been installed as of the measurement date.

 

     As of December 31,      As of June 30,  
     2012      2013      2013      2014  
     (In millions)  

Estimated retained value under energy contract

     $              33.1       $               151.2       $               81.1       $               246.2   

Estimated retained value of renewal

     8.5         39.2         21.5         63.7   

Estimated retained value

     41.6         190.4         102.7         309.9   

Estimated retained value per watt is calculated by dividing the estimated retained value as of the measurement date by the aggregate nameplate capacity of solar energy systems under long-term customer contracts that have been installed as of such date. We have chosen to initially introduce our solar energy systems in states where utility rates, climate conditions and regulatory policies provide for the most compelling market for distributed solar energy. Although we believe there are many other markets that have attractive economics for us, estimated retained value per watt will decrease over time because these markets are not as attractive as the ones in which we currently operate. We may experience disproportionate growth in markets that offer attractive incentives such as SRECs, the value of which is not reflected in estimated retained value. In addition, the estimated retained value associated with commercial and industrial solar energy systems is typically less than that for residential solar energy systems. To the extent we expand into the commercial and industrial market, estimated retained value per watt will also be adversely affected. Furthermore, other companies may calculate estimated retained value per watt (or a similar metric) differently than we do, which reduces its usefulness as a comparative measure.

 

     As of December 31,      As of June 30,  
     2012      2013      2013      2014  

Estimated retained value per watt

   $                 2.83       $                 2.62       $                 2.63       $                 2.39   

Estimated retained value and estimated retained value per watt are reporting metrics forecasted as of specified dates. They are forward-looking numbers and we use judgment in developing the assumptions used to calculate them. Those assumptions may not prove to be accurate over time.

 

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We consider a discount rate of 6% to be appropriate based on recent market transactions that demonstrate that a portfolio of residential solar customer contracts is an asset class that can be securitized successfully on a long term basis, with a coupon of less than 5%. Estimated retained value of renewal assumes all contracts are renewed at 90% of the contractual price in effect at expiration of the initial term. We consider this to be appropriate based on the life expectancy of the equipment, which extends beyond the initial contract term, and the belief that customers will continue to receive value from the energy generated by the solar energy systems as compared to purchasing energy from utilities, assuming utility rates for residential electricity continue to increase at their historical pace. The tables below provide a range of estimated retained value amounts if different default, discount and renewal rate assumptions were used.

LOGO

Estimated retained value and estimated retained value per watt amounts do not consider the impact of other events that could adversely affect the cash flows generated by the solar energy system during the contract term and anticipated renewal period. These events could include, but are not limited to, non-payment of obligated amounts by the customer, declines in utility rates for residential electricity or early contract termination by the customer as a result of the customer purchasing the solar energy system in connection with the sale of the home on which the solar energy system is installed. To date, such early terminations have been immaterial to our business.

 

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Factors Affecting Our Performance

Availability of Capital

Our future success depends on our ability to raise capital from third-party investors on competitive terms to help finance the deployment of our residential solar energy systems. There are a limited number of potential investment fund investors and the competition for these investments is intense. The principal tax credit on which fund investors in our industry rely is the ITC. By statute, the ITC is scheduled to decrease to 10% of the fair market value of a solar energy system on January 1, 2017 from 30% today, and the amounts that fund investors are willing to invest could decrease or we may be required to provide a larger allocation of customer payments to the fund investors as a result of this scheduled decrease. For certain of our investment funds, we are contractually required under certain circumstances to make payments to a fund investor so that the fund investor receives value equivalent to the tax benefits it expected to receive when entering into the transaction. For additional information regarding our investment funds see the section of this prospectus captioned “—Liquidity and Capital Resources—Sources of Funds—Investment Fund Commitments.” In addition, with funds that adopt a partnership structure, we contribute a portion of the cash that is used to acquire solar energy systems. We intend to create additional investment funds with financial investors and potentially with corporate investors, we will also use debt, equity or other financing strategies to fund our operations, including our obligations to make contributions to investment funds. Such other financing strategies may increase our cost of capital.

 

Government Incentives

Our cost of capital, the price we can charge for electricity, the cost of our systems and the demand for residential distributed solar energy is impacted by a number of federal, state and local government incentives and regulations, including: tax credits, particularly the ITC; tax abatements; rebate programs; net metering; and to a lesser extent, cash grants, particularly the U.S. Treasury grant program. While we have received U.S. Treasury grants with respect to some of the solar energy systems that we have installed in the past, we have no other existing cash grant investment funds as of the date of this prospectus. If we were to enter into cash grant funds in the future we may be required to engage in further discussions with, or otherwise be subject to investigation by, the U.S. Treasury Department in relation to applications for cash grants made by such funds. In addition, these programs have on occasion been challenged by incumbent utilities and questioned by those in government and others arguing for less governmental spending and involvement in the energy market. To the extent that such views are reflected in government policy, the reduction of such incentives could adversely affect our results of operations, cost of capital and growth prospects.

Cost of Solar Energy Systems

Since our inception, the cost of solar panels and the components necessary to manufacture them has declined, which has been a key driver in the price we charge for electricity and customer adoption of solar energy. We have purchased substantially all of the solar panels used in our solar energy systems from manufacturers based in China which have benefited from favorable governmental policies and subsidies by the Chinese government. More recently, solar

 

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panel and component prices have stabilized and could increase in the future. In January 2014, the U.S. government broadened its investigation of Chinese pricing practices in this area to include solar panels and modules produced in China containing solar cells manufactured in other countries, such as Taiwan. On June 10, 2014, the U.S. government issued a preliminary determination of countervailing subsidies by China and has proposed duties ranging from 18.6% to 35.2% on Chinese solar companies importing certain solar products into the United States, including our solar panel suppliers. On July 25, 2014, the U.S. government issued a separate preliminary determination imposing antidumping duties on imports of certain solar products from China. Although the exact applicability remains unclear, these duties are at rates of 26.3% to 165% for affected Chinese products, including our solar panel supplier Trina Solar. The U.S. government issued a separate preliminary determination relating to imports of solar products from Taiwan, with duties at rates from 20.9% to 27.6% for affected Taiwanese products (although we do not currently purchase Taiwanese products). To the extent that the U.S. government makes a final determination that U.S. market participants experience harm from these Chinese pricing practices, such solar panels and modules could become subject to these or additional tariffs. These combined tariffs would make such solar cells less competitively priced in the United States, and the Chinese and Taiwanese manufacturers may choose to limit the amount of solar equipment they sell into the United States. As a result, it may be easier for solar cell manufacturers located outside of China or Taiwan to increase the prices of the solar cells they sell into the United States. The cost of other components, such as inverters, racking systems and other electrical equipment, may also vary from period to period. If solar energy system costs begin to increase, whether as a result of these tariffs or because of the removal of government subsidies, we may be forced to pass these costs on to our customers and the value proposition for customers would decrease. Alternatively, our financial results would decrease if we did not pass these costs on to our customers.

Expansion into New Markets

We currently operate in Arizona, California, Hawaii, Maryland, Massachusetts, New Jersey and New York. We have chosen to initially introduce our solar energy systems in these states because the utility prices, sun exposure, climate conditions and regulatory policies in these states provide for the most compelling market for distributed solar energy. We believe that these states remain significantly underpenetrated. Accordingly, we intend to further penetrate these markets by introducing our solar energy systems into new neighborhoods and communities in states where we already have operations.

In recent years, the combination of declining solar energy system costs and increasing retail electricity prices have made distributed solar energy a cost effective power source for homeowners in an increasing number of markets. We plan to enlarge our addressable market by expanding into new states that present attractive economics for us and homeowners. We believe our scalable approach to entering new geographic markets significantly accelerates the time required for us to effectively sell in a particular market after establishing a new office.

During 2014 we plan to open at least 20 new offices in states in which we currently have operations and new states into which we are expanding.

Additionally, we are considering the option of expanding into markets outside of the residential market. These markets may include small businesses such as community retailers as

 

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well as larger retailers and manufacturers. Upon determination of our strategy with respect to commercial customers, we would pursue similar debt, equity, and other financing strategies consistent with our approach in the residential market, including creating investment funds, to help finance such systems.

Sales Channels

We employ a direct-to-home sales model because we believe it improves sales effectiveness. Currently, we ask potential customers to sign long-term customer contracts at no upfront cost to them and prior to us conducting a formal assessment of the home, designing a system, obtaining permits and other actions required prior to installation. As may be expected with a direct sales model, a large number of potential customers who sign long-term customer contracts ultimately elect not to have a system installed or the potential customers fail to meet our underwriting standards. We believe there are opportunities to improve the rate at which potential customers ultimately move forward through system installation, including by conducting the formal assessment of the home or installing a control panel on the day the contract is signed, or requiring potential customers to commit to a modest upfront fee that would be credited against payments under our contracts with them. We are currently evaluating such changes to determine if they can improve our signing to installation rate.

In addition to direct sales, we are currently exploring opportunities to sell solar energy systems to customers through a number of distribution channels, including relationships with home builders, large construction, electrical and roofing companies and other third parties such as home improvement stores that have access to large numbers of potential customers. We believe that such initiatives will contribute to our revenue growth. The potential impact of these initiatives on our financial results, however, is uncertain because while the price per kilowatt we can charge may be lower, we expect to benefit from more favorable cost structures by virtue of the larger nature of the installations.

Operations as a Stand-Alone Company

We rely on the administrative and operational support of Vivint, Inc. to run our business. Some of the Vivint resources we are using include office space, information and technology resources and systems, purchasing services, operational and fleet services and marketing services. In addition, Vivint has made available to us lines of credit providing for up to $70.0 million in revolver borrowings.

The historical financial information we have included in this prospectus does not necessarily reflect what our financial position, results of operations, cash flows or costs and expenses would have been had we operated separately from Vivint during the historical periods presented. The historical costs and expenses reflected in our consolidated financial statements include charges to certain corporate functions historically provided to us by Vivint. We and Vivint believe these charges are reasonable reflections of the historical utilization levels of these services in support of our business. Although we have made and are continuing to make investments to support our near and longer-term growth as a fully independent company, we will continue to have an ongoing relationship with Vivint which will provide services such as office space, information and technology resources and systems, purchasing services, operational and fleet services and marketing services, pursuant to a transition services agreement. Our continued expansion may exceed the capacity that Vivint is

 

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able to provide under the terms of such agreement. If Vivint is unable to satisfy its obligations thereunder on a timely basis, we may face difficulties in providing these services internally or implementing acceptable, substitute arrangements with third-party providers. As we obtain separate technologies and services, we may incur additional costs which may impact our operating results.

Sale of Common Stock

In August 2014, we issued and sold 2,671,875 shares of our common stock to 313 Acquisition LLC for $10.667 per share for aggregate proceeds of $28.5 million. In September 2014, we issued and sold an aggregate of 7,031,247 additional shares of our common stock to 313 Acquisition LLC, Alex Dunn and an entity affiliated with Todd Pedersen for $10.667 per share for aggregate proceeds of $75.0 million. However, as discussed in the section of this prospectus captioned “—Critical Accounting Policies and Estimates—Stock-Based Compensation,” in connection with the preparation of our financial statements for the six months ended June 30, 2004, we re-evaluated the estimate of the fair value of our common stock for financial reporting purposes in light of our progress with respect to the offering contemplated by this prospectus and the establishment of the price range set forth on the cover of this prospectus and determined that a straight line interpolation from the $2.93 fair value estimate as of December 31, 2013 suggested by an independent third party common stock valuation and the midpoint of the preliminary price range set forth on the cover page of this prospectus as of September 17, 2014 was an appropriate method of re-evaluating the fair value of our common stock for each of the equity transactions completed between January 1, 2014 and September 17, 2014, including the sale of common stock. As to the shares sold to 313 Acquisition LLC, we expect that the difference between the estimated fair value as of each of the closing dates and the purchase price will be recorded as an aggregate return of capital of $43.4 million within additional paid-in capital. As to the shares sold to Alex Dunn and the entity affiliated with Todd Pedersen, we expect to record approximately $14.8 million in compensation expense within general and administrative expense.

Basis of Presentation

The consolidated financial statements included within this prospectus are presented for the periods from January 1, 2012 through November 16, 2012, which we refer to as the Predecessor Period or Predecessor, as the context requires and November 17, 2012 through December 31, 2012, the year ended December 31, 2013, and the six months ended June 30, 2013 and 2014, which we refer to as the Successor Periods or Successor, as the context requires. In connection with our acquisition by 313 Acquisition LLC, which we refer to as the Acquisition, our assets and liabilities were adjusted to fair value on the closing date of the Acquisition by application of push-down accounting. Due to the change in the basis of accounting resulting from the Acquisition, the consolidated financial statements for the Predecessor Period and the Successor Periods are not comparable.

Components of Results of Operations

Revenue

We classify and account for long-term customer contracts as operating leases. We consider the proceeds from solar energy system rebate incentives offered by certain state and

 

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local governments to form part of the payments under our operating leases and recognize such payments as revenue over the contract term. We record revenue from our operating leases over the term of our long-term customer contracts, which is typically 20 years. We also apply for and receive SRECs in certain jurisdictions for power generated by our solar energy systems. We generally recognize revenue related to the sale of SRECs upon delivery. The market for SRECs is extremely volatile and sellers are often able to obtain better unit pricing by selling a large quantity of SRECs. As a result, we may sell SRECs infrequently, at opportune times and in large quantities and the timing and volume of our SREC sales may lead to fluctuations in our quarterly results. During 2013, approximately 5% of our revenue was attributable to SREC sales and less than 1% of our revenue was attributable to state and local rebates and incentives. During the six months ended June 30, 2014, approximately 8% of our revenue was attributable to SREC sales and 1% of our revenue was attributable to state and local rebates and incentives. On occasion we have sold solar energy systems for cash. In these instances, the revenue is recognized upon the solar energy system passing inspection by the responsible city department. Subsequent to our acquisition of Solmetric Corporation in the first quarter of 2014, we began recognizing revenue related to the sale of photovoltaic installation software products and devices, a portion of which consists of post-contract customer support.

Operating Expenses

Cost of Revenue

Cost of operating leases and incentives is comprised of the depreciation of the cost of the solar energy systems, which are depreciated for accounting purposes over 30 years, the amortization of initial direct costs, which are amortized over the term of the long-term customer contract, warehouse rent, utilities, fleet vehicle executory costs and the indirect costs related to the processing, account creation, design, installation and interconnection of solar energy systems, such as personnel costs not directly associated to a solar energy system installation, which are not capitalized. Under our direct sales model, a vast majority of payments to our direct sales personnel consist of commissions attributable to long-term customer contract acquisition. Capitalized initial direct costs consist of these commissions and other customer acquisition expenses. The cost of operating leases and incentives related to the sales of SRECs is limited to broker fees which are only paid in connection with certain transactions. Accordingly, the sale of SRECs in a quarter favorably impacts our operating results for that period. In future periods, we anticipate that the cost of operating leases and incentives revenue will continue to increase in dollar amount along with our operating leases and incentive revenue as we continue to expand sales coverage.

Cost of solar energy system and product sales consists of direct and indirect material and labor costs for solar energy systems. It also consists of materials, personnel costs, depreciation, facilities costs, other overhead costs, and infrastructure expenses associated with the manufacturing of the photovoltaic installation software products and devices.

Sales and Marketing Expenses

Sales and marketing expenses include personnel costs such as salaries, benefits, bonuses, sales commissions and stock-based compensation for our corporate sales and marketing employees and exclude costs related to our direct sales personnel which are accounted for as cost of revenue. Sales and marketing expenses also include advertising, promotional and

 

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other marketing-related expenses, certain allocated corporate overhead costs related to facilities and information technology, travel and professional services. In future periods, we anticipate sales and marketing costs to increase significantly in absolute dollars but remain relatively constant as a percentage of revenue as we continue to grow our headcount for sales employees and undertake new marketing initiatives to continue to grow our business.

Research and Development

Research and development expense is comprised primarily of salaries and benefits and other costs related to the development of photovoltaic installation software products and devices. Our software development costs to date have not been significant and therefore have not been capitalized. Research and development costs are charged to expense when incurred. In future periods we anticipate research and development costs to remain relatively stable in absolute dollars.

General and Administrative Expenses

General and administrative expenses include personnel costs such as salaries, bonuses and stock-based compensation, professional fees related to legal, human resources and accounting and structured finance services. General and administrative expenses also include certain allocated corporate overhead costs related to facilities and information technology, travel and professional services. We expect that general and administrative expenses will increase on an absolute basis and as a percentage of revenue to support the growth in our business and as a result of the additional costs we will incur as we continue to build a corporate infrastructure separate from Vivint, in addition to the additional costs of being a public reporting company and the costs related to managing an increasing number of investment fund arrangements. Our historical financial results include charges for the use of services provided by Vivint centralized departments and shared facilities. These costs were based on the actual cost incurred by Vivint without mark-up. The charges to us may not be representative of what the costs would have been had we operated separately from the Vivint businesses during the periods presented, however, we believe the amounts charged are representative of the incremental cost to Vivint to provide these services to us. In future periods we expect to continue to use certain of these services, such as office space, information and technology resources and systems, purchasing services, operational and fleet services and marketing services, from Vivint as part of the transition services agreement, which provides that we will be charged based upon the actual costs incurred.

Amortization of Intangible Assets

We recorded intangible assets at their fair value of $43.8 million as of the date of the Acquisition. Such intangible assets are being amortized over their estimated useful life of three years. In addition, we recorded finite-lived intangible assets of $3.7 million with useful lives ranging from five to ten years as part of the acquisition of Solmetric Corporation in January 2014. We also recorded $2.1 million related to in-process research and development which are subject to amortization upon completion of the project or impairment if the project is subsequently abandoned.

 

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Non-Operating Expenses

Interest Expense

Interest expense primarily consists of the interest charges associated with our indebtedness and the interest component of capital lease obligations. In the future we may incur additional indebtedness to fund our operations and our interest expense would correspondingly increase.

Other Expense

Other expense consists of interest and penalties primarily associated with employee payroll withholding tax payments which were not paid in a timely manner.

Provision for Income Taxes

We are subject to taxation in the United States, where all our business is conducted.

Our effective tax rates differ from the statutory rate primarily due to changes in the valuation allowance on our deferred taxes, state taxes, transactions with non-controlling interests and redeemable non-controlling interests, tax credits and nondeductible expenses. Our tax expense (benefit) is composed primarily of state and local minimum taxes paid, intercompany gains, tax credits and net operating losses that are being carried forward to future tax periods.

As of June 30, 2014, we had approximately $4.5 million of federal and $4.5 million of state net operating loss carryforwards, or collectively the NOLs, available to offset future taxable income, if any, which expire in varying amounts from 2031 through 2034 for federal and state tax purposes if unused. It is possible that we will not generate taxable income in time to use these NOLs before their expiration. In addition, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change federal NOLs to offset future taxable income. We have not yet completed a Section 382 analysis to determine if an ownership change will occur as a result of this offering. Until such analysis is completed, we cannot be sure that the full amount of the existing federal NOLs will be available, even if we generate taxable income before their expiration.

Net Income Available (Loss Attributable) to Stockholder

We determine the net income available (loss attributable) to stockholder by deducting from net loss the net loss attributable to non-controlling interests and redeemable non-controlling interests. The net loss attributable to non-controlling interests and redeemable non-controlling interests represents the investment fund investors’ allocable share in the results of operations of the investment funds, which we consolidate.

We have determined that the legal provisions in the contractual arrangements of the investment funds represent substantive profit-sharing arrangements, where the allocation to the partners differ from the stated ownership percentages. We have 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 using the 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

 

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under the liquidation provisions of the contractual agreements of these funds, assuming the net assets of the respective investment funds were liquidated at recorded amounts determined in accordance with GAAP. The fund investors’ interest in the results of operations of these investment funds is determined as the difference in the non-controlling interests and redeemable non-controlling interests’ claim under the HLBV method at the start and end of each reporting period, after taking into account any capital transactions between the fund and the fund investors. For all of our investment funds, the application of HLBV is performed consistently, however, the results of that application and its impact on the income or loss allocated between us and the non-controlling interests and redeemable non-controlling interests depend on the respective funds’ specific contractual liquidation provisions. For all of our investment funds, the HLBV results are generally affected by, among other factors, the tax attributes allocated to the fund investors including tax bonus depreciation and investment tax credits or U.S. Treasury grants in lieu of the investment tax credits, the amount of preferred returns that have been paid to the fund investors by the investment funds, and the allocation of tax income or losses in a liquidation scenario.

Regardless of the investment fund structure, the contractual liquidation provisions of our existing funds provide that the allocation percentages between us and the investor change, or “flip,” under certain circumstances. Prior to the point at which the allocation percentage flips, the investor is entitled to receive most of the value generated by the solar energy systems; afterwards, we are entitled to receive most of the value. The difference between our current inverted lease structures and our current partnership structures that drives a significant impact on our results from the application of the HLBV method is how the flip point is determined. The result of this difference is described in detail in the following paragraphs.

For our existing investment funds which have adopted the partnership structure, the flip point is tied to the achievement of the fund investor’s targeted rate of return. The receipt of tax benefits by the fund investor count towards the achievement of such target, which reduces the amount distributable to the fund investor in a hypothetical liquidation under these funds’ contractual liquidation provisions. This results in a net loss attributable to the fund investor in the period in which these tax benefits are received as a result of our application of the HLBV method.

For our existing investment funds which have adopted the inverted lease structure, the flip point is typically tied to the passage of a period of time that corresponds to the expiration of the recapture period associated with ITCs. An investor in a fund with an inverted lease fund structure will receive tax benefits similar to an investor in a fund that has adopted a partnership structure; however, unlike the partnership investment fund structure, the receipt of tax benefits by the fund investor does not impact the amount distributable to the fund investor in a hypothetical liquidation under these funds’ contractual liquidation provisions. At the flip point, which typically corresponds to the end of the ITC recapture period, the fund investor’s claims on the net assets of the investment fund generally decreases. This is expected to result in a net loss attributable to the fund investor in the period when the flip occurs as a result of our application of the HLBV method.

These differences are a result of the specific contractual provisions for each of our existing funds and are not necessarily indicative of terms for our future partnership or inverted lease structures. Future investment funds may contain different features than those that we currently employ and, as a result, would not necessarily impact the HLBV calculation and resulting allocation of net income or loss in the same way that our existing funds do. For example, we may in the future enter into partnership structures in which the flip is based on the passage of time, and we would expect such funds to impact the HLBV calculation in ways that more closely resemble the impact of our current inverted lease funds than our current partnership funds.

 

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The HLBV calculation for both fund structures is also impacted by the difference between the cash received by us from the investment funds and the carrying value of the solar energy systems contributed to the investment funds. The purchase price paid for solar energy systems by an investment fund is based on the fair market value, as determined by an independent appraiser. As the Company consolidates the subsidiary that develops the solar energy systems as well as the investment fund, the sales of the solar energy systems are considered transactions under common control and therefore reflected at their historical cost (i.e., their carryover basis). Cash received in excess of the installed purchased solar energy systems’ carryover basis is treated as deemed distributions from the investment fund to the Company. In most cases, any excess of the purchase price over the carryover basis of the solar energy systems would result in allocations of income to us.

The HLBV calculation for both fund structures may also be affected by the timing of an investor’s cash contribution to the investment fund relative to the timing of the contribution or sale of the solar energy systems to the applicable investment fund. A portion of the solar energy systems purchased by, or contributed to, an investment fund are not installed at the time of purchase or contribution and therefore do not have any carryover basis allocated to them. Our wholly-owned subsidiary has an obligation to purchase, install, and provide the solar energy system equipment to an investment fund for any in-progress projects that were previously purchased by such fund. If our wholly-owned subsidiary does not ultimately provide the investment fund with the solar energy systems that it purchased, it is required to refund the purchase price to the investment fund. In these specific cases, we determined that the portion of the cash purchase price paid by an investment fund that relates to in-progress projects should be recorded as a receivable by the investment fund (i.e., representing the investment fund’s right to receive solar panels and related equipment for solar energy systems that are installed after the project is purchased by the investment fund). Given that our subsidiary controls the investment fund, we have accounted for the receivable balance (i.e., the entire cash balance paid to our subsidiary for the purchased, uninstalled solar energy systems) as a reduction in the investment fund’s members’ equity in accordance with GAAP. Initially, this results in the allocation of losses amongst the partners, primarily to the fund investor, because the GAAP equity balance is less than the tax capital account. When such solar energy systems are subsequently installed, the systems are recorded at their carryover basis as a common control transaction and the receivable balance is eliminated. With the elimination of the receivable, the investment fund’s member’s equity is increased to the extent of the carrying amount of the assets contributed which results in the reversal of a portion of the prior allocation of losses. In most cases, the reversal of such losses occurs within a short period of time, approximately three months. As discussed above, the difference between the receivable balance eliminated (i.e., the cash received for such solar energy systems) and the carryover basis of the installed solar energy systems is treated as deemed distributions from the investment fund to the Company, and as a result that portion of the prior allocation of losses is not reversed over time.

If the redemption value of our redeemable non-controlling interests exceeds their carrying value after attribution of income or loss under the HLBV method in any period, we will make an additional attribution of income to our redeemable non-controlling interests such that their carrying value will at least equal the redemption value.

We apply the HLBV method consistently across our investment funds; however, the impact on non-controlling interests and redeemable non-controlling interests may vary significantly period-to-period depending on the structure of the funds we enter into, the contractual liquidation

 

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provisions of such investment funds, the age of such investment funds and the timing of an investor’s cash contribution to the investment fund relative to the timing of the contribution or sale by us of the solar energy system to the applicable investment fund.

Results of Operations

We believe that a discussion of the results of operations for a partial year versus a full year would not be meaningful. We have therefore set forth a discussion comparing the results of operations for the year ended December 31, 2013 to the results of operations of the Successor Period from November 17, 2012 through December 31, 2012, combined with the results of operations of the Predecessor Period from January 1, 2012 through November 16, 2012. We have also provided a discussion comparing the results of operations for the six months ended June 30, 2014 to the results of operations for the six months ended June 30, 2013, both of which occurred in the Successor Period. The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes thereto included elsewhere in this prospectus. Certain financial information for the Successor Period is not comparable to the Predecessor Period due to the change in basis of accounting as a result of the Acquisition. This information includes, but may not be limited to, amortization expense, Acquisition transaction expenses and accretion to redemption value.

 

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The following table sets forth selected consolidated statements of operations data for each of the periods indicated.

 

    Predecessor     Successor  
    Period from
January 1,
through
November 16,
2012
    Period from
November 17,
through
December 31,
2012
    Year Ended
December 31,
2013
    Six Months Ended
June 30
 
          2013     2014  
                (Restated)              
                (In thousands)              

Revenue:

           

Operating leases and incentives

  $ 183      $ 109      $ 5,864      $ 1,793      $ 8,667   

Solar energy system and product sales

    157               306        132        1,398   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    340        109        6,170        1,925        10,065   

Operating expenses:

           

Cost of revenue—operating leases and incentives

    3,302        1,018        19,004        8,013        27,646   

Cost of revenue—solar energy system and product sales

    95               123        76        883   

Sales and marketing

    1,471        533        7,348        2,890        11,009   

Research and development

                                972   

General and administrative

    7,789        971        16,438        4,832        26,106   

Amortization of intangible assets

           1,824        14,595        7,297        7,428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    12,657        4,346        57,508        23,108        74,044   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (12,317     (4,237     (51,338     (21,183     (63,979

Interest expense

    881        96        3,144        991        4,074   

Other expense

    240        44        1,865        522        1,165   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (13,438     (4,377     (56,347     (22,696     (69,218

Income tax expense (benefit)

    7        (1,074     123        45        6,936   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (13,445     (3,303     (56,470     (22,741     (76,154

Net loss attributable to non-controlling interests and redeemable non-controlling interests

    (1,771     (699     (62,108     (2,307     (88,688
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to stockholder

    (11,674     (2,604     5,638        (20,434     12,534   

Accretion to redemption value of Series B redeemable preferred stock

    (20,000                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholder

  $ (31,674   $ (2,604   $ 5,638      $ (20,434   $ 12,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of Six Months Ended June 30, 2013 and 2014

Revenue

 

       Six Month Ended June 30,      $ Change
2013 to 2014
 
               2013                      2014             
       (In thousands)  

Total revenue

     $             1,925       $           10,065       $         8,140   

The $8.1 million increase in total revenue was primarily attributable to an increase of $6.2 million related to operating lease and incentives as the number of installed solar energy systems in service increased significantly for the six months ended June 30, 2014 compared to the same period in 2013. In addition, revenue from the sale of SRECs increased $0.7 million for the six months ended June 30, 2014 compared to the same period in 2013. Finally, subsequent to our acquisition of Solmetric Corporation in January 2014, we recognized revenue of $1.3 million related to the sale of photovoltaic installation software products and devices in the six months ended June 30, 2014.

Operating Expenses

 

      

Six Month Ended June 30,

     $ Change
2013 to 2014
 
               2013                      2014             
       (In thousands)  

Operating expenses:

          

Cost of revenue—operating leases and incentives

     $ 8,013       $ 27,646       $ 19,633   

Cost of revenue—solar energy system and product sales

       76         883         807   

Sales and marketing

       2,890         11,009         8,119   

Research and development

               972         972   

General and administrative

       4,832         26,106         21,274   

Amortization of intangible assets

       7,297         7,428         131   
    

 

 

    

 

 

    

 

 

 

Total operating expenses

     $ 23,108       $ 74,044       $ 50,936   
    

 

 

    

 

 

    

 

 

 

Cost of Revenue.    The $19.6 million increase in cost of revenue—operating leases and incentives was primarily due to a $12.1 million increase in indirect costs related to the design, installation and interconnection of solar energy systems to the power grid that were expensed in the period and a $2.4 million increase in depreciation and amortization of solar energy systems, consistent with the significant growth in revenue over these periods. The facility and information technology expenses related to our agreements with Vivint and allocated to cost of revenue—operating leases and incentives increased by $2.5 million due to our increased headcount as well as increased square footage utilized by our employees. Other factors contributing to the increase in these expenses were the increase in travel costs related to design and installation activities of $1.2 million and the increases in fleet vehicle maintenance, insurance, warehouse and other related costs of $1.3 million. The $0.8 million increase in cost of revenue—solar energy system and product sales in the six months ended June 30, 2014 was primarily due to the costs of photovoltaic installation software products.

Sales and Marketing Expense.    The $8.1 million increase in sales and marketing expense was attributable to our continued efforts to grow our business by entering into new markets,

 

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opening new sales offices in various locations and increased hiring of sales and marketing personnel. Specifically, the higher expense level was attributable to increased compensation and benefits expense of $4.6 million, increased costs related to advertising, promotional and other marketing-related expenses of $2.8 million, increased travel expenses of $0.7 million and increased facility and information technology expenses allocated to sales and marketing related to our agreement with Vivint of $0.1 million.

Research and Development Expense.    The $1.0 million increase in research and development expense was attributable to photovoltaic installation software product and device development during the six months ended June 30, 2014. Prior to the acquisition of Solmetric Corporation in January 2014, we did not incur any research and development expenses.

General and Administrative Expense.    The $21.3 million increase in general and administrative expenses primarily resulted from a $13.9 million increase in professional service fees driven primarily from costs related to our anticipated initial public offering and preparations to become a public reporting company. In addition, compensation and benefits increased $6.2 million as we added headcount to support our growth, new corporate office computer equipment and software increased by $0.2 million, information technology expenses related to our agreement with Vivint allocated to general and administrative expenses increased by $0.3 million, and banking service charges increased by $0.2 million.

Amortization of Intangible Assets.    In connection with the Acquisition, we recorded intangible assets at their fair value of $43.8 million as of the date of the Acquisition for which amortization of $7.3 million is reflected in each of the six months ended June 30, 2013 and 2014. Additionally, as part of the acquisition of Solmetric Corporation in January 2014, we recorded additional intangible assets at their fair value of $5.8 million, of which $3.7 million is subject to amortization. The $0.1 million increase in amortization of intangible assets in the six months ended June 30, 2014 is a result of these acquired Solmetric intangible assets.

Non-Operating Expenses

 

    

   Six Month Ended June 30,   

     $ Change
2013 to 2014
 
             2013                      2014             
     (In thousands)  

Interest expense

   $     991       $     4,074       $     3,083   

Other expense

     522         1,165         643   

Interest Expense.    The $3.1 million increase in interest expense was primarily the result of additional borrowings. Of the $3.1 million increase, $2.1 million related to our revolving lines of credit with Vivint and $1.2 million related to the Bank of America, N.A. term loan credit facility entered into in May 2014, $0.7 million of which were loan fees. These increases were partially offset by a decrease of $0.2 million in interest expense related to the revolving line of credit that was terminated in June 2013.

Other Expense.    The $0.6 million increase in other expenses during the six months ended June 30, 2014 as compared to the prior period was comprised primarily of interest and penalties associated with payroll taxes from 2012 and 2013 that were not paid in a timely manner.

 

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Net Loss Attributable to Non-Controlling Interests and Redeemable Non-Controlling Interests

 

      

   Six Month Ended June 30,   

     $ Change
2013 to 2014
 
               2013              2014     
       (In thousands)  

Net loss attributable to non-controlling interests and redeemable non-controlling interests

    

$

         (2,307

  

$

    (88,688

   $     (86,381

The allocation of net loss to non-controlling interests and redeemable non-controlling interests as a percentage of our total net loss was 10% and 116% for the six months ended June 30, 2013 and 2014. The increase in net loss attributable to non-controlling interests and redeemable non-controlling interests was mainly due to the $88.4 million loss allocation from funds into which we sold assets. Due to the increase in the number of investment funds, loss allocations from funds into which we sold assets for the six months ended June 30, 2014 are greater compared to the six months ended June 30, 2013. These loss allocations are partially offset by a $2.0 million decrease in net loss attributable to redeemable non-controlling interests. Losses that are allocated to the fund investors under the HLBV method relate to hypothetical liquidation losses resulting from differences between the net assets of the investment fund and the partners’ respective tax capital accounts in the investment fund. Specifically, a large portion of the total loss allocated to the non-controlling interests was caused by a significant liquidation loss for a new fund which experienced differences between the GAAP net equity and the tax capital accounts due to the investment fund’s purchase of a large number of solar energy systems that were not yet installed. Losses to the fund investors were also driven by a reduction in certain fund investors’ claims on net assets due to the election of the partnership to take bonus depreciation allowances under Internal Revenue Code Section 179, as well as the receipt of ITCs which were primarily allocated to fund investors.

Comparison of Predecessor Period Ended November 16, 2012, Successor Period Ended December 31, 2012 and Year Ended December 31, 2013

Amounts in the “$ Change 2012 to 2013” column equal results of operations for the year ended December 31, 2013 less combined results of operations for the Successor Period from November 17, 2012 through December 31, 2012 and the results of operations for the Predecessor Period from January 1, 2012 through November 16, 2012.

Revenue

 

     Predecessor      Successor         
     Period from
January 1,
through
November 16,
2012
     Period from
November 17,
through
December 31,
2012
     Year Ended
December 31,
2013
     $ Change
2012 to
2013
 
            (In thousands)         

Total revenue

   $         340       $         109       $     6,170       $     5,721   

The $5.7 million increase in total revenue was primarily attributable to an increase of $5.2 million related to operating leases and incentives as the number of installed solar energy systems in service increased significantly from 2012 to 2013. In addition, sales of SRECs increased to $0.3 million in 2013 from $15,000 in 2012, and was recognized within operating leases and incentives revenue. We also had an increase of $0.1 million in solar energy system sales.

 

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Operating Expenses

 

     Predecessor      Successor         
     Period from
January 1,
through
November 16,
2012
     Period from
November 17,
through
December 31,
2012
     Year Ended
December 31,
2013
     $ Change
2012 to
2013
 
                   (Restated)         
     (In thousands)  

Operating expenses:

             

Cost of revenue—operating leases and incentives

   $ 3,302       $ 1,018       $ 19,004       $ 14,684   

Cost of revenue—solar energy system and product sales

     95                 123         28   

Sales and marketing

     1,471         533         7,348         5,344   

General and administrative

     7,789         971         16,438         7,678   

Amortization of intangible assets

             1,824         14,595         12,771   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $     12,657       $         4,346       $     57,508       $     40,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of Revenue.    The $14.7 million increase in cost of revenue—operating leases and incentives was primarily due to a $9.4 million increase in indirect costs related to the design, installation and interconnection of solar energy systems to the power grid that were expensed in the period and a $1.9 million increase in depreciation and amortization of solar energy systems, consistent with the significant growth in revenue over these periods. The facility and information technology expenses related to our agreements with Vivint and allocated to cost of revenue increased by $1.8 million due to our increased headcount as well as increased square footage utilized by our employees. Warehouse and other related costs increased by $1.1 million. We also experienced a $0.3 million increase in fleet vehicle maintenance and insurance and a $0.3 million increase in travel costs related to design and installation activities.

Sales and Marketing Expense.    The $5.3 million increase in sales and marketing expense was attributable to our continued efforts to grow our business by entering into new markets, opening new sales offices in various locations and increased hiring of sales and marketing personnel. Specifically, the higher expense level was attributable to increased compensation and benefits expense of $3.0 million, increased costs related to advertising, promotional and other related expenses of $2.0 million and increased travel expenses of $0.4 million.

General and Administrative Expense.    The $7.7 million increase in general and administrative expenses primarily resulted from a $5.1 million increase in compensation and benefits as we increased headcount to support our growth. In addition, professional service fees increased by $3.8 million, office supplies and postage increased by $0.6 million, information technology related to our agreement with Vivint allocated to general and administrative expenses increased by $0.4 million, insurance costs increased by $0.4 million, travel expenses increased by $0.4 million and banking service charges increased by $0.2 million. These increases were partially offset by Acquisition-related costs consisting of $2.7 million of special retention bonuses and other payments to employees and $1.0 million of transaction fees that were expensed in the Predecessor Period which did not occur in the Successor Periods.

 

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Amortization of Intangible Assets.    In connection with the Acquisition, we recorded intangible assets at their fair value of $43.8 million as of the date of the Acquisition for which amortization is reflected in the Successor Periods ended December 31, 2012 and 2013.

Non-Operating Expenses

 

     Predecessor     Successor        
     Period from
January 1,
through
November 16,
2012
    Period from
November 17,
through
December 31,
2012
    Year Ended
December 31,
2013
    $ Change
2012 to
2013
 
     (In thousands)  

Interest expense

   $         881      $         96      $     3,144      $     2,167   

Other expense

     240        44        1,865        1,581   

Interest Expense.    The increase in interest expense was primarily the result of additional borrowings under our revolving lines of credit with Vivint.

Other Expense.    The increase in other expenses was comprised primarily of interest and penalties associated with payroll taxes that were not paid in a timely manner in 2012 and 2013.

Income Tax Expense (Benefit)

 

     Predecessor     Successor        
     Period from
January 1,
through
November 16,
2012
    Period from
November 17,
through
December 31,
2012
    Year
Ended
December 31,
2013
    $ Change
2012 to
2013
 
                 (Restated)        
     (In thousands)  

Income tax expense (benefit)

   $                 7      $     (1,074)      $     123      $     1,190   

Income Tax Expense (Benefit).    The $1.2 million increase in income tax expense (benefit) was a result of an increase in taxable income resulting from adjustments for permanent items, such as increases in losses attributable to non-controlling interests and redeemable non-controlling interests, intercompany sales, tax credits and other nondeductible expenses.

Net Loss Attributable to Non-Controlling Interests and Redeemable Non-Controlling Interests

 

     Predecessor     Successor        
     Period from
January 1,
through
November 16,
2012
    Period from
November 17,
through
December 31,
2012
    Year
Ended
December 31,
2013
    $ Change
2012 to
2013
 
                 (Restated)        
     (In thousands)  

Net loss attributable to non-controlling interests and redeemable non-controlling interests

   $     (1,771)      $         (699)      $ (62,108   $ (59,638

The allocation of net loss to non-controlling interests and redeemable non-controlling interests as a percentage of our total net loss was 13%, 21%, and 110% for the Predecessor Period and the Successor Periods ended December 31, 2012 and 2013. The increase in net loss

 

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attributable to non-controlling interests and redeemable non-controlling interests was mainly due to the $57.5 million loss allocation from funds into which we were selling assets. The losses to the fund investors for the period ending December 31, 2013 are primarily driven by a reduction in certain fund investors’ claims on net assets due to the election of the partnership to take bonus depreciation allowances under Internal Revenue Code Section 179, as well as the receipt of investment tax credits which were primarily allocated to fund investors.

Accretion to Redemption Value of Series B Redeemable Preferred Stock

 

     Predecessor     Successor        
     Period from
January 1,
through
November 16,
2012
    Period from
November 17,
through
December 31,
2012
    Year
Ended
December 31,
2013
    $ Change
2012 to
2013
 
     (In thousands)  

Accretion to redemption value of Series B redeemable preferred stock

   $ (20,000   $     —      $     —      $ 20,000   

Immediately prior to the Acquisition, we had 8,342 shares of Series B redeemable preferred stock outstanding. Due to the change in control upon the Acquisition, we recorded $20.0 million to accrete Series B redeemable preferred stock to redemption value in relation to the redemption of such preferred stock in the Predecessor Period. We do not expect to incur similar charges in future periods as we no longer have redeemable preferred stock outstanding after the Acquisition.

 

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Quarterly Results of Operations

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the six quarters in the 18 month period ended June 30, 2014. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

     Three Months Ended  
     March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
 
                       (Restated)        
                 (In thousands)              

Revenue:

            

Operating leases and incentives

   $ 568      $ 1,225      $ 2,123      $ 1,948      $ 2,863      $ 5,804   

Solar energy system and product sales

     24        108        151        23        644        754   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     592        1,333        2,274        1,971        3,507        6,558   

Operating expenses:

            

Cost of revenue — operating leases and incentives

     3,617        4,396        4,811        6,180        11,187        16,459   

Cost of revenue — solar energy system and product sales

     15        61        32        15        398        485   

Sales and marketing

     1,217        1,673        2,105        2,353        5,219        5,790   

Research and development

                                 472        500   

General and administrative

     1,796        3,036        5,135        6,471        12,354        13,752   

Amortization of intangible assets

     3,649        3,648        3,649        3,649        3,737        3,691   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     10,294        12,814        15,732        18,668        33,367        40,677   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (9,702     (11,481     (13,458     (16,697     (29,860     (34,119

Interest expense

     425        566        963        1,190        1,401        2,673   

Other expense

     168        354        541        802        888        277   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (10,295     (12,401     (14,962     (18,689     (32,149     (37,069

Income tax expense (benefit)

     485        (440     31        47        4,394        2,542   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (10,780     (11,961     (14,993     (18,736     (36,543     (39,611

Net loss attributable to non-controlling interests and redeemable non-controlling interests

     (2,121     (186     (37,848     (21,953     (43,584     (45,104
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholder

   $ (8,659   $ (11,775   $ 22,855      $ 3,217      $ 7,041      $ 5,493   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Quarterly Trends

Revenue

Operating leases and incentives revenue has generally increased quarter over quarter as a result of our continued increase in the number of installations of solar energy systems under power purchase agreements in new and existing markets. Operating leases and incentives revenue in the three months ended December 31, 2013 was lower than the preceding quarter due to the impact of seasonally shorter daylight hours in the winter.

Revenue from solar energy system and product sales fluctuated in 2013 as we only sold solar energy systems on occasion. Revenue from solar energy system and product sales in the first two quarters of 2014 is primarily from sales of photovoltaic installation software products and devices subsequent to our acquisition of Solmetric Corporation in January 2014.

Operating Expenses

Cost of operating leases and incentives revenue, which is comprised mainly of depreciation, has increased quarter over quarter primarily as a result of the increase in the number of installed solar energy systems under lease and power purchase agreements.

Cost of revenue from solar energy system and product sales has increased quarter over quarter primarily as a result of increased sales of photovoltaic installation software products and devices subsequent to our acquisition of Solmetric Corporation in January 2014.

Sales and marketing expenses have increased quarter over quarter as we have continued to increase our headcount for sales employees and undertake new marketing initiatives to continue to grow our business.

General and administrative expenses have increased quarter over quarter as a result of additional headcount and expenditures in order to support the growth of our business as well as the additional costs of preparing to be a public reporting company.

Amortization of intangible assets increased in the first two quarters of 2014 due to the finite-lived intangible assets of $3.7 million which we recorded as part of the acquisition of Solmetric Corporation in January 2014.

Non-Operating Expenses

Interest expense increased quarter over quarter due to additional borrowings in order to support our growth.

Other expense consists mainly of interest and penalties primarily associated with employee payroll withholding tax payments which were not paid in a timely manner. The decrease in other expense in the second quarter of 2014 was the result of our resolving the cause of such late employee payroll withholding tax payments.

 

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Net Loss Attributable to Non-controlling Interests and Redeemable Non-controlling Interests

As discussed in the section of this prospectus captioned “—Components of Results of Operations,” we apply the HLBV method in a consistent manner to all of our investment funds; however, as seen in the quarterly trend, the impact on non-controlling interests and redeemable non-controlling interests varies significantly period-to-period depending on the structure of the funds we enter into, the contractual liquidation provisions of such investment funds, the age of such investment funds and the timing of an investor’s cash contribution to the investment fund relative to the timing of the contribution or sale by us of the solar energy system to the applicable investment fund.

Seasonality

We have experienced seasonal fluctuations in our operations. For example, the amount of revenue we recognize in a given period from power purchase agreements is dependent in part on the amount of energy generated by solar energy systems under such contracts. As a result, operating leases and incentives revenue is impacted by seasonally shorter daylight hours in winter months. In addition, our ability to install solar energy systems is impacted by weather. For example, we have limited ability to install solar energy systems during the winter months in the Northeastern United States. Such delays can impact the timing of when we can install and begin to generate revenue from solar energy systems. However, given that we are an early stage company operating in a rapidly growing industry, the true extent of these fluctuations may have been masked by our recent growth rates and thus may not be readily apparent from our historical operating results and may be difficult to predict. As such, our historical operating results may not be indicative of future performance.

Liquidity and Capital Resources

As of June 30, 2014, we had cash and cash equivalents of $25.2 million, which consisted principally of cash and time deposits with high-credit-quality financial institutions. Since inception, we have financed our operations primarily from investment fund arrangements that we have formed with fund investors and, to a lesser extent, from borrowings. Our principal uses of cash are funding our operations, including the costs of acquisition and installation of solar energy systems, satisfaction of our obligations under our debt instruments and other working capital requirements. Our business model requires substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar energy systems. Since we invest our available cash into purchases of new solar energy systems, our working capital balance was negative as of June 30, 2014. As we continue to grow our business, we anticipate that our negative working capital balance will also grow. The solar energy systems that are operational typically generate a positive return rate, however, in order to grow, we are dependent on financing from outside parties. If financing is not available to us on acceptable terms, if and when needed, we may be required to reduce planned spending, which could have a material adverse effect on our operations. While there can be no assurances, we anticipate raising additional required capital from new and existing investors. We believe our cash and cash equivalents, investment fund commitments, projected investment fund contributions and available borrowings as further described below will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, due to our rapid growth and business expansion, combined with the outlay of significant upfront capital costs, the liquidity provided from this offering may be necessary to provide additional funding depending on our ability to secure adequate future financing and the rate at which our business continues to expand.

 

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Sources of Funds

Investment Fund Commitments

As of the date of this prospectus, we have raised 10 investment funds to which investors such as banks and other large financial investors have committed to invest approximately $543 million. These commitments will enable us to install solar energy systems of total fair market value (as determined at the time of such investment) of approximately $1.3 billion, of which approximately $913 million has been installed. The undrawn committed capital for these funds is approximately $165 million, which includes approximately $46 million in payments that will be received from fund investors upon interconnection to the respective utility grid of solar energy systems that have already been allocated to investment funds. As of the date of this prospectus, we had tax equity commitments to fund approximately 81 MWs of future deployments. We are currently in negotiations with financial investors to create additional investment funds in 2014. We also expect to create additional investment funds with financial investors and potentially with corporate investors, and may also use debt, equity or other financing strategies to fund our operations. To that end, in August and September 2014, we received non-binding letters of intent from four financial institutions on a several basis in amounts equaling up to $300 million in the aggregate. We estimate such investments would be sufficient to fund approximately 133 MWs of future deployments. It is contemplated that each of the potential investment funds would adopt the partnership structure and be on terms similar to those of our existing investment funds that have adopted such structure, which terms may include conditions on our ability to draw on the financing commitments made by these funds. Such letters of intent are non-binding and do not constitute a commitment to invest. Although we cannot be certain when, if ever, such investment documentation will be executed, our current expectation is that forward investment documentation will be executed within the last quarter of 2014 or the first quarter of 2015 to fund investments at various times throughout 2015 and 2016. If we are unable to consummate these investments or establish the other investment funds that we intend to pursue during this period, we will be required to obtain additional financing in order to continue to grow our business or finance the deployment of solar energy systems using cash on hand until such additional financing has been secured. We assign to our investment funds long-term customer contracts and related economic benefits associated with solar energy systems in accordance with the criteria of the specific funds. Upon such allocation and upon our satisfaction of the conditions precedent to drawing upon such commitments, we are able to draw down on the investment fund commitments. The conditions precedent to funding vary across our investment funds, but generally require that we have entered into a contract with the customer, that the customer meets certain credit criteria, that the solar energy system is expected to be eligible for the ITC, that we have a recent appraisal from an independent appraiser establishing the fair market value of the system and that the property is in an approved state. All of the capital contributed by our fund investors into the investment funds is, depending on the investment fund structure, either paid to us to acquire solar energy systems or distributed to us following our contribution of solar energy systems to the investment fund. Some fund investors have additional criteria that are specific to those investment funds. Once received by us, these proceeds are generally used for working capital to develop and deliver solar energy systems but may be used for any purpose.

 

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Debt Instruments

Aggregation Credit Facility.    In September 2014, we entered into an aggregation credit facility with an initial lender commitment of up to $350 million with certain financial institutions for which Bank of America, N.A. is acting as administrative agent. The aggregation credit facility provides that, upon the satisfaction of certain conditions, we may incur up to an aggregate of $200 million of additional term loan borrowings.

Prepayments are permitted under the aggregation credit facility, and the principal and accrued interest on any outstanding loans mature on March 12, 2018. Under the aggregation credit facility, interest on borrowings accrues at a floating rate equal to (1) a margin that varies between 3.25% during the period during which we may incur borrowings and 3.50% after such period plus either of (2)(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%.

The borrower under the aggregation credit facility is Vivint Solar Financing I, LLC, one of our indirect wholly owned subsidiaries, that in turn holds our interests in the managing members in our existing investment funds. These managing members guarantee the borrower’s obligations under the aggregation credit facility. In addition, Vivint Solar Holdings, Inc., has pledged its interests in the borrower, and the borrower has pledged its interests in the guarantors as security for the borrower’s obligations under the aggregation credit facility. The aggregation credit 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 credit facility provides that the borrower may not incur any indebtedness other than that related to the aggregation credit facility or in respect of permitted swap agreements, and that the guarantors may not incur any indebtedness other than that related to the aggregation credit facility or as permitted under existing investment fund transaction documents. These restrictions do not impact our ability to enter into investment funds, including those that are similar to those we have entered into previously. As of the date of this prospectus, we had incurred an aggregate of $87.0 million in term loan borrowings under this agreement, of which we used approximately $75.7 million to repay the outstanding principal and accrued and unpaid interest under the May 2014 credit facility, and had remaining borrowing capacity of $263 million.

Our aggregation credit facility also contains certain customary events of default. If an event of default occurs, lenders under the aggregation credit facility will be entitled to take various actions, including the acceleration of amounts due under the aggregation credit facility and foreclosure on the interests of the borrower and the guarantors that have been pledged to the lenders.

Credit Facility.    In May 2014, we entered into a term loan credit facility with certain financial institutions for which Bank of America, N.A. was acting as administrative agent, under which we incurred an aggregate principal amount of $75.5 million in term loan borrowings. Under the credit facility, interest on borrowings accrued at a floating rate based on (1) LIBOR plus a margin equal to 4%, or (2) a rate equal to 3% plus the greatest of (a) the Federal Funds Rate plus 0.5%, (b) the administrative agent’s prime rate and (c) LIBOR plus 1%.

 

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The credit facility included customary covenants, including covenants that restrict, subject to certain exceptions, our ability to incur indebtedness, incur liens, make investments, make fundamental changes to our business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions. As of June 30, 2014, we were in compliance with such covenants. The credit facility permitted prepayments without premium, and in September 2014 we repaid the outstanding term loan borrowings and accrued and unpaid interest under the credit facility with proceeds from the aggregation credit facility.

Related Party Revolving Lines of Credit.    In December 2012, we entered into a Subordinated Note and Loan Agreement with Vivint, pursuant to which we may incur up to $20.0 million in revolver borrowings. Interest accrues on these borrowings at 7.5% per year and accrued interest is paid-in-kind through additions to the principal amount on a semi-annual basis. Such additions to the principal amount do not reduce borrowing capacity under the revolving lines of credit. In December 2012, we incurred $15.0 million in revolver borrowings and in January through May 2013, we incurred an additional $5.0 million in revolver borrowings. In July 2013, we amended this agreement to provide for a maturity date of January 1, 2016. As of June 30, 2014, we had borrowed $20.0 million in aggregate under this agreement and as such did not have any remaining borrowing capacity available under this agreement.

In May 2013, we entered into a separate Subordinated Note and Loan Agreement with Vivint, pursuant to which we may incur up to $20.0 million in revolver borrowings. From May 2013 through December 2013, we incurred $18.5 million in revolver borrowings under the agreement. Accrued interest is paid-in-kind through additions to the principal amount on a semi-annual basis and interest accrued on these borrowings at 12% per year through November 2013 and 20% per year in December 2013. In January 2014, we amended and restated the agreement, pursuant to which we may incur up to an additional $30.0 million in revolver borrowings. In addition, the amendment provides that the interest on all borrowings under the agreement will accrue at a rate of 12% per year for the remaining term of the agreement. In April 2014, we amended the agreement to provide for a maturity date of January 1, 2017. In January 2014, we incurred an additional $13.0 million in revolver borrowings under the agreement. As of June 30, 2014, we had $35.0 million outstanding under such agreement, inclusive of paid-in-kind and accrued interest, and we had an aggregate of $18.5 million in borrowing capacity available under such agreement.

While prepayments are permitted under both of the loan agreements, the principal amount and accrued interest of each of the loans under the loan agreements is due upon the earliest to occur of (1) a change of control, (2) an event of default and (3) January 1, 2016 in the case of the first agreement or January 1, 2017 in the case of the second agreement. Our obligations to these lenders with respect to the loans are subordinate to our guaranty obligations to our investment funds. Neither of these loan agreements limit our ability to incur additional indebtedness.

Terminated Revolving Line of Credit.    In July 2012, we entered into a credit agreement with a financial institution. The credit agreement provided for a senior secured credit facility in aggregate principal amount of $15.0 million and which accrued interest at LIBOR plus 10% annually. In 2012, we incurred $6.5 million in debt under such agreement. We repaid all borrowings under and terminated this agreement in June 2013.

 

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Sale of Equity Securities

In August and September 2014, we issued and sold an aggregate of 9,703,122 shares of common stock to 313 Acquisition LLC, Alex Dunn and an entity affiliated with Todd Pedersen for $10.667 per share for aggregate gross proceeds of $103.5 million. If at any time prior to the earlier of (1) the offering contemplated by this prospectus and (2) September 3, 2015, we issue or sell shares of our common stock or any equivalents that would entitle the holder of such securities to acquire shares of our common stock in one or more transactions to an unrelated third party at a price per share of less than $10.667, then we must issue a number of additional shares of common stock to the holder of such securities equal to (1) the aggregate purchase price paid by the original purchaser divided by such lesser purchase price less (2) the aggregate number of shares purchased by the original purchaser. We obtained such financing to fund our growing operations without altering our existing plans and to bolster our financial condition in advance of this offering.

Use of Funds

Our principal uses of cash are funding our operations, including the costs of acquisition and installation of solar energy systems and other working capital requirements. Over the past two years, our revenue and operating expenses have increased from year to year due to the significant growth of our business. Currently, our capital expenditures excluding our solar energy systems are minimal, however, we anticipate that our capital expenditures will increase as we continue to grow our business.

We expect our operating cash requirements to increase in the future as we increase sales and marketing activities to expand into new markets and increase sales coverage in markets in which we currently operate. In addition, the agreements governing each of our investment funds include options that, when exercised, either require us to purchase, or allow us to elect to purchase, our fund investor’s interest in the investment fund. Generally, these options are exercisable for a set period of time beginning upon the later of (1) five to six years after the date on which the last solar energy system included in the fund has been placed into service, or (2) the date on which the fund investor achieves a specified return on their investment, or (3) any longer period of time during which the tax credits received by the funds could be subject to recapture. The purchase price for the fund investor’s interest varies by fund, but is generally the greater of a specified amount, which ranges from approximately $0.7 million to $7.0 million, or the fair market value of such interest at the time the option is exercised, or an amount which causes the fund investor to achieve a specified return on investment. No options have been exercised or become exercisable to date, however, such options are expected to become exercisable in the future and the exercise of one or more options could require us to expend significant funds. Regardless of whether these options are exercised, we will need to raise financing to support our operations, and such financing may not be available to us on acceptable terms, or at all. If we are unable to raise financing when needed, our operations and ability to execute our business strategy could be adversely affected. We may seek to raise financing through the sale of equity, equity-linked securities or the incurrence of indebtedness. Additional equity or equity-linked financing may be dilutive to our stockholders. If we raise funding through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations.

 

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Historical Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

    Predecessor     Successor  
    Period from
January 1,
through
November 16,
2012
    Period from
November 17,
through
December 31,
2012
    Year Ended
December 31,
2013
    Six Months Ended
June 30,
 
          2013     2014  
                (Restated)              
                (In thousands)              

Consolidated cash flow data:

           

Net cash used in operating activities

  $ (2,890   $ (1,209   $ (20,873   $ (5,772   $ (58,217

Net cash used in investing activities

    (15,308     (8,014     (127,522     (49,798     (164,047

Net cash provided by financing activities

    18,113            20,873            142,783                43,920        241,456   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

  $ (85   $ 11,650      $ (5,612   $ (11,650   $         19,192   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

For the six months ended June 30, 2014, we had a net cash outflow from operations of $58.2 million. The cash outflow primarily resulted from our net loss of $76.2 million and increases in prepaid tax asset of $23.8 million, accounts receivable of $1.7 million, prepaid and other current assets of $8.9 million and other non-current assets of $6.3 million as well as decreases in accrued compensation of $3.4 million and accounts payable to related parties of $0.8 million. The cash outflow was primarily offset by non-cash items such as $10.5 million of depreciation and amortization, $35.9 million of deferred income taxes, $2.9 million of non-cash interest expense, $0.8 million of stock-based compensation, $0.7 million of amortized deferred financing costs and increases in accounts payable of $5.1 million, accrued and other current liabilities of $6.1 million and deferred revenue of $0.7 million.

For the six months ended June 30, 2013, we had a net cash outflow from operations of $5.8 million. This cash outflow primarily resulted from our net loss of $22.7 million, increases in prepaid tax asset of $3.4 million and accounts receivable and other current assets of $2.1 million. The cash outflow was partially offset by non-cash items such as $8.0 million of depreciation and amortization, $2.4 million of deferred income taxes, $0.8 million of non-cash interest expense and increases in accounts payable of $3.4 million, accounts payable to related parties of $0.7 million, accrued compensation of $4.1 million, accrued and other current liabilities of $2.8 million and deferred revenue of $0.3 million.

In 2013, we had a net cash outflow from operations of $20.9 million. This cash outflow primarily resulted from our net loss of $56.5 million and increases in prepaid tax asset of $30.7 million, accounts receivable and other current assets of $4.1 million and other non-current assets of $0.7 million, partially offset by non-cash items such as depreciation and amortization of $16.6 million, deferred income taxes of $30.9 million and stock-based compensation of $0.3 million. The net cash outflow was also offset by increases in accrued compensation of $10.4 million, $2.9 million of non-cash interest expense,

 

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accounts payable to related parties of $2.6 million, accounts payable of $1.4 million, accrued and other current liabilities of $4.6 million and deferred revenue of $1.3 million.

In the Successor Period ended December 31, 2012, we had a net cash outflow from operations of $1.2 million. This cash outflow primarily resulted from our net loss of $3.3 million as well as a $1.1 million non-cash deferred income tax decrease, partially offset by non-cash items such as depreciation and amortization of $1.8 million and $0.8 million of allocated expenses from Vivint which were accounted for as capital contributions.

In the Predecessor Period, we had a net cash outflow from operations of $2.9 million primarily resulting from our net loss of $13.4 million partially offset by allocated expenses from Vivint which were accounted for as capital contributions totaling $4.0 million, increases in accrued and other current liabilities of $4.8 million and accounts payable to related parties of $1.7 million.

Investing Activities

For the six months ended June 30, 2014, we used $164.0 million in investing activities of which $150.4 million was associated with the design, acquisition and installation of solar energy systems, $12.0 million was related to the acquisition of Solmetric, $1.6 million was related to the change in restricted cash associated with our term loan credit facility entered into in May 2014 and $0.1 million was related to the purchase of property, partially offset by receipt of $0.2 million of U.S. Treasury grants associated with the solar energy systems.

For the six months ended June 30, 2013, we used $49.8 million in investing activities of which $53.0 million was related to the design, acquisition and installation of solar energy systems and $3.5 million was related to the change in restricted cash associated with the guaranty agreements with fund investors partially offset by receipt of $6.7 million of U.S. Treasury grants associated with the solar energy systems.

In 2013, we used $127.5 million in investing activities, $134.1 million of which was related to the design, acquisition and installation of solar energy systems partially offset by receipt of $10.1 million of U.S. Treasury grants associated with the solar energy systems. In addition, amounts held as restricted cash related to guarantees we have provided for certain investment funds increased by $3.5 million.

In the Successor Period ended December 31, 2012, we used $8.0 million in investing activities, $11.1 million of which was related to the design, acquisition and installation of solar energy systems offset by receipt of $3.1 million of U.S. Treasury grants associated with the solar energy systems.

In the Predecessor Period, we used $15.3 million in investing activities, $18.3 million of which was related to the design, acquisition and installation of solar energy systems partially offset by $3.2 million of U.S. Treasury grants received associated with these solar energy systems.

Financing Activities

For the six months ended June 30, 2014, we generated $241.5 million from financing activities primarily comprised of $157.4 million in proceeds from investments by various fund investors and paid distributions to fund investors of $1.9 million. In addition, we received $114.0 million and repaid $101.0 million under our revolving lines of credit with related parties and

 

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received $75.5 million under our term loan credit facility entered into in May 2014. We also repaid $1.1 million on our capital lease obligation and paid $1.4 million of deferred offering costs.

For the six months ended June 30, 2013, we generated $43.9 million from financing activities primarily resulting from $22.4 million and $23.5 million in proceeds from investments by various fund investors and revolving lines of credit from a related party, respectively, and paid distributions to fund investors of $0.9 million. In addition, we repaid $2.0 million on our revolving line of credit with a third party and $0.4 million on our capital lease obligation and received capital contributions from 313 Acquisition LLC of $1.4 million.

In 2013, we generated $142.8 million from financing activities primarily resulting from $123.2 million in proceeds from investments by various fund investors and paid distributions to fund investors of $2.3 million. During 2013, we received $83.5 million and repaid $60.0 million under our revolving lines of credit with related parties. Additionally, we also repaid $1.0 million on our capital lease obligation and $2.0 million on our revolving line of credit with a third party and received capital contributions from 313 Acquisition LLC of $1.4 million.

In the Successor Period ended December 31, 2012, we generated $20.9 million from financing activities. We generated $8.1 million in proceeds from investments by various fund investors partially offset by distributions paid to fund investors of $0.3 million. We received an additional $15.0 million and repaid $4.5 million under our revolving lines of credit with related parties. We also received $2.5 million on our revolving line of credit with a third party.

In the Predecessor Period, we generated $18.1 million from financing activities of which $5.0 million was proceeds from the issuance of redeemable preferred stock. In addition, we generated $9.2 million in proceeds from investments by various fund investors and received $4.0 million under our revolving line of credit with a third party.

Contractual Obligations

Set forth below is information concerning our contractual commitments and obligations as of December 31, 2013:

 

     Payments Due by Period(1)(2)(3)  
     Less Than
1 Year
     1 to 3 Years      3 to 5 Years      More Than
5 Years
           Total        
     (In thousands)  

Revolving lines of credit, related party

   $       $ 21,444       $ 19,968       $       $ 41,412   

Distributions payable to non-controlling interests and redeemable non-controlling interests(4)

     1,620                                 1,620   

Capital lease obligations and interest

     1,508         2,466         156                 4,130   

Operating lease obligations(5)

     1,176         1,106         59                 2,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $         4,304       $       25,016       $      20,183       $             —       $ 49,503   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Does not include amounts related to redemption options held by fund investors. The redemption price for the fund investors’ interest in the respective fund is equal to the sum of: (a) any unpaid, accrued priority return, and (i) the greater of: (x) a fixed price and (b) the fair market value of such interest at the date the option is exercised. Due to uncertainties associated with estimating the timing and amount of the redemption price, we cannot determine the potential future payments that we could have to make under these redemption options. As of December 31, 2013, the fund investors have contributed an aggregate of $140.7 million into the funds. For additional information, see Note 10 to our consolidated financial statements included elsewhere in this prospectus.

 

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(2) Does not include amounts related to the $75.5 million term loan credit facility, entered into in May 2014, with certain financial institutions for which Bank of America, N.A. is acting as administrative agent. Prepayments are permitted under the credit facility, and the principal and accrued interest on any outstanding loans mature on December 15, 2014. For additional information, see Note 11 to our consolidated financial statements included elsewhere in this prospectus. All funds under this facility were fully drawn as of June 30, 2014.
(3) Does not include amounts related to the $350 million aggregation credit facility entered into in September 2014 with certain financial institutions for which Bank of America, N.A. is acting as administrative agent. Prepayments are permitted under the aggregation credit facility, and the principal and accrued interest on any outstanding loans mature on March 12, 2018. For additional information, see Note 20 to our consolidated financial statements included elsewhere in this prospectus. As of September 17, 2014, we had incurred an aggregate of $87.0 million in term loan borrowings under this aggregation credit facility.
(4) Does not include any potential contractual obligations that may arise as a result of the contractual guarantees we have made with certain investors in our investment funds. The amounts of any potential payments we may be required to make depend on the amount and timing of future distributions to the relevant fund investors and the investment tax credits that accrue to such investors from the funds’ activities. Due to uncertainties associated with estimating the timing and amounts of distributions and likelihood of an event that may trigger repayment of any forfeiture or recapture of investment tax credits to such investors, we cannot determine the potential maximum future payments that we could have to make under these guarantees. As a result of these guarantees, as of December 31, 2013, we were required to hold a minimum balance of $5.0 million in the aggregate, which is classified as restricted cash, non-current on our consolidated balance sheet.
(5) Does not include payments we will make under non-cancelable leases we entered into in May and September 2014 in anticipation of relocating our corporate office space to Lehi, Utah. We expect to make payments under these leases of approximately $0.2 million for the remainder of 2014, beginning in September 2014 when the lease terms commence, $1.2 million for 2015 and $3.1 million to $3.6 million per year from 2016 to 2020.

Off-Balance Sheet Arrangements

We include in our consolidated financial statements all assets and liabilities and results of operations of investment fund arrangements that we have entered into. We do not have any off-balance sheet arrangements.

Internal Control Over Financial Reporting

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the preparation, audits and interim reviews of our consolidated financial statements, we and our independent registered public accounting firm identified a material weakness in internal control over financial reporting. Under standards established by the Public Company Accounting Oversight Board of the United States, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Specifically, we and our independent registered public accounting firm identified a number of material errors and other audit adjustments in connection with the preparation, audits and interim reviews of our consolidated financial statements which resulted in the restatement of our consolidated financial statements as of and for the year ended December 31, 2013 and as of and for the three months ended March 31, 2014. As a result, we and our independent registered public accounting firm determined that a material weakness in our internal controls over financial reporting continued to exist as of June 30, 2014.

As of December 31, 2013 and through June 30, 2014, we did not design and implement sufficient controls and processes and did not have a sufficient number of qualified accounting, finance and tax personnel. Additionally, the nature of our investment funds increases the

 

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complexity of our accounting for the allocation of net income (loss) between our stockholders and non-controlling interests under the HLBV method and the calculation of our tax provision. As we enter into additional investment funds, which may have contractual provisions different from those of our existing funds, the calculation under the HLBV method and the calculation of our tax provision could become increasingly complicated. This additional complexity could increase the chance that we experience additional errors in the future, particularly because we have a material weakness in internal controls. In addition, our need to devote our resources to addressing this complexity could delay or prolong our remediation efforts and thereby prolong the existence of the material weakness. As a result, we and our independent registered public accounting firm determined that we did not have adequate procedures and controls and adequate number of personnel to ensure that accurate financial statements could be prepared on a timely basis.

We have begun taking numerous steps and plan to take additional steps to remediate the underlying causes of the material weakness. In November 2013, we hired a new chief financial officer and a new vice president of finance and in January 2014, we hired a new corporate controller as well as additional finance and accounting personnel since January 2014, which significantly increases our finance and accounting team’s experience in GAAP and financial reporting for publicly traded companies. We are also in the process of formalizing and implementing written policies and procedures for the review of account analyses, reconciliations and journal entries. In January 2014, we engaged third-party consultants to provide support over our accounting and financial reporting process including assisting us with our evaluation of complex technical accounting matters. In addition, we expect to retain consultants to advise us on making further improvements to our internal controls over financial reporting. We believe that these additional resources will enable us to broaden the scope and quality of our controls relating to the oversight and review of financial statements and our application of relevant accounting policies. Furthermore, we plan to implement and improve systems to automate certain financial reporting processes and to improve efficiency and accuracy. However, these remediation efforts are still in process and have not yet been completed. Because of this material weakness, there is heightened risk that a material misstatement of our annual or quarterly financial statements will not be prevented or detected. We plan to complete this remediation process as quickly as possible. Although we expect it will take at least a year, we cannot estimate how long it will take to remediate this material weakness. In addition, the remediation steps we have taken, are taking and expect to take may not effectively remediate the material weakness, in which case our internal control over financial reporting would continue to be ineffective. We cannot guarantee that we will be able to complete our remedial actions successfully. Even if we are able to complete these actions successfully, these measures may not adequately address our material weakness and may take more than a year to complete. In addition, it is possible that we will discover additional material weaknesses in our internal control over financial reporting or that our existing material weakness will result in additional errors in or restatements of our financial statements.

Upon the completion of this offering, we will be required to disclose changes made in our internal controls and procedures on a quarterly basis. We will be required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting commencing with the filing of our second annual report on Form 10-K. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will have to opine on the effectiveness of our internal control over financial reporting beginning at the date we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our management may conclude that our internal control over financial reporting is not

 

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effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is adverse if such firm is not satisfied with the level at which our controls are documented, designed, operated or reviewed. As a result, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. Our remediation efforts may not enable us to avoid a material weakness in the future. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

The restatement of certain of our financial statements referred to above was the result of errors that included, but were not limited to: (1) incorrectly accounting for income taxes, (2) incorrect inputs in the HLBV method of attributing net income or loss to non-controlling interests and redeemable non-controlling interests and (3) the incorrect classification of paid-in-kind interest in our statement of cash flows. Additionally, other immaterial errors and reclassifications were made to conform to the current presentation.

The corrections to our accounting for certain taxable gains realized on the sales of solar energy systems to our investment funds resulted in our recording a prepaid tax asset of $30.7 million (net of amortization of $0.5 million), an income tax payable of $3.0 million shown in the line item accrued and other current liabilities and a reduction to deferred tax assets of $28.2 million (reflected as a component of deferred tax liability, net), as of December 31, 2013. The corrections also resulted in our recording a prepaid tax asset of $41.2 million (net of amortization of $0.9 million), an income tax payable of $3.0 million shown in the line item accrued and other current liabilities and a reduction to deferred tax assets of $38.2 million (reflected as a component of deferred tax liability, net), as of March 31, 2014. Additionally, income tax expense increased by $0.5 million for the year ended December 31, 2013 and by $0.4 million for the three months ended March 31, 2014.

Corrections for income taxes also included corrections related to the accounting for certain tax credits for solar energy systems that were placed in service in Hawaii and related to the calculation of federal investment tax credits. The Company will receive a cash refund for the Hawaii tax credits which are treated similarly to Treasury grants and result in a decrease to the cost basis of the solar energy systems, net of $2.1 million with a corresponding increase to other receivables included in prepaid expense and other current assets as of December 31, 2013. As of March 31, 2014, this change resulted in a decrease to the cost basis of the solar energy systems of $2.4 million, net of amortization of $0.1 million, with a corresponding increase to other receivables included in prepaid expense and other current assets. Additionally, the recognition of the federal investment tax credits decreased income tax expense by $4.5 million and increased deferred tax assets by $2.8 million as of and for the year ended December 31, 2013. The recognition of the investment tax credits decreased income tax expense by $0.8 million and increased deferred tax assets by $3.6 million as of and for the three months ended March 31, 2014.

Correcting the inputs to the HLBV method resulted in a decrease in net loss attributable to non-controlling interests and redeemable non-controlling interests by $1.1 million and $7.7 million and corresponding decreases in net income attributable to common stockholders for the year ended December 31, 2013 and for the three months ended March 31, 2014, respectively. In addition, non-controlling interests increased by $1.5 million and $8.9 million and redeemable non- controlling interests decreased by $0.5 million and $0.1 million as of December 31, 2013 and March 31, 2014, respectively.

 

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The reclassification of paid-in-kind interest accrued under our revolving lines of credit with Vivint on our statement of cash flows resulted in a $2.9 million and $1.4 million increase in non-cash interest expense included in cash flows from operating activities and a $2.9 million and $1.4 million decrease in proceeds from revolving lines of credit, related party included in cash flows from financing activities for the year ended December 31, 2013 and for the three months ended March 31, 2014, respectively.

In addition to the above, we also identified and corrected certain other immaterial errors related to solar energy systems, net, stock-based compensation, accrued compensation and income tax expense. We have reclassified certain amounts in prior-period financial statements to align with the presentation of the consolidated financial statements as of and for the six months ended June 30, 2014. Specifically, we have reclassified certain amounts from sales and marketing and general and administrative to cost of revenue—operating leases and incentives and distributions payable to redeemable non-controlling interests to accrued and other current liabilities.

Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents and our indebtedness.

As of June 30, 2014, we had cash and cash equivalents of $25.2 million. Our cash equivalents are money market accounts and time deposits with maturities of three months or less at the time of purchase. Our primary exposure to market risk on these funds is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our consolidated financial statements.

In May 2014, we incurred an aggregate principal amount of $75.5 million in term borrowings under our credit facility, which borrowings accrue interest at floating rates. Currently, interest on such borrowings accrues at approximately 4.2%. If such borrowings had been outstanding as of December 31, 2013 and remained outstanding for all of 2014, the effect of a hypothetical 10% change in our floating interest rate on these borrowings would increase or decrease interest expense by approximately $0.3 million on an annual basis.

In September 2014, we entered into an aggregation credit facility that currently provides for the incurrence of up to $350 million of term loan borrowings, which borrowings accrue interest at floating rates. As of the date of this prospectus, we had incurred an aggregate of $87.0 million of term loan borrowings under such facility, which currently accrues interest at a rate of 3.8%. If the aggregation facility had been fully drawn at December 31, 2013 and remained outstanding for all of 2014, the effect of a hypothetical 10% change in our floating interest rate on these borrowings would increase or decrease interest expense by approximately $1.3 million on an annual basis.

All of our operations are in the United States and all purchases of our solar energy system components are denominated in U.S. dollars. However, our suppliers often incur a significant amount of their costs by purchasing raw materials and generating operating expenses in foreign currencies. If the value of the U.S. dollar depreciates significantly or for a prolonged period of time against these currencies (particularly the Chinese Renminbi), our suppliers may raise the prices they charge us, which could harm our financial results.

 

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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. GAAP require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flows and related footnote disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Our future consolidated financial statements will be affected to the extent that our actual results materially differ from these estimates.

We believe that the assumptions and estimates associated with our principles of consolidation, revenue recognition, solar energy systems, net, performance guarantees, impairment of long-lived assets, goodwill impairment analysis, stock-based compensation, provision for income taxes and non-controlling interests and redeemable non-controlling interests have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Principles of Consolidation

We consider each of our investment funds to be a separate variable interest entity, or VIE. We use a qualitative approach in assessing the consolidation requirement for these VIEs. This approach focuses on determining whether we have the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and whether we have the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. All of these determinations involve significant management judgments and estimates. We have determined that we are the primary beneficiary in all of our operational VIEs. We evaluate our relationships with the VIEs on an ongoing basis to ensure that we continue to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

Revenue Recognition

We sell the electricity that our solar energy systems produce through long-term power purchase agreements or we lease our solar energy systems through long-term leases. Prior to the first quarter of 2014, all of our long-term customer contracts were structured as power purchase agreements. In the first quarter of 2014, we began offering leases to residential customers in connection with our entry into the Arizona market. None of our leased solar energy systems had been placed in service as of June 30, 2014, and therefore no amounts were recorded in the period. On occasion, we have sold solar energy systems and photovoltaic installation software products and devices. We also derive a portion of our revenue from sales of SRECs. We recognize 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.

Operating Leases and Incentives Revenue

Through June 30, 2014, we primarily generated revenue from power purchase agreements with residential customers, under which the customer agrees to purchase all of the power

 

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generated by the solar energy system for the 20-year term of the power purchase agreement. In the power purchase agreement structure, we charge a fixed fee per kilowatt hour based on the amount of electricity the solar energy system actually produces, with an annual fixed percentage price escalation to address the impact of inflation and utility rate increases over the period of the contract. Customers have not historically paid any money upfront.

We have determined that these power purchase agreements should be accounted for as operating leases after evaluating the following lease classification criteria: whether there is a transfer of ownership or bargain purchase option at the end of the lease, whether the lease term is greater than 75% of the useful life, or whether the present value of minimum lease payments exceeds 90% of the fair value at lease inception.

Because our customers are charged based upon the actual amount of power generated at rates specified under the contracts, we consider customer payments under the power purchase agreements to be contingent lease payments which are excluded from minimum lease payments used for purposes of assessing the lease classification criteria above. Accordingly, we recognize customer payments as earned, assuming the other revenue recognition criteria discussed above are met.

We also apply for and receive upfront rebates offered by certain state and local governments on behalf of our customers for systems installed on certain of our customers’ premises. We consider these rebates to be minimum lease payments which are generally recognized on a straight-line basis over the life of the power purchase agreement.

We apply for and receive SRECs in certain jurisdictions for power generated by our solar energy systems. We generally recognize revenue related to the sale of SRECs upon delivery, assuming the other revenue recognition criteria have been met.

Operating leases and incentives revenue is recorded net of sales tax collected.

In the first quarter of 2014, we began offering legal-form leases to customers in connection with our entry into the Arizona market. The customer agreements are structured as legal-form leases due to local regulations that can be read to prohibit the sale of electricity pursuant to our standard power purchase agreement. Pursuant to the lease agreements, the customers’ monthly payment is a pre-determined amount calculated based on the expected solar energy generation and includes an annual fixed percentage price escalation (to address the impact of inflation and utility rate increases) over the period of the contracts, which are 20 years. We provide our lease customers a production guarantee, under which we agree to make a payment at the end of each year to the customer if the solar energy systems do not meet the guaranteed production level in the prior 12-month period. As of June 30, 2014, no systems related to customer agreements structured as legal-form leases were placed in service and as such, we have not recognized any revenue related to these leases.

Solar Energy System and Product Sales

Revenue from solar energy system sales is recognized upon delivery of the solar energy system, which we consider to have occurred when the solar energy system has passed inspection by the responsible city department, assuming the other revenue recognition criteria have been met.

 

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As a result of the Solmetric acquisition, we now enter into revenue arrangements that may consist of multiple elements. Our typical multiple-element arrangements involve sales of (1) photovoltaic installation hardware devices containing software essential to the hardware product’s functionality, or the photovoltaic device, and (2) stand alone software, both including the implied right for the customer to receive post-contract customer support, or PCS, with the purchase of our products.

For sales of photovoltaic devices, we allocate revenue between (1) the photovoltaic device and (2) PCS using the relative selling price method. Because we have not sold these deliverables separately, vendor-specific objective evidence of fair value, or VSOE, is not available. Additionally, we are unable to reliably determine the selling prices of similar competitor products and upgrades on a stand alone basis to determine third-party evidence of selling price. As such, the allocation of revenue is based on our best estimate of selling price, or BESP. The objective of BESP is to determine the price at which we would transact a sale if the product or service was sold on a stand-alone basis.

We determine BESP for a product or service by considering multiple factors including, but not limited to, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The determination of BESP is made through consultation with and formal approval by our management, taking into consideration our marketing strategy.

Our process for determining BESPs involves management’s judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. Should future facts and circumstances change, our BESPs and the future rate of related amortization for PCS related to future sales of photovoltaic devices could change. Factors subject to change include the PCS provided, the estimated value of PCS, the estimated or actual costs incurred to provide PCS, and the estimated period PCS is expected to be provided.

The consideration allocated to the delivered photovoltaic device is recognized at the time of shipment provided that the four general revenue recognition criteria discussed above have been met. The consideration allocated to the PCS is deferred and recognized ratably over the four year estimated life of the devices and the period during which the related PCS is expected to be provided.

For sales of software with PCS, revenue is recognized based on software revenue recognition accounting guidance. Because we are not able to determine VSOE for the PCS, the only undelivered element of the arrangement, revenue from the entire arrangement is recognized ratably over four years, which is the expected life of the software and the period during which the related PCS is expected to be provided.

U.S. Treasury Grants and Investment Tax Credits

Certain solar energy systems remain eligible to receive U.S. Treasury grants in lieu of investment tax credits under Section 1603 of the American Recovery and Reinvestment Act of 2009, as amended by the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of December 2010. Prior to the installation of such eligible systems, we submit an application to receive a grant. After installation is complete and the solar energy system is interconnected to the power grid, we will request disbursement of the funds, which are typically based on 30% of the tax basis of eligible solar energy systems. Once we have been notified that the U.S. Treasury Department has approved the disbursement of the grant proceeds for a solar energy system, we record a reduction in

 

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the basis of the solar energy system in the amount of cash to be received at the grant approval date. A catch-up adjustment to reduce depreciation expense is recorded in the period in which the grant is approved by the U.S. Treasury Department to recognize the portion of the grant that matches proportionally the depreciation for the period between when the solar energy systems are interconnected to the power grid and when the grants are approved by the U.S. Treasury Department. Such catch-up adjustments have not been significant to date. For the solar energy systems which are not eligible to receive U.S. Treasury grants, we will apply for and receive investment tax credits under Section 48(a) of the Internal Revenue Code. The amount for the investment tax credit is equal to 30% of the value of eligible solar property.

We determine the fair market value of the solar energy systems using valuation techniques that, consistent with industry practice, consider various factors, such as the cost of producing the solar energy systems, the estimated price that could be obtained in the market from the sale of the solar energy systems and the present value of the economic benefits expected to be generated by the solar energy systems, determine the fair market values of such systems. We then present the fair market value to the U.S. Treasury Department when we apply for grants or to the IRS for purposes of claiming investment tax credits.

We receive minimal allocations of investment tax credits as the majority of such credits are allocated to the fund investor. Some of our investment funds obligate us to make certain fund investors whole for losses that the investors may suffer in certain limited circumstances resulting from the disallowance or recapture of investment tax credits as a result of the IRS assessment of the fair value of such systems. We have concluded that the likelihood of a recapture event is remote and consequently have not recorded any liability in the consolidated financial statements for any potential recapture exposure.

Solar Energy Systems, Net

Solar energy systems are stated at cost, less accumulated depreciation and amortization. As in the section captioned “—U.S. Treasury Grants” above, we also applied for and received U.S. Treasury grants related to our solar energy systems. We record the U.S. Treasury grants as a reduction in the basis of the solar energy systems at the approval date of the grant. This accounting treatment results in decreased depreciation expense related to these solar energy systems over their useful lives.

Depreciation and amortization expense 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)

We commence depreciation of our solar energy systems once the respective systems have been installed and interconnected to the power grid.

The determination of the useful lives of assets included within solar energy systems involves significant management judgment.

 

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Solar Energy Performance Guarantees

Under our customer agreements that are structured as legal-form leases, we agree to make payments at the end of each year to our customers if the solar energy systems do not meet the guaranteed production level in the prior 12-month period. As of June 30, 2014, we had not placed in service any leased solar energy systems. Accordingly, we had not recorded any liabilities relating to these guarantees in this period.

Impairment of Long-Lived Assets and Indefinite-Lived Intangible Assets

The carrying amounts of our long-lived assets, including solar energy systems, property and intangible assets subject to depreciation and amortization, 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 we consider in deciding when to perform an impairment review include significant negative industry or economic trends, and significant changes or planned changes in our 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, we amortize the remaining carrying value over the new shorter useful life. No impairment of any long-lived assets was identified for any of the periods presented.

We will assess (or test) indefinite-lived intangible assets that were acquired as part of the acquisition of Solmetric Corporation for impairment on an annual basis, or whenever events or changes in circumstances indicate that the fair value is less than its carrying value. To test these intangible assets for impairment, we compare the fair value of the indefinite-lived asset with its carrying amount. In the event the carrying value exceeds the fair value of the assets, the assets are written down to their fair value. There has been no impairment of indefinite-lived intangible assets during any of the periods presented.

Goodwill Impairment Analysis

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and identifiable intangible assets acquired. We have goodwill recorded on our books as a result of push-down accounting from 313 Acquisition LLC applied as of the Acquisition date and our acquisition of Solmetric Corporation in January 2014. We have determined that we operate as one reporting unit. We perform our annual impairment test of goodwill as of October 1st of each fiscal year or whenever events or circumstances change or occur that would indicate that goodwill might be impaired. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, loss of key personnel, significant changes in the manner we use the acquired assets or the strategy for the overall business, significant negative industry or economic trends or significant underperformance relative to historical operations or projected future results of operations. In conducting the impairment test, we first assess qualitative factors, including those stated previously, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If the qualitative step is not passed, we perform a two-step impairment test whereby in the first step we must compare the fair value of the

 

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reporting unit with its carrying amount. If the carrying amount exceeds its fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying value of the goodwill. Any excess of the goodwill carrying value over the implied fair value is recognized as an impairment loss. We determined the two-step goodwill impairment test was not necessary based on the results of our qualitative assessment as of October 1, 2013.

Stock-Based Compensation

We have granted options at an exercise price per share not less than what the board of directors had determined was the fair market value per share of our underlying common stock on each date of grant. The common stock valuations were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Because our common stock is not currently publicly traded, the board of directors exercises significant judgment in determining the fair value of our common stock. Changes in judgments could have a material impact on our results of operations and financial position. Following completion of this offering and so long as our common stock is publicly traded, estimates regarding the fair value of our common stock will not be necessary.

The board of directors is comprised of a majority of non-employee directors that we believe have the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. In the absence of a public trading market for our common stock, the board of directors, with input from management, considered numerous objective and subjective factors to determine the common stock’s fair value as of the date of each option grant, including our operating and financial performance, financial condition, current business conditions and projections, the market performance of companies in the industry in which we compete, the hiring of key personnel and the availability of tax equity and debt financing.

In connection with the preparation of our financial statements for the year ended December 31, 2013, we re-evaluated the estimate of the fair value of our common stock for financial reporting purposes. As part of that re-evaluation, we engaged a third-party valuation specialist to assist us in the valuation of our common stock as of September 30, 2013 and December 31, 2013 on a retrospective basis. The methodology used in connection with such valuation was a guideline public company approach which involved applying a revenue multiple derived from a number of comparable public companies to our revenue forecasts. As a result of applying this different methodology and following an assessment of our progress at each relevant date, for financial reporting purposes the fair value per common share for each of the options granted in September 2013 and October 2013 was adjusted.

In connection with the finalization of this offering, we re-evaluated the estimate of the fair value of our common stock for financial reporting purposes in light of our progress with respect to the offering contemplated by this prospectus and the establishment of the price range set forth on the cover of this prospectus and adjusted the fair value per share for each of the options granted in 2014. In conducting such re-evaluation, we determined that there was no single event that caused the increase in the fair value of our common stock. Given our rapid growth and improvement in our prospects enabled by additional completed and potential tax equity, debt and equity financings, we determined that a straight line interpolation from the $2.93 fair value estimate as of December 31,

 

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2013 suggested by the common stock valuation described in the immediately preceding paragraph and the midpoint of the preliminary price range as of September 17, 2014 was an appropriate method of re-evaluating the fair value of our common stock for each of the stock-based compensation and other equity transactions completed between January 1, 2014 and September 17, 2014. Based on this re-evaluation, we expect to record incremental stock-based compensation for the six months ended June 30, 2014 of approximately $266,000 in our third quarter 2014 financial statements.

The table below lists all grants of options to purchase our common stock made from January 1, 2013 through the date of this prospectus.

 

Grant Date

   Number of
Shares
Underlying
Options
     Exercise
Price Per
Share
     Fair Value Per
Common Share
for Financial
Reporting
Purposes at
Grant Date
     Intrinsic
Value of
Stock
option
 

July 12, 2013

     3,141,178         $     1.00       $          1.00       $   

August 19, 2013

     644,118         1.00         1.00           

September 3, 2013

     3,529,412         1.00         1.47         0.47   

September 25, 2013

     264,706         1.00         1.47         0.47   

January 24, 2014

     2,278,677         1.30         4.29         2.99   

January 31, 2014

     220,588         1.30         4.69         3.39   

February 11, 2014

     661,765         1.30         5.25         3.95   

July 7, 2014

     320,000         4.14         13.57         9.43   

Expense related to stock-based compensation granted to employees is measured and recognized in the financial statements based on the fair value of the awards granted. The fair value of each stock-based award is estimated on the grant date using the Black-Scholes-Merton option-pricing model. The stock-based compensation expense, net of forfeitures, is recognized on an accelerated attribution basis over the requisite service period of an award, which is generally the award’s 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.

Use of the Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions, including (1) the fair value of the underlying common stock, (2) the expected term of the option, (3) the expected volatility of the price of our common stock, (4) risk-free interest rates and (5) the expected dividend yield of our common stock. The assumptions used in the option-pricing model represent our best estimates. These estimates involve inherent uncertainties and the application of our judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

 

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These assumptions and estimates are as follows:

 

    Fair Value of Common Stock.    Because our common stock is not yet publicly traded, the fair value of common stock must be estimated. The fair values of the common stock underlying our stock-based awards were determined by our board of directors, which considered numerous objective and subjective factors to determine the fair value of common stock at each grant date.

 

    Expected Term.    The expected term represents the period that our option awards are expected to be outstanding. We utilized the simplified method in estimating the expected term of options granted. The simplified method deems the term to be the average of the time to vesting and the contractual life of the options. We also considered additional factors including the expected lives used by a peer group of companies within the industry that we consider to be comparable to our business.

 

    Expected Volatility.    As we do not have a trading history for our common stock, the expected stock price volatility is derived from the average historical stock volatilities of a peer group of public companies within our industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock-based grants.

 

    Risk-Free Interest Rate.    The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.

 

    Dividend Yield.    We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

A summary of the significant assumptions used to estimate the fair value of equity awards during the Predecessor Period and the Successor Periods ended December 31, 2012 and December 31, 2013 and June 30, 2013 and 2014 were as follows:

 

    Predecessor     Successor  
    Period from
January 1,
through
November 16,
2012
    Period from
November 17,
through
December 31,
2012
    Year Ended
December 31,
2013
    Six Months Ended
June 30,
 
          2013     2014  

Expected term (in years)

    6.3               6.3                          —                          6.2   

Volatility

    67.0            80.0            87.1

Risk-free interest rate

    1.2            1.7            1.9

Dividend yield

    0.0            0.0            0.0

In addition to assumptions used in the Black-Scholes-Merton option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures since the adoption of our equity award plan. We routinely evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and expectations of future option exercise behavior. Changes in the estimated forfeiture rate can have a significant impact on our stock-

 

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based compensation expense as the cumulative effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements.

We will continue to use judgment in evaluating the expected term, expected volatility and forfeiture rate related to our stock-based compensation expense on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to the estimates of our expected volatility, expected terms and forfeiture rates, which could materially impact our future stock-based compensation expense as it relates to the future grants of our stock-based awards.

We recorded stock-based compensation expense of $0.2 million, $0, $0.3 million, $0 and $0.8 million in the Predecessor Period and the Successor Periods ended December 31, 2012 and 2013 and the six months ended June 30, 2013 and 2014. In future periods, we expect stock-based compensation expense to increase, due in part to our existing unrecognized stock-based compensation expense and as we grant additional stock-based awards to continue to attract and retain our service providers.

From July 2013 to June 2014, we issued stock options to purchase 9,728,681 shares of common stock with time and performance conditions. These awards had an aggregate grant date fair value of $13.6 million to be recognized as stock-based compensation expense over the expected term. As of June 30, 2014 we had $14.6 million of unrecognized stock-based compensation expense related to the outstanding time and performance conditions awards. The aggregate grant date fair value and unrecognized stock-based compensation expense amounts reflect the re-valuation of the fair value of our common stock as discussed above. The time-based awards are expected to be recognized over a weighted average period of 2.6 years. No compensation expense has been recorded for awards with performance conditions as it is not probable that the performance conditions will be achieved. The fair value of our company has risen over the past year; because the fair value of the underlying stock is an important factor in valuing stock options, the compensation expense associated with option grants will rise in 2014 as we continue to grant additional options to our employees.

Provision for Income Taxes

We account for income taxes under an asset and liability approach. Deferred income taxes 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.

We sell solar energy systems to the investment funds. As the investment funds are consolidated by us, the gain on the sale of the solar energy systems is not recognized in the consolidated financial statements. However, this gain is recognized for tax reporting purposes. Since these transactions are intercompany sales for book 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.

 

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We determine 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. We use 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.

Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations.

Non-Controlling Interests and Redeemable Non-Controlling Interests

Our non-controlling interests and redeemable non-controlling interests represent fund investors’ interests in the net assets of certain investment funds, which we consolidate, that we have entered into in order to finance the costs of solar energy systems under long-term customer contracts. We have determined that the provisions in the contractual arrangements of the investment funds represent substantive profit-sharing arrangements, which gives rise to the non-controlling interests and redeemable non-controlling interests. We have 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 using the 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 funds, assuming the net assets of these respective investment funds were liquidated at recorded amounts. The fund investors’ interest in the results of operations of these investment funds is determined as the difference in the non-controlling interests and redeemable non-controlling interest’s claim under the HLBV method at the start and end of each reporting period, after taking into account any capital transactions 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.

We classify certain non-controlling interests with redemption features that are not solely within our control outside of permanent equity on our consolidated balance sheets. 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.

 

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Emerging Growth Company Status

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

Recent Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

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BUSINESS

Overview

We offer distributed solar energy — electricity generated by a solar energy system installed at or near customers’ locations — to residential customers based on 20-year contracts at prices below their current utility rates. Our customers pay little to no money upfront, typically realize savings of 15% to 30% relative to utility-generated electricity immediately following system interconnection to the power grid and continue to benefit from guaranteed energy prices over the term of their contracts, insulating them against unpredictable increases in utility rates.

Our 20-year customer contracts generate predictable, recurring cash flows and establish a long-term relationship with homeowners. Through our investment funds, we own an interest in the solar energy systems we install and ownership of the solar energy systems allows us and the other fund investors to benefit from various local, state and federal incentives. Together, these cash flows and incentives facilitate our ability to obtain financing and to optimize our financial returns on investment. These cash flows are not impacted if a customer decides to move or sell the home prior to the end of the customer contract term because the customer contracts allow our customers to transfer their obligations to the new home buyer (subject to a creditworthiness determination). If the home buyer is not creditworthy or does not wish to assume the customer’s obligations, the contract allows us to require the customer to purchase the system. Our sources of financing are designed to offset our direct installation costs and most, if not all, of our allocated overhead expenses. Our direct relationship with homeowners also facilitates our ability to control quality and provide high levels of customer service and provides us with an opportunity to offer additional value-added products and services to our customers.

From our inception in May 2011 through June 30, 2014, we have experienced rapid growth, installing solar energy systems with an aggregate of 129.7 megawatts of capacity at more than 21,900 homes in seven states for an average solar energy system capacity of approximately 5.9 kilowatts. According to GTM Research, an industry research firm, we were the second largest installer of solar energy systems to the U.S. residential market with approximately 8% market share in 2013 and 9% in the first quarter of 2014 up from 1% in 2012, according to its ‘Q2 2014 PV Leaderboard’ report. We believe the key ingredients to our success include the following:

 

    High growth industry with a significant addressable market.    The market for residential distributed solar energy is growing rapidly and disrupting the traditional electricity market. According to GTM Research, an industry research firm, the U.S. residential solar energy market is expected to grow at a compound annual growth rate, or CAGR, of approximately 37% from 2012 through 2018. Residential distributed solar has currently penetrated less than 1% of its total addressable market in the United States.

 

   

Differentiated and highly scalable platform.    We have developed an integrated approach to providing distributed solar energy where we fully control the lifecycle of our customers’ experience including the initial professional consultation, design and engineering process, installation and ongoing monitoring and service. We deploy our sales force on a neighborhood-by-neighborhood basis, which allows us to cultivate a geographically concentrated customer base that reduces our costs and increases our operating efficiency. We couple this model with repeatable and highly scalable

 

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processes to establish warehouse facilities, assemble and train sales and installation teams and open new offices. We believe that our processes enable us to expand rapidly within existing markets and into new markets. We also believe that our direct sales model and integrated approach represent a differentiated platform, unique in the industry that accelerates our growth by maximizing sales effectiveness, delivering high levels of customer satisfaction and driving cost efficiency.

 

    Long-term, highly visible, recurring cash flow.    Our customers typically sign 20-year contracts for solar electricity generated by the system owned by us and pay us directly over the term of their contracts. These customer contracts generate recurring monthly customer payments. As of June 30, 2014, the average estimated nominal contracted payment for our customer contracts exceeded $30,000, and there is the potential for additional payments if customers choose to renew their contracts at the end of the term. The solar energy systems we install are eligible for investment tax credits, or ITCs, accelerated tax depreciation and other governmental incentives. We have historically financed the assets created by substantially all of these contracts through investment funds, which reduces our cost of capital to finance our operations.

As of the date of this prospectus, we have raised 10 investment funds to which investors such as banks have committed to invest approximately $543 million which will enable us to install solar energy systems of total fair market value approximating $1.3 billion. As of the date of this prospectus, we had tax equity commitments to fund approximately 81 MWs of future deployments, which we estimate to be sufficient to fund solar energy systems with a total fair market value of approximately $405 million. We intend to create additional investment funds with financial investors and potentially with corporate investors, and may also use debt, equity or other financing strategies to fund our operations.

We were founded in 2011 when Vivint, Inc., our sister company and a residential security solutions and home automation services provider, recognized an opportunity to replicate its strong direct-to-home sales model in the residential solar energy market. Vivint, Inc. had approximately 850,000 subscribers as of June 30, 2014, and we believe there will be a continued opportunity to leverage our relationship with Vivint to offer our solar energy systems to its customers in markets that we serve.

Market Opportunity

The market for residential distributed solar energy is growing rapidly and disrupting the traditional electricity market. According to research compiled by GTM Research, an industry research firm, 494 megawatts of capacity was installed within the U.S. residential solar energy market in 2012 and 2,135 megawatts of capacity is expected to be installed in 2016, the final year of the 30% federal investment tax credit, or ITC, for residential solar installations. In 2018, one year after the ITC is currently scheduled to decrease to 10%, 3,258 megawatts of capacity is expected to be installed within the U.S. residential solar energy market, representing a CAGR of approximately 37% from 2012. This market possesses significant growth opportunities as compared to the total U.S. electricity market, as distributed solar has penetrated less than 1% of its total addressable market in the residential sector. We believe that there is a significant opportunity for distributed solar energy to increasingly displace traditional retail electricity generated from fossil fuels.

 

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In recent years, declining solar energy system costs and increasing retail electricity prices have made distributed solar energy a cost effective power source for homeowners in an increasing number of markets. According to the Lawrence Berkeley National Laboratory, residential solar energy system costs decreased by 40% on a per watt basis from 2005 through 2012, or 7% annually for solar installations with capacities of 10 kilowatts or less. This trend, driven by the increased global production of solar panels and the resulting economies of scale, increased government incentives and declining solar panel raw material costs, has served to greatly increase the affordability of residential solar energy systems and benefit distributed solar providers.

Installed Prices of Residential PV Systems (10kW or less) as a Percent of Price in 2005

 

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Source: Lawrence Berkeley National Laboratory

Over this same period, average U.S. retail electricity prices from the power grid increased at a 3.3% CAGR, according to the Energy Information Administration, or EIA. As retail electricity prices increase, the number of markets in which distributed solar energy generation is an economically viable alternative for utility customers is expected to increase and we expect the relative economics of distributed solar energy in those markets to continue to improve. In many of the markets we currently serve, the utility rates have increased faster than the national average. States that rely heavily on oil-fired energy generation, such as Hawaii, have seen energy prices increase significantly as the price of oil has increased. Other factors, including investments in aging infrastructure, plant retirement, declining load and regulatory obligations and production requirements, are contributing to an increase in retail electric prices in select markets. For example, from 2007 to 2012, according to the U.S. Energy Information Administration, utility rates increased 12% nationwide while over the same period rates in Hawaii and Arizona increased 55% and 17%, respectively. More broadly, in the past 20 years, the combined average residential utility rate in our top markets of California and Hawaii has doubled.

 

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Average Residential Retail Utility Rates, 2005 to 2012

(Cents/kWh)

 

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Source: Energy Information Administration

Net metering is one of several key incentives that have enabled the growth of distributed solar in the United States. Net metering allows a homeowner to pay his or her local traditional utility only for their power usage net of production from the solar energy system installed on his or her roof, transforming the conventional relationship between customers and traditional utilities. Homeowners receive credit for the energy that the solar installation generates, and are reimbursed by the utility for excess generation in some utility markets. In states that allow for net metering, the customer typically pays for the net energy used or receives a credit against future bills at the retail rate if more energy is produced than consumed. Forty-three states, Puerto Rico and the District of Columbia have adopted some form of net metering. According to the EIA, the total number of net metered customers in the United States has grown at a CAGR of approximately 48%, from approximately 19,000 households in 2005 to approximately 300,000 households in 2012. Despite this rapid growth, in 2012 only 0.2% of all grid-connected households were engaged in some form of net metering. In 2013, however, net metering programs were subject to regulatory scrutiny in Arizona, California, Colorado, Idaho and Louisiana. Regulators in these states have considered imposing limits on the aggregate capacity of net metering generation, reducing the rate that net metering customers are paid for the power that they deliver back to the grid, whether the owner of a leased solar energy system is subject to property tax on the solar energy system and allegations that homeowners with net metered solar systems shift the costs of maintaining the electric grid onto non-solar ratepayers. Despite these considerations, regulators have generally upheld the programs in their current form, though some were subject to minor modification and others, including California, have been designated for additional review in the next few years.

Tax incentives, such as the ITC, accelerated depreciation and state incentives have also facilitated rapid growth in U.S. solar energy system installations. Solar energy system owners are generally allowed to claim a tax credit that is equal to 30% of the system’s eligible tax basis, which is generally the fair market value of the system. By statute, this tax credit is scheduled to decrease to 10% of the fair market value of a solar energy system on January 1, 2017. Although this scheduled reduction in the ITC will likely adversely impact growth in the distributed solar energy market, decreasing system costs, combined with increasing retail utility rates as described above, are expected to partially mitigate the impact of such reduction. In addition, industry sources have suggested that the reduction in the ITC in 2017 may be stepped down gradually over time, which we believe would further mitigate the impact of such reduction. The economics of purchasing a solar energy system are also improved by eligibility for accelerated depreciation, also known as the modified accelerated cost recovery system, or MACRS, depreciation which allows for the

 

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depreciation of equipment according to an accelerated schedule set forth by the Internal Revenue Service. The acceleration of depreciation creates a valuable tax benefit that reduces the overall cost of the solar energy system and increases the return on investment.

A number of market participants in our industry monetize federal tax credits through a variety of structured investments, also known as “tax equity.” Tax equity investments are generally structured as investments with limited recourse to us. In the context of the distributed solar energy market, tax equity investors make an upfront advance payment to a sponsor through an investment facility in exchange for a share of the tax attributes and cash flows emanating from an underlying portfolio of solar energy systems. In these tax equity investments, the U.S. federal tax attributes offset taxes that otherwise would have been payable on the investors’ other operations.

According to Bloomberg New Energy Finance, renewable energy tax equity investment commitments in 2013 totaled $7.1 billion. In recent years, renewable energy tax equity investment has shifted towards solar and away from other renewable energy investments such as wind, with solar accounting for 54% of 2013 renewable energy tax equity investment relative to 28% in 2012.

Additional financing alternatives for distributed solar energy have become increasingly available as the industry has developed. Securitization, which is the practice of pooling rights with respect to a large number of underlying contracts, such as power purchase agreements and leases, and selling interests in such pools as securities, represents an emerging financing strategy. Access to the capital markets through securitization may assist the solar energy market in achieving greater liquidity and provide an advantageous cost of capital to decrease further the cost of solar installations.

Increasing utility rates, decreasing component costs, the availability of incentives and the lower cost of financing have all contributed to reduce overall costs of distributed solar energy systems. As a result, a number of U.S. states are now achieving “grid parity,” the point at which the overall cost of solar-generated electricity matches the cost of utility-generated electricity. It is expected that the United States will achieve grid parity between 2014 and 2017. This prediction is based on a comparison of the estimated levelized cost of electricity in the solar photovoltaic market and the cost of grid generated retail electricity. The levelized cost of electricity in the solar photovoltaic market takes into account system costs, financing costs, insurance, operations and maintenance, depreciation and government incentives. The below graph shows the “Low Case,” “High Case” and “Base Case” scenarios, each based on varying assumptions. Specifically the three scenarios vary the estimates by increasing and decreasing capital costs per megawatt by 5%, the capacity factor by one percent and the discount rate by 1.5%.

 

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Solar Photovoltaic Market, The US Levelized Cost Of Electricity (LCOE) Comparison with Retail Electricity Prices, 2011-2025

 

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Source: Solar Photovoltaic Power Market to 2020, page 288, GBI Research, 2011.

Our Approach

We secure financing that enables our customers to access solar energy for little to no upfront cost to them. The key elements of our integrated approach to providing distributed solar energy include:

 

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    Professional consultation.    We deploy our direct-to-home sales force to provide in-person professional consultations to prospective customers to evaluate the feasibility of installing a solar energy system at their residence. Our sales closing and referral rates are enhanced by homeowners’ responsiveness to our direct-to-home, neighborhood-by-neighborhood outreach strategy.

 

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    Design and engineering.    We have developed a streamlined process that enables us to efficiently design and install a custom solar energy system that delivers significant customer savings. This process, which incorporates proprietary software, standardized templates and data derived from on-site surveys, allows us to design each system to comply with complex and varied state and local regulations and optimize system performance on a per panel basis. We continue to pursue technology innovation to integrate accurate system design into the initial in-person sales consultation as a competitive tool to enhance the customer experience and increase sales close rates.

 

    Installation.    We are a licensed contractor in every market we serve and are responsible for every customer installation. Once we complete the system design, we obtain all necessary building permits and begin installation. Upon completion, we schedule all required inspections and arrange for interconnection to the power grid. By directly handling these logistics, we control quality and make the system installation process simple and seamless for our customers. During every step of this process, we keep our customers apprised of the project status with regular updates from our account representatives. Controlling every aspect of the installation process allows us to minimize costs, ensure quality and deliver high levels of customer satisfaction. In addition, we compensate our installation personnel on a piece-rate basis such that they are only paid upon successful installation, which we have found further enhances both efficiency and quality.