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  • VIVINT SOLAR, INC. - d1lge852tjjqow.cloudfront.netd1lge852tjjqow.cloudfront.net/CIK-0001607716/0fe46bfd-c1a5-4e92-9... · UNITED STATES SECURITIES AND ... largest installer of solar
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-36642 VIVINT SOLAR, INC. (Exact name of Registrant as specified in its Charter) Delaware 45-5605880 ( State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 3301 N. Thanksgiving Way, Suite 500 Lehi, UT 84043 (Address of principal executive offices) (Zip Code) (877) 404-4129 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.01 Per Share; Common stock traded on the New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO x Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨ Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES x NO ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x 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 definition 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 x Non-accelerated filer ¨ (Do not check if a small reporting company) Small reporting company ¨ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x As of June 30, 2015, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price of $12.17 for shares of the registrant’s common stock as reported by the New York Stock Exchange, was approximately $264.1 million . As of March 2, 2016, there were 106,595,407 shares of registrant’s common stock outstanding. Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on June 6, 2016, are incorporated by reference into Part III of this report.

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  • UNITEDSTATESSECURITIESANDEXCHANGECOMMISSION

    Washington,D.C.20549

    FORM10-K

    (MarkOne)x ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

    ForthefiscalyearendedDecember31,2015OR

    TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934CommissionFileNumber001-36642

    VIVINTSOLAR,INC.(ExactnameofRegistrantasspecifiedinitsCharter)

    Delaware 45-5605880(Stateorotherjurisdictionofincorporationororganization)

    (I.R.S.EmployerIdentificationNo.)

    3301N.ThanksgivingWay,Suite500Lehi,UT84043

    (Addressofprincipalexecutiveoffices)(ZipCode)(877)404-4129

    (Registrantstelephonenumber,includingareacode)SecuritiesregisteredpursuanttoSection12(b)oftheAct:

    CommonStock,ParValue$0.01PerShare; CommonstocktradedontheNewYorkStockExchange

    SecuritiesregisteredpursuanttoSection12(g)oftheAct:None

    IndicatebycheckmarkiftheRegistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YESNOx

    IndicatebycheckmarkiftheRegistrantisnotrequiredtofilereportspursuanttoSection13or15(d)oftheAct.YESNOx

    IndicatebycheckmarkwhethertheRegistrant:(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheRegistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YESxNO

    IndicatebycheckmarkwhethertheRegistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T(232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheRegistrantwasrequiredtosubmitandpostsuchfiles).YESxNO

    IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-K(229.405)isnotcontainedherein,andwillnotbecontained,tothebestofRegistrantsknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.x

    IndicatebycheckmarkwhethertheRegistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionoflargeacceleratedfiler,acceleratedfiler,andsmallerreportingcompanyinRule12b-2oftheExchangeAct.(Checkone):

    Largeacceleratedfiler Acceleratedfiler x

    Non-acceleratedfiler (Donotcheckifasmallreportingcompany) Smallreportingcompany IndicatebycheckmarkwhethertheRegistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).YESNOx

    AsofJune30,2015,thelastbusinessdayoftheregistrantsmostrecentlycompletedsecondquarter,theaggregatemarketvalueofvotingstockheldbynon-affiliatesoftheregistrantbasedontheclosingpriceof$12.17forsharesoftheregistrantscommonstockasreportedbytheNewYorkStockExchange,wasapproximately$264.1million.

    AsofMarch2,2016,therewere106,595,407sharesofregistrantscommonstockoutstanding.

    PortionsoftheRegistrantsDefinitiveProxyStatementrelatingtotheAnnualMeetingofShareholders,scheduledtobeheldonJune6,2016,areincorporatedbyreferenceintoPartIIIofthisreport.

  • TableofContents

    PagePARTI Item1. Business 1Item1A. RiskFactors 35Item1B. UnresolvedStaffComments 35Item2. Properties 36Item3. LegalProceedings 36Item4. MineSafetyDisclosures 37

    PARTII Item5. MarketforRegistrantsCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities 38Item6. SelectedFinancialData 39Item7. ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations 41Item7A. QuantitativeandQualitativeDisclosuresAboutMarketRisk 67Item8. FinancialStatementsandSupplementaryData 68Item9. ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosure 110Item9A. ControlsandProcedures 110Item9B. OtherInformation 111

    PARTIII Item10. Directors,ExecutiveOfficersandCorporateGovernance 112Item11. ExecutiveCompensation 112Item12. SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters 112Item13. CertainRelationshipsandRelatedTransactions,andDirectorIndependence 112Item14. PrincipalAccountingFeesandServices 112

    PARTIV Item15. Exhibits,FinancialStatementSchedules 113

    i

  • PARTI

    Forward-lookingStatements

    Thisreport,includingthesectionsentitledBusiness,RiskFactors,andManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperationsandcertaininformationincorporatedbyreferenceintothisreportcontainforward-lookingstatementswithinthemeaningofSection27AoftheSecuritiesActof1933,asamended,andSection21EoftheSecuritiesExchangeActof1934,asamended.Forward-lookingstatementsareidentifiedbywordssuchasbelieve,anticipate,expect,intend,plan,will,may,seekandothersimilarexpressions.Youshouldreadthesestatementscarefullybecausetheydiscussfutureexpectations,containprojectionsoffutureresultsofoperationsorfinancialconditionorstateotherforward-lookinginformation.Thesestatementsrelatetoourfutureplans,objectives,expectations,intentionsandfinancialperformanceandtheassumptionsthatunderliethesestatements.

    Theseforward-lookingstatementsinclude,butarenotlimitedto:

    federal,stateandlocalregulationsandpoliciesgoverningtheelectricutilityindustry;

    theregulatoryregimeforourofferingsandforthird-partyownedsolarenergysystems;

    technicallimitationsimposedbyoperatorsofthepowergrid;

    thecontinuationoftaxrebates,creditsandincentives,includingchangestotheratesoftheincometaxcredit,orITC,beginningin2020;

    thepriceofutility-generatedelectricityandelectricityfromothersources;

    ourabilitytofinancetheinstallationofsolarenergysystems;

    ourabilitytoefficientlyinstallandinterconnectsolarenergysystemstothepowergrid;

    ourabilitytosustainandmanagegrowthandcosts;

    ourabilitytofurtherpenetrateexistingmarkets,expandintonewmarketsandexpandintomarketsfornon-residentialsolarenergysystems,suchasthecommercialandindustrialmarket,orC&I;

    ourabilitytodevelopnewproductofferingsanddistributionchannels;

    ourrelationshipwithoursistercompanyVivintInc.,orVivint,andTheBlackstoneGroupL.P.,oursponsor;

    ourabilitytomanageoursupplychain;

    thecostofsolarpanelsandtheresidualvalueofsolarpanelsaftertheexpirationofourcustomercontracts;

    thecourseandoutcomeoflitigationandotherdisputes;and

    ourabilitytomaintainourbrandandprotectourintellectualproperty.

    Incombinationwiththeriskfactorswehaveidentified,wecannotassureyouthattheforward-lookingstatementsinthisreportwillprovetobeaccurate.Further,ifourforward-lookingstatementsprovetobeinaccurate,theinaccuracymaybematerial.Inlightofthesignificantuncertaintiesintheseforward-lookingstatements,youshouldnotregardthesestatementsasarepresentationorwarrantybyusoranyotherpersonthatwewillachieveourobjectivesandplansinanyspecifiedtimeframe,oratall,oraspredictionsoffutureevents.Moreover,neitherwenoranyotherpersonassumesresponsibilityfortheaccuracyandcompletenessoftheforward-lookingstatements.Weundertakenoobligationtopubliclyupdateanyforward-lookingstatements,whetherasaresultofnewinformation,futureeventsorotherwise,exceptasrequiredbylaw.

    Item1.Business.

    BUSINESS

    Overview

    Weprimarilyofferdistributedsolarenergyelectricitygeneratedbyasolarenergysysteminstalledatornearcustomerslocationstoresidentialcustomersbasedon20-yearcontractsatpricesbelowtheircurrentutilityrates.Ourcustomerspaylittletonomoneyupfront,andtypicallysave20%to40%onsolar-generatedelectricityratesrelativetoutility-generatedelectricityratesfollowingsysteminterconnectiontothepowergridandcontinuetobenefitfromlocked-inenergypricesoverthetermoftheircontracts,insulatingthemagainstunpredictableincreasesinutilityrates.In2015,webeganofferingourcustomerstheoptiontopurchasesolarenergysystems.

    1

  • Our20-yearcustomercontractsgeneratepredictable,recurringcashflowsandestablishalong-termrelationshipwithhomeowners.Throughourinvestmentfunds,weownaninterestinthesolarenergysystemsweinstallandownershipofthesolarenergysystemsallowsusandtheotherfundinvestorstobenefitfromvariouslocal,stateandfederalincentives.Weobtainfinancingbasedonthesecashflowsandincentives.Whencustomersdecidetomoveorsellthehomepriortotheendoftheircontractterm,thecustomercontractsallowourcustomerstotransfertheirobligationstothenewhomebuyer,subjecttoacreditworthinessdetermination.Ifthehomebuyerisnotcreditworthyordoesnotwishtoassumethecustomersobligations,thecontractallowsustorequirethecustomertopurchasethesystem.Oursourcesoffinancingareusedtooffsetourdirectinstallationcostsandmost,ifnotall,ofourallocatedoverheadexpenses.

    FromourinceptioninMay2011throughDecember31,2015,wehaveexperiencedrapidgrowth,installingsolarenergysystemswithanaggregateof458.9megawattsofcapacityatmorethan68,500homesin12statesforanaveragesolarenergysystemcapacityofapproximately6.7kilowatts.AccordingtoGTMResearch,anindustryresearchfirm,wewerethesecondlargestinstallerofsolarenergysystemstotheU.S.residentialmarketin2015,capturingapproximately11%marketshareinthethirdquarterof2015,downfromapproximately16%inthethirdquarterof2014.WeattributethedecreaseinmarketsharetodistractionsfromtheproposedSunEdisonacquisitionandincreasedcompetitionintheresidentialsolarmarket.Webelievethekeyingredientstoourgrowthincludethefollowing:

    Highgrowthindustry.Themarketforresidentialdistributedsolarenergyisgrowingrapidlyanddisruptingthetraditionalelectricitymarket.AccordingtoGTMResearch,theU.S.residentialsolarenergymarketisexpectedtogrowatacompoundannualgrowthrate,orCAGR,ofapproximately19%from2015through2020.

    Differentiatedandscalableplatform.Wehavedevelopedanintegratedapproachtoprovidingresidentialdistributedsolarenergywherewefullycontrolthelifecycleofourcustomersexperienceincludingtheinitialprofessionalconsultation,designandengineeringprocess,installationandongoingmonitoringandservice.Wedeployoursalesforceonaneighborhood-by-neighborhoodbasis,whichallowsustocultivateageographicallyconcentratedcustomerbasethatreducesourcostsandincreasesouroperatingefficiency.Wecouplethismodelwithrepeatableandscalableprocessestoestablishwarehousefacilities,assembleandtrainsalesandinstallationteamsandopennewoffices.Webelievethatourprocessesenableustoexpandwithinexistingmarketsandintonewmarkets.Wealsobelievethatourdirectsalesmodelandintegratedapproachrepresentadifferentiatedplatform,uniqueintheindustrythatacceleratesourgrowthbymaximizingsaleseffectiveness,deliveringhighlevelsofcustomersatisfactionanddrivingcostefficiency.

    Long-term,highlyvisible,recurringcashflow.Themajorityofourcustomerssign20-yearcontractsforsolarelectricitygeneratedbythesystemownedbyusandpayusdirectlyoverthetermoftheircontracts.Thesecustomercontractsgeneraterecurringmonthlycustomerpayments.AsofDecember31,2015,theaverageestimatednominalcontractedpaymentforourcustomercontractswasapproximately$28,500,andthereisthepotentialforadditionalpaymentsifcustomerschoosetorenewtheircontractsattheendoftheterm.ThesolarenergysystemsweinstallareeligibleforITCs,acceleratedtaxdepreciationandotherutilityandgovernmentalincentives.Wehavehistoricallyfinancedtheassetscreatedbysubstantiallyallofthesecontractsthroughinvestmentfunds.

    AsofFebruary29,2016,wehadraised16residentialinvestmentfundstowhichinvestorssuchasbankshavecommittedtoinvestapproximately$1.1billionwhichwillenableustoinstallsolarenergysystemsoftotalfairmarketvalueapproximating$2.6billion.AsofFebruary29,2016,wehadremainingtaxequitycommitmentstofundapproximately55megawattsoffuturedeployments,whichweestimatetobesufficienttofundsolarenergysystemswithatotalfairmarketvalueofapproximately$241million.

    OurApproach

    Wesecurefinancingthatenablesourcustomerstoaccesssolarenergyforlittletonoupfrontcosttothem.Thekeyelementsofourintegratedapproachtoprovidingdistributedsolarenergyinclude:

    Professionalconsultation.Wedeployourdirect-to-homesalesforcetoprovidein-personprofessionalconsultationstoprospectivecustomerstoevaluatethefeasibilityofinstallingasolarenergysystemattheirresidence.Oursalesclosingandreferralratesareenhancedbyhomeownersresponsivenesstoourdirect-to-home,neighborhood-by-neighborhoodoutreachstrategy.

    Designandengineering.Wehavedevelopedaprocessthatenablesustodesignandinstallacustomsolarenergysystemthatdeliverscustomersavings.Thisprocess,whichincorporatesproprietarysoftware,standardizedtemplatesanddataderivedfromon-sitesurveys,allowsustodesigneachsystemtocomplywithcomplexandvariedstateandlocalregulationsandoptimizesystemperformanceonaperpanelbasis.Wecontinuetopursuetechnologyinnovationtointegrateaccuratesystemdesignintotheinitialin-personsalesconsultationasacompetitivetooltoenhancethecustomer

    2

  • experienceandincreasesalescloserates.Forexample,in2015wereleasedourinternal-useSunEye360sitesurveyandsystemdesigntoolthatimprovestheaccuracyofour

    solarenergygenerationestimatesanddecreasesthenumberofhomeswhereourpersonnelneedtogetontheroofforpre-installationmeasurements,whichreducestheinvasivenessoftheseinitialprocessesonthecustomerexperience.

    Installation.Wearealicensedcontractorinthemarketsweserveandareresponsibleforeachcustomerinstallation.Oncewecompletethesystemdesign,weobtainthenecessarybuildingpermitsandbegininstallation.Uponcompletion,wescheduletherequiredinspectionsandarrangeforinterconnectiontothepowergrid.Bydirectlyhandlingtheselogistics,wecontrolqualityandstreamlinethesysteminstallationprocessforourcustomers.Throughoutthisprocess,weappriseourcustomersoftheprojectstatuswithregularupdatesfromouraccountrepresentatives.

    Monitoringandservice.Wemonitortheperformanceofoursolarenergysystems,leveragingacombinationofinternallydevelopedsolutionsaswellascapabilitiesprovidedbyoursuppliers.Oursystemsusecommunicationgatewaysandmonitoringservicestocollectperformancedataandweusethisdatatoensurethatwedeliverqualityoperationsandmaintenanceservicesforoursolarenergysystems.Ifservicesarerequired,ourstronglocalpresenceenablesrapidresponsetimes.

    Referrals.Webelieveourcommitmenttodeliveringcustomersatisfactionandourconcentratedgeographicdeploymentstrategyhavegeneratedasignificantamountofsalesthroughcustomerreferrals,whichincreaseourneighborhoodpenetrationrates,lowerourcustomeracquisitioncostsanddriveourgrowth.Ourfinancialreturnsalsobenefitfromthecostsavingsderivedfromincreasingthedensityofinstallationsinaneighborhood.

    OurStrategy

    Ourgoalistobecomethepremierproviderofdistributedsolarenergy.Keyelementsofourstrategyinclude:

    Furtherpenetratingourexistingmarkets.Whilewehavechosentoinitiallyintroduceoursolarenergysystemsinstateswhoseutilityprices,sunexposure,climateconditionsandregulatorypoliciesprovideforthemostcompellingmarketfordistributedsolarenergy,webelievethatmanyofthosestatesarestillsignificantlyunderpenetrated.Accordingly,weintendtoincreaseourpresenceinmanyofthesemarketsbyintroducingoursolarenergysystemsintonewneighborhoodsandcommunitiesinstatesinwhichwealreadyhaveoperations.Weintendtoleverageourexistingcustomerbasetogrowinthesemarketsatlowercustomeracquisitionandinstallationcostsrelativetoourcompetitors.Inaddition,wehavecomplementedourexistinggo-to-marketstrategywithoutrightsalesofsolarenergysystems.

    Expandingintonewlocationsandcommercialmarkets.Toenlargeouraddressablemarket,weplantoexpandourpresencetonewstatesandwehaveenteredtheC&Imarket,whichincludessmallbusinessessuchascommunityretailersaswellaslargerretailersandmanufacturers.Weplantopursuesimilardebt,equityandotherfinancingstrategiesconsistentwithourapproachintheresidentialmarket,includingcreatinginvestmentfunds,tohelpfinanceourC&Ioperations.InMay2015,weenteredintoaC&Isolarinvestmentfundarrangementwithafundinvestor.AsofDecember31,2015,wehavecontractsinplacewithcommercialoff-takersbutnoprojectshavebeenacceptedintothefund.ThedevelopmentcycleofC&Iprojectsistypicallylongerthanthedevelopmentofresidentialsolarenergysystemsduetocomplexitiesassociatedwithlargersystemsizesandinstallations.TheprojectapprovalprocessbythefundinvestorhasbeendelayedduetouncertaintyrelatedtotheproposedSunEdisonacquisition.

    Capitalizingonopportunitiestoincreasesalesandlowercosts.Weintendtocapitalizeonouropportunitiestoincreasesalesandlowercoststhroughinternaldevelopment

    initiativesandalternativefinancingstructures.Weplantomakeadditionalinvestmentsinnewtechnologiesrelatedtooursystemdesignandinstallationandongoingcustomerservicepractices.Suchinvestmentswillenableustocontinuetoimproveouroperatingefficiency,coststructureandcustomersatisfaction.

    Buildingandleveragingstrategicrelationships.Weplantobuildandleveragestrategicrelationshipswithnewandexistingpartnerstogrowourbusinessanddrivecostreductions.Forexample,inadditiontoourdirectsaleschannel,wearecurrentlyexploringopportunitiestosellsolarenergysystemstocustomersthroughanumberofdistributionchannelsincludingrelationshipswithrealestatemanagementcompanies,homebuilders,homeimprovementstores,largeconstruction,electricalandroofingcompaniesandotherthirdpartiesthathaveaccesstolargenumbersofpotentialcustomers.InFebruary2016,weenteredintoanagreementwitharealestatemanagementcompanytoinstallsolaron488homesinUtah.Weexpecttoenterintoothersimilaragreementswithrealestatemanagementcompanies.Inaddition,weexpecttobenefitfromBlackstonesnetworkofstrategicrelationships.

    3

  • CustomerContracts

    Priortothefirstquarterof2014,allofourlong-termcontractswerestructuredaspowerpurchaseagreements.In2014,webeganofferinglegal-formleasestoresidentialcustomers.In2015,webeganofferingcontractswherebycustomerscouldpurchasesolarenergysystemswithcashorenterintoaloanproductadministeredbyathirdparty.Ofourover68,500cumulativeinstallationsthroughDecember31,2015,approximately1,300systemswereleased.ThroughDecember31,2015,ademinimisnumberweresold;however,weexpectinstallationsrelatedtosalestogrowinfutureperiods.

    Inthepowerpurchaseagreementstructure,wechargecustomersafeeperkilowatthourbasedontheamountofelectricitythesolarenergysystemactuallyproduces.Intheleasestructure,thecustomersmonthlypaymentisfixedbasedonacalculationthattakesintoaccountexpectedsolarenergygeneration.Theleaseincludesaperformanceguaranteeunderwhichweagreetorefundaproportionofthecustomerpaymentsiftheleasedsolarenergysystemdoesnotmeettheannualguaranteedenergyproductionlevel.AsofDecember31,2015,theaverageFICOscoreofourcustomerswasapproximately760.Thepowerpurchaseagreementandleasetermsaretypicallyfor20years,andallofthepricesthatwechargetoourcustomersaresubjecttopre-determinedannualfixedpercentagepriceescalationsasspecifiedinthecustomercontract.SinceJanuary2014,substantiallyallofourcustomercontractshaveincludedanannualpriceescalatorof2.9%.Overthetermoftheseagreements,weoperatethesystemsandagreetomaintainthemingoodcondition.Customerswhobuyenergyfromusunderpowerpurchaseagreementsorleasesystemsarecoveredbyourworkmanshipwarrantyequaltothelengthofthetermoftheseagreements.

    SalesandMarketing

    Weplaceourintegratedresidentialsolarenergysystemsthroughascalablesalesorganizationthatprimarilyusesadirect-to-homesalesmodel.Webelievethatahigh-touch,customer-focusedsellingprocessisimportantbefore,duringandafterthesaleofourproductstomaximizeoursalessuccess.Themembersofoursalesforcetypicallyresideandworkwithinthemarkettheyserve.Wealsogenerateasignificantamountofsalesthroughcustomerreferrals.Wehavefoundthatcustomerreferralsincreaseinrelationtoourpenetrationinaparticularmarketandshortlyafterenteringanewmarketbecomeanincreasinglyeffectivewaytomarketoursolarenergysystems.Inadditiontodirectsales,weselltocustomersthroughourinsidesalesteamandthroughourretailchannelthatreachesnewcustomersatkiosksinmallsandotherlocations.Wealsocontinuetoexploreopportunitiestosellsolarenergysystemstocustomersthroughanumberofotherdistributionchannels,includingrelationshipswithrealestatemanagementcompanies,homebuilders,homeimprovementstores,largeconstruction,electricalandroofingcompaniesandotherthirdpartiesthathaveaccesstolargenumbersofpotentialcustomers.

    Weestablishasalesofficeineachmarketthatweenter.Atypicalsalesteammayconsistof15to20salesrepresentatives,dependingonthesalesregion,whichwerefertoassalesmanagers,andonetotwodistrictmanagers.Salesmanagersaretypicallyrecruitedbydistrictmanagersorthroughoursalesrecruitingteam.Thesesalesteamsaresupportedbyapproximately30installationtechniciansandanoperationsmanager.Therearealsoregionalmanagerswhogenerallyoversee10to20salesoffices.AsofDecember31,2015,wehad66totalsalesoffices.

    OperationsandSuppliers

    Wepurchasesolarpanelsdirectlyfrommultiplemanufacturers.During2015,TrinaSolarLimited,YingliGreenEnergyAmericas,Inc.andJinkoSolarHoldingCo.,Ltd.accountedforsubstantiallyallofoursolarphotovoltaicmodulepurchasesandEnphaseEnergy,Inc.andSolarEdgeTechnologiesInc.accountedforsubstantiallyallofourinverterpurchases.EcolibriumSolar,EcoFastenSolarandMountingSystemsInc.accountedforsubstantiallyallofourrackingpurchases.Wegenerallysourcetheotherproductsrelatedtooursolarenergysystems,suchasfasteners,wiringandelectricalfittings,throughavarietyofdistributors.

    Ifwefailtodevelop,maintainandexpandourrelationshipswiththeseorothersuppliers,ourabilitytomeetanticipateddemandforoursolarenergysystemsmaybeadverselyaffected,orwemayonlybeabletoofferoursystemsathighercostsorafterdelays.Ifoneormoreofthesuppliersthatwerelyupontomeetanticipateddemandceasesorreducesproductionduetoitsfinancialcondition,acquisitionbyacompetitororotherwise,itmaybedifficulttoquicklyidentifyalternativesuppliersortoqualifyalternativeproductsoncommerciallyreasonableterms,andourabilitytosatisfythisdemandmaybeadverselyaffected.

    Wescreenallsuppliersandcomponentsbasedonexpectedcost,reliability,warrantycoverage,easeofinstallationandotherancillarycosts.Wetypicallyenterintomastercontractarrangementswithourmajorsuppliersthatdefinethegeneraltermsandconditionsofourpurchases,includingwarranties,productspecifications,indemnities,deliveryandothercustomaryterms.Wetypicallypurchasesolarpanels,invertersandrackingfromoursuppliersatthenprevailingpricespursuanttopurchaseordersissuedunderourmastercontractarrangements.

    4

  • Thedecliningcostofsolarpanelsandtherawmaterialsnecessarytomanufacturethemhasbeenakeydriverinthepricewechargeforelectricityandcustomeradoptionofsolarenergy.Accordingtoindustryexperts,solarpanelandrawmaterialpricesarenotexpectedtocontinuetodeclineatthesamerateastheyhaveoverthepastseveralyears.Theresultingpriceswepayforcomponentscouldslowourgrowthandcauseourfinancialresultstosuffer.InthepastwehavepurchasedvirtuallyallofthesolarpanelsusedinoursolarenergysystemsfrommanufacturersbasedinChinaandweexpectthatourmanufacturerswillbegintoseeklowertariffcountriessuchasVietnam,MalaysiaandThailand.

    AsofDecember31,2015,weoperatedinArizona,California,Connecticut,Hawaii,Maryland,Massachusetts,NewJersey,NewMexico,NewYork,Pennsylvania,SouthCarolinaandUtah.OurcorporateheadquartersarelocatedinUtah.Wemanageinventorythroughourlocalwarehousesandmaintainafleetofnearly900trucksandothervehiclestosupportourinstallersandoperations.In2015,ourfieldteamscompletedonaverageapproximately2,730residentialinstallationspermonth.Ourprojectmanagementteamssimultaneouslymanagethousandsofprojectsastheymovethroughthestagesofengineering,permitting,installation,maintenanceandmonitoring.

    Weofferaninstallationwarrantythatthesolarenergysystemsunderourcustomercontractswillbefreefrommaterialdefectsindesignandworkmanshipforthetermofthecontractaswellasalimitedwarrantyonroofpenetrations.Wearealsoobligatedtomaintainthesolarenergysystemsingoodconditionforthetermofthecontractorforastatedperiod,usually20years.

    Weprovideaperformanceguaranteetoourleasecustomersthatrequiresustorefundmoneytothelesseeifthesolarenergysystemfailstogeneratetheminimumamountofelectricityinagiventerm,asspecifiedinthelease.Wecompensatecustomersiftheirsystemsproducelessenergythantheguaranteedamountinanygivenyearbymakingapaymenttocustomerswithunder-performingsystems.ThroughDecember31,2015,suchcompensationhasbeendeminimis.AsofDecember31,2015,approximately1,300ofoursystemsinservicehadbeenleased.Asthenumberofleasedsystemsgrows,paymentsforunderperformingsystemsmayincreaseovertimeandmayvaryfromperiod-to-periodbasedonanumberoffactors,includingweatherconditionsintheareasinwhichweleasesystems,whichmayadverselyimpactourresultsofoperations.

    Wefurtherofferarangeofwarrantiesonoursolarenergysystemstoourinvestmentfunds.Allofoursystemsfeatureaworkmanshipwarrantyduringwhichweareobligated,atourcostandexpense,tocorrectdefectsinourinstallationwork,whichdependingontheparticularinvestmentfund,isforperiodsoffivetotwentyyears.Generallyourmaintenanceobligationstoourinvestmentfundsdonotincludethecostofpanels,invertersorracking,shouldsuchmajorcomponentsrequirereplacement.Thecostofsuchcomponentsareborneinsteadbytheapplicableinvestmentfund,althoughweareobligatedtoinstallsuchequipmentaspartofourservicescoveredbytheagreedmaintenanceservicesfee.ThisobligationissatisfiedbyVivintSolarDeveloper,LLC,onbehalfofVivintSolarProvider,LLC,whichprovidesoperationsandmaintenanceservicestoeachofourinvestmentfunds.AspartofVivintSolarProvidersoperationsandmaintenancework,weprovideapass-throughoftheinverterandpanelmanufacturerswarrantycoveragetoourcustomers,whichgenerallyrangefrom10to25years.Wealsoprovideongoingserviceandrepairduringtheentiretermofthecustomerrelationship,regardlessofwhetherornotsuchrepairsarecoveredbyouroramanufacturerswarranty.Weexpectthecostsweincurinprovidingtheseserviceswillcontinuetogrowasthenumberofsystemsinourportfolioincreasesandasinstalledsolarenergysystemsage.

    Competition

    Webelievethatourprimarycompetitorsarethetraditionalutilitiesthatsupplyelectricitytoourpotentialcustomers.Wecompetewiththesetraditionalutilitiesprimarilybasedonprice(centsperkilowatthour),predictabilityoffutureprices(byprovidingpre-determinedannualpriceescalations)andtheeasebywhichcustomerscanswitchtoelectricitygeneratedbyoursolarenergysystems.Webelievethatwecompetefavorablywithtraditionalutilitiesbasedonthesefactorsinthestateswhereweoperate.

    Wealsocompetewithcompaniesthatarenotregulatedliketraditionalutilitiesbutthathaveaccesstothetraditionalutilityelectricitytransmissionanddistributioninfrastructurepursuanttostateandlocalpro-competitiveandconsumerchoicepoliciesandwithsolarcompanieswithbusinessmodelsthataresimilartoours,suchasSolarCityCorporationandSunrunInc.Webelievethatwecompetefavorablywiththesecompanies;however,in2015,weexperiencedadecreaseinmarketsharewhichweattributetodistractionsassociatedwiththeproposedSunEdisonacquisition.

    5

  • Inaddition,wecompetewithsolarcompaniesinthedownstreamvaluechainofsolarenergy.Forexample,wefacecompetitionfrompurelyfinancedrivenorganizationsthatacquirecustomersandthensubcontractouttheinstallationofsolarenergysystems,frominstallationbusinessesthatseekfinancingfromexternalparties,fromlargeconstructioncompaniesandutilitiesandincreasinglyfromsophisticatedelectricalandroofingcompanies.Thesedistributedenergycompetitorstypicallyworkincontractualarrangementswiththirdparties,leavingthecustomerinthepositionofhavingtodealwithdifferentcompaniesfordifferentaspectsoftheirsolarenergysystems.Webelievethatwecompetefavorablywiththesecompaniesbecauseweofferanintegratedapproachtoresidentialsolarenergysystems,whichincludesin-housesales,financing,engineering,installation,maintenanceandmonitoring.Manyofourcompetitorsofferonlyasubsetoftheservicesweprovide.Asidefromsimplecostefficiency,weofferdistinctpracticalbenefitsasanall-in-oneprovidersuchasprovidingasinglepointofcontactandaccountabilityforourofferingsduringtherelationshipwithourcustomers.Further,wearenotdependentoninstallationsubcontractors,enablingustobetterscaleourbusinesswhilemaintainingqualitycontrol.

    TechnologyandIntellectualProperty

    AsofDecember31,2015,we,directlyorthroughourwhollyownedsubsidiaryVivintSolarLabs(formerlyknownasSolmetricCorporation)hadfivepatentsand12pendingapplicationswiththeU.S.PatentandTrademarkOffice.Thesepatentsandapplicationsrelateprimarilytoshadeandsiteanalysis.Ourissuedpatentsstartexpiringin2026.Weintendtofileadditionalpatentapplicationsasweinnovatethroughourresearchanddevelopmentefforts.

    VivintSolarLabsisourresearchanddevelopmentteamfocusedonproprietaryphotovoltaicinstallationinstrumentsandsoftware.InFebruary2015,wedecidedtodiscontinueexternalsalesoftwoofthethreemainVivintSolarLabsproducts,whichwereattheendoftheirproductlifecycles.WewillcontinuesellingthePVAnalyzerproduct,whichiscommerciallyusedincommissioning,auditing,operating,maintainingandtroubleshootingissueswithphotovoltaicsystems.Wewillcontinuetodevelopandproducethediscontinuedproductsforinternaluseonly.

    Aspartofourstrategy,wemayexpandourtechnologicalcapabilitiesthroughtargetedacquisitionssuchasSolmetric,licensingtechnologyandintellectualpropertyfromthirdparties,jointdevelopmentrelationshipswithpartnersandsuppliersandotherstrategicinitiativesaswestrivetooffertheindustrysbestoperationalefficiency,performanceprediction,operationsandmanagement.

    GovernmentRegulation,PoliciesandIncentives

    GovernmentRegulation

    WearenotregulatedasapublicutilityintheUnitedStatesundercurrentapplicablenational,stateorotherlocalregulatoryregimeswhereweconductbusiness.

    Tooperateoursystemsweobtaininterconnectionpermissionfromtheapplicablelocalprimaryelectricutility.Dependingonthesizeofthesolarenergysystemandlocallawrequirements,interconnectionpermissionisprovidedbythelocalutilityandusand/orourcustomer.Inalmostallcases,interconnectionpermissionsareissuedonthebasisofastandardprocessthathasbeenpre-approvedbythelocalpublicutilitycommissionorotherregulatorybodywithjurisdictionovernetmeteringprocedures.Wemaintainautilityadministrationfunction,withprimaryresponsibilityforengagingwithutilitiesandensuringourcompliancewithinterconnectionrules.

    Ouroperationsaresubjecttostringentandcomplexfederal,stateandlocallaws,includingregulationsgoverningtheoccupationalhealthandsafetyofouremployeesandwageregulations.Forexample,wearesubjecttotherequirementsofthefederalOccupationalSafetyandHealthAct,asamended,orOSHA,theU.S.DepartmentofTransportation,orDOT,andcomparablestatelawsthatprotectandregulateemployeehealthandsafety.WestrivetomaintaincompliancewithapplicableOSHA,DOTandsimilargovernmentregulations;however,asdiscussedinthesectioncaptionedRiskFactorsCompliancewithoccupationalsafetyandhealthrequirementsandbestpracticescanbecostly,andnoncompliancewithsuchrequirementsmayresultinpotentiallysignificantmonetarypenalties,operationaldelaysandadversepublicity,therehavebeeninstancesinwhichweexperiencedworkplaceaccidentsandreceivedcitationsfromregulators,resultinginfines.Suchinstanceshavenotmateriallyimpactedourbusinessorrelationswithouremployees.

    GovernmentPolicies

    NetmeteringisoneofseveralkeypoliciesthathaveenabledthegrowthofdistributedsolarintheUnitedStates.Netmeteringallowsahomeownertopayhisorherlocaltraditionalutilityonlyfortheirpowerusagenetofproductionfromthesolarenergysysteminstalledonhisorherroof.Wherethecustomersutilityprovidesfornetmetering,thecustomertypicallypaysforthenetenergyusedorreceivesacreditagainstfuturebillsattheretailrateifmoreenergyisproducedthanconsumed.Homeownersreceivecreditfortheenergythatthesolarinstallationexportstothelocalpowergrid,andarereimbursedbytheutilityfornetexcess

    6

  • generationinsomeutilitymarkets,includingsomeofthoseinwhichweoperate.Forty-onestates,PuertoRico,theDistrictofColumbia,AmericanSamoaandtheU.S.VirginIslandshaveadoptedsomeformofnetmeteringlaworregulation.AccordingtotheU.S.EnergyInformationAdministration,orEIA,thetotalnumberofnetmeteredcustomersintheUnitedStateshasgrownataCAGRofapproximately90%,fromapproximately19,000householdsin2005toapproximately6,213,130householdsin2014.NetmeteringprogramshavebeensubjecttoregulatoryscrutinyorlegislativeproposalsinArizona,California,Colorado,Hawaii,Nevada,PuertoRico,Utahandseveralotherstates.Regulatorsinthesestateshaveconsideredimposinglimitsontheaggregatecapacityofnetmeteringgeneration,feesonnetmeteringcustomers,reducingtheratethatnetmeteringcustomersarepaidforthepowerthattheydeliverbacktothegridandallegationsthathomeownerswithnetmeteredsolarsystemsshiftthecostsofmaintainingtheelectricgridontonon-solarratepayers.InCalifornia,thePublicUtilitiesCommissionlargelyupheldnetmeteringinitscurrentformwithfullretailcompensationforexports,butdidimposesomeadditionalfeesonnetmeteringcustomers,andwillrequiresuchcustomerstotakeserviceontime-of-userates.In2015,HawaiisPublicUtilitiesCommissionsignificantlyloweredtherateofcompensationpaidtonetmeteringcustomers.Inlate2015,theNevadaPublicUtilitiesCommissionvotedinfavorofaplanwhichlimitsexportcompensationtonetmeteringcustomersandimposedhighmonthlyfees,whichgreatlyreducedtheeconomicbenefittoNevadacustomersofresidentialsolar.AsaresultwenolongerhaveapresenceinNevada.

    GovernmentIncentives

    Federal,stateandlocalgovernmentbodiesandutilitiesprovideincentivestovariousparties,includingowners,endusers,distributors,systemintegratorsandmanufacturersofsolarenergysystemstopromotesolarenergy.Theseincentivescomeinvariousforms,includingrebates,taxcreditsandotherfinancialincentivessuchassystemperformancepayments,paymentsforrenewableenergycreditsassociatedwithrenewableenergygenerationandexclusionofsolarenergysystemsfrompropertytaxassessments.Theseincentivesenableustolowerthepricewechargeourcustomers,helpingtocatalyzecustomeracceptanceofsolarenergyasanalternativetoutility-providedpower.

    TheFederalgovernmentcurrentlyoffersa30%ITCunderSection48(a)oftheInternalRevenueCodefortheinstallationofcertainsolarpowerfacilities;legislationwaspassedinDecember2015whichextendedthis30%rateuntilDecember31,2019.Theratewilldecreaseto26%in2020and22%in2021.Bystatute,thistaxcreditisscheduledtodecreaseto10%onJanuary1,2022.

    Theeconomicsofpurchasingasolarenergysystemarealsoimprovedbyeligibilityforaccelerateddepreciation,alsoknownasthemodifiedacceleratedcostrecoverysystem,orMACRS,whichallowsforthedepreciationofequipmentaccordingtoanacceleratedscheduleestablishedbytheInternalRevenueService.Theaccelerationofdepreciationcreatesavaluabletaxbenefitthatreducestheoverallcostofthesolarenergysystemandincreasesthereturnoninvestment.

    Approximatelyhalfofthestatesinwhichweoperateofferapersonaland/orcorporateinvestmentorproductiontaxcreditforsolarenergythatisadditivetotheITC.Further,mostofthestatesandlocaljurisdictionshaveestablishedpropertytaxincentivesforrenewableenergysystemsthatincludeexemptions,exclusions,abatementsandcredits.

    Manystategovernments,traditionalutilities,municipalutilitiesandco-operativeutilitiesofferarebateorothercashincentivefortheinstallationandoperationofasolarenergysystemorenergyefficiencymeasures.Capitalcostsorup-frontrebatesprovidefundstosolarcustomersordevelopersorsystemsownersbasedonthecost,sizeorexpectedproductionofacustomerssolarenergysystem.Performance-basedincentivesprovidecashpaymentstosolarcustomersorasystemownerbasedontheenergygeneratedbythesolarenergysystemduringapre-determinedperiod.

    Manystatesalsohaveadoptedprocurementrequirementsforrenewableenergyproduction.Twenty-ninestates,theDistrictofColumbiaandthreeU.S.territorieshaveadoptedarenewableportfoliostandardthatrequiresregulatedutilitiestoprocureaspecifiedpercentageoftotalelectricitydeliveredtocustomersinthestatefromeligiblerenewableenergysources,suchassolarenergysystems,byaspecifieddate.Toprovecompliancewithsuchmandates,utilitiesusuallymustsurrendersolarrenewableenergycertificates,orSRECstotheapplicableauthority.SolarenergysystemownerssuchasourinvestmentfundsoftenareabletosellSRECstoutilitiesdirectlyorinSRECmarkets.

    Workforce

    AsofDecember31,2015,wehadatotalworkforceof3,685,including1,750employeesininstallation,831serviceprovidersinsalesandmarketing,790employeesinoperations,282employeesingeneralandadministrativeand32employeesinresearchanddevelopment.Oursalesandmarketingheadcountincludes721activedirectsellers.Weconsideradirectsalespersontobeactiveiftheycompletedatleastfourcustomerpre-surveysinthepriorfourweeks.Ouroperationspersonnelworkprimarilyininstallation,designandaccountmanagement.Ourgeneralandadministrativepersonnelworkprimarilyinfinance,businessdevelopment,capitalmarketsandhumanresources.Noneofourserviceprovidersarerepresentedbyalaborunionandweconsiderrelationswithourworkerstobegood.

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  • Item1A.RiskFactors

    Youshouldcarefullyconsiderthefollowingriskfactors,togetherwithalloftheotherinformationincludedinthisreport,includingthesectionofthisreportcaptionedManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperationsandourfinancialstatementsandrelatednotes.Ifanyofthefollowingrisksoccurred,itcouldmateriallyadverselyaffectourbusiness,financialconditionoroperatingresults.Thisreportalsocontainsforward-lookingstatementsthatinvolverisksanduncertainties.Ouractualresultscoulddiffermateriallyfromthoseanticipatedintheforward-lookingstatementsasaresultoffactorsthataredescribedbelowandelsewhereinthisreport.

    RiskRelatedtoourProposedAcquisitionbySunEdison

    SunEdisonsfailuretocompletetheacquisitionhasaffectedandmayinthefuture,materiallyandadverselyaffectourresultsofoperationsandstockprice.

    OnJuly20,2015,weenteredintoanAgreementandPlanofMerger,orMergerAgreement,asamendedbytheAmendmenttotheAgreementandPlanofMerger,datedasofDecember9,2015,withSunEdison,Inc.,orSunEdison,aDelawarecorporation,andSEVMergerSubInc.,aDelawarecorporationandawhollyownedsubsidiaryofSunEdison,pursuanttowhichtheweweretohavebeenacquiredbySunEdison.

    WedeliverednoticetoSunEdisononFebruary26,2016,andagainonMarch1,2016,that,pursuanttothetermsoftheMergerAgreement,SunEdisonwasrequiredtocausetheclosingoftheacquisitiontooccuronFebruary26,2016,andremainedobligatedtocausetheclosingtooccur,giventhatallconditionstoSunEdisonsobligationstoclosetheacquisitionintheMergerAgreementweresatisfiedonFebruary24,2016when(1)ourstockholdersadoptedtheMergerAgreement,and(2)themarketingperiodcontemplatedbytheMergerAgreementrelatedtoSunEdisonsfinancingoftheacquisition(whichcommencedwhenwedeliveredallrequiredinformationtoSunEdisononFebruary11,2016)terminatedonFebruary21,2016.SunEdisonsfailuretocausetheclosingwithinthreebusinessdaysofthedeliveryofthenoticesspecifiedintheprecedingsentencetriggeredourrighttoterminatetheMergerAgreementpursuanttoSection7.01(i)thereof.

    Moreover,asofSunEdisonsfailuretocausetheclosingtooccuronFebruary26,2016,SunEdisonwasinbreachofitscovenantsunderSections1.02and4.05(a)oftheMergerAgreement,andsuchbreachresultedinthefailureoftheconditionssetforthinSection6.02oftheMergerAgreementtobesatisfiedonsuchdate.SunEdisonsrepresentativessubsequentlyinformedusthatSunEdisonwasunabletocausetheclosingtooccurintheforeseeablefuture.SincesuchbreachwasthereforeincurablepriortoMarch18,2016,thedateonwhichtheMergerAgreementwouldotherwiseterminate,wehavetherighttoterminatetheMergerAgreementpursuanttoSection7.01(e)thereof.

    AsaresultoftheforegoingandinaccordancewithandpursuanttoourrightsunderSection7.01(i)and7.01(e)oftheMergerAgreement,weterminatedtheMergerAgreementonMarch7,2016.OnMarch8,2016,wefiledsuitintheCourtofChanceryStateofDelawareagainstSunEdisonandSEVMergerSubInc.allegingthatSunEdisonwillfullybreacheditsobligationsundertheMergerAgreement.WhilewebelievethatSunEdisonwillfullybreacheditsobligationsundertheMergerAgreementandthatourclaimshavemeritandarelikelytosucceed,theoutcomesoflawsuitsareinherentlyunpredictable,andwemaybeunsuccessfulinourclaims.

    However,SunEdisonsfailuretoclosetheacquisitionpresentssignificantriskstous,including:

    wewillnotrealizeanyorallofthepotentialbenefitsoftheacquisition,includinganysynergiesthatcouldresultfromcombiningtheresourcesofusandSunEdison,whichcouldhaveanegativeeffectonourstockprice;

    wewillremainliableforsignificanttransactioncosts,includinglegal,accounting,financialadvisoryandothercostsrelatingtothetransaction;

    theattentionofourmanagementandemployeeshasbeendiverted,andmaycontinuetobediverted,fromday-to-dayoperationsaswepursueourremediesundertheMergerAgreement;

    ourbusinesshasbeendisruptedbycustomeruncertaintyoverwhenoriftheacquisitionwillbecompletedorcustomersandinvestorsperceptionofusasastandalonecompanyandourbusinessmaycontinuetobeaffectedbytheresidualimpactoftheseorsimilarfactors;

    undertheMergerAgreement,weweresubjecttocertainrestrictionsontheconductofourbusinesspriortocompletingtheacquisition,whichrestrictionshaveadverselyaffectedourabilitytoconductbusinessasweotherwisewouldhavedoneifwewerenotsubjecttotheserestrictionsandourbusinessmaycontinuetobeaffectedbytheresidualimpactoftheseorsimilarfactors;

    8

  • duetoinvestoruncertaintyregardingtheacquisition,ourabilitytoraiseadditionalfinancingwaslimited,whichmayadverselyaffectourabilitytoraiseadditionalfinancingina

    timelymanneroronfavorableterms;and

    ourabilitytoretaincurrentkeyemployeesorattractnewemployeesmaybeharmedbyuncertaintiesassociatedwithourfutureasastandalonecompany.

    Theoccurrence,continuationorexacerbationofanyoftheseeventsindividuallyorincombinationcouldmateriallyandadverselyaffectourresultsofoperationsandstockprice.

    Theannouncementandpendencyoftheacquisitioncauseddisruptionsinourbusiness,whichhashad,andmaycontinuetohave,anadverseeffectonourbusinessoperationsandfinancialresults.

    Duringthependencyoftheacquisition,weandSunEdisonoperatedindependently.Uncertaintyabouttheeffectoftheacquisitiononcustomersandemployeeshashad,andmaycontinuetohave,anadverseeffectonusandconsequently,mayhaveanadverseeffectonourbusinessoperationsandfinancialresultsasastandalonecompany.Duringthependencyoftheacquisition,currentandprospectiveemployeesexperienceduncertaintyabouttheirfuturewithSunEdison,usorthecombinedcompany.Theseuncertaintieshaveimpaired,andmaycontinuetoimpairtheabilityofustoretain,recruitormotivatekeypersonnel,andmayhavenegativelyimpactedtheproductivityofcurrentemployees.Inaddition,duetotheseuncertaintiesandtoSunEdisonsrequiredapprovals,weceasedcertainemployeeactionssuchashiring,terminatingandreallocatingpersonnel.Ouremployeesandourmanagementteamsreallocatedsignificanttimetointegrationefforts.WedeferredtransitionstokeyITsystemsasastandalonecompany.Wewerealsocausedtodeferanddelayfinancingoptions,includingadditionalacquiringinvestmentfundsanddebtfacilities,whichhasdecreasedouroperationalefficiencyandeffectiveness.Further,SunEdisonwithheldapprovalofpowerpurchaseagreementenhancementsasaleveragetool,whichfurtherdecreasedoureffectivenessinattractingandobtainingprospectivecustomers.

    Inresponsetotheannouncementoftheacquisition,andduetouncertaintyregardingtheclosingoftheacquisition,ourexistingorprospectivecustomersorsuppliershaveormayhave:

    delayed,deferredandmayceasepurchasingproductsorservicesfromorprovidingproductsorservicestous;

    delayedordeferredotherdecisionsconcerningus;or

    otherwisesoughttochangethetermsonwhichtheydobusinesswithus.

    Thesesuchdelaysorchangestotermshavedisrupted,andmaycontinuetodisruptourbusinessandadverselyimpactourresultsofoperationsaswecontinuetooperateasastandalonecompany.

    RisksRelatedtoourBusiness

    Weneedtoenterintosubstantialadditionalfinancingarrangementstofacilitatenewcustomersaccesstooursolarenergysystems,andiffinancingisnotavailabletousonacceptabletermswhenneeded,ourabilitytocontinuetogrowourbusinesswouldbemateriallyadverselyimpacted.

    Ourfuturesuccessdependsonourabilitytoraisecapitalfromthird-partyinvestorsoncompetitivetermstohelpfinancethedeploymentofoursolarenergysystems.Weseektominimizeourcostofcapitalinordertomaintainthepricecompetitivenessoftheelectricityproducedby,ortheleasepaymentsfor,oursolarenergysystems.Ifweareunabletoestablishnewinvestmentfundswhenneeded,orupondesirableterms,toenableourcustomersaccesstooursolarenergysystemswithlittletonoupfrontcosttothem,wemaybeunabletofinanceinstallationofourcustomerssystemsorourcostofcapitalcouldincrease,eitherofwhichwouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperationsandprospects.AsofFebruary29,2016,wehadraised16residentialinvestmentfundstowhichinvestorssuchasbanksandotherlargefinancialinvestorshavecommittedtoinvestapproximately$1.1billionwhichwillenableustoinstallsolarenergysystemsoftotalfairmarketvalueapproximating$2.6billion.AsofFebruary29,2016,wehadremainingresidentialtaxequitycommitmentstofundapproximately55megawattsoffuturedeployments,whichweestimatetobesufficienttofundsolarenergysystemswithatotalfairmarketvalueofapproximately$241million.AsofFebruary29,2016,wehadenteredintooneC&Iinvestmentfundwithatotalcommittedcapitalamountof$150.0million,however,noprojectshadbeenacceptedintotheinvestmentfundasofFebruary29,2016.Thecontracttermsincertainofourinvestmentfunddocumentsimposeconditionsonourabilitytodrawonfinancingcommitmentsfromthefundinvestors,includingifaneventoccursthatcouldreasonablybeexpectedtohaveamaterialadverseeffectonthefundoronus.Ifwedonotsatisfysuchconditionsduetoeventsrelatedtoourbusinessoraspecificinvestmentfundordevelopmentsinourindustryorotherwise,andasaresultweareunabletodrawonexistingcommitments,ourinabilitytodrawonsuchcommitmentscouldhaveamaterialadverseeffectonourbusiness,liquidity,financialconditionandprospects.Inadditiontoourinabilitytodrawontheinvestors'commitments,wemayincurfinancialpenaltiesfornon-performance,includingdelaysintheinstallationprocessandinterconnectiontothepowergridofsolarenergysystemsandotherfactors.Basedonthetermsoftheinvestmentfundagreements,wewilleitherreimbursea

    9

  • portionofthefundinvestorscapitalorpaythefundinvestorapenaltyfee.FortheC&Iinvestmentfund,wecouldincuranon-performancefeeofupto$3.0millionprimarilyduetoadelayinsolarenergysystemsbeinginterconnectedtothepowergrid.

    Tomeetthecapitalneedsofourgrowingbusiness,wewillneedtoobtainadditionalfinancingfromnewinvestorsandinvestorswithwhomwecurrentlyhavearrangements.Ifanyofthefinancialinstitutionsthatcurrentlyprovidefinancingdecidenottoinvestinthefutureduetogeneralmarketconditions,concernsaboutourbusinessorprospectsoranyotherreason,ordecidetoinvestatlevelsthatareinadequatetosupportouranticipatedneedsormateriallychangethetermsunderwhichtheyarewillingtoprovidefuturefinancing,wewillneedtoidentifynewfinancialinstitutionsandcompaniestoprovidefinancingandnegotiatenewfinancingterms.Inaddition,thependencyoftheSunEdisonacquisitionandtherisksanduncertaintiesassociatedwithitadverselyaffectedthewillingnessofpartiestoenterintofinancingarrangementswithus.This,combinedwithrestrictionsundertheMergerAgreementonourabilitytoincur,assumeorguaranteeanyindebtedness,ormakeanyloansoradvancestoanyotherperson,restrictedourabilitytoraiseadditionalcapitalduringthependencyoftheacquisitionandourbusinessmaycontinuetobeaffectedbytheresidualimpactoftheseorsimilarfactors.Ifweareunabletoraiseadditionalcapitalinatimelymanner,ourabilitytomeetourcapitalneedsandfundfuturegrowthmaybelimited.

    Inthepast,wehavesometimesbeenunabletotimelyestablishinvestmentfundsinaccordancewithourplans,dueinparttotherelativelylimitednumberofinvestorsattractedtosuchtypesoffunds,competitionforsuchcapitalandthecomplexityassociatedwithnegotiatingtheagreementswithrespecttosuchfunds.Delaysinraisingfinancingcouldcauseustodelayexpandinginexistingmarketsorenteringintonewmarketsandhiringadditionalpersonnelinsupportofourplannedgrowth.Anyfuturedelaysincapitalraisingcouldsimilarlycauseustodelaydeploymentofasubstantialnumberofsolarenergysystemsforwhichwehavesignedpowerpurchaseagreementsorleaseswithcustomers.Ourfutureabilitytoobtainadditionalfinancingdependsonbanksandotherfinancingsourcescontinuedconfidenceinourbusinessmodelandtherenewableenergyindustryasawhole.Itcouldalsobeimpactedbytheliquidityneedsofsuchfinancingsourcesthemselves.Wefaceintensecompetitionfromavarietyofothercompanies,technologiesandfinancingstructuresforsuchlimitedinvestmentcapital.Ifweareunabletocontinuetoofferacompetitiveinvestmentprofile,wemayloseaccesstothesefundsortheymayonlybeavailabletousontermsthatarelessfavorablethanthosereceivedbyourcompetitors.Forexample,ifweexperiencehighercustomerdefaultratesthanwecurrentlyexperienceinourexistinginvestmentfunds,thiscouldmakeitmoredifficultorcostlytoattractfuturefinancing.Inourexperience,therearearelativelysmallnumberofinvestorsthatgeneratesufficientprofitsandpossesstherequisitefinancialsophisticationthatcanbenefitfromandhavesignificantdemandforthetaxbenefitsthatourinvestmentfundscanprovide.Historically,inthedistributedsolarenergyindustry,investorshavetypicallybeenlargefinancialinstitutionsandafewlarge,profitablecorporations.Ourabilitytoraiseinvestmentfundsislimitedbytherelativelysmallnumberofsuchinvestors.Anyinabilitytosecurefinancingcouldleadustocancelplannedinstallations,couldimpairourabilitytoacceptnewcustomersandcouldincreaseourborrowingcosts,anyofwhichwouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperationsandprospects.

    Amaterialreductionintheretailpriceoftraditionalutility-generatedelectricityorelectricityfromothersourcesorotherreductioninthecostofsuchelectricitywouldharmourbusiness,financialcondition,resultsofoperationsandprospects.

    Webelievethatasignificantnumberofourcustomersdecidetobuysolarenergybecausetheywanttopaylessforelectricitythanwhatisofferedbythetraditionalutilities.However,distributedresidentialsolarenergyhasyettoachievebroadmarketadoption.

    Thecustomersdecisiontochoosesolarenergymayalsobeaffectedbythecostofotherrenewableenergysources.Decreasesintheretailpricesofelectricityfromthetraditionalutilitiesorfromotherrenewableenergysourceswouldharmourabilitytooffercompetitivepricingandcouldharmourbusiness.Thecostofelectricityfromtraditionalutilitiescoulddecreaseasaresultof:

    constructionofnewpowergenerationplants,includingplantsutilizingnaturalgas,nuclear,coal,renewableenergyorothergenerationtechnologies;

    reliefoftransmissionconstraintsthatenablelocalcenterstogenerateenergylessexpensively;

    reductionsinthepriceofnaturalgasorotherfuelsources;

    utilityrateadjustmentandcustomerclasscostreallocation;

    energyconservationtechnologiesandpublicinitiativestoreduceelectricityconsumption;

    widespreaddeploymentofexistingordevelopmentofneworlower-costenergystoragetechnologiesthathavetheabilitytoreduceacustomersaveragecostofelectricitybyshiftingloadtooff-peaktimes;and

    developmentofnewenergygenerationtechnologiesthatprovidelessexpensiveenergy.

    10

  • Areductioninutilityelectricitycostswouldmakethepurchaseofelectricityunderourpowerpurchaseagreementsortheleaseofoursolarenergysystemslesseconomicallyattractive.Ifthecostofenergyavailablefromtraditionalutilitiesweretodecreaseduetoanyofthesereasons,orotherreasons,wewouldbeatacompetitivedisadvantage,wemaybeunabletoattractnewcustomersandourgrowthwouldbelimited.

    Electricutilityindustrypoliciesandregulationsmaypresenttechnical,regulatoryandeconomicbarrierstothepurchaseanduseofsolarenergysystemsthatmaysignificantlyreducedemandforelectricityfromoursolarenergysystems.

    Federal,stateandlocalgovernmentregulationsandpoliciesconcerningtheelectricutilityindustry,utilityratestructures,interconnectionprocedures,andinternalpoliciesofelectricutilities,heavilyinfluencethemarketforelectricitygenerationproductsandservices.Theseregulationsandpoliciesoftenrelatetoelectricitypricingandtheinterconnectionofdistributedelectricitygenerationsystemstothepowergrid.Policiesandregulationsthatpromoterenewableenergyandcustomer-sitedenergygenerationhavebeenchallengedbytraditionalutilitiesandquestionedbythoseingovernmentandothersarguingforlessgovernmentalspendingandinvolvementintheenergymarket.Totheextentthatsuchviewsarereflectedingovernmentpolicy,thechangesinsuchpoliciesandregulationscouldadverselyaffectourresultsofoperations,costofcapitalandgrowthprospects.

    IntheUnitedStates,governmentsandthestatepublicservicecommissionsthatdetermineutilityratescontinuouslymodifytheseregulationsandpolicies.Theseregulationsandpoliciescouldresultinasignificantreductioninthepotentialdemandforelectricityfromoursolarenergysystemsandcoulddetercustomersfromenteringintocontractswithus.Inaddition,dependingontheregion,electricitygeneratedbysolarenergysystemscompetesmosteffectivelywiththemostexpensiveretailratesforelectricityfromthepowergrid,ratherthanthelessexpensiveaveragepriceofelectricity.Modificationstotheutilitiespeakhourpricingpoliciesorratedesign,suchastoaflatrate,wouldmakeourcurrentproductslesscompetitivewiththepriceofelectricityfromthepowergrid.Forexample,theCaliforniaPublicUtilitiesCommissionrecentlyissuedadecisionthatwilltransitionresidentialratesoverthenextfouryearsfromafour-tieredstructuretoatwo-tieredstructure,withonlya25%differentialbetweenthetworatesandasurchargeforveryhighenergyusers.ItispossiblethatthischangecouldhavetheeffectofloweringtheincentiveforresidentialcustomersofCaliforniaslargeinvestor-ownedutilitiestoreducetheirpurchasesofelectricityfromtheirutilitybysupplyingmoreoftheirownelectricityfromsolar,andtherebyreducedemandforourproducts.Inaddition,Californiaisintheprocessofshiftingtoatime-of-useratestructureinthecomingyears.Ashiftinthetimingofpeakratesforutility-generatedelectricitytoatimeofdaywhensolarenergygenerationislessefficientcouldmakeoursolarenergysystemofferingslesscompetitiveandreducedemandforourofferings.TheCaliforniaPublicUtilitiesCommissiondeterminedinJanuaryof2016thatnetmeteringcustomerstakingserviceonthenetenergymetering(NEM)successortariffwillberequiredtotakeserviceontime-of-userates.Thistransitionmayoccurin2016forsomeofourpotentialcustomers.Inaddition,sincewearerequiredtoobtaininterconnectionpermissionforeachsolarenergysystemfromthelocalutility,changesinalocalutilitysregulations,policiesorinterconnectionprocesshaveinthepastdelayedandinthefuturecoulddelayorpreventthecompletionofoursolarenergysystems.Thisinturnhasdelayedandinthefuturecoulddelayorpreventusfromgeneratingrevenuesfromsuchsolarenergysystemsorcauseustoredeploysolarenergysystems,adverselyimpactingourresultsofoperations.

    Inaddition,anychangestogovernmentorinternalutilityregulationsandpoliciesthatfavorelectricutilitiescouldreduceourcompetitivenessandcauseasignificantreductionindemandforourofferingsorincreaseourcostsorthepriceswechargeourcustomers.Certainjurisdictionshaveproposedallowingtraditionalutilitiestoassessfeesoncustomerspurchasingenergyfromsolarenergysystemsorhaveimposedorproposednewchargesorratestructuresthatwoulddisproportionatelyimpactsolarenergysystemcustomerswhoutilizenetmetering,eitherofwhichwouldincreasethecostofenergytothosecustomersandcouldreducedemandforoursolarenergysystems.Forexample,theCaliforniaPublicUtilitiesCommissionissuedadecisioninJuly2015thatallowedutilitiestoimposeaminimum$10monthlybillforresidentialcustomers,approvedtheconceptoffixedchargesandwillpermittheutilitiestoproposesuchfixedchargesagainin2018.AdecisionissuedinJanuary2016willallownewinterconnectionfeesandadditionalnonbypassablechargestobeassessedoncustomerstakingserviceonCaliforniasnetmeteringsuccessortariff.ThiswillresultinmonthlychargesbeingimposedonourcustomersinCalifornia.Additionally,certainutilitiesinArizonahaveapprovedincreasedratesandchargesfornetmeteringcustomers,andothershaveproposeddoingawaywiththestatesrenewableelectricitystandardcarve-outsfordistributedgenerationaswellasthestatesnetmeteringprogram.Thesepolicychangesmaynegativelyimpactourcustomersandaffectdemandforoursolarenergysystems,andsimilarchangestonetmeteringpoliciesmayoccurinotherstates.Itisalsopossiblethattheseorotherchangescouldbeimposedonourcurrentcustomers,aswellasfuturecustomers.DuetothecurrentandexpectedcontinuedconcentrationofoursolarenergysystemsinCalifornia,anysuchchangesinthismarketwouldbeparticularlyharmfultoourreputation,customerrelations,business,resultsofoperationsandfuturegrowthintheseareas.Wemaybesimilarlyadverselyaffectedifourbusinessbecomesconcentratedinotherjurisdictions.

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  • Ourbusinesscurrentlydependsontheavailabilityofrebates,taxcreditsandotherfinancialincentives.Theexpiration,eliminationorreductionoftheserebates,creditsorincentivescouldadverselyimpactourbusiness.

    Federal,stateandlocalgovernmentandregulatorybodiesprovidefortariffstructuresandincentivestovariouspartiesincludingowners,endusers,distributors,systemintegratorsandmanufacturersofsolarenergysystemstopromotesolarenergyinvariousforms,includingrebates,taxcreditsandotherfinancialincentivessuchassystemperformancepayments,renewableenergycreditsassociatedwithrenewableenergygeneration,exclusionofsolarenergysystemsfrompropertytaxassessmentsandnetmetering.Werelyonthesegovernmentalandregulatoryprogramstofinancesolarenergysysteminstallations,whichenablesustolowerthepricewechargecustomersforenergyfrom,andtolease,oursolarenergysystems,helpingtocatalyzecustomeracceptanceofsolarenergywiththosecustomersasanalternativetoutility-providedpower.However,theseprogramsmayexpireonaparticulardate,endwhentheallocatedfundingisexhaustedorbereducedorterminated.Thesereductionsorterminationsoftenoccurwithoutwarning.Forexample,theArizonaDepartmentofRevenuerecentlydecidedthatitwillbegintocollectpropertytaxesin2015onrooftopsolarenergysystemssuchasours.Inaddition,thefinancialvalueofcertainincentivesdecreasesovertime.Forexample,thevalueofsolarrenewableenergycertificates,orSRECs,inamarkettendstodecreaseovertimeasthesupplyofSREC-producingsolarenergysystemsinstalledinthatmarketincreases.Ifweoverestimatethefuturevalueoftheseincentives,itcouldadverselyimpactourfinancialresults.

    Thefederalgovernmentcurrentlyoffersa30%investmenttaxcredit,ortheITC,underSection48(a)oftheInternalRevenueCodefortheinstallationofcertainsolarpowerfacilities;the30%ratecontinuesuntilDecember31,2019.Bystatute,theITCisscheduledtodecreaseto26%for2020,22%for2021and10%ofthefairmarketvalueofasolarenergysystemonJanuary1,2022,andtheamountsthatfundinvestorsarewillingtoinvestcoulddecreaseorwemayberequiredtoprovidealargerallocationofcustomerpaymentstothefundinvestorsasaresultofthisscheduleddecrease.Totheextentwehaveareducedabilitytoraiseinvestmentfundsasaresultofthisreduction,therateofgrowthofinstallationsofourresidentialsolarenergysystemscouldbenegativelyimpacted.TheITChasbeenasignificantdriverofthefinancingsupportingtheadoptionofresidentialsolarenergysystemsintheUnitedStatesanditsscheduledreductionbeginningin2020,unlessmodifiedbyaninterveningchangeinlaw,willsignificantlyimpacttheattractivenessofsolarenergytotheseinvestorsandcouldpotentiallyharmourbusiness.

    Applicableauthoritiesmayadjustordecreaseincentivesfromtimetotimeorincludeprovisionsforminimumdomesticcontentrequirementsorotherrequirementstoqualifyfortheseincentives.Reductionsin,eliminationsorexpirationsoforadditionalapplicationrequirementsfor,governmentalincentivescouldadverselyimpactourresultsofoperationsandabilitytocompeteinourindustrybyincreasingourcostofcapital,causingustoincreasethepricesofourenergyandsolarenergysystemsandreducingthesizeofouraddressablemarket.Inaddition,thiswouldadverselyimpactourabilitytoattractinvestmentpartnersandtoformnewinvestmentfundsandourabilitytoofferattractivefinancingtoprospectivecustomers.

    Werelyonnetmeteringandrelatedpoliciestooffercompetitivepricingtoourcustomersinallofourcurrentmarkets,andchangestonetmeteringpoliciesmaysignificantlyreducedemandforelectricityfromoursolarenergysystems.

    Ourbusinessbenefitssignificantlyfromfavorablenetmeteringpoliciesinstatesinwhichweoperate.Netmeteringallowsahomeownertopayhisorherlocalelectricutilityonlyfortheirpowerusagenetofproductionfromthesolarenergysystem,transformingtheconventionalrelationshipbetweencustomersandtraditionalutilities.Homeownersreceivecreditfortheenergythatthesolarinstallationgeneratesinexcessofthatneededbythehometooffsetenergyusageattimeswhenthesolarinstallationisnotgeneratingenergy.Instatesthatprovidefornetmetering,thecustomertypicallypaysforthenetenergyusedorreceivesacreditagainstfuturebillsattheretailrateifmoreenergyisproducedbythesolarinstallationthanconsumed.Insomestatesandutilityterritories,customersarealsoreimbursedbytheelectricutilityfornetexcessgenerationonaperiodicbasis.

    Forty-onestates,PuertoRico,theDistrictofColumbia,AmericanSamoaandtheU.S.VirginIslandshaveadoptedsomeformofnetmetering.Eachofthestateswherewecurrentlyservecustomershasadoptedsomeformofanetmeteringpolicy.

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  • Inrecentyears,netmeteringprogramshavebeensubjecttoregulatoryscrutinyandlegislativeproposalsinsomestates,suchasArizona,California,Colorado,Hawaii,NevadaandUtah.InCalifornia,forexample,aftertheearlierofJuly1,2017orthedatetheapplicableinvestorownedutilityreachesitsstatutorynetmeteringcap,customerswilltakeserviceonanewnetmeteringsuccessortariff.Thenetmeteringcapismeasuredbasedonthenameplatecapacityofnetmeteredsystemswithintheapplicableutilitysserviceterritory.Currently,thenetmeteringcapsforthethreelargeinvestor-ownedutilitiesare:617megawattsforSanDiegoGasandElectricCompany;2,240megawattsforSouthernCaliforniaEdisonCompany;and2,409megawattsforPacificGasandElectricCompany.AsreflectedintheirJanuary31,2016reportsrequiredbystatute,theseinvestor-ownedutilitieshaveapproximately12%,35%and22%,respectively,ofcapacityremainingundertheirrespectivenetmeteringcaps.Thestatuteprovidingthecurrentcapsalsoprovidesthat,oncethenewnetmeteringrulesareeffective,therewillbenonetmeteringcapsappliedtotheseutilities.FortheNEMsuccessortariff,theCaliforniaPublicUtilitiesCommissionlargelyupheldnetmeteringinitscurrentformwithfullretailcompensationforexportsandrejectedutilityrequeststoimposeextremelyhighfixedandcapacitycharges.TheCommissiondidallowtheutilitiestoimposereasonableinterconnectionfeesandsomeadditionalchargesoncustomers,andwillrequiresuchcustomerstotakeserviceontime-of-userates.

    OnOctober12,2015,theHawaiiPublicUtilitiesCommissionissuedanorderclosingtheHawaiianElectricCompanysnetmeteringprogramtonewparticipantsandreplacedthisprogramwithtwonewoptionsforcustomerstointerconnecttotheutilitieselectricgrids,neitherofwhichprovidesforcompensationforexportsatretailelectricityrates.Solaradvocateshavefiledsuitchallengingthisorderandseekingtoenjoinitseffectiveness.

    Inlate2015,theNevadaPublicUtilitiesCommissionvotedinfavorofaplanwhichlimitsexportcompensationtonetmeteringcustomerstoavoidedcostratesandimposeshighmonthlyfeesonsuchcustomers.ThisordergreatlyreducedtheeconomicbenefittoNevadacustomersofresidentialsolar.Solaradvocateshavefiledsuitchallengingthisorder.Severalotherstatesplantorevisittheirnetmeteringpoliciesinthecomingyears,andtheFirstCircuitCourtsorderdenyingtheplaintiffsrequestedreliefiscurrentlyonappeal.

    Ifandwhennetmeteringcapsincertainjurisdictionsarereachedwhiletheyarestillineffect,thevalueofthecreditthatcustomersreceivefornetmeteringissignificantlyreduced,utilityratestructuresarealtered,orfeesareimposedonnetmeteringcustomers,futurecustomersmaybeunabletorecognizethesamelevelofcostsavingsassociatedwithnetmeteringthatcurrentcustomersenjoy.Theabsenceoffavorablenetmeteringpoliciesorofnetmeteringentirely,ortheimpositionofnewchargesthatonlyordisproportionatelyimpactcustomersthatusenetmeteringwouldsignificantlylimitcustomerdemandforoursolarenergysystemsandtheelectricitytheygenerateandcouldadverselyimpactourbusiness,resultsofoperationsandfuturegrowth.Forexample,shortlyafterexpandingouroperationsintoNevada,thestatesprimaryelectricutilityreacheditsnetmeteringcap.Asaresult,wehavesuspendedoperationsinNevadapendingrevisionstothenetmeteringavailableinthestate.

    Technicalandregulatorylimitationsmaysignificantlyreduceourabilitytosellelectricityfromoursolarenergysystemsandretainemployeesincertainmarkets.

    Technicalandregulatorylimitsmaycurbourgrowthincertainkeymarkets,whichmayalsoreduceourabilitytoretainemployeesinthosemarkets.Forexample,theFederalEnergyRegulatoryCommission,inpromulgatingthefirstformsmallgeneratorinterconnectionprocedures,recommendedlimitingcustomer-sitedintermittentgenerationresources,suchasoursolarenergysystems,toacertainpercentageofpeakloadonagivenelectricalfeedercircuit.Similarlimitshavebeenadoptedbymanystatesasadefactostandardandcouldconstrainourabilitytomarkettocustomersincertaingeographicareaswheretheconcentrationofsolarinstallationsexceedsthislimit.Forexample,Hawaiianelectricutilitieshaveadoptedcertainpoliciesthatlimitdistributedelectricitygenerationinpartsoftheirserviceterritories.Inthefirsthalfof2014,Hawaiiwasthesecondlargestmarketinwhichweoperatedasmeasuredbytotalinstallations.However,despitelegislativeandregulatoryactionstoallowfurtherdistributedelectricitypenetration,theselimitationsconstrainedgrowthofdistributedresidentialsolarenergyinHawaiiinthesecondhalfof2014andbeyond,andHawaiihasbecomealessimportantmarkettousasaresult;whichinturnresultedinthelossofemployeeslocatedinthatmarketthatwerenotwillingtorelocate.WhilearecentHawaiiPublicUtilitiesCommissionorderseekstostreamlinetheinterconnectionprocess,andwhileourgrowthinothermarketshasmorethanoffsettheimpactoftheselimitationsinHawaii,ifweexperiencedsimilarorotherlimitationsonthedeploymentofsolarenergysystems,ourbusiness,operatingresultsandgrowthprospectscouldbemateriallyadverselyaffected.Furthermore,incertainareas,webenefitfrompoliciesthatallowforexpeditedorsimplifiedproceduresrelatedtoconnectingsolarenergysystemstothepowergrid.Ifsuchproceduresarechangedorceasetobeavailable,ourabilitytoselltheelectricitygeneratedbysolarenergysystemsweinstallmaybeadverselyimpacted.AsadoptionofsolardistributedgenerationrisesalongwiththecommercialoperationofutilityscalesolargenerationinkeymarketssuchasCalifornia,theamountofsolarenergybeingfedintothepowergridwillsurpasstheamountplannedforrelativetotheamountofaggregatedemand.Sometraditionalutilitiesclaimthatinlessthanfiveyears,solargenerationresourcesmayreachalevelcapableofproducinganover-generationsituation,whichmayrequiresomesolargenerationresourcestobecurtailedtomaintainoperationofthegrid.Whiletheprospectofsuchcurtailmentissomewhatspeculative,theadverseeffectsofsuchcurtailmentwithoutcompensationcouldadverselyimpactourbusiness,resultsofoperationsandfuturegrowth.

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  • Wehaveincurredoperatinglossesandmaybeunabletoachieveorsustainprofitabilityinthefuture.

    Wehaveincurredoperatinglossessinceourinception.Weincurrednetlossesof$253.3millionand$165.9millionfortheyearsendedDecember31,2015and2014.Weexpecttocontinuetoincurnetlossesfromoperationsaswefinancetheexpansionofouroperations,expandourinstallation,engineering,administrative,salesandmarketingstaffs,andimplementinternalsystemsandinfrastructuretosupportourgrowth.Failuretogrowatasufficientratetosupporttheseinvestmentsinpersonnel,systemsandinfrastructure,haveadverselyimpactedandinthefuturecouldadverselyimpactourbusinessandresultsofoperations.Ourabilitytoachieveprofitabilitydependsonanumberoffactors,including:

    growingourcustomerbase;

    findinginvestorswillingtoinvestinourinvestmentfunds;

    maintainingandfurtherloweringourcostofcapital;

    reducingthetimebetweensysteminstallationandinterconnectiontothepowergrid,whichallowsustobegingeneratingrevenue;

    reducingthecostofcomponentsforoursolarenergysystems;and

    reducingouroperatingcostsbyoptimizingoursales,designandinstallationprocessesandsupplychainlogistics.Evenifwedoachieveprofitability,wemaybeunabletosustainorincreaseourprofitabilityinthefuture.

    Thevastmajorityofourbusinessisconductedprimarilyusingonechannel,direct-selling.

    Historically,ourprimarysaleschannelhasbeenadirectsalesmodel.Recently,wehaveopenedanewretailsaleschannelandsetupaninsidesalesteamasnewmeansofreachingcustomers.Wecompeteagainstcompanieswithexperiencesellingsolarenergysystemstocustomersthroughanumberofdistributionchannels,includinghomebuilders,homeimprovementstores,largeconstruction,electricalandroofingcompaniesandotherthirdpartiesandcompaniesthataccesscustomersthroughrelationshipswiththirdpartiesinadditiontootherdirect-sellingcompanies.Ourlessdiversifieddistributionchannelsmayplaceusatadisadvantagewithconsumerswhoprefertopurchaseproductsthroughtheseotherdistributionchannels.Additionally,weareexperiencedinreachingcustomersefficientlythroughadirectsalemodel;however,duetolimitedexperience,acquiringcustomersthroughotherchannelshasbeenslowtodevelop,leadingtolessmarketpenetrationinthesechannels.Wearealsovulnerabletochangesinlawsrelatedtodirectmarketingasregulationshavelimitedunsolicitedresidentialsalescallsandmayimposeadditionalrestrictions.Ifadditionallawsaffectingdirectmarketingarepassedinthemarketsinwhichweoperate,itwouldtaketimetotrainoursalesforcetocomplywithsuchlaws,andwemaybeexposedtofinesorotherpenaltiesforviolationsofsuchlaws.Ifwefailtocompeteeffectivelythroughourdirect-sellingeffortsorarenotsuccessfulinexecutingourstrategytoselloursolarenergysystemsthroughotherchannels,ourfinancialcondition,resultsofoperationsandgrowthprospectswillbeadverselyaffected.

    Wearehighlydependentonourabilitytoattract,trainandretainaneffectivesalesforce.

    Thesuccessofourdirect-sellingchanneleffortsdependsupontherecruitment,retentionandmotivationofalargenumberofsalespersonneltocompensateforahighturnoverrateamongsalespersonnel,whichisacommoncharacteristicofadirect-sellingbusiness.Inordertogrowourbusiness,weneedtorecruit,trainandretainsalespersonnelonacontinuingbasis.Historically,wehaverecruitedalargeportionofoursalespersonnelfromoursistercompany,Vivint,particularlyinCalifornia,whereasignificantportionofourbusinessisconcentrated.Pursuanttoanon-competitionagreemententeredintoinconnectionwithourinitialpublicoffering,weandVivinthaveagreednottosolicitforemploymentanyoftheothersemployeeswhoprimarilymanagesales,installationorservicingoftheothersproductsandservices.Thecommitmentnottosolicitthoseemployeeslastsfor180daysaftertheemployeefinishesemploymentwithusorVivint.Inthefuture,wewillneedtorecruitgreaternumbersofoursalespersonnelfromothersourcesandwemaybeunabletosuccessfullydoso.Salespersonnelareattractedtodirect-sellingbycompetitiveearningsopportunitiesandsodirect-sellerstypicallycompeteforsalespersonnelbyprovidingamorecompetitiveearningsopportunitythanthatofferedbythecompetition.Competitorsdevotesubstantialefforttodeterminingtheeffectivenessofsuchincentivessothattheycaninvestinincentivesthatarethemostcosteffectiveorproducethebestreturnonincentive.Forexample,wehavehistoricallycompensatedoursalespersonnelonacommissionbasis,basedonthesizeofthesolarenergysystemstheysell.Somesalespersonnelmaypreferacompensationstructurethatalsoincludesasalaryandequityincentivecomponent.Wemayneedtoadjustourcompensationmodeltoincludesuchcomponents,andtheseadjustmentscouldadverselyimpactouroperatingresultsandfinancialperformance.

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  • Inadditiontooursalescompensationmodel,ourabilitytorecruit,trainandretaineffectivesalespersonnelcouldbeharmedbyadditionalfactors,including:

    theresidualimpactofuncertaintyassociatedwiththeterminationoftheSunEdisonacquisitionorourfutureasastandalonecompany;

    anyadversepublicityregardingus,oursolarenergysystems,ourdistributionchannelorourindustry;

    lackofinterestin,orthetechnicalfailureof,oursolarenergysystems;

    lackofacompellingproductorincomeopportunitythatgeneratesinterestforpotentialnewsalespersonnel,orperceptionthatotherproductorincomeopportunitiesaremoreattractive;

    anynegativepublicperceptionofoursalespersonnelanddirect-sellingbusinessesingeneral;

    anyregulatoryactionsorchargesagainstusorothersinourindustry;

    generaleconomicandbusinessconditions;and

    potentialsaturationormaturitylevelsinagivenmarketwhichcouldnegativelyimpactourabilitytoattractandretainsalespersonnelinsuchmarket.

    Wearesubjecttosignificantcompetitionfortherecruitmentofsalespersonnelfromotherdirect-sellingcompaniesandfromothercompaniesthatsellsolarenergysystemsinparticular.Furthermore,theregionalanddistrictmanagersofoursalespersonnelareinstrumentalinrecruiting,retainingandmotivatingoursalespersonnel.Whenmanagershaveelectedtoleaveusandjoinothercompanies,thesalespersonneltheysupervisehaveoftenleftwiththem.Weexpecttoexperiencesimilarattritioninoursalespersonnelinthefuturewhichmayimpactourresultsofoperationsandgrowth.Theimpactofsuchattritioncouldbeparticularlyacuteinthosejurisdictions,suchasCalifornia,wherecontractualnon-competitionagreementsforserviceprovidersarenotenforceableorsubjecttosignificantlimitations.

    Itisthereforecontinuallynecessarytoinnovateandenhanceourdirect-sellingandservicemodelaswellastorecruitandretainnewsalespersonnel.Ifweareunabletodoso,ourbusinesswillbeadverselyaffected.

    Wearenotcurrentlyregulatedasanelectricutilityunderapplicablelaw,butwemaybesubjecttoregulationasanelectricutilityinthefuture.

    Wearenotregulatedasapublicutilityinanyofthemarketsinwhichwecurrentlyoperate.Asaresult,wearenotsubjecttothevariousfederal,stateandlocalstandards,restrictionsandregulatoryrequirementsapplicabletotraditionalutilitiesthatoperatetransmissionanddistributionsystemsandthathaveanobligationtoserveelectriccustomerswithinaspecifiedjurisdiction.Anyfederal,state,orlocalregulationsthatcauseustobetreatedasanelectricutility,ortootherwisebesubjecttoasimilarregulatoryregimeofcommission-approvedoperatingtariffs,ratelimitations,andrelatedmandatoryprovisions,couldplacesignificantrestrictionsonourabilitytooperateourbusinessandexecuteourbusinessplanbyprohibiting,restrictingorotherwiseregulatingoursaleofelectricity.IfweweresubjecttothesamestateorfederalregulatoryauthoritiesaselectricutilitiesintheUnitedStatesorifnewregulatorybodieswereestablishedtooverseeourbusinessintheUnitedStates,thenouroperatingcostswouldmateriallyincrease.

    Ourbusinessdependsinpartontheregulatorytreatmentofthird-partyownedsolarenergysystems.

    Retailsalesofelectricitybynon-utilitiessuchasusfaceregulatoryhurdlesinsomestatesandjurisdictions,includingstatesandjurisdictionsthatweintendtoenterwherethelawsandregulatorypolicieshavenothistoricallyembracedcompetitiontotheserviceprovidedbytheincumbent,verticallyintegratedelectricutility.Someoftheprincipalchallengespertaintowhethernon-customerownedsystemsqualifyforthesamelevelsofrebatesorothernon-taxincentivesavailableforcustomer-ownedsolarenergysystems,whetherthird-partyownedsystemsareeligibleatallfortheseincentivesandwhetherthird-partyownedsystemsareeligiblefornetmeteringandtheassociatedsignificantcostsavings.Furthermore,insomestatesandutilityterritoriesthirdpartiesarelimitedinthewaythattheymaydeliversolartotheircustomers.InjurisdictionssuchasArizona,SouthCarolinaandUtahandinLosAngeles,California,lawshavebeeninterpretedtoprohibitthesaleofelectricitypursuanttoourstandardpowerpurchaseagreement,insomecases,leadingresidentialsolarenergysystemproviderstouseleasesinlieuofpowerpurchaseagreements.Changesinlaw,reductionsin,eliminationsoforadditionalapplicationrequirementsfor,thesebenefitscouldreducedemandforoursystems,adverselyimpactouraccesstocapitalandcouldcauseustoincreasethepricewechargeourcustomersforenergy.

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  • IftheInternalRevenueServiceortheU.S.TreasuryDepartmentmakesadeterminationthatthefairmarketvalueofoursolarenergysystemsismateriallylowerthanwhatwehavereportedinourfundtaxreturnsorcashgrantapplications,wemayhavetopaysignificantamountstoourinvestmentfunds,toourfundinvestorsand/ortheU.S.government.Suchdeterminationscouldhaveamaterialadverseeffectonourbusiness,financialconditionandprospects.

    WereportinourfundtaxreturnsandweandourfundinvestorsclaimtheITCbasedonthefairmarketvalueofoursolarenergysystems.WhilewearenotawareofanyauditsorresultsofauditsrelatedtoourappraisalsorfairmarketvaluedeterminationsofanyofourinvestmentfundsbytheInternalRevenueService,orIRS,scrutinywithrespecttofairmarketvaluedeterminationshasincreasedindustry-wideinrecentyears.IfaspartofanexaminationtheIRSweretoreviewthefairmarketvaluethatweusedtoestablishourbasisforclaimingITCsanddeterminethattheITCspreviouslyclaimedshouldbereduced,wewouldowecertainofourinvestmentfundsorourfundinvestorsanamountequalto30%oftheinvestorsshareofthedifferencebetweenthefairmarketvalueusedtoestablishourbasisforclaimingITCsandtheadjustedfairmarketvaluedeterminedbytheIRS,plusanycostsandexpensesassociatedwithachallengetothatfairmarketvalue,plusagrossuptopayforadditionaltaxes.Wecouldalsobesubjecttotaxliabilities,includinginterestandpenaltiesbasedonourshareofclaimedITCs.Todate,wehavenotbeenrequiredtomakesuchpaymentsunderanyofourinvestmentfunds.

    Ourabilitytoprovidesolarenergysystemstocustomersonaneconomicallyviablebasisdependsonourabilitytofinancethesesystemswithfundinvestorswhorequireparticulartaxandotherbenefits.

    SubstantiallyallofoursolarenergysystemsinstalledtodatehavebeeneligibleforITCsorU.S.Treasurygrants,aswellasaccelerateddepreciationbenefits.Wehavereliedon,andwillcontinuetorelyon,financingstructuresthatmonetizeasubstantialportionofthosebenefitsandprovidefinancingforoursolarenergysystems.If,foranyreason,wewereunabletocontinuetomonetizethosebenefitsthroughthesearrangements,wemaybeunabletoprovidesolarenergysystemsfornewcustomersandmaintainsolarenergysystemsfornewandexistingcustomersonaneconomicallyviablebasis.Theavailabilityofthistax-advantagedfinancingdependsuponmanyfactors,including:

    ourabilitytocompetewithotherrenewableenergycompaniesforthelimitednumberofpotentialinvestmentfundinvestors,eachofwhichhaslimitedfundsandlimitedappetiteforthetaxbenefitsassociatedwiththesefinancings;

    thestateoffinancialandcreditmarkets;

    changesinthelegalortaxrisksassociatedwiththesefinancings;and

    non-renewaloftheseincentivesordecreasesintheassociatedbenefits.

    SolarenergysystemownersarecurrentlyallowedtoclaimtheITCthatisequalto30%ofthesystemseligibletaxbasis,whichisgenerallythefairmarketvalueofthesystem.Bystatute,theITCisscheduledtodecreaseto26%for2020,22%for2021and10%onJanuary1,2022.Moreover,potentialfundinvestorsmustremainsatisfiedthatthestructuresweofferqualifyforthetaxbenefitsassociatedwithsolarenergysystemsavailabletotheseinvestors,whichdependsbothontheinvestorsassessmentoftaxlawandtheabsenceofanyunfavorableinterpretationsofthatlaw.ChangesinexistinglawandinterpretationsbytheIRSandthecourtscouldreducethewillingnessoffundinvestorstoinvestinfundsassociatedwiththesesolarenergysysteminvestments.Wecannotassureyouthatthistypeoffinancingwillcontinuetobeavailabletous.Alternatively,newinvestmentfundstructuresorotherfinancingmechanismsmaybecomeavailable,andifweareunabletotakeadvantageofthesefundstructuresandfinancingmechanismsitmayplaceusatacompetitivedisadvantage.If,foranyreason,weareunabletofinancesolarenergysystemsthroughtax-advantagedstructuresorifweareunabletorealizeormonetizedepreciationbenefits,orifweareotherwiseunabletostructureinvestmentfundsinwaysthatarebothattractivetoinvestorsandallowustoprovidedesirablepricingtocustomers,wemaynolongerbeabletoprovidesolarenergysystemstonewcustomersonaneconomicallyviablebasis.Thiswouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperationsandprospects.

    Risinginterestratescouldadverselyimpactourbusiness.

    Risinginterestratescouldhaveanadverseimpactonourbusinessbyincreasingourcostofcapital.Themajorityofourcashflowstodatehavebeenfromcustomercontractsthathavebeenpartiallymonetizedundervariousinvestmentfundstructures.Oneofthecomponentsofthismonetizationisthepresentvalueofthepaymentstreamsfromthecustomerswhoenterintothesecontracts.Iftherateofreturnrequiredbythefundinvestorrisesasaresultofariseininterestrates,thepresentvalueofthecustomerpaymentstreamandthetotalvaluethatweareabletoderivefrommonetizingthepaymentstreamwilleachbereduced.Interestratesareathistoricallylowlevels.Itislikelythatinterestrateswillrisein2016,whichwouldcauseourcostsofcapitaltoincrease.

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  • Ourinvestmentfundscontainarrangementswhichprovideforprioritydistributionstofundinvestorsuntiltheyreceivetheirtargetedratesofreturn.Inaddition,underthetermsofcertainofourinvestmentfunds,wemayberequiredtomakepaymentstothefundinvestorsifcertaintaxbenefitsthatareallocatedtosuchfundinvestorsarenotrealizedasexpected.Ourfinancialconditionmaybeadverselyimpactedifafundisrequiredtomaketheseprioritydistributionsforalongerperiodthananticipatedtoachievethefundinvestorstargetedratesofreturnorifwearerequiredtomakeanytax-relatedpayments.

    Ourinvestmentfundscontaintermsthatcontractuallyrequiretheinvestmentfundstomakeprioritydistributionstothefundinvestor,totheextentcashisavailable,untilitachievesitstargetedrateofreturn.Theamountsofpotentialfuturedistributionsunderthesearrangementsdependsontheamountsandtimingofreceiptofcashflowsintotheinvestmentfund,almostallofwhichisgeneratedfromcustomerpaymentsrelatedtosolarenergysystemsthathavebeenpreviouslypurchased(orleased,asapplicable)bysuchfund.Ifsuchcashflowsarelowerthanexpected,theprioritydistributionstotheinvestormaycontinueforlongerthaninitiallyanticipated.Additionally,certainofourinvestmentfundsrequirethat,undercertaincircumstances,weforegodistributionsfromthefundthatweareotherwisecontractuallyentitledto,ormakecapitalcontributionstothefund,sothatsuchdistributionsowedtous,oradditionalcapitalcontributionsmadebyus,canberedirectedtothefundinvestorsuchthatitachievesthetargetedreturn.Forexample,asofDecember31,2015,weaccruedanestimated$5.2millioncapitalcontributiontoreimburseafundinvestoraportionofitscapitalcontributioninordertotrue-uptheinvestorsexpectedrateofreturnprimarilyduetoadelayinsolarenergysystemsbeinginterconnectedtothepowergridandotherfactors.

    Ourfundinvestorsalsoexpectreturnspartiallyintheformoftaxbenefitsand,toenablesuchreturns,ourinvestmentfundscontaintermsthatcontractuallyrequireustomakepaymentstothefundsthatarethenusedtomakepaymentstothefundinvestorincertaincircumstancessothatthefundinvestorreceivesvalueequivalenttothetaxbenefitsitexpectedtoreceivewhenenteringintothetransaction.Theamountsofpotentialtaxpaymentsunderthesearrangementsdependonthetaxbenefitsthataccruetosuchinvestorsfromthefundsactivities.

    Duetouncertaintiesassociatedwithestimatingthetimingandamountsofthesecashdistributionsandallocationsoftaxbenefitstosuchinvestors,wecannotdeterminethepotentialmaximumfutureimpactonourcashflowsorpaymentsthatwecouldhavetomakeunderthesearrangements.Wemayagreetosimilartermsinthefutureifmarketconditionsrequireit.Anysignificantpaymentsthatwemayberequiredtomakeordistributionstousthatarereducedordivertedasaresultofthesearrangementscouldadverselyaffectourfinancialcondition.

    Wemayincursubstantiallymoredebtortakeotheractionsthatcouldrestrictourabilitytopursueourbusinessstrategies.

    InSeptember2014,weenteredintoanaggregationcreditfacility,whichwassubsequentlyamendedinFebruary2015andNovember2015,pursuanttowhichwemayborrowuptoanaggregateof$375.0millionand,uponthesatisfactionofcertainconditionsandtheapprovalofthelenders,uptoanaggregateof$175.0millioninadditionalborrowings.Inaddition,inMarch2015,weenteredintoarevolvingcreditfacilitypursuanttowhichwemayborrowuptoanaggregateof$131.0million.InMay2015,certainconditionsweresatisfiedandtheaggregateamountofavailablerevolverborrowingswasincreasedto$150.0million.Thesecreditfacilitiesrestrictourabilitytodisposeofassets,incurindebtedness,incurliens,paydividendsormakeotherdistributionstoholdersofourcapitalstock,repurchaseourcapitalstock,makespecifiedinvestmentsorengageintransactionswithouraffiliates.Inaddition,wedonothavefullaccesstothecashandcashequivalentsheldinourinvestmentsfundsuntildistributedperthetermsofthearrangements.Weandoursubsidiariesmayincursubstantialadditionaldebtinthefutureandanydebtinstrumentweenterintointhefuturemaycontainsimilar,ormoreonerous,restrictions.Theserestrictionscouldinhibitourabilitytopursueourbusinessstrategies.Furthermore,ifwedefaultononeofourdebtinstruments,andsucheventofdefaultisnotcuredorwaived,thelenderscouldterminatecommitmentstolendandcauseallamountsoutstandingwithrespecttothedebttobedueandpayableimmediately,whichinturncouldresultincrossaccelerationunderotherdebtinstruments.Ourassetsandcashflowmaynotbesufficienttofullyrepayborrowingsunderallofouroutstandingdebtinstrumentsifsomeoralloftheseinstrumentsareaccelerateduponadefault.

    Furthermore,thereisnoassurancethatwewillbeabletoenterintonewdebtinstrumentsonacceptableterms.Ifweareunabletosatisfyfinancialcovenantsandothertermsunderexistingornewinstrumentsorobtainwaiversorforbearancefromourlendersorifweareunabletoobtainrefinancingornewfinancingsforourworkingcapital,equipmentandotherneedsonacceptabletermsifandwhenneeded,ourbusinesswouldbeadverselyaffected.

    Ourbusinessisconcentratedincertainmarkets,puttingusatriskofregionspecificdisruptions.

    AsofDecember31,2015,approximately39%ofourcumulativeinstallationsandtotalofficeswerelocatedinCalifornia.Inaddition,weexpectfuturegrowthtooccurinCalifornia,whichcouldfurtherconcentrateourcustomerbaseandoperationalinfrastructure.Accordingly,ourbusinessandresultsofoperationsareparticularlysusceptibletoadverseeconomic,regulatory,political,weatherandotherconditionsinCaliforniaandinothermarketsthatmaybecomesimilarlyconcentrated.

    17

  • Itisdifficulttoevaluateourbusinessandprospectsduetoourlimitedoperatinghistory.

    Sinceourformationin2011,wehavefocusedoureffortsexclusivelyonthesales,financing,engineering,installation,maintenanceandmonitoringofsolarenergysystemsforresidentialcustomers.Wemaybeunsuccessfulinsignificantlybroadeningourcustomerbasethroughinstallationofsolarenergysystemswithinourcurrentmarketsorinnewmarketswemayenter.Ourlimitedoperatinghistory,combinedwiththerapidlyevolvingandcompetitivenatureofourindustry,maynotprovideanadequatebasisforyoutoevaluateouroperatingandfinancialresultsandbusinessprospects.Inaddition,wehavelimitedinsightintoemergingtrendsthatmayadverselyimpactourbusiness,prospectsandoperatingresults.

    Additionally,duetoourlimitedoperatinghistory,wedonothaveempiricalevidenceoftheeffectofoursystemsontheresalevalueofourcustomershouses.Duetothelengthofourcustomercontracts,thesystemdeployedonacustomersroofmaybeoutdatedpriortotheexpirationofthetermofthecustomercontractreducingthelikelihoodofrenewalofourcontractsattheendofthe20-yearterm,andpossiblyincreasingtheoccurrenceofdefaults.Thiscouldhaveanadverseeffectonourbusiness,financialcondition,resultsofoperationsandcashflow.Asaresult,ourlimitedoperatinghistorymayimpairourabilitytoaccuratelyforecastourfutureperformanceandtoinvestaccordingly.

    Wehaveidentifiedamaterialweaknessinourinternalcontroloverfinancialreportingrelatingtoinadequatefinancialstatementpreparationandreviewproceduresinconnectionwiththepreparationofourconsolidatedfinancialstatementsthatresultedintherestatementofcertainofourfinancialstatements,andwemayidentifymaterialweaknessesinthefuture.

    Inconnectionwiththepreparation,auditsandinterimreviewsofourconsolidatedfinancialstatements,weandourindependentregisteredpublicaccountingfirmidentifiedamaterialweaknessininternalcontroloverfinancialreporting.UnderstandardsestablishedbythePublicCompanyAccountingOversightBoardoftheUnitedStates,amaterialweaknessisadeficiency,oracombinationofdeficienciesininternalcontroloverfinancialreporting,suchthatthereisareasonablepossibilitythatamaterialmisstatementofourannualorinterimfinancialstatementswillnotbepreventedordetectedonatimelybasis.

    WepreviouslyreportedamaterialweaknessininternalcontroloverfinancialreportingfortheyearendedDecember31,2014.Thismaterialweaknesshasnotbeenfullyremediatedandasaresult,fortheyearendedDecember31,2015,wecontinuedtohavedeficienciesinourinternalcontrolsincludingthoseassociatedwiththeHLBVmethodofattributingnetincomeorlosstonon-controllinginterestsandredeemablenon-controllinginterestsandwithourfinancialstatementcloseprocess.

    Thenatureofourinvestmentfundsincreasesthecomplexityofouraccountingfortheallocationofnetincome(loss)betweenourstockholdersandnon-controllinginterestsundertheHLBVmethodandthecalculationofourtaxprovision.Asweenterintoadditionalinvestmentfunds,whichmayhavecontractualprovisionsdifferentfromthoseofourexistingfunds,thecalculationundertheHLBVmethodandthecalculationofourtaxprovisioncouldbecomeincreasinglycomplicated.Thisadditionalcomplexitycouldincreasethechancethatweexperienceadditionalerrorsinthefuture,particularlybecausewehaveamaterialweaknessininternalcontrols.Inaddition,ourneedtodevoteourresourcestoaddressingthiscomplexitycoulddelayorprolongourremediationeffortsandtherebyprolongtheexistenceofthematerialweakness.

    WecontinuetotakestepstoremediatetheunderlyingcausesofthematerialweaknessthatwasreportedfortheyearendedDecember31,2014.Wehavehiredanumberofadditionalfinancial,accountingandtaxpersonnel.InJanuary2015,wehiredadirectorofinternalaudittoassistusinimplementingandimprovingourexistinginternalcontrols.InFebruary2015,wehiredachiefinformationofficertoassistusinimprovingourunderlyinginformationtechnologysystemsandtodecreaseourrelianceonmanualprocesses.Wecontinuetoengagethird-partyconsultantstoprovidesupportoverouraccountingandtaxprocessestoassistuswithourevaluationofcomplextechnicalaccountingmatters.Wecontinuetoengageconsultantstoadviseusonmakingfurtherimprovementstoourinternalcontrolsoverfinancialreporting.Webelievethattheseadditionalresourceswillenableustobroadenthescopeandqualityofourcontrolsrelatingtotheoversightandreviewoffinancialstatementsandourapplicationofrelevantaccountingpolicies.Furthermore,wecontinuetoimplementandimprovesystemstoautomatecertainfinancialreportingprocessesandtoimproveinformationaccuracy.Theseremediationeffortsarestillinprocessandhavenotyetbeencompleted.Becauseofthismaterialweakness,thereisheightenedriskthatamaterialmisstatementofourannualorquarterlyfinancialstatementswillnotbepreventedordetected.

    Theactionsthatwearetakingaresubjecttoongoingseniormanagementreviewaswellasauditcommitteeoversight.Weareworkingdiligentlyonthisremediationprocess;however,wecannotestimatehowlongitwilltaketoremediatethismaterialweakness.Inaddition,theremediationstepswehavetaken,aretakingandexpecttotakemaynoteffectivelyremediatethematerialweakness,inwhichcaseourinternalcontroloverfinancialreportingwouldcontinuetobeineffective.Wecannotguaranteethatwewillbeabletocompleteourremedialactionssuccessfully.Evenifweareabletocompletetheseactionssuccessfully,thesemeasuresmaynotadequatelyaddressourmaterialweakness.Inaddition,itispossiblethatwewilldiscoveradditionalmaterialweaknessesinourinternalcontroloverfinancialreportingorthatourexistingmaterialweaknesswillresultinadditionalerrorsinorrestatementsofourfinancialstatements.

    18

  • Ifinfutureperiodswedeterminethatthismaterialweaknesshasnotbeenremediatedorweidentifyothermaterialweaknessesininternalcontroloverfinancialreporting,wewillbeunabletoassertthatourinternalcontroloverfinancialreportingise


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