VIVINT SOLAR, INC. -...
Transcript of VIVINT SOLAR, INC. -...
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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.
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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
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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.
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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
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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.
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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.
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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.
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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
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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;
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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
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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.
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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.
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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.
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Ifinfutureperiodswedeterminethatthismaterialweaknesshasnotbeenremediatedorweidentifyothermaterialweaknessesininternalcontroloverfinancialreporting,wewillbeunabletoassertthatourinternalcontroloverfinancialreportingise