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~~2016

¨☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-35758

SolarCity Corporation

(Exact name of registrant as specified in its charter)

Delaware		02-0781046
(State or other jurisdiction ofincorporation or organization)		(I.R.S. EmployerIdentification Number)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

3055 Clearview Way

San Mateo, California 94402

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (650) 638-1028

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.0001 per share		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

~~Securities~~Indicate ~~registered~~by ~~pursuant~~check tomark ~~Section~~if the registrant is a well-known seasoned issuer, as defined in Rule ~~12(g)~~405 of the ~~Act:~~Securities Act. Yes ☐ No ☒

~~None~~Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Yes ☐ No ☒

Indicate by check mark ifwhether the registrant: is(1) has afiled ~~well-known~~all ~~seasoned~~reports ~~issuer,~~required asto ~~defined~~be infiled ~~Rule~~by Section ~~405~~13 or 15(d) of the ~~Securities~~Exchange Act 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 ifwhether the registrant ishas ~~not~~submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to ~~file~~be ~~reports~~submitted and posted pursuant to ~~Section~~Rule 13405 orof ~~Section~~Regulation 15S-T (d)§232.405 of ~~the~~this ~~Securities~~chapter) ~~Exchange~~during ~~Act~~the ofpreceding ~~1934~~12 months (or for such shorter period that the ~~“Exchange~~registrant ~~Act”~~was required to submit and post such files). Yes ¨☒ No x ☐

Indicate by check mark ~~whether~~if ~~the~~disclosure ~~registrant:~~of ~~(1) has~~delinquent ~~filed~~filers ~~all~~pursuant ~~reports required~~ to beItem 405 ~~filed~~of ~~by Section~~Regulation 13S-K ~~or 15~~(d)§229.405 of ~~the~~this ~~Exchange~~chapter) ~~Act~~is ~~during~~not ~~the~~contained ~~preceding~~herein, ~~12 months~~and ~~(or~~will ~~for~~not ~~such~~be ~~shorter~~contained, ~~period~~to ~~that~~ the best of registrant’s ~~was~~knowledge, ~~required~~in todefinitive ~~file~~proxy ~~such~~or ~~reports),~~information ~~and~~statements ~~(2) has~~incorporated ~~been~~by ~~subject~~reference toin ~~such~~Part III ~~filing~~of ~~requirements~~this ~~for~~Form 10-K ~~the~~or ~~past~~any 90amendment to this Form ~~days~~10-K. ~~Yes~~ ~~x No ¨~~ ☒

Indicate by check mark whether the registrant ~~has~~is ~~submitted~~a ~~electronically~~large ~~and~~accelerated ~~posted~~filer, onan ~~its~~accelerated ~~corporate Web site~~filer, ifa ~~any~~non-accelerated filer, ~~every~~or ~~Interactive~~a ~~Data~~smaller ~~File~~reporting ~~required~~company. toSee bethe ~~submitted~~definitions ~~and~~of ~~posted~~“large ~~pursuant~~accelerated tofiler,” ~~Rule 405~~“accelerated offiler” ~~Regulation S-T~~and ~~(§232.405~~“smaller ofreporting ~~this~~company” ~~chapter)~~in ~~during the preceding 12~~Rule ~~months~~12b-2 ~~(or~~of ~~for such shorter period that~~ the ~~registrant~~Exchange ~~was~~Act. ~~required~~(Check ~~to submit and post such files~~one)~~. Yes x No ¨~~

~~Indicate~~Large byaccelerated ~~check~~filer ~~mark~~☐ ifAccelerated ~~disclosure~~filer of☐ ~~delinquent~~Non-accelerated ~~filers~~filer ~~pursuant~~☒ ~~to Item 405 of Regulation S-K~~ (~~§229.405~~Do ~~of this chapter) is~~ not ~~contained~~check ~~herein,~~if ~~and~~a ~~will~~smaller ~~not~~reporting becompany) ~~contained,~~Smaller toreporting ~~the~~company ~~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. ¨~~ ☐

Indicate by check mark whether the registrant is a ~~large~~shell ~~accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting~~ company. ~~See~~(as ~~the~~defined ~~definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”~~ in Rule 12b-2 of the Exchange Act~~. (Check one~~): . Yes ☐ No ☒

~~Large~~As ~~accelerated~~of ~~filer~~June 30, x2016 ~~Accelerated~~(the ~~filer~~last ¨business ~~Non~~day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of voting stock held by non-~~accelerated~~affiliates ~~filer~~of ¨the ~~(Do~~registrant ~~not~~based ~~check~~on ifthe aclosing ~~smaller~~price ~~reporting~~of ~~company)~~$23.93 ~~Smaller~~for ~~reporting~~shares ~~company~~of ¨the registrant’s common stock as reported by the NASDAQ Global Select Market, was approximately $1,615.7 million.

~~Indicate~~Since byNovember ~~check~~21, ~~mark~~2016 ~~whether~~and on January 31, 2017, 100 shares of the registrant’s iscommon astock, ~~shell~~$0.01 ~~company~~par ~~(as~~value, ~~defined~~were inoutstanding, ~~Rule 12b-2~~all of ~~the~~which ~~Exchange~~were ~~Act). Yes ¨ No x~~owned directly by Tesla, Inc.

AsREDUCED ofDISCLOSURE June 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price of $53.55 for shares of the registrant’s common stock as reported by the NASDAQ Global Select Market, was approximately $3,281.8 million. FORMAT

OnThe ~~January 31,~~registrant ~~2016,~~meets ~~97,913,107~~the ~~shares~~conditions set forth in General Instruction I(1)(a) and (b) of ~~the~~Form ~~registrant’s~~10-K ~~common~~and ~~stock,~~is ~~$0.0001~~therefore ~~par~~filing ~~value,~~this ~~were~~Form ~~outstanding.~~with the reduced disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

Portions of the information called for by Part III of this Form 10-K is hereby incorporated by reference from the definitive Proxy Statement for our annual meeting of stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2015.

TABLE OF CONTENTS

		Page
PART I		2
Item 1.	Business	2
Item 1A.	Risk Factors	126
Item 1B.	Unresolved Staff Comments	3624
Item 2.	Properties	3624
Item 3	Legal Proceedings	3724
Item 4.	Mine Safety Disclosures	3826
PART II		3927
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities	3927
Item 6.	Selected Consolidated Financial Data	4127
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4228
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	7036
Item 8.	Financial Statements and Supplementary Data	7137
	Report of Independent Registered Public Accounting Firm	7238
	Consolidated Balance Sheets	7339
	Consolidated Statements of Operations	7541
	Consolidated Statements of Equity	7642
	Consolidated Statements of Cash Flows	7743
	Notes to Consolidated Financial Statements	7945
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	~~132~~95
Item 9A.	Controls and Procedures	~~132~~95
Item 9B.	Other Information	~~134~~96
PART III		~~135~~97
Item 10.	Directors, Executive Officers, and Corporate Governance	~~135~~97
Item 11.	Executive Compensation	~~135~~97
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~135~~97
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~135~~97
Item 14.	Principal Accountant Fees and Services	~~135~~97
PART IV		~~136~~99
Item 15.	Exhibits and Financial Statement Schedules	~~136~~99
	Signatures

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The ~~discussion~~discussions in this ~~annual~~Annual ~~report~~Report on Form 10-K ~~contains~~contain forward-looking statements ~~within~~reflecting ~~the~~our ~~meaning~~current ofexpectations ~~Section 27A~~that ofinvolve ~~the~~risks ~~Securities Act of 1933, as amended, or the Securities Act,~~ and ~~Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act~~uncertainties. ~~Forward~~These forward-looking statements ~~are~~include, ~~any~~but ~~statements~~are ~~that~~not ~~look~~limited to, ~~future~~statements ~~events~~concerning ~~and~~our ~~consist of~~strategy, ~~among~~future ~~other things~~operations, ~~our business strategies; anticipated~~ future financial ~~results;~~position, ~~expected~~future ~~trends~~revenues, inprojected ~~certain~~costs, ~~financial~~profitability, ~~and~~expected ~~operating~~cost ~~metrics;~~reductions, ~~our~~capital ~~belief~~adequacy, ~~that~~expectations ~~the~~regarding ~~aggregate~~demand ~~megawatt~~and ~~production~~acceptance ~~capacity~~for of our ~~systems~~products, ~~is an indicator of the~~ growth ~~rate~~opportunities ~~of our solar energy systems business; the calculation of estimated nominal contracted payments remaining,~~ and ~~certain~~trends ~~other metrics based on forward-looking projections; projections on growth~~ in the markets ~~that~~in which we operate ~~and our growth rates; pricing trends~~, ~~including~~prospects ~~our ability to achieve economies of scale in both installation~~ and ~~capital~~plans ~~costs; our ability to successfully integrate acquired businesses, operations~~ and ~~personnel;~~objectives ~~our ability to achieve manufacturing economies~~ of ~~scale and associated cost reductions; our goals reducing our cost per watt to $2~~management.30 byThe ~~2017~~words ~~and~~“anticipates”, ~~$2.00~~“believes”, by“estimates”, ~~2019;~~“expects”, ~~our~~“intends”, ~~expectations~~“may”, ~~regarding~~“plans”, ~~the~~“projects”, ~~Riverbend Agreement~~“will”, ~~the~~“would” ~~development~~ and ~~construction~~similar ofexpressions ~~the~~are ~~Manufacturing~~intended ~~Facility, anticipated timing and expense related~~ to ~~acquisition~~identify offorward-looking ~~manufacturing equipment~~statements, ~~and~~although ~~related~~not ~~assumptions~~all ~~regarding expected capital and operating expenses and the performance of our manufacturing operations; our belief that adequate surplus capacity of non~~forward-~~tariff~~looking ~~solar~~statements ~~panels~~contain isthese ~~available~~identifying towords. ~~suit~~We ~~our~~may ~~future~~not ~~needs~~actually ~~and~~achieve the ~~costs~~plans, ofintentions ~~solar~~or ~~energy~~expectations ~~system~~disclosed ~~components;~~in our ~~beliefs~~forward-looking ~~regarding~~statements ~~future regulations~~ and ~~policies~~you ~~affecting~~should ~~our~~not ~~business,~~place ~~such~~undue ~~as net energy metering policies; projections relating to our use of and~~ reliance on ~~U.S. Treasury grants and federal, state and local incentives and tax attributes;~~ our ~~regulatory~~forward-looking ~~status~~statements. asActual aresults ~~non-utility;~~or ~~our~~events ~~ability~~could todiffer ~~continue~~materially tofrom ~~meet~~ the ~~regulatory~~plans, ~~requirements~~intentions ~~of a public company; domestic~~ and ~~international~~expectations ~~expansion,~~disclosed ~~including~~in ~~throughout~~the ~~Mexico,~~forward-looking ~~and~~statements ~~hiring~~that ~~plans;~~we ~~compliance~~make. ~~with~~These ~~federal~~forward-looking ~~and~~statements ~~international~~involve ~~laws~~risks and ~~regulations;~~uncertainties ~~product~~that ~~development~~could ~~efforts~~cause ~~and~~our ~~customer~~actual ~~preferences;~~results ~~the~~to ~~fair~~differ ~~market~~materially ~~value~~from ofthose ~~our~~in ~~solar~~the ~~energy~~forward-looking ~~systems~~statements, including, ~~amounts~~without ~~potentially~~limitation, ~~payable to our fund investors as a result of decreased fair market value determinations by~~ the ~~U.S.~~risks ~~Treasury~~set ~~Department;~~forth ~~the~~in ~~life~~Part ~~and~~I, ~~durability~~Item ~~of our solar systems and equipment~~1A, ~~anticipated~~“Risk ~~contract~~Factors” ~~renewals~~in ~~and~~this ~~warranty~~Annual ~~obligations;~~Report ~~the~~on ~~success~~Form of10-K ~~our sales~~ and ~~marketing~~in ~~efforts;~~ our ~~internal~~other ~~control~~filings ~~environment;~~with ~~pending litigation;~~ the ~~payment~~Securities ~~of future dividends;~~ and ~~our~~Exchange ~~belief~~Commission. asWe todo ~~the~~not ~~sufficiency~~assume ofany ~~our~~obligation ~~existing cash and cash equivalents, funds available under our secured credit facilities and funds available under existing financing funds~~ to ~~meet~~update ~~our~~any ~~working~~forward-looking ~~capital and operating resource requirements for the next 12 months~~statements.

The forward-looking statements are contained principally in, but not limited to, the sections titled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “will,” “may,” “anticipate,” “believe,” “could,” “would,” “might,” “potentially,” “estimate,” “continue,” “plan,” “expect,” “intend,” and similar expressions or the negative of these terms or other comparable terminology that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements speak only as of the date of this annual report on Form 10-K and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of a number of factors, including those set forth below in Part I, Item 1A, “Risk Factors,” and in our other reports filed with the U.S. Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We undertake no obligation to revise or publically release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

PART I

ITEM 1. BUSINESS

Overview

SolarCity’s founding vision is to accelerate mass adoption of sustainable energy. We believe solar power can and will become the world’s predominant source of energy, and that we can speed widespread adoption of solar power by offering products that save our customers money. WeIn ~~sell~~November ~~renewable~~2016, ~~energy~~we towere ~~our~~acquired ~~customers~~by atTesla, Inc., ~~prices~~or ~~below utility rates~~Tesla, ~~and~~with ~~are~~a ~~focused~~goal onof ~~reducing~~creating the ~~cost~~world’s offirst ~~solar~~vertically ~~energy.~~integrated ~~Since~~sustainable ~~our founding in 2006, we have installed solar~~ energy ~~systems~~company ~~for~~to ~~over~~provide ~~230,000~~ customers. ~~Our long-term agreements~~ with ~~our customers generate recurring payments and create~~ a ~~portfolio~~simple ~~of high~~one-~~quality~~stop ~~receivables~~experience ~~that~~for weclean ~~leverage~~energy togeneration, ~~further~~storage ~~reduce~~and ~~the cost of making the switch to solar energy~~transportation.

We ~~currently~~sell ~~install~~renewable ~~more~~energy ~~solar~~and energy ~~systems~~storage ~~than~~solutions ~~any~~to ~~other~~our ~~company~~customers, intypically ~~the~~at ~~United~~prices ~~States~~below ~~with~~utility ~~over 110~~rates,~~000~~ ~~new~~and ~~installations~~are infocused ~~2015.~~on ~~During~~reducing the ~~first~~costs ~~nine months~~ of ~~2015,~~adopting ~~we installed approximately one-third of all residential~~ solar energy. ~~capacity~~We ~~installed~~make init ~~the~~easy ~~United~~for ~~States~~our ~~and~~customers ~~approximately~~to ~~one-eighth~~adopt ~~of all commercial and industrial~~ solar energy ~~capacity~~by indesigning, ~~the United States~~permitting, ~~according to GTM Research~~financing, and weinstalling ~~are~~our ~~the largest employer in the United States~~ solar ~~industry.~~energy ~~Despite~~and ~~our~~storage ~~growth~~systems, asand ofperforming ~~the~~maintenance ~~end~~and ofmonitoring ~~2015,~~services. ~~the~~We ~~electricity~~offer ~~produced by~~ our ~~solar~~customers ~~installations~~the ~~represented~~ability ~~less~~to ~~than~~go ~~0.1%~~solar offor ~~total~~little ~~U.S.~~to ~~electricity~~no ~~generation.~~upfront ~~With over 37 million single-family homes in our primary service territories~~costs, ~~and~~or ~~many~~we ~~millions~~sell ~~more~~solar ~~across~~energy ~~the rest of the country~~ and ~~the~~energy ~~world,~~storage ~~our~~systems ~~opportunity~~ to ~~expand~~our iscustomers ~~enormous~~with ~~and~~a ~~continues~~variety toof ~~grow~~financing alternatives.

~~Achieving~~2016 ~~our~~Operational founding vision requires changing the way that electricity is produced and delivered. As part of this mission, we have set operational goals of reducing our cost per watt to $2.30 by 2017 and $2.00 by 2019. Accomplishing these goals requires efficient growth in our business through continued product and financing innovations, and a strong dedication to customer service.Highlights:

~~2015~~Our ~~Operational~~2016 ~~Highlights~~operational highlights include the following:

~~Our~~• ~~2015~~Acquisition ~~operational~~by ~~highlights~~Tesla ~~include~~– With our acquisition by Tesla, we have combined to create the ~~follow:~~world’s only vertically integrated sustainable energy company, offering customer solutions ranging from clean energy generation to storage to transportation.

·• ~~Megawatts~~Solar ~~Installed~~Roof Announcement – WeWith ~~installed~~Tesla, ~~870~~we ~~megawatts~~announced in the ~~year~~launch ~~ended~~of ~~December~~our ~~31,~~Solar ~~2015~~Roof, anseamlessly ~~increase~~integrating ofhigh-efficiency ~~73.0%~~solar ~~from~~energy ~~the~~production ~~year~~with ~~ended~~aesthetically ~~December~~pleasing ~~31, 2014,~~ and ~~installed~~extremely ~~more~~durable ~~solar~~glass ~~energy~~roofing ~~systems~~tiles, ~~than~~designed ~~any~~to ~~other~~complement ~~company~~and inpower ~~the~~customer ~~United States in 2015~~homes.

·• ~~Healthy~~Manufacturing ~~Balance~~Relationship ~~Sheet~~with Panasonic – We ~~had~~entered ~~cash~~into long-term agreements with Panasonic to manufacture custom solar cell and ~~cash~~solar ~~equivalents~~panels ofat ~~$382.5~~the ~~million~~Riverbend asmanufacturing offacility ~~December~~located 31in Buffalo, ~~2015~~New York, designed to accompany Tesla’s Powerwall and Powerpack energy storage products.

·• ~~Solar~~Worldwide ~~Installations~~Microgrid Service – We ~~have~~made ~~installed~~continued ~~232~~advancements in our GridLogic microgrid services,~~940~~ ~~solar~~with ~~energy~~an ~~systems~~installation ~~for~~on ~~our~~the ~~customers~~island asof ~~December~~Ta’u ~~31,~~in ~~2015,~~American anSamoa ~~increase~~designed ofto ~~87.8%~~replace ~~from~~the ~~fiscal~~costly ~~2014~~need to transport diesel fuel for generators with affordable, reliable solar power.

· Total Employees – We grew to 15,273 total employees as of December 31, 2015, an increase of 68.7% from fiscal 2014.

· International Expansion – In 2015, we expanded our solar installation business internationally into Mexico, with our acquisition of Ilioss in August 2015.

· Convertible Note Offerings – We issued $113 million in aggregate principal of zero coupon convertible senior notes due 2020 in a private placement transaction.

· Advancement in Rooftop Solar Panel Efficiency – In the fourth quarter of 2015, we announced that we had built what we believe to be the world’s most efficient rooftop solar panel, with a module efficiency exceeding 22%, and began domestic manufacturing of our high-efficiency rooftop solar panels.

· Worldwide Microgrid Service – We launched GridLogic, a microgrid service that combines distributed energy resources (solar, batteries and controllable load) and can provide dependable, clean power to communities anywhere in the world vulnerable to power outages and high energy costs.

· Service Offering to SMBs – We partnered with Renew Financial to begin offering our energy contracts to small and medium-sized businesses, or SMBs, by allowing them to make payments through their property tax bills.

We believe the significant demand for our energy solutions results from the following value propositions:

· We lower energy costs. We make it possible for our customers to switch to clean solar energy for less than they currently pay for electricity from utilities, with little to no up-front cost. Customers also are able to secure their energy costs for the long term and potentially insulate themselves from rising energy costs.

· We build long-term customer relationships. We are focused on creating lifetime customer relationships. We offer solar energy on long-term customer agreements, typically with 20-year contract terms for SolarCity owned systems (with the potential to renew contracts at the end of the original term) and 30-year contract terms for customer-owned systems financed by SolarCity. These agreements reflect a position of trust in our customers’ homes and businesses and generate significant referrals to new customers. Approximately one-out-of-five of our new residential sales in 2015 have come from referrals from other customers.

· We make it easy. We perform the entire process – designing, permitting, financing, installing, maintenance and monitoring – and enable our customers to make the simple switch to renewable energy.

· We focus on quality. Our top priority is to provide value and quality service to our customers. We have assembled a highly skilled team of in-house professionals dedicated to the highest engineering standards, overall quality and customer service during the installation process and throughout the entire life of the solar energy system.

Our Customers

Our customers purchase electricity and energy-related products and services from us that lower their overall energy costs. Our customer base is comprised of the following key sectors:

· Residential. The vast majority of our customers are individual homeowners who want to switch to cleaner, more affordable energy. Residential customers also include homeowners within communities developed by home builders we have partnered with.

· Commercial. Our commercial customers represent diverse business sectors, including technology, retail, manufacturing, agriculture and nonprofits, including large customers such as Walmart, eBay, HP, Walgreens, Intel, and Safeway, Mexican businesses such as Tiendas Soriana, and thousands of other businesses across the United States, including SMBs.

· Government. We have installed solar energy systems for various federal, state and municipal government entities, including the U.S. Air Force, Army, Marines and Navy, the City of Lancaster, the City of San Jose, the City of Sacramento, the Department of Homeland Security and a number of schools and universities.

We generally group our commercial and governmental customers together for our internal customer management purposes.

We have completed installations in 27 states, the District of Columbia, Puerto Rico, Canada and Mexico, and maintain operations centers across the United States. More than 70% of our current customers are in our top five states – California, Arizona, Massachusetts, Maryland and New York. We intend to expand our footprint domestically and internationally wherever distributed solar energy generation is a viable economic alternative to utility generation.

Our Approach

Through our ~~uniquely~~collaboration with Tesla, our vertically-integrated ~~strategy,~~offerings we enable our customers to lower their energy costs with distributed solar energy in a simple and efficient process. We have disrupted the industry status quo by providing renewable energy directly to customers, typically for less than they are currently paying for utility-generated energy. Unlike utilities, we provide energy with a predictable cost structure that does not rely on limited fossil fuels and is insulated from rising retail electricity prices. We also provide assurances to our customers as to the amount of electricity produced by our solar energy systems. Our strategy is to create a best-in-class vertically-integrated operation focused on leveraging differentiated technology and our significant scale to lead the way in driving down the cost of solar energy to an affordable level for more and more people across the country and, eventually, the world. By focusing on technology solutions, we are working to build a cleaner, more affordable, more resilient energy distribution grid. By putting cleaner and more affordable energy in the hands of the consumer, we are building a broad portfolio of customers with relationships we aim to retain for life and ultimately a network of distributed solar energy systems that could transform the way energy is delivered globally.

The key elements of our integrated customer-focused approach are illustrated below:

SolarCity’s Integrated Approach

· Sales. We sell our products and services through a national sales organization that includes specialized internal call centers, a door-to-door sales team, a channel partner network and a robust customer referral program. We have structured our sales organization to efficiently engage prospective customers from initial interest to customized proposals to signed contracts. We intend to continue growing our sales teams as we focus on cost-efficient growth to educate consumers about the benefits of our solar products in order to lower customer acquisition costs and further expand our operations.

· Financing. Financing makes it possible to install our solar energy systems for little or no upfront cost. Through a streamlined process, we provide multiple pricing options to our customers to help make renewable, distributed energy accessible and affordable, either on a fixed monthly fee basis or a fee based on the amount of energy produced. Our continued focus on innovative solar financing helps reduce our cost of capital and offers a range of payment alternatives to our customers.

· Engineering. Our in-house engineering team designs a customized solar energy system for each of our customers. We have developed software that simplifies and expedites the design process and optimizes the design to maximize the energy production of each system. Our engineers complete a structural analysis of each building and produce a full set of structural design and electrical blueprints that contain the specifications for all system components.

· Manufacturing: In the fourth quarter of 2015, we announced that we had built what we believe to be the world’s most efficient rooftop solar panel, with a module efficiency exceeding 22%, and began domestic manufacturing of our high-efficiency rooftop solar panels. We have also continued making innovations in solar mounting hardware, focusing on further reducing our installation time and costs.

· Installation. Once we complete the design of our solar energy systems, we obtain all necessary building permits. Our customer care representatives coordinate the SolarCity team and continually update our customers every step through the project. We are a licensed contractor or use licensed subcontractors in every community we service, and we are responsible for every customer installation. For substantially all of our residential projects, we are the general contractor, construction manager and installer. For our commercial projects, we are in most cases the general contractor and construction manager and are increasing the integration of our commercial installation operations. Once we complete installation of a system, we schedule inspections with the local building department and arrange for interconnection to the power grid with the utility. By handling these logistics, we make the installation process simple for our customers.

· Monitoring and Maintenance. Our proprietary monitoring software provides our customers with a real-time view of their energy generation and consumption. Our monitoring systems collect, monitor and display critical performance data from our solar energy systems, including production levels, local weather, electricity usage and environmental impacts. These monitoring systems allow us to confirm the continuing proper operation of our solar energy systems, identify maintenance issues and provide our customers with a better understanding of their energy usage, allowing them the opportunity to modify their usage accordingly. Our proprietary MySolarCity application offers an easy-to-read graphical display available on smartphones and any device with a Web browser, along with our proprietary EnergyExplorer that provides homeowners a self-guided tour of their energy usage, and MySystem which allows them to track their installation throughout the process.

· Energy Storage. We also offer energy storage services through our collaboration with Tesla Motors. In March 2015, we announced our proprietary GridLogic microgrid service that combines distributed energy resources to enable a cleaner, more resilient and more affordable way of providing power. In April 2015, we announced a turnkey residential battery backup service that incorporates Tesla’s Powerwall. We continue to see strong customer adoption of our DemandLogic smart energy storage system for commercial customers that allow businesses to reduce energy costs by using stored electricity generated by our solar energy systems to reduce peak demand from utilities.

Competitive Strengths

We believe the following strengths enable us to deliver our solar energy solutions to a diversified customer base that includes residential homeowners, large and small businesses, and government entities:

· Lower cost energy. We provide energy to our customers at prices below utility rates. Our solar energy systems rely solely on the energy produced by the sun, allowing our customers to generate their own energy and reduce the amount they purchase from utilities. We help put solar energy generation within the reach of our customers by providing a variety of pricing options that minimize or eliminate upfront costs. Our customers typically achieve a lower overall electricity bill immediately upon installation. As retail utility rates rise, our customers’ savings can generally increase.

· Easy to switch. We have developed an integrated approach that allows our customers to access distributed renewable energy generation simply and efficiently. By providing the sales, financing, engineering, installation, monitoring and maintenance ourselves, we are able to control and oversee the entire process while providing a superior experience to our customers.

· Long-term customer relationships. Our business model is centered on developing long-term relationships with our customers. Under our standard customer lease and power purchase agreements, our solar energy customers typically purchase energy from us for 20 years, and because our solar energy systems have an estimated life in excess of 30 years, we intend to offer our customers renewal contracts at the end of the original contract term. Under our MyPower product, we sell solar energy systems to our customers financed by a loan of up to 30 years. Under all our agreements, we maintain an ongoing relationship with our solar energy customers through our receipt of payments and our real-time monitoring systems.

· Significant size and scale. Our status as the leading installer of solar energy systems in the United States enables us to achieve economies of scale in both installation and capital costs. We believe that our scale provides our customers with confidence in our continuing ability to service their system and guarantee its performance over the duration of their long-term contract.

· Innovative technology. We continually innovate and develop new technologies to facilitate our growth and to enhance the delivery of our products and services. For example, we have developed proprietary software to reduce system design and installation, and we have acquired leading solar technology companies such as Zep Solar and Silevo.

· Brand recognition. Our lifetime approach to customer relationships, our ability to provide high-quality services, and our dedication to best-in-class engineering efforts have helped us establish a recognized and trusted national brand. As one of the first companies to enter the solar leasing business and with the largest number of installations in the country by a wide margin, we have built a formidable track record of excellent workmanship and high customer satisfaction that is difficult for smaller, newer competitors to match. In 2015, approximately one-out-of-five of our new residential sales contracts originated from customer referrals. We believe our well-known brand and strong reputation are meaningful factors for customers as they consider their energy alternatives.

· Strong leadership team. We are led by a strong management team with demonstrated execution capabilities and an ability to adapt to rapidly changing market environments. Our senior leadership team, consisting of our co-founders, Lyndon R. Rive and Peter J. Rive, and our chairman, Elon Musk, are widely recognized entrepreneurs and thought leaders with track records of building successful businesses. Additionally, to support our integrated business model, we have developed in-house expertise through strong senior leadership on our engineering, structured finance, legal and government affairs teams.

Our Financial Strategy and Product Offerings

SolarCity is an industry leader in offering innovative financing alternatives for our customers. In 2008, we launched the SolarLease, offering customers a fixed monthly fee at rates that typically translated into lower monthly utility bills with an electricity production guarantee from a SolarCity-owned system. This was followed in 2009 by the launch of the SolarPPA, a power purchase agreement charging customers a fee per kilowatt hour, or kWh, based on the amount of electricity produced by our solar energy systems at rates typically lower than their local utility rate. Our current standard SolarLease and SolarPPA offerings have 20-year terms, and we typically offer the opportunity to renew for up to an additional 10 years. In 2014, we launched ~~MyPower,~~our first loan product with a SolarCity-financed loan ~~that~~allowing ~~offers~~customers to finance the ~~benefits~~purchase of ~~customer-owned~~a ~~systems.~~solar ~~MyPower~~energy ~~allows~~system, ~~customers~~and towe ~~take~~followed ~~direct~~that ~~advantage~~in of2016 ~~federal~~with ~~tax~~our ~~credits~~current toSolar ~~reduce~~Loan ~~their~~product. ~~electricity~~Our ~~prices,~~current ~~with~~Solar ~~monthly~~Loan ~~payments~~offers ~~applied~~third-party financing alternatives to finance the ~~balance~~purchase of ~~the~~a ~~customer’s~~solar ~~outstanding~~energy ~~loan.~~system ~~These~~and ~~money-saving~~allow ~~product~~customers ~~offerings~~to ~~have~~take ~~fueled~~direct ~~our~~advantage ~~growth~~of federal tax credits to ~~date~~reduce their electricity costs.

Our long-term ~~customer~~SolarLeases ~~agreements~~and SolarPPAs create high-quality recurring payments, investment tax credits, accelerated tax depreciation and other incentives. We perceive our recurring customer payments as high-quality assets because electricity is a necessity, and our customers typically include individuals with high credit scores, commercial businesses and government agencies. In addition, we have experienced extremely low historic default rates on payments from our customers, with average net loss rates in ~~2015~~2016 ofless ~~approximately~~than ~~0.5~~1%. Our financial strategy is to monetize these assets at the lowest cost of capital. We share the economic benefit of this lower cost of capital with our customers by lowering the price they pay for energy.

Historically, we have monetized the assets created by our customer agreements through financing funds we have formed with fund investors and by leveraging the value of our residual interests. In general, we contribute and sell solar assets to the financing funds in exchange for upfront cash and a residual interest. The allocation of the economic benefits, as well as the timing of receipt of such economic benefits, among us and the fund investors varies depending on the structure of the financing fund. We use ~~a portion of~~ the cash received from ~~the~~ financing ~~fund~~funds toand ~~cover~~borrowings against the value of our ~~variable~~residual ~~and~~interests ~~fixed~~to cover costs associated with installing the related solar energy systems. ~~We invest the excess cash in the growth of our business.~~ At the end of ~~2015~~2016, we had over 4054 financing funds with 2022 different investors, comprised mostly of large financial institutions and large blue chip corporations, and had engaged in a number of long-term strategic transactions, including securitization and cash equity transactions.

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In addition, we are continuing to develop proprietary microgrid and other battery management systems designed to work seamlessly with Tesla energy storage products to enable remote, fully bidirectional control of distributed energy storage that can potentially provide significant benefits to our customers, utilities and grid operators.

We are organized and operate in a single segment. See Note 2 to our consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K.

Our Innovative Products, Services and Technology

We use a portfolio of complementary products, services and technology innovations to reduce the cost and burdens of switching to solar energy, manage our growth and save our customers money.

· Solar Energy Systems. The major components of our solar energy systems include solar panels that convert sunlight into electrical current, inverters that convert the electrical output from the panels to a usable current compatible with the electric grid, racking that attaches the solar panels to the roof or ground and electrical hardware that connects the solar energy system to the electric grid and our monitoring device. We purchase the majority of system components from vendors, maintaining multiple sources for each major component to ensure competitive pricing and an adequate supply of materials. We also design and manufacture other system components.

In the fourth quarter of 2015, we announced that we had built what we believe to be the world’s most efficient rooftop solar panel, with a module efficiency exceeding 22%, and began domestic manufacturing of our high-efficiency rooftop solar panels. The SolarCity panel generates more power per square foot and harvests more energy over a year than any other rooftop panel in production.

· Customer Agreements

· SolarLease and SolarPPA Customer Agreements. Our innovative SolarLease and SolarPPA customer agreements have fueled our growth by allowing our customers to pay little or no upfront costs to switch to distributed solar energy. Customers can also increase their lifetime energy savings by pre-paying a portion of their future payments. Over the terms of both agreements, we own and operate the system and guarantee its performance. Our current standard SolarLeases and SolarPPAs have 20-year terms, and we typically offer the opportunity to renew our agreements for up to an additional 10 years. Prior to 2010, our standard lease term was 15 years. In a limited number of utility districts, we continue to offer lease terms of less than 20 years to offer the maximum savings under applicable incentive programs. In addition, a limited number of our commercial customers have entered into power purchase agreements with terms of between 10 and 20 years.

· MyPower Loan Agreement. Our first-of-its-kind MyPower product combines the benefits of our SolarPPA with financing directly through SolarCity. Under MyPower, we operate and maintain the system through the 30-year term of the agreement. MyPower allows us to broaden our customer base to customers preferring system ownership and expand our markets to jurisdictions less favorable to third-party owned systems.

· Grid Control / Energy Storage Systems. We are also developing proprietary battery management systems built on our solar energy monitoring communications backbone. These battery management systems are designed to enable remote, fully bidirectional control of distributed energy storage that can potentially provide significant benefits to our customers, utilities and grid operators. The benefits to our customers of energy storage coupled with a solar energy system may include back-up power, time-of-use energy arbitrage, rate arbitrage, peak demand shaving and demand response. The benefits to utilities and grid operators may include more stable grid management and improved up-time. We believe that advances in battery storage technology, steep reductions in pricing and burgeoning policy changes that support energy storage hold significant promise for enabling deployments of grid-connected energy storage systems.

· Zep Solar Mounting Systems. Our Zep Solar division designs complementary mounting and grounding hardware. Zep Solar’s engineering team is dedicated to state-of-the-art innovations to reduce the cost of installing solar energy systems and increase their productivity. Our ZS Peak flat roof solar mounting solution has increased our ability to serve commercial customers by reducing installation times and increasing the electricity generation and panel capacity of our system layouts.

· Proprietary Software

· SolarBid Sales Management Platform. SolarBid is our proprietary sales management platform that incorporates a database of rate information by utility, sun exposure, roof orientation and a variety of other factors to enable a detailed analysis and customized graphical presentation of each customer’s savings. SolarBid simplifies the sales process and automates pricing, system configuration and proposal generation. It also automatically prepares the customer agreements, incentive forms and utility paperwork required to complete a project. SolarBid is designed for maximum flexibility, allowing us to quickly add new products, services and geographies.

· SolarWorks Customer Management Software. SolarWorks is our proprietary software platform used to track and manage every project. SolarWorks’ embedded database and custom architecture offers reduced costs, improved quality and improved customer experience by supporting scheduling, budgeting and other project management functions as well as customer communications, inventory management and detailed project data.

· Energy Designer. Energy Designer is a proprietary software application used by our field engineering auditors to rapidly collect all pertinent site-specific design details on a tablet computer. This information then syncs with our design automation software, reducing design time and accelerating the permitting process.

· PowerGuide Proactive Monitoring Solutions. SolarGuard and PowerGuide provide our customers a real-time view of their home’s or business’s energy generation and consumption. Through easy-to-read graphical displays available on smartphones and any device with a web browser, our monitoring systems collect, monitor and display critical performance data from our solar energy systems, including production levels, local weather, electricity usage and environmental impacts such as carbon offset and pollution reduction. Our customer service team reviews system performance data using this proprietary monitoring software to confirm continued efficient operation.

Sales and Marketing

We market and sell our products and services through a national sales organization that includes a direct outside sales force, a door-to-door sales force, call centers, a channel partner network and a robust customer referral program.

· Direct Outside Sales Force. Our outside sales force typically resides and works within the markets we serve. Our outside sales force allows us to sell to those customers who prefer a face-to-face interaction.

· Call Centers. Our call centers allow us to sell our energy products and services to customers without visiting their homes or businesses. Because every home or site is unique, we begin by talking with each prospective customer about their energy needs and savings goals. Then, using online satellite technology, our salesperson evaluates the suitability of the site for our products and services. If a solar energy system is an appropriate solution, our salesperson collects preliminary utility usage data and site information, and ultimately, provides a preliminary estimate of costs. If the customer desires to work with us, contracts can then be executed with e-signatures.

· Door-to-Door Sales Force. Our door-to-door sales force consists of trained salespersons that identify and educate potential customers about our product and service offerings. As solar energy remains a new commodity for many homeowners, our trained sales force can help reach families that may not have considered solar energy.

· Channel Partner Network

· The Home Depot. Our products and services are available through The Home Depot stores located in most states where we have significant operations. We are the exclusive solar provider in the stores we serve. We primarily sell through a team of field energy specialists that speak to and qualify prospective customers in stores. In addition, we sell through point-of-purchase displays in the stores, and through other direct marketing strategies including in-store flyers, seminars, promotions, retail signage and displays, and a co-branded website.

· Best Buy. We also offer our products and services in over 200 Best Buy stores across the nation, where SolarCity representatives are available to evaluate the feasibility of installing a residential solar energy system.

· Homebuilder Partners. Our products and services are available through a number of regional and national new home builders, including Shea Homes, Pulte, Taylor Morrison and Del Webb. These partners market solar energy systems through a variety of strategies, including advertising within their model homes, signage within their communities, realtor emails, newspaper inserts, online banners and co-branded flyers. Certain of these partners pre-pay for the electricity that will be produced by the solar energy system installed on the new home they sell, using the benefit of pre-paid solar energy as a selling point.

· Other Channel Partners. Our products and services are also available through partnerships with Tesla Motors, Direct Energy, Honda, Acura and BMW.

· Solar Ambassador Program. In 2014, we launched our Solar Ambassador program. The program is a network marketing program in which interested ambassadors are engaged as independent contractors to promote the benefits of solar energy and become eligible to receive cash rewards through customer referrals that result in the successful installation of solar energy systems.

We also market our products and services through a variety of direct marketing strategies designed to reach qualified homeowners and businesses, including radio ads and public radio sponsorships, newspaper and magazine ads, online banner ads, search engine marketing, direct mail, participation in trade shows, events and home shows, email marketing, public relations, social media, sweepstakes and promotions, newsletters, community programs and field marketing techniques. Our in-house marketing team manages and coordinates our media buying and customizes our content for each region.

Operations and Suppliers

We purchase major components such as solar panels and inverters directly from multiple manufacturers. ~~We screen these suppliers and components based on expected cost, reliability, warranty coverage, ease of installation and other ancillary costs.~~ As of December 31, ~~2015~~2016, our primary solar panel suppliers were Canadian Solar Inc., Trina Solar Limited, ~~AUO Green Energy America Corp.,~~ REC Americas LLC, ~~Hanwa~~Hanwha ~~Qcells~~Q-Cells America, and ~~Kyocera~~LG ~~Solar~~Electronics, ~~Inc.,~~ among others, and our primary inverter suppliers were ABB Inc., SolarEdge Technologies, Inc., Fronius USA, LLC, ~~and~~ Solectria Renewables, LLC and Delta Electronics, among others. We typically enter into master contractual arrangements with our major suppliers that define the general terms and conditions of our purchases, including warranties, product specifications, indemnities, delivery and other customary terms. We typically purchase solar panels and inverters on an as-needed basis from our suppliers at then-prevailing prices pursuant to purchase orders issued under our master contractual arrangements. While we generally do not enter into arrangements containing long-term pricing or volume commitments, we have entered into several long-term purchase commitments to procure solar panels, system components and other commodities, and we may increasingly do so in the future.

~~Our~~In ~~racking~~December 2016, we entered into long-term agreements with Panasonic to manufacture custom solar cells and ~~mounting~~solar ~~systems~~panels ~~are~~at ~~manufactured~~the byRiverbend ~~our~~manufacturing ~~Zep~~facility ~~Solar~~located ~~subsidiary~~in Buffalo, asNew ~~well~~York, aswith ~~other~~negotiated ~~contract~~pricing ~~manufacturers~~provisions ~~using~~and ~~our~~the ~~design~~intent to manufacture 1 Gigawatt of solar panels annually.

We maintain over 80 centralized operations and maintenance facilities and a fleet of approximately 4,300 trucks and other vehicles to support our rapidly growing business. In California, our operations and maintenance facilities allow us to service more than 95% of the state’s population. This operational scale is fundamental to our business, as our field teams currently complete over 8,000 residential solar energy system installations each month, while our project management teams simultaneously manage thousands of projects as they move through the stages of engineering, permitting, installation and monitoring.

We offer a range of warranties and performance guarantees for our solar energy systems. We generally provide warranties of between 10 to 30 years on the generating and non-generating parts of the solar energy systems we sell, together with a pass-through of the inverter and module manufacturers’ warranties that generally range from 5 to 30 years. Where we sell the electricity generated by a solar energy system, we compensate customers if their system produces less energy over a specified performance period than our guarantee. We also provide ongoing service and repair during the entire term of the customer relationship. Costs associated with such ongoing service and repair have not been material to date, but are expected to increase as our customer base expands, inverters require replacement and the systems age.

Competition

We believe our primary competitors are the traditional local utilities that supply energy to our potential customers. We compete with these traditional utilities primarily based on price, predictability of price and the ease by which customers can switch to electricity generated by our solar energy systems rather than fossil based alternatives. We believe that our favorable pricing and focus on lifetime customer relationships allows us to compete favorably with traditional utilities in the regions we service.

We also compete with companies that provide products and services in distinct segments of the downstream solar energy and energy-related products value chain. Many companies only install solar energy systems, while others only provide financing for these installations. In the residential solar energy system installation market, our primary competitors include Vivint Solar Inc., Sunrun Inc., NRG Home Solar, Sungevity, Inc., Trinity Solar, Verengo, Inc., and many smaller local solar companies. In the commercial solar energy system installation market, our competitors include SunPower Corporation, SunEdison LLC, Borrego Solar Systems, Inc., G&S Solar Installers, Cenergy Power and numerous other companies.3

We also compete with companies that provide products and services in distinct segments of the downstream solar energy and energy-related products value chain. Many companies only install solar energy systems, while others only provide financing for these installations. In the residential solar energy system installation market, our primary competitors include Vivint Solar Inc., Sunrun Inc., Trinity Solar, Sungevity, Inc., and many smaller local solar companies. In the commercial solar energy system installation market, our competitors include SunPower Corporation, Safari Energy, Greenskies Renewable Energy, Borrego Solar Systems, Inc and numerous other companies.

We believe that our favorable pricing, focus on lifetime customer relationships, and integrated customer-facing approach to delivering solar energy allows us to compete favorably with these companies. While we offer in-house sales, financing, engineering, installation, monitoring, and operations and maintenance, many of our competitors offer only a subset of the products and services we provide.

Intellectual Property

Our intellectual property is an essential element of our business, and our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patent, trade secret, trademark, copyright and other intellectual property laws, confidentiality agreements and license agreements to establish and protect our intellectual property rights.

As of December 31, ~~2015~~2016, SolarCity and our wholly owned subsidiaries had 76approximately 131 issued patents and ~~250~~296 patent applications pending with the U.S. Patent and Trademark Office, 5664 patents issued/registered and ~~111~~135 patent applications pending with foreign patent and trademark offices~~, and 47 trademark registrations and 55 pending trademark applications~~. These ~~patents~~patent ~~and~~assets ~~applications~~cover ~~relate to~~ various SolarCity technologies, such as solar cells, installation and mounting hardware, financial products, electrical hardware, monitoring solutions and related software. Our issued patents start expiring in 2025. SolarCity intends to continue to file additional patent applications. ~~“SolarCity~~In addition,” “SolarCity and ~~Sun~~our ~~logo,”~~wholly ~~“SolarGuard,”~~owned ~~“SolarLease,”~~subsidiaries ~~“PowerGuide,”~~had ~~“SunRaising,”~~approximately ~~“Rooftop~~60 ~~Rewards,”~~trademark ~~“Solar~~registrations ~~Made Simple,” “Energy Explorer,” “Zep Solar,” “Zep Compatible,” “Zep Groove,” “Silevo,” “Triex,”~~ and ~~“Ilioss”~~46 ~~are~~pending ~~among~~trademark applications. SolarCity’s registered and unregistered trademarks in the United States and, in ~~some cases, in~~ certain other countries. ~~SolarCity’s other unregistered trademarks and service marks in the United States include: “Power Forever~~cover,” ~~“Better~~for ~~Energy~~example,” “~~SolarBid,~~SolarCity” and “~~SolarWorks”~~SolarCity and ~~“DemandLogic~~Sun logo.”

All of our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property and assigning to us any ownership that they may claim in those works.

Securing Our Solar Energy Systems

~~Unless~~For asolar ~~customer~~energy ~~fully~~systems ~~prepays~~installed ~~for~~under aour ~~solar~~SolarLease ~~energy~~and ~~system~~SolarPPA, we file a uniform commercial code financing statement, or UCC-1, on the systems in the real property records where each system is located prior to or when the system is installed. We file the UCC-1 to provide notice of our interests in the solar energy system to anyone who might perform a title search on the address where the system is located. ~~For loans financed by SolarCity, we also file the UCC-1 with the applicable state’s secretary of state.~~

A UCC-1 fixture filing is not a lien against a customer’s home and does not entitle us to the proceeds of the sale of a home in foreclosure. Typically, when a foreclosed home is sold by the lender, we negotiate with the prospective buyer to assume the existing agreement. We believe the prospective buyer is generally motivated to assume the existing agreement to receive its benefits. The number of solar energy systems identified for recovery has been immaterial to date.

Government Regulation

We are not a “regulated utility” in the United States under applicable national, state or other local regulatory regimes where we conduct business. For our limited operations in Ontario, Canada, our subsidiary is subject to the regulations of the relevant energy regulatory agencies applicable to all producers of electricity under the relevant feed-in tariff, or FIT, regulations, including the FIT rates.

To operate our systems, we obtain interconnection agreements from the applicable local primary electricity utility. Depending on the size of the solar energy system and local law requirements, interconnection agreements are between the local utility and either us or our customer. In almost all cases, interconnection agreements are standard form agreements that have been pre-approved by the local public utility commission or other regulatory body with jurisdiction over interconnection agreements. As such, no additional regulatory approvals are required once interconnection agreements are signed. We maintain a utility administration function, with primary responsibility for engaging with utilities and ensuring our compliance with interconnection rules.

Our operations are subject to stringent and complex federal, state and local laws and regulations governing the occupational health and safety of our employees, wage regulations and environmental regulations. For example, we are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or OSHA, and comparable state laws that protect and regulate employee health and safety. Our increased manufacturing operations also subject us to a number of environmental health and safety regulations. We have a robust safety department led by safety professionals, and we expend significant resources to comply with these regulations, requirements and industry best practices.

of the federal Occupational Safety and Health Act, as amended, or OSHA, and comparable state laws that protect and regulate employee health and safety. We have a robust safety department led by safety professionals, and we expend significant resources to comply with these regulations, requirements and industry best practices.

Federal and/or state prevailing wage requirements, which generally apply to any “public works” construction project that receives public funds, may apply to installations of our solar energy systems on government facilities. The prevailing wage is the basic hourly rate paid on public works projects to a majority of workers engaged in a particular craft, classification or type of work within a particular area. Prevailing wage requirements are established and enforced by regulatory agencies. Our in-house prevailing wage personnel monitor and coordinate our continuing compliance with these regulations.

Government Incentives

U.S. federal, state and local governments have established various policies, incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives include tax credits, cash grants, tax abatements and rebates. These incentives help catalyze private sector investments in solar energy, energy efficiency and energy storage measures, including the installation and operation of residential and commercial solar energy systems.

The federal government currently provides an uncapped investment tax credit, or Federal ITC, under two sections of the Internal Revenue Code of 1986, as amended, or IRC: Section 48 and Section 25D, both of which were modified and extended at the end of 2015.

Section 48(a)(3) of the IRC allows a taxpayer to claim a credit of 30% of qualified expenditures for a commercial solar energy system that commences construction by December 31, 2019. The credit then declines to 26% for systems that commence construction by December 31, 2020 and to 22% for systems that commence construction by December 31, 2021. The credit is scheduled to decline to a permanent 10% effective January 1, 2022. Historically, we have utilized the Section 48 commercial credit when available for both our residential and commercial projects, based on ownership of the solar energy system. The federal government also provides accelerated depreciation for eligible commercial solar energy systems. ~~Department of Treasury regulations detailing how the commence construction requirements can be satisfied are expected by the end of the first quarter of 2016.~~

Section 25D of the IRC allows a taxpayer to claim a credit for a residential solar energy system that is owned by the homeowner. This credit is available at 30% for systems that are placed in service by December 31, 2019, at 26% for systems placed in service in 2020, and at 22% for systems placed in service in 2021. The credit is scheduled to expire effective January 1, 2022. ~~MyPower customers can currently claim the Section 25D investment tax credit.~~ Customers who purchase their solar energy systems for cash ~~are~~or ~~also~~through our Solar Loan are eligible to claim the Section 25D investment tax credit.

Approximately half of U.S. states offer a personal and/or corporate investment or production tax credit for solar, which are additive to the Federal ITC. Further, more than half of U.S. states, and many local jurisdictions, have established property tax incentives for renewable energy systems, which include exemptions, exclusions, abatements and credits.

~~Many~~Some ~~state governments, investor-owned~~ utilities, ~~municipal utilities and co-operative utilities~~ offer rebates or other cash incentives for the installation and operation of a solar energy system or energy-related products. Capital costs or “up-front” rebates provide payments to solar customers based on the cost, size or expected production of a customer’s solar energy system. Performance-based incentives provide cash payments to a system owner based on the energy generated by their solar energy system during a pre-determined period, and they are paid over that time period. Some states and utilities also have established feed-in tariff programs that are a type of performance-based incentive where the system owner-producer is paid a set rate for the electricity their system generates and exports to the grid over a set period of time.

10Forty-one states, Washington, D.C. and Puerto Rico have a form of regulatory policy known as net energy metering, or net metering, available to new solar customers. Net metering typically allows solar customers to interconnect their on-site solar energy systems to the utility grid and offset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by their solar energy system that is exported to the grid in excess of electric load used by customers. Each of the states where we currently serve customers has adopted a net metering policy except for Texas, where certain individual utilities have adopted net metering or a policy similar to net metering. Typically, at the end of the billing period, the customer simply pays for the net energy used or receives a credit at the retail rate if more energy is produced than consumed.

~~Forty-one~~Some states, ~~Washington,~~have ~~D.C.~~established ~~and~~limits ~~Puerto~~on ~~Rico~~net ~~have~~metering. aFor ~~regulatory~~example, ~~policy~~in ~~known~~October ~~as net energy metering~~2015, orthe ~~net~~Hawaii ~~metering,~~Public ~~available~~Utilities toCommission ~~new~~capped ~~customers.~~the ~~Net~~state’s net metering ~~typically~~program ~~allows~~at ~~SolarCity’s~~existing ~~customers~~levels toand ~~interconnect~~net ~~their~~metering ~~on-site~~no ~~solar~~longer ~~energy~~is ~~systems~~available to ~~the~~new ~~utility~~customers. ~~grid~~In ~~and~~late ~~offset~~December ~~their~~2015, ~~utility~~the ~~electricity~~Nevada ~~purchases~~Public byUtilities ~~receiving~~Commission a(PUCN) ~~bill~~also ~~credit~~effectively atcapped the ~~utility~~state’s ~~retail~~net ~~rate~~metering ~~for~~program ~~energy~~at ~~generated~~existing bylevels ~~their~~and ~~solar~~net ~~energy~~metering ~~system~~no ~~that~~longer iswas ~~exported~~available to ~~the~~new ~~grid~~customers. inAt ~~excess~~that oftime, ~~electric~~the ~~load~~PUCN ~~used~~also byadopted ~~customers.~~new ~~Each~~rules ofthat ~~the~~include ~~states~~significant ~~where~~additional wemonthly ~~currently~~charges ~~serve~~on customers ~~has~~who ~~adopted~~interconnect atheir ~~net~~solar ~~metering~~energy ~~policy~~systems, ~~except~~and ~~for~~a ~~Texas,~~significant ~~where~~reduction ~~certain~~in ~~individual~~the ~~utilities~~amount ~~have~~of ~~adopted~~bill ~~net~~credit ~~metering~~customers orreceive afor ~~policy~~energy ~~similar~~generated toby ~~net~~their ~~metering.~~solar ~~Typically,~~energy atsystem ~~the~~that ~~end~~is ofexported to the ~~billing~~grid ~~period,~~in ~~the~~excess ~~customer~~of ~~simply~~electric ~~pays~~load ~~for~~used ~~the~~by ~~net~~customers. ~~energy~~Subsequently, ~~used~~the orPUCN ~~receives~~modified aportions ~~credit~~of at the ~~retail~~new ~~rate~~rules ifto be more ~~energy~~favorable isfor ~~produced~~solar ~~than~~customers, ~~consumed.~~including

Some states have established limits on net metering. For example, in October 2015, the Hawaii Public Utilities Commission capped the state’s net metering program at existing levels and net metering no longer is available to new customers. In late-December 2015, the Nevada Public Utilities Commission also effectively capped the state’s net metering program at existing levels and net metering no longer is available to new customers. In addition, the new rules adopted by the Nevada Public Utilities Commission include significant additional monthly charges on customers who interconnect their solar energy systems, a significant reduction in the amount of bill credit customer receive for energy generated by their solar energy system that is exported to the grid in excess of electric load used by customers, and application of the new rules to existing customers with solar energy systems. These actions have been criticized by solar and customer protection groups and we have challenged these new rules and their application to existing customers in filings with the Nevada Public Utilities Commission.5

~~California~~providing ~~investor-owned~~grandfathering ~~utilities~~treatment ~~are~~for ~~currently~~existing ~~required to provide~~ net metering ~~to their~~ customers ~~until~~and ~~the~~reopening ~~total~~a ~~generating~~specified capacity of net ~~metered~~metering ~~systems~~for ~~exceeds~~new 5%customers ofin ~~the~~northern ~~utilities’ “aggregate customer peak demand~~Nevada.” ~~In January 2016~~However, ~~the~~at ~~California~~this ~~Public~~time ~~Utilities Commission established a new~~ net metering ~~program~~still ~~requiring that customers utilize a time-of-use tariff, with no participation cap that will apply after the current 5% cap~~ is ~~reached.~~not ~~Other~~available ~~states,~~to ~~such~~new ascustomers ~~New~~in ~~York~~southern ~~and New Jersey, recently have increased their respective limits on net metering~~Nevada.

~~Sales~~California ofinvestor-owned ~~electricity~~utilities ~~and~~are ~~non-sale~~required ~~equipment~~to ~~leases~~provide bynet ~~third~~metering ~~parties~~to ~~face~~their ~~regulatory~~customers ~~challenges~~until inthe ~~some~~total ~~states~~generating ~~and~~capacity ~~jurisdictions,~~of ~~and~~net ~~our~~metered ~~leases~~systems ~~and~~exceeds ~~power~~5% ~~purchase~~of ~~agreements~~the ~~are~~utilities’ ~~third-party~~“aggregate ~~ownership~~customer ~~arrangements~~peak demand.” ~~Other~~In ~~challenges~~January ~~pertain~~2016, tothe ~~whether~~California ~~third~~Public Utilities Commission established a new net metering program requiring that customers utilize a time-~~party~~of-use ~~owned~~tariff, ~~systems~~with ~~qualify~~no ~~for~~participation cap that will apply after the ~~same~~utility’s ~~levels~~5% ofcap ~~rebates~~on orthe ~~other~~original ~~non-tax~~net ~~incentives~~metering ~~available~~program ~~for~~is ~~customer-owned~~reached. PG&E ~~solar~~and ~~energy~~SDG&E ~~systems,~~have reached their 5% caps on the original program and ~~whether~~now ~~third-party~~offer ~~owned~~the ~~systems~~uncapped ~~are~~new ~~eligible~~net ~~for~~metering ~~these~~program ~~incentives~~to new customers.

~~Many~~Sales states also have adopted procurement requirements for renewable energy production. Twenty-nine states and Washington, D.C. have adopted an enforceable renewable portfolio standard, or RPS, or other mandated renewable capacity policy that requires covered entities to procure a specified percentage of ~~total~~ electricity ~~delivered~~and tonon-sale ~~customers~~equipment inleases ~~the~~by ~~state from eligible renewable energy sources~~third-parties, such as ~~solar~~our ~~energy~~SolarLeases ~~systems~~and SolarPPAs, byface aregulatory ~~specified~~challenges ~~date.~~in Insome ~~addition, seven other~~ states ~~have~~and ~~set~~jurisdictions. ~~voluntary~~Other ~~goals~~challenges ~~for~~pertain ~~renewable~~to ~~generation.~~whether ~~Roughly one-~~third-party ofowned ~~states~~systems ~~with~~qualify ~~RPS~~for ~~policies~~the ~~require~~same alevels ~~minimum portion~~ of ~~the~~rebates ~~RPS~~or beother ~~met~~non-tax byincentives ~~solar,~~available orfor customer-~~generated~~owned solar, ~~with substantial penalties for non-compliance. To prove compliance with such mandates, utilities typically must surrender renewable~~ energy ~~certificates~~systems, orand ~~RECs,~~whether tothird-party ~~system~~owned ~~owners,~~systems ~~who often~~ are ~~able~~eligible tofor ~~sell~~these ~~RECs to utilities directly or in REC markets~~incentives.

Many states also have adopted procurement requirements for renewable energy production, such as an enforceable renewable portfolio standard, or RPS, or other mandated renewable capacity policy that requires covered entities to procure a specified percentage of total electricity delivered to customers in the state from eligible renewable energy sources, such as solar energy systems, by a specified date. In addition, several other states have set voluntary goals for renewable generation. Many states with RPS policies require a minimum portion of the RPS be met by solar, with substantial penalties for non-compliance. To prove compliance with such mandates, utilities typically must surrender renewable energy certificates. A solar renewable energy certificate, or SREC, is a tradable credit that represents all of the clean energy benefits of electricity generated from a solar energy system. Every time a solar energy system generates 1,000 kWh of electricity, one SREC is issued or minted by a government agency. The SREC can then be sold or traded separately from the energy produced, generally through brokers and dealers facilitating individually negotiated bilateral arrangements. SRECs are primarily valuable because they help utilities and other energy suppliers comply with RPS standards.

Employees

As of December 31, ~~2015~~2016, we had 15approximately 12,~~273~~243 total employees~~, of whom 15,219 were full-time employees~~. Approximately 65,~~873~~332 worked in operations, installations and manufacturing; 54,~~661~~155 in various sales and marketing related departments and 2,~~739~~756 in general and administrative and research and development related departments. In January 2016, following the recent actions by the Nevada Public Utilities Commission, we were forced to eliminate more than 550 jobs in Nevada, primarily affecting personnel in operations, installations and manufacturing, as well as sales and marketing related departments. As of the date of this Annual Report, we are focused on relocating employees to other states and positions and reducing the impact of these job eliminations on our employees. Our employees are not currently represented by any labor union or subject to any collective bargaining agreement. We have not experienced any work stoppages, and we consider our relationship with our employees to be good.

Corporate Information

We were incorporated in June 2006 as a Delaware corporation. In November 2016, we were acquired by, and now operate as a wholly owned subsidiary of, Tesla, Inc. Our headquarters are located at 3055 Clearview Way, San Mateo, California 94402, and our telephone number is (650) 638-1028. You can access our website at www.solarcity.com. Information contained on our website is not a part of, and is not incorporated into, this annual report on Form 10-K, and the inclusion of our website address in this annual report on Form 10-K is an inactive textual reference only. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available free of charge on the Investors portion of ~~our~~the Tesla web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below, together with the other information contained in this annual report on Form 10-K, including our consolidated financial statements and related notes~~, before investing in our common stock~~. The risks described below are not the only risks facing our company. Any of the following risks and additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition, results or operations. In such case, our ability to repay borrowed amounts when due may be impaired, and you may lose all or part of your original investment.

Risks Related to our Operations

Existing electric utility industry regulations, and changes to regulations, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our solar energy systems or adversely impact the economics of existing energy contracts.

Federal, state and local government regulations and policies concerning the electric utility industry, utility rate structures, interconnection procedures, internal policies and regulations promulgated by electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies often relate to electricity pricing and the interconnection of customer-owned electricity generation. In the United States, governments and utilities continuously modify these regulations and policies. These regulations and policies could deter potential customers from purchasing renewable energy, including solar energy systems. This could result in a significant reduction in demand for our solar energy systems. For example, utilities commonly charge fees to large, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could increase our customers’ cost to use our systems and make our product offerings less desirable, thereby harming our business, prospects, financial condition and results of operations. In addition, depending on the region, electricity generated by solar energy systems competes most effectively with higher priced peak-hour electricity from the electric grid, rather than the lower average price of electricity. Modifications to the utilities’ peak-hour pricing policies or other electricity rate ~~design~~designs, such as a ~~flat~~lower volumetric rate, would require us to lower the price of our solar energy systems to compete with the price of electricity from the electric grid.

Future changes to government or internal utility regulations and policies ~~that favor electric utilities~~ could also reduce our competitiveness, cause a significant reduction in demand for our products and services, and threaten the economics of our existing energy contracts. For example, in October 2015, the Hawaii Public Utilities Commission capped the state’s net metering program at existing levels and net ~~metering~~energy ~~no longer is available to new customers. In late-December 2015, the Nevada Public Utilities Commission also effectively capped the state’s net~~ metering ~~program at existing levels and net metering~~ no longer is available to new customers. In addition, Nevada’s new rules include significant additional monthly charges on customers who interconnect their solar energy systems, significant reduction in the amount of bill credit for energy generated by their solar energy system that is exported to the grid in excess of electric load used by customers, and application of the new rules to existing customers with solar energy systems. These new rules and their application to existing customers have been challenged in filings with the Nevada Public Utilities Commission and we intend to pursue available remedies under state law, if necessary. As a result of these new rules we have ceased our sales and installation operations in Nevada. If these new rules are imposed as adopted, the new rules are not overruled legislatively, and challenges to these new rules are unsuccessful, demand for solar energy systems and services in Nevada will likely be significantly impaired, and we could see an increase in the default rate of existing energy contracts or we may find it necessary to renegotiate our pricing of affected customers.

In other jurisdictions, it has been proposed that additional fees and other charges be assessed on customers purchasing energy from solar energy systems. In particular, the Salt River Project, or SRP, in Arizona has imposed anticompetitive penalties on new solar customers in an attempt to exclude rooftop solar, and in response in March 2015 we filed a lawsuit in federal court in Arizona, asking the court to stop SRP’s anti-competitive behavior. In 2016, seventy one actions relating to fixed charges were taken by utilities around the country. In the event that effective net metering programs are limited in California, Arizona and other key markets or any such fees or charges are imposed, our ability to attract new customers and compete with the price of electricity generated by local utilities in these jurisdictions may be severely limited, and such unaccounted for increases in the fees or charges applicable to existing customer agreements may increase the cost of energy to those customers and result in an increased rate of defaults under our customer agreements. Any of these results could reduce demand for our solar energy systems, harm our business, prospects, financial condition and results of operations.

12We rely on net metering and related policies to offer competitive pricing to our customers in our key states.

We rely on net metering and related policies to offer competitive pricing to our customers in some of our key markets.

Forty-one states, Washington, D.C. and Puerto Rico have a regulatory policy known as net energy metering, or net metering, available to new customers. Each of the states where we currently serve customers has adopted a net metering policy except for Texas, where certain individual utilities have adopted net metering or a policy similar to net metering. Net metering typically allows our customers to interconnect their on-site solar energy systems to the utility grid and offset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by their solar energy system that is exported to the grid in excess of the electric load used by the customers. At the end of the billing period, the customer simply pays for the net energy used or receives a credit at the retail rate if more energy is produced than consumed. Utilities operating in states without a net metering policy may receive solar electricity that is exported to the grid when there is no simultaneous energy demand by the customer without providing retail compensation to the customer for this generation.

Our ability to sell solar energy systems and the electricity they generate may be adversely impacted by the failure to expand existing limits on the amount of net metering in states that have implemented it, the failure to adopt a net metering policy where it currently is not in place, the imposition of new charges that only or disproportionately impact customers that utilize net metering or reductions in the amount or value of credit that customers receive through net metering. Our ability to sell solar energy systems and the electricity they generate may also be adversely impacted by the unavailability of expedited or simplified interconnection for grid-tied solar energy systems or any limitation on the number of customer interconnections or amount of solar energy that utilities are required to allow in their service territory or some part of the grid. For example, in October 2015, the Hawaii Public Utilities Commission capped the state’s net metering program at existing levels, and in late-December 2015, the Nevada Public Utilities Commission effectively capped the state’s net metering program at existing levels and imposed additional monthly charges on customers who interconnect their solar energy systems. In addition, utilities in some states, such as SRP in Arizona, ~~have~~imposed ~~proposed imposing~~ additional monthly charges on customers who interconnect solar energy systems installed on their homes. If such charges are imposed, the cost savings associated with switching to solar energy may be significantly reduced and our ability to attract future customers and compete with traditional utility providers could be impacted. If such charges are imposed on existing customers in a way that adversely impacts the economics of existing energy contracts, ~~as in Nevada,~~ we could further see an increase in the default rate of existing energy contracts or we may find it necessary to renegotiate our pricing of affected customers.

Limits on net metering, interconnection of solar energy systems and other operational policies in key markets could limit the number of solar energy systems installed in those markets. For example, California investor-owned utilities are currently required to provide net metering to their customers until the total generating capacity of net metered systems exceeds 5% of the utilities’ “aggregate customer peak demand.” In January 2016, the California Public Utilities Commission established a new net metering program requiring that customers utilize a time-of-use tariff, with no participation cap that will apply after the current 5% cap is reached. New York is considering a net metering successor program through the Reforming the Energy Vision docket at the state Public Service Commission. If the caps on net metering in New York and other key markets are reached or if the amount or value of credit that customers receive for net metering is significantly reduced or eliminated, future customers will be unable to recognize the current cost savings associated with net metering and existing customers may not recognize the economic benefits that were available at the time their energy contracts were entered into. We rely substantially on net metering when we establish competitive pricing for our prospective customers and the absence of net metering for new customers could greatly limit demand for our solar energy systems and increase the default rate of existing energy contracts.7

~~Regulatory~~Limits ~~limitations~~on ~~associated~~net ~~with~~metering, ~~technical~~interconnection ~~considerations~~of ~~may~~solar ~~significantly~~energy ~~limit~~systems ~~our~~and ~~ability~~other tooperational ~~sell~~policies ~~electricity~~in ~~from~~key ~~our~~markets could limit the number of solar energy systems installed in ~~certain~~those markets. For example, in late December 2015, the Nevada Public Utilities Commission (PUCN) effectively capped the state’s net metering program at existing levels and net metering no longer was available to new customers. Subsequently, the PUCN modified portions of the new rules to be more favorable for solar customers, including providing grandfathering treatment for existing net metering customers and reopening a specified capacity of net metering for new customers in northern Nevada. However, at this time net metering still is not available to new customers in southern Nevada. If the caps on net metering in key markets are reached and not extended or if the amount or value of credit that customers receive for net metering is significantly reduced or eliminated, future customers will be unable to recognize the current cost savings associated with net metering and existing customers may not recognize the economic benefits that were available at the time their energy contracts were entered into. We rely substantially on net metering when we establish competitive pricing for our prospective customers and the absence of net metering for new customers could greatly limit demand for our solar energy systems.

Regulatory ~~limits~~limitations associated with technical considerations may ~~curb~~significantly ~~our~~limit growth in certain key markets. For example, the Federal Energy Regulatory Commission has promulgated small generator interconnection procedures that recommend limiting customer-sited intermittent generation resources, such as our ~~solar energy systems, to a certain percentage of peak load on a given electrical feeder circuit. Similar limits have been adopted by various states and could constrain our~~ ability to ~~market~~sell ~~to customers in certain geographic areas where the concentration of solar installations exceeds the limit. For example, Hawaiian electric utilities have adopted certain policies that limit distributed~~ electricity generation in certain geographic areas. While these limits have constrained our growth in certain parts of Hawaii, policy developments in Hawaii generally have allowed distributed electricity generation penetration despite the electric utility-imposed limitations. Furthermore, in certain areas, we benefit from ~~policies that allow for expedited or simplified procedures related to connecting solar energy systems to the power grid. If such procedures are changed or cease to be available,~~ our ~~ability to sell the electricity generated by~~ solar energy systems ~~we install may be adversely impacted. As adoption of solar distributed generation increases, along with the operation of large-scale solar generation~~ in ~~key~~certain ~~markets such as California, the amount of solar energy being fed into the power grid will surpass the amount planned for relative to the amount of aggregate demand~~states. Some utilities claim that within several years, solar generation resources may reach a level capable of causing an over-generation situation that could require some solar generation resources to be curtailed to maintain operation of the grid. The adverse effects of such curtailment without compensation could adversely impact our business, results of operations and future growth.

13Regulatory limits associated with technical considerations may curb our growth in certain key states. For example, the Federal Energy Regulatory Commission has promulgated small generator interconnection procedures that recommend limiting customer-sited intermittent generation resources, such as our solar energy systems, to a certain percentage of peak load on a given electrical feeder circuit. Similar limits have been adopted by various states and could constrain our ability to market to customers in certain geographic areas where the concentration of solar installations exceeds the limit. For example, Hawaiian electric utilities have adopted certain policies that limit distributed electricity generation in certain geographic areas. While these limits have constrained our growth in certain parts of Hawaii, policy developments in Hawaii generally have allowed distributed electricity generation penetration despite the electric utility-imposed limitations. Furthermore, in certain areas, we benefit from policies that allow for expedited or simplified procedures related to connecting solar energy systems to the power grid. If such procedures are changed or cease to be available, our ability to sell the electricity generated by solar energy systems we install may be adversely impacted. As adoption of solar distributed generation increases, along with the operation of large-scale solar generation in key markets such as California, the amount of solar energy being fed into the power grid may surpass the amount planned for relative to the amount of aggregate demand. Some utilities claim that within several years, solar generation resources may reach a level capable of causing an over-generation situation that could require some solar generation resources to be curtailed to maintain operation of the grid. The adverse effects of such curtailment without compensation could adversely impact our business, results of operations and future growth.

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

U.S. federal, state and local government bodies provide incentives to end users, distributors, system integrators and manufacturers of solar energy systems to promote solar electricity in the form of rebates, tax credits and other financial incentives such as system performance payments, payments for renewable energy credits associated with renewable energy generation and the exclusion of solar energy systems from property tax assessments. We rely on these governmental rebates, tax credits and other financial incentives to lower our cost of capital and to encourage fund investors to invest in our funds. These incentives enable us to lower the price we charge customers for energy and for our solar energy systems. However, these incentives may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption rates increase. These reductions or terminations often occur without warning.

The federal government currently offers a 30% investment tax credit under Section 48(a)(3) and Section 25D of the IRC, or the Federal ITC, for the installation of certain solar power facilities ~~until December 31, 2016~~. Additionally, under Section 48, energy storage systems that are installed at the time of the solar power facility and, as required by IRS guidelines, store the energy of the solar power facility, are also eligible for the Federal ITC.

The credit under Section 48(a)(3) has been modified to remain at 30% of qualified expenditures for a commercial solar energy system that commences construction by December 31, 2019, then decline to 26% for systems that commence construction by December 31, 2020 and to 22% for systems that commence construction by December 31, 2021. The credit is scheduled to decline to a permanent 10% effective January 1, 2022. Historically, we have utilized the Section 48 commercial credit when available for both our residential and commercial leases and power purchase agreements, based on ownership of the solar energy system.

The credit under Section 25D has been modified to remain 30% of qualified expenditures for a residential solar energy system owned by the homeowner that is placed in service by December 31 2019, then decline to 26% for systems placed in service by December 21, 2020, and to 22% for systems placed in service by December 31, 2021. The credit is scheduled to expire effective January 1, 2022. ~~MyPower~~Loan product customers can currently claim the Section 25D investment tax credit. Customers who purchase their solar energy systems for cash are also eligible to claim the Section 25D investment tax credit.

Department of Treasury regulations detailing how the commence construction requirements can be satisfied are expected by the end of the first quarter of 2016. Applicable authorities may adjust or decrease incentives from time to time or include provisions for minimum domestic content requirements or other requirements to qualify for these incentives.8

Reductions in, eliminations of, or expirations of, governmental incentives could adversely impact our results of operations and ability to compete in our industry by increasing our cost of capital, causing us to increase the prices of our energy and solar energy systems and reducing the size of our addressable market. In addition, this would adversely impact our ability to attract investment partners and to form new financing funds and our ability to offer attractive financing to prospective customers.

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

Our leases and power purchase agreements are third-party ownership arrangements. Sales of electricity by third -parties face regulatory challenges in some states and jurisdictions. Other challenges pertain to whether third-party owned systems qualify for the same levels of rebates or other non-tax incentives available for customer-owned solar energy systems, whether third-party owned systems are eligible at all for these incentives and whether third-party owned systems are eligible for net metering and the associated significant cost savings. In some states and utility territories, third -parties that own solar energy systems are limited in the way that they may deliver solar energy to their customers. In jurisdictions such as Arizona, Florida, ~~Georgia, Iowa,~~ Kentucky, North Carolina, Oklahoma and the Los Angeles Department of Water and Power service territory, laws have been interpreted to prohibit the sale of electricity pursuant to our standard power purchase agreement. This has led us and other solar energy system providers that utilize third-party ownership arrangements to offer leases rather than power purchase agreements in such jurisdictions. Imposition of such limitations in additional jurisdictions or reductions in, or eliminations of, incentives for third-party owned systems could reduce demand for our systems, adversely impact our access to capital and cause us to increase the price we charge our customers for energy.

14We need to enter into additional substantial financing arrangements to facilitate our customers’ access to our solar energy systems, and if this financing is not available to us on acceptable terms, if and when needed, our ability to grow our business would be materially adversely impacted.

Our future success depends on our ability to raise capital from third-party fund investors to help finance the deployment of our residential and commercial solar energy systems. In particular, our strategy is to reduce the cost of capital through these arrangements to improve our margins, offset future reductions in government incentives and maintain the price competitiveness of our solar energy systems. If we are unable to establish new financing funds for third-party ownership arrangements when needed, or on desirable terms, to enable our customers’ access to our solar energy systems with little or no upfront cost, we may be unable to finance installation of our customers’ systems, or our cost of capital could increase and our liquidity may be significantly constrained, any of which would have a material adverse effect on our business, financial condition and results of operations. To date, we have raised capital sufficient to finance installation of our customers’ solar energy systems from a number of financial institutions and other large companies (including some that may be considered competitors to Tesla). In the past, challenges raising new funds have caused us to delay customer installations for brief periods of time.

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

•

the continued confidence of banks and other financing sources in the solar energy industry and the quality of our customer contracts;

•

the state of financial and credit markets, and the liquidity needs of banks and other financing sources;

•

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

•

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

•

non-renewal of government incentives or decreases in the associated benefits; and

•

no adverse changes in the regulatory environment affecting the economics of our existing energy contracts.

Under current law, the Federal ITC will be reduced from 30% of the cost of solar energy systems to 26% of the cost of solar energy systems for systems that commence construction by December 31, 2020, and then reduced again to 22% of the cost of solar energy systems for systems that commence construction by December 31, 2021, until the Section 25D investment tax credit expires and the Section 48(a)(3) investment tax credit declines to a permanent 10% effective January 1, 2022.

In addition, U.S. Treasury grants are no longer available for new solar energy systems. Moreover, potential fund investors must remain satisfied that the structures we offer make the tax benefits associated with solar energy systems available to these investors, which depends both on the investors’ assessment of the tax law and the absence of any unfavorable interpretations of that law. Changes in existing law and interpretations by the Internal Revenue Service and the courts could reduce the willingness of fund investors to invest in funds associated with these solar energy system investments. In addition, changes by state energy regulators impairing the economics of existing energy contracts causing an increased risk of default may also reduce the willingness of fund investors to invest. We cannot assure you that this type of financing will be available to us. If, for any reason, we are unable to finance

solar energy systems through tax-advantaged structures or if we are unable to realize or monetize depreciation benefits, we may no longer be able to provide solar energy systems to new customers on an economically viable basis. This would have a material adverse effect on our business, financial condition and results of operations.

Solar energy has yet to achieve broad market acceptance and depends on continued support in the form of performance-based incentives, rebates, tax credits and other incentives from federal, state, local and foreign governments. If this support diminishes, our ability to obtain external financing, on acceptable terms or otherwise, could be materially adversely affected.

Our ability to draw on financing commitments is subject to the conditions of the agreements underlying our financing funds, including the mix of types of energy contracts that we contribute and measures of customer credit. If we do not satisfy such conditions due to events related to our business or a specific financing fund, developments in our industry (including related to the Department of Treasury Inspector General investigation) or otherwise, and as a result we are unable to draw on existing commitments, it could have a material adverse effect on our business, liquidity, financial condition and prospects. If any of the financial institutions or large companies that currently invest in our financing funds decide not to invest in future financing funds due to general market conditions, concerns about our business or prospects, the pendency of the Department of Treasury Inspector General investigation or any other reason, or materially change the terms under which they are willing to provide future financing, we may be unable to raise sufficient financing to engage in the third-party ownership arrangements that have fueled our growth to date.

Servicing our debt requires a significant amount of cash and we may not have sufficient cash flow from our business to pay our substantial debt; other actions we are forced to take to satisfy our obligations under our indebtedness may not be successful.

Our total consolidated indebtedness was $3,580.4 million as of December 31, 2016, representing outstanding recourse indebtedness of $1,628.8 million and non-recourse indebtedness of $1,951.6 million.

While our non-recourse credit facilities have been structured to be supported solely by the assets that are pledged as collateral, and, to date, we have not experienced any failure to pay such non-recourse indebtedness, our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on such factors as:

•

our future operational and financial performance;

•

global economic, financial, competitive and other factors beyond our control;

•

incorrect assumptions as to the amount of future cash flows to be produced by the solar assets subject to the non-recourse credit facilities;

•

the potential for widespread failure of solar energy systems and related components due to product defects;

•

the potential of widespread disasters for which our insurance coverage proves to be insufficient; and

•

changes in laws, regulations or policies that adversely affect the treatment of third-party owned solar energy systems.

As a result of these and other factors, our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. In addition, we may not fully achieve the full anticipated benefits and other cost reductions as a result of our acquisition by Tesla. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing our operations and operating expenses, selling assets, restructuring debt or obtaining additional capital on terms that may be onerous.

Our ability to refinance our existing indebtedness will depend on the financial markets and our financial condition at such time, and the occurrence of certain events and concerns regarding our business and liquidity, and general market conditions may make it difficult for us to access the financial markets or to refinance our existing indebtedness or raise additional funds on acceptable terms. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations or otherwise significantly limit our ability to respond to periods of increased liquidity pressure.

We expect to incur substantially more debt or take other actions which would intensify the risks discussed above.

A major part of our financial strategy is to monetize the customer payments and incentives associated with the deployment of solar energy systems under our third-party ownership arrangements through non-recourse borrowings against our interests to finance our operations. We and our subsidiaries expect to incur substantial additional non-recourse debt in the future, subject to the restrictions contained in our debt instruments, some of which may be secured debt. Incurring such additional debt could have the effect of diminishing our ability to make payments on existing indebtedness when due, and otherwise limiting our ability to respond to periods of increased liquidity pressure. Although certain of our existing credit facilities restrict our ability to incur additional indebtedness, including recourse and secured indebtedness, we may be able to obtain amendments and waivers of such restrictions or may not be

subject to such restrictions under the terms of any subsequent indebtedness. As the total amount of indebtedness we carry increases, we may be unable to enter into new credit facilities or refinance existing credit facilities and other indebtedness on acceptable terms, any such failure could constrain our liquidity and adversely impact our business, results of operations and future growth.

We may have trouble refinancing our existing indebtedness or obtaining new financing for our working capital, equipment financing and other needs in the future or complying with the terms of existing credit facilities. If credit facilities are not available to us on acceptable terms, if and when needed, or if we are unable to comply with their terms, our ability to respond to periods of constrained liquidity and to operate our business in accordance with current operating plans would be adversely impacted.

As of December 31, 2016, we had the ability to draw up to an additional $468.0 million under all of our credit facilities. Our secured revolving credit facility, our primary working capital facility, currently has a maximum size of $500 million (with $393.5 million currently committed from several lenders and an additional $106.5 million subject to further conditions) that matures in December 2017. The working capital facility requires us to comply with certain financial, reporting and other requirements. During the first and second quarters of 2016, the margins of our compliance with these financial covenants decreased, particularly with respect to the amount of unencumbered liquidity. While our lenders have given us waivers of certain covenants we have not satisfied in the past, there is no assurance that the lenders will waive or forbear from exercising their remedies with respect to any future defaults that might occur.

If we are unable to satisfy financial covenants and other terms under existing or new facilities, obtain associated waivers or forbearance from our lenders, or if we are unable to obtain refinancing or new financings for our working capital, equipment, convertible senior notes and other needs on acceptable terms if and when needed, our business would be adversely affected.

Although our acquisition by Tesla in an all-stock transaction did not result in a “fundamental change,” we continue to be responsible for payments of interest during the term and may need to repay principal at maturity unless the stock price of Tesla significantly appreciates and the convertible senior notes are converted into Tesla common stock. We may need to refinance the convertible senior notes. Our failure to pay amounts when due or repurchase the convertible senior notes when required would constitute a default which could also result in defaults under other agreements governing our existing or future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the convertible senior notes.

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

We have incurred net losses in the past, and we had an accumulated deficit of $77.9 million as of December 31, 2016. We may continue to incur net losses from operations if we are unable to fully achieve the anticipated benefits of our acquisition by Tesla, or if we increase our spending to finance any expansion of our operations, engage in additional product development activities (including solar-integrated roofing products) and implement internal systems and infrastructure to support our growth. We do not know whether our revenue will grow rapidly enough to absorb these costs, and our limited operating history in many of these areas makes it difficult to assess the extent of these expenses or their impact on our operating results. Our ability to achieve profitability depends on a number of factors, including:

•

successful integration with Tesla;

•

growing our customer base;

•

increasing the mix of cash sales and loans;

•

finding investors willing to invest in our financing funds;

•

maintaining and further lowering our cost of capital; and

•

reducing the cost of components for our solar energy systems.

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

The Office of the Inspector General of the U.S. Department of Treasury has issued subpoenas to a number of significant participants in the solar energy installation industry, including us. The subpoena we received requires us to deliver certain documents in our possession relating to our participation in the U.S. Treasury grant program. These documents are being delivered to the Office of the Inspector General of the U.S. Department of Treasury, which is investigating the administration and implementation of the U.S. Treasury grant program.

In July 2012, we and other companies that are significant participants in both the solar industry and the cash grant program under Section 1603 of the American Recovery and Reinvestment Act of 2009 received subpoenas from the U.S. Department of Treasury’s Office of the Inspector General to deliver certain documents in our respective possession. In particular, our subpoena requested, among other things, documents dated, created, revised or referred to since January 1, 2007 that relate to our applications for U.S. Treasury grants or communications with certain other solar companies or certain firms that appraise solar energy property for U.S. Treasury grant application purposes. The Inspector General is working with the Civil Division of the U.S. Department of Justice to investigate the administration and implementation of the U.S. Treasury grant program, including possible misrepresentations concerning the fair market value of the solar power systems submitted for grant under that program made in grant applications by solar companies, including us. We intend to cooperate fully with the Inspector General and the Department of Justice and continue to produce documents and testimony as requested by the Inspector General. We are unable to anticipate when the Inspector General will conclude its review. If, at the conclusion of the investigation, the Inspector General concludes that misrepresentations were made, the Department of Justice could bring a civil action to recover amounts it believes were improperly paid to us. If the Department of Justice were successful in asserting such an action, we could then be required to pay damages and penalties for any funds received based on such misrepresentations (which, in turn, could require us to make indemnity payments to certain of our fund investors). Such consequences could have a material adverse effect on our business, liquidity, financial condition and prospects. Additionally, the period of time necessary to resolve the investigation is uncertain and this matter could require significant management and financial resources that could otherwise be devoted to the operation of our business.

Treasury’s Office of the Inspector General to deliver certain documents in our respective possession. In particular, our subpoena requested, among other things, documents dated, created, revised or referred to since January 1, 2007 that relate to our applications for U.S. Treasury grants or communications with certain other solar companies or certain firms that appraise solar energy property for U.S. Treasury grant application purposes. The Inspector General is working with the Civil Division of the U.S. Department of Justice to investigate the administration and implementation of the U.S. Treasury grant program, including possible misrepresentations concerning the fair market value of the solar power systems submitted for grant under that program made in grant applications by solar companies, including us. We intend to cooperate fully with the Inspector General and the Department of Justice and continue to produce information as requested by the Inspector General. We are unable to anticipate when the Inspector General will conclude its review. If, at the conclusion of the investigation, the Inspector General concludes that misrepresentations were made, the Department of Justice could bring a civil action to recover amounts it believes were improperly paid to us. If the Department of Justice were successful in asserting such an action, we could then be required to pay damages and penalties for any funds received based on such misrepresentations (which, in turn, could require us to make indemnity payments to certain of our fund investors). Such consequences could have a material adverse effect on our business, liquidity, financial condition and prospects. Additionally, the period of time necessary to resolve the investigation is uncertain and this matter could require significant management and financial resources that could otherwise be devoted to the operation of our business.

If the Internal Revenue Service or the U.S. Treasury Department makes additional determinations that the fair market value of our solar energy systems is materially lower than what we have claimed, we may have to pay significant amounts to our financing funds or to our fund investors and such determinations could have a material adverse effect on our business, financial condition and prospects.

We and our fund investors claim the Federal ITC or the U.S. Treasury grant in amounts based on the fair market value of our solar energy systems. We have obtained independent appraisals to support the fair market values we report for claiming Federal ITCs and U.S. Treasury grants. The Internal Revenue Service and the U.S. Treasury Department review these fair market values. With respect to U.S. Treasury grants, the U.S. Treasury Department reviews the reported fair market value in determining the amount initially awarded. The Internal Revenue Service and the U.S. Treasury Department may subsequently audit the fair market value and determine that amounts previously awarded must be repaid to the U.S. Treasury Department or that excess awards constitute taxable income for U.S. federal income tax purposes. A small number of our financing funds are undergoing such audits. With respect to Federal ITCs, the Internal Revenue Service may review the fair market value on audit and determine that the tax credits previously claimed must be reduced. If the fair market value is determined to be less than we reported, we may owe our financing fund or fund investors an amount equal to this difference, plus any costs and expenses associated with a challenge to that valuation. We could also be subject to tax liabilities, including interest and penalties.

The U.S. Treasury Department has previously determined to award U.S. Treasury grants for some of our solar energy systems at a materially lower value than we had established in our appraisals. As a result, we have been required to pay our fund investors a true-up payment or contribute additional assets to the associated financing funds. It is possible that the U.S. Treasury Department will make similar determinations in the future. In response to such shortfalls, two of our financing funds filed a lawsuit in the United States Court of Federal Claims to recover the difference between the U.S. Treasury grants they sought and the amounts the U.S. Treasury paid; to the extent that these lawsuits are successful, any recovery would be used to repay us for amounts we previously reimbursed those funds. Our fund investors have contributed to our financing funds at the amounts the U.S. Treasury Department most recently awarded on similarly situated energy systems in order to reduce or eliminate the need for us to subsequently pay those fund investors true-up payments or contribute additional assets to the associated financing funds.

The Internal Revenue Service or the U.S. Treasury Department may object to the fair market value of solar energy systems that we have constructed, or will construct, including any systems for which grants have already been paid, as a result of:

·• any pending or future audit,

·• the outcome of the Department of Treasury Inspector General investigation, or

·• changes in guidelines or otherwise.

15If the Internal Revenue Service or the U.S. Treasury Department were to object to amounts we have claimed as too high of a fair market value on such systems, it could have a material adverse effect on our business, financial condition and prospects. For example, a hypothetical 5% downward adjustment in the fair market value of the $501.2 million of U.S. Department of Treasury grant applications that have been awarded from the beginning of the U.S. Treasury grant program through December 31, 2016 would obligate us to repay up to $25.1 million to our fund investors.

If the Internal Revenue Service or the U.S. Treasury Department were to object to amounts we have claimed as too high of a fair market value on such systems, it could have a material adverse effect on our business, financial condition and prospects. For example, a hypothetical 5% downward adjustment in the fair market value of the $501.2 million of U.S. Department of Treasury grant applications that have been awarded from the beginning of the U.S. Treasury grant program through December 31, 2015 would obligate us to repay up to $25.1 million to our fund investors.12

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In the past, challenges raising new funds have caused us to delay deployment of a substantial number of solar energy systems for which we had already signed leases or power purchase agreements with customers. For example, in late 2008 and early 2009, as a result of the state of the capital markets, our ability to finance the installation of solar energy systems was limited and resulted in a significant backlog of signed sales orders for solar energy systems. Our future ability to obtain additional financing depends on the continued confidence of banks and other financing sources in our business model and the solar energy industry as a whole. It could also be impacted by the liquidity needs of such financing sources. In addition, attracting future financing could be more difficult or costly to secure if the quality of our customer contracts, as perceived by our fund investors, were to decrease as a result of an increase in customer default rates, lower credit rating requirements for new customers or other factors. Solar energy has yet to achieve broad market acceptance and depends on continued support in the form of performance-based incentives, rebates, tax credits and other incentives from federal, state, local and foreign governments. If this support diminishes, our ability to obtain external financing, on acceptable terms or otherwise could be materially adversely affected. In addition, we face competition for these third-party investor funds. If we are unable to continue to offer a competitive investment profile, we may lose access to these funds or they may only be available on less favorable terms than are available to our competitors. Our current financing sources may be inadequate to support the anticipated growth in our business plans. Moreover, we will require additional capital in the near term, and we continue to look for opportunities to optimize our capital structure. We plan to pursue sources of such capital through various financing transactions and arrangements. Our inability to secure financing could lead to cancellations and could impair our ability to accept new projects and customers. In addition, our borrowing costs could increase, which would have a material adverse effect on our business, financial condition and results of operations.

We have historically benefited from the declining cost of solar panels, and our business and financial results may be harmed as a result of increases in the cost of solar panels or tariffs on imported solar panels imposed by the U.S. government.

The declining cost of solar panels and the raw materials necessary to manufacture them has been a key driver in the pricing of our solar energy systems and customer adoption of this form of renewable energy. With an increase of solar panel and raw materials prices, our growth could slow, and our financial results could suffer. Further, the cost of solar panels and raw materials could potentially increase in the future due to a variety of factors which we cannot control, including the imposition of duties, subsidies and/or safeguards or other trade-related costs or penalties or shortages of essential components.

The U.S. government imposes antidumping and countervailing duties on solar cells manufactured in China and/or Taiwan. Based on determinations by the U.S. government, the antidumping and countervailing duty rates range from approximately 33%-255%. Such antidumping and countervailing duties are subject to annual review and may be increased or decreased.

In addition, the U.S. government imposed additional tariffs on solar modules manufactured in China (with solar cells manufactured in other countries) and solar cells manufactured in Taiwan. In early January 2015, the U.S. government announced its affirmative final determinations in both the countervailing duty and antidumping cases against China and in the antidumping case against Taiwan.

Since these tariffs are reflected in the purchase price of the solar panels and cells, these tariffs are a cost associated with purchasing these solar products. In the past, we purchased a significant number of the solar panels used in our solar energy systems from manufacturers that were based in China. We continue to be affected by these tariffs/duties and any changes to them as many of the solar panels we currently purchase contain components, including solar cells, from China and Taiwan.

If additional tariffs are imposed or other negotiated outcomes occur, our ability to purchase these products on competitive terms or to access specialized technologies from countries like China and Taiwan could be limited. Further, foreign suppliers in other countries could also be the subject of these or future trade cases. Any of these events could harm our financial results by requiring us to account for the cost of trade penalties or to purchase and integrate solar panels or other system components from alternative and potentially higher-priced sources.

In September 2014, we acquired Silevo, a solar panel technology and manufacturing company with manufacturing operations in China. In May 2015, we were contacted by the U.S. Customs and Border Protection, or (CBP,) to provide information regarding our importation of solar panels ~~manufactured~~from byChina. ~~Silevo~~Based inupon ~~China. In~~the ~~response~~information towe provided, CBP’s ~~request~~agreed ~~for~~that ~~information,~~our wesolar ~~provided~~panels ~~applicable~~were ~~documentation~~not subject to ~~CBP~~the ~~and~~scope ~~engaged~~of inantidumping aand ~~review~~countervailing ~~with~~duty ~~their~~Orders ~~staff. Following~~on ~~this~~Crystalline ~~review,~~Silicon wePhotovoltaic ~~reached~~Cells/Modules anfrom ~~informal~~China ~~consensus~~(Orders); ~~with~~however, CBP ~~that~~instructed ~~Silevo’s~~us ~~solar~~to ~~panels~~obtain ~~are~~a ~~exempt~~determination from the ~~scope~~Department of ~~the~~Commerce ~~antidumping~~(DOC). ~~and~~In ~~countervailing~~June ~~duties~~2016, ~~orders.~~the InDOC ~~addition,~~issued weits ~~have~~final ~~submitted~~determination afinding ~~request~~that ~~for~~Silevo’s asolar ~~scope~~panels, ~~ruling~~manufactured ~~with~~in ~~the~~China, ~~U.S.~~are ~~Department~~within ofthe ~~Commerce~~scope ~~for~~of athe ~~determination~~antidumping onand ~~this~~countervailing ~~issue~~Orders. We ~~anticipate~~are ~~receiving~~currently achallenging ~~response~~that ~~from~~final determination in the ~~Department~~Court of ~~Commerce~~International inTrade ~~March~~(CIT). ~~2016~~However, ~~and~~until this issue is resolved, we have ~~ceased~~not and do not intend on importing Silevo solar panels ~~manufactured~~produced in China ~~while~~for weour ~~await their decision~~U. WeS. ~~believe~~operations ~~that~~without depositing the ~~Silevo~~applicable ~~solar~~antidumping ~~panels~~and ~~are~~countervailing ~~exempt from these tariffs~~duties.

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

Our solar energy systems have been eligible for Federal ITCs or U.S. Treasury grants, as well as depreciation benefits. We have relied on, and will continue to rely on, financing structures that monetize a substantial portion of those benefits and provide financing for our solar energy systems. With the lapse of the U.S. Treasury grant program, our reliance on these tax-advantaged financing structures has substantially increased. If, for any reason, we were unable to continue to monetize those benefits through these arrangements, we may be unable to provide and maintain solar energy systems for new customers on an economically viable basis.

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

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

· the state of financial and credit markets;

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

· non-renewal of these incentives or decreases in the associated benefits; and

· no adverse changes in the regulatory environment affecting the economics of our existing energy contracts.

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

We believe that a customer’s decision to buy renewable energy from us is primarily driven by their desire to pay less for electricity. The customer’s decision may also be affected by the cost of other renewable energy sources. Decreases in the retail prices of electricity from the utilities or other renewable energy sources would harm our ability to offer competitive pricing and could harm our business. The price of electricity from utilities could decrease as a result of:

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

·• the construction of additional electric transmission and distribution lines;

·• a reduction in the price of natural gas, including as a result of new drilling techniques or a relaxation of associated regulatory standards;

·• the development of energy conservation technologies and public initiatives to reduce electricity consumption; and

·• the development of new renewable energy technologies that provide less expensive energy.

A reduction in utility electricity prices would make the purchase of our solar energy systems or the purchase of energy under our lease and power purchase agreements less economically attractive. In addition, a shift in the timing of peak rates for utility-generated electricity to a time of day when solar energy generation is less efficient could make our solar energy system offerings less competitive and reduce demand for our products and services. If the retail price of energy available from utilities were to decrease for any reason, we would be at a competitive disadvantage. As a result of these or similar events impacting the economics of our customer agreements, we may be unable to attract new customers and we may experience an increased rate of defaults under our existing customer agreements.

A material drop in the retail price of utility-generated electricity would particularly adversely impact our ability to attract commercial customers.

Commercial customers comprise a significant and growing portion of our business, and the commercial market for energy is particularly sensitive to price changes. Typically, commercial customers pay less for energy from utilities than residential customers. Because the price we are able to charge commercial customers is only slightly lower than their current retail rate, any decline in the retail rate of energy for commercial entities could have a significant impact on our ability to attract commercial customers. We may be unable to offer solar energy systems in commercial markets that produce electricity at rates that are competitive with the unsubsidized price of retail electricity. If this were to occur, our business would be harmed because we would be at a competitive disadvantage compared to other energy providers and may be unable to attract new commercial customers.

The terms of our agreement with the Research Foundation for the State University of New York, as amended, pertaining to the construction of the Buffalo Riverbend Manufacturing Facility, among other things, require us to comply with a number of covenants during the term of the agreement. Any failure to comply with these covenants could obligate us to pay significant amounts to the Foundation and result in termination of the agreement.

In September 2014, Silevo entered into an amended and restated research and development alliance agreement, as amended from time to time, referred to as the Riverbend Agreement, with the Research Foundation for the State University of New York, referred to as the Foundation, for the construction of an approximately 1 million square foot manufacturing facility capable of producing 1-gigawatt of solar panels annually on an approximately 88.24 acre site located in Buffalo, New York, referred to as the Manufacturing Facility.

Under the terms of the Riverbend Agreement, the Foundation will construct the Manufacturing Facility and install certain utilities and other improvements, with participation by us as to the design and construction of the Manufacturing Facility, and acquire certain manufacturing equipment designated by us to be used in the Manufacturing Facility and other specified items. The Foundation will cover construction costs related to the Manufacturing Facility and certain manufacturing equipment, in each case up to a maximum funding allocation from the State of New York, as well as additional specified items, and we will be responsible for any construction and equipment costs in excess of such amounts. The Foundation will own the Manufacturing Facility and manufacturing equipment it acquires for the project. We are also responsible for the acquisition of certain manufacturing equipment, which equipment we will own. Following completion of the Manufacturing Facility, we will lease the Manufacturing Facility from the Foundation for an initial period of 10 years for $2 per year plus utilities, and the Foundation will grant us the right to use the manufacturing equipment owned by it during the initial lease term at no charge.

In addition to the other obligations under the Riverbend Agreement, we must (i) use our best commercially reasonable efforts to commission the manufacturing equipment within three months of Manufacturing Facility ~~completion~~Completion and reach full production output within three months thereafter, (ii) employ personnel for at least 1,460 jobs in Buffalo, New York, with 500 of such jobs for the manufacturing operation at the Manufacturing Facility, for the initial two years of collaboration commencing after Manufacturing Facility ~~completion~~Completion, and we have committed to the retention of these jobs for five years, (iii) employ at least 2,000 other personnel in the State of New York for five years after Manufacturing Facility ~~completion~~Completion, (iv) employ a total of 5,000 people in the State of New York by the tenth anniversary of Manufacturing Facility ~~completion~~Completion, (v) spend or incur approximately $5 billion in combined capital, operational expenses and other costs in the State of New York during the 10 year period following full production, (vi) make reasonable efforts to provide first consideration to New York-based suppliers, (vii) invest and spend in manufacturing operations at a level that ensures competitive product costs for at least five years from full production, and (viii) negotiate in good faith with the Foundation on an exclusive “first opportunity basis” for 120 days before entering into any agreement for additional solar panel manufacturing capacity that Silevo may wish to develop during the term of the agreement. If we are not able to hire the specified number of employees or identify and qualify local vendors and suppliers, we would face the risk of not only failing to meet the performance criteria under the Riverbend Agreement but also not being capable of running the operations related to the Manufacturing Facility. If we fail in any year over the course of the ten-year term to meet these specified investment and job creation obligations, as described above, we would be obligated to pay a “program payment” of $41.2 million to the Foundation in any such year. In addition, we are subject to other events of defaults, including breach of these program payments and certain insolvency events, that would lead to the acceleration of all of the then unpaid program payments by us to the Foundation. Our failure to meet our contractual obligations under the Riverbend Agreement may result in our obligation to pay significant amounts to the Foundation in scheduled program payments, other contractual damages and/or the termination of our lease of the Manufacturing Facility. Any inability on our part to raise the capital necessary to operate the Manufacturing Facility and meet the specified requirements of the Riverbend Agreement during the 10-year period following full production would also cause a material adverse effect upon our business operations and prospects.

Our expectations as to the cost of building the Manufacturing Facility, acquiring manufacturing equipment and supporting our manufacturing operations may prove incorrect, which could subject us to significant expenses to achieve the desired benefits under the Riverbend Agreement. In the event of any cost overruns in construction, commissioning, acquiring manufacturing equipment or operating the Manufacturing Facility, we may incur additional capital and operating expenses that would have a material adverse effect upon our business operations and prospects.14

payments, other contractual damages and/or the termination of our lease of the Manufacturing Facility. Any inability on our part to raise the capital necessary to operate the Manufacturing Facility and meet the specified requirements of the Riverbend Agreement during the 10-year period following full production would also cause a material adverse effect upon our business operations and prospects.

In December 2016, we entered into agreements with Panasonic to manufacture solar cells and modules at the Manufacturing Facility. Our expectations as to the cost of building the Manufacturing Facility, acquiring manufacturing equipment and supporting our manufacturing relationship with Panasonic and other operations may prove incorrect, which could subject us to significant expenses to achieve the desired benefits under the Riverbend Agreement. In the event of any cost overruns in construction, commissioning, acquiring manufacturing equipment or operating the Manufacturing Facility, we may incur additional capital and operating expenses that would have a material adverse effect upon our business operations and prospects.

Our projections as to the time and expense necessary to build the Manufacturing Facility and acquire the manufacturing equipment may prove incorrect and subject us to significant delay and additional expense.

We currently anticipate ~~that~~commencing ~~construction~~solar ofmodule ~~the~~and ~~Manufacturing~~solar ~~Facility~~roof ~~will~~manufacturing ~~be completed~~ in ~~March~~the orsecond ~~April~~half of ~~2016,~~2017 ~~after~~with ~~which~~photovoltaic ~~time~~cells wesourced ~~will~~from ~~commence~~Panasonic, ~~installation~~ and ~~commissioning~~are ofworking ~~the~~towards ~~manufacturing~~ramping ~~equipment.~~production Toto ~~date,~~1 wegigawatt ~~have experienced delays in purchasing some~~ of ~~the~~solar ~~manufacturing~~cell ~~equipment,~~production ~~due~~by ~~in part to longer lead times than we originally expected~~2019. We ~~While~~are weworking ~~currently~~with ~~believe that all manufacturing equipment will be delivered by~~ the ~~second~~State ~~quarter~~ of ~~2017,~~New weYork ~~may~~to ~~experience~~finalize ~~additional~~orders ~~unforeseen~~of ~~delays.~~manufacturing ~~Based~~equipment onrelated ~~our~~to ~~current forecast, we estimate that we will commence manufacturing~~ solar ~~modules~~module ~~at the Manufacturing Facility in the third quarter of 2017~~production. ~~However, this is an aggressive schedule and we may experience additional delays.~~

We have recently identified potential modifications to the manufacturing equipment and factory layout related to the solar cell manufacturing line that may offer the ability to increase the production capacity of the Manufacturing Facility above 1 gigawatt per year. We believe that the short delay in finalizing the overall configuration will help maintain the long-term competitiveness of the Manufacturing Facility. However, this is an aggressive schedule and we may experience additional delays.

There are a number of risks which may delay the completion of the Manufacturing Facility and commencement of operations, including:

·• delays in placing orders for necessary equipment with long lead times;

·• failure or delay in obtaining necessary permits, licenses or other governmental support or approvals;

·• the time necessary for the construction of related utility and infrastructure improvements;

19• unforeseen engineering problems;

·• ~~unforeseen~~the ~~engineering~~inability ~~problems~~to identify and hire qualified construction and other workers on a timely basis or at all;

·• ~~the~~construction ~~inability~~delays ~~to identify~~ and ~~hire~~contractor ~~qualified~~performance ~~construction and other workers on a timely basis or at all~~shortfalls;

·• ~~construction~~work ~~delays~~stoppages ~~and~~or ~~contractor~~labor ~~performance~~disruptions, ~~shortfalls~~including efforts by our employees to enter into collective bargaining agreements;

·• ~~work~~availability ~~stoppages~~of orraw ~~labor~~materials ~~disruptions,~~and ~~including~~components ~~efforts~~from bysuppliers ~~our~~and ~~employees~~any todelivery ~~enter~~delays ~~into~~in ~~collective~~such ~~bargaining~~materials ~~agreements~~or components;

·• ~~availability~~delays ofresulting ~~raw~~from ~~materials~~environmental conditions, and ~~components~~any ~~from~~design ~~suppliers~~changes ~~and~~or ~~any~~additions ~~delivery~~necessary ~~delays~~to inremediate ~~such~~prior ~~materials~~environmental orhazards ~~components~~at the site; and

·• ~~delays~~adverse ~~resulting~~weather ~~from environmental~~ conditions, ~~and~~such ~~any~~as ~~design~~an ~~changes~~extreme orwinter, ~~additions~~and ~~necessary~~natural ~~to remediate prior environmental hazards at the site; and~~disasters.

· adverse weather conditions, such as an extreme winter, and natural disasters.

Any delay in the completion of the Manufacturing Facility and commencement of our operations will result in us incurring additional expenses and could negatively affect our operating results, financial condition and prospects.

We may not be able to achieve anticipated production yields, efficiencies and quality, which would harm our production volume and increase our costs.

The Manufacturing Facility is expected to be the largest of its kind in the Western Hemisphere. Successfully achieving volume manufacturing of solar cells at our projected yield, efficiency and quality levels will be difficult, and we have little experience in manufacturing at these high volumes. As we expand our manufacturing capacity and qualify additional suppliers to support our projected production volume, we may initially experience lower yields than anticipated. Any deviations in our manufacturing processes may result in significant decreases in production yield, efficiency and quality, and in some cases, may cause production to be suspended or yield no output. If we cannot achieve planned yields over time, our production costs could increase and we may be unable to produce a sufficient amount of our solar panels to meet our installation needs.

In addition, Silevo’s Triex technology is novel and involves proprietary and complex manufacturing techniques, which may result in undetected errors or defects in the solar cells produced. Any defects in our solar panels could cause us to incur significant warranty, non-warranty and re-engineering costs, divert the attention of our engineering personnel, result in indemnification liability to our fund investors and significantly affect our customer relations and business reputation.

If we are unable to achieve our cost projections or otherwise control the costs associated with operating our manufacturing business, our financial condition and operating results will suffer.

As a result of initial production levels that under-utilize the Manufacturing Facility as we ramp up production, we anticipate that our initial production costs (on a per watt basis) will be relatively high. As we work to achieve full utilization of the Manufacturing Facility, we anticipate that the volume of production will reduce our production costs (on a per watt basis). There is no guarantee that we will be able to achieve planned cost targets, some of which will be beyond our control. For example, the costs of our raw materials and components, such as polysilicon and polysilicon wafers, could increase due to shortages as global demand for these products increases. Any failure to achieve our per watt cost projections would cause our financial condition and operating results to suffer. In addition, the pricing of our solar energy systems may become less competitive if our competitors are able to reduce their manufacturing and installation costs faster than we are able to.

Competition in the solar industry is intense, and future success and innovation will require additional research and development expenses.

The Manufacturing Facility is designed to be a high-technology volume-manufacturing facility. In constructing the Manufacturing Facility, including local utility infrastructure upgrades and procurement of manufacturing equipment, the State of New York is making a significant investment in the Buffalo-area economy. However, the solar panel manufacturing market is characterized by continually changing technology that requires improved features, such as increased efficiency, higher power output and enhanced aesthetics. In the time it takes us to achieve volume production of Silevo’s Triex technology, it is possible that additional innovations in solar technology could result in our technology and the Manufacturing Facility becoming less competitive or obsolete, which could harm our costs and adversely affect our business operations. This risk requires us to continuously focus on research and development, and will require significant on-going research and development expenses. If we cannot continually improve the efficiency and power output of our solar panels and reduce the cost of production, we could become less competitive in the market and our financial condition and operating results could be adversely affected.

Rising interest rates could adversely impact our business.

Changes in interest rates could have an adverse impact on our business by increasing our cost of capital. For example:

·• rising interest rates would increase our cost of capital; and

·• rising interest rates may negatively impact our ability to secure financing on favorable terms to facilitate our customers’ purchase of our solar energy systems or energy generated by our solar energy systems.

The majority of our cash flows to date have been from solar energy systems under lease and power purchase agreements that have been monetized under various financing fund and borrowing structures. One of the components of this monetization is the present value of the payment streams from our customers who enter into these leases and power purchase agreements. If the rate of return required by ~~the~~investors ~~fund investor~~ rises as a result of a rise in interest rates, it will reduce the present value of the customer payment stream and consequently reduce the total value that we are able to derive from monetizing the payment stream. Interest rates are at historically low levels, partially as a result of intervention by the U.S. Federal Reserve. The U.S. Federal Reserve has taken actions to taper its intervention, and should these actions continue, it is likely that interest rates will rise, which could cause our cost of capital to increase and impede our ability to secure financing. As a result, our business and financial condition could be harmed.

low levels, partially as a result of intervention by the U.S. Federal Reserve. The U.S. Federal Reserve has taken actions to taper its intervention, and should these actions continue, it is likely that interest rates will rise, which could cause our cost of capital to increase and impede our ability to secure financing. As a result, our business and financial condition could be harmed.

In addition, we evaluate our business with a long-term view based on cash flows relating to our customer agreements, third-party financing funds and other arrangements. To date, we have taken limited actions to mitigate the risk of rising future interest rates. In 2014, we initiated a strategy of purchasing limited long-term derivative securities to economically hedge the effect of future interest rate increases. We may continue to engage in such transactions and the cost and outcomes of such transactions are currently not known.

We are expanding our international activities and customers, and plan to continue these efforts, which subject us to additional business risks, including compliance with international and trade regulations.

Our long-term strategic plans include international expansion and we intend to sell our solar energy products and services in international markets. For example, in August 2015, we acquired S.A. de C.V., or Ilioss to expand our operations into Mexico.

Risks inherent to our international operations include the following:

·• multiple, conflicting and changing laws and regulations, including energy regulations, export and import restrictions, tax laws and regulations, environmental regulations, labor laws and other government requirements, approvals, permits and licenses;

·• trade barriers and trade remedies such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries;

·• potentially adverse tax consequences associated with our permanent establishment of operations in more countries, including repatriation of non-U.S. earnings taxed at rates lower than the U.S. statutory effective tax rate;

·• difficulties and costs in recruiting and retaining individuals skilled in international business operations;

·• changes in general economic and political conditions in the countries where we operate, including changes in government incentives relating to power generation and solar electricity, and availability of capital at competitive rates;

·• political and economic instability, including wars, acts of terrorism, political unrest, boycotts, curtailments of trade and other business restrictions;

·• the inability to work successfully with third -parties with local expertise to co-develop international projects;

·• relatively uncertain legal systems, including potentially limited protection for intellectual property rights and laws, changes in the governmental incentives we rely on, regulations and policies which impose additional restrictions on the ability of foreign companies to conduct business in certain countries or otherwise place them at a competitive disadvantage in relation to domestic companies;

·• international business practices that may conflict with CBP or other legal requirements enforced by partner government agencies;

·• financial risks, such as longer sales and payment cycles and greater difficulty collecting accounts receivable; and

·• fluctuations in currency exchange rates relative to the U.S. dollar.

Doing business in foreign markets requires us to be able to respond to rapid changes in market, legal, and political conditions in these countries. The success of our business will depend in part on our ability to succeed in differing legal, regulatory, economic, social and political environments. We recognize that we must understand the risks and opportunities relating to trade remedies so that we can develop and implement policies and strategies that will be effective in each location where we do business.

We are subject to the Foreign Corrupt Practices Act of 1977, or the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face significant risks if we fail to comply with the FCPA and other anticorruption laws that prohibit companies and their employees and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties, and private-sector recipients for the purpose of obtaining or retaining business. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. We may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. ~~We can be held liable~~ (for ~~the~~example, ~~corrupt~~Mexico’s orelectricity ~~other~~sector ~~illegal~~is ~~activities~~federally ofowned ~~our employees, representatives, contractors, partners,~~ and ~~agents,~~controlled ~~even~~by ifthe weFederal doElectricity ~~not explicitly authorize such activities~~Commission). ~~Any~~We ~~violation~~can ofbe ~~the~~held ~~FCPA,~~liable ~~other~~for applicable anticorruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the ~~case~~corrupt ~~of the FCPA, suspension~~ or debarment from U.S. government contracting, which could have a material adverse effect on our business, financial condition, cash flows and reputation. In addition, responding to any enforcement action may result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees.

Our vertically integrated and our continued international expansion efforts may subject us to additional regulatory risks that may impact our operating results. For example, we will have to ensure we are in compliance with any bilateral and/or multilateral free trade agreements in addition to understanding trade remedies that directly affect those products and components involved in the construction of our solar energy systems, which are procured from vendors and manufacturers outside of the United States. Some of these components, particularly solar panels and mounting hardware made from aluminum extrusions, may be subject to antidumping and countervailing duties.16

~~While~~other ~~conducting~~illegal anactivities ~~internal review~~ of our ~~supply~~employees, ~~chain~~representatives, ~~and~~contractors, ~~import practices~~partners, ~~we recently identified certain potential instances in which our Zep Solar subsidiaries have imported system components~~ and ~~other~~agents, ~~products~~even ~~into~~if ~~the United States which were misclassified upon import. In addition,~~ we ~~discovered~~do ~~that~~not ~~certain~~explicitly ~~parts~~authorize ~~may~~such ~~be subject to antidumping and countervailing duties~~activities. In ~~September~~Any ~~2015,~~violation weof ~~submitted a voluntary disclosure to~~ the ~~CBP~~FCPA, ~~of these and~~ other ~~potential~~applicable ~~misclassifications~~anticorruption laws, and weanti-money ~~intend~~laundering tolaws ~~cooperate~~could ~~with~~result ~~CBP~~in aswhistleblower wecomplaints, ~~finalize~~adverse ~~this~~media ~~review. As~~coverage, ainvestigations, ~~result~~loss of ~~these~~export ~~misclassifications~~privileges, ~~for~~severe ~~the~~criminal ~~third~~or ~~quarter~~civil ~~ended~~sanctions ~~September 30~~and, ~~2015, we recorded an accrual~~ in the ~~amount~~case of ~~approximately~~the ~~$5.3 million for import duties that we currently anticipate will be owed by our acquired subsidiaries to CBP relating to items imported since January 1~~FCPA, ~~2014. We~~suspension ~~are~~or ~~continuing~~debarment ~~to review information related to imports~~ from ~~prior periods and anticipate that amounts of import duties for these periods will not be significant~~U.S. Ifgovernment ~~our revised classifications or estimates prove to be incorrect with respect to these import duties~~contracting, ~~the~~which ~~actual~~could ~~amounts~~have ~~owed~~a ~~may~~material ~~materially~~adverse ~~increase~~effect ason ~~we finalize~~ our ~~disclosure~~business, ~~with~~financial ~~CBP~~condition, ~~which~~cash weflows ~~anticipate~~and ~~will occur during the first quarter of 2016~~reputation. In addition, ~~during~~responding ~~the~~to ~~pendency~~any ofenforcement ~~this~~action ~~review, we~~ may beresult ~~required~~in toa ~~make~~materially ~~full~~significant ~~antidumping~~diversion ~~and countervailing duties deposits for imports determined to be inside the scope~~ of ~~the~~management’s ~~antidumping~~attention and ~~countervailing~~resources ~~duties~~and ~~orders. Any~~significant ~~increase~~defense ~~in the anticipated~~ costs ofand ~~import~~other ~~duties~~professional ~~would increase our operating costs, which could be harmful to our financial results~~fees.

Our vertical integration and continued international expansion efforts may subject us to additional regulatory risks that may impact our operating results. For example, we will have to ensure we are in compliance with any bilateral and/or multilateral free trade agreements in addition to understanding trade remedies that directly affect those products and components involved in the construction of our solar energy systems, which are procured from vendors and manufacturers outside of the United States. Some of these components, particularly solar panels and mounting hardware made from aluminum extrusions, may be subject to antidumping and countervailing duties.

In March 2015, we conducted an internal review of our supply chain and import practices for our subsidiary, Zep Solar, which included a review of the classification of products manufactured overseas. We identified instances in which some of the products and system components imported into the United States were misclassified. As a result of these misclassifications, we discovered that two legacy products might be subject to antidumping and countervailing duties. In September 2015, we submitted a voluntary disclosure to the CBP identifying these and other potential misclassifications, cooperating fully with CBP to finalize this review. In April 2016, we perfected our disclosure tendering $5.3 million to CBP for import duties owed by our acquired subsidiary relating to items imported since August 2012. For items potentially subject to antidumping or countervailing duties, CBP may require us to obtain a determination from the DOC.

In the event that we fail to or are unable to comply with the legal requirements in the jurisdictions in which we operate, we may be subject to significant fines, penalties and other amounts which could materially harm our operations and financial results.

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

In August 2015, we acquired Iliosson S.A. de C.V., a commercial and industrial solar project developer in Mexico. In September 2014, we acquired Silevo, LLC, a solar panel technology and manufacturing company. In 2013, we acquired Zep Solar, Common Assets, certain assets of Paramount Solar and completed other smaller acquisitions. In the future, we may acquire additional companies, project pipelines, products or technologies, ~~including additional photovoltaics companies,~~ or enter into joint ventures or other strategic initiatives. Our ability as an organization to integrate acquisitions is unproven. We may not realize the anticipated benefits of our acquisitions or any other future acquisition or the acquisition may be viewed negatively by customers, financial markets or investors.

Any acquisition has numerous risks, including the following:

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

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

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

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

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

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

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

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

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

·• failure of due diligence processes to identify significant issues with product quality, legal and financial liabilities, among other things;

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

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

In connection with our acquisitions of Silevo, Zep Solar and Paramount Solar, we issued approximately 8.8 million shares of our common stock. In connection with our acquisition of Silevo, we may issue additional common stock with an aggregate value of up to $150 million, subject to adjustments, upon the timely achievement of all earnout related milestones. Following the announcement of the production of our record-breaking rooftop solar panel, we amended the Silevo merger agreement to reflect new product specifications and manufacturing process and to extend the deadline for achieving certain manufacturing-related milestones. In addition, we typically offer additional equity compensation to continuing employees of these businesses. If we are unable to successfully integrate these businesses and technologies or are unable to otherwise achieve the anticipated benefits of these acquisitions, the related issuances of our securities may be highly dilutive to our existing stockholders.17

Our total consolidated indebtedness was $2,753.7 million as of December 31, 2015. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. In addition, our 2.75% Convertible Senior Notes due 2018 issued in November 2013 (the “2018 Notes”), our 1.625% Convertible Senior Notes due 2019 issued in September and October 2014 (the “2019 Notes”) and our Zero Coupon Convertible Senior Notes due 2020 issued in December 2015 (the “2020 Notes” and together with the 2018 Notes and the 2019, the “Notes”), are convertible into shares of common stock, and we may engage in similar issuances of convertible securities in the future to fund our operating and expansion plans. Our ability to issue additional securities and to refinance our existing indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

We expect to incur substantially more debt or take other actions which would intensify the risks discussed above.

We and our subsidiaries expect to incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of which may be secured debt. Incurring such additional debt could have the effect of diminishing our ability to make payments on existing indebtedness, including the Notes, when due and otherwise limiting our ability to respond to periods of increased liquidity pressure. Although our existing credit facilities restrict our ability to incur additional indebtedness, including secured indebtedness, but we may be able to obtain amendments and waivers of such restrictions or may not be subject to such restrictions under the terms of any subsequent indebtedness.

We may have trouble refinancing our credit facilities or obtaining new financing for our working capital, equipment financing and other needs in the future or complying with the terms of existing credit facilities. If credit facilities are not available to us on acceptable terms, if and when needed, or if we are unable to comply with their terms, our ability to continue to grow our business would be adversely impacted.

As of December 31, 2015, we had the ability to draw up to an additional $234.2 million under all of our credit facilities. Our secured revolving credit facility, our primary working capital facility, currently has a maximum size of $500 million (with $398.5 million currently committed from several lenders and an additional $101.5 million subject to further conditions) that matures in December 2017. The working capital facility requires us to comply with certain financial, reporting and other requirements. The timing of our commercial projects has on occasion adversely affected our ability to satisfy certain financial covenants under these or prior facilities. While our lenders have given us waivers of certain covenants we have not satisfied in the past, there is no assurance that the lenders will waive or forbear from exercising their remedies with respect to any future defaults that might occur. In addition, we have amended our secured revolving credit facility to engage in transactions such as the issuance of the 2020 Notes and issue Solar Bonds debt securities. While we believe that some of the financial and other covenants are generally more favorable to us following these changes, a breach of our covenants may still occur in the future.

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

We may not have the ability to raise the funds necessary to repurchase the Notes, including upon a fundamental change, and one of our current credit facilities prohibits us from repurchasing the issued Notes upon a fundamental change.

Holders of the Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. However, at such time that we may be required to repurchase the Notes, we may not have sufficient available cash or be able to obtain sufficient financing to allow for repurchase. In addition, one of our existing credit facilities prohibits us from repurchasing the Notes upon a fundamental change. We may enter into agreements in the future that similarly restrict our ability to repurchase the Notes and other securities. Our failure to repurchase the Notes when required would constitute a default which could also result in defaults under other agreements governing our existing or future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof. Our ability to repurchase the Notes may also be limited by law or by regulatory authority.

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

We have incurred net losses in the past, and we had an accumulated deficit of $316.7 million as of December 31, 2015. We may incur net losses from operations as we increase our spending to finance the expansion of our operations, expand our installation, engineering, administrative, sales and marketing staffs, and implement internal systems and infrastructure to support our growth. We do not know whether our revenue will grow rapidly enough to absorb these costs, and our limited operating history makes it difficult to assess the extent of these expenses or their impact on our operating results. Our ability to achieve profitability depends on a number of factors, including:

· growing our customer base;

· finding investors willing to invest in our financing funds;

· maintaining and further lowering our cost of capital;

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

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

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

If we are unable to maintain effective internal controls over financial reporting and disclosure controls and procedures, or if material weaknesses are discovered in future periods, the accuracy and timeliness of our financial and operating reporting may be adversely affected, and confidence in our operations and disclosures may be lost.

In ~~connection with~~ the ~~audit~~past ~~of our consolidated financial statements for the year ended December 31, 2013,~~ we have identified ~~four~~ material weaknesses in our internal control over financial reporting relating to (i) the costing of our solar system installations, (ii) accounting for and classification of redeemable noncontrolling interests, (iii) segregation of incompatible duties at our lease administrator and our controls over the data received from our administrator, and (iv) certain areas of our financial statement close process. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. These material weaknesses resulted from separate control deficiencies, as well as our misinterpretation of certain accounting standards, and resulted in the restatement of our consolidated financial statements as of and for the years ended December 31, 2012, 2011, 2010 and 2009 and for certain interim periods in 2012 and 2013.

AsIn aconnection ~~result~~with ofthis ~~significant~~annual ~~efforts~~report byon usForm ~~and~~10-K, our ~~Audit~~management ~~Committee~~has performed an evaluation of our internal control over financial reporting as of December 31, we2016 ~~have~~pursuant ~~successfully~~to ~~remediated~~Section ~~these~~404 ~~material~~of ~~weaknesses~~the Sarbanes-Oxley Act, and ~~improved~~has concluded that our internal control over financial reporting and our disclosure controls and procedures were effective as of December 31, 2016.

InIf ~~connection~~we ~~with~~are ~~this~~not ~~annual~~able ~~report~~to onmaintain ~~Form~~effective ~~10-K~~internal control over financial reporting and disclosure controls and procedures, ~~our~~or ~~management~~if ~~has~~additional ~~performed~~material anweaknesses ~~evaluation~~are discovered in future periods, a risk that is significantly increased in light of the complexity of our ~~internal~~business ~~control~~and ~~over~~investment funds, we may be unable to accurately and timely report our financial ~~reporting~~position, asresults of ~~December 31~~operations, ~~2015~~cash ~~pursuant~~flows toor ~~Section~~key ~~404~~operating metrics, which could result in late filings of our annual and quarterly reports under the ~~Sarbanes-Oxley~~Exchange Act, ~~and~~restatements ~~has~~of ~~concluded~~our ~~that~~consolidated ~~our~~financial ~~internal~~statements ~~control~~or ~~over~~other ~~financial~~corrective ~~reporting~~disclosures, ~~and~~an inability to access commercial lending markets, defaults under our ~~disclosure~~secured ~~controls~~revolving credit facility and ~~procedures~~other ~~were~~agreements, ~~effective~~or asother material adverse effects on our business, reputation, results of ~~December 31~~operations, ~~2015~~financial condition or liquidity.

If we are not able to maintain effective internal control over financial reporting and disclosure controls and procedures, or if additional material weaknesses are discovered in future periods, a risk that is significantly increased in light of the complexity of our business and investment funds, we may be unable to accurately and timely report our financial position, results of operations, cash flows or key operating metrics, which could result in additional late filings of our annual and quarterly reports under the Exchange Act, additional restatements of our consolidated financial statements or other corrective disclosures, a decline in our stock price, suspension or delisting of our common stock by The NASDAQ Stock Market, an inability to access the capital and commercial lending markets, defaults under our secured revolving credit facility and other agreements, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity.

Updates or changes to our IT systems affecting our customer billing and control environment may disrupt our operations.

As we continue to evaluate and implement upgrades and changes to our IT systems affecting our customer billing and control environment, some of which are significant, we may encounter unexpected challenges, outages and other issues. Upgrades involve replacing existing systems with successor systems, making changes to existing systems, or cost-effectively acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training, and staging implementation, as well as ensuring appropriate commercial contracts are in place with third-party vendors supplying or supporting our IT initiatives. However, there can be no assurances that we will successfully launch these systems as planned or that they will occur without disruptions to our operations. IT system disruptions, if not anticipated and appropriately mitigated, or failure to successfully implement new or upgraded systems, could have a material adverse effect on our results of operations, and our ability to timely and accurately report our financial and operating results.

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

Federal law and most state laws do not currently regulate us as a utility. As a result, we are not subject to the various federal and state standards, restrictions and regulatory requirements applicable to U.S. utilities. In the United States, we obtain federal and state regulatory exemptions by establishing “Qualifying Facility” status with the Federal Energy Regulatory Commission for all of our qualifying solar energy projects. In Canada, we also are generally subject to the regulations of the relevant energy regulatory agencies applicable to all producers of electricity under the relevant feed-in tariff regulations (including the feed-in tariff rates), however we are not currently subject to regulation as a utility. Our business strategy includes the continued development of larger solar energy systems in the future for our commercial and government customers, which has the potential to impact our regulatory position. Any local, state, federal or foreign regulations could place significant restrictions on our ability to operate our business and execute our business plan by prohibiting or otherwise restricting our sale of electricity. If we were subject to the same state, federal or foreign regulatory authorities as utilities in the United States or if new regulatory bodies were established to oversee our business in the United States or in foreign markets, then our operating costs would materially increase.

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

To support our growth, we need to hire, train, deploy, manage and retain a substantial number of skilled employees. In particular, we need to continue to expand and optimize our sales infrastructure to grow our customer base and our business, and we plan to expand our direct sales force. Identifying, recruiting and training qualified personnel requires significant time, expense and attention. It can take several months before a new salesperson is fully trained and productive. If we are unable to hire, develop and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or grow our business.

To complete current and future customer projects and to continue to grow our customer base, we need to hire a large number of installers in the relevant markets. Competition for qualified personnel in our industry is increasing, particularly for skilled installers and other personnel involved in the installation of solar energy systems. We also compete with the homebuilding and construction industries for skilled labor. As these industries seek to hire additional workers, our cost of labor may increase. The unionization of our labor force could also increase our labor costs. Shortages of skilled labor could significantly delay a project or otherwise increase our costs. Because our profit on a particular installation is based in part on assumptions as to the cost of such project, cost overruns, delays or other execution issues may cause us to not achieve our expected margins or cover our costs for that project. In addition, because we are headquartered in the San Francisco Bay Area, we compete for a limited pool of technical and engineering resources that requires us to pay wages that are competitive with relatively high regional standards for employees in these fields.

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

In our lease pass-through financing funds, there is a one-time reset of the lease payments, and we may be obligated, in connection with the resetting of the lease payments at true up, to refund lease prepayments or to contribute additional assets to the extent the system sizes, costs and timing are not consistent with the initial lease payment model.

In our lease pass-through financing funds, the models used to calculate the lease prepayments will be updated for each fund at a fixed date occurring after placement in service of all solar energy systems in a given fund or on an agreed upon date (typically within the first year of the applicable lease term) to reflect certain specified conditions as they exist at such date, including the ultimate system size of the equipment that was leased, how much it cost and when it went into service. As a result of such a true up, the lease payments are resized and we may be obligated to refund the investor’s lease prepayments or to contribute additional assets to the fund. Any significant refunds or capital contributions that we may be required to make could adversely affect our financial condition.

We have guaranteed a minimum return to be received by an investor in one of our financing funds and could be adversely affected if we are required to make any payments under this guarantee.

We have guaranteed payments to the investor in one of our financing funds to compensate for payments that the investor would be required to make to a certain third -party as a result of the investor not achieving a specified minimum internal rate of return in this fund, assessed annually. Although the investor has achieved the specified minimum internal rate of return to date, the amounts of any potential future payments under this guarantee depend on the amounts and timing of future distributions to the investor from the fund and the tax benefits that accrue to the investor from the fund’s activities. Because of uncertainties associated with estimating the timing and amounts of future distributions to the investor, we cannot determine the potential maximum future payments that we could have to make under this guarantee. We may agree to similar guarantees in the future if market conditions require it. Any significant payments that we may be required to make under our guarantees could adversely affect our financial condition.

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

Since our formation in 2006, we have focused our efforts primarily on the sales, financing, engineering, installation and monitoring of solar energy systems for residential, commercial and government customers. We launched our pilot commercial and residential energy storage products and services in late 2013, and revenue attributable to this line of business has not been material compared to revenue attributable to our solar energy systems. We may be unsuccessful in significantly broadening our customer base through installation of solar energy systems within our current markets or in new markets we may enter. Additionally, we cannot assure you that we will be successful in generating substantial revenue from our current energy-related products and services or from any additional products and services we may introduce in the future. Our limited operating history, combined with the rapidly evolving and competitive nature of our industry, may not provide an adequate basis for you to evaluate our operating and financing results and business prospects. In addition, we only have limited insight into emerging trends that may adversely impact our business, prospects and operating results. As a result, our limited operating history may impair our ability to accurately forecast our future performance.

We face competition from both traditional energy companies and renewable energy companies.

The solar energy and renewable energy industries are both highly competitive and continually evolving as participants strive to distinguish themselves within their markets and compete with large utilities. We believe that our primary competitors are the traditional utilities that supply energy to our potential customers. We compete with these utilities primarily based on price, predictability of price and the ease by which customers can switch to electricity generated by our solar energy systems. If we cannot offer compelling value to our customers based on these factors, then our business will not grow. Utilities generally have substantially greater financial, technical, operational and other resources than we do. As a result of their greater size, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and changes in market conditions than we can. Utilities could also offer other value-added products and services that could help them compete with us even if the cost of electricity they offer is higher than ours. In addition, a majority of utilities’ sources of electricity is non-solar, which may allow utilities to sell electricity more cheaply than electricity generated by our solar energy systems.

We also compete with solar companies in the downstream value chain of solar energy. For example, we face competition from purely finance driven organizations which then subcontract out the installation of solar energy systems, from installation businesses that seek financing from external parties, from large construction companies and utilities and increasingly from sophisticated electrical and roofing companies. Some of these competitors specialize in either the residential or commercial solar energy markets, and some may provide energy at lower costs than we do. Many of our competitors also have significant brand name recognition and have extensive knowledge of our target markets. Competitors have increasingly begun vertically integrating their operations to offer comprehensive products and services offerings similar to ours, and, recently, we have seen increased consolidation of competitors in our primary markets. For us to remain competitive, we must distinguish ourselves from our competitors by offering an integrated approach that successfully competes with each level of products and services offered by our competitors at various points in the value chain. As consolidation in our markets increases and more of our competitors develop an integrated approach similar to ours, our marketplace differentiation may suffer.

We also face competition in the energy-related products and services markets and we expect to face competition in additional markets as we introduce new products and services. As the solar industry grows and evolves, we will also face new competitors who are not currently in the market. Our failure to adapt to changing market conditions and to compete successfully with existing and new competitors could limit our growth and could have a material adverse effect on our business and prospects.

Projects for our significant commercial and government customers involve concentrated project risks that may cause significant changes in our financial results.

During any given financial reporting period, we typically have ongoing significant projects for commercial and governmental customers that represent a significant portion of our potential financial results for such period. For example, Walmart is a significant customer for which we have installed a substantial number of solar energy systems. These larger projects create concentrated operating and financial risks. The effect of recognizing revenue or other financial measures on the sale of a larger project, or the failure to recognize revenue or other financial measures as anticipated in a given reporting period because a project is not yet completed under applicable accounting rules by period end, may materially impact our quarterly or annual financial results. In addition, if construction, warranty or operational issues arise on a larger project, or if the timing of such projects unexpectedly shifts for other reasons, such issues could have a material impact on our financial results. If we are unable to successfully manage these significant projects in multiple markets, including our related internal processes and external construction management, or if we are unable to continue to attract such significant customers and projects in the future, our financial results could be harmed.

We depend on a limited number of suppliers of solar panels and other system components to adequately meet anticipated demand for our solar energy systems. Any shortage, delay or component price change from these suppliers could result in sales and installation delays, cancellations and loss of our ability to effectively compete.

We purchase solar panels, inverters and other system components from a limited number of suppliers, which makes us susceptible to quality issues, shortages and price changes. If we fail to develop, maintain and expand our relationships with existing or new suppliers, including our recent long-term manufacturing relationship with Panasonic, we may be unable to adequately meet anticipated demand for our solar energy systems or we may only be able to offer our systems at higher costs or after delays. If one or more of the suppliers that we rely upon to meet anticipated demand ceases or reduces production, we may be unable to satisfy this demand due to an inability to quickly identify alternate suppliers or to qualify alternative products on commercially reasonable terms. In particular, there are a limited number of inverter suppliers. Once we design a system for use with a particular inverter, if that type of inverter is not readily available at an anticipated price, we may incur additional delay and expense to redesign the system.

In particular, there are a limited number of inverter suppliers. Once we design a system for use with a particular inverter, if that type of inverter is not readily available at an anticipated price, we may incur additional delay and expense to redesign the system.

In addition, production of solar panels involves the use of numerous raw materials and components. Several of these have experienced periods of limited availability, particularly polysilicon, as well as indium, cadmium telluride, aluminum and copper. The manufacturing infrastructure for some of these raw materials and components has a long lead time, requires significant capital investment and relies on the continued availability of key commodity materials, potentially resulting in an inability to meet demand for these components. The prices for these raw materials and components fluctuate depending on global market conditions and demand and we may experience rapid increases in costs or sustained periods of limited supplies.

In addition to purchasing from New York-based suppliers, we anticipate that we will need to purchase supplies globally in order to meet the anticipated production output of the Manufacturing Facility. Despite our efforts to obtain raw materials and components from multiple sources whenever possible, many of our suppliers may be single-source suppliers of certain components. If we are not able to maintain long-term supply agreements or identify and qualify multiple sources for raw materials and components, our access to supplies at satisfactory prices, volumes and quality levels may be harmed. We may also experience delivery delays of raw materials and components from suppliers in various global locations. In addition, we may be unable to establish alternate supply relationships or obtain or engineer replacement components in the short term, or at all, at favorable prices or costs. Qualifying alternate suppliers or developing our own replacements for certain components may be time-consuming and costly and may force us to make modifications to our product designs.

Our need to purchase supplies globally in order to meet the anticipated production output of the Manufacturing Facility and our continued international expansion further subjects us to risks relating to currency fluctuations. Any decline in the exchange rate of the U.S. dollar compared to the functional currency of our component suppliers could increase our component prices. In addition, the state of the financial markets could limit our suppliers’ ability to raise capital if they are required to expand their production to meet our needs or satisfy their operating capital requirements. Changes in economic and business conditions, wars, governmental changes and other factors beyond our control or which we do not presently anticipate, could also affect our suppliers’ solvency and ability to deliver components to us on a timely basis. Any of these shortages, delays or price changes could limit our growth, cause cancellations or adversely affect our profitability and ability to effectively complete in the markets in which we operate.

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

Our quarterly operating results are difficult to predict and may fluctuate significantly in the future. We have experienced seasonal and quarterly fluctuations in the past. However, given that we are an early-stage public company operating in a rapidly growing industry, those fluctuations may be masked by our recent growth rates and thus may not be readily apparent from our historical operating results. As such, our past quarterly operating results may not be good indicators of future performance.

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

· expiration or initiation of any rebates or incentives;

· significant fluctuations in customer demand for our products and services;

· our ability to complete installations in a timely manner due to market conditions resulting in inconsistently available financing;

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

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

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

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

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

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

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

We are a licensed contractor or use licensed subcontractors in every community we service, and we are responsible for every customer installation. For our residential projects, we are the general contractor, construction manager and installer. For our commercial projects, we are the general contractor and construction manager, and we have historically relied on licensed subcontractors to install these commercial systems. We may be liable to customers for any damage we cause to their home or facility and belongings or property during the installation of our systems. For example, we frequently penetrate our customers’ roofs during the installation process and may incur liability for the failure to adequately weatherproof such penetrations following the completion of construction. In addition, shortages of skilled subcontractor labor for our commercial projects could significantly delay a project or otherwise increase our costs. Because our profit on a particular installation is based in part on assumptions as to the cost of such project, cost overruns, delays or other execution issues may cause us to not achieve our expected margins or not cover our costs for that project.

In addition, the installation of solar energy systems and energy-storage systems requiring building modifications are subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building codes, safety, utility interconnection and metering, environmental protection and related matters. It is difficult and costly to track the requirements of every individual authority having jurisdiction over our installations and to design solar energy systems to comply with these varying standards. Any new government regulations or utility policies pertaining to our systems may result in significant additional expenses to us and our customers and, as a result, could cause a significant reduction in demand for our systems.

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

The installation of solar energy systems requires our employees to work at heights with complicated and potentially dangerous electrical systems. The evaluation and installation of our energy-storage and related products requires our employees to work in locations that may contain potentially dangerous levels of asbestos, lead or mold. We also maintain a fleet of ~~over~~thousands ~~3,000~~ of vehicles that our employees use in the course of their work. There is substantial risk of serious injury or death if proper safety procedures are not followed. Our operations are subject to regulation under the U.S. Occupational Safety and Health Act, or OSHA, and equivalent state laws. Changes to OSHA requirements, or stricter interpretation or enforcement of existing laws or regulations, could result in increased costs. If we fail to comply with applicable OSHA regulations, even if no work-related serious injury or death occurs, we may be subject to civil or criminal enforcement and be required to pay substantial penalties, incur significant capital expenditures or suspend or limit operations. In the past, we have had workplace accidents and received citations from OSHA regulators for alleged safety violations, resulting in fines and operational delays for certain projects. Any such accidents, citations, violations, injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and adversely affect our business.

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~~Problems~~increased costs. If we fail to comply with ~~product~~applicable ~~quality~~OSHA regulations, even if no work-related serious injury or ~~performance~~death occurs, we may ~~cause~~be ussubject to ~~incur~~civil ~~warranty~~or ~~expenses~~criminal enforcement and ~~performance~~be ~~guarantee~~required ~~expenses~~to pay substantial penalties, ~~may~~incur ~~lower~~significant capital expenditures or suspend or limit operations. In the ~~residual~~past, ~~value~~we ofhave ~~our~~had ~~solar~~workplace ~~energy~~accidents ~~systems~~and received citations from OSHA regulators for alleged safety violations, resulting in fines and operational delays for certain projects. Any such accidents, citations, violations, injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our ~~market~~ reputation and competitive position and adversely affect our ~~financial performance and valuation~~business.

~~Our~~Problems ~~solar~~with ~~energy~~product ~~system~~quality ~~warranties~~or ~~are~~performance ~~lengthy.~~may ~~Customers~~cause ~~who buy energy from~~ us ~~under leases or power purchase agreements are covered by warranties equal~~ to ~~the~~incur ~~length~~warranty ofexpenses ~~the term of these agreements—typically 20 years for leases~~ and ~~power~~performance ~~purchase~~guarantee ~~agreements~~expenses, ~~and~~may 30lower ~~years for MyPower loan agreements. Depending on~~ the ~~state~~residual ~~where~~value ~~they~~of ~~live, customers who purchase~~ our solar energy systems for cash are covered by a warranty up to 10 years in duration. We also make extended warranties available at an additional cost to customers who purchase our solar energy systems for cash. In addition, we provide a pass-through of the inverter and ~~panel~~adversely ~~manufacturers’~~affect ~~warranties to~~ our ~~customers,~~financial ~~which~~performance ~~generally range from 5 to 25 years. One of these third-party manufacturers could cease operations~~ and ~~no longer honor these warranties, leaving us to fulfill these potential obligations to our customers~~valuation. For example, Evergreen Solar, Inc., one of our former solar panel suppliers, filed for bankruptcy in August 2011. Further, we provide a performance guarantee with our leased solar energy systems that compensates a customer on an annual basis if their system does not meet the electricity production guarantees set forth in their lease.

~~Because~~Our ofsolar ~~the~~energy ~~limited~~system ~~operating~~warranties ~~history~~are oflengthy. ~~our~~Customers ~~solar~~who buy energy ~~systems,~~from weus ~~have~~under ~~been~~leases ~~required~~or topower ~~make~~purchase ~~assumptions~~agreements ~~and~~are ~~apply~~covered ~~judgments~~by ~~regarding~~warranties aequal ~~number~~to the length of ~~factors,~~the ~~including~~term ~~our~~of ~~anticipated~~these ~~rate~~agreements—typically of20 ~~warranty~~years ~~claims~~for leases and power purchase agreements. Depending on the ~~durability,~~state ~~performance~~where ~~and~~they ~~reliability~~live, ofcustomers who purchase our solar energy systems for cash are covered by a warranty up to 10 years in duration. We ~~have~~also ~~made~~make ~~these~~extended ~~assumptions~~warranties ~~based~~available onat ~~the~~an ~~historic~~additional ~~performance~~cost ofto ~~similar~~customers ~~systems~~who orpurchase onour ~~accelerated~~solar ~~life~~energy ~~cycle~~systems ~~testing~~for cash. ~~Our~~In ~~assumptions~~addition, ~~could~~we ~~prove~~provide toa bepass-through ~~materially~~of ~~different~~the ~~from~~inverter ~~the~~and ~~actual~~panel ~~performance~~manufacturers’ ofwarranties to our ~~systems~~customers, ~~causing~~which usgenerally range from 5 to ~~incur~~30 ~~substantial~~years. ~~expense~~One toof ~~repair~~these orthird-party ~~replace~~manufacturers ~~defective~~could ~~solar~~cease ~~energy~~operations ~~systems~~and inno ~~the~~longer ~~future~~honor orthese warranties, leaving us to ~~compensate~~fulfill ~~customers~~these ~~for~~potential ~~systems~~obligations ~~that~~to doour ~~not~~customers. ~~meet~~For ~~their~~example, ~~production~~Evergreen ~~guarantees~~Solar, Inc., ~~Product~~one ~~failures~~of orour ~~operational~~former ~~deficiencies~~solar ~~would~~panel ~~also~~suppliers, ~~reduce~~filed ~~our~~for ~~revenue~~bankruptcy ~~from~~in ~~power~~August ~~purchase~~2011. ~~agreements~~Further, ~~because~~we ~~they~~provide ~~are~~a ~~dependent~~performance onguarantee ~~system~~with ~~production.~~our ~~Any~~leased ~~widespread~~solar ~~product~~energy ~~failures~~systems orthat ~~operating~~compensates ~~deficiencies~~a ~~may~~customer ~~damage~~on ~~our~~an ~~market~~annual ~~reputation~~basis ~~and~~if ~~adversely~~their ~~impact~~system ~~our~~does ~~financial~~not ~~results~~meet the electricity production guarantees set forth in their lease.

InWe ~~addition,~~rely weupon ~~amortize~~assumptions ~~costs~~and ofjudgments ~~our~~based ~~solar~~on ~~energy~~our ~~systems~~operating ~~over~~history 30and ~~years,~~accelerated ~~which~~life ~~typically~~cycle ~~exceeds~~testing ~~the~~regarding ~~period~~a number of ~~the~~factors, ~~component~~including ~~warranties and the corresponding payment streams from~~ our ~~operating~~anticipated ~~lease~~rate ~~arrangements~~of ~~with~~warranty ~~our~~claims ~~customers.~~and Inthe ~~addition~~durability, weperformance ~~typically~~and ~~bear~~reliability ~~the cost~~ of ~~removing~~our ~~the~~ solar energy systems. atOur ~~the~~assumptions ~~end~~could ofprove ~~the~~to ~~lease~~be ~~term.~~materially ~~Furthermore,~~different itfrom isthe ~~difficult~~actual tolong-term ~~predict~~performance ~~how~~of ~~future~~our ~~environmental~~systems, ~~regulations~~causing ~~may~~us ~~affect~~to ~~the~~incur ~~costs~~substantial ~~associated~~expense ~~with~~to ~~the~~repair ~~removal,~~or ~~disposal~~replace ~~and~~defective ~~recycling of our~~ solar energy systems. ~~Consequently,~~in if the ~~residual~~future ~~value~~or ofto ~~the~~compensate customers for systems isthat ~~less~~do ~~than~~not wemeet ~~expect~~their atproduction ~~the~~guarantees. ~~end~~Product offailures ~~the~~or ~~lease,~~operational ~~after~~deficiencies ~~giving~~would ~~effect~~also toreduce ~~any~~our ~~associated~~revenue ~~removal~~from ~~and~~power ~~redeployment~~purchase ~~costs,~~agreements webecause ~~may~~they beare ~~required~~dependent toon ~~accelerate~~system ~~all~~production. Any widespread product failures or ~~some~~operating ofdeficiencies ~~the~~may ~~remaining~~damage ~~unamortized~~our ~~expenses.~~market ~~This~~reputation ~~could~~and ~~materially~~adversely ~~impair~~impact our ~~future~~financial ~~operating~~ results.

~~Compliance~~In ~~with~~addition, ~~environmental~~we ~~regulations~~amortize ~~can~~the becosts ~~expensive~~of our solar energy systems over 30 to 35 years, which typically exceeds the period of the component warranties and ~~noncompliance~~the corresponding payment streams from our operating lease arrangements with ~~these~~our customers. In addition, we typically bear the cost of removing the solar energy systems at the end of the lease term. Furthermore, it is difficult to predict how future environmental regulations may ~~result~~affect inthe ~~adverse~~costs ~~publicity~~associated with the removal, disposal and ~~potentially~~recycling ~~significant~~of ~~monetary~~our ~~damages~~solar energy systems. Consequently, if the residual value of the systems is less than we expect at the end of the lease, after giving effect to any associated removal and ~~fines~~redeployment costs, we may be required to accelerate all or some of the remaining unamortized expenses. This could materially impair our future operating results.

Compliance with environmental regulations can be expensive, and non-compliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.

We are required to comply with all foreign, federal, state and local laws and regulations regarding pollution control and protection of the environment. In addition, under some statutes and regulations, a government agency, or other parties, may seek recovery and response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for such release and not otherwise at fault. While we and the State of New York have performed environmental diligence relating to the construction of the Manufacturing Facility, the site where the Manufacturing Facility is to be located is on the former site of Republic Steel and has been considered a “brownfield.”

The operation of ~~Silevo’s~~our manufacturing and research and development facilities, including in Hangzhou, China, Buffalo, New York and Fremont, California, involves the use of hazardous chemicals and materials which may subject us to liabilities for any releases or other failures to comply with applicable laws, regulations and policies. Any failure by us to maintain effective controls regarding the use of hazardous materials or to obtain and maintain all necessary permits could subject us to potentially significant fines and damages or interrupt our operations.

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

We would be exposed to product liability claims if one of our solar energy systems or other products injured ~~someone~~any property or persons. Because solar energy systems and many of our other current and anticipated products are electricity-producing and storing devices, it is possible that ~~consumers~~property or persons could be ~~injured~~harmed by our products for ~~many~~ reasons, including product malfunctions, defects or improper installation. We rely on our general liability insurance to cover product liability claims and have not obtained separate product liability insurance. Any product liability claim we face could be expensive to defend and could divert management’s attention. Any product liability claims against us and any resulting adverse outcomes could result in potentially significant monetary damages that could require us to make significant payments, as well as subject us to adverse publicity, damage our reputation and competitive position or adversely affect sales of our systems and other products.

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~~Damage~~Any toproduct ~~our~~liability ~~brand~~claims against us and ~~reputation~~any ~~would~~resulting ~~harm~~adverse outcomes could result in potentially significant monetary damages that could require us to make significant payments, as well as subject us to adverse publicity, damage our ~~business~~reputation and ~~results~~competitive position or adversely affect sales of ~~operations~~our systems and other products.

We depend significantly on our reputation for high-quality products and services, best-in-class engineering, exceptional customer service and the brand name “SolarCity” to attract new customers and grow our business. Our brand and reputation could be significantly impaired if we fail to continue to deliver our solar energy systems and our other energy products and services within the planned timelines, if our products and services do not perform as anticipated or if we damage any of our customers’ properties or cancel projects. In addition, if we fail to deliver, or fail to continue to deliver, high-quality products and services to our customers through our long-term relationships, our customers will be less likely to purchase future products and services from us, which is a key strategy to achieve our desired growth. In addition to our other marketing efforts, we also depend greatly on referrals from existing customers for our growth. Therefore, our inability to meet or exceed our current customers’ expectations would harm our reputation and growth through referrals.

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

We have experienced significant growth in recent periods and we intend to continue to expand our business significantly within existing markets and in a number of new foreign and domestic locations in the future. This growth has placed, and any future growth may place, a significant strain on our management, operational and financial infrastructure. In particular, we will be required to expand, train and manage our growing employee base. Our management will also be required to maintain and expand our relationships with customers, suppliers and other third parties and attract new customers and suppliers, as well as to manage multiple geographic locations and regulatory requirements.

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

We may not be successful in leveraging our customer base to grow our business through sales of other energy products and services.

To date, we have derived substantially all of our revenue and cash receipts from the sale of solar energy systems and the sale of energy under our long-term customer agreements. While we continue to develop and offer innovative energy-related products and services, such as our Demand Logic and residential energy storage products, customer demand for these offerings may be more limited than we anticipate. We may not be successful in completing development of these products as a result of research and development difficulties, technical issues, regulatory issues, availability of third-party products or other reasons. Even if we are able to offer these or other additional products and services, we may not successfully generate meaningful customer demand to make these offerings viable. Our growth will be limited if we fail to deliver these additional products and services, if the costs associated with bringing these additional products and services to market is greater than we anticipate, if customer demand for these offerings is smaller than we anticipate or if our strategies to implement new sales approaches and acquire new customers are not successful.

Our growth depends in part on the success of our strategic relationships with third parties.

A key component of our growth strategy is to develop or expand our strategic relationships with third parties. For example, in an effort to generate new customers, we are investing resources in establishing relationships with leaders in other industries, such as trusted retailers and commercial homebuilders. Identifying partners and negotiating relationships requires significant time and resources. Our ability to grow our business could be impaired if we are unsuccessful in establishing or maintaining our relationships with these third parties. Even if we are able to establish these relationships, we may not be able to execute our goal of leveraging these relationships to meaningfully expand our business and customer base. This would limit our growth potential and our opportunities to generate significant additional revenue or cash receipts.

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

We depend on our experienced management team and the loss of one or more key executives could have a negative impact on our business. In particular, we are dependent on the services of our chief executive officer and co-founder, Lyndon R. Rive, and our chief technology officer and co-founder, Peter J. Rive. We also depend on our ability to retain and motivate key employees and attract qualified new employees. Our founders and our key employees are not bound by employment agreements for any specific term, and as a result, we may be unable to replace key members of our management team and key employees in the event we lose their services. Integrating new employees into our management team could prove disruptive to our operations, require substantial resources and management attention and ultimately prove unsuccessful. An inability to attract and retain sufficient managerial personnel who have critical industry experience and relationships could limit or delay our strategic efforts, which could have a material adverse effect on our business, financial condition and results of operations.

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

The energy produced and revenue and cash receipts generated by a solar energy system depend on suitable solar and weather conditions, both of which are beyond our control. Furthermore, components of our systems, such as panels and inverters, could be damaged by severe weather, such as hailstorms or tornadoes. In these circumstances, we generally would be obligated to bear the expense of repairing or replacing the damaged solar energy systems that we own. Sustained unfavorable weather also could unexpectedly delay our installation of solar energy systems, leading to increased expenses and decreased revenue and cash receipts in the relevant periods. For example, certain states in which we operate, such as New York and Massachusetts, commonly experience inclement winter weather~~, and the impacts of significant rainfall from El Niño are expected to continue to impact our operations in California, Mexico and other areas~~. Weather patterns could change, making it harder to predict the average annual amount of sunlight striking each location where we install. This could make our solar energy systems less economical overall or make individual systems less economical. Any of these events or conditions could harm our business, financial condition and results of operations.

Our business may be harmed if we fail to properly protect our intellectual property.

We believe that the success of our business depends in part on our proprietary technology, including our hardware, software, information, processes and know-how. We rely on many forms of intellectual property rights to secure our technology, including trade secrets and patents. We cannot be certain that we have adequately protected or will be able to adequately protect our technology, that our competitors will not be able to use our existing technology or develop similar technology independently, that any patents or other intellectual property rights held by us will be broad enough to protect our technology or that foreign intellectual property laws will adequately protect us. Moreover, our patents and other intellectual property rights may not provide us with a competitive advantage.

Despite our precautions, it may be possible for third -parties to obtain and use our intellectual property without our consent. Reverse engineering, unauthorized use or other misappropriation of our proprietary technology could enable third -parties to benefit from our technology without compensating us for doing so. In addition, our proprietary technology may not be adequately protected because:

·• our systems may be subject to intrusions, security breaches or targeted thefts of our trade secrets;

·• people may not be deterred from misappropriating our technology despite the existence of laws or contracts prohibiting it;

·• unauthorized use of our intellectual property may be difficult to detect and expensive and time-consuming to remedy, and any remedies obtained may be inadequate to restore protection of our intellectual property;

·• the laws of other countries in which we ~~manufacture~~do ~~our~~business ~~solar products, such as Silevo’s joint venture manufacturing company with partners in China and other countries in the Asia/Pacific region,~~ may offer ~~little~~less ~~or no~~ protection for our proprietary technology; and

·• reports we may be required to file in connection with any government-sponsored research contracts may disclose some of our sensitive confidential information because they are or will be generally available to the public.

Any such activities or any other inabilities to adequately protect our proprietary rights could harm our ability to compete, to generate revenue and to grow our business.

Claims of patent and other intellectual property infringement are complex and their outcomes are uncertain, and the costs associated with such claims may be high and could harm our business.

Our success in operating our business, ~~including operation of the Manufacturing Facility,~~ depends largely on our ability to use and develop our proprietary technologies and manufacturing know-how without infringing or misappropriating the intellectual property rights of third -parties, many of whom have robust patent portfolios, greater capital resources and decades of manufacturing experience. ~~In addition, as we have gained greater visibility and market exposure as a public company, we face a higher risk of being the subject of intellectual property infringement claims.~~ Any claim of infringement by a third -party, even those without merit, could cause us to incur substantial legal costs defending against the claim and could distract our management and technical personnel from our business. In particular, the validity and scope of claims relating to photovoltaic technology patents may be highly uncertain because they involve complex scientific, legal and factual considerations and analysis. Furthermore, we could be subject to a judgment or voluntarily enter into a settlement, either of which could require us to pay substantial damages. A judgment or settlement could also include an injunction, a court order or other agreement that could prevent us from ~~operating~~engaging ~~the~~in ~~Manufacturing~~certain ~~Facility and producing our products~~activities. In addition, we might elect or be required to seek a license for the use of third-party intellectual property, which may not be available on commercially reasonable terms or at all, or if available, the payments under such license may harm our operating results and financial condition. Alternatively, we may be required to develop non-infringing technology, redesign our products or alter our manufacturing techniques and processes, each of which could require significant research and development efforts and expenses and may ultimately not be successful. Any of these events could seriously harm our business, operating results and financial condition.

techniques and processes, each of which could require significant research and development efforts and expenses and may ultimately not be successful. Any of these events could seriously harm our business, operating results and financial condition.

We are subject to legal proceedings and regulatory inquiries and we may be named in additional claims or legal proceedings or become involved in regulatory inquiries, all of which are costly, distracting to our core business and could result in an unfavorable outcome or a material adverse effect on our business, financial condition, results of operations or the trading price for our securities.

We are involved in claims, legal proceedings (such as the class action and derivative lawsuits filed against us) and receive inquiries from government and regulatory agencies (such as the pending Treasury and Department of Labor investigations) that arise from ~~the~~our normal business activities. In addition, from time to time, third -parties may assert claims against us. We evaluate all claims, lawsuits and investigations with respect to their potential merits, our potential defenses and counter claims, settlement or litigation potential and the expected effect on us. In the event that we are involved in significant disputes or are the subject of a formal action by a regulatory agency, we could be exposed to costly and time-consuming legal proceedings that could result in any number of outcomes. Although outcomes of such actions vary, any claims, proceedings or regulatory actions initiated by or against us, whether successful or not, could result in expensive costs of defense, costly damage awards, injunctive relief, increased costs of business, fines or orders to change certain business practices, significant dedication of management time, diversion of significant operational resources or some other harm to our business. In any of these cases, our business, financial condition, or results of operations ~~or the trading price for our securities~~ could be negatively impacted.

We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. In our opinion, resolution of all current matters is not expected to have a material adverse impact on our business, financial condition or results of operations. However, depending on the nature and timing of any such controversy, an unfavorable resolution of a matter could materially affect our future business, financial condition or results of operations, or all of the foregoing, in a particular quarter.

We typically bear the risk of loss and the cost of maintenance and repair on solar systems that are owned or leased by our fund investors.

We typically bear the risk of loss and are generally obligated to cover the cost of maintenance and repair on any solar systems that we sell or lease to our fund investors. At the time we sell or lease a solar system to a fund investor, we enter into a maintenance services agreement where we agree to operate and maintain the system for a fixed fee that is calculated to cover our future expected maintenance costs. If our solar systems require an above-average amount of repairs or if the cost of repairing systems were higher than our estimate, we would need to perform such repairs without additional compensation. If our solar systems, a majority of which are located in California, are damaged in ~~the event of~~ a natural disaster beyond our control, losses could be excluded, such as earthquake damage, or exceed insurance policy limits, and we could incur unforeseen costs that could harm our business and financial condition. We may also incur significant costs for taking other actions in preparation for, or in reaction to, such events. We purchase Property and Business Interruption insurance with industry standard coverage and limits approved by an investor’s third-party insurance advisors to hedge against such risk, but such coverage may not cover our losses.

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

We receive, store and use personal information of our customers, including names, addresses, e-mail addresses, credit information and other housing and energy use information. Unauthorized disclosure of such personal information could harm our business, whether through breach of our systems by an unauthorized party, employee theft or misuse, or otherwise. If we were subject to an inadvertent disclosure of such personal information or if a third -party were to gain unauthorized access to customer personal information in our possession, our operations could be seriously disrupted and we could be subject to claims or litigation arising from damages suffered by our customers. In addition, we could incur significant costs in complying with the multitude of federal, state and local laws regarding the unauthorized disclosure of personal customer information. Finally, any perceived or actual unauthorized disclosure of such information could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business.

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

As the country’s largest residential solar installer, we rely on our ability to engage in transactions with residential customers. In doing so, we must comply with numerous federal, state and local laws and regulations that govern matters relating to our interactions with residential consumers, including those pertaining to privacy and data security, consumer financial and credit transactions, home improvement contracts, warranties and door-to-door solicitation. These laws and regulations change frequently and are interpreted by various federal, state and local regulatory bodies. Changes in these laws or regulations or their interpretation could dramatically affect how and where we conduct our business, acquire customers, and manage and use information we collect from and about current and prospective customers and the costs associated therewith.

with residential consumers, including those pertaining to privacy and data security, consumer financial and credit transactions, home improvement contracts, warranties and door-to-door solicitation. These laws and regulations change frequently and are interpreted by various federal, state and local regulatory bodies. Changes in these laws or regulations or their interpretation could dramatically affect how and where we conduct our business, acquire customers, and manage and use information we collect from and about current and prospective customers and the costs associated therewith.

Even though we may believe that we maintain effective compliance with all such laws and regulations, we may still be subject to claims, proceedings, litigation and investigations by private parties and regulatory authorities, and could be subject to substantial fines and negative publicity, each of which may materially and adversely affect our business and operations. For example, a putative class action was filed against us in November 2015 alleging violations of the federal Telephone Consumer Protection Act. We have incurred, and will continue to incur, significant expenses to comply with such laws and regulations, and increased regulation of matters relating to our interactions with residential consumers could require us to modify our operations and incur significant additional expenses, which could have an adverse effect on our business, financial condition and results of operations.

In addition, we are subject to federal, state and international laws relating to the collection, use, retention, security and transfer of personal information of our customers. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between one company and its subsidiaries. Several jurisdictions have passed new laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing requirements may cause us to incur costs or require us to change our business practices. Any failure by us, our affiliates or other parties with whom we do business to comply with a posted privacy policies or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others, which could have a detrimental effect on our business, results of operations and financial condition.

Risks Related to the Ownership of Our Common Stock

Our stock price has been and may continue to be volatile, and the value of your investment could decline.

The trading price of our common stock has been volatile since our initial public offering. Since shares of our common stock were sold in our initial public offering in December 2012 at a price of $8.00 per share, the reported high and low sales prices of our common stock on The NASDAQ Stock Market has ranged from $9.20 to $88.35 per share, through February 9, 2016. The market price of our common stock may fluctuate widely in response to many risk factors listed in this section and others beyond our control, including:

· changes in laws or regulations applicable to our industry, products or services, including the effects of tariffs and other anti-competitive actions;

· additions or departures of key personnel;

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

· price and volume fluctuations in the overall stock market;

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

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

· addition or loss of significant customers;

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

· sales of our common stock by us or our stockholders, including as a result of recent, proposed or new offerings and acquisitions;

· litigation involving us, our industry or both;

· major catastrophic events; and

· general economic and market conditions and trends.

Further, in recent years the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices of many renewable energy companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, government shutdowns, interest rate changes or international currency fluctuations, may cause the market price of our common stock to decline. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

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

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Such sales may occur in connection with our acquisitions, such as our issuance of approximately 8.8 million shares in the aggregate for our acquisitions of Silevo, Zep Solar and certain assets of Paramount Solar. In connection with our acquisition of Silevo, we may issue additional common stock with an aggregate value of up to $150.0 million, subject to adjustments and as determined in connection with the merger agreement, upon the timely achievement of all earnout related milestones. In addition, holders of a substantial amount of our common stock are entitled to rights with respect to registration of these shares under the Securities Act pursuant to an investors’ rights agreement. If these holders of our common stock, by exercising their registration rights, sell a large number of shares, they could adversely affect the market price for our common stock. If we file a registration statement for the purposes of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired.

Insiders have substantial control over us, which could limit your ability to influence the outcome of key transactions, including a change of control.

As of December 31, 2015, our directors and executive officers and their affiliates, in the aggregate, owned approximately 35% of the outstanding shares of our common stock. As a result, these stockholders, if acting together, would be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may have interests that differ from yours and may vote in a way with which you disagree and that may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might affect the market price of our common stock.

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

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

· establishing a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

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

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

· limiting the ability of stockholders to act by written consent;

· authorizing the board of directors to make, alter or repeal our bylaws; and

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

If securities or industry analysts cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations regarding our stock, our stock price and trading volume could decline.

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

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any dividends on our common stock. We intend to retain any earnings to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

ITEM 1B. UNRESOLVED STAFF COMMENTS

~~Not applicable.~~ None

ITEM 2. PROPERTIES

Our corporate headquarters and executive offices are located in San Mateo, California, where we occupy approximately 68,025 square feet of office space under a lease that expires in December ~~2016~~2021, with a renewal option. We also ~~maintain~~lease a regional headquarters in Salt Lake City, Utah, as well as larger offices in San Francisco, San Rafael and Fremont, California. In addition, we lease sales offices, warehouses and manufacturing facilities across the ~~country~~United States and in Mexico and China. We also ~~maintain~~lease sales and support offices in Ontario, Canada. We ~~lease all of our facilities, and we do not own any real property. We~~ believe that our existing facilities are adequate for our current needs and that we will be able to lease suitable additional or alternative space on commercially reasonable terms if and when we need it.

ITEM 3. LEGAL PROCEEDINGS

In July 2012, wethe Company, along with other companies in the solar energy industry, received a subpoena from the U.S. Treasury Department’s Office of the Inspector General to deliver certain documents in ~~our~~the Company’s possession that were dated, created, revised or referred to after January 1, 2007 and that relate to ~~our~~the Company’s applications for U.S. Treasury grants or communications with certain other solar energy development companies or with certain firms that appraise solar energy property for U.S Treasury grant application purposes. The Inspector General and the Civil Division of the U.S. Department of Justice are investigating the administration and implementation of the U.S Treasury grant program, ~~including~~relating ~~possible~~to ~~misrepresentations concerning~~ the fair market value of the solar energy systems ~~submitted~~that bythe usCompany submitted in U.S. Treasury grant applications. IfThe ~~the~~Company ~~Inspector~~has ~~General~~accrued ~~concludes that misrepresentations were made, the U.S. Department of Justice could decide to bring~~ a ~~civil~~reserve ~~action~~for toits ~~recover~~potential ~~amounts~~liability itassociated ~~believes~~with ~~were~~this ~~improperly~~ongoing ~~paid~~investigation toas ~~us. If the U.S. Department~~ of ~~Justice~~December ~~is successful in asserting this action~~31, we could then be required to pay material damages and penalties for any funds received based on such misrepresentations, which, in turn, could require us to make indemnity payments to certain fund investors2016. ~~We are unable to estimate the possible loss, if any, associated with this ongoing investigation.~~

OnIn ~~March 28,~~February ~~2014~~2013, atwo ~~purported~~of ~~stockholder~~the ~~class~~Company’s ~~action~~financing ~~was~~funds filed a lawsuit in the United States ~~District~~ Court ~~for~~of ~~the~~Federal ~~Northern~~Claims ~~District~~against ofthe ~~California~~United ~~against~~States usgovernment, ~~and~~seeking ~~two~~to ofrecover ~~our~~approximately ~~officers~~$14.0 million ~~The~~that ~~complaint~~the ~~alleges~~United ~~claims~~States ~~for~~Treasury ~~violations~~was ofobligated ~~the~~to ~~federal securities laws~~pay, ~~and~~but ~~seeks~~failed ~~unspecified~~to ~~compensatory~~pay, ~~damages~~under ~~and~~Section ~~other~~1603 ~~relief~~of onthe ~~behalf~~American ofRecovery aand ~~purported~~Reinvestment ~~class~~Act of ~~purchasers of our securities from March 6, 2013 to March 18, 2014~~2009. OnIn ~~April 16,~~February ~~2015~~2016, the ~~District~~government ~~Court~~filed ~~dismissed~~a ~~the~~motion ~~complaint~~seeking ~~and~~leave ~~allowed the plaintiffs~~ to ~~file~~assert ana ~~amended~~counterclaim ~~complaint~~against inthe antwo ~~attempt~~plaintiff tofunds ~~remedy~~on the ~~defects~~grounds inthat the ~~original~~government, ~~complaint.~~in ~~The~~fact, ~~plaintiffs~~paid ~~filed~~them ~~their~~more, ~~amended~~not ~~complaint~~less, ~~and~~than wethey ~~filed~~were aentitled ~~renewed motion~~ to ~~dismiss~~as ona ~~August 7,~~matter ~~2015~~of law. OnThe ~~January 5,~~Company ~~2016,~~believes that the ~~District~~government’s ~~Court~~claims ~~dismissed~~are ~~the~~without ~~amended~~merit ~~complaint~~ and ~~allowed~~expects the ~~plaintiffs~~plaintiff ~~until~~funds ~~February 15, 2016~~ to ~~file~~litigate athe ~~further~~case ~~amended~~vigorously. ~~complaint~~Trial in ~~an attempt to remedy~~ the ~~defects~~case inis ~~the~~set ~~amended~~for ~~complaint. We believe that~~ the ~~claims~~latter ~~are~~half ~~without~~of ~~merit and intends to defend ourselves vigorously~~2017. WeThe ~~are~~Company is unable to estimate the possible loss, if any, associated with this lawsuit.

On ~~June~~March ~~5 and 11~~28, 2014, a purported stockholder ~~derivative~~class ~~actions~~action ~~were~~lawsuit was filed in the ~~Superior~~United ~~Court~~States ofDistrict ~~California~~Court for the ~~County~~Northern ofDistrict ~~San Mateo, purportedly on behalf~~ of usCalifornia ~~and~~ against ~~our~~the ~~board~~Company ofand ~~directors,~~two ~~alleging that our board~~ of ~~directors~~its ~~breached~~officers. ~~their~~The ~~duties~~complaint toalleges usviolations byof ~~failing~~federal tosecurities ~~prevent~~laws, ~~the~~and ~~conduct~~seeks ~~alleged~~unspecified incompensatory ~~the~~damages ~~pending purported stockholder class action lawsuit. We~~ and ~~the~~other ~~individual~~relief ~~board~~on ~~member~~behalf ~~defendants~~of ~~filed~~ a ~~motion~~purported toclass ~~dismiss~~of ~~the~~purchasers ~~complaint,~~of ~~which~~ the ~~Superior~~Company’s ~~Court~~securities ~~granted~~from ~~on December~~March 176, ~~2015.~~2013 ~~The~~to ~~Superior Court allowed the plaintiffs until February~~March 2418, ~~2016 to file an amended complaint in an attempt to remedy the defects in the original complaint~~2014. ~~The~~After ~~Superior Court scheduled~~ a ~~hearing~~series ~~on June 10, 2016 for any motion by our board~~ of ~~directors~~amendments ~~or us~~ to ~~dismiss~~ the ~~amended~~original complaint., ~~We will continue to review~~ the ~~claims~~District ~~asserted~~Court bydismissed the ~~stockholders and are unable to estimate the possible loss, if any, associated with this lawsuit.~~

In June 2014, we along with Sunrun, Inc., or Sunrun, filed a lawsuit in the Superior Court of Arizona against the Arizona Department of Revenue, or DOR, challenging DOR’s interpretation of Arizona state law to impose property taxes on solar energy systems that are leased by customers. On June 1, 2015, the Superior Court issued an order rejecting the interpretation of the Arizona state law under which the DOR had sought to tax leased solar energy systems. In that same order, the Superior Court held that a separate Arizona statute, which provides that such systems are deemed to have no value for purposes of calculating property tax, violated certain provisions of the Arizona state constitution. Both the DOR and we have appealed the Superior Court’s ruling, and we will continue to vigorously pursue our claims.24

Onamended ~~March 2,~~complaint ~~2015,~~and weentered ~~filed~~ a ~~lawsuit~~judgment in the ~~United States District Court for the District of Arizona against the Salt River Project Agricultural Improvement and Power District and the Salt River Valley Water Users~~Company’ ~~Association, or SRP, alleging that SRP’~~s ~~imposition~~favor ~~of distribution charges and demand charges~~ on ~~new solar energy customers in its territory violates state and federal antitrust laws. On June~~August 239, ~~2015, SRP moved to dismiss the complaint~~2016. OnThe ~~October 27,~~plaintiffs ~~2015,~~have ~~the~~filed ~~District~~a ~~Court~~notice ~~denied~~of ~~SRP’s motion to dismiss in part and granted it in part~~appeal. InThe ~~particular,~~Company ~~the~~believes ~~District Court held~~ that wethe ~~may proceed on our antitrust~~ claims ~~against~~are ~~SRP~~without tomerit ~~seek an injunction blocking SRP’s new charges~~ and ~~may~~intends ~~proceed~~to ~~with~~defend ~~claims~~against ~~for~~this ~~damages~~lawsuit ~~under state laws other than antitrust laws~~vigorously. ~~Furthermore,~~The ~~the~~Company ~~District~~is ~~Court~~unable ~~held~~to ~~that~~estimate ~~we may not recover monetary damages on our antitrust theories and dismissed two of our antitrust claims while allowing~~ the ~~others~~possible toloss, ~~proceed.~~if ~~Discovery has commenced~~any, ~~and~~associated wewith ~~intend~~this ~~to pursue our claims vigorously~~lawsuit.

On ~~September~~June 185 and 11, ~~2015~~2014, a stockholder derivative ~~action~~actions ~~was~~were filed in the Superior Court of ~~Chancery~~California offor the ~~State~~County of ~~Delaware~~San Mateo, purportedly on behalf of usthe Company and against ~~our~~the board of directors, alleging that ~~our~~the board of directors breached ~~their~~its duties to usthe Company by ~~approving~~failing ~~stock-based~~to ~~compensation~~prevent tothe conduct alleged in the ~~non-employee~~pending ~~directors~~purported ~~that~~stockholder class action lawsuit. The Company and the ~~plaintiff~~individual ~~claims~~board ismember ~~excessive~~defendants ~~compared~~filed a motion to dismiss the ~~compensation~~complaint, ~~paid~~which the Superior Court granted on December 17, 2015, while allowing the plaintiffs an opportunity to ~~directors~~file ofan ~~peer~~amended ~~companies~~complaint to remedy the defects in the original complaint. WeOn ~~are~~or ~~reviewing~~about March 2, 2016, the ~~claim~~plaintiffs informed the Company and ~~are~~the ~~unable~~Superior toCourt ~~estimate~~that they had sold their shares in the ~~possible~~Company ~~loss,~~during ifthe ~~any~~pendency of the suit. Consequently, ~~associated~~the ~~with~~plaintiffs ~~this~~no longer had standing to bring their lawsuit, which they voluntarily dismissed.

37In June 2014, the Company along with Sunrun, Inc., or Sunrun, filed a lawsuit in the Superior Court of Arizona against the Arizona Department of Revenue, or DOR, challenging DOR’s interpretation of Arizona state law to impose property taxes on solar energy systems that are leased by customers. On June 1, 2015, the Superior Court issued an order rejecting the interpretation of the Arizona state law under which the DOR had sought to tax leased solar energy systems. In that same order, the Superior Court held that a separate Arizona statute, which provides that such systems are deemed to have no value for purposes of calculating property tax, violated certain provisions of the Arizona state constitution. Both the DOR and the Company have appealed the Superior Court’s ruling, and the Court of Appeals heard argument on November 15, 2016. The Company will continue to vigorously pursue its claims.

On ~~September~~March 212, 2015, wethe Company filed a lawsuit in the United States District Court for the District of ~~Massachusetts~~Arizona against ~~Seaboard~~the ~~Solar~~Salt ~~Operations~~River ~~LLC,~~Project orAgricultural ~~Seaboard,~~Improvement and ~~its~~Power ~~principal~~District and the Salt River Valley Water Users’ Association, ~~Stuart~~or ~~Longman~~SRP, alleging ~~breaches~~that SRP’s imposition of ~~the~~distribution ~~various~~charges ~~written~~and ~~contracts~~demand ~~between~~charges uson new solar energy customers in its territory violates state and ~~Seaboard~~federal antitrust laws. On June 23, ~~fraud~~2015, ~~conversion~~SRP moved to dismiss the complaint. On October 27, 2015, the District Court denied SRP’s motion to dismiss in part and ~~unfair~~granted ~~business~~it ~~practices~~in part. WeIn ~~sought~~particular, athe ~~declaratory~~District ~~judgment~~Court held that wethe ~~own~~Company may proceed on its antitrust claims against SRP to seek an injunction blocking SRP’s new charges and ~~have~~may proceed with claims for damages under state laws other than antitrust laws. Furthermore, the ~~right~~District toCourt ~~develop~~held that the ~~specified~~Company ~~projects~~may ~~and~~not ofrecover monetary damages on its antitrust theories and dismissed two of ~~approximately~~its ~~$16~~antitrust claims while allowing the others to proceed.~~0 million~~ Discovery has concluded. InOn ~~December~~September 20, ~~2015~~2016, wethe ~~settled~~District Court entered a stay of the ~~lawsuit~~litigation inwhile ~~exchange~~SRP ~~for~~appeals ~~$16.1 million~~the District Court’s earlier decision, holding that SRP is subject to bestate ~~paid~~and byfederal ~~Seaboard~~antitrust ~~over~~laws. ~~the~~The ~~course~~Court of ~~2016;~~Appeals ~~upon~~heard ~~making~~argument ~~those~~on ~~payments~~November 18, ~~Seaboard~~2016. ~~will~~The ~~have~~Company ~~the~~intends ~~rights~~ to ~~the~~pursue ~~projects~~its claims vigorously.

OnIn ~~November 6,~~April 2015, aBorrego ~~putative~~Solar ~~class~~Systems ~~action~~Inc., ~~was~~or ~~filed~~Borrego, ~~against~~commenced usan inarbitration against the ~~United~~Company ~~States~~alleging ~~District~~that ~~Court~~the ~~for~~Company ~~the~~wrongfully ~~Northern~~terminated ~~District~~a ofconstruction ~~California~~services agreement. The ~~complaint~~Company ~~alleges~~engaged ~~that~~in wediscovery ~~made unlawful telephone marketing calls to the plaintiff~~ and ~~others,~~participated in ~~violation~~an ofarbitration ~~the~~hearing ~~federal~~in ~~Telephone~~February ~~Consumer Protection Act~~2016. ~~The~~After ~~plaintiff~~the ~~seeks injunctive relief and statutory damages~~hearing, on ~~behalf of himself and a certified class. On January~~April 2512, 2016, ~~we filed a motion to dismiss~~ the ~~complaint.~~arbitrator Weentered ~~believe~~an ~~that~~interim ~~the~~award ~~claims~~in ~~are~~favor ~~without~~of ~~merit~~Borrego and ~~intend~~ultimately toentered ~~defend~~a ~~ourselves~~final ~~vigorously.~~award Wein ~~are unable to estimate~~ the ~~possible~~amount ~~loss~~of $2.0 million, ifwhich ~~any,~~the ~~associated~~Company ~~with~~has ~~this~~satisfied ~~lawsuit~~in full.

~~From~~On ~~time~~September 18, ~~to time~~2015, ~~claims~~a ~~have~~stockholder ~~been~~derivative ~~asserted,~~action ~~and~~was ~~may~~filed in the ~~future~~Court beof ~~asserted,~~Chancery ~~including~~of ~~claims~~the ~~from~~State ~~regulatory~~of ~~authorities~~Delaware, ~~related~~purportedly toon ~~labor~~behalf ~~practices~~of the Company and ~~other~~against ~~matters.~~the ~~Such~~board ~~assertions~~of ~~arise~~directors, inalleging that the ~~normal~~board ~~course~~ of ~~our~~directors ~~operations.~~breached ~~The~~its ~~resolution~~duties ofto ~~any~~the ~~such~~Company ~~assertions~~by orapproving ~~claims~~stock-based ~~cannot~~compensation beto ~~predicted~~the ~~with~~non-employee ~~certainty.~~directors Ifthat anthe ~~unfavorable~~plaintiff ~~ruling~~claims ~~were~~is excessive compared to ~~occur,~~the ~~there~~compensation ~~exists~~paid ~~the~~to ~~possibility~~directors of apeer ~~material~~companies. ~~adverse~~At ~~impact~~the onCompany’s ~~our~~2016 ~~results~~annual meeting of ~~operations~~stockholders, ~~prospects~~the non-employee director compensation plan was approved and ratified, ~~cash~~including ~~flows~~by a majority of the shares held by the disinterested stockholders of the Company. As a result, ~~financial~~the ~~position~~case has been dismissed, and ~~brand~~the matter has been resolved.

On September 21, 2015, the Company filed a lawsuit in the United States District Court for the District of Massachusetts against Seaboard Solar Operations LLC, or Seaboard, and its principal, Stuart Longman, alleging breaches of the various written contracts between the Company and Seaboard, fraud, conversion and unfair business practices. The Company sought a declaratory judgment that it owns and has the right to develop the specified projects and of damages of approximately $16.0 million. In December 2015, the Company settled the lawsuit in exchange for $16.1 million to be paid by Seaboard; upon making the payment, Seaboard will have the rights to the projects.

On November 6, 2015, a putative class action lawsuit, Morris v. SolarCity, was filed in the United States District Court for the Northern District of California against the Company. The complaint alleges that the Company made unlawful telephone marketing calls to the plaintiff and others, in violation of the federal Telephone Consumer Protection Act. The plaintiff seeks injunctive relief and statutory damages, on behalf of himself and a certified class. The Company filed a motion to dismiss the complaint, which the District Court denied on April 6, 2016. Following discovery, plaintiff filed a motion for class certification on December 15, 2016. Briefing on class certification is expected to be complete in late February 2017, and the certification motion will be heard in March 2017. SolarCity continues to believe that the claims are without merit and intends to defend itself vigorously. The Company has accrued a reserve for its potential liability associated with this matter and the Gibbs matter described below, as of December 31, 2016.

On June 1, 2016, a putative class action lawsuit, Gibbs v. SolarCity, alleging that the Company made unlawful telephone marketing calls in violation of the federal Telephone Consumer Protection Act, was filed against the Company in the United States District Court for the District of Massachusetts. The two named plaintiffs seek injunctive relief and statutory damages, on behalf of themselves and a certified class. The Company has moved to dismiss the complaint; the hearing on that motion was held on December 8, 2016. The Company believes that the claims are without merit and intends to defend itself vigorously. The Company has accrued a reserve for its potential liability associated with this matter and the Morris matter described above, as of December 31, 2016

On August 15, 2016, a purported stockholder class action lawsuit was filed in the United States District Court for the Northern District of California against the Company, two of its officers and a former officer. The complaint alleges that the Company made projections of future sales and installations that the Company failed to achieve and that these projections were fraudulent when made. The plaintiffs claim violations of federal securities laws and seek unspecified compensatory damages and other relief on behalf of a purported class of purchasers of the Company’s securities from May 5, 2015 to February 16, 2016. The Company believes that the claims are without merit and intends to defend against them vigorously. The Company is unable to estimate the possible loss, if any, associated with this lawsuit.

On September 26, 2016, Cogenra Solar Inc., or Cogenra, and Khosla Ventures III, L.P. filed a lawsuit in the United States District Court for the Northern District of California alleging that the Company and its subsidiary, Silevo Inc., had misappropriated trade secrets obtained from Cogenra during interactions governed by non-disclosure agreements and during the course of diligence in 2014, when the Company considered acquiring Cogenra. The Company believes that the claims are without merit and intends to defend itself vigorously. The Company is unable to estimate the possible loss, if any, associated with this lawsuit.

From time to time, claims have been asserted, and may in the future be asserted, including claims from regulatory authorities related to labor practices and other matters. Such assertions arise in the normal course of the Company’s operations. The resolution of any such assertions or claims cannot be predicted with certainty. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the Company’s results of operations, prospects, cash flows, and financial position.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

3826

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

~~Market~~On ~~Information~~November 21, 2016, Tesla, Inc. completed its acquisition of SolarCity Corporation. Following this date, all SolarCity Corporation common stock is held by Tesla, Inc., and no established public trading market exists for SolarCity Corporation common stock.

~~Our~~SolarCity ~~common~~Corporation ~~stock,~~has ~~$0.0001~~never ~~par~~declared ~~value~~or ~~per~~paid ~~share,~~dividends ~~began~~on ~~trading~~its oncapital ~~the~~stock. ~~NASDAQ~~Any ~~Global~~decision ~~Select~~to ~~Market~~declare onand ~~December 13,~~pay ~~2012,~~dividends ~~where~~in ~~its~~the ~~prices~~future ~~are~~will ~~quoted~~be ~~under~~made at the ~~symbol~~discretion ~~“SCTY.”~~of SolarCity Corporation’s board of directors.

Holders of Record

As of December 31, 2015, there were 233 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

Price Range of Our Common Stock

The following table sets forth the reported high and low sales prices of our common stock for the indicated periods, as regularly quoted on the NASDAQ Global Select Market:

	Year Ended				Year Ended
	December 31, 2014				December 31, 2015
	High		Low		High		Low
First Quarter	$	88.35	$	55.56	$	59.31	$	46.45
Second Quarter	$	72.10	$	45.79	$	63.79	$	50.00
Third Quarter	$	79.40	$	58.43	$	61.72	$	34.65
Fourth Quarter	$	61.09	$	45.91	$	58.87	$	24.07

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions including compliance with covenants under our credit facilities and other factors that our board of directors may deem relevant.

Stock Price Performance Graph

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of SolarCity Corporation under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

This chart compares the cumulative total return on our common stock with that of the NASDAQ Composite Index and the NASDAQ Clean Edge U.S. Liquid Series Index, or NASDAQ CELS Index. The chart assumes $100 was invested on December 13, 2012 in the common stock of SolarCity Corporation, the NASDAQ Composite Index and the NASDAQ CELS Index, and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

			Indexed Returns		Indexed Returns		Indexed Returns
	Base Period		Period ended		Period ended		Period ended
Company/Index	12/13/2012		12/31/2013		12/31/2014		12/31/2015
SolarCity Corporation	$	100.00	$	481.93	$	453.60	$	432.74
NASDAQ Composite Index	$	100.00	$	139.58	$	158.28	$	167.35
NASDAQ Clean Edge U.S. Liquid Series Index	$	100.00	$	192.30	$	185.30	$	171.76

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

~~You~~Omitted ~~should~~pursuant ~~read~~to ~~the~~General ~~following~~Instruction I(2)(a) ~~selected consolidated financial data below in conjunction with Management’s Discussion and Analysis~~ of ~~Financial Condition and Results of Operations and the consolidated financial statements, the accompanying notes and other financial information included elsewhere in this annual report on~~ Form 10-K. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and the accompanying notes included elsewhere in this annual report on Form 10-K.

The consolidated statements of operations data for the years ended December 31, 2015, 2014 and 2013 and the consolidated balance sheets data as of December 31, 2015 and 2014 are derived from our audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2012 and 2011 and the consolidated balance sheets data as of December 31, 2013, 2012 and 2011 are derived from our audited consolidated financial statements not included in this annual report on Form 10-K, which are stated on a basis consistent with our audited consolidated financial statements included herein. Our historical results are not necessarily indicative of the results that may be expected in any future period. 27

				Year Ended December 31,
	2015			2014			2013			2012			2011
				(in thousands, except per share amounts)
Consolidated statement of operations data:
Revenue:
Operating leases and solar energy systems incentives	$	293,543		$	173,636		$	82,856		$	46,098		$	23,145
Solar energy systems and component sales		106,076			81,395			80,981			80,810			36,406
Total revenue		399,619			255,031			163,837			126,908			59,551
Cost of revenue:
Operating leases and solar energy systems incentives		165,546			92,920			32,745			14,596			5,718
Solar energy systems and component sales		115,245			83,512			91,723			84,856			41,418
Total cost of revenue		280,791			176,432			124,468			99,452			47,136
Gross profit		118,828			78,599			39,369			27,456			12,415
Net loss		(768,822	)		(375,230	)		(151,758	)		(113,726	)		(73,714	)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests(1)		(710,492	)		(319,196	)		(95,968	)		(14,391	)		(117,230	)
Net (loss) income attributable to stockholders(1)	$	(58,330	)	$	(56,034	)	$	(55,790	)	$	(99,335	)	$	43,516
Net (loss) income per share attributable to common stockholders:
Basic	$	(0.60	)	$	(0.60	)	$	(0.70	)	$	(7.68	)	$	0.82
Diluted	$	(0.60	)	$	(0.60	)	$	(0.70	)	$	(7.69	)	$	0.76

(1) Under U.S. generally accepted accounting principles, we are required to present the impact of a hypothetical liquidation of our joint ventures on our consolidated statements of operations. For a more detailed discussion of this accounting treatment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Net Income (Loss) Attributable to Stockholders.”

	As of December 31,
	2015			2014		2013		2012		2011
	(in thousands)
Consolidated balance sheet data:
Cash and cash equivalents	$	382,544		$	504,383	$	577,080	$	160,080	$	50,471
Total current assets	$	902,138		$	997,616	$	785,924	$	313,938	$	241,522
Solar energy systems, leased and to be leased - net	$	4,375,553		$	2,796,796	$	1,682,521	$	984,121	$	535,609
Total assets	$	7,287,118		$	4,551,219	$	2,792,120	$	1,335,592	$	812,703
Total current liabilities	$	1,193,362		$	566,513	$	338,029	$	213,939	$	246,886
Long-term debt, net of current portion	$	1,006,595		$	282,789	$	231,504	$	76,864	$	14,111
Convertible senior notes, net of current portion	$	894,560		$	777,726	$	222,827	$	—	$	—
Solar asset-backed notes, net of current portion	$	395,667		$	293,215	$	46,824	$	—	$	—
Deferred revenue, net of current portion	$	1,010,491		$	557,408	$	410,161	$	204,396	$	101,359
Financing obligation, net of current portion	$	68,940		$	73,379	$	78,505	$	140,639	$	61,685
Other liabilities and deferred credits	$	279,006		$	218,024	$	193,439	$	114,006	$	36,314
Redeemable noncontrolling interests in subsidiaries	$	320,935		$	186,788	$	44,709	$	12,827	$	22,308
Convertible redeemable preferred stock	$	—		$	—	$	—	$	—	$	125,722
Total stockholders' equity (deficit)	$	(316,680	)	$	745,642	$	617,598	$	183,601	$	(37,662	)
Noncontrolling interests in subsidiaries	$	535,062		$	409,942	$	186,817	$	96,793	$	100,338

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes to those statements included elsewhere in this annual report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this annual report on Form 10-K. Furthermore, the following discussion and analysis has been abbreviated pursuant to General Instruction I(2)(a) of Form 10-K.

Overview

We integrate the sales, engineering, manufacturing, installation, monitoring, maintenance and financing of our distributed solar energy systems. This allows us to offer long-term energy solutions to residential, commercial, government and other customers. We make it possible for our customers to buy renewable energy or solar energy systems from us for less than they currently pay for electricity from utilities with little to no up-front cost or down payment, as applicable. Our long-term contractual arrangements typically generate recurring customer payments, provide our customers with insight into their future electricity costs and minimize their exposure to rising retail electricity rates. We also offer energy-related products and services to our customers, such as energy storage solutions. To date, revenue attributable to our energy-related products and services has not been material.

We offer our customers the choice to either purchase and own solar energy systems or to purchase the energy that our solar energy systems produce through various contractual arrangements. These contractual arrangements include long-term leases and power purchase agreements. In both structures, we install our solar energy systems at our customer’s premises and charge the customer a monthly fee for the power that our system produces. In the lease structure, this monthly payment is fixed with a production guarantee. In the power purchase agreement structure, we charge customers a fee per kilowatt-hour, or kWh, based on the amount of electricity the solar energy system actually produces. The leases and power purchase agreements are typically for 20 years with a renewal option, and generally when there is no upfront prepayment, the specified monthly fees are subject to annual escalations.

Initially, we only offered our solar energy systems on an outright purchase basis. During 2008, we began offering leases and power purchase agreements. In the fourth quarter of 2014, we began offering MyPower. Under MyPower, we provide qualified residential customers with a 30-year loan to finance the purchase of a solar energy system. The interest rate on the loan is fixed at inception and ranges from 4.50% to 5.49% per annum, depending on the geographic market. The interest rates are reduced by 0.50% per annum for customers who elect to have their payments automatically withdrawn. The monthly loan repayments are variable based on the amount of electricity generated by the systems. The customers are eligible to receive a federal income tax credit equal to 30% of the value of the solar energy system, which the customers can, and in certain cases are contractually obligated to, use to pay down the loan principal, and lower future monthly loan payments. This in turn translates to a lower effective cost per kWh of electricity to these customers. Our ability to offer leases, power purchase agreements and the financing of systems under MyPower depends in part on our ability to monetize the resulting customer receivables and any related investment tax credits, or ITCs, accelerated tax depreciation and other incentives.

We compete mainly with the retail electricity rate charged by the utilities in the markets we serve, and our strategy is to price the energy and/or services we provide and payments under MyPower below that rate. As a result, the price our customers pay varies depending on the state where the customer is located and the local utility. The price we charge also depends on customer price sensitivity, the need to offer a compelling financial benefit and the price other solar energy companies charge in the region. Our commercial rates in a given region are also typically lower than our residential rates in that region because utilities’ commercial retail rates are generally lower than their residential retail rates.

We generally recognize revenue from solar energy systems sold to our customers on an outright purchase basis when we install the solar energy system and it passes inspection by the utility or the authority having jurisdiction. We recognize revenue from MyPower financed sales over the term of the loan contract as the customer pays the loan’s outstanding principal and interest. We account for our leases and power purchase agreements as operating leases. We recognize the revenue that these arrangements generate on a straight-line basis over the term for leases, and as we generate and deliver energy for power purchase agreements. We recognize revenue from our energy-related products and services when we complete the services or when we earn a referral fee. Substantially all of our revenue is attributable to customers located in the United States.

We monetize certain government incentives in the form of ITCs under lease pass-through structures by assigning the ITCs to investors in exchange for upfront cash payments. We record the amounts we receive from the investors for the ITCs as a liability, which is subsequently recognized as revenue as the five-year ITC recapture period expires.

The amount of operating lease revenue that we recognize in a given period is dependent in part on the amount of energy generated by solar energy systems under power purchase agreements and by solar energy systems with energy output performance based incentives, which is in turn dependent on the amount of sunlight received by these solar energy systems. Additionally, a portion of the revenue that we recognize in any given period for sales financed under MyPower is derived from the cash receipts from periodic customer billings. The periodic customer billings are based on the amount of electricity generated by these systems, which in turn is dependent in part on the amount of sunlight received by these systems. As a result, operating lease revenue and revenue from sales financed under MyPower are impacted by seasonally shorter daylight hours and inclement weather in winter months. As the relative percentage of our revenue attributable to power purchase agreements, performance-based incentives or financed sales under MyPower increases, this seasonality has and will continue to become more significant to our financial results.

Various state and local agencies offer incentive rebates for the installation and operation of solar energy systems. For solar energy systems we sell, we typically have the customer assign the incentive rebate to us. For outright sales, we record the incentive rebate as a component of proceeds from the solar energy system sale. For incentive rebates associated with solar energy systems under leases or power purchase agreements, we initially record the incentive rebate that is paid upfront as deferred revenue and recognize the deferred revenue as revenue over the term of the lease or power purchase agreement. For incentives that are paid based on the performance of the solar energy systems, we recognize revenue as the solar energy systems produce electricity.

Component materials, direct labor and third-party appliances comprise the substantial majority of the costs of our solar energy systems and energy-related products and services. Under U.S. generally accepted accounting principles, or GAAP, the cost of revenue from our leases and power purchase agreements are primarily comprised of the depreciation of the cost of the solar energy systems, which are depreciated over their estimated useful lives of 30 years, reduced by amortization of U.S. Treasury grants income. The cost of revenue from our leases and power purchase agreements also include the amortization of initial direct costs, which generally include the incremental costs of contract administration, referral fees and sales commissions, which are amortized over the minimum contractual term of the lease or power purchase agreement, which is typically 20 years. The costs associated with sales financed under MyPower, with the exception of warranty costs, are initially deferred as other assets on the balance sheet and subsequently recognized on the statement of operations, in proportion to the reduction of the principal balance of the customer’s loan.

The estimated warranty costs associated with sales under MyPower are recognized as an expense upon the delivery of the solar energy systems, while any actual cash payments for these warranty costs would be made in future periods if and when component parts fail and then need to be repaired or replaced. We price our solar energy systems such that we will realize an overall gross profit on the systems over the 30-year term of the MyPower contracts. However, since the revenue associated with sales under MyPower is recognized over the term of the MyPower contracts, recognizing the estimated warranty costs as an expense upfront results in a gross loss being recognized at the inception of the MyPower contracts. As sales under MyPower continue to increase, we expect that the impact of recognizing the warranty expense upfront will continue to adversely affect our gross margins.

We have structured different types of financing funds to implement our asset monetization strategy. One such structure is a joint venture structure where we and our fund investors both contribute funds or assets into the joint venture. In accordance with GAAP, we recognize the impact of a hypothetical liquidation of these joint ventures on our consolidated statements of operations. Therefore, after we determine our consolidated net income (loss) for a given period, we allocate a portion of our consolidated net income (loss) to the fund investors in our joint ventures (referred to as the “noncontrolling interests and redeemable noncontrolling interests” in our consolidated financial statements) and allocate the remainder of the consolidated net income (loss) to our stockholders. These income or loss allocations, reflected on our consolidated statements of operations, can have a significant impact on our reported results of operations. For example, for the years ended December 31, 2015 and 2014, our consolidated net loss was $768.8 million and $375.2 million, respectively. However, after applying the required allocations to arrive at the consolidated net loss attributable to our stockholders, the result was a loss of $58.3 million and $56.0 million in 2015 and 2014, respectively. For a more detailed discussion of this accounting treatment, see “—Components of Results of Operations—Net Income (Loss) Attributable to Stockholders.”

We are in the process of making leasehold improvements to a manufacturing facility in Fremont, California, which we began leasing from a third party in 2014. The leasehold improvements include a 100.0-megawatt high-performance solar cell and module production line as well as normal tenant improvements. In the fourth quarter of 2015, we began limited domestic production of solar cells and modules at this facility, and will also be using the facility for our solar panel research and development activities.

In September 2014, one of our subsidiaries entered into a build-to-suit lease arrangement with the Research Foundation for the State University of New York, or the Foundation, for the construction of an approximately 1.0 million square-feet solar panel manufacturing facility with a capacity of 1.0 gigawatts on an approximately 88.2 acre site located in Buffalo, New York. Under the terms of the arrangement, which has been amended, the Foundation will construct the manufacturing facility and install certain utilities and other improvements, with participation by us as to the design and construction of the manufacturing facility, and acquire certain manufacturing equipment designated by us to be used in the manufacturing facility. The Foundation will cover (i) construction costs related to the manufacturing facility in an amount up to $350.0 million, (ii) the acquisition and commissioning of the manufacturing equipment in an amount up to $348.1 million and (iii) $51.9 million for additional specified scope costs, in cases (i) and (ii) only, subject to the maximum funding allocation from the State of New York, and we will be responsible for any construction and equipment costs in excess of such amounts. The Foundation will own the manufacturing facility and manufacturing equipment purchased by the Foundation. Following completion of the manufacturing facility, we will lease the manufacturing facility and the manufacturing equipment owned by the Foundation from the Foundation for an initial period of 10 years, with an option to renew, for $2 per year plus utilities.

Under the terms of the build-to-suit lease arrangement, we are required to achieve specific operational milestones during the initial term of the lease, which include employing a certain number of employees at the facility, within western New York and within the State of New York within specified time periods following the completion of the facility. We are also required to spend or incur approximately $5.0 billion in combined capital, operational expenses and other costs in the State of New York over the 10 years following the achievement of full production. On an annual basis during the initial lease term, as measured on each anniversary of the commissioning of the facility, if we fail to meet our specified investment and job creation obligations, then we would be obligated to pay a $41.2 million “program payment” to the Foundation for each year that we fail to meet these requirements. Furthermore, if the arrangement is terminated due to a material breach by us, then additional amounts might be payable by us.

In October 2014, we commenced issuing Solar Bonds to the general public, which are senior unsecured obligations that are structurally subordinate to the indebtedness and other liabilities of our subsidiaries. Solar Bonds have various terms and interest rates. We intend to continue to issue Solar Bonds periodically.

On August 7, 2015, we acquired all of the outstanding shares of Ilioss, a designer and marketer of commercial and industrial solar energy systems in Mexico. Historically, Ilioss subcontracted the installation of its solar energy systems and sold them to financing companies along with the related customer power purchase agreements. We have vertically integrated Ilioss’ operations, and expect to expand our product offerings throughout Mexico.

Financing Funds

Our lease and power purchase agreements in conjunction with the associated solar energy systems create ITCs, accelerated tax depreciation deductions, customer payments and other incentives. Our current financial strategy is to monetize these attributes or ‘assets’ to generate cash. Through this monetization process, we are able to share the economic benefits generated by the solar energy system with our customers by lowering the price they pay for energy. Historically, we have monetized the assets created by substantially all of our leases and power purchase agreements via funds we have formed with fund investors. Depending on the structure of the fund, we may contribute or sell solar energy systems to the fund and assign certain of the tax attributes and other incentives associated with the solar energy systems to the investors and in return we receive upfront cash payments from investors.

We also enter into arrangements that allow us to borrow against the future recurring customer payments under the solar system leases and power purchase agreements. Through the financing funds, we are able to retain the residual value in leases and the solar energy systems themselves. We use the cash received from the investors to cover our operating and capital costs including the variable and fixed costs associated with installing the related solar energy systems. Because these recurring customer payments are from individuals or commercial businesses with high credit scores, and because electricity is a necessity, our fund investors perceive these as high-quality assets with a relatively low loss rate. We invest any excess cash in the growth of our business.

Joint Ventures. Under joint venture structures, we and our fund investors contribute assets or cash into a joint venture. Then, the joint venture acquires solar energy systems from us and leases the solar energy systems to customers. Prior to the fund investor receiving its contractual rate of return or for a time period specified in the contractual arrangements, the fund investors receive substantially all of the value attributable to the long-term recurring customer payments, ITCs, accelerated tax depreciation and, in some cases, other incentives. After the fund investor receives its contractual rate of return or after the specified time period, we receive substantially all of the value attributable to the long-term recurring customer payments and the other incentives.

We have determined that we are the primary beneficiary in these joint venture structures. Accordingly, we consolidate the assets and liabilities and operating results of these joint ventures, including the solar energy systems and operating lease revenue, in our consolidated financial statements. We recognize the fund investors’ share of the net assets of the joint ventures as noncontrolling interests in subsidiaries or redeemable noncontrolling interests in subsidiaries in our consolidated balance sheets. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests or redeemable noncontrolling interests in subsidiaries. Our consolidated statements of cash flows reflect cash received from these fund investors as proceeds from investments by noncontrolling interests and redeemable noncontrolling interests in subsidiaries. Our consolidated statements of cash flows also reflect cash paid to these fund investors as distributions paid to noncontrolling interests and redeemable noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these fund investors as distributions payable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries in our consolidated balance sheets.

Lease Pass-Through. Under lease pass-through structures, we lease solar energy systems to fund investors under a master lease agreement, and these investors in turn sublease the solar energy systems to customers. We receive all of the value attributable to the accelerated tax depreciation and some or all of the value attributable to the other incentives. We assign to the fund investors the value attributable to the ITCs, the right to receive U.S. Treasury Department grants, where applicable, and, for the duration of the master lease term, the long-term recurring customer payments. The investors typically make significant upfront cash payments that we classify and allocate between the right to the ITCs, where applicable, and the future customer lease payments and other benefits assigned to the investor, which are recorded as a lease pass-through financing obligation. After the master lease term expires, we receive the customer payments, if any. We record the solar energy systems on our consolidated balance sheets as a component of solar energy systems, leased and to be leased—net. We record the amounts allocated to the ITCs as deferred revenue on our consolidated balance sheets as the associated solar energy systems are placed in service. We then recognize the deferred revenue in our consolidated statements of operations as revenue from operating leases and solar energy systems incentives, by reducing the deferred revenue balance at each reporting date as the five-year recapture period expires. We record the balance of the amounts received from fund investors as a financing obligation on our consolidated balance sheets and subsequently reduce the obligation by the amounts received by the fund investors from U.S. Treasury Department grants, where applicable, customer payments and the associated incentive rebates. We in turn recognize the incentive rebates and customer payments as revenue over the customer lease term and amortize U.S. Treasury Department grants as a reduction to depreciation of the associated solar energy systems over the estimated life of these systems.

Sale-Leaseback. Under sale-leaseback structures, we generate cash through the sale of solar energy systems to fund investors, and we then lease these systems back from the investors and sublease them to our customers. For the duration of the lease term, we may, for some of the structures, receive the value attributable to the incentives and the long-term recurring customer payments, and we make leaseback payments to the fund investors. The fund investors receive the customer payments after the lease term. They also receive the value attributable to the ITCs, accelerated depreciation and other incentives. At the end of the lease term, we have the option to purchase the solar energy systems from the fund investors at the greater of the fair value or the predetermined agreed upon value. Typically, our customers make monthly lease payments that we recognize as revenue over the term of the subleases on a straight-line basis. Depending on the design, size and construction of the individual systems and the leaseback terms, we may recognize a portion of the revenue from the sale of the systems or we may treat the cash received from the sale as financing received from the fund investors and reflect the cash received as a financing obligation on our consolidated balance sheets.

Securitization. Under securitization arrangements, we pool and transfer qualifying solar energy systems and the associated customer contracts or our interests in specified financing funds into a special purpose entity, or SPE, and issue notes backed by these solar assets to investors. The SPE is wholly owned by us and is consolidated in our consolidated financial statements. Accordingly, we do not recognize a gain or loss on transfer of these assets. The notes bear interest at a rate determined on the issuance of the notes. The cash flows generated by the assets in the SPEs are used to service the principal and interest payments of the notes and meet the SPE’s expenses, and any remaining cash is distributed to us. We recognize the revenue earned from the associated customer contracts in our consolidated financial statements. The assets and cash flows generated by the SPE are not available to our other creditors and the creditors of the SPE, including the note holders, have no recourse to our other assets.

Key Operating Metrics

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

Customers

We track the number of residential, commercial, government and other customers where we have installed or contracted to install a solar energy system, or performed or contracted to perform an energy-related consultation or other energy efficiency services. We believe that the relationship we establish with building owners, together with the energy-related information we obtain about the buildings, position us to provide the owners with additional solutions to further lower their energy costs. We track the cumulative number of customers as of the end of a given period as an indicator of our historical growth and as an indicator of our rate of expected growth from period to period.

The following table sets forth our cumulative number of customers as of the dates presented:

		December 31, 2015				December 31, 2014
Cumulative customers			331,256				189,657

As of December 31, 2015 and December 31, 2014, we had installed solar energy systems for 232,710 customers and 124,021 customers, respectively.

Energy Contracts

We define an energy contract as a residential, commercial or government lease, power purchase agreement or MyPower contract pursuant to which consumers use or will use energy generated by a solar energy system that we have installed or have been contracted to install. For landlord-tenant structures in which we contract with the landlord or development company, we include each residence as an individual contract. For commercial customers with multiple locations, each location is deemed a contract if we maintain a separate contract for that location. We track the cumulative number of energy contracts as of the end of a given period as an indicator of our historical growth and as an indicator of our rate of growth from period to period.

The following table sets forth our cumulative number of energy contracts as of the dates presented:

		December 31, 2015				December 31, 2014
Cumulative energy contracts			322,897				177,455

Megawatts Deployed and Megawatts Installed

We track megawatts deployed, or the megawatt production capacity of our solar energy systems that have had all required building department inspections completed during the applicable period. This metric includes solar energy systems deployed under energy contracts, as well as solar energy system direct sales. Because the size of our solar energy systems varies greatly, we believe that tracking the megawatt production capacity of deployed systems is an indicator of our growth rate and cost efficiency of our solar energy system business. We track the megawatts deployed in a given period as an indicator of asset growth and efficiency of the scale of our operations in the period. We track cumulative megawatts deployed as of the end of a given period as an indicator of our historical growth and our future opportunity to provide customers with additional solutions to further lower their energy costs.

The following table sets forth the megawatt production capacity of solar energy systems that we have deployed during the periods presented and the cumulative megawatts deployed as of the end of each period presented:

	Year Ended December 31,
	2015		2014		2013
Megawatts deployed		778		502		280
Cumulative megawatts deployed		1,847		1,069		567

In addition, we track megawatts installed, or the megawatt production capacity of solar energy systems for which (i) all solar panels, inverters, mounting and racking hardware and system wiring have been installed, (ii) the system inverter is connected and a successful direct current string test has been completed confirming the production capacity of the system and (iii) the system is capable of being grid connected (including pending a utility disconnect procedure), in each case, as of the latest of which criteria is completed during the applicable period. This metric includes solar energy systems installed under energy contracts, as well as solar energy system direct sales. The following table sets forth the megawatt production capacity of solar energy systems that we have installed during the periods presented and the cumulative megawatts installed as of the end of each period presented:

	Year Ended December 31,
	2015		2014		2013
Megawatts installed		870		503		285
Cumulative megawatts installed		1,945		1,075		572

Though we have historically reported nominal contracted payments as a representation of the growth in our operations and the value of our energy contracts, we have decided not to report our undeployed backlog of contracts as a value in this manner and will no longer be reporting this amount.

Components of Results of Operations

Revenue

Operating leases and solar energy systems incentives. We classify and account for our leases and power purchase agreements as operating leases. We consider the proceeds from solar energy system incentives offered by certain state and local governments to form part of the proceeds from our operating leases. We recognize revenue from our operating leases over the operating lease term either on a straight-line basis over the lease term for lease arrangements or as we generate and sell energy to customers under power purchase agreements. We typically bundle and charge for remote monitoring services as part of the lease or power purchase agreement and recognize the allocated amount as revenue over the term of the monitoring service. The term of our leases and power purchase agreements ranges between 10 and 20 years.

Solar energy systems and components sales. Solar energy systems and components sales is comprised of revenue from the outright sale of solar energy systems directly to cash paying customers, revenue generated from long-term solar energy system sales contracts, revenue from solar energy systems financed under MyPower contracts, revenue generated from fulfillment of orders of Zep Solar and Silevo products that were outstanding on the acquisitions of Zep Solar and Silevo and revenue attributable to our energy-related products and services. We generally recognize revenue from solar energy systems sold outright to our customers when we install the solar energy system and it passes inspection by the utility or the authority having jurisdiction. We allocate a portion of the proceeds from the sale of the system to the remote monitoring service or maintenance service if applicable and recognize the allocated amount (based on relative selling prices) as revenue over the contractual service term. We recognize revenue generated from long-term solar energy system sales contracts on a percentage-of-completion basis, based on the ratio of labor costs incurred to date to total project labor costs. We recognize revenue from solar energy systems financed under MyPower over the 30-year term of the contract as the customer pays the loan’s principal and interest. We generally recognize revenue from sales of Zep Solar or Silevo components upon delivery to the third-party customer. Currently, we are internally consuming the entire output of Zep Solar products in solar energy systems installations for our customers. We recognize revenue from our energy-related products and services when we complete the services or the customer referral.

During the years ended December 31, 2015 and 2014, less than 10% of our solar energy system installations were cash sales, as measured by system capacities. However, because of our revenue recognition policy, these sales represented 19% and 32%, respectively, of our total revenue for those periods. We expect installations utilizing leases and power purchase agreements to continue to represent a significant portion of our installed systems. We also expect financed sales to grow and form a significant portion of our future installations. As a result, the number of systems sold outright and delivered in a given period has a disproportionate effect on the total revenue reported for that period.

Cost of Revenue, Gross Profit and Gross Profit Margin

Operating Leases and Solar Energy Systems Incentives Cost of Revenue. Operating leases and solar energy systems incentives cost of revenue is primarily comprised of depreciation of the cost of leased solar energy systems reduced by amortization of U.S. Treasury grants income, maintenance costs associated with those systems and amortization of initial direct costs associated with those systems. Initial direct costs include allocated incremental contract administration costs, sales commissions and customer acquisition referral fees from the origination of solar energy systems leased to customers. These contract administration costs include incremental personnel costs, such as salary, bonus, employee benefit costs and stock-based compensation costs. Operating leases and solar energy systems incentives cost of revenue also includes direct and allocated costs associated with monitoring services for these systems.

Solar Energy Systems and Components Sales Cost of Revenue. The substantial majority of solar energy systems and components sales cost of revenue consists of the costs of solar energy systems components and personnel costs associated with system installations or manufacture of components. Cost of revenue associated with solar energy systems financed under MyPower is comprised of a portion of the cost of the systems, which is generally recognized in proportion to the revenue recognized, and the estimated warranty costs associated with the systems, which are fully recognized upon the delivery of the systems and result in a gross loss being recognized upon the delivery of the systems. We acquire the significant component parts of the solar energy systems directly from foreign and domestic manufacturers or distributors. Following the acquisition of Zep Solar, we produce, through contract manufacturers, mounting solutions for photovoltaic panels, which are components of the solar energy systems. In the fourth quarter of 2015, following the acquisition of Silevo, we began limited domestic production of solar cells and modules for use in our solar energy systems installations. We primarily consume both Zep Solar and Silevo products.

Solar energy systems and components sales cost of revenue also includes solar energy system installation costs, project-specific engineering and design costs, estimated warranty costs, freight charges, allocated corporate overhead costs such as facilities costs, vehicle depreciation costs and personnel costs associated with supply chain, logistics, operations management, safety and quality control. Personnel costs include salary, bonus, employee benefit costs and stock-based compensation costs. Our employees install our residential solar energy systems, and our project managers and construction managers oversee the subcontractors that install our commercial systems. To a lesser extent, solar energy systems and components sales cost of revenue also includes personnel costs associated with performing our energy-related products and services and related materials.

We allocate to solar energy systems and components sales cost of revenue certain corporate overhead costs that include rental and operating costs for our corporate facilities, information technology costs, travel expenses and certain professional services to cost of solar energy systems, work in process, cost of sales, sales and marketing and general and administrative expenses using an appropriate allocation basis.

Sales and Marketing Expenses

Sales and marketing expenses include personnel costs such as salaries, benefits, bonuses, sales commissions and stock-based compensation as well as advertising, promotional and other marketing related expenses. Sales and marketing expenses also include certain customer referral fees that are not a component of initial direct costs, allocated corporate overhead costs related to facilities and information technology, travel and professional services. Initial direct costs from the origination of solar energy systems leased to customers (which include the incremental cost of contract administration, referral fees and sales commissions) are capitalized as an element of solar energy systems, leased and to be leased, and subsequently amortized over the term of the related lease or power purchase agreement as a component of operating leases and solar energy systems incentives cost of revenue. We expect sales and marketing costs to increase in future periods for us to meet our installation and deployment targets.

General and Administrative Expenses

General and administrative expenses include personnel costs such as salaries, bonuses and stock-based compensation and professional fees related to legal, human resources, accounting and structured finance services. General and administrative expenses also include allocated corporate overhead costs related to facilities, information technology, asset management, travel and professional services. We anticipate that we will continue to incur additional administrative headcount costs to support the growth in our business and our financing fund arrangements.

Research and Development Expenses

Research and development expenses include personnel costs such as salaries, benefits, bonuses and stock-based compensation. Research and development expenses also include allocated corporate overhead costs related to facilities and information technology, travel and professional services. We expect research and development expenses to increase significantly in future periods as we continue to grow our research and development group headcount and undertake more research projects.

Interest Income and Expense

Interest income and expense primarily consist of the interest charges associated with our revolving credit facilities, long-term debt facilities, solar asset-backed notes, convertible notes, Solar Bonds, financing obligations and capital lease obligations. Our secured revolving credit facilities, certain of our long-term debt facilities and certain of our Solar Bonds are subject to variable interest rates. The interest rates charged on our solar asset-backed notes, our convertible notes and certain of our Solar Bonds are fixed at inception. The interest rates charged on our financing obligations are fixed at the inception of the related transaction based on the incremental borrowing rate in effect on such date or the effective interest rate in the arrangement giving rise to the obligation. The interest rates charged on our capital lease obligations are fixed at the inception of the related transaction based on the incremental borrowing rate in effect on such date. Interest income and expense also include the amortization of any debt discounts, partially offset by a nominal amount of interest income generated from our cash holdings in interest-bearing accounts.

Other Income and Expenses

Our other income and expenses consisted principally of franchise taxes, losses on the extinguishment of long-term debt, the change in fair value of interest rate swaps and accretion on the contingent consideration related to the Silevo acquisition. We will continue to accrete the contingent consideration until it is settled or determined to be not payable.

Provision for Income Taxes

We are subject to taxation mainly in the United States, Puerto Rico, China, United Kingdom, Mexico and Canada. We conduct our business primarily in the United States.

Our effective tax rates differ from the statutory rate primarily due to the valuation allowance on our deferred taxes, state taxes, foreign taxes, intercompany and joint venture transactions and nondeductible stock-based compensation. Our current tax expense is primarily comprised of the amortization of prepaid tax expense arising from sales of assets to joint venture funds included in our consolidated financial statements and foreign income taxes. In the years ended December 31, 2014 and 2013, as a result of the acquisitions of Silevo and Zep Solar, for which a significant amount of the purchase price allocated to intangible assets had no tax basis, we recorded a net long-term deferred tax liability, which subsequently triggered the release of $27.3 million and $24.8 million, respectively, of the valuation allowance on our deferred tax asset as a benefit to income taxes.

As of December 31, 2015 and 2014, we had a net deferred tax asset of $367.8 million and $111.2 million, respectively . During these periods, we maintained a valuation allowance against the net deferred tax asset. As of December 31, 2015, as a result of increased sales to the joint venture funds and increased sales under the MyPower program, we had utilized all available net operating loss carryovers and investment tax credits to reduce our current tax liability, and we had a remaining current tax liability of $43.3 million for Federal, state and foreign jurisdictions. We expect to have a higher current tax liability in future periods after utilizing all available net operating loss carryovers and investment tax credits in the current period.

Net Income (Loss) Attributable to Stockholders

We determine the net income (loss) attributable to stockholders by deducting from net income (loss) in a period the net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests. The net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests represents the joint venture fund investors’ allocable share in the results of the joint venture funds and three investors’ allocable share in the results of a limited partnership operated by one of our acquired subsidiaries in China. We have determined that the provisions in the contractual arrangements represent substantive profit sharing arrangements. We have further determined that the appropriate methodology for calculating the noncontrolling interest and redeemable noncontrolling interests balances that reflects the substantive profit sharing arrangements is a balance sheet approach using the hypothetical liquidation at book value method, or HLBV method, for the joint venture funds. We therefore use the HLBV method to determine the share of the results of the joint venture funds attributable to the joint venture fund investors, which we record in our consolidated balance sheets as noncontrolling interests and redeemable noncontrolling interests in subsidiaries. The HLBV method determines the joint venture fund investors’ allocable share of the results of the joint venture funds by calculating the net change in the joint venture fund investors’ share in the consolidated net assets of the joint venture funds at the beginning and end of the period after adjusting for any transactions between the joint venture funds and the joint venture fund investors, such as capital contributions or cash distributions. However, in all cases, the redeemable noncontrolling interests balance is at least equal to the redemption amount.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions believed to be reasonable. Actual results could differ materially from these estimates. Our future consolidated financial statements will be affected to the extent that our actual results differ materially from these estimates.

We believe that the estimates and assumptions regarding the selling price of undelivered elements for revenue recognition purposes, the collectability of accounts and rebates receivable, the valuation of inventories, the labor costs for long-term contracts used as a basis for determining the percentage of completion for such contracts, the fair values and residual values of solar energy systems subject to leases, the accounting for business combinations, the fair values and useful lives of acquired tangible and intangible assets, the fair value of debt assumed under business combinations, the fair value of contingent consideration payable under business combinations, the fair value of short-term investments, the useful lives of solar energy systems, property, plant and equipment, the determination of accrued warranty, the determination of accrued liability for solar energy system performance guarantees, the determination of lease pass-through financing obligations, the discount rates used to determine the fair values of ITCs, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, asset impairment, the valuation of build-to-suit lease assets, the fair value of interest rate swaps and other items have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant policies, see Note 2, Summary of Significant Accounting Policies and Procedures, to our consolidated financial statements included elsewhere in this annual report on Form 10-K.

Principles of Consolidation

Our consolidated financial statements reflect our accounts and operations and those of our subsidiaries in which we have a controlling financial interest. In accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 810, Consolidation, we consolidate any variable interest entity, or VIE, of which we are the primary beneficiary. We form VIEs with our financing fund investors in the ordinary course of business in order to facilitate the funding and monetization of certain attributes associated with our solar energy systems. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This holder is considered the primary beneficiary. We do not consolidate a VIE in which we have a majority ownership interest when we are not considered the primary beneficiary. We have determined that we are the primary beneficiary of a number of our VIEs, and accordingly, we consolidate the assets and liabilities of such VIEs. We evaluate our relationships with our VIEs on an ongoing basis to ensure that we continue to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

Revenue Recognition

Our customers purchase solar energy systems from us under fixed-price contracts or lease our solar energy systems that also include remote monitoring services. A residential customer that purchases a solar energy system has the option to pay the full purchase price for the system at the time of purchase or finance the purchase through a 30-year loan from our wholly owned subsidiary under the MyPower program that we launched in the fourth quarter of 2014. We can also earn incentives that have been assigned to us by our customers, where available from utility companies and state and local governments.

Solar Energy Systems and Components Sales

For solar energy systems and components sales wherein customers pay the full purchase price upon delivery of the system, we recognize revenue, net of any applicable governmental sales taxes, in accordance with ASC 605-25, Revenue Recognition—Multiple-Element Arrangements, and ASC 605-10-S99, Revenue Recognition—Overall—SEC Materials. Revenue is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable and (4) collection of the related receivable is reasonably assured. Components comprise of photovoltaic panels and solar energy system mounting hardware. In instances where there are multiple deliverables in a single arrangement, we allocate the arrangement consideration to the various elements in the arrangement based on the relative selling price method. We recognize revenue when we install a solar energy system and it passes inspection by the utility or the authority having jurisdiction, provided all other revenue recognition criteria have been met. Costs incurred on residential installations before the solar energy systems are completed are included in inventories as work in progress in our consolidated balance sheets.

We recognize revenue for solar energy systems constructed for certain commercial customers according to ASC 605-35, Revenue Recognition—Construction-Type and Production Type Contracts. Revenue is recognized on a percentage-of-completion basis, based on the ratio of labor costs incurred to date to total projected labor costs. Provisions are made for the full amount of any anticipated losses on a contract-by-contract basis. Costs in excess of billings are recorded where costs recognized are in excess of amounts billed to customers of purchased commercial solar energy systems.

For solar energy systems sold under a MyPower contract, we have determined that the arrangement consideration is not currently fixed or determinable. In making this determination, we considered that (i) the MyPower arrangement is unique and we do not have company-specific or market history for similar financing arrangements with similar asset classes over an extended term; (ii) customer preferences and satisfaction during the life of these long-term contracts, including as a result of technological advances in solar energy systems over time, may change, and we may be incented to offer future inducements or concessions to ensure customers remain satisfied during the life of these long-term contracts; and (iii) possible future decreases in the retail prices of electricity from utilities or from other renewable energy sources that may make the purchase of the solar energy systems less economically attractive and may cause us to amend the terms of our contracts to ensure continued performance and to remain competitive. Accordingly, we initially defer the revenue associated with the sale of a solar energy system under a MyPower contract when we deliver a system that has passed inspection by the utility or the authority having jurisdiction. In instances where there are multiple deliverables in a single MyPower contract, we allocate the arrangement consideration to the various elements in the contract based on the relative selling price method. We subsequently recognize revenue for the system over the term of the contract as cash payments are received for the loan’s outstanding principal and interest. The deferred revenue is included in our consolidated balance sheets under current portion of deferred revenue for the portion expected to be recognized as revenue in the next 12 months, and the non-current portion is included under deferred revenue, net of current portion. We record a note receivable when the customer secures the loan from our wholly owned subsidiary to finance the purchase of the solar energy system.

The costs associated with solar energy systems sold under MyPower contracts, including the costs of acquisition of system components, personnel costs associated with system installations and costs to originate the contracts such as sales commissions, referral fees and some incremental contract administration costs, are initially capitalized as deferred costs. Subsequently, these costs are recognized as a component of cost of revenue from solar energy systems and components sales for the costs associated with system components and installations, or as a component of operating expenses for costs associated with contract origination, generally in proportion to the reduction of the MyPower loans’ outstanding principal over the 30-year term. The deferred costs are included in our consolidated balance sheets under prepaid expenses and other current assets for the portion expected to be recognized in our consolidated statements of operations in the next 12 months, and the non-current portion is included as a component of other assets. However, the estimated warranty costs associated with the systems are fully expensed upon the delivery of the systems and result in a gross loss being recognized upon the delivery of the systems.

Operating Leases and Power Purchase Agreements

We are the lessor under lease agreements for solar energy systems, which are accounted for as operating leases in accordance with ASC 840, Leases. We record operating lease revenue from minimum lease payments, including upfront rebates and incentives earned from such systems, on a straight-line basis over the life of the lease term, assuming all other revenue recognition criteria are met. For incentives that are earned based on the amount of electricity generated by the system, we record revenue as the amounts are earned. The difference between the payments received and the revenue recognized is recorded as deferred revenue on the consolidated balance sheet.

For solar energy systems where customers purchase electricity from us under power purchase agreements, we have determined that these agreements should be accounted for, in substance, as operating leases pursuant to ASC 840. We recognize revenue based upon the amount of electricity delivered at rates specified under the contracts, assuming all other revenue recognition criteria are met.

We capitalize initial direct costs from the origination of solar energy systems leased to customers (the incremental cost of contract administration, referral fees and sales commissions) as an element of solar energy systems, leased and to be leased – net, and subsequently amortize these costs over the term of the related lease or power purchase agreement, which generally ranges from 10 to 20 years.

Remote Monitoring Services

We provide solar energy system remote monitoring services, which are generally bundled with both sales and leases of solar energy systems. We allocate revenue between remote monitoring services and the other elements in a bundled sale of a solar energy system using the relative selling price method. The selling prices used in the allocation are determined by reference to the prices charged by third-parties for similar services and products on a standalone basis. For remote monitoring services bundled with a sale of a solar energy system, we recognize the revenue allocated to remote monitoring services over the term specified in the associated contract or over the warranty period of the solar energy system if the contract does not specify the term. For remote monitoring services bundled with a lease of a solar energy system, we recognize the revenue allocated to remote monitoring services on a straight-line basis over the lease term. To date, remote monitoring services revenue has not been material and is included in our consolidated statements of operations under both operating leases and solar energy systems incentives revenue, when remote monitoring services are bundled with leases of solar energy systems, and solar energy systems and components sales revenue, when remote monitoring services are bundled with sales of solar energy systems.

Sale-Leaseback

We are a party to master lease agreements that provide for the sale of solar energy systems to third-parties and the simultaneous leaseback of the systems, which we then sublease to our customers. In sale-leaseback arrangements, we first determine whether the solar energy system under the sale-leaseback arrangement is “integral equipment.” A solar energy system is determined to be integral equipment when the cost to remove the system from its existing location, including the shipping and reinstallation costs of the solar energy system at the new site, including any diminution in fair value, exceeds 10% of the fair value of the solar energy system at the time of its original installation. When the leaseback arrangements expire, we have the option to purchase the solar energy system, and in most cases, the lessor has the option to sell the system back to us, though in some instances, the lessor can only sell the system back to us prior to expiration of the arrangement.

For solar energy systems that we have determined to be integral equipment, we have concluded that these rights create a continuing involvement. Therefore, we use the financing method to account for the sale-leaseback of such solar energy systems. Under the financing method, we do not recognize as revenue any of the sale proceeds received from the lessor that contractually constitutes a payment to acquire the solar energy system. Instead, we treat any such sale proceeds received as financing capital to install and deliver the solar energy system and, accordingly, record the proceeds as a sale-leaseback financing obligation in our consolidated balance sheets. We allocate the leaseback payments made to the lessor between interest expense and a reduction to the sale-leaseback financing obligation. Interest on the financing obligation is calculated using our incremental borrowing rate at the inception of the arrangement on the outstanding financing obligation. We determine our incremental borrowing rate by reference to the interest rates that we would obtain in the financial markets to borrow amounts equal to the sale-leaseback financing obligation over a term similar to the master lease term.

For solar energy systems that we have determined not to be integral equipment, we determine if the leaseback is classified as a capital lease or an operating lease. For leasebacks classified as capital leases, we initially record a capital lease asset and capital lease obligation in our consolidated balance sheet equal to the lower of the present value of our future minimum leaseback payments or the fair value of the solar energy system. For capital leasebacks, we do not recognize any revenue but defer the gross profit comprising of the net of the revenue and the associated cost of sale. For leasebacks classified as operating leases, we recognize a portion of the revenue and the associated cost of sale and defer the portion of revenue and cost of sale that represents the gross profit that is equal to the present value of the future minimum lease payments over the master leaseback term. For both capital and operating leasebacks, we record the deferred gross profit in our consolidated balance sheet as deferred income and amortize the deferred income over the leaseback term as a reduction to the leaseback rental expense included in operating leases and solar energy systems incentives cost of revenue in our consolidated statement of operations.

Solar Energy Systems, Leased and To Be Leased

We are the operating lessor of the solar energy systems under leases that qualify as operating leases. We account for the leases in accordance with ASC 840. To determine lease classification, we evaluate lease terms to determine whether there is a transfer of ownership or bargain purchase option at the end of the lease, whether the lease term is greater than 75% of the useful life, or whether the present value of minimum lease payments exceed 90% of the fair value at lease inception. We utilize periodic appraisals to estimate useful life and fair values at lease inception, and residual values at lease termination. Solar energy systems are stated at cost, less accumulated depreciation.

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

		Useful Lives
Solar energy systems leased to customers		30 years
Initial direct costs related to customer solar energy system lease acquisition costs		Lease term (10 to 20 years)

Solar energy systems under construction represents systems that are under installation, which will be depreciated as solar energy systems leased to customers when the respective systems are completed, interconnected and subsequently leased to customers.

Initial direct costs related to customer solar energy system lease acquisition costs are capitalized and amortized over the term of the related customer lease agreements.

Presentation of Cash Flows Associated with Solar Energy Systems

We classify cash flows associated with solar energy systems in accordance with ASC 230, Statement of Cash Flows. We determine the appropriate classification of cash payments related to solar energy systems depending on the activity that is likely to be the predominant source of cash flows for the item being paid for. Accordingly, we present payments made in a period for costs incurred to install solar energy systems that will be leased to customers, including the payments for cost of the inventory that is utilized in such systems, as investing activities in our consolidated statement of cash flows. Payments made for inventory that will be utilized for solar energy systems that will be sold to customers are presented as cash flows from operations in our consolidated statement of cash flows. We do not track payments for component parts at the individual component part level as they are not unique and can be used in either leased solar energy systems or solar energy systems that are sold to customers. Accordingly, we treat costs of raw materials transferred to solar energy systems to be leased as if they were paid in the period they are transferred to the systems.

Warranties

We generally provide a warranty on the installation and components of the solar energy systems we sell, including sales under MyPower contracts, for periods typically between 10 to 30 years. The manufacturer’s warranty on the solar energy systems’ components, which is typically passed-through to customers, ranges from one to 25 years. However, for the solar energy systems under lease contracts or power purchase agreements, we do not accrue a warranty liability because those systems are owned by subsidiaries that we consolidate. Instead, any repair costs on those systems are expensed when they are incurred as a component of operating leases and solar energy systems incentives cost of revenue.

Solar Energy Systems Performance Guarantees

We guarantee certain specified minimum solar energy production output for certain systems leased or sold to customers generally for a term of up to 30 years. We monitor the solar energy systems to ensure that these outputs are being achieved. We evaluate if any amounts are due to our customers and make any payments periodically as specified in the customer contracts. If we determine that the guaranteed minimum solar energy production output has not been achieved, then we record a liability for the estimated amounts payable as a component of accrued and other current liabilities. Since the actual solar energy production output is impacted by seasonality, this liability is also affected by seasonality.

Deferred U.S. Treasury Grants Income

We are eligible for U.S. Treasury grants received or receivable on eligible property as defined under Section 1603 of the American Recovery and Reinvestment Act of 2009, as amended by the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of December 2010, which includes solar energy system installations, upon approval by the U.S. Treasury Department. However, to be eligible for U.S. Treasury grants, a solar energy system must have commenced construction in 2011 either physically or through the incurrence of sufficient project costs. We submit applications for grants receivable from the U.S. Treasury Department related to eligible property based on 30% of the tax basis of the solar energy systems as supported by independently appraised fair market values of the systems or guideline system values that have been posted by the U.S. Treasury Department on its website. To determine the fair market value of the systems, an independent appraiser considers various factors such as the cost of producing the systems, the estimated price that could be obtained in the market from the sale of the systems and the present value of the economic benefits expected to be generated by the systems. We then present our appraised fair market value to the U.S. Treasury Department when we apply for grants on our solar energy systems. In a number of cases, the U.S. Treasury Department has determined that grants should be paid based on a lower value for the systems and has in such instances posted guideline system values on its website that should be used in the grant applications.

We initially record the grants receivable for leased solar energy systems as deferred income at the amounts that have been approved for payment by the U.S. Treasury Department and then amortize them on a straight-line basis over the estimated useful lives of the related solar energy systems of 30 years. The amortization of the deferred income is recorded as a reduction to depreciation expense, which is a component of the cost of revenue of operating leases and solar energy systems incentives in our consolidated statements of operations. A catch-up adjustment is recorded in the period in which the grant is approved by the U.S. Treasury Department or received by lease pass-through investors to recognize the portion of the grant that matches proportionally the amortization for the period between the date of placement in service of the solar energy systems and approval by the U.S. Treasury Department or receipt by lease pass-through investors of the associated grant, in the case of lease pass-through fund arrangements. Some of our fund agreements obligate us to reimburse the fund investors based upon the difference between their anticipated benefit from U.S. Treasury grants at the formation of the funds and the benefit they receive from the amounts paid by the U.S. Treasury Department. For the joint venture financing funds where we are contractually obligated to reimburse investors for reductions in anticipated grants receivable, we record amounts we expect to pay the investors as distributions payable to noncontrolling interests and redeemable noncontrolling interests in our consolidated balance sheets, and any impact to our consolidated statements of operations, which is determined using the HLBV method, is reflected in the net income or loss attributable to noncontrolling interests and redeemable noncontrolling interests line item. For sale-leaseback financing funds where we are contractually obligated to reimburse investors for reductions in anticipated grants receivable, we record amounts we expect to pay the investors under accrued and other current liabilities and reduce the deferred gain on sale-leaseback transactions included within other liabilities in our consolidated balance sheets, with no impact on our consolidated statements of operations. For solar energy systems under lease pass-through fund arrangements, all amounts received from the investors are recorded in our consolidated balance sheets as a lease pass-through financing obligation, and the amounts we expect to reimburse investors for reductions in anticipated grants receivable would reduce the lease pass-through financing obligation with no impact on our consolidated statements of operations. We reduce the lease pass-through financing obligation and record deferred income for the U.S. Treasury grants that are paid directly to the investors upon receipt of the grants by the investors.

Deferred ITCs Revenue

Our solar energy systems are eligible for ITCs that accrue to eligible property under the IRC. Under Section 50(d)(5) of the IRC and the related regulations, a lessor of qualifying property may elect to treat the lessee as the owner of such property for the purposes of claiming the ITCs associated with such property. These regulations enable the ITCs to be separated from the ownership of the property and allow the transfer of the ITCs. Under the lease pass-through fund arrangements, we can make a tax election to pass-through the ITCs to the investor, who is the legal lessee of the property. We are therefore able to monetize these ITCs to investors who can utilize them in return for cash payments. We consider the monetization of ITCs to constitute one of the key elements of realizing the value associated with solar energy systems. We therefore view the proceeds from the monetization of ITCs to be a component of revenue generated from solar energy systems.

For the lease pass-through fund arrangements, we allocate a portion of the aggregate payments received from the investors to the estimated fair value of the assigned ITCs and the balance to the future customer lease payments that are also assigned to the investors. The estimated fair value of the ITCs is determined by discounting the estimated cash flows impacts of the ITCs using an appropriate discount rate that reflects a market interest rate.

We recognize the revenue associated with the monetization of ITCs in accordance with ASC 605-10-S99. The revenue associated with the monetization of the ITCs is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable and (4) collection of the related receivable is reasonably assured. The ITCs are subject to recapture under the IRC if the underlying solar energy system either ceases to be a qualifying property or undergoes a change in ownership within five years of its placed in service date. The recapture amount decreases on the anniversary of the placed in service date. As we have an obligation to ensure the solar energy system is in service and operational for a term of five years to avoid any recapture of the ITCs, we recognize revenue as the recapture provisions lapse assuming the other aforementioned revenue recognition criteria have been met. The monetized ITCs are initially recorded as deferred revenue on our consolidated balance sheets, and subsequently, one-fifth of the monetized ITCs is recognized as revenue from operating leases and solar energy systems incentives in our consolidated statements of operations on each anniversary of the solar energy system’s placed in service date over the next five years.

We guarantee our financing fund investors that in the event of a subsequent recapture of ITCs by the taxing authority due to our noncompliance with the applicable ITC guidelines, we would compensate them for any recaptured ITCs. We have concluded that the likelihood of a recapture event is remote and, consequently, have not recorded any liability in our consolidated balance sheets for any potential recapture exposure.

Stock-Based Compensation

We account for stock-based compensation costs under the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest. Stock-based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased or cancelled during the periods reported.

We apply ASC 718 and ASC Subtopic 505-50, Equity-Based Payments to Non Employees, to options and other stock-based awards issued to non-employees. In accordance with ASC 718 and ASC Subtopic 505-50, we use the Black-Scholes option-pricing model to measure the fair value of the options at the measurement date. The measurement of stock-based compensation is subject to periodic adjustments as the awards vest and the resulting change in fair value is recognized in our consolidated statements of operations in the period the related services are rendered.

Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option valuation model, except for awards with market conditions for which we use a Monte Carlo simulation, to determine the fair value of stock options. The determination of the grant date fair value of stock options using an option valuation model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include our expected stock price volatility over the expected term, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:

· Fair value of our common stock. Because our common stock was not publicly traded when we issued stock options prior to our initial public offering, we estimated our common stock’s fair value as discussed below. Subsequent to our initial public offering, we determined the fair value of our common stock based on its trading price on the NASDAQ Global Select Market.

· Expected term. The expected term represents the period that our stock-based awards are expected to be outstanding and was primarily determined using the simplified method in accordance with guidance provided by the U.S. Securities and Exchange Commission, or SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. We will continue to utilize the simplified method until we have established a reasonable period of representative trading history as a public company, at which time we will determine the expected term based on the historical option exercise behavior of our employees, expectations about future option exercise behavior and post-vesting cancellations.

· Volatility. Because we do not have a significant trading history for our common stock, the expected stock price volatility for our common stock has been estimated based on the average historical volatilities of us and our industry peers using daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the solar energy industry similar in size and financial leverage. We did not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us. If this occurs, more suitable companies whose share prices are publicly available would be utilized in the calculation. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense determined on the grant date.

· Risk-free rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

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

In addition to assumptions used in the Black-Scholes option valuation model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures, and forecasted forfeitures for awards with performance conditions. We routinely evaluate the appropriateness of the forfeiture rate based on actual and forecasted forfeiture experience, analysis of employee turnover and expectations of future option exercise behavior. Any changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that would result in a decrease to the stock-based compensation expense recognized in our consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that would result in an increase to the stock-based compensation expense recognized in our consolidated financial statements.

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

Short-Term Investments

Our short-term investments are comprised of corporate debt securities and asset-backed securities. We classify short-term investments as available-for-sale and carry them at fair value, with any unrealized gains or losses recognized as other comprehensive income or loss in our consolidated balance sheet. The specific identification method is used to determine the cost of any securities disposed of, with any realized gains or losses recognized as other income or expense in our consolidated statement of operations. Short-term investments are anticipated to be used for current operations and are, therefore, classified as current assets even though their maturities may extend beyond one year. We periodically review short-term investments for impairment. In the event a decline in value is determined to be other-than-temporary, an impairment loss is recognized. When determining if a decline in value is other-than-temporary, we take into consideration the current market conditions and the duration and severity of and the reason for the decline, as well as the likelihood that we would need to sell the security prior to a recovery of par value.

Inventories

Inventories include raw materials that include silicon wafers, process gasses, chemicals and other consumables used in solar cell production, solar cells, photovoltaic panels, inverters, mounting hardware and miscellaneous electrical components. Inventories also include work in process that includes raw materials partially installed and direct and indirect capitalized installation costs. Raw materials and work in process are stated at the lower of cost or market (on a first-in-first-out basis). Work in process primarily relates to solar energy systems that will be sold to customers, which are under construction and have yet to pass inspection.

We also evaluate our inventory reserves on a quarterly basis and write down the value of inventories for estimated excess and obsolete inventories based upon assumptions about future demand and market conditions.

Business Combinations

We account for business acquisitions under ASC 805, Business Combinations. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued, contingent consideration issuable and liabilities assumed at the acquisition date. Costs that are directly attributable to the acquisition are expensed as incurred. Identifiable assets, including intangible assets, acquired and liabilities, including contingent liabilities, assumed in the acquisition are measured initially at their fair values at the acquisition date. Any noncontrolling interests in the acquired business are also initially measured at fair value. We recognize goodwill if the aggregate fair value of the total purchase consideration and the noncontrolling interests is in excess of the aggregate fair value of the identifiable assets acquired and the liabilities assumed.

Long-Lived Assets

Our long-lived assets include property, plant and equipment, solar energy systems, leased and to be leased, and intangible assets acquired through business combinations. Intangible assets with definite useful lives are amortized over their estimated useful lives, which range from one to 30 years.

Furthermore, we are deemed to be the owner, for accounting purposes, during the construction phase of certain long-lived assets under build-to-suit lease arrangements because of our involvement with the construction, our exposure to any potential cost overruns and our other commitments under the arrangements. In these cases, we recognize a build-to-suit lease asset under construction and a corresponding build-to-suit lease liability on our consolidated balance sheets.

In accordance with ASC 360, Property, Plant, and Equipment, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of a long-lived asset, or group of assets, as appropriate, may not be recoverable. If the aggregate undiscounted future net cash flows expected to result from the use and the eventual disposition of a long-lived asset is less than its carrying value, then we would recognize an impairment loss based on the discounted future net cash flows.

Goodwill

Goodwill represents the difference between the purchase price and the aggregate fair value of the identifiable assets acquired and the liabilities assumed in a business combination. We assess goodwill for impairment annually, in the fourth quarter of each fiscal year, and whenever events or changes in circumstances indicate that the carrying value of goodwill may exceed its fair value, at the consolidated-level, which is the sole reporting unit. When assessing goodwill for impairment, we consider our market capitalization adjusted for a control premium and, if necessary, our discounted cash flow model, which involves significant assumptions and estimates, including our future financial performance, weighted-average cost of capital and interpretation of currently enacted tax laws. Circumstances that could indicate impairment and require us to perform an impairment test include a significant decline in our financial results, a significant decline in our market capitalization relative to our net book value, an unanticipated change in competition or our market share and a significant change in our strategic plans.

Provision for Income Taxes

We use the asset and liability method in accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be reversed.

The calculation of our tax assets and liabilities involves uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process prescribed by applicable accounting principles. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the relevant period.

As of December 31, 2015, we had $10.1 million of uncertain tax positions. As of December 31, 2014, we had $0.5 million of uncertain tax positions that were acquired related to the purchase of Silevo and Zep Solar.

As of December 31, 2015 and 2014, we had net deferred tax assets of $367.8 million and $111.2 million, respectively. During these periods, we maintained valuation allowances against these net deferred tax assets.

Our deferred tax assets prior to 2015, primarily relate to net operating loss, or NOL, carryforwards, accelerated gains for tax purposes, stock options, and deferred revenue. In 2015, our deferred tax assets primarily are related to deferred revenues, stock options, and the book versus tax basis differences in the joint venture funds. Our deferred tax asset valuation allowance is determined in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Based on the available objective evidence and our history of losses, we believe it is more likely than not that our net deferred tax assets will not be realized.

We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. The amount of our valuation allowance could be materially affected should the actual amounts differ from our estimates. Any adjustment to the deferred tax asset valuation allowance would be recorded in our consolidated statements of operations in the period in which the adjustment is determined to be required.

In the current year, we utilized all available NOL carryforwards from prior years. The utilization of the remaining NOL carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions. The annual limitation may result in the expiration of NOL carryforwards and credits before utilization. We completed an IRC Section 382 analysis through December 31, 2015. Based on the analysis, the NOL carryforwards presented have accounted for any limited and potential lost attributes due to any ownership changes and expiration dates. We also analyzed the NOL carryovers related to our acquisitions of Zep Solar and Silevo. Based on the analysis, there were no significant limitations to the utilization of either Zep Solar’s or Silevo’s NOL carryforwards. The NOL carryforwards presented are not expected to expire unutilized.

As part of our asset monetization strategy, we have agreements to sell solar energy systems to financing funds. The gain on the sale of the assets has been eliminated in our consolidated financial statements. These transactions are treated as inter-company sales, and as such, income taxes are not recognized on the sales until we no longer benefit from the underlying asset. Since the assets remain within the consolidated group, the income tax expense incurred related to the sales is being deferred and amortized over the estimated useful life of the assets, which has been estimated to be 30 years. The deferral of income tax expense results in the recording of a prepaid tax expense that is included in our consolidated balance sheets as other assets. The amortization of the prepaid tax expense in each period makes up the major component of our income tax expense.

In November 2015, the FASB issued Accounting Standards Update, or ASU, No. 2015-17, Balance Sheet Classification of Deferred Taxes, to eliminate the requirement to classify deferred income tax assets and liabilities between current and noncurrent. The ASU simply requires that all deferred income tax assets and liabilities be classified as noncurrent. The ASU is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. Adoption of the ASU is either retrospective to each prior period presented or prospective. As of December 31, 2015, we early adopted the ASU prospectively. As a result, we no longer present any current deferred income tax assets or liabilities but did not reclassify prior period deferred income tax assets or liabilities, as permitted by the ASU.

Noncontrolling Interests and Redeemable Noncontrolling Interests

Our noncontrolling interests and redeemable noncontrolling interests represent third-party interests in the net assets under certain funding arrangements, or funds, that we have entered into to finance the costs of solar energy systems under operating leases, as well as under a limited partnership operated by one of our acquired subsidiaries in China. We have determined that the contractual provisions of the funds and the limited partnership represent substantive profit sharing arrangements. We have further determined that the appropriate methodology for calculating the noncontrolling interests and redeemable noncontrolling interests balance that reflects the substantive profit sharing arrangements is a balance sheet approach using the HLBV method for the funds. We therefore determine the amount of the noncontrolling interests and redeemable noncontrolling interests in the net assets at each balance sheet date using the HLBV method for the funds, which is presented on our consolidated balance sheets as noncontrolling interests in subsidiaries and redeemable noncontrolling interests in subsidiaries. Under the HLBV method, the amounts reported as noncontrolling interests and redeemable noncontrolling interests in our consolidated balance sheets represent the amounts the third-parties would hypothetically receive at each balance sheet date under the liquidation provisions of the funds, assuming the net assets of the funds were liquidated at their recorded amounts determined in accordance with GAAP and distributed to the third-parties. The third-parties’ interests in the results of operations of the funds are determined as the difference in the noncontrolling interests and redeemable noncontrolling interests balance in our consolidated balance sheets between the start and end of each reporting period, after taking into account any capital transactions between the funds and the third-parties. However, for both the funds and the limited partnership, the redeemable noncontrolling interests balance is at least equal to the redemption amount. The noncontrolling interests balance is presented as a component of permanent equity in our consolidated balance sheets, and the redeemable noncontrolling interests balance is presented as temporary equity in the mezzanine section of our consolidated balance sheets when the third-parties have the right to redeem their interests in the funds or the limited partnership for cash or other assets.

Results of Operations

The following table sets forth selected consolidated statements of operations data for each of the periods indicated (in thousands~~, except share and per share amounts~~).

	Year Ended December 31,
	2015			2014			2013
	2016			2015			2014
Revenue:
Operating leases and solar energy systems incentives	$	~~293~~422,~~543~~326		$	~~173~~293,~~636~~543		$	82173,~~856~~636
Solar energy systems and components sales		~~106~~308,~~076~~016			81106,~~395~~076			8081,~~981~~395
Total revenue		~~399~~730,~~619~~342			~~255~~399,~~031~~619			~~163~~255,~~837~~031
Cost of revenue:
Operating leases and solar energy systems incentives		~~165~~253,~~546~~653			92165,~~920~~546			3292,~~745~~920
Solar energy systems and components sales		~~115~~225,~~245~~269			83115,~~512~~245			9183,~~723~~512
Total cost of revenue		~~280~~478,~~791~~922			~~176~~280,~~432~~791			~~124~~176,~~468~~432
Gross profit		~~118~~251,~~828~~420			78118,~~599~~828			3978,~~369~~599
Operating expenses:
Sales and marketing		~~457~~442,~~185~~590			~~238~~457,~~608~~185			97238,~~426~~608
General and administrative		~~244~~228,~~508~~980			~~156~~244,~~426~~508			89156,~~801~~426
Research and development		64,925			19,162			1,520
Pre-production expense		69,306			—			—
Total operating expenses		766,618			414,196			188,747
Restructuring and other		105,922			—			—
Loss from operations		(647,790	)		(335,597	)		(149,378	)
Research and development		54,963			64,925			19,162
Interest expense, net		91,939			55,758			25,738
Total operating expenses		901,761			766,618			414,196
Other expense, net		25,767			10,611			1,441
Loss from operations		(650,341	)		(647,790	)		(335,597	)
Loss before income taxes		(765,496	)		(401,966	)		(176,557	)
Interest and other expenses:
Income tax (provision) benefit		(3,326	)		26,736			24,799
Interest expense – recourse debt		42,162			28,145			14,522
Net loss		(768,822	)		(375,230	)		(151,758	)
Interest expense – non-recourse debt		74,527			29,905			13,537
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests		(710,492	)		(319,196	)		(95,968	)
Other interest expense and amortization of debt discounts and fees, net		39,965			33,889			27,699
Net loss attributable to stockholders	$	(58,330	)	$	(56,034	)	$	(55,790	)
Other expense, net		13,660			25,767			10,611
Net loss attributable to common stockholders
Total interest and other expenses		170,314			117,706			66,369
Basic	$	(58,330	)	$	(56,034	)	$	(55,790	)
Loss before income taxes		(820,655	)		(765,496	)		(401,966	)
Diluted	$	(58,330	)	$	(56,034	)	$	(55,790	)
Income tax benefit (provision)		308			(3,326	)		26,736
Net loss per share attributable to common stockholders
Net loss		(820,347	)		(768,822	)		(375,230	)
Basic	$	(0.60	)	$	(0.60	)	$	(0.70	)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests		(1,059,121	)		(710,492	)		(319,196	)
Diluted	$	(0.60	)	$	(0.60	)	$	(0.70	)
Net income (loss) attributable to parent	$	238,774		$	(58,330	)	$	(56,034	)
Weighted-average shares used to compute net loss per share attributable to common stockholders
Basic		97,200,925			93,333,880			79,781,976
Diluted		97,200,925			93,333,880			79,781,976

Revenue

	Year Ended December 31,						Change ~~2015~~2016 vs. ~~2014~~2015					Change ~~2014~~2015 vs. ~~2013~~2014
(Dollars in thousands)	~~2015~~2016		~~2014~~2015		~~2013~~2014		$		%			$		%
Operating leases and solar energy systems incentives	$	293,543	$	173,636	$	82,856	$	119,907		69	%	$	90,780		110	%
Revenue
Solar energy systems and components sales		106,076		81,395		80,981		24,681		30	%		414		1	%
Operating leases and solar energy systems incentives	$	422,326	$	293,543	$	173,636	$	128,783		44	%	$	119,907		69	%
Total revenue	$	399,619	$	255,031	$	163,837	$	144,588		57	%	$	91,194		56	%
Solar energy systems and components sales		308,016		106,076		81,395		201,940		190	%		24,681		30	%
Total revenue	$	730,342	$	399,619	$	255,031	$	330,723		83	%	$	144,588		57	%

2016 Compared to 2015

Total revenue increased by $330.7 million, or 83%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015.

Operating leases and solar energy systems incentives revenue increased by $128.8 million, or 44%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was primarily attributable to the increase in solar energy systems placed in service under leases and power purchase agreements. The average aggregate megawatt production capacity of solar energy systems placed in service under leases during the year ended December 31, 2016 increased by 47% as compared to the average during the year ended December 31, 2015. In addition, the megawatt hours produced by solar energy systems under power purchase agreements increased by 68% during the year ended December 31, 2016, as compared to the year ended December 31, 2015. The impact of the installed base on the increase in revenue varied in part by the mix between solar energy systems under leases, for which revenue is recognized on a straight-line basis over the lease term, and under power purchase agreements, for which revenue is recognized based on energy produced and when the systems were placed in service.

Revenue from sales of solar energy systems and components increased by $201.9 million, or 190%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was primarily due to the $124.6 million increase in revenue from solar energy systems sold under Solar Loans and the $19.6 million increase in revenue from cash sales to residential customers. Additionally, revenue from MyPower contracts, which are recognized into revenue as cash is received, resulting from the cumulative increase in sales under MyPower contracts, increased by $69.3 million. These increases were partially offset by the $5.4 million decrease in revenue from sales to commercial customers and the $6.2 million decrease in revenue from sales to government entities. In the third quarter of 2016, we completely discontinued offering MyPower contracts, and we have been offering Solar Loans as the replacement, which are accounted for as sales of solar energy systems and components. Revenue from sales of solar energy systems and components has varied considerably in the past, and as we expect that direct sales and Solar Loans will increase as a percentage of future customer contracts, we expect revenue from sales of solar energy systems and components to increase in future periods as well.

2015 Compared to 2014

Total revenue increased by $144.6 million, or 57%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014.

59Operating leases and solar energy systems incentives revenue increased by $119.9 million, or 69%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily attributable to the increase in solar energy systems placed in service under leases and power purchase agreements in 2015. The in-period average of the aggregate megawatt production capacity of solar energy systems placed in service under leases and power purchase agreements during the year ended December 31, 2015 increased by 79% as compared to the in-period average during the year ended December 31, 2014. This significant growth was attributable to our continued success in the installation and operation of solar energy systems under lease and power purchase agreements in new and existing markets. In addition, revenue from the monetization of ITCs increased by $19.8 million, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, as we recognized such revenue from more solar energy systems in the year ended December 31, 2015. We recognize revenue from the monetization of ITCs on the anniversary date of each solar energy system’s placed in service date as ITC recapture provisions expire.

Operating leases and solar energy systems incentives revenue increased by $119.9 million, or 69%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily attributable to the increase in solar energy systems placed in service under leases and power purchase agreements in 2015. The in-period average of the aggregate megawatt production capacity of solar energy systems placed in service under leases and power purchase agreements during the year ended December 31, 2015 increased by 79% as compared to the in-period average during the year ended December 31, 2014. This significant growth was attributable to our continued success in the installation and operation of solar energy systems under lease and power purchase agreements in new and existing markets. In addition, revenue from the monetization of ITCs increased by $19.8 million for the year ended December 31, 2015, as compared to the year ended December 31, 2014, as we recognized such revenue from more solar energy systems in the year ended December 31, 2015. We recognize revenue from the monetization of ITCs on the anniversary date of each solar energy system’s placed in service date as ITC recapture provisions expire.

Revenue from sales of solar energy systems and components increased by $24.7 million, or 30%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily due to the $29.8 million increase in revenue from MyPower contracts, the $13.0 million increase in revenue from outright sales to residential customers, the $4.0 million increase in revenue from sales to government entities, the $1.1 million increase in revenue from sales by Ilioss, which we acquired in August 2015, the $0.8 million increase in revenue from sales of battery storage products and the $0.3 million increase in revenue from sales of Silevo products as we fulfilled open customer orders following our acquisition of Silevo. These increases were partially offset by the $9.0 million decrease in revenue from sales of Zep Solar products, the $8.7 million decrease in revenue from long-term solar energy system sales contracts recognized on the percentage-of-completion basis and the $7.5 million decrease in revenue from sales to commercial customers. Revenue from sales of solar energy systems and components has varied considerably and will continue to vary considerably from period to period due to the successful adoption of our MyPower product and the unpredictability of sales to commercial customers, long-term solar energy system sales contracts recognized on the percentage-of-completion basis and sales to government entities.

~~2014 Compared to 2013~~ 29

Total revenue increased by $91.2 million, or 56%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013.

Operating leases and solar energy systems incentives revenue increased by $90.8 million, or 110%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. This increase was attributable to the increase in solar energy systems placed in service under leases and power purchase agreements between January 1, 2013 and December 31, 2014. The in-period average of the aggregate megawatt production capacity of solar energy systems placed in service under leases and power purchase agreements during the year ended December 31, 2014 increased by 97% as compared to the in-period average during the year ended December 31, 2013. This significant growth was attributable to our continued success in the installation and operation of solar energy systems under lease and power purchase agreements in new and existing markets. However, the impact of the installed base on the increase in revenue varied by the mix between solar energy systems under leases, for which revenue is recognized on a straight-line basis over the lease term, and power purchase agreements, for which revenue is recognized based on the energy produced. In addition, revenue from the monetization of ITCs increased by $27.7 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013, as we recognized revenue from monetization of ITCs related solar energy systems that were placed in service in the year ended December 31, 2013. We recognize revenue from monetization of ITCs on the anniversary date of each solar energy system’s placed in service date as recapture provisions expire.

Revenue from sales of solar energy systems and components increased by $0.4 million, or 1%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. This increase was primarily due to a $21.6 million increase in revenue from long-term solar energy system sales contracts recognized on the percentage-of-completion basis, a $5.6 million increase in revenue from sales to residential customers and $1.1 million of revenue from sales of Silevo products in the year ended December 31, 2014. Additionally, in the year ended December 31, 2014, we recorded $9.0 million in revenue from sales of Zep Solar products as we fulfilled open customer orders following our acquisition of Zep Solar. Subsequent to the fulfillment of all external Zep Solar sales orders, we have internally consumed the Zep Solar product in solar energy system installations for our customers. These increases were partially offset by a $26.0 million decrease in revenue from sales to government entities, a $5.0 million decrease in revenue from sales of energy efficiency products and services and a $4.6 million decrease in revenue from sales to commercial customers. Through December 31, 2014, revenue from MyPower arrangements has been immaterial.

Cost of Revenue, Gross Profit and Gross Profit Margin

	Year Ended December 31,									Change ~~2015~~2016 vs. ~~2014~~2015						Change ~~2014~~2015 vs. ~~2013~~2014
(Dollars in thousands)	~~2015~~2016			~~2014~~2015			~~2013~~2014			$			%			$			%
Cost of operating leases and solar energy systems incentives	$	165,546		$	92,920		$	32,745		$	72,626			78	%	$	60,175			184	%
Operating leases and solar energy systems incentives	$	253,653		$	165,546		$	92,920		$	88,107			53	%		72,626			78	%
Gross profit of operating leases and solar energy systems incentives		127,997			80,716			50,111			47,281			59	%		30,605			61	%
Solar energy systems and components sales		225,269			115,245			83,512			110,024			95	%		31,733			38	%
Gross profit margin of operating leases and solar energy systems incentives		44	%		46	%		60	%
Total cost of revenue	$	478,922		$	280,791		$	176,432		$	198,131			71	%	$	104,359			59	%
Cost of solar energy systems and component sales	$	115,245		$	83,512		$	91,723		$	31,733			38	%	$	(8,211	)		(9	)%
Gross loss of solar energy systems and component sales		(9,169	)		(2,117	)		(10,742	)		(7,052	)		333	%		8,625			(80	)%
Gross loss margin of solar energy systems and component sales		(9	)%		(3	)%		(13	)%
Total cost of revenue	$	280,791		$	176,432		$	124,468		$	104,359			59	%	$	51,964			42	%
Total gross profit		118,828			78,599			39,369			40,229			51	%		39,230			100	%
Total gross profit margin		30	%		31	%		24	%

2016 Compared to 2015

Cost of operating leases and solar energy systems incentives revenue increased by $88.1 million, or 53%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was primarily due to the increase in depreciation expense arising from the higher aggregate cost of solar energy systems placed in service. Additionally, costs incurred on customer contracts that were ultimately canceled, costs from our dedicated operations and maintenance department and other costs to maintain our operating leases also increased for the year ended December 31, 2016, as compared to the year ended December 31, 2015.

Cost of solar energy systems and component sales increased by $110.0 million, or 95%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was primarily due to the introduction of our Solar Loan product offering and an increase in residential sales.

2015 Compared to 2014

Cost of operating leases and solar energy systems incentives revenue increased by $72.6 million, or 78%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily due to greater depreciation expense arising from the higher aggregate cost of solar energy systems placed in service ~~and generating revenue under solar energy system leases and power purchase agreements~~. Additionally, we incurred $15.5 million of increased period costs related to customer contract cancellations, our dedicated operations and maintenance department and customer warranties. We also incurred $7.5 million of increased expenses due to the continuing amortization of intangible assets related to the Silevo acquisition in the third quarter of 2014.

Cost of solar energy systems and component sales increased by $31.7 million, or 38%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was partly due to higher sales of solar energy systems and components and also the recognition of $17.0 million of warranty expenses associated with sales under MyPower contracts. The warranty expense for a sale under a MyPower contract is recorded upon the delivery of the solar energy system while the associated revenue and cost of revenue are recognized over the term of the MyPower contract as the customer pays-down the principal balance of the MyPower loan. We expect to continue to record negative gross margins in future periods as sales under MyPower contracts increase and revenue is recognized over the term of the MyPower contracts.

2014 Compared to 2013

Cost of operating leases and solar energy systems incentives revenue increased by $60.2 million, or 184%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. This increase was primarily due to the increase in depreciation expense arising from the higher aggregate cost of solar energy systems placed in service under leases and power purchase agreements. Additionally, we incurred $14.4 million of increased period costs related to customer contract cancellations, our dedicated operations and maintenance department and customer warranties. We also incurred $9.4 million of increased expenses due to the continuing amortization of intangible assets related to the Zep Solar acquisition in the fourth quarter of 2013 and the Silevo acquisition in the third quarter of 2014. Furthermore, the percentage of depreciation expense that was offset by the amortization of U.S. Treasury grants received continued to decrease, from 42% for the year ended December 31, 2013 to 25% for the year ended December 31, 2014, as no significant new grants have been received in 2014 due to the winding-down of the U.S. Treasury grant program.

Cost of solar energy systems and component sales decreased by $8.2 million, or 9%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. The increase in our total deployment of solar energy systems resulted in the allocation of overhead costs over more megawatts installed. In addition, the percentage of residential sales increased in 2014, which generally have higher gross margins in comparison to larger scale commercial and government sales as recognized in the year ended December 31, 2013. Furthermore, non-recurring Zep Solar product sales in the year ended December 31, 2014 had generally higher gross margins than the solar energy systems sales. These factors contributed to an improvement in the gross margin loss from (13%) to (3%).

Operating Expenses

	Year Ended December 31,						Change ~~2015~~2016 vs. ~~2014~~2015						Change ~~2014~~2015 vs. ~~2013~~2014
(Dollars in thousands)	~~2015~~2016		~~2014~~2015		~~2013~~2014		$			%			$		%
Sales and marketing	$	~~457~~442,~~185~~590	$	~~238~~457,~~608~~185	$	97238,~~426~~608	$	~~218~~(14,~~577~~595	)		92(3	)%	$	~~141~~218,~~182~~577		~~145~~92	%
General and administrative		~~244~~228,~~508~~980		~~156~~244,~~426~~508		89156,~~801~~426		88(15,~~082~~528	)		56(6	)%		6688,~~625~~082		7456	%
Research and development		64,925		19,162		1,520		45,763			239	%		17,642		1161	%
Pre-production expense		69,306		—		—		69,306
Total operating expenses	$	766,618	$	414,196	$	188,747	$	352,422			85	%	$	225,449		119	%
Restructuring and other		105,922		—		—		105,922
Research and development		54,963		64,925		19,162		(9,962	)		(15	)%		45,763		239	%
Total operating expenses	$	901,761	$	766,618	$	414,196	$	135,143			18	%	$	352,422		85	%

2016 Compared to 2015

Sales and marketing expense decreased by $14.6 million, or 3%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This decrease was primarily due to our restructuring and the corresponding decrease in the average number of personnel in sales and marketing personnel and our focus on increasing the efficiency of sales operations.

General and administrative expense decreased by $15.5 million, or 6%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decrease was primarily due to reversal of previously accrued Silevo contingent consideration and Founder Awards as a result of the Tesla acquisition. The decrease was offset by the increase in the average number of personnel in

general and administrative departments and an increase in professional services fees primarily due to legal costs. However, as a result of our restructuring activities, the number of personnel in general and administrative departments has decreased since June 30, 2016.

Costs that we incur at our Fremont, California manufacturing facility prior to attaining commercial production (including salaries, other personnel-related costs, raw materials costs and other production costs for solar modules run through the production line during this period) are treated as pre-production expense. We commenced operations at our Fremont, California manufacturing facility in the fourth quarter of 2015.

We recorded $105.9 million of restructuring and other expenses in the year ended December 31, 2016, primarily consisting of certain amounts due to us since 2014 related to an uninstalled commercial project (but not related to any customer contracts or loans) that were determined to be unrecoverable, certain acquired sales and marketing-related intangible assets that became fully impaired, a revision of the useful lives of our manufacturing equipment in China, one-time employee termination benefit expenses due to our restructuring activities and transaction related expenses arising from our merger with Tesla.

Research and development expense decreased by $10.0 million, or 15%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This decrease was primarily due to the decreased level of research and development activities undertaken by Silevo as such expenses are now recorded in pre-production.

2015 Compared to 2014

Sales and marketing expense increased by $218.6 million, or 92%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily due to more expansive sales and marketing efforts, which have resulted in increases in the number of customers, system installations and system deployments. This initiative increased the average number of personnel in sales and marketing departments by 103% for the year ended December 31, 2015, as compared to the year ended December 31, 2014. As a result of this growth in headcount, employee compensation costs increased by $137.9 million (of which $7.8 million was related to stock-based compensation) and facilities and operations costs increased by $25.7 million. In addition, promotional marketing costs increased by $53.5 million as part of this broadening of the scope of our marketing activities, including enhanced digital marketing activities to increase brand awareness and customer reach. In the future, we expect to reduce our sales and marketing expenses, on a per Watt basis, by focusing on our more efficient sales channels, renegotiating or eliminating our higher cost sales channels and other cost efficiency initiatives.

General and administrative expense increased by $88.1 million, or 56%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily due to the increase in the average number of personnel in general and administrative departments, which grew by 103% for the year ended December 31, 2015, as compared to the year ended December 31, 2014. As a result of this growth in headcount, employee compensation costs increased by $45.5 million (of which $4.2 million was related to stock-based compensation) and facilities and operations costs increased by $13.6 million. In addition, professional services fees increased by $22.9 million primarily due to increased legal costs and accounting services fees. Furthermore, Ilioss, which we acquired in August 2015, incurred $1.7 million of general and administrative expenses in the year ended December 31, 2015.

Research and development expense increased by $45.8 million, or 239%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily due to the greater level of research and development activities undertaken by Silevo and the corresponding increase in the average number of personnel in research and development departments, which grew by 227%, for the year ended December 31, 2015, as compared to the year ended December 31, 2014.

2014 Compared to 2013

Sales and marketing expense increased by $141.2 million, or 145%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. This increase was primarily due to more expansive sales and marketing efforts, that have resulted in an increase in the overall backlog, number of customers and deployments. In particular, we acquired certain assets of a leading direct-to-consumer marketer, Paramount Energy, including its employees, technology and tools, in the third quarter of 2013, and we created a dedicated door-to-door direct sales group in the fourth quarter 2013. These initiatives increased the average number of personnel in sales and marketing departments by 180% for the year ended December 31, 2014 as compared to the year ended December 31, 2013. As a result of this growth in headcount, employee compensation costs increased by $88.9 million, of which $12.4 million was non-cash and related to stock-based compensation. In addition, facilities and operations costs increased by $13.0 million, promotional marketing costs increased by $29.3 million and expenses from the non-cash amortization of marketing-related intangible assets, acquired through the Paramount Energy and Zep Solar acquisitions, increased by $8.9 million. We expect that our increased investment in sales and marketing efforts will continue to drive the future growth of our business.

General and administrative expense increased by $66.6 million, or 74%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. This increase was primarily due to the increase in the average number of personnel in general and administrative departments, which grew by 80% for the year ended December 31, 2014 as compared to the year ended December 31, 2013. As a result of this growth in headcount, employee compensation costs increased by $48.2 million, of which $25.0 million was non-cash and related to stock-based compensation, and facilities and operations costs increased by $7.9 million. In addition, professional services fees increased by $11.0 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily due to increased audit fees, our efforts with regard to compliance with the Sarbanes-Oxley Act of 2002 and increased financing activities.

Research and development expense increased by $17.6 million, or 1,161%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. This was primarily due to the product research and development activities undertaken by Zep Solar, which we acquired in the fourth quarter of 2013, and by Silevo, which we acquired in the third quarter 2014.

Other Income and Expenses

	Year Ended December 31,						Change ~~2015~~2016 vs. ~~2014~~2015						Change ~~2014~~2015 vs. ~~2013~~2014
(Dollars in thousands)	~~2015~~2016		~~2014~~2015		~~2013~~2014		$			%			$		%
Interest expense, net	$	91,939	$	55,758	$	25,738	$	36,181			65	%	$	30,020		117	%
Interest expense - recourse debt	$	42,162	$	28,145	$	14,522	$	14,017			50	%	$	13,623		94	%
Other expense, net		25,767		10,611		1,441		15,156			143	%		9,170		636	%
Interest expense - non-recourse debt		74,527		29,905		13,537		44,622			149	%		16,368		121	%
Total interest and other expenses, net	$	117,706	$	66,369	$	27,179	$	51,337			77	%	$	39,190		144	%
Other interest expense and amortization of debt discounts and fees, net		39,965		33,889		27,699		6,076			18	%		6,190		22	%
Other expense, net		13,660		25,767		10,611		(12,107	)		(47	)%		15,156		143	%
Total interest and other expenses, net	$	170,314	$	117,706	$	66,369	$	52,608			45	%	$	51,337		77	%

2016 Compared to 2015

Interest expense – recourse debt, increased by $14.0 million, or 50%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was primarily due to 19% increase in the average carrying balances of interest bearing recourse debt for the year ended December 31, 2016, as compared to the year ended December 31, 2015, as well as the increase in interest rates for the year ended December 31, 2016, as compared to the year ended December 31, 2015.

Interest expense – non-recourse debt increased by $44.6 million, or 149%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was primarily due to the 98% increase in the average carrying balances of interest bearing nonrecourse debt for the year ended December 31, 2016, as compared to the year ended December 31, 2015, as well as the increase in interest rates for the year ended December 31, 2016, as compared to the year ended December 31, 2015.

Other interest expense and amortization of debt discounts and fees, net, increased by $6.1 million, or 18%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was primarily due to the higher average balances of debt discounts and issuance costs related to our debt for the year ended December 31, 2016, as compared to the year ended December 31, 2015.

Other expense, net, decreased by $12.1 million, or 47%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This decrease was mainly due to the $3.0 million loss from the changes in the fair value of our interest rate swaps in 2016 as compared to the $11.6 million loss from the changes in the fair value of our interest rate swaps in 2015. We account for our interest rate swaps as non-hedging derivatives. Additionally, we incurred $2.4 million loss from settlement of a matter and the $5.3 million increase in accretion on the contingent consideration related to the Silevo acquisition in 2015.

2015 Compared to 2014

Interest expense, ~~net~~– recourse debt, increased by $3613.2 6 million, or 6594%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily due to the ~~$36.8~~90% ~~million~~ increase in ~~interest expense, net, attributable to~~ the ~~higher~~ average carrying balances onof ~~our~~interest ~~various~~bearing ~~borrowing~~recourse ~~facilities~~debt for the year ended December 31, 2015, as compared to the year ended December 31, 2014.

~~Other~~Interest expense, ~~net~~– non-recourse debt, increased by $1516.2 4 million, or ~~143~~121%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase in was ~~mainly~~primarily due to the ~~$11.6~~146% ~~million loss from interest rate swaps related to our debt facilities, the $2.4 million loss from the settlement for Seaboard projects and the $5.3 million~~ increase in ~~accretion on~~ the ~~contingent~~average ~~consideration~~carrying ~~related~~balances toof ~~the~~interest ~~Silevo~~bearing ~~acquisition,~~non-recourse indebt for the year ended December 31, 2015., Weas ~~have~~compared ~~entered into forward interest rate swaps in order~~ to ~~fix~~ the ~~variable~~year ~~interest~~ended ~~rates~~December ~~for~~31, ~~each draw under certain credit facilities~~2014. ~~We account for interest rate swaps as non-hedging derivatives. This increase was partially offset by the $3.1 million decrease in loss on debt extinguishment.~~

~~2014~~Other ~~Compared~~interest expense and amortization of debt discounts and fees, net, increased by $6.2 million, or 22%, This increase was primarily due to ~~2013~~the higher average balances of debt discounts and issuance costs related to our debt for the year ended December 31, 2015, as compared to the year ended December 31, 2014.

~~Interest~~Other expense, net, increased by $3015.02 million, or ~~117~~143%, for the year ended December 31, ~~2014~~2015 as compared to the year ended December 31, ~~2013~~2014. ~~The~~This increase was mainly due to the $11.6 million loss from interest ~~expense,~~rate ~~net,~~swaps related to our ~~cash~~debt ~~borrowings~~facilities, ~~increased~~the by $312.64 million asloss afrom ~~result~~the ofsettlement ~~higher~~for ~~average~~a ~~carrying~~matter ~~balances~~and onthe ~~our~~$5.3 million ~~borrowing~~increase ~~facilities~~in ~~for~~accretion on the ~~year~~contingent ~~ended~~consideration ~~December 31,~~related ~~2014~~to asthe ~~compared~~Silevo toacquisition, in the year ended December 31, ~~2013~~2015. ~~The~~We ~~increase~~have inentered ~~interest~~into ~~expense,~~forward ~~net,~~interest ~~related~~rate toswaps ~~our~~in ~~cash~~order ~~borrowings~~to ~~was~~fix ~~partially~~the ~~offset~~variable ~~by a decrease of $1.6 million of~~ interest ~~expense,~~rates ~~net,~~for ~~related~~each todraw ~~our~~under ~~lease~~certain ~~pass-through~~credit ~~fund~~facilities. ~~arrangements,~~We ~~mainly~~account ~~due~~for tointerest ~~lower~~rate ~~average~~swaps ~~lease~~as ~~pass~~non-~~through~~hedging ~~financing~~derivatives. ~~obligation~~This ~~balances~~increase ~~during~~was ~~the~~partially ~~year~~offset ~~ended~~by ~~December~~the $3.1 ~~31,~~million ~~2014~~decrease asin ~~compared~~loss toon ~~the~~debt ~~year ended December 31, 2013~~extinguishment.

Other expense, net, increased by $9.2 million, or 636%, for the year ended December 31, 2014 as compared to the year ended December 31, 2013. The increase in other expense, net, was mainly due to a $4.5 million charge related to the settlement of certain debt in the year ended December 31, 2014 and a $1.9 million charge related to the accretion on the contingent consideration payable to certain Silevo employees negotiated as part of the Silevo acquisition agreement. Additionally, franchise taxes increased by $1.1 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013.

Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

Year Ended December 31,

Change ~~2015~~2016 vs. ~~2014~~2015

Change ~~2014~~2015 vs. ~~2013~~2014

(Dollars in thousands)

~~2015~~2016

~~2014~~2015

~~2013~~2014

Net loss attributable to noncontrolling interests and redeemable noncontrolling

(~~710~~1,~~492~~059,121

)

(~~319~~710,~~196~~492

)

(95319,~~968~~196

)

(~~391~~348,~~296~~629

)

(~~123~~49

(~~223~~391,~~228~~296

)

(~~233~~123

63The net loss attributable to noncontrolling interests and redeemable noncontrolling interests represents the share of net loss that was allocated to the investors in the joint venture financing funds. This amount was determined as the change in the investors’ interests in the joint venture financing funds between the beginning and end of each reported period, calculated primarily using the HLBV method, less any capital contributions net of any capital distributions. The calculation depends on the specific contractual liquidation provisions of each joint venture financing fund and is generally affected by, among other factors, the tax attributes allocated to the investors including tax bonus depreciation and ITCs or U.S. Treasury grants in lieu of the ITCs, the existence of guarantees of minimum returns to the investors by us and the allocation of taxable income or losses including provisions that govern the level of deficits that can be funded by the investors in a liquidation scenario. The calculation is also affected by the cost of the

The net loss attributable to noncontrolling interests and redeemable noncontrolling interests represents the share of net loss that was allocated to the investors in the joint venture financing funds. This amount was determined as the change in the investors’ interests in the joint venture financing funds between the beginning and end of each reported period calculated primarily using the HLBV method, less any capital contributions net of any capital distributions. The calculation depends on the specific contractual liquidation provisions of each joint venture financing fund and is generally affected by, among other factors, the tax attributes allocated to the investors including tax bonus depreciation and ITCs or U.S. Treasury grants in lieu of the ITCs, the existence of guarantees of minimum returns to the investors by us and the allocation of tax income or losses including provisions that govern the level of deficits that can be funded by the investors in a liquidation scenario. The calculation is also affected by the cost of the assets sold to the joint venture financing funds, which forms the book basis of the net assets allocated to the investors assuming a liquidation scenario. Generally, significant loss allocations to the investors have arisen in situations where there was a significant difference between the fair value and the cost of the assets sold to the joint venture financing funds in a particular period accompanied by the absence of guarantees of minimum returns to the investors by us, since the capital contributions by the investors were based on the fair value of the assets while the calculation is based on the cost of the assets. The existence of guarantees of minimum returns to the investors by us and limits on the level of deficits that the investors are contractually obligated to fund in a liquidation scenario reduce the amount of losses that could be allocated to the investors. In addition, the redeemable noncontrolling interests balance is at least equal to the redemption amount. 32

assets sold to the joint venture financing funds, which forms the book basis of the net assets allocated to the investors assuming a liquidation scenario. Generally, significant loss allocations to the investors have arisen in situations where there was a significant difference between the fair value and the cost of the assets sold to the joint venture financing funds in a particular period accompanied by the absence of guarantees of minimum returns to the investors by us, since the capital contributions by the investors were based on the fair value of the assets while the calculation is based on the cost of the assets. The existence of guarantees of minimum returns to the investors by us and limits on the level of deficits that the investors are contractually obligated to fund in a liquidation scenario reduce the amount of losses that could be allocated to the investors. In addition, the redeemable noncontrolling interest balance is at least equal to the redemption amount.

2016 Compared to 2015

The net loss allocation to noncontrolling interests and redeemable noncontrolling interests for the year ended December 31, 2016 was $1,059.1 million compared to the $710.5 million net loss allocation for year ended December 31, 2015. The net loss allocation for the year ended December 31, 2016 was primarily due to a $959.7 million loss allocation from financing funds into which we were selling or contributing assets and $99.4 million loss allocation related to financing funds that were fully funded and that we were not selling or contributing additional assets. The net loss allocation for the year ended December 31, 2015 was primarily due to a $701.9 million loss allocation from financing funds into which we were selling or contributing assets.

2015 Compared to 2014

The net loss allocation to noncontrolling interests and redeemable noncontrolling interests for the year ended December 31, 2015 was $710.5 million compared to the $319.2 million net loss allocation for year ended December 31, 2014. The net loss allocation ~~to noncontrolling interests and redeemable noncontrolling interests~~ for the year ended December 31, 2015 was primarily due to a $701.9 million loss allocation from financing funds into which we were selling or contributing assets. The net loss allocation ~~to noncontrolling interests and redeemable noncontrolling interests~~ for the year ended December 31, 2014 was primarily due to a $345.4 million loss allocation from financing funds into which we were selling or contributing assets. This loss allocation was partially offset by a $25.9 million income allocation related to financing funds that were fully funded and that we were not selling or contributing additional assets.

~~2014 Compared to 2013~~ 33

The net loss allocation to noncontrolling interests and redeemable noncontrolling interests for the year ended December 31, 2014 was primarily due to a $345.4 million loss allocation from financing funds into which we were selling or contributing assets. This loss allocation was partially offset by a $13.6 million income allocation related to financing funds that were fully funded and that we were not selling or contributing additional assets. Additionally, $12.3 million of income was allocated to noncontrolling interests and redeemable noncontrolling interests in an entity that has a lease pass-through fund arrangement with us, including $8.5 million of income allocated due to adjustments of the carrying value of the redeemable noncontrolling interest balance to its redemption amount following amendments to the contractual agreements of the entity that granted the investor redemption rights in conjunction with the termination of the lease pass-through fund arrangement. The net loss allocation to noncontrolling interests and redeemable noncontrolling interests for the year ended December 31, 2013 was primarily due to a $165.7 million loss allocation from financing funds into which we were selling or contributing assets. This loss allocation was partially offset by a $57.8 million income allocation related to a single financing fund whose contractual documents were amended in 2013. The amendments were made to ensure that the investor in this financing fund would earn, in the future, amounts equal to the anticipated shortfalls in U.S. Treasury grants related to the assets previously sold to this financing fund. Furthermore, $10.3 million of income was allocated to noncontrolling interests and redeemable noncontrolling interests in an entity that has a lease pass-through fund arrangement with us.

Quarterly Results of Operations

The following table presents our unaudited consolidated statements of operations for each of the quarters indicated. Our consolidated statements of operations for each of these quarters have been prepared on a basis consistent with our audited annual consolidated financial statements included elsewhere in this annual report on Form 10-K and, in the opinion of management, include all adjustments necessary for the fair presentation of our consolidated results of operations for these quarters. You should read this information together with our annual consolidated financial statements and the accompanying notes included elsewhere in this annual report on Form 10-K. Our quarterly results of operations are not necessarily indicative of our results for any future period.

	Three Months Ended
	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2015			2015			2015			2015			2014			2014			2014			2014
	(in thousands, except share and per share amounts)
Revenue:
Operating leases and solar energy systems incentives	$	75,430		$	85,059		$	78,283		$	54,771		$	49,205		$	52,178		$	43,181		$	29,072
Solar energy systems and components sales		40,050			28,798			24,520			12,708			22,603			6,165			18,153			34,474
Total revenue		115,480			113,857			102,803			67,479			71,808			58,343			61,334			63,546
Cost of revenue:
Operating leases and solar energy systems incentives		49,879			46,015			37,392			32,260			30,387			25,728			20,826			15,979
Solar energy systems and components sales		37,144			42,554			22,087			13,460			26,455			6,640			17,635			32,782
Total cost of revenue		87,023			88,569			59,479			45,720			56,842			32,368			38,461			48,761
Gross profit		28,457			25,288			43,324			21,759			14,966			25,975			22,873			14,785
Operating expenses:
Sales and marketing		128,070			129,284			113,160			86,671			79,515			56,472			55,771			46,850
General and administrative		76,220			69,423			50,211			48,654			45,420			39,608			38,387			33,011
Research and development		22,752			17,652			12,401			12,120			10,004			4,235			3,000			1,923
Total operating expenses		227,042			216,359			175,772			147,445			134,939			100,315			97,158			81,784
Loss from operations		(198,585	)		(191,071	)		(132,448	)		(125,686	)		(119,973	)		(74,340	)		(74,285	)		(66,999	)
Interest expense, net		27,059			25,862			20,497			18,521			18,566			16,321			12,892			7,979
Other expense, net		4,044			16,851			2,768			2,104			6,318			2,961			1,307			25
Loss before income taxes		(229,688	)		(233,784	)		(155,713	)		(146,311	)		(144,857	)		(93,622	)		(88,484	)		(75,003	)
Income tax (provision) benefit		(2,198	)		(482	)		(20	)		(626	)		3,421			23,506			24			(215	)
Net loss		(231,886	)		(234,266	)		(155,733	)		(146,937	)		(141,436	)		(70,116	)		(88,460	)		(75,218	)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests		(236,514	)		(215,193	)		(133,373	)		(125,412	)		(137,881	)		(89,352	)		(40,808	)		(51,155	)
Net income (loss) attributable to stockholders	$	4,628		$	(19,073	)	$	(22,360	)	$	(21,525	)	$	(3,555	)	$	19,236		$	(47,652	)	$	(24,063	)
Net income (loss) attributable to common stockholders
Basic	$	4,628		$	(19,073	)	$	(22,360	)	$	(21,525	)	$	(3,555	)	$	19,236		$	(47,652	)	$	(24,063	)
Diluted	$	4,630		$	(19,073	)	$	(22,360	)	$	(21,525	)	$	(3,555	)	$	19,236		$	(47,652	)	$	(24,063	)
Net income (loss) per share attributable to common stockholders
Basic	$	0.05		$	(0.20	)	$	(0.23	)	$	(0.22	)	$	(0.04	)	$	0.21		$	(0.52	)	$	(0.26	)
Diluted	$	0.04		$	(0.20	)	$	(0.23	)	$	(0.22	)	$	(0.04	)	$	0.19		$	(0.52	)	$	(0.26	)
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders
Basic		97,714,725			97,384,949			97,013,499			96,680,069			96,296,151			93,323,687			92,251,767			91,412,126
Diluted		102,942,993			97,384,949			97,013,499			96,680,069			96,296,151			99,380,397			92,251,767			91,412,126

Liquidity and Capital Resources

~~The~~We ~~following~~finance ~~table~~our ~~summarizes~~operations, ~~our~~including ~~consolidated~~the costs of acquisition and installation of solar energy systems, mainly through a variety of financing fund arrangements that we have formed with fund investors, recourse and non-recourse credit facilities, other corporate borrowing and cash ~~flows:~~generated from our operations.

	Year Ended December 31,
	2015			2014			2013
	(in thousands)
Consolidated cash flow data:
Net cash (used in) provided by operating activities	$	(789,884	)	$	(217,849	)	$	174,515
Net cash used in investing activities		(1,726,734	)		(1,344,814	)		(729,899	)
Net cash provided by financing activities		2,394,779			1,489,966			972,384
Net decrease in cash and cash equivalents	$	(121,839	)	$	(72,697	)	$	417,000

As described below under “Financing Fund Commitments,” as of December 31, 2016, we had $481.4 million of available commitments from our fund investors. Our ability to draw-down the available commitments from our fund investors is dependent on our ability to originate and transfer qualifying solar energy systems and the associated customer lease or power purchase agreements into the financing funds. Some of the financing funds have restrictions regarding the mix of customer leases or power purchase agreements that can be assigned to them, as well as measures of minimum customer credit. We expect to be able to draw-down on substantially all of the available commitments from our fund investors within the next 12 months. The proceeds from our financing fund arrangements are available for general working capital purposes.

We finance our operations, including the costs of acquisition and installation of solar energy systems, mainly through a variety of financing fund arrangements that we have formed with fund investors, credit facilities from banks, solar asset-backed notes, convertible notes, Solar Bonds and cash generated from our operations. As ~~described below under “—Financing Activities— Debt and Financing Fund Commitments,” as~~ of December 31, ~~2015~~2016, we had $~~657~~411.78 million of ~~available commitments from our fund investors and $234.2 million of~~ unused borrowing capacity available under our credit facilities. In(or ~~future~~$468.0 million ~~periods,~~including wethe ~~expect~~$56.2 tomillion ~~incur~~available ~~additional~~under ~~capital~~the ~~expenses~~MyPower asrevolving wecredit ~~invest~~facility), ~~further~~subject into our ~~solar~~continuing ~~module~~compliance ~~manufacturing~~with ~~operations,~~the ~~technology~~terms ~~platform~~ and ~~proprietary~~covenants ~~mounting~~of ~~and~~our ~~racking~~credit ~~hardware~~facilities. In ~~particular,~~Of wethis ~~may~~amount, ~~incur~~$387.4 million ~~substantial~~was ~~expenses~~available ~~in connection with the completion of the manufacturing facility~~ under ~~construction~~our innon-recourse ~~New~~debt ~~York~~facilities ~~and~~(excluding ~~as we purchase equipment in excess of~~ the ~~amounts~~MyPower ~~spent~~revolving bycredit ~~the Foundation~~facility).

The ~~amount~~secured ofrevolving ~~our~~credit ~~liquidity~~facility ~~and~~requires ~~capital~~us ~~resources~~to ashave ofunused acommitments ~~given date is also dependent upon, among other things, the relative timing of our investments in solar energy systems~~ and ~~the timing of subsequent draws on our financing funds. As~~ a ~~result,~~sufficient ~~the~~borrowing ~~amount~~base ofin ~~our~~order ~~liquidity~~to ~~and~~both ~~capital~~borrow ~~resources~~additional ~~may significantly fluctuate within a reporting period by~~ amounts ~~that are not reflected by comparing our cash~~ and ~~cash~~to ~~equivalents~~allow ~~balances~~borrowed atfunds ~~each~~to ~~balance~~remain ~~sheet date~~outstanding. ~~For~~We ~~example,~~anticipate ~~solar~~maintaining ~~energy systems deployed towards the end of~~ a ~~fiscal quarter may not be transferred to a financing fund in~~ sufficient ~~time~~borrowing ~~for~~base ~~the funds~~ to besupport ~~received~~substantially ~~and~~all ~~reflected in our cash and cash equivalents balance as~~ of the ~~quarter-end.~~committed Incapital ~~addition,~~under ~~downward revisions to~~ our ~~installation~~secured ~~projections~~revolving ~~for~~credit afacility ~~fiscal period are also likely to impact our liquidity and capital resources, for example,~~ in ~~situations~~the ~~where~~next we12 ~~have~~months; ~~already~~such ~~spent~~borrowings ~~funds~~are toavailable ~~purchase components~~ for ~~solar~~general ~~energy~~working ~~systems that are installed in subsequent periods. As our business grows and the megawatts deployed increases, the amounts by which our liquidity and~~ capital ~~resources may fluctuate within a quarter are likely to increase~~purposes.

~~While~~Our wenon-recourse ~~had~~debt afacilities ~~net~~require ~~loss~~us ~~for~~to ~~the~~have ~~year~~unused ~~ended December 31~~commitments, ~~2015,~~to weprovide ~~believe~~qualified ~~that~~security ~~the~~(such ~~aggregate~~as ofsolar ~~our~~energy ~~existing~~systems ~~cash~~or ~~and~~our ~~cash~~interests ~~equivalents~~in ~~and~~financing ~~short-term~~funds) ~~investments~~and ofto ~~$393.9 million,~~remain in ~~addition~~compliance towith the ~~funds~~terms ~~available~~of ~~under our debt agreements and~~ the ~~funds~~facilities ~~available~~ in ~~our~~order ~~existing~~to ~~financing~~make ~~funds~~additional ~~that~~borrowings. ~~can~~In bethe ~~drawn-down~~event ~~through~~that ~~our~~we ~~asset~~fail ~~monetization strategy, will be sufficient~~ to meet ~~our~~specific ~~cash~~terms ~~requirements~~ for atadditional ~~least the next 12 months. However~~borrowings, ~~if,~~our inability ~~the~~to ~~future,~~borrow weunused ~~are~~commitments ~~unable~~may tobe ~~comply~~suspended ~~with~~until ~~all~~we ofresume ~~the~~compliance. ~~covenants~~We ~~contained~~anticipate inthat our ~~debt~~operations ~~agreements~~will orprovide wesufficient ~~are~~qualified ~~unable~~security toand ~~obtain~~that ~~waivers of any non-compliance, then~~ we ~~might~~will be ~~considered~~ in ~~default~~compliance ~~under~~with ~~our~~the ~~debt~~terms ~~agreements.~~to Indraw ~~that~~on ~~circumstance,~~substantially all of the ~~payments~~committed ~~due~~capital under our non-recourse debt ~~agreements~~facilities ~~could~~in bethe ~~accelerated,~~next ~~which~~12 ~~would~~months; ~~negatively~~such ~~impact~~borrowings ~~our~~are ~~liquidity~~available ~~and~~for ~~capital~~general ~~resources.~~working ~~Under~~capital ~~the terms of our secured revolving credit facility~~purposes, ~~we are~~ subject to ~~the~~nominal ~~following~~reserve ~~financial covenants:~~requirements.

~~Interest~~The ~~Coverage~~MyPower ~~Ratio:~~revolving Wecredit ~~are~~facility ~~obligated~~is toonly ~~maintain~~available anfor ~~interest~~funding ~~coverage~~costs ~~ratio~~associated ofwith ~~1.5-to-1~~sales asunder ofMyPower ~~the~~arrangements; ~~end~~as ofwe ~~each~~have ~~fiscal~~discontinued ~~quarter.~~offering ~~The~~MyPower ~~interest~~arrangements, ~~coverage~~we ~~ratio~~do isnot ~~measured~~expect byto ~~dividing~~incur ~~(a) an~~additional ~~amount~~borrowings ~~equal~~under to the ~~excess~~MyPower ofrevolving ~~(i) our~~credit ~~trailing 12-month consolidated gross profit over (ii) 20% of our trailing 12-month consolidated general and administrative expenses by (b) our unconsolidated trailing 12-month cash interest charges~~facility.

~~Unencumbered~~In ~~Liquidity:~~future Weperiods, ~~are~~we ~~obligated~~expect to ~~maintain~~incur ~~unencumbered~~additional ~~liquidity~~capital atexpenses anas ~~amount~~we ~~equal~~invest tofurther atin ~~least~~our ~~20%~~solar ofroof ~~the~~and ~~sum~~other ofmodule ~~(a)~~manufacturing ~~the~~operations, ~~committed~~technology ~~amount~~platform ~~under~~and ~~the~~proprietary ~~secured~~mounting ~~revolving~~and ~~credit~~racking ~~facility~~hardware. ~~plus~~As ~~(b)~~a ~~the~~result ~~aggregate principal outstanding~~ of ~~Solar~~our ~~Bonds~~manufacturing ~~that~~relationship ~~mature~~with ~~prior~~Panasonic toCorporation ~~the~~and ~~secured~~its ~~revolving credit facility’s maturity date~~affiliates, asor ~~of the end of each month. However~~Panasonic, ~~unencumbered~~we ~~liquidity~~anticipate ~~can~~significantly ~~never~~reduced beexpenditures ~~less~~related ~~than~~to ~~$50.0 million,~~manufacturing asoperations ofat the ~~end~~Riverbend ofManufacturing ~~each~~Facility ~~month.~~in ~~Unencumbered liquidity is defined as our average daily cash and cash equivalents~~Buffalo, ~~excluding~~New ~~certain of our subsidiaries~~York.

~~Under~~We have agreed to spend or incur approximately $5 billion in combined capital, operational expenses, costs of goods sold and other costs in the ~~terms~~State of ~~certain~~New ~~borrowings~~York byduring ~~our~~the ~~subsidiaries~~10-year period following full production of the Riverbend Manufacturing Facility. Generally, ~~certain~~these obligations commence following the manufacturing facility completion date, which occurs upon the arrival of ~~our~~manufacturing ~~subsidiaries~~equipment, the receipt of certain permits and other specified items. These committed amounts commence with $130.0 million in cumulative investments in the first year after the completion date, and we are ~~subject~~required to pay a $41.2 million “program payment” in any year that we do not meet these requirements. We anticipate meeting these obligations through our operations at the ~~following~~Riverbend ~~financial~~Manufacturing ~~covenants:~~Facility and other operations within the State of New York, as well as Panasonic’s manufacturing operations at the Riverbend Manufacturing Facility, over the 10-year term of the agreement, and we do not believe that we face a significant risk of default.

~~Interest~~The ~~Coverage~~amount ~~Ratio:~~of ~~Certain~~our liquidity and capital resources as of a given date is also dependent upon, among other things, the relative timing of our ~~subsidiaries~~investments ~~are~~in ~~obligated~~solar toenergy ~~maintain~~systems anand ~~interest~~the ~~coverage~~timing ~~ratio~~of subsequent draws on our financing funds and utilization of 1our credit facilities.~~4-to-1~~ asAs ofa result, the ~~specified~~amount ~~dates~~of our liquidity and ~~periods.~~capital ~~The~~resources ~~interest~~may ~~coverage~~significantly ~~ratio~~fluctuate iswithin ~~measured~~a reporting period by ~~dividing~~amounts ~~(a)~~that are not reflected by comparing our cash and cash equivalents balances at each balance sheet date. For example, solar energy systems deployed towards the ~~subsidiary’s~~end ~~revenue~~of ~~less~~a fiscal quarter may not be transferred to a financing fund in sufficient time for the ~~specified~~funds ~~expenses~~to be received and ~~fees~~reflected byin ~~(b)~~our cash ~~interest~~and ~~charges~~cash ~~plus~~equivalents balance as of the ~~specified~~quarter-end. ~~fees~~In addition, any delays in large commercial projects are also likely to impact our liquidity and capital resources, for example, in situations where we have already spent funds to purchase components for solar energy systems that are installed in subsequent periods. As our business grows and cumulative system installations increase, the amounts by which our liquidity and capital resources may fluctuate within a quarter are likely to increase.

6634

~~Debt~~Our ~~Service~~operating ~~Coverage~~plans ~~Ratio:~~and ~~Certain~~expected ofcash ~~our~~requirements ~~subsidiaries~~for the next 12 months are ~~obligated~~primarily todependent ~~maintain~~on athe ~~debt~~cost, ~~service~~number ~~coverage~~and ~~ratio~~size of ~~1.05-~~future solar energy systems that we expect to-1 install and our ability to successfully monetize the related future customer payments, as ofwell as the ~~specified~~mix ~~dates~~of ~~and~~sales ~~periods~~that involve upfront cash proceeds versus long-term contracted payments. ~~The~~We ~~debt~~believe ~~service~~that ~~coverage~~the ~~ratio~~cash isrequirements ~~measured~~of byour ~~dividing~~operations (aincluding repayment or refinancing of our recourse indebtedness) will be satisfied for at least the ~~specified~~next 12 months by: (i) our existing cash ~~receipts~~and cash equivalents, (ii) an improving mix of direct system sales and Solar Loan contracts that provide upfront cash proceeds, (iii) the ~~subsidiary~~funds ~~less~~available under our recourse and non-recourse credit facilities (excluding amounts available under the ~~specified~~MyPower ~~cash~~revolving ~~payments~~credit byfacility) that may be drawn-down during this period, (biv) the ~~cash~~funds available under our existing financing funds that may be drawn-down during this period, (v) the continued interest ~~charges~~of ~~plus~~investors ~~any~~in, ~~principal~~and ~~due~~our track record of, entering into new financing funds and ~~payable~~non-recourse debt facilities, (vi) reduced customer acquisition costs as a result of our acquisition by Tesla and (vii) improved access to capital as a result of our acquisition by Tesla.

~~Operating~~As ~~Activities~~of December 31, 2016, we were in compliance with all financial covenants contained in our debt agreements, and we expect to remain in compliance with these financial covenants. However, if our assumptions prove inaccurate and we are unable to adjust our operating plan to comply with these financial covenants, then we could be in default under our debt agreements. In that circumstance, the amounts outstanding under our debt agreements could be accelerated, which would negatively impact our liquidity and capital resources. In particular, under the terms of our secured revolving credit facility, the occurrence of an event of default with respect to a credit facility (including both recourse and non-recourse indebtedness) having an aggregate principal amount of more than $10.0 million could trigger a cross-default that could result in the acceleration of or the taking of other remedies under our secured revolving credit facility. In addition, the occurrence of an event of default that results in the acceleration of more than $50.0 million of recourse indebtedness could trigger a cross-default that could result in the acceleration of or the taking of other remedies under our convertible senior notes.

InUnder the ~~year~~terms ~~ended December 31, 2015, we utilized $789.9 million in net cash from operations. This cash outflow primarily resulted from a net loss~~ of ~~$768.8 million~~our ~~reduced~~secured byrevolving ~~non-cash~~credit ~~items such as depreciation and amortization of $166.7 million~~facility, ~~stock-based~~we ~~compensation~~are ofsubject ~~$86.4 million and non-cash interest and other expense of $16.4 million mainly related~~ to ~~lease pass-through financing obligations and deferred contingent consideration and increased by a reduction in lease pass-through financing obligation of $48.1 million and~~ the ~~tax~~following ~~benefit~~financial of stock option exercises of $63.0 million. The cash outflow also increased in part due to an increase in restricted cash of $48.7 million, an increase in accounts receivable of $11.0 million, an increase in inventories of $125.3 million, an increase in prepaid expenses and other current assets of $24.5 million, an increase in other assets of $70.0 million, and an increase in MyPower deferred costs of $202.9 million. This cash outflow was offset by a decrease in rebates receivable of $18.5 million, an increase in accounts payable of $125.5 million, an increase in accrued and other liabilities of $147.5 million, and an increase in deferred revenue under our joint venture and lease pass-through structures of $11.5 million relating to upfront lease payments received from customers, solar energy system incentive rebate payments received from various state and local governments and deferred investment tax credits revenue. covenants:

InInterest ~~the~~Coverage ~~year~~Ratio: ~~ended~~We ~~December 31,~~are ~~2014,~~obligated weto ~~utilized~~maintain ~~$217.8 million~~an ininterest ~~net~~coverage ~~cash~~ratio ~~from operations. This cash outflow primarily resulted from a net loss~~ of ~~$375.2 million~~at ~~reduced~~least ~~by non-cash items such as depreciation and amortization of $97~~1.~~9 million, stock~~5-~~based compensation of $65.6 million and non-cash interest expense of $13.6 million mainly related~~ to ~~lease pass~~-~~through~~1 ~~financing~~as ~~obligations and increased by a reduction in lease pass-through financing obligation~~ of ~~$48.8 million and~~ the ~~release~~end of ~~$26.7 million~~each offiscal ~~deferred tax asset valuation allowances as a result of the Silevo acquisition~~quarter. The ~~cash~~interest ~~outflow~~coverage ~~also~~ratio ~~increased~~is inmeasured ~~part~~by ~~due~~dividing ~~to an increase in restricted cash of $17.7~~(a) ~~million,~~ an ~~increase~~amount inequal ~~rebates~~to ~~receivable~~the ofexcess ~~$9.9 million, an increase in inventories~~ of ~~$97.3~~(i) ~~million,~~our antrailing ~~increase~~12-month inconsolidated ~~prepaid~~gross ~~expenses~~profit ~~and~~over ~~other current assets of $23.6~~(ii) ~~million,~~20% ~~an increase in other assets~~ of ~~$32.0 million~~our ~~and~~trailing a12-month ~~decrease~~consolidated ingeneral ~~accrued~~ and ~~other~~administrative ~~liabilities~~expenses ~~of $22.7 million. This cash outflow was offset~~ by ~~an increase in deferred revenue under~~ (b) our ~~joint~~unconsolidated ~~venture~~trailing ~~and lease pass~~12-~~through~~month ~~structures~~cash ofinterest ~~$137.9 million~~charges ~~relating~~excluding tointerest ~~upfront~~charges ~~lease~~on ~~payments~~non-recourse received from customers, solar energy system incentive rebate payments received from various state and local governments and deferred investment tax credits revenue and an increase in accounts payable of $112debt.~~5 million.~~

InUnencumbered ~~the~~Liquidity: ~~year~~We ~~ended~~are ~~December 31,~~obligated ~~2013,~~to wemaintain ~~generated~~unencumbered ~~$174.5 million~~liquidity inat ~~net cash from operations. This cash inflow primarily resulted from~~ an ~~increase~~amount inequal ~~deferred revenue of $233.6 million relating~~ to ~~upfront~~at ~~lease~~least ~~payments~~20% ~~received~~of ~~from~~the ~~customers~~sum ~~and~~of ~~solar~~(a) ~~energy~~the ~~system~~amount ~~incentive~~committed ~~rebate~~under ~~payments~~our ~~received~~secured ~~from~~revolving ~~various~~credit ~~state~~facility ~~and~~plus ~~local~~(b) ~~governments~~the ~~and~~aggregate ~~deferred~~outstanding ~~investment~~principal ~~tax~~amount ~~credits revenue, an increase in accounts payable~~ of ~~$50.8 million,~~Solar anBonds ~~increase~~that inmature ~~accrued~~prior ~~and~~to ~~other~~our ~~liabilities~~secured ofrevolving ~~$84.4 million~~credit ~~and~~facility’s amaturity ~~decrease~~date, inas ~~accounts receivable~~ of ~~$2.9 million.~~the ~~The~~end ~~cash inflow was offset in part by an increase in restricted cash~~ of ~~$13~~each month.~~1 million~~ However, anunencumbered ~~increase~~liquidity inmust ~~incentive~~always ~~rebates~~be ~~receivable~~greater ofthan $250.~~6 million, an increase in inventories of $20.~~0 million, anas ~~increase in prepaid and other current assets~~ of ~~$19.3 million~~the ~~and~~end ~~a net loss~~ of ~~$151~~each month.~~8 million~~ ~~reduced~~Unencumbered byliquidity ~~non-cash~~is ~~items~~defined ~~such~~ as ~~depreciation~~our ~~and~~average ~~amortization~~daily ofbalance ~~$41.4 million, stock-based compensation~~ of ~~$21.3 million~~cash and ~~interest~~cash onequivalents, ~~lease~~in ~~pass-through~~deposit ~~financing~~accounts ~~obligation~~controlled ~~of $13.4 million and increased~~ by athe ~~reduction~~borrower inor ~~lease~~the ~~pass-through~~guarantors ~~financing obligation~~ of ~~$35.7 million~~our ~~and~~secured arevolving ~~change~~credit ~~in deferred income taxes of $25~~facility.~~4 million.~~

~~Investing~~Under ~~Activities~~the terms of a borrowing by one of our subsidiaries, the subsidiary is obligated to maintain a debt service coverage ratio of at least 1.05-to-1 as of certain specified dates and periods. The debt service coverage ratio is measured by dividing (a) the specified cash receipts of the subsidiary less the specified cash payments made by the subsidiary in the period by (b) the scheduled principal payments due and payable by the subsidiary plus the interest payments due and payable by the subsidiary, at the end of the period.

Our investing activities consist primarily of purchases of solar energy systems, capital expenditures for our module research and development and our panel manufacturing and general corporate purchases to support our standard operations.

In the year ended December 31, 2015, we used $1,726.7 million in investing activities. Of this amount, we used $1,665.6 million on the design, acquisition and installation of solar energy systems under operating leases with our customers, $176.5 million in the acquisition of solar panel manufacturing equipment, vehicles, office equipment, leasehold improvements and furniture and $9.5 million for the acquisition of Ilioss. We also invested $44.6 million in short-term investments in highly rated corporate debt securities and asset-backed securities. These expenditures were offset by $170.7 million from sales and maturities of short-term investments.

In the year ended December 31, 2014, we used $1,344.8 million in investing activities. Of this amount, we used $1,163.0 million on the design, acquisition and installation of solar energy systems under operating leases with our customers, $22.9 million on the acquisition of vehicles, office equipment, leasehold improvements and furniture and $0.5 million for the acquisition of the redeemable noncontrolling interest related to a single joint venture financing fund. We also invested $21.8 million in promissory notes receivable and other investments and $167.4 million in short-term investments in highly rated corporate debt securities and asset-backed securities. These expenditures were offset by $1.9 million net cash inflow from the acquisition of Silevo and $28.8 million from sales and maturities of short-term investments.

In the year ended December 31, 2013, we used $729.9 million in investing activities. Of this amount, we used $717.0 million on the design, acquisition and installation of solar energy systems under operating leases with our customers and $9.1 million on the acquisition of vehicles, office equipment, leasehold improvements and furniture. We also invested $3.8 million on the acquisitions of businesses.

Financing Activities

In the year ended December 31, 2015, we generated $2,394.8 million from financing activities. We received $1,093.3 million, net of lender fees, from long-term debt and repaid $215.9 million of long-term debt. We received $119.8 million, net of issuance costs, from the issuance of solar asset-backed notes and repaid $15.9 million of the solar asset-backed notes. We received $112.8 million, net of issuance costs, from the issuance of zero-coupon convertible senior notes. We received $212.2 million from the issuance of solar bonds and repaid $2.2 million of solar bonds. We received $43.1 million from fund investors in our financing funds and paid $5.3 million to fund investors in our financing funds. We also generated $1,097.5 million from proceeds from investments by various investors in our joint venture financing funds, paid distributions to fund investors of $109.5 million and generated $63.0 million from the tax benefit of stock option exercises. Additionally, we paid $3.7 million for deferred purchase consideration and paid $6.0 million for capital lease obligations.

In the year ended December 31, 2014, we generated $1,490.0 million from financing activities. We received $552.8 million, net of issuance costs, from the issuance of convertible senior notes, and in conjunction with this issuance, we paid $65.2 million to enter into a capped call option agreement. We received $373.5 million, net of lender fees, from long-term debt and repaid $336.6 million of long-term debt. We received $262.9 million, net of issuance costs, from the issuance of solar asset-backed notes and repaid $5.9 million of the solar asset-backed notes. We received $44.6 million from fund investors in financing funds and paid $12.5 million to fund investors in our financing funds. We also generated $778.0 million from proceeds from investments by various investors in our joint venture financing funds and paid distributions to fund investors of $117.1 million. Additionally, we paid $2.2 million for deferred purchase consideration.

In the year ended December 31, 2013, we generated $972.4 million from financing activities. We raised $174.1 million, net of underwriting discounts, commissions and issuance costs, from a secondary issuance of our common stock. We received $222.5 million, net of issuance costs, from the issuance of convertible senior notes. We received $203.2 million, net of lender fees, from long-term debt and repaid $65.3 million of long-term debt. We received $51.3 million, net of issuance costs, from the issuance of solar asset-backed notes and repaid $1.5 million of the solar asset-backed notes. We also repaid $1.6 million of our capital lease obligation. We received $127.5 million from U.S. Treasury Department grants associated with solar energy systems that we had leased to customers. We received $57.8 million from investors in our financing funds and paid $41.5 million to investors in our financing funds. We also generated $362.7 million from proceeds from investments by various investors in our joint venture financing funds and paid distributions to fund investors of $137.0 million. Additionally, we paid $3.4 million for deferred purchase consideration.

Debt

For a detailed discussion of our indebtedness, refer to Note 11, Indebtedness, to our consolidated financial statements included elsewhere in this annual report on Form 10-K. Our new debt facilities are summarized below.

Zero-Coupon Convertible Senior Notes Due in 2020

In December 2015, we issued $113.0 million in aggregate principal of zero-coupon convertible senior notes due on December 1, 2020 through a private placement. $13.0 million of the convertible senior notes were issued to related parties and are separately presented on our consolidated balance sheets. The net proceeds from the offering, after deducting debt issuance costs, were $112.8 million.

Each $1,000 of principal of the convertible senior notes is initially convertible into 30.3030 shares of our common stock, which is equivalent to an initial conversion price of $33.00 per share, subject to adjustment upon the occurrence of specified events related to

dividends, tender offers or exchange offers. Holders of the convertible senior notes may convert their convertible senior notes at their option at any time up to and including the second scheduled trading day prior to maturity. If certain events that would constitute a make-whole fundamental change, such as significant changes in ownership, corporate structure or tradability of our common stock, occur prior to the maturity date, we would increase the conversion rate for a holder who elects to convert its convertible senior notes in connection with such an event in certain circumstances. The maximum conversion rate is capped at 38.4615 shares for each $1,000 of principal of the convertible senior notes, which is equivalent to a minimum conversion price of $26.00 per share. The convertible senior notes do not have a cash conversion option. The convertible senior note holders may require us to repurchase their convertible senior notes for cash only under certain defined fundamental changes. On or after June 30, 2017, the convertible senior notes will be redeemable by us in the event that the closing price of our common stock exceeds 200% of the conversion price for 45 consecutive trading days ending within three trading days of such redemption notice at a redemption price of par plus accrued and unpaid interest to, but excluding, the redemption date.

MyPower Revolving Credit Facility

On January 9, 2015, one of our subsidiaries entered into a $200.0 million revolving credit agreement with a syndicate of banks to obtain funding for the MyPower customer loan program. The MyPower revolving credit facility initially provided up to $160.0 million of Class A notes and up to $40.0 million of Class B notes. On December 16, 2015, the committed amount under the Class A notes was increased to $200.0 million. The Class A notes bear interest at an annual rate of (i) for the first $160.0 million, 2.50% and (ii) for the remaining $40.0 million, 3.00%; in each case, plus (a) the commercial paper rate or (b) 1.50% plus adjusted LIBOR. The Class B notes bear interest at an annual rate of 5.00% plus LIBOR. The fee for undrawn commitments under the Class A notes is 0.50% per annum for the first $160.0 million of undrawn commitments and 0.75% per annum for the remaining $40.0 million of undrawn commitments, if any. The fee for undrawn commitments under the Class B notes is 0.50% per annum. The MyPower revolving credit facility is secured by the payments owed to us or our subsidiaries under MyPower customer loans and is non-recourse to our other assets.

Revolving Aggregation Credit Facility

On May 4, 2015, one of our subsidiaries entered into an agreement with a syndicate of banks for a revolving aggregation credit facility with a total committed amount of $500.0 million. On July 13, 2015, the total committed amount was increased to $650.0 million. The revolving aggregation credit facility bears interest at an annual rate of 2.75% plus (i) for commercial paper loans, the commercial paper rate and (ii) for LIBOR loans, at our option, three-month LIBOR or daily LIBOR. The revolving aggregation credit facility is secured by certain assets and cash flows of certain of our subsidiaries and is non-recourse to our other assets.

Solar Asset-backed Notes, Series 2015-1

In August 2015, we pooled and transferred our interests in certain financing funds into a SPE and issued $103.5 million in aggregate principal of Solar Asset-backed Notes, Series 2015-1, Class A, and $20.0 million in aggregate principal of Solar Asset-backed Notes, Series 2015-1, Class B, to certain investors. The Solar Asset-backed Notes, Series 2015-1, Class A, were issued at a discount of 0.05%, bear interest at 4.18% per annum and mature on August 21, 2045. The Solar Asset-backed Notes, Series 2015-1, Class B, were issued at a discount of 1.46%, bear interest at 5.58% per annum and mature on August 21, 2045. The SPE’s assets and cash flows are not available to our other creditors, and the creditors of the SPE, including the Solar Asset-backed Note holders, have no recourse to our other assets.

Financing Fund Commitments

We have financing fund commitments from several fund investors that we can draw-on ~~upon~~ in the future upon the achievement of specific funding criteria. As of December 31, ~~2015~~2016, we had entered into 46 63 financing funds that had a total of $~~657~~481.7 4 million of undrawn committed capital. ~~From~~We ~~our~~allocate ~~significant~~ customer ~~backlog, we allocate to our financing funds~~ leases, power purchase agreements and the related economic benefits associated with the solar energy systems to our financing funds, in accordance with the criteria of each fund. Upon such allocation and ~~upon~~ our satisfaction of the conditions precedent ~~to drawing upon such commitments~~, we are able to draw -down on the financing fund commitments. Once received, these proceeds provide working capital to deliver solar energy systems to our customers and form part of our general working capital.

6935

Contractual Obligations

Set forth below is information concerning our contractual commitments and obligations as of December 31, ~~2015~~2016 (in thousands): .

			Less Than						More Than 5
	Total		1 Year		1-3 Years		3-5 Years		Years
Long-term borrowings(1)	$	2,753,746	$	375,137	$	1,295,328	$	728,762	$	354,519
Long-term borrowings	$	3,580,405	$	828,584	$	1,461,115	$	376,749	$	913,957
Firm purchase commitments		~~237~~376,~~387~~563		~~191~~335,~~033~~166		2418,~~150~~224		67,~~274~~702		15,~~930~~471
Interest(2)		208,729		75,064		76,915		32,060		24,690
Interest(1)		598,609		131,179		167,736		105,625		194,069
Lease obligations		~~280~~253,~~764~~105		5760,~~791~~306		9688,~~990~~945		4938,~~343~~371		7665,~~640~~483
Performance guarantee		36,~~126~~611		36,~~126~~611		—		—		—
Total	$	34,~~483~~815,~~752~~293	$	~~702~~1,~~151~~361,846	$	1,~~493~~736,~~383~~020	$	~~816~~528,~~439~~447	$	~~471~~1,~~779~~188,980

(1) ~~Included~~Excludes ininterest ~~the~~payments ~~2018,~~on ~~2019 and 2020 long~~sale-~~term~~leaseback ~~borrowings~~financing ~~commitments are $230.0 million~~obligations, ~~$566.0~~which ~~million~~is ~~and~~included ~~$113.0 million, respectively, related to convertible senior notes. These notes do not have a cash conversion option and are therefore expected to be settled~~ in ~~shares~~lease ~~of our common stock~~obligations.

(2) Represents obligations for interest payments on long-term borrowings and sale-leaseback financing obligations, and includes projected interest on variable-rate long-term borrowings based on interest rates as of December 31, 2015.

Off-Balance Sheet Arrangements

We include in our consolidated financial statements all assets, liabilities and results of operations of the financing fund arrangements that we have entered into. We have not entered into any other transactions that have generated relationships with unconsolidated entities, financial partnerships or SPEs. Accordingly, we do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies and Procedures, to our consolidated financial statements included elsewhere in this annual report on Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks as part of our ongoing business operations. Our primary exposures include changes in interest rates because certain borrowings bear interest at floating rates plus a specified margin. For fixed-rate debt, interest rate changes do not affect our earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally impact our earnings and cash flows, assuming other factors are held constant. Pursuant to our risk management policies, in certain cases, we utilize derivative instruments to manage some of our exposures to fluctuations in interest rates on certain floating-rate debt. We do not enter into any derivative instruments for trading or speculative purposes. In addition, we entered into capped call option agreements tothat could potentially reduce the ~~potential~~ dilution to ~~holders of~~ our parent’s common stock upon the conversion of our outstanding convertible senior notes.

Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense and reducing our funds available for capital investments, operations or other purposes. In addition, we must use a substantial portion of our cash inflows to service our borrowings, which may affect our ability to make future acquisitions or capital expenditures. A hypothetical 10% change in our interest rates would have increased our interest expense for the year ended December 31, ~~2015~~2016 and ~~2014~~2015 by $25.~~3million~~2 million and $02.93 million, respectively.

7036

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SOLARCITY CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm		7238
Consolidated Balance Sheets		7339
Consolidated Statements of Operations		7541
Consolidated Statements of Equity		7642
Consolidated Statements of Cash Flows		7743
Notes to Consolidated Financial Statements		7945

The supplementary data required by Item 8 is presented under Part II, Item 7 and is incorporated herein by reference.

7137

Report of Independent Registered Public Accounting Firm

The Board of Directors and ~~Stockholders~~Stockholder of

SolarCity Corporation

We have audited the accompanying consolidated balance sheets of SolarCity Corporation (the Company) as of December 31, ~~2015~~2016 and ~~2014~~2015, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, ~~2015~~2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SolarCity Corporation at December 31, ~~2015~~2016 and ~~2014~~2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2015~~2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 10, 2016 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

~~February~~March 101, ~~2016~~2017

7238

SolarCity Corporation

Consolidated Balance Sheets

(In Thousands, Except Shares and Share Par Values)

	December 31,			~~December 31,~~
	2015			2014
	2016			2015
Assets
Current assets:
Cash and cash equivalents	$	~~382~~290,~~544~~710		$	~~504~~382,~~383~~544
Short-term investments		~~11,311~~—			~~138~~11,311
Restricted cash		3974,~~864~~717			2039,~~875~~864
Accounts receivable (net of allowances for doubtful accounts of $4,292 and $1,941 as of December 31, 2015 and December 31, 2014, respectively)		33,998			22,708
Accounts receivable (net of allowances for doubtful accounts of $14,829 and $4,292 as of December 31, 2016 and December 31, 2015, respectively)		66,949			33,998
Rebates receivable (net of reserves of $2,207 and $7,860 as of December 31, 2015 and December 31, 2014, respectively)		11,545			30,021
Rebates receivable (net of reserves of $2,803 and $2,207 as of December 31, 2016 and December 31, 2015, respectively)		10,339			11,545
Inventories		~~342~~172,~~951~~713			~~217~~342,~~223~~951
Deferred income tax asset		—			13,149
Prepaid expenses and other current assets		77,497			79,925
Prepaid expenses and other current assets		79,925			50,946
Total current assets		692,925			902,138
Total current assets		902,138			997,616
Solar energy systems, leased and to be leased – net		5,828,755			4,375,553
Solar energy systems, leased and to be leased – net		4,375,553			2,796,796
Property, plant and equipment – net		244,736			262,387
Property, plant and equipment – net		262,387			75,464
Build-to-suit lease asset under construction		807,593			284,500
Build-to-suit lease asset under construction		284,500			26,450
Goodwill and intangible assets – net		461,989			517,109
Goodwill and intangible assets – net		517,109			539,557
MyPower customer notes receivable, net of current portion		517,244			488,461
MyPower customer notes receivable, net of current portion		488,461			34,544
MyPower deferred costs		232,369			215,708
MyPower deferred costs		215,708			13,147
Other assets		345,145			241,262
Other assets		241,262			67,645
Total assets(1)	$	9,130,756		$	7,287,118
Total assets(1)	$	7,287,118		$	4,551,219
Liabilities and equity
Current liabilities:
Accounts payable	$	364,973		$	237,809
Distributions payable to noncontrolling interests and redeemable noncontrolling interests		26,769			8,552
Current portion of deferred U.S. Treasury grant income		15,336			15,330
Accrued and other current liabilities		270,184			152,408
Customer deposits		6,322			10,560
Current portion of deferred revenue		103,078			86,238
Current portion of long-term debt		180,048			11,781
Current portion of solar bonds		13,189			659
Current portion of solar bonds issued to related parties		165,120			330
Current portion of solar asset-backed notes		13,864			13,157
Current portion of financing obligation		34,479			29,689
Total current liabilities		1,193,362			566,513
Deferred revenue, net of current portion		1,010,491			557,408
Long-term debt, net of current portion		1,006,595			282,789
Solar bonds, net of current portion		35,678			2,463
Solar bonds issued to related parties, net of current portion		100			200
Convertible senior notes		881,585			777,726
Convertible senior notes issued to related parties		12,975			—
Solar asset-backed notes, net of current portion		395,667			293,215
Long-term deferred tax liability		1,373			13,194
Financing obligation, net of current portion		68,940			73,379
Deferred U.S. Treasury grant income, net of current portion		382,283			397,486
Build-to-suit lease liability		284,500			26,450
Other liabilities and deferred credits		279,006			218,024
Total liabilities(1)		5,552,555			3,208,847
Commitments and contingencies (Note 22)
Redeemable noncontrolling interests in subsidiaries		320,935			186,788
Stockholders' equity:
Common stock, $0.0001 par value - authorized, 1,000,000 shares as of December 31, 2015 and December 31, 2014; issued and outstanding, 97,864 and 96,521 shares as of December 31, 2015 and December 31, 2014, respectively		10			10
Additional paid-in capital		1,195,246			1,003,992
Accumulated deficit		(316,690	)		(258,360	)
Total stockholders' equity		878,566			745,642
Noncontrolling interests in subsidiaries		535,062			409,942
Total equity		1,413,628			1,155,584
Total liabilities and equity	$	7,287,118		$	4,551,219

7339

(1) SolarCity Corporation’s, or the Company’s, consolidated assets as of December 31, 2015 and 2014 include $2,866,882 and $1,672,370, respectively, being assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets include solar energy systems, leased and to be leased - net of $2,779,363 and $1,581,459 as of December 31, 2015 and 2014, respectively; property, plant and equipment - net of $21,960 and $24,286 as of December 31, 2015 and 2014, respectively; cash and cash equivalents of $33,537 and $27,820 as of December 31, 2015 and 2014, respectively; inventory of $1,000 and $614 as of December 31, 2015 and 2014, respectively; restricted cash, current, of $522 and $106 as of December 31, 2015 and 2014, respectively; accounts receivable - net of $10,267 and $6,769 as of December 31, 2015 and 2014, respectively; prepaid expenses and other current assets of $2,713 and $1,839 as of December 31, 2015 and 2014, respectively; rebates receivable of $6,220 and $25,397 as of December 31, 2015 and 2014, respectively; restricted cash, long-term, of $254 and $300 as of December 31, 2015 and 2014, respectively; and other assets of $11,046 and $3,780 as of December 31, 2015 and 2014, respectively. The Company’s consolidated liabilities as of December 31, 2015 and 2014 included $33,475 and $27,808, respectively, being liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include distributions payable to noncontrolling interests in subsidiaries and redeemable noncontrolling interests in subsidiaries of $26,769 and $8,552 as of December 31, 2015 and 2014, respectively; accounts payable of $1,954 and $2,748 as of December 31, 2015 and 2014, respectively; customer deposits of $2,928 and $6,405 as of December 31, 2015 and 2014, respectively; accrued liabilities and other payables of $1,824 and $969 as of December 31, 2015 and 2014, respectively; and current portion of long-term debt of $0 and $9,134 as of December 31, 2015 and 2014, respectively.

	December 31,
	2016			2015
Liabilities and equity
Current liabilities:
Accounts payable	$	207,643		$	364,973
Distributions payable to noncontrolling interests and redeemable noncontrolling interests		24,085			26,769
Payable to parent – net		11,693			—
Current portion of deferred U.S. Treasury grant income		14,348			15,336
Accrued and other current liabilities		265,987			276,506
Current portion of deferred revenue		124,722			103,078
Current portion of long-term debt		617,588			180,048
Current portion of solar bonds		16,582			13,189
Current portion of solar bonds issued to related parties		165,000			165,120
Current portion of solar asset-backed notes		19,628			13,864
Current portion of financing obligation		52,031			34,479
Total current liabilities		1,519,307			1,193,362
Deferred revenue, net of current portion		1,086,417			1,010,491
Long-term debt, net of current portion		1,092,426			1,006,595
Solar bonds, net of current portion		50,179			35,678
Solar bonds issued to related parties, net of current portion		100,100			100
Convertible senior notes		873,194			881,585
Convertible senior notes issued to related parties		11,669			12,975
Solar asset-backed notes, net of current portion		549,205			395,667
Long-term deferred tax liability		481			1,373
Financing obligation, net of current portion		81,917			68,940
Deferred U.S. Treasury grant income, net of current portion		343,264			382,283
Build-to-suit lease liability		807,593			284,500
Other liabilities and deferred credits		339,951			279,006
Total liabilities(1)		6,855,703			5,552,555
Commitments and contingencies (Note 23)
Redeemable noncontrolling interests in subsidiaries		343,623			320,935
Parent's equity:
Common stock: as of December 31, 2016, $0.01 par value, 1.0 million shares authorized, 100 shares issued and outstanding; as of December 31, 2015, $0.0001 par value, 1 billion shares authorized, 97.9 million shares issued and outstanding		—			10
Additional paid-in capital		1,301,201			1,195,246
Accumulated deficit		(77,916	)		(316,690	)
Total parent's equity		1,223,285			878,566
Noncontrolling interests in subsidiaries		708,145			535,062
Total equity		1,931,430			1,413,628
Total liabilities and equity	$	9,130,756		$	7,287,118

~~See~~(1) SolarCity Corporation’s, or the ~~further~~Company’s, ~~description~~consolidated inassets ~~Note~~ as of December 31, 2016 and 2015 included $4,133,472 and $2,866,882, respectively, of assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets included solar energy systems, leased and to be leased – net of $3,975,214 ~~Acquisitions~~and $2,779,363 as of December 31, 2016 and ~~Note 12~~2015, ~~VIE~~respectively; ~~Fund~~property, ~~Arrangements~~plant and equipment – net of $0 and $21,960 as of December 31, 2016 and 2015, respectively; cash and cash equivalents of $44,091 and $33,537 as of December 31, 2016 and 2015, respectively; inventory of $0 and $1,000 as of December 31, 2016 and 2015, respectively; restricted cash, current, of $20,916 and $522 as of December 31, 2016 and 2015, respectively; accounts receivable – net of $16,023 and $10,267 as of December 31, 2016 and 2015, respectively; prepaid expenses and other current assets of $7,532 and $2,713 as of December 31, 2016 and 2015, respectively; rebates receivable of $6,646 and $6,220 as of December 31, 2016 and 2015, respectively; and other assets of $63,050 and $11,300 as of December 31, 2016 and 2015, respectively. The Company’s consolidated liabilities as of December 31, 2016 and 2015 included $596,802 and $33,475, respectively, of liabilities of VIEs whose creditors have no recourse to the Company. These liabilities included distributions payable to noncontrolling interests in subsidiaries and redeemable noncontrolling interests in subsidiaries of $24,085 and $26,769 as of December 31, 2016 and 2015, respectively; accounts payable of $20 and $1,954 as of December 31, 2016 and 2015, respectively; customer deposits of $1,169 and $2,928 as of December 31, 2016 and 2015, respectively; accrued liabilities and other payables of $8,524 and $1,824 as of December 31, 2016 and 2015, respectively; current portion of long-term debt of $87,467 and $0 as of December 31, 2016 and 2015, respectively; and long-term debt, net of current portion, of $475,537 and $0 as of December 31, 2016 and 2015, respectively.

See the further description in Note 13, VIE Arrangements.

See accompanying notes.

7440

SolarCity Corporation

Consolidated Statements of Operations

(In Thousands~~, Except Share and Per Share Amounts~~)

	Year Ended December 31,
	2015			2014			2013
	2016			2015			2014
Revenue:
Operating leases and solar energy systems incentives	$	~~293~~422,~~543~~326		$	~~173~~293,~~636~~543		$	82173,~~856~~636
Solar energy systems and components sales		~~106~~308,~~076~~016			81106,~~395~~076			8081,~~981~~395
Total revenue		~~399~~730,~~619~~342			~~255~~399,~~031~~619			~~163~~255,~~837~~031
Cost of revenue:
Operating leases and solar energy systems incentives		~~165~~253,~~546~~653			92165,~~920~~546			3292,~~745~~920
Solar energy systems and components sales		~~115~~225,~~245~~269			83115,~~512~~245			9183,~~723~~512
Total cost of revenue		~~280~~478,~~791~~922			~~176~~280,~~432~~791			~~124~~176,~~468~~432
Gross profit		~~118~~251,~~828~~420			78118,~~599~~828			3978,~~369~~599
Operating expenses:
Sales and marketing		~~457~~442,~~185~~590			~~238~~457,~~608~~185			97238,~~426~~608
General and administrative		~~244~~228,~~508~~980			~~156~~244,~~426~~508			89156,~~801~~426
Research and development		64,925			19,162			1,520
Pre-production expense		69,306			—			—
Total operating expenses		766,618			414,196			188,747
Restructuring and other		105,922			—			—
Loss from operations		(647,790	)		(335,597	)		(149,378	)
Research and development		54,963			64,925			19,162
Interest expense - net		91,939			55,758			25,738
Total operating expenses		901,761			766,618			414,196
Other expense - net		25,767			10,611			1,441
Loss from operations		(650,341	)		(647,790	)		(335,597	)
Loss before income taxes		(765,496	)		(401,966	)		(176,557	)
Interest and other expenses:
Income tax (provision) benefit		(3,326	)		26,736			24,799
Interest expense – recourse debt		42,162			28,145			14,522
Net loss		(768,822	)		(375,230	)		(151,758	)
Interest expense – non-recourse debt		74,527			29,905			13,537
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests		(710,492	)		(319,196	)		(95,968	)
Other interest expense and amortization of debt discounts and fees, net		39,965			33,889			27,699
Net loss attributable to stockholders	$	(58,330	)	$	(56,034	)	$	(55,790	)
Other expense, net		13,660			25,767			10,611
Net loss attributable to common stockholders
Total interest and other expenses		170,314			117,706			66,369
Basic	$	(58,330	)	$	(56,034	)	$	(55,790	)
Loss before income taxes		(820,655	)		(765,496	)		(401,966	)
Diluted	$	(58,330	)	$	(56,034	)	$	(55,790	)
Income tax benefit (provision)		308			(3,326	)		26,736
Net loss per share attributable to common stockholders
Net loss		(820,347	)		(768,822	)		(375,230	)
Basic	$	(0.60	)	$	(0.60	)	$	(0.70	)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests		(1,059,121	)		(710,492	)		(319,196	)
Diluted	$	(0.60	)	$	(0.60	)	$	(0.70	)
Net income (loss) attributable to parent	$	238,774		$	(58,330	)	$	(56,034	)
Weighted-average shares used to compute net loss per share attributable to common stockholders
Basic		97,200,925			93,333,880			79,781,976
Diluted		97,200,925			93,333,880			79,781,976

See accompanying notes.

7541

SolarCity Corporation

Consolidated Statements of Equity

(In Thousands~~, Except Per Share Amounts~~)

													Total
							Additional						Total			Noncontrolling
							Additional						Stockholders'			Noncontrolling
	Common Stock						Paid-In			Accumulated			Parent's			Interests in			Total
	Common Stock						Paid-In			Accumulated			Equity			Interests in			Total
	Shares			Amount			Capital			Deficit			Equity			Subsidiaries			Equity
	Shares			Amount				Capital			Deficit			(Deficit)			Subsidiaries			Equity
Balance at January 1, 2014		91,009		$	10		$	819,914		$	(202,326	)	$	617,598		$	186,817		$	804,415
Balance at January 1, 2013		74,913		$	7		$	330,130		$	(146,536	)	$	183,601		$	96,793		$	280,394
Contributions from noncontrolling interests		—			—			—			—			—			189,779			189,779
Issuance of common stock from a subsequent public offering, net of underwriting discounts and commissions and issuance costs of $7,888		3,910			1			174,082			—			174,083			—			174,083
Issuance of common stock upon acquisition of assets of Paramount Energy, net of issuance costs of $70		3,675			1			108,733			—			108,734			—			108,734
Issuance of common stock upon acquisition of Zep Solar		2,752			1			140,561			—			140,562			—			140,562
Issuance of common stock options upon acquisition of Zep Solar		—			—			14,893			—			14,893			—			14,893
Stock-based compensation expense		—			—			27,936			—			27,936			—			27,936
Issuance of common stock upon exercise of stock options for cash		4,260			—			15,545			—			15,545			—			15,545
Issuance of common stock upon vesting of restricted stock units		14			—			—			—			—			—			—
Issuance of common stock upon exercise of stock warrants for cash		1,485			—			8,034			—			8,034			—			8,034
Net (loss) income		—			—			—			(55,790	)		(55,790	)		22,886			(32,904	)
Distributions to noncontrolling interests		—			—			—			—			—			(122,641	)		(122,641	)
Balance at December 31, 2013		91,009		$	10		$	819,914		$	(202,326	)	$	617,598		$	186,817		$	804,415
Contributions from noncontrolling interests		—			—			—			—			—			517,471			517,471
Issuance of common stock upon acquisition of Silevo		2,284			—			137,958			—			137,958			—			137,958
Issuance of restricted stock units upon acquisition of Silevo		—			—			132			—			132			—			132
Purchase of capped call options		—			—			(65,203	)		—			(65,203	)					(65,203	)
Stock-based compensation expense		—			—			88,936			—			88,936			—			88,936
Issuance of common stock upon exercise of stock options for cash		3,176			—			20,255			—			20,255			—			20,255
Issuance of common stock upon vesting of restricted stock units		52			—			—			—			—			—			—
Acquisition of noncontrolling interest in subsidiaries		—			—			2,000			—			2,000			—			2,000
Net loss		—			—			—			(56,034	)		(56,034	)		(178,124	)		(234,158	)
Transfers to redeemable noncontrolling interests in subsidiaries		—			—			—			—			—			(25,248	)		(25,248	)
Distributions to noncontrolling interests		—			—			—			—			—			(90,974	)		(90,974	)
Balance at December 31, 2014		96,521		$	10		$	1,003,992		$	(258,360	)	$	745,642		$	409,942		$	1,155,584
Contributions from noncontrolling interests		—			—			—			—			—			681,994			681,994
Tax benefit of stock option exercises		—			—			63,019			—			63,019			—			63,019
Stock-based compensation expense		—			—			116,585			—			116,585			—			116,585
Issuance of common stock upon exercise of stock options for cash		951			—			11,650			—			11,650			—			11,650
Issuance of common stock to employees and board members upon vesting of restricted stock units		392			—			—			—			—			—			—
Net loss		—			—			—			(58,330	)		(58,330	)		(451,999	)		(510,329	)
Distributions to noncontrolling interests		—			—			—			—			—			(104,875	)		(104,875	)
Balance at December 31, 2015		97,864		$	10		$	1,195,246		$	(316,690	)	$	878,566		$	535,062		$	1,413,628
Contributions from noncontrolling interests		—			—			—			—			—			847,979			847,979
Tax impact of stock option exercises		—			—			(11,650	)		—			(11,650	)		—			(11,650	)
Stock-based compensation expense		—			—			74,775			—			74,775			—			74,775
Issuance of common stock upon exercise of stock options for cash		605			—			4,072			—			4,072			—			4,072
Issuance of common stock to employees and board members upon vesting of restricted stock units		1,150			—			—			—			—			—			—
Issuance of stock to settle accrued compensation		—			—			631			—			631			—			631
Issuance of stock on settlement of Silevo contingent consideration		1,514			—			34,170			—			34,170			—			34,170
Common stock purchased by Tesla, Inc. and retired		(101,133	)		(10	)		(1,297,244	)		—			(1,297,254	)		—			(1,297,254	)
Issuance of common stock to Tesla, Inc.		100			—			1,297,254			—			1,297,254			—			1,297,254
Stock compensation expense for Tesla, Inc. stock		—			—			485			—			485			—			485
Reclassification of capped call options		—			—			3,462			—			3,462			—			3,462
Net income (loss)		—			—			—			238,774			238,774			(573,553	)		(334,779	)
Distributions to noncontrolling interests		—			—			—			—			—			(101,343	)		(101,343	)
Balance at December 31, 2016		100		$	—		$	1,301,201		$	(77,916	)	$	1,223,285		$	708,145		$	1,931,430

See accompanying notes.

7642

SolarCity Corporation

Consolidated Statements of Cash Flows

(In Thousands)

	Year Ended December 31,
	2015			2014			2013
	2016			2015			2014
Operating activities:
Net loss	$	(~~768~~820,~~822~~347	)	$	(~~375~~768,~~230~~822	)	$	(~~151~~375,~~758~~230	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		166,653			97,880			41,448
Depreciation, amortization and write-offs		308,773			166,653			97,880
Non cash interest and other expense		16,427			13,631			13,438
Change in fair value of interest rate swaps		2,954			11,560			—
Stock-based compensation, net of amounts capitalized		86,369			65,562			21,262
Non-cash interest and other expense		(76,023	)		16,427			13,631
Tax benefit of stock option exercises		(63,019	)		—			—
Stock-based compensation, net of amounts capitalized		49,988			86,369			65,562
Loss on extinguishment of long-term debt		1,093			4,533			306
Tax impact of stock option exercises		11,650			(63,019	)		—
Deferred income taxes		(527	)		(26,680	)		(25,424	)
Loss on extinguishment of long-term debt		798			1,093			4,533
Non-cash reduction in financing obligation		(48,132	)		(48,837	)		(35,675	)
Deferred income taxes		(892	)		(527	)		(26,680	)
Loss on disposal of property, plant and equipment and construction in progress		3,840			1,404			60
Non-cash reduction in financing obligation		(50,342	)		(48,132	)		(48,837	)
Loss on disposal of property, plant and equipment and construction in progress		1,798			3,840			1,404
Changes in operating assets and liabilities:
Restricted cash		(4891,~~650~~388	)		(1748,~~699~~650	)		(1317,~~059~~699	)
Accounts receivable		(1132,~~049~~951	)		~~945~~(11,049	)		~~2,911~~945
Rebates receivable		181,~~476~~206			(918,~~890~~476	)		(29,~~630~~890	)
Inventories		~~(125~~170,~~337~~582	)		(97125,~~347~~337	)		(1997,~~954~~347	)
Prepaid expenses and other current assets		~~(24~~4,~~485~~701	)		(2324,~~155~~485	)		(1923,~~276~~155	)
MyPower deferred costs		(~~202~~17,~~899~~067	)		(13202,~~571~~899	)		—(13,571	)
Other assets		(7027,~~016~~607	)		(1870,~~872~~016	)		(618,~~882~~872	)
Accounts payable		~~125~~(149,~~472~~686	)		~~112~~125,~~480~~472			50112,~~750~~480
Accrued and other liabilities		147,455			(22,676	)		84,444
Payable to parent company, net		5,115			—			—
Customer deposits		(4,238	)		1,732			919
Accrued and other liabilities		132,826			131,657			(20,944	)
Deferred revenue		1167,~~505~~135			~~137~~11,~~941~~505			~~233~~137,~~635~~941
Net cash (used in) provided by operating activities		(789,884	)		(217,849	)		174,515
Net cash used in operating activities		(508,777	)		(789,884	)		(217,849	)
Investing activities:
Payments for the cost of solar energy systems, leased and to be leased		(1,~~665~~611,~~641~~010	)		(1,~~162~~665,~~963~~641	)		(~~716~~1,~~947~~162,963	)
Purchase of property, plant and equipment		(~~176~~62,~~540~~895	)		(22176,~~892~~540	)		(922,~~126~~892	)
Purchases of short-term investments		~~(44,592~~—	)		(~~167~~44,~~397~~592	)		—(167,397	)
Proceeds from sales and maturities of short-term investments		~~170~~11,~~737~~243			28170,~~764~~737			—28,764
Acquisition of business, net of cash acquired		~~(9,509~~—	)		1(9,~~874~~509	)		(31,~~826~~874	)
Other investments		(1,189	)		(22,200	)		—
Payments for the acquisition of noncontrolling interests		(13,664	)		—			—
Net cash used in investing activities		(1,726,734	)		(1,344,814	)		(729,899	)
Payments for settlements of interest rate swaps		(13,003	)		—			—
Other investments		—			(1,189	)		(22,200	)
Net cash used in investing activities		(1,689,329	)		(1,726,734	)		(1,344,814	)

7743

	Year Ended December 31,
	2015			2014			2013
	2016			2015			2014
Financing activities:
Investment fund financings, bank and other borrowings:
Borrowings under long-term debt		1,~~093~~376,~~261~~177			~~369~~1,~~801~~093,261			~~203~~369,~~228~~801
Repayments of long-term debt		(~~215~~866,~~933~~946	)		(~~336~~215,~~557~~933	)		(65336,~~328~~557	)
Proceeds from issuance of solar bonds		4732,~~146~~436			347,~~122~~146			—3,122
Proceeds from issuance of solar bonds issued to related parties		~~165~~265,~~020~~010			~~530~~165,020			—530
Repayments of borrowings under solar bonds		(114,~~820~~827	)		—(1,820	)		—
Repayments of borrowings under solar bonds issued to related parties		(~~330~~165,110	)		—(330	)		—
Proceeds from issuance of solar asset-backed notes		~~119~~221,~~790~~035			~~262~~119,~~880~~790			51262,~~334~~880
Repayments of borrowings under solar asset-backed notes		(1564,~~863~~090	)		(515,~~932~~863	)		(15,~~461~~932	)
Payment of deferred purchase consideration		~~(3,747~~—	)		(23,~~206~~747	)		(32,~~382~~206	)
Proceeds from financing obligation		4369,~~125~~007			4443,~~563~~125			5744,~~780~~563
Repayments of financing obligation		(~~5,259~~481	)		(125,~~460~~259	)		(4112,~~536~~460	)
Repayment of capital lease obligations		(610,~~036~~318	)		(26,~~772~~036	)		(12,~~594~~772	)
Proceeds from investment by noncontrolling interests and redeemable noncontrolling interests in subsidiaries		1,097,487			777,963			362,692
Proceeds from investments by noncontrolling interests and redeemable noncontrolling interests in subsidiaries		1,420,819			1,097,487			777,963
Distributions paid to noncontrolling interests and redeemable noncontrolling interests in subsidiaries		(~~109~~148,~~511~~862	)		(~~117~~109,~~125~~511	)		(~~137~~117,~~005~~125	)
Proceeds from U.S. Treasury grants		—			~~342~~—			~~127,476~~342
Net cash provided by financing activities before equity and convertible notes issuances		2,207,330			982,149			552,204
Net cash provided by financing activities before equity and convertible senior notes issuances		2,113,850			2,207,330			982,149
Equity and convertible notes issuances:
Equity issuances and convertible senior notes issuances:
Proceeds from issuance of common stock		—			—			174,083
Proceeds from issuance of convertible senior notes		—			99,805			552,765
Proceeds from issuance of convertible senior notes		99,805			552,765			222,518
Proceeds from issuance of convertible senior notes issued to related parties		—			12,975			—
Proceeds from issuance of convertible senior notes issued to related parties		12,975			—			—
Purchase of capped call options		—			—			(65,203	)
Purchase of capped call options		—			(65,203	)		—
Proceeds from exercise of stock options		4,072			11,650			20,255
Proceeds from exercise of stock options		11,650			20,255			15,545
Tax impact of stock option exercises		(11,650	)		63,019			—
Tax benefit of stock option exercises		63,019			—			—
Net cash provided by equity issuances and convertible senior notes issuances		(7,578	)		187,449			507,817
Proceeds from exercise of common stock warrants		—			—			8,034
Net cash provided by financing activities		2,106,272			2,394,779			1,489,966
Net cash provided by equity issuances		187,449			507,817			420,180
Net decrease in cash and cash equivalents		(91,834	)		(121,839	)		(72,697	)
Net cash provided by financing activities		2,394,779			1,489,966			972,384
Cash and cash equivalents, beginning of period		382,544			504,383			577,080
Net (decrease) increase in cash and cash equivalents		(121,839	)		(72,697	)		417,000
Cash and cash equivalents, end of period	$	290,710		$	382,544		$	504,383
Cash and cash equivalents, beginning of period		504,383			577,080			160,080
Cash and cash equivalents, end of period	$	382,544		$	504,383		$	577,080
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	53107,~~971~~157		$	2253,~~702~~971		$	622,~~603~~702
Cash paid during the period for taxes, net of refunds	$	211,~~846~~221		$	12,~~881~~846		$	(1,~~726~~881	)

See accompanying notes.

7844

SolarCity Corporation

Notes to Consolidated Financial Statements

1. Organization

SolarCity Corporation, or the Company, was incorporated as a Delaware corporation on June 21, 2006. The Company is primarily engaged in the design, manufacture, installation and sale or lease of solar energy systems ~~to residential and commercial customers~~, or sale of electricity generated by solar energy systems ~~to customers~~. The Company’s headquarters are located in San Mateo, California.

On November 21, 2016, the Company was acquired by and now operates as a wholly owned subsidiary of Tesla, Inc., or Tesla. Pursuant to the terms of the merger agreement, each share of the Company’s common stock then outstanding was converted into 0.11 shares of Tesla’s common stock, or the Exchange Ratio. The Company’s outstanding option and restricted stock unit awards were also converted into corresponding equity awards of Tesla’s common stock based on the Exchange Ratio, with the awards retaining the same vesting and other terms and conditions as in effect immediately prior to the merger.

2. Summary of Significant Accounting Policies and Procedures

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. In accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 810, Consolidation, the Company consolidates any variable interest entity, or VIE, of which it is the primary beneficiary. The Company forms VIEs with its financing fund investors in the ordinary course of business in order to facilitate the funding and monetization of certain attributes associated with its solar energy systems. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company does not consolidate a VIE in which it has a majority ownership interest when the Company is not considered the primary beneficiary. The Company has determined that it is the primary beneficiary of a number of VIEs (see Note 313, ~~Acquisitions, and Note 12,~~ VIE Arrangements). The Company evaluates its relationships with all the VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. In addition, the consolidated financial statements reflect the Company’s historical amounts and balances and do not reflect pushdown accounting from the acquisition by Tesla.

The Company and its subsidiaries’ fiscal quarters and years are the same as calendar quarters and years except for Silevo, Inc. and its subsidiaries, or Silevo, which continues to have fiscal quarters based on 13-week periods and fiscal years based on 52-week periods. For 2015, Silevo’s fiscal year ended on December 26, 2015, and this timing difference and the related activity did not materially impact the consolidated financial statements.

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation. In ~~addition~~particular, asthe aconsolidated ~~result~~statements of ~~the~~operations ~~Company’s~~have ~~adoption~~been ofexpanded ~~Accounting~~to ~~Standards~~separately ~~Update,~~present ornet ~~ASU,~~interest ~~No. 2015-03,~~expense ~~Simplifying~~between ~~the~~(i) ~~Presentation~~interest ofexpense ~~Debt~~on ~~Issuance~~recourse ~~Costs~~debt ~~(see~~excluding ~~below),~~ the ~~Company~~amortization ~~reclassified~~of ~~deferred~~any ~~financing~~debt ~~costs~~discounts ~~from~~or ~~assets~~fees, ~~and~~(ii) ~~presented~~interest ~~the~~expense ~~balances~~on asnon-recourse andebt ~~offset~~excluding ~~against~~ the ~~associated~~amortization ~~debt.~~of ~~The~~any ~~impact~~debt ofdiscounts ~~the~~or ~~Company’s~~fees ~~adoption~~and of(iii) ~~the~~all ~~ASU~~other onnet ~~the~~interest ~~prior~~expense ~~period~~including ~~consolidated~~the ~~balance~~amortization ~~sheet~~of ~~was~~all asdebt ~~follows~~discounts ~~(in~~and ~~thousands):~~fees.

	December 31, 2014
	As Previously Reported		Adoption of ASU			As Reclassified
Prepaid expenses and other current assets	$	55,729	$	(4,783	)	$	50,946
Other assets	$	97,854	$	(30,209	)	$	67,645
Current portion of solar bonds	$	1,150	$	(161	)	$	989
Current portion of solar asset-backed notes	$	13,574	$	(417	)	$	13,157
Long-term debt, net of current portion	$	287,621	$	(4,832	)	$	282,789
Solar bonds, net of current portion	$	2,793	$	(130	)	$	2,663
Convertible senior notes	$	796,000	$	(18,274	)	$	777,726
Solar asset-backed notes, net of current portion	$	304,393	$	(11,178	)	$	293,215

Use of Estimates

79The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Management regularly makes significant estimates and assumptions regarding the selling price of undelivered elements for revenue recognition purposes, the collectability of accounts and rebates receivable, the valuation of inventories, the labor costs for long-term contracts used as a basis for determining the percentage of completion for such contracts, the fair values and residual values of solar energy systems subject to leases, the accounting for business combinations, the fair values and useful lives of acquired tangible and intangible assets, the fair value of contingent consideration payable under business combinations, the useful lives of solar energy systems, property, plant and equipment, the determination of accrued warranty, the determination of accrued liability for solar energy system performance guarantees, the determination of lease pass-through financing obligations, the discount rates used to determine the fair values of investment tax credits, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, asset impairment, the valuation of build-to-suit lease assets, the fair value of interest rate swaps, the fair value of capped call options, the fair value of convertible senior note conversion features and other items. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates.

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Management regularly makes significant estimates and assumptions regarding the selling price of undelivered elements for revenue recognition purposes, the collectability of accounts and rebates receivable, the valuation of inventories, the labor costs for long-term contracts used as a basis for determining the percentage of completion for such contracts, the fair values and residual values of solar energy systems subject to leases, the accounting for business combinations, the fair values and useful lives of acquired tangible and intangible assets, the fair value of debt assumed under business combinations, the fair value of contingent consideration payable under business combinations, the fair value of short-term investments, the useful lives of solar energy systems, property, plant and equipment, the determination of accrued warranty, the determination of accrued liability for solar energy system performance guarantees, the determination of lease pass-through financing obligations, the discount rates used to determine the fair values of investment tax credits, the valuation of stock-based compensation, the determination of valuation allowances associated with deferred tax assets, asset impairment, the valuation of build-to-suit lease assets, the fair value of interest rate swaps and other items. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. The Company maintains cash and cash equivalents, which consist principally of demand deposits with high- credit-quality financial institutions. The Company has exposure to credit risk to the extent cash and cash equivalent balances, including any restricted cash balances on deposit, exceed amounts covered by federal deposit insurance. The Company believes that its credit risk is not significant.

Short-Term Investments

The Company’s short-term investments are comprised of corporate debt securities and asset-backed securities. The Company classifies short-term investments as available-for-sale and carries them at fair value, with any unrealized gains or losses recognized as other comprehensive income or loss in the consolidated balance sheet. The specific identification method is used to determine the cost of any securities disposed of, with any realized gains or losses recognized as other income or expense in the consolidated statement of operations. Short-term investments are anticipated to be used for current operations and are, therefore, classified as current assets even though their maturities may extend beyond one year. The Company periodically reviews short-term investments for impairment. In the event a decline in value is determined to be other-than-temporary, an impairment loss is recognized. When determining if a decline in value is other-than-temporary, the Company takes into consideration the current market conditions and the duration and severity of and the reason for the decline, as well as the likelihood that it would need to sell the security prior to a recovery of par value.

As of December 31, 2015, short-term investments were comprised of $9.3 million of corporate debt securities and $2.0 million of asset-backed securities. As of December 31, 2014, short-term investments were comprised of $126.2 million of corporate debt securities and $12.1 million of asset-backed securities.

The costs of these securities approximated their fair values, and there were no material gross realized or unrealized gains, gross realized or unrealized losses or impairment losses recognized for the years ended December 31, 2015, 2014 or 2013. As of December 31, 2015, all short-term investments were scheduled to mature within the next 12 months.

Restricted Cash

Restricted cash includes cash received from certain fund investors that had not been released for use by the Company, cash held to service certain payments under various secured debt facilities, including management fee, principal and interest payments, and balances collateralizing outstanding letters of credit, outstanding credit card borrowing facilities and obligations under certain operating leases.

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

Accounts Receivable

Accounts receivable primarily represent trade receivables from billings and sales to residential and commercial customers recorded at net realizable value. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible accounts receivable. The Company reviews its accounts receivable by aging category to identify significant customer balances with known disputes or collection issues. In determining the allowance, the Company makes judgments about the creditworthiness of a majority of its customers based on ongoing credit evaluations. The Company also considers its historical level of credit losses and current economic trends that might impact the level of future credit losses. The Company writes off accounts receivable when they are deemed uncollectible.

Customer Notes Receivable

In the fourth quarter of 2014, the Company launched MyPower, a program that ~~offers~~offered residential customers the option to finance the purchase of solar energy systems through a 30-year loan provided by a wholly owned subsidiary of the Company. InThe Company ceased offering MyPower in the third quarter of 2016. During the periods in which MyPower was offered, in order to qualify for a loan, a customer ~~must~~had to pass the Company’s credit evaluation process, and the loans are secured by the solar energy systems financed. The outstanding loan balances that remain from when MyPower was offered, net of any allowance for potentially uncollectible amounts, are presented on the consolidated balance sheets as a component of prepaid expenses and other current assets for the current portion and as customer notes receivable, net of current portion, for the long-term portion. In determining the allowance and credit quality for customer loans under MyPower, the Company identifies significant customers with known disputes or collection issues and also considers its historical level of credit losses and current economic trends that might impact the level of future credit losses. Customer notes receivable that are individually impaired are charged-off as a write-off of allowance for losses. As of December 31, ~~2015~~2016 and ~~2014~~2015, there were no significant customers with known disputes or collection issues, and the amount of potentially uncollectible amounts was insignificant. Accordingly, the Company did not establish an allowance for losses against customer notes receivable. In addition, there were no material non-accrual or past due customer notes receivable as of December 31, ~~2015~~2016 and ~~2014~~2015.

Rebates Receivable

Rebates receivable represent rebates due from utility companies and government agencies. These receivables include rebates that have been assigned to the Company by its cash customers on state-approved solar energy system installations sold to the customers and also uncollected incentives from state and local government agencies for solar energy system installations that have been leased to customers or are used to generate and sell electricity to customers under power purchase agreements. For the rebates assigned to the Company by its customers, the Company assumes the responsibility for the application and collection of the rebate. The processing cycle for these rebates and incentives involves a multi-step process in which the Company accumulates and submits information required by the utility company or state agency necessary for the collection of the rebate. The entire process typically can take up to several months to complete. The Company recognizes rebates receivable upon the solar energy system passing inspection by the utility or authority having jurisdiction after completion of system installation. The Company maintains an allowance to reserve for potentially uncollectible rebates. In determining the allowance, the Company makes judgments based on the length of period that a rebate amount has been outstanding and reasons for the delays in collecting the rebate.

~~Interest Rate Swaps~~46

In 2015, the Company began entering into fixed-for-floating interest rate swap agreements to reduce the potential impact of future changes in interest rates on certain variable rate debt. All interest rate swaps are recognized at fair value on the consolidated balance sheets within other assets or other liabilities and deferred credits, with any changes in fair value recognized as other income or expense in the consolidated statements of operations. The Company has not designated any interest rate swaps as hedging instruments. As of and for the year ended December 31, 2015, the Company had interest rate swaps outstanding as follows (in thousands):

					Gross Losses
	Aggregate		Gross		Year Ended
	Notional		Liability at		December 31,
	Amount		Fair Value		2015
Interest rate swaps	$	640,628	$	11,544	$	11,544

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

Derivatives

In the second quarter of 2015, the Company began entering into fixed-for-floating interest rate swap agreements to swap variable interest payments on certain debt for fixed interest payments, as required by its lenders. The Company has not designated any interest rate swaps as hedging instruments. Accordingly, all interest rate swaps are recognized at fair value on the consolidated balance sheets within other assets or other liabilities and deferred credits, with any changes in fair value recognized as other income or expense in the consolidated statements of operations and with any cash flows recognized as investing activities in the consolidated statements of cash flows.

Upon the acquisition by Tesla, the Company now accounts for its convertible senior notes’ conversion features and capped call options as derivatives (see Note 12, Indebtedness). The Company has not designated these derivatives as hedging instruments. Accordingly, these derivatives are recognized at fair value on the consolidated balance sheets within other assets or other liabilities and deferred credits, with any changes in fair value recognized as other income or expense in the consolidated statements of operations and with any cash flows recognized as financing activities in the consolidated statements of cash flows.

As of and for the year ended December 31, 2016, the Company had derivatives outstanding as follows (in thousands):

	Aggregate		Gross		Gross
	Notional		Asset at		Liability at		Gross		Gross
	Amount		Fair Value		Fair Value		Gains		Losses
Interest rate swaps	$	789,620	$	10,619	$	12,109	$	49,266	$	52,216
Convertible senior note conversion features	$	909,000	$	—	$	19,400	$	—	$	5,100
Capped call options	745,377 shares		$	5,252	$	—	$	1,789	$	—

As of and for the year ended December 31, 2015, the Company had derivatives outstanding as follows (in thousands):

	Aggregate		Gross		Gross
	Notional		Asset at		Liability at		Gross		Gross
	Amount		Fair Value		Fair Value		Gains		Losses
Interest rate swaps	$	640,628	$	—	$	11,544	$	—	$	11,544

Concentrations of Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, accounts receivable, customer notes receivable, rebates receivable and interest rate swaps. The associated risk of concentration for cash and cash equivalents is mitigated by banking with creditworthy institutions. At certain times, amounts on deposit exceed federal deposit insurance limits. The associated risk of concentration for short-term investments is mitigated by holding a diversified portfolio of highly rated short-term investments. The associated risk of concentration for accounts receivable and customer notes receivable is mitigated by placing liens on the related solar energy systems and performing periodic and ongoing credit evaluations of the Company’s customers. Rebates receivable are due from various states and local governments as well as various utility companies. The associated risk of concentration for interest rate swaps is mitigated by transacting with several highly rated multinational banks. The Company maintains reserves for any amounts that it considers to be uncollectable.

Fair Value of Financial Instruments

ASC 820, Fair Value Measurements, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

ASC 820 requires that the valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes inputs that may be used to measure fair value as follows:

·• Level 1—Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

·• Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

~~· Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.~~47

As of December 31, 2015 and 2014, the assets and liabilities carried at fair value on a recurring basis included cash equivalents, short-term investments, interest rate swaps and contingent consideration (see Note 3, Acquisitions). As of December 31, 2015, the fair value of the Company’s cash equivalents, short-term investments, interest rate swaps and contingent consideration were as follows (in thousands):

	Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	69,080	$	—	$	—
Short-term investments:
Corporate debt securities	$	—	$	9,311	$	—
Asset-backed securities	$	—	$	2,000	$	—
Liabilities:
Interest rate swaps	$	—	$	11,544	$	—
Contingent consideration	$	—	$	—	$	123,008

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

As• ofLevel ~~December 31,~~3—Unobservable ~~2014,~~inputs ~~the~~that ~~fair~~are ~~value~~supported ofby ~~the~~little ~~Company’s~~or ~~cash~~no ~~equivalents,~~market ~~short-term~~activity ~~investments~~ and ~~contingent~~that ~~consideration~~are ~~were~~significant asto ~~follows~~the ~~(in~~fair ~~thousands):~~value of the assets or liabilities.

	Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	54,229	$	—	$	—
Corporate debt securities	$	—	$	7,599	$	—
Short-term investments:
Corporate debt securities	$	—	$	126,159	$	—
Asset-backed securities	$	—	$	12,152	$	—
Liabilities:
Contingent consideration	$	—	$	—	$	117,197

The assets and liabilities carried at fair value on a recurring basis included cash equivalents, short-term investments, capped call options, interest rate swaps, convertible senior note conversion features and contingent consideration. As of December 31, 2016, their fair values were as follows (in thousands):

The Company classified its money market funds within Level 1 because their fair values are based on their quoted market prices. The Company classified its corporate debt securities, asset-backed securities and interest rate swaps within Level 2 because their fair values are determined using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates, to determine their fair values. The Company classified its contingent consideration within Level 3 because its fair value is determined using unobservable probability estimates and unobservable estimated discount rates applicable to the acquisition. During the years ended December 31, 2015 and 2014, there were no transfers between the levels of the fair value hierarchy.

	Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	3,438	$	—	$	—
Other assets:
Capped call options	$	—	$	5,252	$	—
Liabilities:
Interest rate swaps	$	—	$	1,490	$	—
Convertible senior note conversion features	$	—	$	19,400	$	—

The contingent consideration is dependent on the achievement of the specified production milestones for the acquired business, as discussed in Note 3, Acquisitions. The Company determined the fair value of the contingent consideration using a probability-weighted expected return methodology that considers the timing and probabilities of achieving these milestones and uses discount rates that reflect the appropriate cost of capital. The Company reassesses the valuation assumptions each reporting period, with any changes in the fair value accounted for in the consolidated statement of operations. The fair value of the contingent consideration is directly proportional to the estimated probabilities of achieving these milestones. As of December 31, 2015, ~~the~~their ~~estimated~~fair ~~probabilities~~values ~~ranged~~were ~~from~~as ~~90%~~follows to 95%, the estimated discount rates ranged from 5.0% to 7.0%, $42.9 million was included under accrued and other current liabilities on the consolidated balance sheets and $80.1 million was included under other liabilities and deferred credits on the consolidated balance sheets. As of December 31, 2014, the estimated probabilities ranged from 90% to 95%, the estimated discount rates ranged from 5.0% to 7.0%, $42.0 million was included under accrued and other current liabilities on the consolidated balance sheets and $75.2 million was included under other liabilities and deferred credits on the consolidated balance sheets. The following table summarizes the activity of the Level 3 contingent consideration balance for the years ended December 31, 2015 and 2014 (in thousands):

Balance at January 1, 2014	$	—
	Level 1		Level 2		Level 3
Acquisition of Silevo		115,319
Cash equivalents:
Change in fair value recorded in other expense - net		1,878
Money market funds	$	69,080	$	—	$	—
Balance at December 31, 2014		117,197
Short-term investments:
Change in fair value recorded in other expense - net		5,811
Corporate debt securities	$	—	$	9,311	$	—
Balance at December 31, 2015	$	123,008
Asset-backed securities	$	—	$	2,000	$	—
Liabilities:
Interest rate swaps	$	—	$	11,544	$	—
Contingent consideration	$	—	$	—	$	123,008

The Company’s ~~financial~~classified ~~instruments~~its ~~that~~money ~~are~~market ~~not~~funds ~~re-measured~~within atLevel 1 ~~fair~~because ~~value~~their ~~include~~fair ~~accounts~~values ~~receivable,~~are ~~customer~~based ~~notes~~on ~~receivable,~~their ~~rebates~~quoted ~~receivable,~~market ~~accounts~~prices. ~~payable,~~The ~~customer~~Company ~~deposits,~~classified ~~distributions~~its ~~payable~~corporate todebt ~~noncontrolling~~securities, ~~interests~~asset-backed ~~and~~securities, ~~redeemable~~capped ~~noncontrolling~~call ~~interests~~options, ~~the participation~~ interest, ~~solar~~rate ~~asset-backed~~swaps ~~notes,~~and convertible senior ~~notes,~~note ~~Solar~~conversion ~~Bonds~~features ~~and~~within ~~long-term~~Level 2 ~~debt.~~because ~~The~~their ~~carrying~~fair values ofare ~~these~~determined ~~financial~~using ~~instruments~~alternative ~~other~~pricing ~~than~~sources ~~customer~~or ~~notes~~models ~~receivable,~~that ~~the~~utilized ~~participation~~market ~~interest~~observable inputs, ~~solar~~including ~~asset-backed~~interest ~~notes~~rates, ~~convertible~~share ~~senior~~prices ~~notes,~~and ~~Solar~~volatilities ~~Bonds~~ and ~~long-term~~default ~~debt~~rates. ~~approximated~~The ~~their~~Company classified its contingent consideration within Level 3 because its fair ~~values~~value ~~due~~is todetermined ~~the~~using ~~fact~~unobservable ~~that~~probability ~~they~~estimates ~~were~~and ~~short-term~~unobservable inestimated ~~nature~~discount atrates applicable to the acquisition. During the years ended December 31, 2016, 2015 and 2014, ~~(Level~~there ~~1).~~were no transfers between the levels of the fair value hierarchy.

83The contingent consideration is dependent on the achievement of the specified production milestones by the acquired business, Silevo. The Company determined the fair value of the contingent consideration using a probability-weighted expected return methodology that considers the timing and probabilities of achieving these milestones and uses discount rates that reflect the appropriate cost of capital. The Company reassesses the valuation assumptions each reporting period, with any changes in the fair value accounted for in the consolidated statements of operations. The fair value of the contingent consideration is directly proportional to the estimated probabilities of achieving these milestones.

As of March 31, 2016, the Company determined that the first milestone was achieved and adjusted the accrued contingent consideration balance associated with the first milestone to the full amount payable of $48.3 million. On May 5, 2016, the Company issued 1.6 million shares of its common stock, valued at $34.2 million based on its stock price on the issuance date, to settle the liability. Accordingly, the Company recognized a gain of $14.1 million upon the settlement of the liability associated with the first milestone, which is included as an offset to general and administrative expense.

As of December 31, 2016, the Company determined that the two remaining milestones will not be achieved by Silevo. As a result, the Company changed the estimated probabilities and adjusted the accrued contingent consideration balance to $0, for the two remaining milestones. Accordingly, the Company recognized a gain of $84.0 million, which is included as an offset to general and administrative expense.

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

~~The~~As ~~Company estimates the fair value~~ of ~~convertible~~December 31, ~~senior~~2015, ~~notes~~the ~~based~~estimated onprobabilities ~~their~~ranged ~~last~~from ~~actively~~90% ~~traded~~to ~~prices~~95%, ~~(Level 1). The Company estimates~~ the ~~fair~~estimated ~~value~~discount ofrates ~~customer~~ranged ~~notes~~from ~~receivable,~~5% ~~the~~to ~~participation interest~~7%, ~~solar~~$42.9 million ~~asset-backed~~was ~~notes,~~included ~~Solar~~under ~~Bonds~~accrued and ~~long-term~~other ~~debt~~current ~~based~~liabilities on ~~rates~~the ~~currently~~consolidated ~~offered~~balance ~~for~~sheets ~~instruments with similar maturities~~ and ~~terms (Level 3)~~$80.1 million ~~The~~was ~~following~~included ~~table~~under ~~presents~~other ~~their~~liabilities ~~estimated~~and ~~fair~~deferred ~~values~~credits ~~and~~on ~~their~~the ~~carrying~~consolidated ~~values~~balance ~~(in thousands):~~sheets.

	December 31, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
Participation interest	$	15,919	$	14,525	$	15,556	$	14,102
Solar asset-backed notes	$	409,531	$	432,797	$	306,372	$	328,313
Convertible senior notes	$	894,560	$	842,752	$	777,726	$	752,176
MyPower customer notes receivable	$	493,510	$	493,510	$	35,645	$	35,645
Long-term debt	$	1,186,643	$	1,186,643	$	294,570	$	294,570
Solar bonds	$	214,087	$	214,087	$	3,652	$	3,652

The following table summarizes the activity of the Level 3 contingent consideration balance in the years ended December 31, 2016, 2015 and 2014 (in thousands):

Business Combinations

Balance at January 1, 2015	$	117,197
Change in fair value		5,811
Balance at December 31, 2015		123,008
Settlement of liability		(34,170	)
Change in fair value		(88,838	)
Balance at December 31, 2016	$	—

The Company’s ~~accounts~~financial ~~for~~instruments ~~business~~that ~~acquisitions~~are ~~under~~not ~~ASC~~carried ~~805, Business Combinations. The cost of an acquisition is measured~~ at ~~the~~ fair value ofinclude ~~the~~accounts ~~assets given~~receivable, ~~equity~~customer ~~instruments~~notes ~~issued~~receivable, ~~and~~rebates ~~liabilities~~receivable, ~~assumed~~accounts atpayable, ~~the~~customer ~~acquisition~~deposits, ~~date.~~distributions ~~Costs~~payable ~~that are directly attributable~~ to ~~the~~noncontrolling ~~acquisition~~interests ~~are~~and ~~expensed~~redeemable asnoncontrolling ~~incurred. Identifiable assets~~interests, ~~including~~the ~~intangible~~participation ~~assets~~interest, ~~acquired~~solar ~~and~~asset-backed ~~liabilities~~notes, ~~including~~solar ~~contingent~~loan-backed ~~liabilities~~notes, ~~assumed~~convertible insenior ~~the~~notes, ~~acquisition~~Solar ~~are~~Bonds ~~measured~~and ~~initially~~long-term atdebt. ~~their~~The ~~fair~~carrying values atof ~~the~~these ~~acquisition~~financial ~~date.~~instruments ~~Any~~other ~~noncontrolling~~than ~~interests~~customer innotes receivable, the ~~acquired~~participation ~~business~~interest, ~~are~~solar ~~also~~asset-backed ~~initially~~notes, ~~measured~~solar atloan-backed ~~fair~~notes, ~~value.~~convertible ~~The~~senior ~~Company~~notes, ~~recognizes~~Solar ~~goodwill~~Bonds ifand ~~the~~long-term ~~aggregate~~debt ~~fair~~approximated ~~value~~their offair ~~the~~values ~~total~~due ~~purchase~~to ~~consideration~~the ~~and~~fact ~~the~~that ~~noncontrolling~~they ~~interests~~were isshort-term in ~~excess~~nature ofas ~~the aggregate fair value~~ of ~~the~~December 31, ~~identifiable~~2016 ~~assets~~and ~~acquired~~2015 and ~~the liabilities assumed~~2014.

The Company estimates the fair value of convertible senior notes based on their last actively traded prices (Level 1) or market-observable inputs (Level 2). The Company estimates the fair value of customer notes receivable, the participation interest, solar asset-backed notes, solar loan-backed notes, Solar Bonds and long-term debt based on rates currently offered for instruments with similar maturities and terms (Level 3). The following table presents their estimated fair values and their carrying values (in thousands):

	December 31, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
Participation interest	$	16,713	$	15,025	$	15,919	$	14,525
Solar asset-backed notes	$	438,002	$	428,551	$	409,531	$	432,797
Solar loan-backed notes	$	130,831	$	132,129	$	—	$	—
Convertible senior notes	$	884,863	$	773,100	$	894,560	$	842,752
MyPower customer notes receivable	$	523,944	$	513,002	$	493,510	$	493,510
Long-term debt	$	1,710,014	$	1,728,670	$	1,186,643	$	1,186,643
Solar bonds	$	331,861	$	330,530	$	214,087	$	214,087

Goodwill

Goodwill represents the difference between the purchase price and the aggregate fair value of the identifiable assets acquired and the liabilities assumed in a business combination. The Company assesses goodwill impairment annually, in the fourth quarter ~~of each fiscal year,~~ and whenever events or changes in circumstances indicate that the carrying value of goodwill may exceed its fair value at the consolidated-level, which is the sole reporting unit. When assessing goodwill for impairment, the Company considers its market ~~capitalization~~value adjusted for a control premium and, if necessary, the Company’s discounted cash flow model, which involves significant assumptions and estimates, including the Company’s future financial performance, weighted-average cost of capital and interpretation of currently enacted tax laws. Circumstances that could indicate impairment and require the Company to perform an impairment test include a significant decline in the Company’s financial results, a significant decline in the Company’s market ~~capitalization~~value relative to its net book value, an unanticipated change in competition or the Company’s market share and a significant change in the Company’s strategic plans.

Inventories

Inventories include raw materials that include silicon wafers, process gasses, chemicals and other consumables used in solar cell production, solar cells, photovoltaic panels, inverters, mounting hardware and miscellaneous electrical components. Inventories also include work in process that includes raw materials partially installed and direct and indirect capitalized installation costs. Raw materials and work in process are stated at the lower of cost or market (generally on a first-in-first-out basis). Work in process primarily relates to solar energy systems that will be sold to customers, which are under construction and have yet to pass inspection.

The Company also evaluates its inventory reserves on a quarterly basis and writes down the value of inventories for estimated excess and obsolete inventories based upon assumptions about future demand and market conditions. 49

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

materials and work in process are stated at the lower of cost or market (on a first-in-first-out basis). Work in process primarily relates to solar energy systems that will be sold to customers, which are under construction and have yet to pass inspection.

Solar Energy Systems, Leased and To Be Leased

The Company is the operating lessor of the solar energy systems under leases that qualify as operating leases. The Company accounts for the leases in accordance with ASC 840, Leases. To determine lease classification, the Company evaluates lease terms to determine whether there is a transfer of ownership or bargain purchase option at the end of the lease, whether the lease term is greater than 75% of the useful life, or whether the present value of minimum lease payments exceed 90% of the fair value at lease inception. The Company utilizes periodic appraisals to estimate useful life and fair values at lease inception, and residual values at lease termination. Solar energy systems are stated at cost, less accumulated depreciation.

As of July 1, 2016, Management increased its estimate of the useful lives of new solar energy systems from 30 years to 35 years. This change-in-estimate was the result of new engineering studies of recently deployed solar energy systems across the industry. The Company applied this change-in-estimate on a prospective basis to solar energy systems placed in service on or after July 1, 2016.

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

		Useful Lives
Solar energy systems leased to customers		30 to 35 years
Initial direct costs related to customer solar energy system lease acquisition costs		Lease term (10 to 20 years)

Solar energy systems held for lease to customers are installed systems pending interconnection with the respective utility companies and will be depreciated as solar energy systems leased to customers when the respective systems have been interconnected and placed in service. Solar energy systems under construction represents systems that are under installation, which will be depreciated as solar energy systems leased to customers when the respective systems are completed, interconnected and subsequently leased to customers. Initial direct costs related to customer solar energy system lease acquisition costs are capitalized and amortized over the term of the related customer lease agreements.

Initial direct costs related to customer solar energy system lease acquisition costs are capitalized and amortized over the term of the related customer lease agreements.

Presentation of Cash Flows Associated with Solar Energy Systems

The Company classifies cash flows associated with solar energy systems in accordance with ASC 230, Statement of Cash Flows. The Company determines the appropriate classification of cash payments related to solar energy systems depending on the activity that is likely to be the predominant source of cash flows for the item being paid for. Accordingly, the Company presents payments made in a period for costs incurred to install solar energy systems that will be leased to customers, including the payments for cost of the inventory that is utilized in such systems, as investing activities in the consolidated statement of cash flows. Payments made for inventory that will be utilized for solar energy systems that will be sold to customers are presented as cash flows from operations in the consolidated statement of cash flows.

~~Property, Plant and Equipment~~ 50

Property, plant and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization.

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

		Useful Lives
Furniture and fixtures		3-7 years
Vehicles		5 years
Computer hardware and software		3-10 years
Manufacturing & lab equipment		2 to 3 years
Buildings		20 years
Land use rights		50 years

Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives, currently seven years.

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

~~Repairs~~Property, Plant and ~~maintenance costs are expensed as incurred.~~ Equipment

~~Upon disposition~~Property, ~~the~~plant ~~cost~~ and ~~related~~equipment, ~~accumulated~~including ~~depreciation~~leasehold ofimprovements, ~~the assets~~ are ~~removed~~stated ~~from~~at ~~property~~cost, ~~plant~~less accumulated depreciation and ~~equipment~~amortization. Depreciation and ~~the~~amortization ~~resulting~~is ~~gain~~calculated orusing ~~loss~~the isstraight-line ~~reflected~~method inover the ~~consolidated~~estimated ~~statements~~useful lives of ~~operations~~the respective assets as follows.

		Useful Lives
Furniture and fixtures		3-7 years
Vehicles		5 years
Computer hardware and software		3-10 years
Manufacturing & lab equipment		2 to 3 years
Buildings		20 years
Land use rights		50 years

Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives, currently seven years. Repairs and maintenance costs are expensed as incurred. Upon disposition, the cost and related accumulated depreciation of the assets are removed from property, plant and equipment and the resulting gain or loss is reflected in the consolidated statements of operations.

Long-Lived Assets

The Company’s long-lived assets include property, plant and equipment, solar energy systems, leased and to be leased, and intangible assets acquired through business combinations. ~~Intangible~~Furthermore, the Company is deemed to be the owner, for accounting purposes, during the construction phase of certain long-lived assets under build-to-suit lease arrangements because of its involvement with ~~definite~~the ~~useful~~construction, ~~lives~~its ~~are~~exposure ~~amortized~~to ~~over~~any ~~their~~potential ~~estimated~~cost ~~useful~~overruns ~~lives~~and its other commitments under the arrangements. In these cases, ~~which~~the ~~range~~Company ~~from~~recognizes ~~one~~a build-to-suit 30lease ~~years.~~asset under construction and a corresponding build-to-suit lease liability on the consolidated balance sheets.

~~Furthermore~~In accordance with ASC 360, Property, Plant, and Equipment, the Company isevaluates ~~deemed~~long-lived toassets befor ~~the~~impairment ~~owner,~~whenever ~~for~~events ~~accounting~~or ~~purposes,~~changes ~~during~~in circumstances indicate that the ~~construction~~carrying ~~phase~~value of ~~certain~~a long-lived ~~assets~~asset, ~~under~~or ~~build-to-suit~~group ~~lease~~of ~~arrangements~~assets, ~~because~~as ofappropriate, ~~its~~may ~~involvement~~not ~~with~~be recoverable. If the ~~construction,~~aggregate ~~its~~undiscounted ~~exposure~~future tonet ~~any~~cash ~~potential~~flows ~~cost~~expected ~~overruns~~to ~~and~~result ~~its~~from ~~other~~the ~~commitments~~use ~~under~~and the ~~arrangements.~~eventual Indisposition ~~these~~of ~~cases,~~a ~~the~~long-lived ~~Company~~asset ~~recognizes~~is aless ~~build-to-suit~~than ~~lease~~its ~~asset~~carrying ~~under~~value, ~~construction~~then ~~and~~the aCompany ~~corresponding~~would ~~build-to-suit~~recognize ~~lease~~an ~~liability~~impairment loss based on the ~~consolidated~~discounted ~~balance~~future ~~sheets~~net cash flows.

In accordance with ASC 360, Property, Plant, and Equipment, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of a long-lived asset, or group of assets, as appropriate, may not be recoverable. If the aggregate undiscounted future net cash flows expected to result from the use and the eventual disposition of a long-lived asset is less than its carrying value, then the Company would recognize an impairment loss based on the discounted future net cash flows. No impairment charges were recorded for the years ended December 31, 2015, 2014 or 2013.

Capitalization of Software Costs

For costs incurred in development of internal use software, the Company capitalizes costs incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life of five to 10 years. The Company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

~~Warranties~~ 51

The Company provides a warranty on the installation and components of the solar energy systems it sells, including sales under MyPower contracts, for periods typically between 10 to 30 years. The manufacturer’s warranty on the solar energy systems’ components, which is typically passed-through to customers, ranges from one to 25 years. However, for the solar energy systems under lease contracts or power purchase agreements, the Company does not accrue a warranty liability because those systems are owned by subsidiaries that the Company consolidates. Instead, any repair costs on those solar energy systems are expensed when they are incurred as a component of operating leases and solar energy systems incentives cost of revenue. The changes in the accrued warranty balance, recorded as a component of accrued and other current liabilities on the consolidated balance sheets, consisted of the following (in thousands):

	As of and for the
	Year Ended
	December 31,
	2015			2014
Balance - beginning of the period	$	8,607		$	7,502
Increase in liability (including $16,983 related to MyPower contracts)		18,929			2,022
Change in estimate		(4,282	)		(468	)
Less warranty claims		(261	)		(449	)
Balance - end of the period	$	22,993		$	8,607

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

Warranties

The Company provides a warranty on the installation and components of the solar energy systems it sells, including solar energy systems sold under Solar Loans and previously under MyPower, for periods typically between 10 to 30 years. The manufacturer’s warranty on the solar energy systems’ components, which is typically passed-through to customers, ranges from one to 30 years. However, for the solar energy systems under lease contracts or power purchase agreements, the Company does not accrue a warranty liability because those systems are owned by consolidated subsidiaries of the Company. Instead, any repair costs on those solar energy systems are expensed when they are incurred as a component of operating leases and solar energy systems incentives cost of revenue. The changes in the accrued warranty balance, recorded as a component of accrued and other current liabilities on the consolidated balance sheets, consisted of the following (in thousands):

	As of and for the
	Year Ended
	December 31,
	2016			2015
Balance - beginning of the period	$	22,993		$	8,607
Increase in liability (including $3,807 and $16,983 as of December 31, 2016 and December 31, 2015 related to MyPower contracts)		8,425			18,929
Change in estimate		1,587			(4,282	)
Less warranty claims		(314	)		(261	)
Balance - end of the period	$	32,691		$	22,993

Solar Energy Systems Performance Guarantees

The Company guarantees certain specified minimum solar energy production output for certain systems leased or sold to customers generally for a term of up to 30 years. The Company monitors the solar energy systems to ensure that these outputs are being achieved. The Company evaluates if any amounts are due to its customers and makes any payments periodically as specified in the customer contracts. As of December 31, ~~2015~~2016 and ~~2014~~2015, the Company had recorded liabilities of $36.16 million and $13.61 million, respectively, under accrued and other current liabilities in the consolidated balance sheets, relating to these guarantees based on the Company’s assessment of its current exposure.

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

Deferred U.S. Treasury Grants Income

The Company is eligible for U.S. Treasury grants received or receivable on eligible property as defined under Section 1603 of the American Recovery and Reinvestment Act of 2009, as amended by the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of December 2010, which includes solar energy system installations, upon approval by the U.S. Treasury Department. However, to be eligible for U.S. Treasury grants, a solar energy system must have commenced construction in 2011 either physically or through the incurrence of sufficient project costs. For solar energy systems under lease pass-through fund arrangements, as described in Note 1314, Lease Pass-Through Financing Obligation, the Company reduces the financing obligation and records deferred income for the U.S. Treasury grants which are paid directly to the investors upon receipt of the grants by the investors. The benefit of the U.S. Treasury grants is recorded as deferred income and is amortized on a straight-line basis over the estimated useful lives of the related solar energy systems of 30 years. The amortization of the deferred income is recorded as a reduction to depreciation expense, which is a component of the cost of revenue of operating leases and solar energy systems incentives in the consolidated statements of operations. A catch-up adjustment is recorded in the period in which the grant is approved by the U.S. Treasury Department or received by lease pass-through investors to recognize the portion of the grant that matches proportionally the amortization for the period between the date of placement in service of the solar energy systems and approval by the U.S. Treasury Department or receipt by lease pass-through investors of the associated grant. The changes in deferred U.S. Treasury grants income were as follows (in thousands):

Balance at January 1, 2013	$	298,260
Balance at January 1, 2014	$	427,809
U.S. Treasury grants received and receivable		124,404
U.S. Treasury grants received by investors under lease pass-through fund arrangements		20,599
Amortized as a credit to depreciation expense		(15,454	)
Balance at December 31, 2013		427,809
U.S. Treasury grants received and receivable		342
Amortized as a credit to depreciation expense		(15,335	)
Balance at December 31, 2014		412,816
U.S. Treasury grants received and receivable		144
Amortized as a credit to depreciation expense		(15,341	)
Balance at December 31, 2015	$	397,619
True-up of U.S Treasury grants previously received and receivable		(29,554	)
Amortized as a credit to depreciation expense		(10,453	)
Balance at December 31, 2016	$	357,612

Of the balance outstanding as of December 31, ~~2015~~2016 and ~~2014~~2015, $~~382~~343.3 million and $~~397~~382.53 million, respectively, are classified as ~~noncurrent~~non-current deferred U.S. Treasury grants income in the consolidated balance sheets.

Deferred Investment Tax Credits Revenue

The Company’s solar energy systems are eligible for investment tax credits, or ITCs, that accrue to eligible property under the Internal Revenue Code of 1986, as amended, or IRC. Under Section 50(d)(5) of the IRC and the related regulations, a lessor of qualifying property may elect to treat the lessee as the owner of such property for the purposes of claiming government ITCs associated with such property. These regulations enable the ITCs to be separated from the ownership of the property and allow the transfer of these ITCs. Under the lease pass-through fund arrangements, the Company can make a tax election to pass through the ITCs to the fund investor, who is the legal lessee of the property. The Company is therefore able to monetize the ITCs to investors who can utilize them in return for cash payments. The Company considers the monetization of ITCs to constitute one of the key elements of realizing the value associated with solar energy systems. The Company therefore views the proceeds from the monetization of ITCs to be a component of revenue generated from the solar energy systems.

87For the lease pass-through fund arrangements, the Company allocates a portion of the aggregate payments received from the investor to the estimated fair value of the assigned ITCs and the balance to the future customer lease payments that are also assigned to the investors. The estimated fair value of the ITCs are determined by discounting the estimated cash flow impact of the ITCs using an appropriate discount rate that reflects a market interest rate.

The Company recognizes the revenue associated with the monetization of ITCs in accordance with ASC 605-10-S99, Revenue Recognition-Overall-SEC Materials. The revenue associated with the monetization of the ITCs is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable and (4) collection of the related receivable is reasonably assured. The ITCs are subject to recapture under the IRC if the underlying solar energy system either ceases to be a qualifying property or undergoes a change in ownership within five years of its placed in service date. The recapture amount decreases on the anniversary of the placed in service date. As the Company has an obligation to ensure the solar

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

~~For~~energy ~~the~~system ~~lease~~is ~~pass-through~~in ~~fund~~service ~~arrangements,~~and ~~the~~operational ~~Company~~for ~~allocates~~ a ~~portion~~term of ~~the~~five ~~aggregate~~years ~~payments~~to ~~received~~avoid ~~from~~any ~~the~~recapture ~~investor~~of tothe ITCs, the ~~estimated~~Company ~~fair~~recognizes ~~value~~revenue ofas the ~~assigned~~recapture ~~ITCs~~provisions ~~and~~lapse assuming the ~~balance~~other toaforementioned ~~the~~revenue ~~future~~recognition ~~customer~~criteria ~~lease~~have ~~payments~~been ~~that~~met. The monetized ITCs are ~~also~~initially ~~assigned~~recorded toas deferred revenue on the ~~investors.~~consolidated ~~The~~balance ~~estimated~~sheet, ~~fair~~and ~~value~~subsequently, one-fifth of the monetized ITCs ~~are~~is ~~determined~~recognized byas ~~discounting~~revenue from operating leases and solar energy systems incentives in the ~~estimated~~consolidated ~~cash~~statement ~~flow~~of ~~impact~~operations on each anniversary of the ~~ITCs~~solar ~~using~~energy ansystem’s ~~appropriate~~placed ~~discount~~in ~~rate~~service ~~that~~date ~~reflects~~over athe ~~market~~next ~~interest~~five ~~rate~~years.

The Company ~~recognizes~~guarantees ~~the~~its ~~revenue~~financing ~~associated~~fund ~~with~~investors ~~the~~that ~~monetization of ITCs~~ in ~~accordance with ASC 605-10-S99, Revenue Recognition-Overall-SEC Materials. The revenue associated with~~ the ~~monetization~~event of ~~the~~a ~~ITCs~~subsequent isrecapture ~~recognized when (1) persuasive evidence~~ of ~~an arrangement exists, (2) delivery has occurred or services have been rendered, (3)~~ the ~~sales price is fixed or determinable and (4) collection of the related receivable is reasonably assured. The~~ ITCs ~~are~~by ~~subject to recapture under~~ the ~~IRC~~taxing ifauthority ~~the~~due ~~underlying solar energy system either ceases~~ to ~~be a qualifying property or undergoes a change in ownership within five years of its placed in service date. The recapture amount decreases on~~ the ~~anniversary of the placed in service date. As the~~ Company’s ~~has~~non-compliance anwith ~~obligation to ensure~~ the ~~solar~~applicable ~~energy~~ITC ~~system is in service and operational for a term of five years to avoid any recapture of the ITCs~~guidelines, the Company ~~recognizes~~will ~~revenue~~compensate as the ~~recapture~~investor ~~provisions~~for ~~lapse~~any ~~assuming~~recaptured ~~the other aforementioned revenue recognition criteria have been met~~credits. The ~~monetized~~Company ~~ITCs~~has ~~are~~concluded ~~initially~~that ~~recorded as deferred revenue on~~ the ~~consolidated~~likelihood ~~balance sheet, and subsequently, one-fifth~~ of ~~the~~a ~~monetized~~recapture ~~ITCs~~event is ~~recognized~~remote asand ~~revenue~~consequently ~~from~~has ~~operating~~not ~~leases~~recorded ~~and~~any ~~solar~~liability ~~energy systems incentives~~ in the consolidated ~~statement~~financial ofstatements ~~operations~~for onany ~~each~~potential ~~anniversary~~recapture ~~of the solar energy system’s placed in service date over the next five years~~exposure.

~~The~~Current ~~Company~~deferred ~~guarantees~~investment ~~its~~tax ~~financing~~credits ~~fund~~revenue, ~~investors~~which ~~that~~is included as a part of current portion of deferred revenue in the ~~event~~consolidated balance sheets, as of December 31, 2016 and 2015 was $66.7 million and $51.8 million, respectively. Non-current deferred investment tax credits revenue, which is included as a ~~subsequent~~part ~~recapture~~of deferred revenue, net of ~~the~~current ~~ITCs~~portion, byin the ~~taxing~~consolidated ~~authority~~balance ~~due~~sheets, toas ~~the~~of ~~Company’s~~December 31, ~~noncompliance~~2016 ~~with~~and ~~the~~2015 ~~applicable~~was ~~ITC~~$138.3 million ~~guidelines~~and $130.8 million, respectively. For the ~~Company~~years ~~will~~ended ~~compensate~~December 31, 2016, 2015 and 2014, the ~~investor~~Company ~~for~~recognized ~~any~~$51.8 million, ~~recaptured~~$47.9 million ~~credits~~and $28.2 million, ~~The~~respectively, ~~Company~~of ~~has~~revenue ~~concluded~~related ~~that~~to the ~~likelihood~~monetization of aITCs, ~~recapture~~which ~~event~~ is ~~remote~~included ~~and~~in ~~consequently~~operating ~~has~~leases ~~not~~and ~~recorded~~solar ~~any~~energy ~~liability~~systems incentives revenue in the consolidated ~~financial~~ statements ~~for~~of ~~any potential recapture exposure~~operations.

Current deferred investment tax credits revenue, which is included as a part of current portion of deferred revenue in the consolidated balance sheets, as of December 31, 2015 and 2014 was $51.8 million and $47.9 million, respectively. Noncurrent deferred investment tax credits revenue, which is included as a part of deferred revenue, net of current portion, in the consolidated balance sheets, as of December 31, 2015 and 2014 was $130.8 million and $163.0 million, respectively. For the years ended December 31, 2015, 2014 and 2013, the Company recognized $47.9 million, $28.2 million and $0.5 million, respectively, of revenue related to the monetization of ITCs, which is included in operating leases and solar energy systems incentives revenue in the consolidated statements of operations.

Deferred Revenue

The Company records as deferred revenue any amounts that are collected from customers, including lease prepayments, in excess of revenue recognized. Deferred revenue also includes the portion of rebates and incentives received from utility companies and various local and state government agencies, which are recognized as revenue over the lease term, as well as the remote monitoring fee (discussed below), which is recognized as revenue ratably over the respective customer contract term. As of December 31, ~~2015~~2016 and ~~2014~~2015, deferred revenue related to customer payments, which is included in the deferred revenue balances on the consolidated balance sheets, amounted to $~~289~~316.36 million and $~~229~~289.53 million, respectively. As of December 31, ~~2015~~2016 and ~~2014~~2015, deferred revenue from rebates and incentives, which is included in the deferred revenue balances on the consolidated balance sheets, amounted to $~~186~~203.1 5 million and $~~169~~186.61 million, respectively. In addition, under MyPower customer contracts (discussed below), all initial revenue associated with financed sales of solar energy systems are also recorded as a component of the deferred revenue balances on the consolidated balance sheets. As of December 31, ~~2015~~2016 and ~~2014~~2015, current deferred revenue from MyPower contracts, which is included in current portion of deferred revenue in the consolidated balance sheets, amounted to $4.6 .0 million and $14.06 million, respectively. As of December 31, ~~2015~~2016 and ~~2014~~2015, ~~noncurrent~~non-current deferred revenue from MyPower contracts, which is included in deferred revenue, net of current portion, in the consolidated balance sheets, amounted to $~~448~~473.2 8 million and $32448.7 2 million, respectively. As of December 31, ~~2015~~2016 and ~~2014~~2015, current portion of deferred revenue included $26.8 3 million and $02.0 8 million, respectively, related to accrued interest on MyPower customer notes receivable.

Revenue Recognition

The Company’s customers purchase solar energy systems from the Company under fixed-price contracts or lease Company-owned solar energy systems that also include remote monitoring services. A residential customer that purchases a solar energy system has the option to pay the full purchase price for the system at the time of purchase. orBeginning in the second quarter of 2016, qualified customers can finance the purchase through up to a 3020-year loan directly from athird-party ~~wholly~~lenders ~~owned~~under ~~subsidiary~~the ofSolar Loan program (under which the Company ~~under~~is not a party to the ~~MyPower~~loan ~~program~~agreement ~~that~~between the customer and the third-party lender, and the third-party lender has no recourse against the Company ~~launched~~with inrespect to the ~~fourth~~loan). Prior to the third quarter of ~~2014~~2016, customers could finance the purchase through a 30-year loan from a wholly owned subsidiary of the Company under the MyPower program, which is no longer being offered. The Company ~~can~~ also ~~earn~~earns incentives that have been assigned to the Company by its customers, where available from utility companies and state and local governments.

8854

SolarCity Corporation

Notes to Consolidated Financial Statements (continued)

Operating Leases and Power Purchase Agreements

The Company is the lessor under lease agreements for solar energy systems, which are accounted for as operating leases in accordance with ASC 840. The Company records operating lease revenue from minimum lease payments, including upfront rebates and incentives earned from such systems, on a straight-line basis over the life of the lease term, assuming all other revenue recognition criteria are met. For incentives that are earned based on the amount of electricity generated by the system, the Company records revenue as the amounts are earned. The difference between the payments received and the revenue recognized is recorded as deferred revenue on the consolidated balance sheet.

For solar energy systems where customers purchase electricity from the Company under power purchase agreements, the Company has determined that these agreements should be accounted for, in substance, as operating leases pursuant to ASC 840. Revenue is recognized based on the amount of electricity delivered at rates specified under the contracts, assuming all other revenue recognition criteria are met.

The portion of rebates and incentives recognized within operating leases and solar energy systems incentives revenue for the years ended December 31, 2016, 2015 and 2014 was $37.1 million, $34.3 million and $33.4 million, respectively.

Solar Energy Systems and Components Sales

For solar energy systems and components sales wherein customers pay the full purchase price, either directly or through the Solar Loan program, upon the delivery of the system, the Company recognizes revenue, net of any applicable governmental sales taxes, in accordance with ASC 605-25, Revenue Recognition—Multiple-Element Arrangements, and ASC 605-10-S99, Revenue Recognition—Overall—SEC Materials. Revenue is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable and (4) collection of the related receivable is reasonably assured. Components are comprised of photovoltaic panels and solar energy system mounting hardware. In instances where there are multiple deliverables in a single arrangement, the Company allocates the arrangement consideration to the various elements in the arrangement based on the relative selling price method. The Company recognizes revenue when it installs a solar energy system and the solar energy system passes inspection by the utility or the authority having jurisdiction, provided all other revenue recognition criteria have been met. Costs incurred on residential installations before the solar energy systems are completed are included in inventories as work in progress in the consolidated balance sheets. However, any fees that are paid or payable by the Company to a Solar Loan lender would be recognized as an offset against solar energy systems and components sales revenue, in accordance with ASC 605-50, Customer Payments and Incentives.

The Company recognizes revenue for solar energy systems constructed for certain commercial customers according to ASC 605-35, Revenue Recognition—Construction-Type and Production Type Contracts. Revenue is recognized on a percentage-of-completion basis, based on the ratio of labor costs incurred to date to total projected labor costs. Provisions are made for the full amount of any anticipated losses on a contract-by-contract basis. The Company recognized $87.05 million, $28.10 million and $2.91 million of total losses for these types of contracts for the years ended December 31, ~~2015~~2016, ~~2014~~2015 and ~~2013~~2014, respectively. Costs in excess of billings are recorded where costs recognized are in excess of amounts billed to customers of purchased commercial solar energy systems. Costs in excess of billings as of December 31, ~~2015~~2016 and ~~2014~~2015 were $0.25 million and $0.32 million, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. Billings in excess of costs as of December 31, ~~2015~~2016 and ~~2014~~2015 were $0.51 million and $0.25 million, respectively, and are included in deferred revenue in the consolidated balance sheets.

For solar energy systems previously sold under a MyPower contract, the Company has determined that the arrangement consideration is not currently fixed or determinable. In making this determination, the Company considered that (i) the MyPower arrangement is unique and the Company does not have company-specific or market history for similar financing arrangements with similar asset classes over an extended term; (ii) customer preferences and satisfaction during the life of these long-term contracts, including as a result of technological advances in solar energy systems over time, may change, and the Company may be incented to offer future inducements or concessions to ensure customers remain satisfied during the life of these long-term contracts; and (iii) possible future decreases in the retail prices of electricity from utilities or from other renewable energy sources that may make the purchase of the solar energy systems less economically attractive and may cause the Company to amend the terms of its contracts to ensure continued performance and to remain competitive. Accordingly, the Company initially defers the revenue associated with the sale of a solar energy system under a MyPower contract when it delivers the system that has passed inspection by the utility or the authority having jurisdiction. In instances where there are multiple deliverables in a single MyPower contract, the Company allocates the arrangement consideration to the various elements in the contract based on the relative selling price method. The Company subsequently recognizes revenue for the system over the term of the contract as cash payments are received for the loan’s outstanding principal and interest. The deferred revenue is included in the consolidated balance sheets under current portion of deferred revenue for the portion expected to be recognized as revenue in the next 12 months, and the non-current portion is included under deferred revenue, net of current portion. The Company records a note receivable when the customer secures the loan from a subsidiary of the Company to finance the purchase of the solar energy system.

~~MyPower deferred revenue activity was as follows (in thousands):~~ 55

	As of and for the
	Year Ended
	December 31,
	2015			2014
Balance - beginning of the period	$	33,651		$	—
MyPower systems delivered under executed contracts		442,567			33,738
MyPower revenue recognized within solar energy systems and components sales		(23,421	)		(87	)
Balance - end of the period	$	452,797		$	33,651

SolarCity Corporation

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